Cracker Barrel Old Country Store Inc (CBRL) 2018 Q2 法說會逐字稿

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  • Operator

  • Good morning, and welcome to the Cracker Barrel Fiscal 2018 Second Quarter Earnings Call.

  • (Operator Instructions) Please note, this event is being recorded.

  • I would now like to turn the conference over to Adam Hannon with Investor Relations.

  • Please go ahead.

  • Adam Hannon

  • Thanks, Phil.

  • Good morning, and welcome to Cracker Barrel's second quarter fiscal 2018 conference call and webcast.

  • This morning, we issued a press release announcing our second quarter results and our outlook for the 2018 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 a one-time non-cash revaluation of the company's net deferred tax liability.

  • The company believes that excluding these tax effects from its financial results provide 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 financial.

  • 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, Don Hoffman; 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, Don and Jeff.

  • On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events.

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

  • We caution 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 the press release and are described in detail in our reports that we file with or furnish to the SEC.

  • Finally, the information shared on this call is valid as of today's date and the company undertakes no obligation to update it, except as may be required under applicable law.

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

  • Sandy?

  • Sandra Brophy Cochran - President, CEO & Director

  • Thank you, Adam.

  • Good morning, and thank you for joining us on the call.

  • In this morning's press release, we announced positive comparable store sales in both restaurant and retail, improving upon our first quarter sales results, and again, outperforming the Casual Dining Industry.

  • Additionally, we saw large earnings per share increase related to the Tax Cuts and Jobs Act, which Jill will be speaking to.

  • We were pleased with the quarter as a whole and continued to make good progress on all of our top line initiatives, but we did have some challenges on the expense lines related to the implementation of our new initiatives, commodity inflation and inclement weather.

  • Jill will provided additional details on the financials.

  • But first, I'd like to provide a few highlights on the quarter and an update on our plans for the remainder of the fiscal year.

  • The holidays are an important time for Cracker Barrel and we believe we further strengthened our reputation as a go-to holiday destination, both for in-store and at-home dining and shopping occasions.

  • We were pleased with our in-store restaurant and off-premise performance, both of which were supported by our advertising, which emphasized family holiday traditions and our holiday connections to further build brand affinity with our guests, and include the 6 weeks of national cable TV at higher weekly rates compared to the prior year.

  • I'm proud of the way our teams were able to deliver our brand promise and the Cracker Barrel experience that our guests have come to seek during the holiday season, while also doing an excellent job executing on growing off-premise program, which helped us set another sales record on Thanksgiving day.

  • As a reminder, we rolled out our enhanced off-premise platform system wide in October, which included the introduction of new catering menu offerings and online ordering.

  • We expected to achieve meaningful growth in sales for our Thanksgiving and Christmas Heat n’ Serve offerings and I'm pleased to say that the sales for these offerings exceeded our expectations.

  • Looking ahead to our off-premise program, we're excited about the Easter Heat n’ Serve offering, which features the spiral sliced ham, a choice of 4 sides, a blackberry cobbler and serves 10 people.

  • The Easter occasion, which was smaller than either Thanksgiving or Christmas, represents another opportunity to build our Heat n’ Serve program, and we're optimistic about its potential sales growth over the prior year.

  • As we seek to gain market share within the off-premise space, we also plan to further enhance our catering menu over the coming quarters, which may include some new catering offering such as biscuit bar and handheld breakfast sandwiches.

  • We continue to believe that the convenience of our catering in Heat n’ Serve offerings, combined with the quality and style of our food, create a differentiated offering in the market.

  • Moving on to our upcoming seasonal promotions and menu initiatives.

  • As part of our spring promotion, we're excited to introduce Southern Bowls, which will feature 3 signature offerings: A Fried Chicken Benedict Bowl, a Ham n' Maple Bacon Bowl and a sausage green tomato gravy bowl.

  • The Southern Bowls will be supported by 5 weeks of national cable TV.

