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Operator
Welcome to the Cracker Barrel FY16 fourth quarter earnings conference call.
(Operator Instructions)
Please note this event is being recorded.
I would now like to turn the conference over to Jessica Hazel, Manager, Investor Relations.
Please go ahead.
- Manager of IR
Thanks, Gary.
Good morning and welcome to Cracker Barrel's fourth quarter FY16 conference call and webcast.
This morning we issued a press release announcing our fourth quarter and fiscal year results and our outlook for FY17.
In this press release and on this call, we will refer to non-GAAP financial measures for the current fiscal year, adjusted to exclude the impact of a reduction of the provisions for uncertain tax positions as well as the impact of the current year 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 the prior year impact of the retroactive reinstatement of the Work Opportunity Tax Credit and a prior-year litigation matter.
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 on 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 Jill Golder; Senior Vice President of marketing, Chris Ciavarra; and Vice President and Principal Accounting Officer, Jeff Wilson.
Sandy will begin with a review of the business and Jill will review the financials and outlook.
We will then open up the call for questions for Sandy, Jill, Chris, and Jeff.
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?
- President and CEO
All right.
Thank you, Jessica.
Good morning.
Thank you for joining us on our call.
This week marks Cracker Barrel's 47th anniversary and we're pleased to celebrate this milestone by sharing highlights from our fourth quarter and fiscal year as well as outlining some of our Company plans for FY17.
During FY16, we remained focused and executed well on our business priorities that were laid out at the beginning of the year.
As you can see from today's press release, we concluded another strong year for Cracker Barrel Old Country Store and our shareholders.
During the fourth quarter, we grew our total revenue by 3.7% with comparable store restaurant sales and retail sales both exceeding 3%.
We outperformed our casual dining peers in sales and traffic by the largest quarterly relative outperformance in FY16, and we increased our operating income by nearly 7% and also opened four new Cracker Barrel stores.
In addition, during the fiscal year, we implemented several new initiatives to support operations and reduce cost by approximately $7 million.
We improved our adjusted diluted earnings per share by more than 10%.
We declared $7.70 in dividends per share, including a $3.25 special dividend.
We received top honors from multiple industry recognized consumer research groups like Technomic Inc.
and Nation's Restaurant News, and we successfully developed and brought to market our fast-casual concept, the Holler & Dash Biscuit House.
Jill will discuss our results for the fourth quarter in detail and I'll speak to you about our business priorities for FY17 but before that, I'd like to provide you with an update on our fourth quarter performance.
Starting with our summer menu promotion, our menu offerings included the highly anticipated return of our Foil-Wrapped Campfire Beef and Campfire Chicken meals, the introduction of a new Campfire Mixed Grill and an indulgent Lemon Blueberry French Toast Breakfast.
We were pleased with the performance of this line-up and received positive feedback from both our guests and field operations team, in addition to driving higher sales from our mix during the fourth quarter versus the prior year.
To support our Campfire promotion, we ran a fully integrated marketing campaign featuring dedicated Campfire billboards, product-specific national advertising, in store marketing, and social media content.
We believe this marketing strategy better resonated with our guests and we plan to incorporate this approach into our FY17 advertising.
Another important component of our marketing mix is our music program, which affords us a platform for generating awareness of the Cracker Barrel brand.
Through our own and our partner artists' social and digital media channel through exclusive CD releases, proprietary online music videos, and exclusive retail merchandise collections, we leverage our music program as an experiential influence that further differentiates our brand.
As part of our music program, the fourth quarter included an album release with Grammy-nominated band, Need To Breathe, followed by an August introduction of an exclusive retail merchandise collection inspired by legendary country music artist, Reba McEntire.
We believe these strategic brand partnerships allow us to reach our guests in a way that is uniquely Cracker Barrel.
Also on the retail side of the business, we were pleased with the success of our merchandise offerings during the fourth quarter, particularly our women's apparel category.
Although as the quarter progressed, we experienced lower conversion rates and pressure on our retail sales due to the lower year-over-year store traffic.
While much of the operators' focus during the fourth quarter was on delivering the Cracker Barrel experience our guests have come to expect during the summer travel season, we continue to make headway toward our three-year plan to reduce store operating costs.
Driven by our cost savings initiatives, like targeted food management, new LED lighting technology and food processors, we achieved approximately $7 million in reduced operating expenses in FY16 and anticipate further progress in FY17.
Finally, regarding our store growth, we opened four new store in the fourth quarter, including our first store in Nevada, which brought our total Cracker Barrel store count at the end of FY16 to 639 Cracker Barrel stores in 43 states.
Additionally, we opened our second Holler & Dash during the fourth quarter in Tuscaloosa, Alabama.
Now turning to FY17.
During this ongoing challenging period in the restaurant and retail industry, consumers are more selective in where they allocate their disposable income.
They look to brands that have earned their trust through consistency of execution and delivery of their brand promise.
