Cracker Barrel Old Country Store Inc (CBRL) 2016 Q2 法說會逐字稿

Good day and welcome to the Cracker Barrel fiscal 2016 second-quarter earnings conference call.

Today's conference is being recorded and will be available for replay today from 2 PM Eastern through March 8 at 2 PM Eastern by dialing 719-457-0820 and entering passcode 4134222.

At this time, for opening remarks and introductions I would like to turn the call over to Jessica Hazel.

Please go ahead, ma'am.

Thank you, Priscilla.

Good morning and welcome to Cracker Barrel's second-quarter fiscal 2016 conference call and webcast.

This morning we issued a press release announcing our second-quarter results and our updated guidance for the 2016 fiscal year.

In this press release and on this call, we will refer to non-GAAP financial measures for the current quarter, adjusted to exclude the prior year favorable effect of the December 2015 retroactive reinstatement of the Work Opportunity Tax Credit.

We will also refer to non-GAAP financial measures for the prior fiscal year, adjusted to exclude a litigation matter and the previous year favorable effect of the December 2014 retroactive reinstatement of the Work Opportunity Tax Credit.

The Company believes that excluding these charges and tax effects from its financial results provides information that may be more indicative of the Company's ongoing operating performance, while improving comparability to prior periods.

This information is not intended to be considered in isolation or as a substitute for financial information prepared in accordance with GAAP.

The last page of the press release includes a reconciliation from the non-GAAP information to the GAAP financials.

The press release can be found in the investor section of our website, crackerbarrel.com.

In that press release and during this call, statements may be made by management of their beliefs and expectations of the Company's future operating results or expected future events.

These are what are known as forward-looking statements, which involve risks and uncertainties, and in many cases are beyond management's control and may cause actual results to differ materially from expectations.

We urge caution to our listeners and readers in considering forward-looking statements and information.

Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning's press release and are described in detail in our reports that we file with or furnish to the SEC.

We urge you to read this information carefully.

We also remind you that we do not comment on earnings estimates made by other parties.

In addition, any guidance or outlook we provide, or statements we make regarding trends speak only as of the date they are given, and we do not update or express continuing comfort with our guidance, outlook or trends except in broadly disseminated disclosures such as this morning's press release, filings with the SEC, or as otherwise required by law.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran, Senior Vice President and CFO Larry Hyatt, and Senior Vice President of Marketing, Chris Ciavarra.

Sandy will begin with a review of the business and Larry will review the financials and outlook.

We will then open up the call for questions for Sandy, Larry, and Chris.

We ask that you please limit your questions to matters relating to the Company's performance, outlook and plans.

With that, I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran.

Sandy?

Thanks, Jessica.

Good morning, everyone, and thanks for joining us today.

We continued to deliver positive comparable-store sales in the second quarter, continued to outperform our casual dining industry peers, and delivered earnings at the high end of our expectations.

As we moved into the second quarter, the consumer and economic environment remain challenging, as reflected in our traffic and sales in November and December.

Although we saw positive change in our traffic and sales trend in the first half of January, despite comping our most difficult prior year month, we encountered severe winter weather for the remainder of the month which more than offset the initial gains.

This morning, I will share the highlights of the second quarter and our plans for the second half of the year, and then Larry will provide some detail on the financial results for the quarter.

For Cracker Barrel and our guests, the second quarter is centered around holiday celebrations and travel.

Consistent with our efforts to be a holiday occasion destination, we were very pleased that our combined restaurant and retail sales on Thanksgiving Day set a new Company record for single day sales.

Additionally, we drove year-over-year sales increases of seasonal pies and holiday hams during the second quarter and we believe this reflects the success of our in-store and social media marketing efforts around holiday occasion dining, both in-store and at home.

Sales for our holiday promotion, which ran much of the quarter and featured four breakfast and three lunch/dinner entrees, exceeded our expectations.

This was driven by highlighted core menu offerings such as Fancy Fixin's Chicken Fried Chicken and limited time only offerings such as White Chocolate and Fresh Berry French Toast.

During the quarter, we ran a number of marketing and operational tests which we believe will improve our performance and improve the overall guest experience during future holiday seasons.