  • As we look forward to summer, we'll be reintroducing one of our most popular menu offerings, the Campfire menu promotion, which will headline for a limited time only as part of our summer menu promotion.

  • This year, we are excited to add some new items to the promotion, such as a smoky beef brisket bowl at breakfast and a s'mores latte that complement our returning s'mores dessert.

  • Campfire will be supported by 8 weeks of national cable TV.

  • We continue to make progress on our crafted coffee initiative.

  • We had in just over 350 stores by the end of the second quarter and we plan to complete the rollout by April.

  • In addition to the core iced and hot latte offerings, we're striving to drive additional guest excitement through limited time only flavors, such as the peppermint mocha latte we featured in the second quarter.

  • We continue to be pleased with the results of the crafted coffee program, which drives check favorability, compliments the strengths of our breakfast all-day offering and provides menu variety.

  • Another component of our long term beverage strategy is flavored teas and lemonades and we have plans to introduce new offerings as part of our upcoming seasonal menu promotions.

  • We anticipate the specialty beverage initiative delivering favorable mix in the back half of the year and in coming years.

  • Another initiative we focused on is value.

  • And as a reminder, the purpose of this initiative is to drive frequency by reinforcing our already strong, everyday value proposition.

  • We're currently in the second phase of our value test and the preliminary traffic results of this expanded test are promising, but the reading of the test has been clouded once again by weather that we experienced in January and February, so we will continue to monitor the results and evaluate what next steps for this initiative are.

  • Moving on to retail.

  • While we still have a lot of work to do, I'm proud of the merchandising and operations team for delivering significant improvement in sales growth from our first quarter results.

  • The strength of our assortments, our emphasis on value, our execution of new conversion driving tactics and the opportunity buys that we spoke to on the last call all contributed to this improvement.

  • Looking ahead for retail.

  • Our teams remain diligent in their commitment to improving retail sales through unique merchandise offerings and by converting restaurant guest to a retail purchase.

  • I'm excited about our collections in the coming quarters, some of which will be new, some will be returning favorites, like our vintage-inspired decor and our spring garden collections in our perennial Easter merchandise, where guests can find unique offerings at price points for these lease fit within any budget.

  • Additionally, we'll continue to make opportunity buys and on-trend, relevant assortments at price points that resonate with our guests.

  • And this spring, we'll be featuring several new offerings and apparel as part of this program.

  • Lastly, before turning the call over to Jill, the new tax legislation provides financial benefit to us this year and in coming years.

  • We are evaluating our options, but we plan to reinvest a portion of the benefits in our business, and we're looking forward to using a portion of these savings to strengthen our brand, support our strategic initiatives, invest in the employee experience and to drive shareholder value.

  • And with that, I'll turn the call over to Jill.

  • Jill M. Golder - Senior VP & CFO

  • Good morning, everyone, and thank you, Sandy.

  • I'd like to begin by discussing our financial performance for the second quarter of fiscal 2018 and then our outlook for the 2018 fiscal year.

  • In this morning's release, we reported second quarter net income of $91.1 million or a $3.79 per diluted share.

  • This included a provisional net income benefit of approximately $38 million and an earnings per diluted share benefit of $1.63, resulting from the recently passed Tax Act.

  • When adjusted to exclude a one-time non-cash revaluation of net deferred tax liability, our adjusted EPS was $2.73, representing a 25% increase over prior year earnings per diluted share of $2.19.

  • For the quarter, we reported total revenue of $787.8 million, an increase of 2% when compared to prior year revenue of $772.7 million.

  • Our restaurant revenue increased 2% to $603.2 million, and our retail revenue increased 1.7% to $184.6 million.

  • Our total revenue increase was driven by positive comparable restaurant and retail sales and the opening of 7 new Cracker Barrel locations and 2 new Holler & Dash locations since the prior year second quarter.

  • Cracker Barrel comparable store restaurant sales in the quarter increased 1.1% as average check increased 2% and traffic decreased 0.9%.

