Cracker Barrel Old Country Store Inc (CBRL) 2002 Q4 法說會逐字稿

Good day, everyone.

Welcome to today's CBRL Group fourth quarter earnings conference call.

Today's call is being recorded and will be available for replay starting today at 2:00 p.m.

Eastern time and run through September 17th until 8:00 p.m.

Eastern time by dialing 888-203-1112 and entering the confirmation code 50046.

At this time, for opening remarks and introductions, I'll turn the call over to the Chairman of the Board, Mr. Dan Evins.

Please go ahead, sir.

Thank you, Andy.

Good morning, folks.

We appreciate you all joining us on the 2002 year end conference call on our earnings.

Our assumption is that you all have a copy of our earnings press release.

I sort of feel in the business environment today, I'm reminded of the story of the body that had two heads.

Each head would have control of the body on alternating days.

One head would more often than not get drunk, he was a bad guy.

The other head, a good guy, would suffer the hangover the next day.

I'm not sure that many in the business world, I'm pretty sure that they are feeling much like us, a bit hung over here in the last few months through no fault of their own.

But in any event, I shall advisedly turn this meeting over to Larry White, our CFO, and Mike Woodhouse, our CEO and Jim, Corporate Counsel.

Larry?

Thanks, Dan.

This is Larry White and I want to thank our listeners on the conference call and webcast for your interest and participation this morning.

Hopefully, everyone has had an opportunity to see this morning's press release announcing our fiscal 2002 fourth quarter and year end results, and also providing an update on current trends in the company's guidance for earnings for the new fiscal year.

As a reminder of our policy, and in compliance with regulation FD, we do not review or comment on earnings estimates made by other parties, nor do we provide continuing updates of or express continuing comfort with our own guidance and trends except in broad public disclosure such as we have done this morning.

We do expect to file the required CEO and CFO certifications under both SEC order 4460 and under Sarbanes-Oxley and we expect to file them on time.

Our due date for filing our Form 10-K is October 31st, 2002.

Continuing on, we urge caution to our listeners and readers in considering the information on current trends and earnings guidance.

The restaurant industry is highly competitive, and trends and guidance are subject to numerous factors and influences that can cause future actual results to differ materially from those trends and guidance.

Some of those factors are described in the cautionary discussion of risks and uncertainties found at the end of this morning's press release, and we urge to you read that language carefully.

The company assumes no obligation to update disclosed information on trends or guidance, and should we provide any updates after today, they will be made only by press release or in periodic filings with the SEC under Forms 10-K, 10-Q and 8-K.

With that obligatory recitation of our disclosure policy, aside, let's review this morning's good news.

And for yet another quarter, we think it's very good news.

First of all, let me remind you about the comparisons I'll be making.

In last year's fiscal fourth quarter, we recorded certain charges related primarily to our exiting of the Carmine Giardini's business among other things.

I'm not going to go into the details of those charges today.

They are disclosed in some detail already in our fiscal 2001 annual report and Form 10-K and they are also described to some degree in this morning's press release.

I just want to make it clear that I'm going to be addressing my year-over-year comparisons primarily against a prior year excluding those charges.

Furthermore, the comparisons I make generally won't deduct the estimated 9 cents per diluted share also detailed in our fiscal 2001 Form 10-K and annual report that benefited us last year from having an extra week in last year's fiscal fourth quarter and full year.

I'm sorry if that's a little confusing, but think of it this way: I'll be comparing for the most part against a prior year which excludes the charges but includes the benefit of that extra fiscal week.

Okay, now let's look at the numbers.

Bottom line, we recorded diluted earnings per share for the fourth fiscal quarter of 56 cents versus 48 cents a year ago which was in the high end of the guidance we gave in press releases during the quarter where we said we expected results in the low to mid 50s.

I make the observation also that 56 cents a share ties the record for the further quarter achieved in fiscal 1998.

Summarizing our final results against our earlier expectations, retail cost of goods was better than we expected with a lower retail costs reflecting lower-than-expected shrink.

Group healthcare costs was favorable to our expectations.

Restaurant labor, vacation pay, and also apparently because of a conservative estimate that we made, store bonuses, store bonuses were higher than last year but we overestimated them in our projections.

We're especially pleased that once again, we posted positive sales results throughout our business.

And Cracker Barrel Old Country Store Restaurant and retail and Logan's Roadhouse.

We also discussed that even with some relative softness in sales trends thus far in the present quarter, our present guidance for earnings per-share growth from the -- this quarter and full fiscal year is strong.

Finally, we announced that our board the of directors has authorized an additional share repurchase program under which we'll repurchase another 2 million shares of our common stock and open market trades made from time to time.

That's on top of approximately 7.6 million shares we purchased in fiscal 2002.

Let's look at some of the details of the operating results.

Revenue in our fiscal fourth quarter ended August 2nd, 2002, was approximately the same as fiscal 2000 -- 2001 fourth quarter.

However, the 2001 quarter as I explained earlier, benefited from having a 14th week compared with this year's 13 weeks.

That extra week made the year ago quarter's revenues about 8 percent higher than they otherwise would have been.

So on a comparable number of weeks, this year's fourth quarter total revenues were about 8 percent higher than a year ago.

Taking out those benefits from a year ago, the effect of increase this year resulted primarily from positive comparable store sales and new unit openings for both our cracker balance Old Country Store concept and our Logan's Roadhouse concept and partly offsetting those gains was the reduced revenue effect of exiting our Carmine Giardini's gourmet market business at the end of the last fiscal year.