For example, on Thanksgiving Day when the majority of our guests order our traditional homestyle turkey and dressing meal, we have historically offered all of the selections available on our regular menu, which creates significant operational complexity.

In a group of stores this year, we tested a limited selection of our standard menu items and with increased throughput and positive responses from our guests and employees, we intend to implement this change systemwide for next Thanksgiving.

We also expanded our popular Thanksgiving Family Sized Meals To Go program to the Christmas holiday, and were pleased with guest responses.

We believe these bundled offerings appeal to the time-constrained consumer and we plan to test this platform during the holiday Easter week -- the Easter holiday weekend.

Due to the holiday shopping season, the second quarter is the most important to our retail business.

This year, stores offered a broader range of merchandise in both the Harvest and Christmas themes.

We believe this, combined with continued success in our apparel and accessories categories, contributed to our year-over-year increase in second-quarter retail sales.

While our retail inventories were higher at this quarter end than at the prior year quarter end, this is the result of earlier receipt of spring merchandise and not higher levels of holiday merchandise.

On the marketing front, in addition to our traditional cable advertising, which ran for six weeks, the second quarter included a new advertising campaign in select markets featuring Spanish-language television, local and online radio, plus social and digital marketing.

We believe that this targeted advertising had a positive impact on traffic and sales and we'll continue to focus on this important customer growth segment in coming quarters.

We remain focused on our cost-saving initiatives in the second quarter and we are pleased with the cost savings that we are achieving from our first Fusion store in North Carolina, and plan to use the Fusion prototype in future new store development.

Additionally, we continue to apply selected learnings from the Fusion store to our base business.

For example, we've completed the rollout of a new food processor to all our stores which we believe will result in a labor savings of approximately three hours per store per week.

Following up on the success of our energy-saving lighting initiative in the front of the house we now expect further energy cost savings from expanding this initiative to the back of the house.

Turning now to the balance of the year, I would like to discuss our plans to improve sales in this challenging environment.

Our management team is focused on several sales and traffic initiatives to meet the challenges we face now and to strengthen the business for the future.

First, we will reinforce our value proposition.

We remain committed to providing honest, everyday value to our guests.

To accommodate the price-sensitive consumer, in a period of increasingly competitive promotions and discounting, our spring promotion will feature three limited time only offerings at an accessible dinner price point of $7.99, each served with two sides and bread service.

We believe these offerings will complement our core menu country dinner plate category and highlight our already affordable items across our base menu.

The need for Cracker Barrel to offer solid value and affordability remains high and we believe we can accomplish this through the combination of limited time and core menu offerings.

Second, we will invest our marketing spend to further drive brand awareness.

For the first time, we will run national cable advertising during our third quarter, with a four-week advertising flight to reinforce our unique, freshly prepared menu items, everyday value, and welcoming guest experience.

We will continue to promote the Cracker Barrel brand through a summer national cable television flight and we will provide more details on that on our next call.

Also on the marketing front, we are accelerating the remessaging of our more than 1,600 billboards.

Billboards remain a primary marketing tool and support our iconic Cracker Barrel brand with over 24 billion impressions a year.

Upon completion of this effort, which is expected by mid-April, approximately 1/3 of our billboards will carry a strong value message, with many emphasizing breakfast.

We believe the use of sharp price point messaging further reinforces the affordability of our menu.

Additionally, we continue to focus on increasing our reach with younger audiences, and building channels that provide an always-on capability with a growing investment in paid and owned digital media.

Third, we are committed to bringing new and unique menu items to market.

For example, as we move into our fourth quarter, which begins April 30, we plan an early introduction of one of our most popular menu offerings -- Campfire Chicken and Campfire Beef.

These popular entrees offer a unique flavorful summer dining experience that drives guest excitement.

When we promoted our Campfire meals in prior years, we believe they enhanced our unique guest experience and drove sales during the offering period.

Fourth, we will leverage our unique retail store to further drive sales.

We've got several new spring and summer themes with staggered introductions throughout the third and fourth quarters to keep our merchandise assortment new and fresh.