  • We estimate that inclement weather in the second quarter adversely impacted comparable store sales and traffic by approximately 0.3%.

  • The increase in average check reflected menu price increases of approximately 2.3% and an unfavorable menu mix impact of 0.3%.

  • The second quarter mix unfavorability was driven primarily by a shift in mix from lunch and dinner entrées into breakfast entrées which have a lower retail selling price.

  • Second quarter comparable store retail sales increased 0.5% with increases coming primarily within women's apparel and our food and convenience category.

  • Total cost of goods sold in the quarter was 33.1% of total revenue versus 33% in the prior year quarter.

  • Our restaurant cost of goods sold was 26.1% of restaurant sales, a 10 basis point increase versus the prior year.

  • This increase was driven primarily by the impact of commodity inflation.

  • On a constant mix basis, our food commodity costs were approximately 2.7% higher in the quarter than in the prior year quarter, driven by increases in fruits and vegetables, beef, pork and eggs.

  • This includes an estimated $500,000 residual impact from the hurricanes that occurred in the first quarter.

  • Our retail cost of goods sold was 56.2% of retail sales compared to 56% in the prior year quarter.

  • This 20 basis point increase was primarily due to increased promotional activity.

  • Our retail inventories at quarter end were $120.9 million compared to $118.3 million at the prior year quarter end.

  • Labor and related expenses were $263.7 million or 33.5% of revenue compared with $259.3 million or 33.6% of revenue in the prior year quarter.

  • This 10 basis point decrease was primarily due to lower bonus expense.

  • Other store operating expenses in the quarter were $150.4 million or 19.1% of revenue compared with other store operating expenses of $141 million or 18.2% of revenue in the prior year quarter.

  • This 90 basis point increase was primarily driven by: first, higher maintenance expense, primarily driven by the implementation of our previously announced initiatives and higher costs associated with snow removal due to adverse weather; second, planned depreciation increases related to higher capital expenditures; third, higher advertising expenses due to increased national TV rates, incremental local TV advertising and increased digital media support; and fourth, increased utilities expense, resulting primarily from higher electricity and natural gas costs, driven by both rate and uses increases.

  • Store operating income was $112.7 million in the second quarter, or 14.3% of revenue compared with store operating income of $117.5 million or 15.2% of revenue in the prior year quarter.

  • General and administrative expenses in the quarter were $36 million compared to $34.8 million in the prior year quarter.

  • As a percent of revenue, G&A increased 10 basis points to 4.6%.

  • This increase was primarily driven by investments in our initiatives to drive top line sales growth.

  • Operating income was $76.7 million or 9.7% of revenue compared with operating income of $82.7 million or 10.7% of revenue in the prior year quarter.

  • Net interest expense for the quarter was $3.7 million compared to $3.6 million in the prior year second quarter.

  • Our GAAP effective tax rate for the second quarter was negative 24.9% compared to an effective tax rate of 33.3% in the prior year quarter.

  • Our second quarter tax rate includes the change in the federal statutory rate, the full recognition of the tax benefit of certain capitalized assets and the revaluation of our net deferred tax liability.

  • Turning to our balance sheet.

  • We ended the fiscal quarter with $168.8 million of cash and equivalents compared to $185.7 million at the prior year quarter end.

  • Our total debt was $400 million at quarter end.

  • With respect to our fiscal 2018 outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and in our report filed with the SEC.

  • We continue to expect total revenue of approximately $3.1 billion.

  • We now anticipate comparable store restaurant sales growth for the full fiscal year to be in the range of 1% to 2%.

  • We expect comparable store retail sales to be approximately flat.

  • We continue to expect to open 8 or 9 new Cracker Barrel stores and 3 new Holler & Dash stores in the fiscal 2018.

  • We now expect increased food commodity cost on a constant mix basis in the range of 2.5% to 3% for the fiscal year, reflecting price increases within the categories of eggs, beef and pork.