Through our highly differentiated brand experience that includes real home-style food, retail products that are unique and fun, service that is friendly and caring, all at a fair price, we continue to leverage our brand strength to compete and believe we will continue to deliver growth and profitability.
Our most important priority in FY17 will be enhancing our core business, by broadening our relevance to grow frequency of use across demographic groups and generations and by improving our business model to reduce operating costs and further drive margins.
Through enhanced marketing messaging, menu innovation, and new retail merchandise, we plan to broaden our relevance to those demographic groups and generations that historically have been light users of our brand.
In the near term, we'll focus on the following.
First, we're employing a fully-integrated marketing campaign, adjusting our approach to better leverage our advertising spend and driving more of a call to action.
Second, we're using a dual messaging strategy that focuses on Breakfast All Day as well as choice and variety through our Country Dinner Plates menu category.
Third we're continuing to broaden our target demographic to include millennials and the multi-cultural communities through our spotlight music program, grassroots community programs, and targeted advertising campaigns.
Fourth, to better address an increasingly time-starved consumer, we're enhancing our off-premise business.
Our strong equity and real home-style foods and history as a destination for holiday occasions position us well for large party off-premise solutions.
With enhancements to our existing menu and service offering complete, we're now turning our attention toward a system-wide implementation of our new Heat 'n Serve Holiday Meal program.
Additionally, we believe that the large party off-premise category represents an opportunity for incremental traffic and that Cracker Barrel can secure more share from this market and we're now working on further improvements to our menu, packaging, marketing and customer journey.
Finally, we expect a challenging and heavily promotional retail environment through the holiday period.
We have and are continuing to prepare for this through adjustments to our merchandise plans including more aggressive markdowns as needed.
Our home decor and apparel assortments will provide our guests with products that are both stylish and functional.
We've increased the breadth of our annual great gifts assortment given its historic success.
And we've updated our Christmas merchandise offerings to introduce more current style options.
During the fiscal year, our emphasis on enhancing our core business will also further improvements in our business model and in reducing operating costs to drive margins.
We anticipate operating margin pressure in FY17 from continued and increasing wage inflation headwinds.
We believe we can mitigate this margin pressure and further leverage our margins through realizing an additional $15 million to $20 million in cost savings by the end of the fiscal year.
These will be partially offset by our planned 20 basis point increase in advertising spend as a percent of revenue to support our fiscal year marketing efforts and I'll be sharing more specifics on these opportunities throughout the fiscal year.
During FY17, we plan to expand our footprint in new and developing markets while rebuilding our store opening pipeline to accelerate future growth.
We've been pleased with the success of our fusion prototype in our new store openings as well as our geographic pricing tiers and anticipate opening seven to eight new stores during the fiscal year.
Finally, we plan to extend our brand by optimizing on long-term growth drivers like Holler & Dash to further drive shareholder value.
We currently plan to open four to five additional Holler & Dash locations during the fiscal year in markets including Orlando and Nashville, as we seek to understand the long-term potential of this concept.
As a reminder, we do not anticipate Holler & Dash having a meaningful impact on our financial model during FY17.
I believe our shareholders will benefit from our focus on each of these 2017 business priorities in both the short and long term.
With that, I'll hand the call over to Jill Golder, our CFO, for more details on the quarter.
- SVP and CFO
Good morning, everyone.
Thank you, Sandy.
I would like to begin by discussing our financial performance for the fourth quarter of FY16 and the full fiscal year and then our outlook for FY17.
In this morning's release, we reported fourth quarter net income of $51 million, or $2.12 per diluted share, representing a 7.6% increase over prior-year earnings per diluted share of $1.97.
For the full fiscal year, we reported adjusted net income of $181.7 million, or $7.55 per diluted share, when adjusted for the impact of a reduction of the provisions for uncertain tax positions and the December 2015 retroactive reinstatement of the Work Opportunity Tax Credit.
This represents a 10.7% increase over the prior year's adjusted EPS of $6.82, when also adjusted for the prior year impact of a litigation matter and the December 2014 retroactive reinstatement of the Work Opportunity Tax Credit.
For the quarter, we reported total revenue of $745.6 million, an increase of 3.7% when compared to prior-year revenue of $719.2 million.
Our Restaurant revenue increased 3.6% to $609.5 million and our Retail revenue increased 3.9% to $136.1 million.
Our total revenue increase was driven by positive comparable store sales growth and the net opening of two new stores.
We ended the fiscal year with 639 Cracker Barrel stores and two Holler & Dash stores.
Comparable store restaurant sales in the quarter increased 3.2% as average check increased 4.4% and traffic decreased 1.2%.
The increase in average check reflected menu price increases of approximately 2.4% and a favorable menu mix impact of 2%.
The fourth quarter mix favorability was driven primarily by our summer menu features, Campfire Chicken, Beef, and Mixed Grill Entrees, as well as our core menu Fried Shrimp Platter, which was highlighted during the period.