As we continue to see guests favoring value price points in our assortments, we plan to build on the growth of our apparel business, which offers a strong quality and value statement that we believe resonates with our guests.

In light of the shifting trends in children's playtime activities, we plan to decrease the floor space and inventory dedicated to toys to make room for merchandise categories that offer more attractive sales and margin opportunity.

We expect this reduction in our toy inventory to put some downward pressure on our third-quarter retail gross margin.

We remain a highly differentiated brand that has earned a solid reputation for providing value and hospitality over many years.

Throughout our history, we have been recognized and awarded for this, and most recently were named a Chain Restaurant Consumer's Choice Award Winner among full-service restaurants in the value through service category.

I believe our brand strength, menu, marketing and retail merchandise plans will help us drive sales, leverage our margins, and continue to deliver positive shareholder returns.

Before I hand the call over to Larry, I would like to share with you some additional news about our fast casual concept.

Over the last year, we've developed our new concept, named Holler & Dash, to leverage the strength of the Cracker Barrel brand while providing a new type of guest experience.

With its biscuit-inspired menu that pays tribute to the South in an innovative and modern way, Holler & Dash was created to extend our reach into urban cores and attract new audiences.

The first restaurant will open in Birmingham, Alabama within the next month.

While we are excited about the potential for this new brand, I want to emphasize we do not expect it to have a meaningful impact on our financial results for the next one to two years.

With that, I will turn the call over to Larry.

Good morning, everyone.

Thank you, Sandy.

I would like to begin by discussing our financial performance for the second quarter of fiscal 2016 and then our outlook for the 2016 fiscal year.

As I discuss our results, I will refer to adjusted financial information for the current and prior year second quarters.

This financial information reflects the following adjustments to GAAP net income.

First, during the prior year second quarter, we accrued $2.2 million for a litigation matter.

Second, in December 2014, the federal government retroactively reinstated the Work Opportunity Tax Credit, or WOTC, for the period of January 1 to December 31 of 2014.

It expired again at the end of the 2014 calendar year and was again retroactively reinstated at the end of the 2015 calendar year.

In both instances, the retroactive reinstatement impacted both a current and a prior fiscal year and, in both instances, we have adjusted out the prior year's positive impact, which was $0.10 per diluted share in the second quarter of 2015 and $0.10 per diluted share in the second quarter of 2016.

For the second quarter of fiscal 2016, we reported GAAP net income of $48.2 million, or $2.01 per diluted share, and adjusted net income of $46 million or $1.91 per diluted share, compared with adjusted net income of $46.3 million or $1.93 per diluted share in the prior year quarter.

Our revenue in the quarter was $764 million, an increase of 1.1%, compared to revenue of $756 million in the prior year quarter.

Our restaurant revenue increased 0.6% to $580.9 million and our retail revenue increased 2.6% to $183.1 million.

Our comparable-store restaurant sales in the quarter increased 0.6% as an increase in average check of 3.4% was partially offset by a 2.8% decline in traffic.

The increase in average check reflected menu price increases of approximately 2.9% and a favorable mix impact of 0.5%.

We believe our average menu price increase reflects the successful implementation of our market level pricing structure.

Our comparable store retail sales increased 2.6%.

As you know, winter weather is often a factor in our sales in December, January and February.

This year, we believe that severe winter weather negatively impacted our comparable-store traffic and sales in January by approximately 1.9% and in the second quarter by approximately 0.6%.

Month to date for February, our comparable-store traffic and sales are positive.

However, we believe that last year February weather is a factor.

Our total cost of goods sold in the quarter was 34.7% of revenue, which is flat to the prior year quarter.

Our restaurant cost of goods sold was 28.4% of restaurant sales, which is also flat to the prior year quarter.

On a constant mix basis, our food commodity costs were approximately 170 basis points higher in the quarter than in the prior year quarter, driven by higher prices for liquid and shell eggs.

Our retail cost of goods sold was 54.7% of retail sales, compared to 55.2% in the prior year quarter.

This 50 basis point improvement was primarily the result of a higher initial margin, partially offset by higher markdowns.

Our retail inventories at the end of the quarter were $112.7 million compared to $102.2 million in the prior year quarter.