  • We have locked in our pricing on approximately 60% of our commodity requirements for fiscal 2018 compared to 65% at this time last year.

  • We expect depreciation expense of between $95 million and $100 million for the year, and we anticipate net interest expense of approximately $15 million to $16 million.

  • We now expect a GAAP blended effective tax rate for the fiscal year of between 11% and 14% and an adjusted blended effective tax rate of between 20% and 23%.

  • Regarding the Tax Act, we believe the full fiscal year impact of tax reform will result in a total tax benefit of approximately $45 million to $50 million.

  • We currently plan to invest between $10 million and $12 million of this tax benefit in fiscal 2018, but would like to note that these estimates are subject to change.

  • We anticipate that capital expenditures for the year will be approximately $150 million to $160 million.

  • Taking these assumptions into account, we now expect full year operating income margin to be in the range of 9.5% to 10% of total revenue, and we expect to report full year GAAP earnings per share to be between $10.35 and $10.55, and adjusted earnings per share to be between $9.30 and $9.50.

  • For the third quarter of fiscal 2018, we expect to report earnings per diluted share of between $1.85 and $1.95.

  • The third quarter guidance is predicated on our current expectations.

  • We anticipate that our third quarter sales growth will improve from our second quarter growth rate.

  • However, our February sales to-date have been challenged with continued winter weather and our guidance anticipates sequential monthly sales growth improvements during the third quarter.

  • We remain confident that our business top line initiatives and marketing efforts will drive improvements.

  • And with that, I will 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 Gregory Francfort with Bank of America.

  • Gregory Ryan Francfort - Associate

  • Just 2 questions on the tax rate.

  • Can you maybe help me understand what your guidance implies for the back half of the year?

  • And also, as you look out kind of, on an ongoing post this year basis, what is a normalized tax rate that we should be thinking about for your business?

  • Jeffrey M. Wilson - Principal Accounting Officer, VP & Corporate Controller

  • Sure, this is Jeff.

  • I'll take that question.

  • For the second half of the year, we're looking at a tax rate of around 20%.

  • So with the Tax Cut and Jobs Act, the statutory rate changes and we continue to expect the full benefits of the federal benefit of FICA tip credit and WOTC.

  • Gregory Ryan Francfort - Associate

  • Okay.

  • And then just -- in terms, as I look at your third quarter guidance, I think it assumes kind of, even x the 53rd week in the fourth quarter, a pretty material step up from 3Q to 4Q.

  • Is that in terms of year-over-year growth?

  • Is that driven by sales growth increases?

  • Or is there anything in the margin line that was year-over-year onetime change, last year in the third quarter, fourth quarter, that's causing that to be a little bit lumpy?

  • Jill M. Golder - Senior VP & CFO

  • Greg, this is Jill.

  • Let me take that.

  • So in the third quarter, our guidance has a few primary headwinds that the biggest of which is, we're expecting higher cost of goods sold, primarily due to greater commodity inflation, especially as that quarter is wrapping on deflation from the prior fiscal year.

  • We've also, in that quarter increased our marketing expense versus prior year.

  • And so then as you look out to the fourth quarter growth, as you said, we'd expect to see sales continue to accelerate with the growth of our initiatives as we fully roll those out.

  • And then we do have some marketing favorability in the fourth quarter as we pull some of that forward in the fiscal year.

  • So those are the big drivers between Q3 and Q4 growth versus prior year.

  • Gregory Ryan Francfort - Associate

  • So higher commodity inflation in the third quarter than the fourth quarter?

  • Jill M. Golder - Senior VP & CFO

  • Higher commodity inflation, vis-à-vis prior year, yes.

  • Gregory Ryan Francfort - Associate

  • Got it.

  • Okay, got it.

  • And then just may be one last question.

  • I think the average check as you look within the months of the quarter, took a step up in January.

  • Was there anything with the pricing or was there anything on the promotional front that may have shifted year-over-year?

  • I think the industry's been picking up the average check as well and so I don't know if it's -- you guys are pricing more against labor or if it's something on the product front?