Our fourth quarter GAAP to the industry for both comparable store restaurant sales and traffic marked our largest quarterly outperformance relative to the casual dining industry during FY16.
Comparable store retail sales increased 3.5%, driven primarily by growth in our women's apparel and print media categories.
Total cost of goods sold in the quarter was 30.6% of total revenue, a 50 basis point improvement from the prior-year quarter.
Our Restaurant cost of goods was 26% of Restaurant sales compared to 27.2% in the prior-year quarter.
This 120 basis point improvement was driven by commodity favorability and savings realized through our targeted food management initiative.
These were partially offset by cost mix unfavorability from our Summer Menu promotion.
On a constant mix basis, our food commodity costs were approximately 230 basis points lower in the quarter than in the prior-year quarter, driven primarily by deflation in our beef and poultry categories, partially offset by inflation in the pork category.
Our Retail cost of goods sold was 50.9% of Retail sales compared to 48.6% in the prior-year quarter.
This 230 basis point increase was primarily the result of increased markdown spend.
Our retail inventories at year-end were $114.6 million compared to $115.8 million at the prior-year end.
Labor and related expenses were $260.6 million, or 35% of revenue, which as a percent of revenue, is flat compared to the prior-year quarter.
Other store operating expenses in the quarter were $142.7 million, or 19.1% of revenue compared with other store operating expenses of $132.7 million or 18.4% of revenue in the prior-year quarter.
The largest component of this 70 basis point increase was the previously discussed planned increase in advertising spend.
In addition, supply expenses were up driven by our Campfire Menu offering as well as an increase in expenses from disposal of assets.
Store operating income was $114.4 million in the fourth quarter, or 15.3% of revenue compared with store operating income of $111.3 million, or 15.5% of revenue in the prior-year quarter.
General and administrative expenses in the quarter were $36.8 million, a reduction of $1.8 million from the prior-year quarter.
As a percent of revenue, G&A decreased 50 basis points to 4.9% versus 5.4% in the prior-year fourth quarter.
This reduction was primarily the result of decreased incentive compensation.
Operating income was $77.6 million, or 10.4% of revenue compared with operating income of $72.7 million, or 10.1% of revenue in the prior-year quarter, an improvement of 30 basis points.
Interest expense for the quarter was $3.5 million, which is flat compared to the prior-year fourth quarter.
Our effective tax rate for the fourth quarter was 31.1% compared to an effective tax rate of 31.5% in the prior-year quarter.
For the full fiscal year, our adjusted tax rate was 31.8% compared to an adjusted tax rate of 32.2% in FY15.
Turning to our balance sheet, we ended the fiscal year with $151 million of cash and equivalents compared to $265 million at the prior fiscal year end.
During the fiscal year, the Company made regular quarterly dividend payments, which totaled $4.40 per share.
In addition, the Company paid two special dividends.
One was declared in FY15, on June 2, in the amount of $3 per share, which was paid in August of FY16.
The second was declared in FY16, on June 1, in the amount of $3.25 per share and paid in July of FY16.
The special dividend payments, in conjunction with our regular quarterly dividend payments, reduced our cash balances by approximately $256 million.
Our total debt was $400 million at year-end.
With respect to our FY17 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 expect to report earnings per diluted share for FY17 of between $7.95 and $8.10.
This earnings estimate assumes total revenue of between $2.95 billion and $3 billion, reflecting anticipated increases in comparable Store Restaurant sales and comparable Store Retail sales in the range of 1% to 2%.
This reflects our current belief that the consumer environment will continue to be challenging through the holiday season.
As we believe the gap between food at home and food away from home prices has continued to widen, and that the consumer will still look for value propositions in FY17, we have planned a deceleration in menu price increases from our previous two-year run rate and anticipate our FY17 menu pricing to be in the range of 1% to 2%.
We expect to open seven or eight new Cracker Barrel stores and four or five new Holler & Dash stores in FY17.
We expect decreases in food commodity costs on a constant mix basis in the range of 2% to 3% for the fiscal year, with approximately 70% of the favorability being driven by lower year-over-year egg prices.
We anticipate greater favorability from commodity deceleration in the first half of the fiscal year, with the second half favorability being closer to flat to slightly negative.
We have locked in our pricing on approximately 45% of our commodity requirements for FY17, which is relatively flat to this time last year.
We anticipate FY17 wage inflation, on a constant mix basis, to be in the range of 2.5% to 3.5%.
We expect advertising expenses to be approximately 2.9% of revenue compared to 2.7% in FY16.
We expect our operating income margins for the year to be between 9.5% and 10% of total revenue.
This guidance includes a target of $15 million to $20 million in reduced expenses from the anticipated successful implementation of our cost savings initiatives.
We anticipate reduced labor expenses to account for approximately two-thirds of the targeted amount.