This $10.5 million increase is the result of the earlier receipt of merchandise to accommodate the early Chinese New Year.

Given the unusually low inventory levels at the end of last year's third quarter, we expect our retail inventory at the end of this year's third quarter to be higher.

Our labor and related expenses were $251.9 million or 33% of revenue, a reduction of 30 basis points compared to 33.3% of revenue in the prior year quarter.

This year-over-year improvement is primarily the result of lower store bonus expenses.

Our other store operating expenses in the quarter were $141.1 million or 18.4% of revenue compared with other store operating expenses of $133.7 million or 17.7% of revenue in the prior year quarter.

This year-over-year increase of 70 basis points is due primarily to higher spending in maintenance and advertising, partially offset by lower spend in utilities.

Store operating income was $106 million in the second quarter, or 13.9% of revenue, compared with store operating income of $108.4 million, or 14.3% of revenue in the prior year quarter.

Our general and administrative expenses in the quarter were $35.5 million or 4.7% of revenue compared to adjusted G&A of $35 million or 4.6% of revenue in the prior year quarter.

Our operating income was $70.5 million, or 9.2% of revenue compared to adjusted operating income of $73.4 million or 9.7% of revenue in the prior year quarter.

Our interest expense for the quarter was $3.6 million compared to an interest expense of $4.7 million in the prior year quarter.

This reduction is the result of the expiration of certain higher price swaps and their replacement with lower-priced swaps, and a reduced credit spread.

Our effective tax rate was 27.9% compared to 29.1% in the prior year second quarter.

Our balance sheet continues to be strong.

We ended the quarter with $171.6 million of cash and equivalents compared to $182.6 million at the end of the prior year quarter.

Our total debt is $400 million.

With respect to our outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and in our reports filed with the SEC.

We are raising our full-year earnings guidance for fiscal 2016 to reflect expected moderation in food commodity prices and the anticipated tax benefit of the WOTC.

Reflecting these changes, we now expect to report adjusted earnings per diluted share for the 2016 fiscal year of between $7.40 and $7.50.

We now expect increases in food commodity costs on a constant mix basis of approximately 1% for the full fiscal year.

Based on current market conditions, we expect that the increase in egg prices for the balance of the fiscal year will not be as high as we previously forecasted.

Additionally, driven by increased domestic beef supply and the recent strengthening of the dollar, beef prices have moderated more rapidly than we had previously expected.

We have locked in our pricing on approximately 65% of our commodity requirements for the balance of fiscal 2016, which is approximately flat to our locked percentage at this time last year.

With the recently reported softness in GDP and retail spending, we remain cautious in our sales outlook for the second half of the fiscal year.

Our earnings estimate assumes total revenue of between $2.9 billion and $2.95 billion, reflecting anticipated increases in comparable-store restaurant and retail sales for the full fiscal year in the range of 1.5% to 2.5%, and the expected opening of five or six new Cracker Barrel stores.

We now expect our adjusted operating income margin for the year to be approximately 9.5% of revenue.

We expect depreciation expense of between $76 million and $77 million for the year, and net interest expense of between $14 million and $15 million.

We now expect our effective tax rate for the year to be in the range of 30% to 31%.

We anticipate that capital expenditures for the year will be in the range of $90 million to $100 million.

For the third quarter of fiscal 2016, we expect to report earnings per diluted share of between $1.70 and $1.80.

And with that, I will turn the call over to the operator so that we can take your questions.

Thank you very much.

(Operator Instructions) Jeff Farmer, Wells Fargo.

On the planned $7.99 dinner LTOs, what level of discount does that represent relative to the average entree that you guys are selling there, the average entree price point?

And how confident are you that that lower price point will drive the incremental traffic that you're looking for?

It's Chris Ciavarra.

So that represents about $1 or $2 off of what our typical entree would represent.

We are really mindful when we put these programs in the marketplace that we have other products surrounding it.

So, we aim for the overall program to be margin-neutral, but recognize that these products have the ability to draw guests into our stores.

Okay, and then Larry, you touched on it, but what level of commodity basket inflation does that 1% full-year number imply for the third and fourth quarters?