Cracker Barrel comparable store restaurant sales in the fourth quarter were up 3.9 percent from a year ago, an improvement comprised of 2.4 percent higher average check and 1.5 percent increased guest traffic.

That marks 12 consecutive quarters of positive comparable store guest traffic and 10 consecutive quarters of positive comparable store sales.

It's achievements the company last accomplished in fiscal 1994.

For the quarter, we achieved positive sales and guest counts across all three-day parts, breakfast, lunch and dinner, although we saw minor weekend lunch and dinner traffic softening in a lot of the later part of the quarter.

All in all, we view these results as good and solid.

Let me remind everyone that these sales and traffic results were on top of an up quarter a year ago when we recorded a solid 4 percent comparable store sales increase.

We believe that our continued focus in operational execution and best practices is a key reason why we've enjoyed these favorable trends.

We also think we benefit from having a concept with strong customer perception of value, quality, and down home comfort.

We can't control the economy or overall consumer sentiment, but we can and do strive to be the consumer's destination of choice, a place in gets high consideration when the dining out decision is being made.

Cracker Barrel comparable store retail sales in the fourth quarter also increased, coming in at 1.9 percent above the year ago.

Selling well this quarter were rocking chairs and certain lines of apparel and certain toys or novelty items.

Our focus on targeted retail items has been very successful with those monthly targeted items always achieving sharply higher sales rates during the periods when they're targeted.

Rounding out our comparable store sales increases, we are happy to report another quarter of positive sales and guest traffic trends at our Logan's Roadhouse concept.

Where comparable stores reported a 1.8 percent increase on guest counts on a half a percent lower average check for a net 1.3 percent fourth quarter nominal sales increase.

We have been cautious with our pricing at Logan's and we're presently carrying just over 1 percent of actual menu price increases over the year-ago period and that's been partly offset by lower mix including lower alcohol mix.

During the fourth quarter, we opened 6 new Cracker Barrel Old Country Store units, and one new franchise Logan's Roadhouse restaurant bringing our total openings for the year to 20 Cracker Barrels, 9 company operated Logan's and four franchise Logan's.

The Logan's franchise expansion has been under existing development agreements and no new franchise agreements presently are expected.

As of today, we have 457 Cracker Barrels, in 41 states, 85 company-operated and 12 franchise Logan's in 17 states.

The Logan's store count includes one location opened so far in fiscal 2003, and that was in Beaumont, Texas.

Let's continue on down the income statement again reminding that I'm adjusting last year's comparative results to exclude the charges taken in the fourth quarter of fiscal '01.

Store operating income for the fourth quarter was up 5.5 percent on the flat revenues, and store operating margins improved 80 basis points from 13.5 percent to 14.3 percent of revenues.

Our progress continues on the important front of improving operating margins with a comparable rate aimed at continuous improvement with an equal or greater focus on guest value perception as we strive for our concepts to be destinations of choice.

Improvements compared with last year in cost of sales reflected lower food and retail cost at Cracker Barrel and lower cost of goods at Logan's.

Net commodity costs have been favorable to Cracker Barrel with several items contributing and Logan's benefited from favorable costs in beef and ribs compared with last year.

We're pleased with the beef situation this past quarter and even the near-term outlook but we believe there will be further pressure ahead.

Food costs management is continuing to run well relative to targets in both concepts.

And retail cost of goods sold has benefited primarily from lower shrink, markdowns and retail freight.

We're very pleased with the improvements in retail shrink in the second half of fiscal 2002, and we're hopeful that our initiatives to control shrink are paying off.

Labor and related costs was lower than last year at both Cracker Barrel and Logan's, including among other things lower hourly labor and improving group health costs.

Management of hourly wages relative to targets was good again this quarter, and hourly turnover has generally continued to decline in both concepts.

Hourly wage inflation for our non-tipped employees dropped below 2.5 percent compared with a year ago at Logan's.

And it was less than 1 percent at Cracker Barrel, both of which mark continued improvement for where we have been.

Other store operating expenses in the fourth quarter were slightly unfavorable to a year ago.

That's primarily because of the prior year leveraging effect on fixed cost components of last year's extra sales week.

That leveraging effect on fixed operating costs and on G&A is why the extra week added a relatively large estimated 9 cents to last year's diluted earnings per share.

Again, I'll remind you the details of this effect can be found in last year's annual report and Form 10-K.

General and administrative expense was somewhat higher in the fourth quarter than a year ago.

Included in the higher rates were professional fees, bonus accruals reflective of performance improvements, the effects of staffing and infrastructure changes not in place a year ago, and other miscellaneous effects.

Earlier this year, we adopted FAS 142, goodwill and intangible assets under which we no longer amortize goodwill so that's a pickup compared with last year.

Interest expense in the fourth quarter was lower than a year ago, as we benefited from lower interest rates, which offset higher average outstanding borrowing.

During the prior quarter year, you'll recall we issued almost $173 million of zero coupon convertible notes.

I'm not going to go over that again since it was covered thoroughly in press releases and public filings at the time.

Except I will observe that we now have substantially achieved our targeted capital structure which including the effects of off balance sheet operating leases, puts us at an adjusted total indebtedness to total capitalization in the mid 30 percent range which is where we presently expect to be.

While somewhat more leveraged than the company has been historically, this is still a conservative capital structure and is consistent with our desire to maintain our investment-grade credit rating.

We expect future share repurchases which will utilize free cash flow and not from significant additional leverage.