Based upon our current implementation timelines, we expect sequential increases in quarterly savings from these initiatives.
We expect depreciation expense of between $85 million and $87 million for the year and net interest expense of approximately $15 million.
We expect an effective tax rate for the year of between 31% and 33%.
We anticipate that capital expenditures for the year will be approximately $125 million.
Our capital expenditures include maintenance costs related to the upkeep of our store base as well as technology and strategic initiatives, which are intended to improve the guest experience and improve margins.
This estimate also includes the acquisition of sites and construction costs of seven or eight new Cracker Barrel stores and four to five new Holler & Dash stores that we plan to open during 2017 as well as acquisition and construction costs for store locations to be opened in 2018.
For the first quarter of FY17, we expect to report earnings per diluted share of between $1.75 and $1.85.
This is predicated on our current expectations, as we anticipate a continuation of traffic pressure in addition to an increasingly challenging retail environment.
We also expect commodity deflation in the first quarter partially offset by an increase in Retail cost of goods sold.
And with that, I'll turn the call over to the operator so that we can take your questions.
Thank you very much.
Operator
(Operator Instructions)
The first question comes from Joseph Buckley from Bank of America.
- Analyst
Hi, thank you.
Can you talk about the check a little bit more in the fourth quarter?
I know you attributed the 2 points of mix improvement to the Campfire Grill and to a Shrimp Platter.
On -- maybe could you elaborate a little bit further, like on the Campfire Grill, what the pricing was like versus the Rib promotion a year ago or even the Campfire Grill promotion of two years ago?
And just the sustainability or potentially lack thereof of mix increases?
- President and CEO
Joe, let me -- I'll turn it over to Chris and let him add some specifics but just to set this up, we don't design our promotions to drive that kind of check.
In fact, we work on each of our promotions to offer a variety of price points so that guests can sort of enter the brand and at whatever level they need to and our Summer promotion this year surprised us a little in a positive way by how popular the Campfire was and that Shrimp Platter.
It did also drive costs up but let me turn it over to Chris to see if you would compare that to the last time we offered the Campfire.
- SVP of Marketing
Sure.
Good morning, Joe.
My memory is thinking back to a year ago.
The prices for Campfire are generally in line with what we featured with Ribs and are probably a little higher than they were two years ago with the previous Campfire when we ran both Chicken and Beef.
I think, as Sandy notes, it is -- we do aim for an overall promotion that's got a range of price points coming into it.
In this case as Jill noted, the Shrimp did contribute a good portion of the sales mix benefit as well.
- Analyst
And a question on pricing; you shared with us the plans for 1% to 2% pricing for the full year.
The fourth quarter pricing factor was 2.4%.
How will that run-off as the year begins?
Will the first quarter or perhaps the first half be higher than that 1% to 2% range, with the second half in the range of maybe towards the lower end of the range?
- SVP of Marketing
So, Joe, I guess I would say we plan to maintain our historic pricing cadence so we typically price in August and then again in March, I think as you know.
We are certainly planning to take a lower than recent average price increase in both the Fall and Spring updates and then including the roll forward of our previous increases, we would say the full year, as Jill mentioned, will be in the 1% to 2% range.
- Analyst
Okay, can you say how much price you took in August versus what rolled off a year ago?
- President and CEO
We don't typically do that, I don't think, Joe.
- Analyst
Okay, I will sneak in one more, just a big picture question.
When we look back at the three-year plan at the last Analyst Meeting in 2014 and look at where you are today, the revenues are a little bit short of what you were projecting; the EBIT margins and the EBIT are much higher and kind of a question on both.
Was the revenue shortfall, which is modest, but was that more new unit driven and on the margin side, did the cost savings plans outlined in the past, were they more productive than you thought or did things just happen a little bit more quickly than you thought?
- President and CEO
Okay, let me take a stab.
There's a lot to -- in that question, so first of all, I think that we had hoped that by this time, the industry and the consumer would be stronger than we currently are certainly experiencing the consumer.
Second, we anticipated more new stores sooner.
We slowed down our new store cadence slightly so that we could incorporate the learnings we were getting from our fusion prototype which we're very pleased with and with the idea that we would, after we fine-tuned that or tuned it up more than the initial alpha, it would be -- we would be able to reaccelerate so that certainly had an impact weeks of new stores.
We were not expecting the commodity environment to shape up the way that it has and our wage pressure probably didn't happen quite as soon as we thought it would several years ago.
It's been -- our initiatives I think some, overall, I'm very pleased with what our team has delivered in terms of the progress we've made on a number of fronts, just not only formulating but executing against a number of initiatives, all across the chain, lots of change for a lot of our employees.
And in general, I would say that those are coming along as we expected.
As Larry noted in the last couple of calls, there were a couple of initiatives that we decided to slow down as we became concerned about the consumer and we wanted to ensure that in this environment, we didn't do anything to overly disrupt the guest experience.