  • Jill M. Golder - Senior VP & CFO

  • It wasn't pricing between the quarters, so it would've been driven by product mix or there might've been some impact on the day of the week when we had some of the holiday shifting because that tends to move between quarters and it can also -- I mean between months and it can also impact the overall check average on a week.

  • Operator

  • The next question comes from Jake Bartlett with SunTrust.

  • Jake Rowland Bartlett - Analyst

  • I had kind of an overarching question of, kind of, yield.

  • What has changed given the 3 initiatives you have that you are expected to drive comps in fiscal year '18?

  • You -- since you provided the guidance 5 or 6 months ago.

  • What has changed that kind of lowered your expectations for those initiatives?

  • Anything you, kind of, an answer that give a little update on each?

  • Jill M. Golder - Senior VP & CFO

  • Okay.

  • So this is Jill and I can start that.

  • So we are pleased with our -- the improvement in our overall sales from the first quarter to the second quarter and that's really driven by our initiatives versus our expectations, our sales did fall slightly lower than that.

  • We're also up against a continued difficult industry backdrop.

  • But as we look at our initiatives, we're pleased with the improvements in both restaurant and retail, and we're pleased with the progress that we're making in our 3 key initiatives from our off-premise initiative.

  • As Sandy mentioned, we're in the process of rolling out our coffee initiative.

  • And then of course, we are in the process of testing our value initiative, which has been a little difficult to read given some of the weather impacts.

  • But overall, promising.

  • And Don, I don't know if there's anything you'd like to add to that?

  • Donald H. Hoffman - SVP of Marketing

  • Just as a reminder, the daily delights, everyday low priced platforms when designed to work across 3 dayparts.

  • As both Sandy and Jill have mentioned, we're encouraged with the performance from Q1, however, some of the weather impacts made it difficult to read absolute measures.

  • Now the dimensions that we are seeking to evaluate, including traffic trade in overall value perception.

  • So we're in the second phase of that program now and we continue to evaluate the program performance and we remain encouraged and we consider our work in progress and continue to evaluate how our guests expect Cracker Barrel to deliver overall value to their experience.

  • Jake Rowland Bartlett - Analyst

  • And then in terms of that second phase, we counted some of the stores that we thought had the promotions or head a breakfast.

  • In there and it was about the same as, I think, in the first quarter at the end of January.

  • But what is the second phase news, are you going to expand the number of weeks that you're advertising in your stores?

  • Or are you going to expand the platforms with more stores in, say, March?

  • Donald H. Hoffman - SVP of Marketing

  • Yes, we've grown the test a little bit to add some more markets and we are continuing to support both externally with media as well as internally.

  • We've also been looking at some other adjustments for favorable mix in daypart and overall profitability of the program.

  • So we continue to optimize and grow at a modest rate in terms of how we're evaluating and expanding the program.

  • Operator

  • The next question comes from Jeff Farmer with Wells Fargo.

  • Jeffrey Daniel Farmer - MD and Senior Restaurant Analyst

  • Couple of questions.

  • The first one is a follow-up question.

  • So I think, I heard you say that you're pointing to roughly a low 20% tax rate in the back half of '18.

  • But I think there was a follow-up question that came in terms of your expectations for fiscal '19, is it fair to assume that a low 20% tax rate carries into the fiscal '19 as well?

  • Jill M. Golder - Senior VP & CFO

  • So Jeff, at this time, we are not guiding to '19.

  • Jeffrey Daniel Farmer - MD and Senior Restaurant Analyst

  • Okay.

  • But that's -- the correct understanding, the figure -- a low 20% number in fiscal third quarter and fiscal fourth quarter, that is correct?

  • Jill M. Golder - Senior VP & CFO

  • Yes.

  • Jay Donnelly - Associate Analyst

  • Okay.

  • And then you said you lowered -- you alluded to this, but you lowered that full year same-store sales guidance range by 1 point.