We expect them to be a component of our strategy and maintaining this capital structure target.

We announce today that our board has authorized us to repurchase up to 2 million shares in open market transactions from time to time as conditions warrant.

And this is a continuation of this capital structure strategy.

Wrapping up the fourth quarter, net income of $30.5 million was improved 12.5 percent from $27.1 million a year ago, excluding the charges as mentioned earlier.

Diluted earnings per share of 56 cents were improved 16.7 percent from 48 cents reported in the fourth quarter last year, again excluding the effect of those charges.

As I said earlier, this was at the high end of our guidance of the low to mid 50s that we disclosed in press release updates during the quarter, and it was 2 cents higher than consensus as reported on First Call.

Our total share repurchases in fiscal 2002 including the repurchases made simultaneously with the issuance of convertible debt were approximately 7.6 million shares for an aggregate outlay of almost $217 million, or $28.41 per share.

Partly offsetting that benefit, however, was the impact of more than 2.9 million shares issued under stock option exercises for total net proceeds of about $53 million.

Historically, we had a broad-based stock option plan that awarded options to everyone from the officer group to our most experienced restaurant hourly employees.

The power 4s.

Additionally, with our stock performing well this year, a large portion of our outstanding options have been in the money recently.

Also offsetting some of the effects of the repurchases in our calculation of diluted earnings per share.

While our total option grants in the past have been larger than many in our industry, this is substantially a reflection of the broad based nature of our plan with a significant number of the options historically awarded to our power 4 hourly employees.

After last year's grant and in response to an employee preference survey, we changed our par 4 compensation program to substitute other components for option awards.

So future grants should be smaller than in recent history.

I'll add maybe on your mind and I'll just add that no decision has been made on the issue of expensing stock options in the future.

Finally, in this morning's press release we updated our current trends and earnings guidance.

I again urge you to consider the cautionary discussion of risks and uncertainties at the end of today's press release and to understand the inherent risks associated with trends, targets, guidance and estimates in a competitive industry such as ours.

We remind that you we assume no specific obligation to update this information other than a periodic filings with the SEC from time to time.

Also, we won't offer any further guidance nor after today express continuing comfort with today's disclosure other than in public filings or by other broadly disseminated means such as press releases from time to time.

As reported this morning, restaurant sales trends have softened somewhat this quarter, with early September being softer than August.

Quarter to date same store restaurant sales for Cracker Barrel Old Country Store have been up compared with a year ago, however, by approximately one to 1.5 percent, substantially reflecting a higher average check of approximately the same amount, and approximately flat guest traffic.

Same store retail sales had been down compared with a year ago by approximately 3.5 percent.

Our initiatives to reduce our exposure to a potential West Coast dock strike included rerouting of a large portion of our import shipments to East Coast ports.

This contributed to delays in getting merchandise, especially holiday merchandise, into the stores on the same schedule as last year, and has had a substantial impact on retail sales trends this quarter.

Recent high temperatures also seemed to have affected our sales of fall seasonal apparel.

People don't want to buy cool-weather clothes when it's unseasonably warm.

Our present estimate is that we'll be fully caught up in getting holiday merchandise into the stores by mid-october, which is in time for the busiest part of the holiday shopping season.

Logan's quarter to date sales are approximately flat, including guest traffic decreases of approximately a half a percent.

While we're not happy about the relative softening of sales, we believe it's affecting many in our industry and our relative performance has been better than many have reported.

In the case of retail, sales softness is explainable to a large degree.

Our present earnings guidance which I'll discuss in a moment reflects improvements from these early trends.

We expect to finish the first fiscal quarter with positive comparable store restaurant sales and traffic in Cracker Barrel and with improvements in trends at Logan's.

In addition to the logistics plan for retail, we are looking at other sales initiatives to offset some of the holiday merchandise availability issues that have affected us thus far this quarter.

Overall, we presently expect approximately 6 percent total revenue growth in the first quarter and 8 to 9 percent total revenue growth for the year relative to fiscal 2002.

Apart from some likely relative softness in sales comparisons in the second quarter, when we will compare against last year's unusually mild weather, our present expectations are for sales comparisons generally at or above first quarter expectations.

We also are projecting 4 new Cracker Barrel openings in the first quarter out of a projected total of 23 this year.

We expect five of this year's planned 12 new Logan's restaurants, 5 of the 12, to open in the first quarter.

Our present guidance for diluted earnings per share for the first fiscal quarter is in the high 30s to low 40s cents, obviously, compared with 35 cents in fiscal 2002.

For the full fiscal year of 2003, we presently expect to achieve or exceed our long-term EPS growth goal of 15 percent or better and that's compared with $1.64 that we reported for fiscal 2002 today.

So to wrap up my report, we are reporting good sales and earnings results this morning.

We are at the high end of our guidance range and we beat consensus by a couple of cents.

And we are expecting positive earnings results generally at or above our 15 percent EPS growth target in spite of some softening in recent sales trends.

Finally, we announced a new share repurchase authorization for another two million shares.

We believe all this is good news for our shareholders and we're very happy reporting it this morning.

With that I thank you for your patience with my financial review.

I'd like to introduce Mike Woodhouse, our President and Chief Executive Officer, who has further remarks on operating trends and initiatives.

Mike?

Thanks, Larry.

And good morning, everyone.

Very pleased to be able to report another positive quarter and a very successful year for CBRL.

Our key financial goal is to deliver sustained growth and EPS of 15 percent or better.