So we've been more cautious about the pace that we've implemented them more than the results we've gotten when we do.
- Analyst
Okay.
That's very helpful.
Thank you.
Operator
The next question comes from Bob Derrington from Telsey Group.
- Analyst
Thank you.
A couple of questions.
Sandy, I'm not sure whether to address this to you or Jill.
Basically, you provided us with some earnings guidance for the new fiscal year and specifically for the first quarter.
Now within that earnings guidance, you didn't give us any color on what comprises that guidance.
So I'm just trying to understand, whether should we be expecting a weaker comp outlook in the near term, whether affected by the hurricanes that are affecting about -- the harsh range affecting about 26% of your stores?
Or what kind of color can you provide?
On the last call, I think Larry actually called out that both same-store sales and traffic were positive.
What can you help us with now?
- President and CEO
Bob, this is Jill.
So as we think about the quarter 1 guidance, our typical practice is to provide guidance in the range of $0.10 on the quarter from EPS, which we provided.
So we expect $1.75 to $1.85 based on our current assumptions.
I will add that we anticipate restaurant sales to be at the lower end of our guidance of 1% to 2% and retail sales to be negative in the first quarter.
And as I said in my script, we expect commodity deflation in the range of 2% to 3% for the year, which much of that coming in the first half.
Some offset Retail costs will be higher given the higher promotional environment in the near term.
- Analyst
Okay, all right.
That's super helpful.
I really appreciate that.
As we think about the mix of new stores opening through the course of the year, any kind of color on the timing and when we would anticipate the Old Country Store versus Holler & Dash, and how many are on a quarterly basis?
Any kind of sequential progression?
- President and CEO
The -- we've got one open, one, actually, that was supposed to have opened last fiscal year.
We've got one under construction and then the majority of the others are just sort of at the end of the year, the late third/fourth quarter.
Holler & Dash is -- they're spread, I think we've got one in about 60 days, one in 90 and then there's the other two or three will be at the end of the year.
- Analyst
Okay, all right.
And then last question, back to the mix scenario, with mixes as strong as it was in the fourth quarter, should we be anticipating that mix actually could be negative in the next couple of quarters?
Is there some risk that mix is so high, Sandy, that ultimately it -- there's kind of a sticker shock when customers pay their check and they see how much it was?
- SVP of Marketing
Hey, Bob.
It's Chris.
I would say when we are designing our promotions, we, as Sandy said earlier, we're designing them to be, ultimately, trying to drive traffic through them by providing really compelling offer that will -- with a lot of variety so we're not really looking to drive a mix effect.
So if the consumer is opting into it on their own, I understand your point around potentially sticker shock, but the prices we're presenting, we think are in line with the core menu and wouldn't necessarily be creating that perception.
- Analyst
Terrific.
I'll jump back in the queue.
Thank you.
Operator
The next question comes from Michael Gallo with CL King.
- Analyst
Hi, good morning.
I just want to delve in again a little bit on ticket.
I know you had the plan to move to more of the tiered pricing.
I was wondering when you look at not taking as much check this year, whether you've seen more resistance in some markets than others as you move that tiered pricing or whether this is just a broad reaction to the consumer?
And then on that second note, I was wondering if you could see any consumer feedback in some of the pricing in some areas might have gone too high?
Thanks.
- President and CEO
So I'll start and then turn it over to Chris, Michael.
We're pleased with the results and the learnings we've gotten from our geographic pricing tiered strategy and currently, are -- have been able to pull through the pricing at each of the tiers that we've been at.
The pricing decisions we made for this fiscal year were more centered on wanting to ensure that we continued to be appropriately value focused for a consumer that we think is looking for that as well as cognizant of the situation with food at home versus food away from home and the pricing discrepancy.
So it was more of a strategy that was just in trying to ensure that we were committed to providing value and to be competitive.
Chris, do you have anything you want to add to that?
- SVP of Marketing
I think Sandy characterized it pretty well.
I think, as you know, we've been careful with how and when we choose to take price over the years and we believe we've been very successful in pulling through those price increases.
I would say the deflationary environment around food does create some downward pressure on the overall category.
And as Sandy noted, our intent in maintaining a strong value position is important to us given the brand equities we have.
So I think we've been very mindful of this effect and have priced at a slightly lower than historical level.
So we'll continue to refine and extend the market level pricing we started installing a few years ago and believe those continued refinements will allow us to meet the plan we've outlined in this year's plan.
- Analyst
Thank you.
Operator
The next question comes from Jake Bartlett with SunTrust Robinson Humphrey.
- Analyst
Great.
Thanks for taking my question.
I had another one on just near-term trends.
I just want to fully understand what you're seeing and what you're trying to communicate with, in terms of traffic and price.
You talked about -- I think you mentioned that you expect traffic to remain weak from the July levels.
If I take July and I just add your pricing, I'm getting negative results.
I'm trying to understand how do you get to that 1% that you talked about in the first quarter.