  • I guess I'm curious, is this the result of year-to-date same-store sales being a little bit weaker than expected?

  • Or you take any more cautious outlook over the next 2 quarters?

  • How should we read that downward revision over the same-store sales guidance?

  • Jill M. Golder - Senior VP & CFO

  • Yes, I guess, I would say, it's a little bit of both.

  • As we've said, we're pleased with the improvement from first quarter to second quarter in our same-restaurant sales growth.

  • But that was slightly lower than our initial expectations.

  • And then as we look to the back half, we know it'll take a little bit longer for our initiatives to continue to see.

  • And then as I mentioned in our prepared remarks, February has started off with some continued weather impact.

  • Jeffrey Daniel Farmer - MD and Senior Restaurant Analyst

  • Okay, then last question.

  • You did mention that you touched on it, but what will the $10 million to $12 million in tax savings be reinvested in or upon?

  • So I guess more specifically, is that going to be evenly reinvested across both quarters?

  • Will that reinvestment continue into, at least, the first half of '19?

  • How should we think about that $10 million to $12 million?

  • Jill M. Golder - Senior VP & CFO

  • Yes, as we guided, our guidance does include a planned investment of $10 million to $12 million in (inaudible).

  • Currently working through that list of ideas.

  • Right now, these investments will be -- there are some -- we're assuming some in the third quarter, a little bit more weighted to the fourth quarter from a timing standpoint.

  • Operator

  • The next question comes from Alton Stump with Longbow Research.

  • Alton Kemp Stump - Senior Research Analyst

  • This is exceptional question, I guess.

  • But if you look ahead at full year '19 or even over the next couple of years, given the windfall from tax savings, is there any potential impact on your new store growth plans?

  • Obviously -- of course, you referenced increased investments.

  • I'll guess at labor, (inaudible) in particular, but from actually unit counts, could this potentially lead to any boost in your overall store platform, just for the fact that you have a lot more cash now potentially at your hands to work with?

  • Sandra Brophy Cochran - President, CEO & Director

  • Well I'll start that one and let Jill in.

  • At this point, it's too early to tell whether the implications from the Tax Act and what that's going to have on consumer environment.

  • The -- there are a lot of other issues that are impacting our interest in accelerating new store growth and those relate to Casual Dining segment and the challenges on that, the competitive environment and the continued dealing, the Netflix, Amazon.

  • There's a lot of issues that go into our decision about whether we think we can open stores that deliver shareholder value, but we will continue to evaluate it.

  • Jill M. Golder - Senior VP & CFO

  • Yes.

  • I guess, Alton, what I would add is just on some color on what we are thinking about in terms of some potential investments for the $10 million to $12 million in tax savings.

  • So we are continuing to look at things that will strengthen our brand, support the strategic initiatives that we've already talked about and enhancing our employee experience, and so as we look at those, we could -- we're evaluating things in the range of benefit plans to ensure that they position us to be an employer of choice for our guests -- I mean, for our employees.

  • We're looking at how we might accelerate some future plans to your point, but in that area, we're also looking at things like culinary projects, so can we leverage third-party or outside resources to help us get after some of those projects faster?

  • But as we solidify our plans and we'll make sure that we continue to communicate those, but we're really focused on making sure that we support the initiatives that we've outlined and drive the overall top line growth and the employee experience.

  • Alton Kemp Stump - Senior Research Analyst

  • Great, makes sense.

  • And then I can just follow up if I may, you had a store opening recently in California, I was curious (inaudible) off early but just sort of, how that has trended so far, if you could see the major difference as to market behavior in that new store versus rest of the country?

  • Sandra Brophy Cochran - President, CEO & Director

  • We just opened in Victorville California last week -- 2 weeks ago, and we are very pleased with the response we've gotten from that community.

  • So we're very happy about the initial results in Victorville and are looking forward to our next opening in Oregon, I think, is -- and then we do have a couple of future stores in California on tap.