We achieved that goal in the fourth quarter with 17 percent EPS growth and for the year as a whole, with 26 percent earnings growth.

It's worth noting that both of these results were handicapped by the extra week in the fourth quarter of the prior year.

Of course, as Larry mentioned, we beat the First Call consensus estimate for the quarter and the year by 2 cents.

Our earnings growth is coming from strong operating performance coupled with capital structure management.

On the latter, we adjusted our capital structure in fiscal 2002 through the lion's offering and through the use of free cash flow throughout the year to repurchase shares.

The result is a modestly more aggressive balance sheet than at the end of last year but still conservative and we're committed to maintaining this posture including our investment grade rating to provide a strong foundation to support our long-term goals.

On the operating side of our business, our goals are top-line growth through positive same-store sales and new store development combined with continuous improvements in store operating margins.

We achieved these goals in fiscal 2002 with positive same-store sales in both Cracker Barrel and Logan's in all 4 quarters and in the case of Cracker Barrel, of course, these gains came on top of strong same-store sales in the previous year.

Store operating margins were up 80 basis points in both the quarter and the year as a whole, and we were pleased with this progress that we made in further improving operating costs controls while we were sustaining strong positive top-line growth.

Of course, as Larry mentioned, in Cracker Barrel, this was our 10th consecutive quarter of positive same-store sales and 12th consecutive quarter of positive guest traffic.

We were especially pleased in Cracker Barrel with sales in the quarter after the soft start we experienced along with the rest of the industry over the Memorial Day holiday weekend.

We were also pleased with Cracker Barrel sales given the apparently lighter road travel than had been predicted earlier in the year.

Evidence for the lower travel numbers comes from the reservations reported by the AAA travel barometer and these data indicate that hotel reservations were down in May, June and July after being strongly up from December through April.

Industry tracking data also shows the motel occupancy was down from the prior year in all three months of the quarter.

Another indicator is the federal highway administration traffic volume trends data.

Although it's only available through April as of today, the data shows miles driven on rural interstates up 4.3 percent in the first quarter and up 4/10ths of one percent in April compared with an annual increase of 5.2 percent in calendar 2001.

The picture is the same on urban interstates where the first quarter was up 2.3 percent and April is up 1.7 percent compared with 4.1 percent for all of 2001.

And again, all of these data simply support the idea that we achieved strong sales -- same-store sales performance in Cracker Barrel despite relatively weak travel experience in the quarter.

We continue to run positive sales in traffic in Cracker Barrel in August and in the light of general industry sales, we think it focused on our superior execution coupled with attractive prices allowed Cracker Barrel to perform well in a weak environment.

Maintaining this superior performance is critical in our operational focus in the new year is building on and improving on the speed of service and optimum staffing best practice initiatives we rolled out last year.

Updating and reinforcing these best practices with even greater emphasis on establishing and achieving performance goals will be an ongoing priority.

Familiar food made from quality ingredients and at an attractive price is a key part of the Cracker Barrel experience.

We'll continue to develop and test new menu items for our seasonal promotions, but in the short term we're bringing back the highly successful homestyle chicken product in the near future.

This was the most successful promotional product we have ever run and we expect to see it contribute to a rebuilding of sales momentum as well as a helping to further improve margins.

There is another example of focusing on giving our guests what they want at Thanksgiving as well as running our annual Thanksgiving dinner special we're end expanding on last year's successful test of bulk Thanksgiving dinners to go.

It's a complete meal for six priced at 39.99 and we think it represents exceptional value for those people who want to combine the experience of Cracker Barrel food with the familiar surroundings of their own home.

We're also focusing on a whole pie sales which we believe is a meaningful incremental sales opportunity during the holiday season.

On the retail side of Cracker Barrel, we were pleased with the positive same-store sales throughout the fourth quarter.

We have been experiencing negative sales in this first quarter of the new year and Larry's covered those reasons in his remarks.

But I'd like to stress that we expect the situation with regard to imports to be fully resolved by the middle of October in time for our peak Christmas selling season.

Looking forward in retail, we are continuing to implement a strategy to increase the instance of retail purchases by our dining guests.

The target program is part of the strategy and we continue to see success with this program.

We are also looking for more restaurant tie-ins to the target item program.

For example Apple Crisp is a current promotional item in the restaurant and it's also a target item in retail.

Other key elements of our retail strategy are the broadening of the appeal of the retail merchandise demographic cloudy and the addition of more items below the $20 price point.

We expect to see both of these initiatives have a growing impact as we move through fiscal 2003.

Management turnover in Cracker Barrel was 19.9 percent in the fourth quarter bringing the total for the year to 22.6 percent compared with 24.4 percent in fiscal 2001.

Hourly turnover was 128 percent compared with 151 percent in fiscal 2001 and the turnover in the critical par 4 group of employees was 24 percent, down from 26 percent last year.

The stability and depth of experience created by these low turnover rates is a major contributing factor in our mission after achieving continuous improvement in operational execution.

We opened as Larry said we opened a total of 20 Cracker Barrel stores in fiscal 2002 and the 2002 openings as a group continue to perform better than the 2001 and 2000 new stores.

We've recently developed the new store review process where we conduct a comprehensive review of every new store in the month in which it opens and again after three months so that we can ensure that each store is performing up to expectations.

And if it happens not to be, we can develop an immediate remedial plan to get it back on track.

At Logan's we are also very pleased with the positive same-store sales trends in the fourth quarter and for the year as a whole.