What gives you confidence there?
And then within that question possibly, what you've done in August and in the Fall menu that could maybe be helping mix or traffic or something else?
- President and CEO
Well, Jake, I -- we don't tend to provide -- actually, we don't provide as much as we provided this morning in terms of our quarterly guidance.
So I think that what we provided today and the additional color that Jill added is -- sort of reflects our current thinking given where we are and what we believe the consumer, the position that the consumer is in.
And it takes into account everything that we've experienced up to now in terms of all of the various weather and issues.
In terms of what we're doing in the market, I'll let Chris speak to the marketing programs and the things we're doing in the restaurant to try to drive use in this environment.
- SVP of Marketing
I think Sandy noted in our script.
I'll point to a few things this morning; we have been adjusting our marketing approach.
We're trying to get more leverage out of the line, drive a lot more call to action.
I think we're doing that in three ways right now.
I think of the creative, if you watch the creative, it is moving towards much more predominantly featuring our product, which gives an immediate reason to visit.
We've adjusted the commercial lengths from -- a portion of them being 30s to more 15s, driving a little more reach and frequency for us and while we're going to have about the same number of weeks as last year, we have more grips this year than last year, which we think is a benefit.
Sandy talked about the work we're doing to broaden our target demographic, including millennials and multi-cultural groups.
We've been adjusting our media channels and programming to better reach this audience, putting in as well as the creative putting in new channels and things like Snapchat.
Our artist mix, as I think Sandy has talked about, that Spotlight Program with much younger artists, think of Can, Need To Breathe, Pentatonix, really driving more cultural and marketplace relevance.
On the multi cultural side, employing a lot more holistic sales, with grassroot community programs, enhancements, and targeted marketing programs.
Then from an off-premise perspective, as Sandy talked about, I think we're excited about idea of getting this Heat 'n Serve program into market and seeing what that can do for us in Q2 in particular.
- Analyst
Great and then in your -- in the comments about the industry, Sandy, perhaps you can talk about -- I think you also mentioned that you expect weakness through the holiday quarters.
I didn't know whether that was a comment that just mainly pertains to Retail but is your view that the industry is going to get better as we get past the holidays?
Is your 1% to 2% comp for both the Restaurant, from the Retail predicated on an improving environment as we get past the holidays?
- President and CEO
I'm not sure it's as much a view about they will get better although we are hopeful that by the Spring, that the consumer will begin to feel more optimistic and more settled than we believe they're feeling right now.
Some of the issues, we think will be passed, particularly the retail environment and what I believe is going to be a very promotional Fall and holiday.
In terms of the consumer, our -- it's a difficult subject to get any strong conviction about where it's going.
If I had to say overall, it just feels like many consumers -- it's an uncertain environment.
The source of uncertainty seems to differ depending on who you are and your situation.
So for some, it may be the political rhetoric; for others, it may be their personal employment situation.
For some, it may be healthcare costs; for some, it may be figuring out how to save for retirement.
But overall, it does feel like despite the fact that there certainly are signs, some signs that would suggest the consumer is stronger but it does feel like it's very uncertain and that they're holding back, at least in their spending in the restaurant sector.
- Analyst
Got it and then last question.
This is for Jill.
I had a question about the guidance; the EPS guidance is roughly, I think 5% to 7% increase, yet on the low end of your revenue guidance, it's just about, I think 1% increase in the loan of the operating margin expansion, it's slight contraction.
So I'm trying to understand how you get to any -- how you get to the low end of EPS given the low end of the other two items?
- SVP and CFO
Great.
Thanks, Jake.
So as you think about our guidance and our expectations within each range that we provide, I'd recommend that you work more toward the midpoint of the range rather than assuming all the expectations are either at the low end or the high end of each range.
And then certainly, our practice has been to narrow those ranges as the fiscal year progresses.
- Analyst
Great.
Thank you very much.
- President and CEO
Thanks, Jake.
Operator
The next question comes from Jeff Farmer with Wells Fargo.
- Analyst
Thanks.
Just a lot of similar topics here.
I want to drill further down on the income statement.
So just again, back of the envelope, looking at the guidance for the commodity basket deflation, what you said about menu pricing could imply something close to 100 basis points of COGS favorability, give or take.
You have the incremental cost savings, I think equates to something like 20 to 30 basis points.
I think that's on a net basis but needless to say, let's just call it roughly 100 basis points of favorability that you've called out.
So then the question becomes, in terms of looking at an operating income margin, that's expected to be flattish to up 50 basis points, what the big offsets are there?
So it's -- this is I guess really the heart of the question, across labor, G&A and the other operating expense lines, which of those would you expect to see pressure versus FY16?
- SVP and CFO
Okay.
So Jeff; it's Jill.
I'd think about it this way.
There are a number of moving pieces, as we discussed in my prepared remarks, so on the positive side, we're looking at pricing of 1% to 2% as well as the commodity deflation of 2% to 3% and then our FY17 focused on cost savings initiatives.