  • Operator

  • (Operator Instructions) The next question comes from Bob Derrington with Telsey group.

  • Robert Marshall Derrington - MD & Senior Research Analyst

  • Sandy, could you give us a little bit color on the catering program.

  • I know that it seems there is a pretty good amount of excitement about the potential what that could do, but you're already, kind of, changing some things around with the biscuit bar and I can't remember what the other item you mentioned is.

  • Should we draw any conclusions based on you're already evolving that, given that it's only been out just for a short while?

  • Sandra Brophy Cochran - President, CEO & Director

  • Well the conclusion draws that we -- this is a long-term initiative for us and we plan to continue to enhance our offering, our technology and our execution against it for, I would imagine, years, and some of the things that you'll be seeing in later quarters have been working on -- the culinary team has been working on it just wasn't ready to be rolled out and even some of these will need to test first before we roll them out chain wide.

  • So no, I expect improvements to come to some degree in phases, but to give you little more color as I mentioned, very excited about the Easter Heat n’ Serve, that's an example of a program that we really began investing in seriously a few years ago and over time, have tweaked the offering.

  • We've tweaked the packaging, we've tweaked the marketing and I think our stores of gotten better and better at executing against that -- against it, which is what allowed us to grow it again this Thanksgiving and then over the Christmas timeframe.

  • In the coming quarters, will be introducing first breakfast bundles, which is really more of a way to organize the menu and to make it easier for our catering guest to choose a menu that sort of works for them.

  • We do have some new menu items mentioned the biscuit bar, some handheld -- new handheld sandwiches but in addition, we're looking at new flavors with our breakfast casserole, maybe being able to bring in some pastries, which is something that a lot of our guests would like, and that isn't currently part of our offering in our restaurants, so the guests responses have been positive, the stores are doing a good job of both learning how to execute against it and we're really focused on building competency and awareness of the program in the next few quarters and years.

  • Robert Marshall Derrington - MD & Senior Research Analyst

  • Was there very margin drag, Sandy, this past quarter, which was part of the reason for the lower store level performance?

  • Sandra Brophy Cochran - President, CEO & Director

  • I'm sorry, Bob, ask that question again?

  • Robert Marshall Derrington - MD & Senior Research Analyst

  • The store level margin in this past quarter was roughly down 90 basis points year-over-year.

  • Was there a drag from -- in that margin from the rollout of these programs and from some of the initiatives related to it either training or packaging or?

  • Jill M. Golder - Senior VP & CFO

  • Bob, this is Jill, yes.

  • To your point, there -- we had some continued training within the second quarter.

  • We talked about this as being an investment year for us.

  • And certainly, in the second quarter, we were in the process of fully rolling out our off-premise following our general managers' conference.

  • I'd say the bigger drag in the second quarter were what I highlighted in my prepared comments around the other operating expenses.

  • Operator

  • The next question is a follow-up from Jake Bartlett with SunTrust.

  • Jake Rowland Bartlett - Analyst

  • One question.

  • I asked really 2 questions in marketing.

  • And the first is, what you expect for marketing in 2018, was a little unclear as to whether you expect it to be, kind of, flat as a percentage of sales or flat as a dollar amount?

  • And that's the first question.

  • The second question is around the Campfire promotion, I believe it was you're talking about doing it 8 weeks this year, it was 11 last year.

  • Maybe just explain why that wouldn't be a drag if in past year you had last weeks but more impressions.

  • So maybe a little more detail there would be helpful?

  • Sandra Brophy Cochran - President, CEO & Director

  • So Jake, I can start with the marketing expense.

  • So we're expecting it to be flat as of dollar amount for this fiscal year.

  • And then I'll turn it over to Don to talk about some of our plans.

  • Donald H. Hoffman - SVP of Marketing

  • Yes, thanks, Jake.

  • The -- as Sandy had talked about there's some new product news we're going to put within the Campfire events.

  • We've evaluated the program over the last couple of years.

  • We think 8 weeks is a good duration for that program in store.