We saw positive sales in traffic in every month of fiscal 2002 at Logan's.

Recent sales trends, however, have been soft at Logan's in line with overall industry trends.

And in this environment, we believe that superior execution continues to be critical and the priority at Logan's is to continue with the broader best practices approach I talked about at our last conference call focusing on continuous improvement in operational execution.

We rolled out a new menu design in July at Logan's and took a 1.1 percent price increase in the process.

Guest feedback on the menu has been favorable and it looks like the price increase has been effective.

We saw an 8/10ths improvement in check in July and further strengthening in August and September.

The new alcoholic beverage initiative at Logan's is being well received and we have seen improvement in the trends in liquor mix but we have some way to go before we hit our targets.

Management turnover is also improving at Logan's.

Fourth quarter was 25.4 percent which brought the year as a whole to 23.2 compared with 27.1 percent last year.

And hourly turnover is also improved ending the year at 137 percent down from 154 percent in fiscal 2001.

Beef prices are critical at Logan's and our existing contracts run through the end of December.

And we expect in the short term the severe drought conditions and reduced export demand will continue to delay the expected runup in prices.

But we expect significantly higher prices in our third and fourth fiscal quarters and in the next several months we'll be negotiating contracts with for calendar 2003 and we have anticipated higher prices in our planning process and in our projections.

Before I close, I also want to mention that our subsidiary Cracker Barrel Old Country Store, Inc., is responding to questions recently posed by the US Department of Justice in the first quarter of fiscal 2003, the DOJ formally contacted Cracker Barrel pursuant to title 2 of the civil rights act of 1964 to request background information concerning claims of discrimination in public accommodations.

We understand this to be a preliminary fact finding inquiry and we welcome the opportunity to respond to the DOJ.

The company and Cracker Barrel of course take this matter very seriously and intend to cooperate fully with the DOJ, and we strongly believe that the information we will be providing will be will demonstrate that any claims or concerns which could involve a pattern or practice of discrimination are entirely without merit.

As I'm sure you understand, because Cracker Barrel is also separately engaged in a vigorous defense of litigation concerning claims of discrimination, it's inappropriate for us to comment further on this matter at this time.

In closing, I'd like to reiterate the success we had in fiscal 2002.

This was the result of a lot of hard work by over 55,000 people in our two businesses.

A lot of the success also came from careful planning, focused execution of those plans, and the ability to respond to a changing external environment with a number one priority always being the quality of the guest experience.

As we look forward to the new year, we see a continued uncertain external environment and plenty of challenges to address but I am confident that the internal momentum which comes from the successes of fiscal 2002 will help us meet our goals in fiscal 2003.

And as a final comment, Larry and I worked together a lot as a team.

Larry is very appropriately a conservative CFO.

I suffer from, uhm, a chronic case of English understatement.

So just in case we haven't communicated, we're really excited and pleased with the results and looking forward to a great 2003.

And now I'd like to turn the call over to questions.

Thank you.

If you would like to ask a question at this time, press the star key followed by the digit 1 on your touch-tone telephone.

Once again, that's Star 1 to ask a question.

And we'll go first to Howard Penny with SunTrust.

Hi.

Thanks very much.

I was wondering if you could just maybe clarify your share repurchase program, one, specifically, how many shares are outstanding at the end of the quarter, but, uhm, you know, where you are -- you have so many different share repurchase programs.

Have you completed the one that you had before the new one was announced, or do you -- or maybe -- what exactly do you have left on your share repurchase program?

And have you bought back any stock since the end of the quarter?

Thank you.

Okay.

Thanks, Howard.

This is Larry.

We completed all the previously announced share repurchase programs in -- during fiscal '02 and we have not done any additional share repurchases since the end of fiscal '02 so that the current authorization is 2 million shares.

And can you state your ability to grow margins or show margin improvement given the current sales environment?

I know you expect sales to recover somewhat, but given the current environment, uhm, you still have the ability to hold margins and maybe even improve them or is that just too much of a stretch?

I think we can certainly continue to improve margins.

A lot of the things we have been doing and are doing going forward are on the cost control side, not in any way impacting, for instance, Cracker Barrel, the quality of food.

But we -- we have been address some new purchasing initiatives, finding better ways to buy and bid out our purchases, get better prices that way.

We are very focused on all of our promotional items and our menu development on margin improvement and again, homestyle chicken a great example of that it was very successful as a product, but -- and at the same time, we drove up the average dollar margin per guest fairly substantially in the process.

So those kind of things we can do even in the immediate term softer sales environment and will continue to do that.

We're also very focused on managing labor in both concepts.

As Larry said, our inflation rate has come down substantially.

Part of that is an aggressive approach to managing that and making certain that we're paying people very appropriately, but not overpaying in the current environment and we'll continue to look at those kind of things and feel pretty good that we have a lot of focus and things on our list that we can continue to work on.

And the share count?

I'm sorry, the share count is just over 50 million. 5-0 million shares.

Thank you.

We'll next go to Jack Russo, AG Edwards.

Hi, guys.

Just had a couple of questions.

On the discrimination issue, I know you can't say a lot, but what's the next step?

What are we waiting for next?

Will it be -- are they waiting for more data from you?

Or does the next step that you will hear from them after you -- you will hear from them next?

You provided them all the data and can you give us any type of time frame on when this next step might occur?

I will introduce our Jim Black our General Counsel and ask him to answer that question.

Yes, sir.

Well, as you can imagine, it's difficult to know what the other side of any kind of issue like this is thinking.