If successful, we would expect to be between $15 million to $20 million in improvements so that's on the positive side.
Our headwinds, our wage inflation of 2.5% to 3.5% and then as we mentioned, we're anticipating pressure on our retail margins due to the current environment.
- Analyst
Okay.
- SVP and CFO
In addition, we're investing 20 basis points in advertising and depreciation, so I think kind of taking the midpoint of some of these items together, you get to the operating income margin guidance that we provided of 9.5% to 10%.
- Analyst
All right.
That's helpful and then another sort of follow-up on a topic that's come up a lot today, so just trying to better understand the consumer right now.
A lot of head scratching out there in terms of what's actually led to this pretty dramatic decline in both same-store sales and traffic levels.
So you guys have offered some commentary but I'm curious, do you survey your consumers?
Do you survey them?
Do you actually collect information from them in terms of what they're thinking about, either on their own economic situation or their retail and restaurant spending?
- President and CEO
No, we survey them on a lot of things, how much do they like our food?
How much do they -- how do they feel about our service and so on.
We don't survey them about how they feel about the economic environment.
But Chris, is there anything that --
- SVP of Marketing
We have a variety of measures in market, as you can imagine, everything from looking at our in-store execution.
We have ongoing trackers to understand how the brand is performing relative to awareness and usage and attitudes and things like that so we have a feeling for how the customer views our brand specifically.
We tend to look at more third-party sources when we're thinking about the environment.
- Analyst
Okay and just final question, you did mention that off-premise business.
What -- where does that stand now?
What's the opportunity?
Where can that go?
- President and CEO
Well, we will -- we can -- we're going to provide more information as we go through the year.
Right now, it is going to be focused on a system-wide implementation of our Heat 'n Serve meals at the holidays, so think the Thanksgiving meal that we've been talking about on the last few calls, which we will then put in at Christmas.
We've been testing and we will be implementing, more broadly, the Easter Heat 'n Serve.
We're actually beginning the test and will be, over the year, rolling a new catering menu, which is designed to meet the needs of the large party off-premise business occasion as well as consumer occasion.
So in a more effectively marketed some new menu items, some new systems and technology in the stores, all of which we think will allow us to better compete for this occasion and in this market.
- Analyst
And now just, unfortunately, can I slip in one quick final question here?
Turnover, I've been asked about this constantly so are you feeling it?
Is it happening?
Turnover rates accelerating?
- President and CEO
We certainly monitor it everywhere and they are certainly pockets of concerns in the field but in general, I think that we feel good about our ability to keep our -- the employees that we've hired.
And we believe, at least, that we are better than the industry on both our hourly and our management turnover.
- Analyst
Thank you.
Operator
Next question comes from Alton Stump of Longbow Research.
- Analyst
Good morning, Sandy and Jill.
- President and CEO
Good morning.
- Analyst
I had just a quick question.
Most of the questions have been answered but just on store development front, seven or eight new Cracker Barrels.
You're obviously also doing four to five Holler & Dashes, but I was really -- it would be a surprise that it wasn't a little higher just given that you are -- opening in -- will open a couple stores, if not a few out West over the course of the current fiscal year.
So it would simply imply that you're going to step back a little bit at least for Cracker Barrel concepts as far as builds in your existing, i.e., non-West markets.
Any reason why that is the case?
Is it a matter that you have, of course, the second concept out now so you want to put some focus behind that or is there something else going on as far as sort of the overall store growth slowing a little bit for more Cracker Barrel inner core markets?
- President and CEO
Well, I think our expectation has been that we would eventually accelerate new store growth that 10 to 15 range versus where we are and I would expect to be there perhaps by next year, like I said.
I think that the delay was more centered around ensuring that our fusion prototype and our geographic pricing tiers was that we understood the benefits around that so that we could model sites that needed those benefits to ensure that we were delivering shareholder value with our new stores.
I'm very pleased with the -- our most recent new stores in both Idaho and Nevada have opened very strong and have actually stress tested our fusion kitchen in terms of the level of volume that it is able to produce at a lower headcount and with higher productivity.
So we have ramped up our new store site selection activity and will be -- I think this year, we're -- we just announced there's more than in FY16 and I would not be surprised if in FY18, there was even additional stores.
The growth in the Cracker Barrel new store opening plan is unrelated to the Holler & Dash store opening, which is a different team, operating on a different plan and that opening plan is more driven by us trying to open enough to get the learnings and to understand the long-term potential of the brand before we've opened more than we wish we had.
- Analyst
Got it.
That's all I have.
Thank you, Sandy.
- President and CEO
Thank you.
Operator
The next question is from Steven Anderson with Maxim Group.
- Analyst
Yes, good morning.
I'm calling to ask about the expected tax rate.