Let me get that specifically in front of me.

It implies some very modest commodity deflation in the third quarter in the 1% range, and approximately flat in the fourth quarter.

Okay, and then just one more quick one.

I believe last year in January you saw a pretty sizable jump in gift card redemptions.

I think it was $5 million.

I am not sure, but it looks like it was at least a 1% same-store sales tailwind.

Again, what was the gift card redemption outlook in 2016?

What did it look like for you guys this year?

Let me answer that both in terms of gift card sales and gift card redemptions.

Gift card sales and gift card redemptions for the second quarter of 2016 were higher than in the second quarter of fiscal 2015 in low single digit.

Okay, thank you.

Joe Buckley, Bank of America.

Could we go back to the retail sales performance, which I think was really extraordinary in this holiday season?

And you mentioned taking higher initial markups.

How did you manage the markdowns, I guess, as the quarter proceeded?

And were there any particular hits on the retail side that resulted in the strong performance?

Thank you for the compliment.

I was very pleased as well with the performance of our retail business in a very challenging holiday environment.

Our merchants assembled a terrific assortment of product that really resonated with our guests, from a sort of fun, unique, nostalgic viewpoint, much of which really reinforced our objective, which is to provide value.

In terms of the highlights, I would say our seasonal product, both Thanksgiving and Christmas, which are the decor, the tabletop, the ornaments and so on were very strong this year.

And in fact, we were able to sell through that product at a much higher level before we needed to bring discounting in.

I think apparel was also very strong and very on trend and on target, perfect for the impulse buyer and really allowed them to buy now, wear now, walk out of the store with something that was very high-quality for not a lot of price.

In terms of where we did take markdowns, there were a couple of categories.

I would say toys was one that we were disappointed with, which is why as I mentioned in my prepared remarks, we are going to be more aggressive about managing the square footage and the inventory levels.

In that case, we think that that shift in toys and the use is permanent and so we will be addressing that on the floor.

We were a little disappointed in some of the themes.

Gifts under $10 didn't perform the way we had hoped, so we did have pockets of product that did not all work as we'd hoped.

But overall, I think that the team -- the field team and our buyers did a good job of delivering on the retail side.

Has there been some kind of procedural change with retail, I know you have had new leadership in the retail for a couple of years now.

But, the performance seems to be a little bit more consistent and again this holiday season, I think, extremely good.

Are there changes in the way it's being managed that are leading to the changes?

I think Laura has continued to develop her team and to work very hard.

In fact, I think she is back today from one of several overseas trips that she's been on in the year.

But the entire buying team I think is working really hard to source unique, interesting products that reflect value.

They are working very hard to keep the floor fresher.

So, one of the strategies that Laura had a couple of years ago when she came on was to refresh our themes more frequently so that the guest that comes in sees something new and so on.

She has worked very hard at supporting the core businesses, which are around the perimeter of the store.

And so I think what you see is the combination of a lot of work being done in a lot of areas coming together.

Okay.

And a question on the [nurturing] side.

You mentioned meals to go.

Could you share with us what percentage increase in meals to go or take out sales were in the quarter?

I am going to let Larry speak to it, so I don't know whether we disclose it.

Our meals to go, in general, they are higher in November and December than they are for the rest of the year, but in either times of the year, they are still in the single digits.

I would say mid-single digits overall, high-single digits November and December.

Okay and Larry, a question; the guidance for the third quarter and for the full year implies a stronger third-quarter year-over-year EPS increase than fourth quarter, and just kind of curious, your thoughts around that.

Some of that has to do with the year-over-year change in food commodity costs.

As I indicated earlier, in response to Jeff Farmer's question, we anticipate food commodity costs down in the third quarter and we anticipate it to be roughly flat in the fourth quarter.

Additionally, we anticipate somewhat stronger year-over-year traffic growth in the third quarter than in the fourth quarter, which will be driven at least in part by the fact that we will see media advertising for the first time in the third quarter.

Okay, that's helpful.

Thank you.

Bob Derrington, Telsey Advisory Group.