But we are engaged in a process of delivering what we think is appropriate information in response to questions.

And as for timing, we have not gotten any information.

But you have provided them all the data so now you're just waiting to hear from them now?

No, it's an open conversation.

We are providing data as they request it.

Two other things, guys.

Larry.

Could you provide us some interest expense guidances, given the convertibles that are out there just if there's been any change in that?

And finally, on beef, you guys have used the word "meaningful increase," "material increase."

I'm just curious.

Are we talking double-digit increases expected for calendar '03 or can you put any more color on that?

Thanks.

I think on certain cuts of beef that we could see double-digit increases.

And the interest expense?

On the interest expense, I guess, uhm, there's two pieces.

The lion's piece is fairly easy to track, basically, they are accreting at an interest rate of 3 percent.

Plus there is the amortization of debt issuance costs in the neighborhood of $4.5 million.

It will be amortized over three years.

So those are two pieces.

And the other piece is on our -- whatever fluctuations we have from time to time under our revolving line of credit, looks like we're going to be paying somewhere in the neighborhood of 1.25 percent over LIBOR on that it is possible from time to time for short swings revolver under the -- drawings under the revolver we would be paying prime but it looks like we would be in 1.25 percent over LIBOR on our revolving line of credit.

Right now, our outstanding draws on the revolving line of credit are just barely over 3 percent.

Okay.

That should help.

Thank you.

We'll go next to Janice Meyer, CS First Boston.

Hi, thanks.

Two questions.

On the cost of goods line, do you believe that the better shrink in '03 can help offset the increased commodities to keep your cost of goods sort of flatish as a percent of sales?

And then the second question, you gave 8 to 9 percent I guess revenue growth and 15 percent-plus EPS.

Can you give a little more as to how you get to that EPS growth rate, the -- you know, how much margin expansion should continue, how much repurchases should continue?

And if for whatever reason the sales of the margins didn't meet that goal, would you make up for it on the bottom line with additional share buybacks?

Long questions -- a lot of questions there.

It hasn't been our practice generally to give a lot more detail of line items.

Let me see if I can remember all your questions, Janice.

First of all, do we think that shrink can make up for things like the beef pressure that might feel later in the year?

This is for our retail people who might be listening.

Yes, we definitely think it can. [ Laughter ] Or -- for the investment world, retail people if you will hang up for a moment, I think that we have made some clear progress.

We are not counting in our projections to have additional progress.

That's not to say we're not striving to do that.

But we're not counting on that to make our projections.

I think one area that I'll mention at least in the short term that we do see some pressure -- some margin pressure would be in G&A expense.

But that we think is at this point probably short-lived.

It relates to some various intiatives and professional fees that we have under way.

What else did you ask me, Janice?

Would you in terms --

Oh, would we increase our leverage and reshare repurchases to make up for any bottom line deficiency?

I think that, uhm, you know, anything is hypothetical, anything is possible.

But we have a clear mission, strategy and target to maintain the kind of total debt to total capitalization ratio that we have achieved here in the last fiscal year.

And I really don't see a big departure from that.

Just on the shrink side, was there anything in the quarter that was one-time that you wouldn't expect to continue, or are you just being conservative about your expectations going forward?

Uhm...

I hope I'm being conservative going forward.

Like I said, because we have struggled with shrink, we're -- we're very, very happy with the progress that we made this year.

But because we've struggled there, it's not an area that we're relying upon in order to achieve our projections.

That's about as much as I can say about it.

I mean, I hope that's an upside opportunity for us, but we are not counting on that right now.

Thank you.

We'll go next to Matthew Defrisco with GKM.

Congratulations on a good quarter, guys.

Just a couple of quick questions regard the traffic.

Quarter-to-date traffic you said was flat.

Can you give us a little more specific detail on that?

Was that pretty much pulled down from let's say a poor Labor Day and so it was a little bit more choppy or has it been flat basically every week and it's a trend?

We saw -- speaking of Cracker Barrel specifically, we were positive in traffic in our fiscal August, four weeks of August.

And then it's been pulled down by I guess since the Labor Day weekend, the last couple of weeks leading up to September 11th, I think there was a lot of stuff going on out there that's causing people to just kind of pull in and not go out and do stuff.

So it's not -- it's not the whole quarter at all.

We'll see -- I guess everybody will see what happens now.

We're through the anniversary and get back to a more normal mindset.

Okay.

I can appreciate that and then going forward, you also said regarding the quarter revenue growth 6 percent full year is 8 to 9 percent and you said for 2 q we could expect similar to 1 q.

So just to spell it out I guess, we are looking at 6 percent for the first quarter roughly is your guidance and 6 percent-ish for the second quarter as well and then we are looking for, I guess, a strong pickup in the back half approaching 10 percent?

Unfortunately, I don't think I can get quite that specific because we haven't, you know, published that on a widespread press release.

That's about as close as I can get.

I think you can --

But you did say about the same as first quarter?

Yeah.

I think -- what we said about the second quarter is, I mean, we know, I think everybody knows, that comparisons are going to be tough.

Last winter was unusually mild.

And perhaps to some degree, we might have benefited from some automobile travel during that period, as well.

But it was definitely a -- an easy comparison or -- it was an easy number that we had last year and it's going to be a tough comparison this year.

I mean, our comp store sales in Cracker Barrel in the second quarter were up 7.8 percent.

And that included 5.1 percent of traffic.