  • We've made some plans to not only strengthen it from a product perspective but also from our media perspective.

  • We are going to spend higher TV wait levels this year than we did in years prior.

  • We've begun a strategy about a year ago to concentrate that wait a little bit more closely to have higher impact during the weeks that we're on the air.

  • So in general, you're going to see more media support this year than we saw last year behind Campfire.

  • Jake Rowland Bartlett - Analyst

  • And then, Sandy, I just have one other question for you.

  • What's your perspective on the value environment, the promotional, the competitive environment out there?

  • Do you believe that this quarter was meaningfully impacted by the stepped up advertising or in marketing and promotional cadence that we saw at the -- in QSRs?

  • Donald H. Hoffman - SVP of Marketing

  • Yes, I'll take that question.

  • I think we believe that the environment remains challenged.

  • We think a lot -- there's a lot of price promotional, lot of discounting to try to achieve short-term market share.

  • We are very cognizant of that.

  • As you know from our business plan we don't believe in discounting or couponing but we do believe in everyday value and the everyday value proposition with our guests.

  • So we continue to reinforce that not only through the Daily Delights programs but our other offerings during our breakfast, lunch and dinner hours.

  • And we know from our current consumer learning and our tracking measures as well as competitive tracking that we are viewed to be very favorable in terms of our value equation with our guests.

  • Operator

  • We have another follow-up from Bob Derrington with Telsey group.

  • Robert Marshall Derrington - MD & Senior Research Analyst

  • Two-part question.

  • First, on the value test, Sandy, should we give any thought to the check average as it relates to that, given whatever timing it is that you plan to roll that out?

  • Jill M. Golder - Senior VP & CFO

  • I can start.

  • This is Jill.

  • So right now, it's in test in few markets.

  • So it's not going to be meaningful impact to the company.

  • And part of what we're trying to read is how consumers are using that section of the menu, so probably more to come on that.

  • Robert Marshall Derrington - MD & Senior Research Analyst

  • Okay.

  • And then second piece as it relates to some of the pieces of guidance.

  • One, on the tax rate, your guidance for the low 20% range for the second half of the year, that is essentially, I think, implies no benefit from the FICA tip credit.

  • Is there some reason for that?

  • Donald H. Hoffman - SVP of Marketing

  • No, we are still expecting that we continue to get the FICA tip credit and the WOTC hiring credit.

  • In the back half of the year is based off of a blended statutory rate that uses the 35% and the 21% as the starting point and then we reduce it by those federal credits.

  • Robert Marshall Derrington - MD & Senior Research Analyst

  • Okay, that's helpful.

  • And then on the DNA line the guidance line, the guidance of $95 million to $100 million.

  • If we look at the midpoint of that guidance for the second half of the year, that implies that DNA is up, roughly about 20% year-over-year in the third and fourth quarter.

  • Are there additional investments that are coming online, do we need to be thoughtful about as it relates to that?

  • Jill M. Golder - Senior VP & CFO

  • So Bob, as we're looking at it, we do expect capital spending to increase in the back half, which would result in higher depreciation.

  • And that increase in capital spending includes so the full -- the rest of the rollout of our specialty coffee, we've continued testing of our new POS, along with the full depreciation from some of the equipment that we rolled out in the second quarter for our off-premise initiative.

  • I was just going to add, Bob, as you're looking at that range, we'll probably be towards the lower end of the guidance range for depreciation.

  • Operator

  • This concludes our question-and-answer session.

  • I would like to turn the conference back over to Sandy Cochran for any closing remarks.

  • Sandra Brophy Cochran - President, CEO & Director

  • Well, thank you for joining us today.

  • We remain one of the strongest and highly differentiated brands in the industry.

  • We'll continue to leverage that strength to drive solid returns for shareholders.

  • We appreciate your interest and support and your time this morning.

  • Operator

  • The conference is now concluded.

  • Thank you for attending today's presentation.

  • You may now disconnect.