Larry, if I could follow on on that, on the third-quarter traffic basically, it sounds directionally like mix and traffic would be somewhat offsetting.

Is that reasonable?

Is that kind of what we are thinking about for the third quarter?

(multiple speakers)

We are anticipating traffic to be positive -- to be slightly positive in the third quarter and check to be positive, consistent with our year-to-date trend in menu pricing, Bob.

Okay, all right, thank you.

Second question, as we look at -- Larry, in this past quarter, the operating expense, the other operating expense, which included the marketing, should we expect that that number as a percent will also be higher because of the additional four-week period of advertising?

Our advertising expense as we said at the time that we guided at the beginning of the year, that our advertising expense is expected to be higher as a percent of sales in 2016 than in 2015, which is consistent with what the Company laid out in its three-year strategy of gradually increasing its advertising and marketing spend from a fiscal 2014 level, which was about 2.3% to 2.4%, to a fiscal 2017 level in the 2.8% to 2.9% of sales range.

So, it's reasonable to anticipate for the full year that our advertising spend will be between 200 and 300 basis points higher than in the 2015 fiscal year, which is consistent with that longer term strategy.

And some of the timing differences may be reflected in a higher spend in the third quarter as a result of the advertising flights.

Got you, thank you.

And Sandy, if I may, one more question.

As we look at development, obviously it's way too soon to talk about Holler & Dash and the development plan there, but when you look at the Old Country Store for this year, it looks like development is a little bit later, pushed back a little bit.

How should we think about this year's development for the Old Country Store and possibly some early thoughts on next year?

I will actually let Larry speak to that.

The stores that we expect to open in fiscal 2016 are largely back-end loaded into the fourth quarter.

The reason why we are still offering a range of five or six is that we have two stores scheduled to open in a new Western market in the last week of the fiscal year.

We are reasonably confident about one of them opening and the other one is a little more of a question mark.

As far as our development outlook going into 2017, which we will of course be able to talk about more thoroughly in our fourth-quarter conference call at the time that we offer our outlook for 2017, we have spent 2016 building up a pipeline and we anticipate our new store openings for 2017 are likely to be at a higher pace than 2016.

I assume you're talking about the Old Country Store.

Yes, sir.

Okay, thank you.

Jake Bartlett, SunTrust.

Larry, first a question for you.

Just to clarify your comments on traffic and check for the third quarter, I believe you said that you expect slightly positive traffic, and then you expect the check to be about what it was year-to-date.

And then year-to-date, I'm looking at positive 3.3.

Is this to assume that the higher end of the implied range for the back half of the year in the third quarter you expect to be in the higher end?

Or any kind of indication.

I said consistent with increases in menu prices for the first half of the year, we have been carrying about 50 basis points of menu mix.

So that would probably take you to the high 2s, Jake, which is a testament to the success that the Company has had so far in its regional pricing effort.

Got it.

So the -- are you -- I guess in response to Bob's question earlier, would you say that you think the new promotions are going to drive negative mix?

Or do you think flat is a reasonable expectation for the third quarter?

We never project mix because the way that we manage our menu and our promotions is that mix tends to be margin-neutral.

Okay, okay, and last question, regarding -- it looks like you -- essentially the back half has a pretty wide range for your expectations.

And I calculated a positive 1.5 to a positive 3.5.

Usually your annual range is this wide at the time.

But I'm wondering just how much of it reflects concern about the current environment, and if I add back the weather impact in January, actually you did a -- it would have been very good in January given really difficult compares.

Maybe if you could clarify what you are seeing in February to date, month to date, what the weather impact was in both those two periods last year and this year and how confident you are in sales growth in the back half of the year.

I will start on that one, Jake, and turn it then over to Larry, and just by making one comment about the December, January and February period where weather -- it feels as though if it's not an issue this year, we are trying to figure out whether it was an issue last year.

So it is difficult to get a clean read on how you feel the underlying business is, in particular.

And I'm not sure Larry is going to give you that much more detail on the February numbers.

But from a macro backdrop standpoint, I can tell you that we think the environment remains mixed.

Our consumer continues to be tough to read and that our guidance, and Larry will speak in a little more detail, implies that we do continue to be cautious.