That's a -- those are tough numbers to get around and those were generated, we think, very substantially by that just very unusual winter.

I don't think that having, you know, some apparent year-over-year softness against those kind of numbers is really going to indicate that there is something wrong with the business.

I think you have to do the analysis a little more deeply than that.

I just -- we're not counting on having another really mild winter like that.

Sure.

Homestyle chicken, when is the date that you expect to introduce that?

In the near future.

Okay.

Just keep coming to Cracker Barrel and you'll see it show up one of these days.

Then the last question, do you have the number on the stock options effect for the full year on the earnings line?

Uhm... no.

I haven't done that specifically.

I think the exercises the -- option exercises were probably had a couple of cents impact on the year.

Okay.

Thank you, guys.

Thank you.

The next will be Dennis Forrest with McDonald Investments.

Yeah, hi.

Had a couple of clarification questions.

On the number of shares outstanding, Larry, you said 50 million.

What about the common share equivalents?

I think, uhm, that's going to depend on how the, uhm, you know, it depends so much on how the share price changes.

Because under the treasury method of accounting for options, it's, you know, that is a difficult guess.

I think --

Sure.

What were they in the fourth quarter, just to give us a frame of reference?

Uhm... we were probably -- I had a specific number.

It would be in the neighborhood of, uhm, 2 million to a little more of share dilution effect from options.

Okay.

So there was -- at the end -- the average shares in the fourth quarter were about 52 million?

Right.

Okay.

And you ended the quarter at 50?

Correct.

Okay.

So you bought back a lot of stock in the fourth quarter.

Yeah.

If you will remember, we announced an authorization, -- I think it was during the quarter, additional options.

And you completed that.

And the 2 million share authorization you have outstanding now, is there a sunset on that, or a timing when you think you'll complete it?

No.

You know, as you look back over the last few years, you see that periodically, we come out with new authorizations taking one bite of the Apple at a time.

And we execute them as, you know, in open market trades from time to time.

Right.

So we are not out there doing big blocks typically.

And there is no prohibition for you to complete that six months and have another 2 million share authorization before the end of this new fiscal year?

There is neither a prohibition nor a charge to do it.

So it will just depend on how circumstances evolve.

Okay.

And then I wanted to ask about the comment you made about pressure on G&A.

You are talking about maybe a higher percentage of sales?

Yes.

This year?

It went up last year about, what, almost 40 basis points.

And what is causing that?

You see the leverage going the other way.

We see some at least near-term pressures and various expenses and, uhm, can't go into a lot of specific details other than to tell you that we expect we'll see a little bit of pressure in G&A certainly in the first quarter.

Okay.

With that -- would that also be for the year, do you think?

Maybe a little.

But we're hopeful that it won't be as much as in the first quarter.

Very good.

Hey, thanks a lot.

You bet.

We'll go next to Barry Stouffer, BBC Capital Markets.

On the G&A question, you elaborate at all on the progression of G&A expense throughout the year?

It sounds like you're saying it ought to be fairly similar to what we saw in '02 where it was unusually high in the first quarter and then lower balance of the year?

Yeah.

I think, uhm, I tend to look at it a little more on a dollar basis.

Yeah.

That's what I'm referring to.

Yeah.

We have been -- we were high in the first quarter.

We were relatively stable the rest of the year.

Once again, I think we are going to be high in the first quarter and in fact, probably a little higher than last year.

And then do you expect a similar type progression where it would be lower in the second quarter and fairly stable from there?

I think it's too early to tell.

Obviously, we do have some assumptions in our projections and all, but everything subject to risks and opportunities, and we'll -- we'll give more guidance on the specific future quarters at future dates.

Okay.

And just to clarify, did I hear you say correctly that sales trends needed to improve from here in order to hit the Q1 target?

To get to our what?

To hit the Q1 target of upper 30s to low 40s, do sales trends have to improve?

Yeah.

We expect to see some improvement over the course of the remainder of the quarter.

Okay. --

And that's based on, you know, what we're doing in August relative to the things that we have seen early in September with which we attribute largely to, you know, things that have been going on with consumer sentiment and there's a lot of uncertainty out there.

You can share our expectation or not, but we think that fundamentally we ought to get back to seeing some better trends than we have experienced in the last few weeks.

Okay.

And do you have any comments on what you might see in terms of food cost pressure other than in beef?

Nothing that's jumping out at us.

You know, I think as we have mentioned before, first of all, the bulk of our food cost is in Cracker Barrel because Cracker Barrel is much bigger than Logan's.

And Cracker Barrel is I think as most of you know has a very diversified menu, lots of different products, and those -- that tends to be a real benefit for us in times when something is going up.

And on the other hand, we may not realize, you know, when that something goes down, we may not realize the benefit that some others do.

But it's a good stabilizing influence.

Okay.

Thank you very much.

We'll go next to Amy Green with Avondale Partners.

Hi, guys.

Quickly, regarding the retail at Cracker Barrel, I wanted to see if you all were going to be focusing again on gift cards going in to the holiday season and then you mentioned the -- trying to make it demographic move from the product offerings and see if you could quantify that any for us.

Yes, we are continuing with gift cards.

This will be our second holiday season with gift cards in Cracker Barrel.

We have experienced pretty good success continuing in terms of year-over-year increases versus gift certificates.

We are putting renewed emphasis this year and expect to see some improvements.

We're also in Logan's switching from traditional gift certificates -- certificates to gift cards for this holiday season.

I expect to see the same kind of improvements that we saw in Cracker Barrel last year.