You have a fairly wide range of between 31% and 33% and you've mentioned the last couple years the effective tax rate has been just a little bit north of 31%.
Is there anything in your expectations that would lead you to think you would see an increase in your expected tax rate going forward?
- SVP and CFO
Good morning, Steve.
This is Jill.
Yes, we tend to begin our fiscal year guidance with a wider range and as a reminder, on an adjusted basis, our prior year tax rate was at 31.8%, so when we provided guidance for this year of 31% to 33%, we would expect to be in the middle of that range.
And this does include the 2016 five-year reinstatement of our WOTC.
- Analyst
All right.
Thank you.
Operator
The next question is a follow-up from Joseph Buckley with Bank of America.
- Analyst
Thank you.
Just a question on the $15 million to $20 million of cost savings.
I think you mentioned two-thirds of those -- of that would be in labor.
Can you talk about where you are in the different programs, your initiatives on labor that is yielding that kind of savings?
- President and CEO
Joe, we'll provide more information as we go through the year on that in more detail.
I can say that the initiatives are -- that labor makes up the bulk of it and that was always intentional, as we saw a number of years ago and have been discussing what we believe a pressure that we'll have on wage rates and wage inflation.
I will also say that the initiatives are mostly, not all, but mostly learnings from the fusion prototype and the work we've done there that this constitutes sort of a retrofit, if you will.
It isn't involved capital but it is learnings that is allowing us to go back into the field and surgically take some labor out in places, restructure, duties in a way that we think we will get the kind of numbers, at least we hope to get the kind of numbers that Jill laid out.
- Analyst
Okay, thank you.
Operator
The next question is a follow-up from Bob Derrington with Telsey Group.
- Analyst
Yes, thank you.
Jill, can you give us a little bit of color on specifically back to the depreciation line.
Your guidance for 2017 versus 2016 is up approximately about 10% or so, and yet unit counts are only up, maybe 1% to 2%-ish.
Can you give us a little bit of color on what's driving that increase in depreciation?
And then I've got a follow-up to that.
- SVP and CFO
Yes.
Sure, Bob.
So as I mentioned, a portion of this increase is driven by our FY16 increased capital spend and then really, the remainder is driven by our 2017 capital spend around our continued forecast of that higher increase.
So just as we've increased the capital spend, we've seen that depreciation number increase as well.
- Analyst
Okay, is it based on shorter depreciable live assets, whether technology or something related to that?
- SVP and CFO
Yes, it's just really a mix of all of the assets.
- Analyst
Okay, all right.
And then second question, basically, I guess it was about three years or so ago, Sandy, you all provided us a great framework for the Company's plan looking forward at an Analyst Day, and I think we originally -- you all were talking about one in this past Spring move to this Fall.
Any kind of timeline on when you anticipate that we would actually have that Analyst Day?
- President and CEO
No, I've -- we have not set a date for that but thank you for saying that you found it helpful and as soon as we schedule it, we'll publish the date.
- Analyst
Okay.
That's terrific.
Thank you.
Operator
The next question is a follow-up from Steven Anderson with Maxim Group.
- Analyst
Yes.
With regard to your calendar, is there any calendar shifts that we should be made aware of, specifically with the holiday season and the shift to -- of the Christmas holiday?
- President and CEO
Well, certainly, there aren't any shifts across quarters, which sometimes can happen and Christmas this year is going to give us, I think one more Friday and half of the day Saturday because Christmas Eve this year is Saturday and will be close to Sunday.
And that's probably a benefit to us; that's baked in and a benefit was baked in by -- in our guidance.
- Analyst
Okay, thank you.
Operator
The next question is a follow-up from Jake Bartlett with SunTrust Robinson Humphrey.
- Analyst
Hi, thanks for taking the follow-up.
My question is on G&A.
In 2016, I believe you mentioned that even in this quarter, is less incentive comp.
I'm wondering whether G&A accelerates more than usual in 2017.
Is that part of the pressure towards the constraint on your operating margins?
- SVP and CFO
So as we think about G&A this fiscal year, we would expect it to be relatively flat as a percent of revenue to the prior year.
- Analyst
Okay, so there's no catch up because of lower incentive comp in 2016?
- SVP and CFO
No, 2016 is just -- was a more normalized incentive comp.
- President and CEO
2015, it was high.
- SVP and CFO
Yes, it was 2015.
- Analyst
Right.
Okay, thank you very much.
Operator
This concludes our question-and-answer session.
I would like to turn the conference back over to Sandy Cochran for any closing remarks.
- President and CEO
All right.
Thank you.
Well, while 2016 was a challenging year within the restaurant industry, I'm very proud of our more than 70,000 employees for remaining focused, on executing our strategic plans, and delivering our pleasing people mission.
As we begin our new fiscal year, continuing to deliver positive results and provide value for our shareholders and guests remains our first priority.
Thank you.
Operator
The conference has now concluded.
Thank you for attending today's presentation.
You may now disconnect.