Yes, Jake, we continue to be cautious when we look at the GDP numbers for the fourth quarter of the 2015 calendar year, it is possible to make an argument that those are near-recession levels of GDP growth.

On the other hand, there continues to be some strength in the labor market numbers, although those numbers also mask a relatively low and continuing low levels of labor force participation, which appears again to disproportionately impact our consumer.

And it is likely to be a very promotional and price competitive spring, particularly in the QSR segment as beef prices come down.

While that's very helpful for Cracker Barrel, it's even more helpful for the hamburger-based QSRs who, if their behavior over the last couple of months is indicative, are likely to be very aggressive on food planning and price promotions.

And for those meal occasions, Cracker Barrel is competing against the QSRs.

It's possible that that could have an impact.

So that's why, as Sandy laid out, we are focusing on value.

But that's also why we are remaining cautious and there is a fairly wide range in the implied comp store sales in the second half of the year.

Thank you.

And just lastly real quick, do you estimate that McDonald's all-day breakfast had any impact on your sales?

Interestingly, we have looked at this a variety of ways including looking at comparisons of this year to last year, the breakfast item sales in the lunch and dinner dayparts, before and after, and the conclusion that we have reached is that McDonald's all-day breakfast seems to have not had an impact on our breakfast item sales in the lunch and dinner period.

Our conclusion is, it really is a different dining occasion.

Great, thank you so much.

Alton Stump, Longbow Research.

It's actually Brittany on for Alton this morning.

Just kind of wanted to see -- your expectation for food cost inflation came down maybe from last quarter's guidance.

Just kind of wanted to see how much of that is maybe from eggs or if anything else is driving that, maybe beef, for example.

Sure, Brittany.

Our commodity inflation expectation from the beginning of the first -- of our guidance at the end of the first quarter to our guidance now has come down for the third and fourth quarters by about $10 million.

That is made up of about 30% of that's our changed outlook for beef.

About 50% of that is our changed outlook for eggs, and the balance is various other things, mostly poultry.

Okay, that's helpful.

And then just going back to the McDonald's question, but I guess a little bit more broadly on the competitive environment, are you seeing any other material changes from other casual diners or anything that is impacting you guys?

It's Chris.

I think obviously, as Sandy and Larry have spoken to, the environment has absolutely turned more promotional.

I think if we think back to last fall, we did see QSR operators really picking up the pace with value-oriented offers.

We continue to focus on what we need to do to maintain and grow share.

I think Sandy has outlined some of those pieces we've been focused on today in terms of moving back to value-based position, or even a more strong basis through the reintroduction of our $7.99 offering as well as our billboards, which are going to get reposted, including more sharp price point messaging.

And then certainly on a relative basis, feeling like we are continuing to take share as well.

Okay, great.

Thanks so much, guys.

Michael Gallo, CL King.

Most of my questions have been answered.

I just had a follow-up.

I know you guys have started testing kind of the kitchen of the future and whether you might retrofit a couple stores.

I was wondering if you can give us an update on where that stands at this point.

Thanks.

Our first Fusion kitchen, only Fusion kitchen at this point, is in North Carolina and we continue to work through the new processes, and I continue to feel optimistic about the productivity improvements that we are expecting to get from that.

Our second one will be opening in Idaho in a few weeks, Coeur d'Alene, and then the kitchen of the -- the Fusion kitchen is the vehicle that we will be using in future development.

The retrofit opportunities were more about taking selected ideas out of the -- and learnings from the Fusion kitchen and then testing first and then implementing those ideas in the chain.

The first one, for example, is a food processor that we were able to put in and we've got a number of other ideas in the pipeline.

Unlikely that we would ever model -- or that it would ever model that you would completely scrape out an existing kitchen and lay in the Fusion kitchen in totality.

Okay, thanks.

Bob Derrington, Telsey Advisory Group.

Sandy, can you give us any kind of color on the cost saving initiatives that you talked about in the past?

I think the target was roughly $10 million of incremental savings this year, and I think the target was for $20 million of savings for next year.

Any kind of update on those things?

Bob, this is Larry.