On the demographics, we have done a really good job of selling merchandise to a relatively narrow demographic, which happens to be the core demographic for Cracker Barrel.

We think based on observation and based on number of focus groups recently that there's a real opportunity to broaden our appeal without losing the core target and sell to more people.

And we are getting some feedback that has given us some pretty good indication in which direction to go with that.

Okay.

And then one last question regarding the increase in G&A expense.

Do your legal expenses or outsourcing of any legal tie to the Department of Justice, does that go into the G&A line?

Our legal expenses go into the G&A line.

But we can't comment any further on the litigation or the factfinding investigation.

No.

I was just curious if that's -- I mean, if those factored into that line.

That's where they go, yes.

Okay.

That's all.

Thanks, guys.

Thank you.

We'll go next to David Taylor, Taylor Capital Management.

All my questions have been answered.

Just out of curiosity, what percent of the retail sales are represented by apparel?

We have disclosed the individual categories in retail and we plan not to do that.

Thank you.

Thank you.

We'll go next to Roger Lipton, Lipton Financial Services.

Good morning.

This is actually Quint Spector.

Couple questions on your capital structure.

If I understand you correctly, you've attained your 30 percent debt to total capital already?

And if so, does that mean your capitalized operating lease -- leases are about $100 million?

As we -- as we evaluate -- you can get very specific on the operating leases from our annual report.

What we do is we do consider those as part of our leverage when we're looking at our total capitalization targets.

We've been making increased use of ground leases from what the company has done historically and getting there.

One adjustment I think it's important for you to understand that we do when we go through that process is we're a little unusual in our industry in that we make a very substantial use of outdoor advertising billboards.

We are I think the second largest user of billboards in the restaurant industry and something like the 7th largest in the -- of all users of billboards in the country.

We are -- we're a big user of billboards in Cracker Barrel.

Those -- the way that industry works is billboards are on leases.

And those leases will typically be from one to three years.

We disclose in our annual report how much of our rent expense relates to those billboard leases.

And we're not counting that as part of our capitalization target.

Okay.

And have you reached that 30 percent --

Yes.

It's mid 30s and yes, we have.

Okay.

And you plan to keep that going forward ex the billboards?

Ex the billboards, correct.

Okay.

And forgive me, you may have mentioned this earlier in the call, and I missed it, but did you disclose what your -- or give us guidance on your Cap Ex for the year?

I didn't.

But it will be somewhere in the 120, $125 million range.

And how many stores and remodels and whatever does that -- if you can give us a breakdown on that?

Yeah.

It's, uhm, 23 Cracker Barrels and a dozen Logan's.

Okay.

Plus there is a time shift on that Cap Ex on new stores because we are spending money on the '04 stores.

Right.

Okay.

Thank you very much.

You're welcome.

We'll go next to Michael Carsh, with Carsh Capital Management.

Hi.

I just had a couple questions.

First is one on your Cap Ex.

It's actually increasing I guess last year you did 97 million last reported year, now you're talking about 120, 125.

What are the differences between this year's level of capital spending and last year's or the year that just started.

New store growth.

We are doing more new stores this year, possibility that we'll do more than that next year.

But that's yet to be determined.

We just are opening new more stores.

That's the key.

All right.

But as you shift more to a leasing model for your stores as opposed to buying the land and building --

We're not -- we aren't shifting.

We have shifted.

That isn't a departure from where we have been in the last year or two.

That's a departure from where we were back in the '90s and the '80s and et cetera.

Okay.

And, uhm, the other question I had was I know you answered this a couple of times.

I just want to make sure I fully understood.

The share count of 50 million at the end.

Quarter, that's for basic shares or fully diluted?

That's for actual shares outstanding.

Not including the treasury method of the options?

That is correct.

Okay.

So the basic shares were 50 million.

What would be the diluted amount at the end of the quarter?

If you can give me what the share price will be day by day, I can come up with a number for you.

Oh, okay.

I mean, just based on, you know, the $25 or whatever it was last night?

Have to put that in my model and see.

Okay.

I'll do that math.

And then... what is your EPS guidance for 2003 based on the 50 million shares plus the options less two million of a repurchase or you're not taking the two million of a repurchase into the EPS guidance?

I think the practical fact of the matter on projections is you make a set of best assumptions.

And we've disclosed some of the -- one of those -- what those key assumptions are.

Within that, let's face it nobody knows what future's going to hold.

So a really important part of your evaluation of a projection is to look at potential risks and opportunities.

And you go through an evaluation and a balancing and deciding what comfort levels you have.

That's why we don't make a projection of a point estimate.

We know that there are things that will be different than what we expect.

We don't know what they are.

One of those is -- could very well be the number of shares we have outstanding, whether it relates to share repurchases or to the dilutive effect of options on the treasury method.

So I just can't -- I can't be as precise as I know some of you might like us to be.

But that's the practical fact of the matter.

There's a whole lot of moving parts out there, and we look for what we think is a comfortable outlook based on all those moving parts.

Right.

And then given that you're now comfortable with the capital structure in terms of your debt versus equity percentage, that implies that the future free cash flow -- future share repurchase will all be done out of the free cash generation of the business?

Yes.

Okay.

Great.

Thank you.

And, gentlemen, at this time we have no further questions.

If there are no further questions, we would like to thank you for joining us this morning and look forward to talking to you again at the end of the first quarter.

Thank you.

Thanks very much.

This concludes today's conference call.

We thank you for joining us.

You may now disconnect.