To refresh everybody's memory, in the analyst and investor day meeting back in May of 2014 when we laid out the three-year strategy, we laid out about $50 million in cost savings over the 2015, 2016 and 2017 years.

And roughly where it was that we expected those costs savings in terms of the implementation of various initiatives, and we said at the end of the 2015 fiscal year that we had achieved $20 million in annualized cost savings in the 2015 fiscal year.

We said at the same time, as we were offering guidance for 2016, that we expect to realize about $10 million in savings, so that math would, of course, indicate that we are anticipating another $20 million of savings in 2017.

We are proceeding along with the implementation of the number of our cost saving initiatives.

Sandy mentioned a couple of them in terms of the implementation of some new kitchen equipment this year, that will result in some labor cost savings.

The implementation of some energy savings, we additionally in our managers conference and our training event in September, trained every general manager in the Cracker Barrel system on our new targeted food management process.

We now have fully rolled it out.

So we anticipate savings in the 2016 fiscal year, given the choppiness of the consumer and the fact that our number one focus right now is on making sure that we meet the consumers' needs and wants without the potential disruption, which sometimes occurs from the implementation of some of these cost saving initiatives.

There is a possibility that the implementation pace in 2016 and 2017 is such that some of these anticipated cost savings may be realized in subsequent years.

That's super helpful.

If you could just clarify one point.

I thought, Larry, in the past, you all had talked about the savings in fiscal 2017 be more labor-related.

Did I remember that correctly?

Yes, indeed.

Okay, terrific, thank you.

Stephen Anderson, Maxim Group.

I just wanted to follow up on some of the questions that were asked about commodities.

You mentioned one detail about egg and beef prices.

I wanted to see if you had any other color about some of your other commodity pricing, particularly on poultry, dairy and some of the other items.

Poultry -- we are anticipating a savings in poultry in the back half of the year, which is due to a very large extent from the success our supply chain teams had in the negotiation of some really favorable agreements, particularly with chicken suppliers.

Dairy is additionally down due to some favorability in some lot coverage for some dairy items, and in particular block cheese and cheese sauce.

And pork is down due to some favorability in sell prices.

Okay, thank you.

Joe Buckley, Bank of America.

Does the earlier Easter play a role in -- I realize Easter is, you know, in the April quarter in both periods, but does it falling earlier have any good or bad implications in terms of sales?

We talk about that a lot and I would say that spring breaks and how that changes is probably a much more important driver of our business in this quarter.

Easter, when it comes to on the retail side, the earlier Easter is generally considered to not be as good as a later one, you are not quite in the mood for spring clothes if the weather hasn't changed and so on.

So I would say the Easter shift is certainly factored into our guidance.

But we are much more focused on spring break trends.

Okay.

And Larry, just on the revised guidance, the $7.40 to $7.50.

I know that is adjusted.

So what is in there for the WOTC and what is not?

What has been adjusted out for the WOTC in the guidance is the $0.10 per-share that we adjusted out in the second quarter that is a result of the retroactive application of the WOTC reinstatement to prior fiscal years.

We feel that to the extent possible individual fiscal years should stand individually and should not have the tax benefit from these retroactive reinstatements.

Now, the good news is, is that Congress has now reinstated WOTC for multiple years so we will presumably not face this again anytime soon.

So as far as tax is concerned, as we go forward in the third and fourth quarter we are currently not anticipating that there would be any differences in between adjusted and actual.

So, the increase sell from the $7.15 to $7.30 range, the $7.40 to $7.50, how much of that is tax rate-related?

Joe, it's probably the change in the tax rate as a result of the ongoing impact of WOTC is probably in the range of about 100 basis points on the tax rate, and the balance is the change in commodities.

Okay, got it.

Thank you.

Thank you, and we have no further questions today.

I would like to turn the call back to Sandy Cochran for closing comments today.

Thank you all for joining us today.

I remain confident that we've got the right strategy and the right leadership in place to move the brand forward and to further drive shareholder value.

We appreciate your interest and support, and for your time this morning.

Thank you.

This does conclude today's conference.

Thank you for your participation.

You may disconnect at any time.