Cracker Barrel Old Country Store Inc (CBRL) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the CBRL Group conference call.

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

Eastern time and running through November 27 until 8:00 p.m.

Eastern, by dialing 888-203-1112, and entering the confirmation code 673282.

At this time, for opening remarks and introductions, I would like to turn the conference over to the Chairman of the Board, Mr. Dan Evins, please go ahead.

Thank you, thank you very much.

We appreciate you all joining us this morning.

As she said, I'm Dan Evins, Chairman of the Board.

As you might imagine, I'm sitting in the board room in a chair.

We have with us Michael Woodhouse, our CEO;

Larry White, our Chief Financial Officer;

Jim Blackstock, our General Counsel, and as you might imagine, since there institutionalization, Sarbanes-Oxley are probably here in spirit.

Usually when they come around, we just send them away disappointed.

They haven't been able to find any trouble yet.

That being said, I trust you have a copy of our report and I will turn it over to Larry to get serious.

He is one of the best at that.

Thanks, Dan.

I always look forward to your opening remarks.

Thank you to 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 2004 first quarter results and providing an update on current sales trends and the company's guidance for the earnings for the remainder of 2004.

As a reminder and in compliance with regulation FD, we don't 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 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 such trends and guidance.

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

The company disclaims any 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 our periodic filings with the SEC on forms 10-K, 10-Q and 8-K.

With those cautionary reminders aside, let's review this morning's good news.

And for yet another quarter, we think it is really good news.

Bottom line, we recorded diluted net income per share for our first fiscal quarter of 56 cents versus 45 cents a year ago.

That's an increase of 24.4%.

That marks the 9th consecutive quarter in which we have achieved diluted net income per share growth in excess of our stated long-term objective of 15%.

In fact, the last five of those quarters have been above 24%.

A big part of the increase this quarter came from an 80 basis point expansion on operating margins compared to last year's first quarter.

That's the eighth consecutive quarter of year over year operating margin expansion.

And we accomplished that margin improvement while continuing to follow our conservative pricing strategies.

Furthermore, we had positive comparable store sales throughout our business, including double-digit increases in Cracker Barrel retail.

That's a lot of good news.

Let's look at some of the details.

Revenue in our first fiscal quarter ended October 31 increased 9.3% from last year's first quarter.

That's $576 million compared with approximately $528 million a year ago.

The increase came primarily from new unit openings and from increases in comparable store restaurant and retail sales in the Cracker Barrel Old County Store concept and in Logan's Roadhouse.

Cracker Barrel comparable store restaurant sales for the quarter were up 1.3% from a year ago, reflecting a 1.5% higher average check, which included just .9 of a percent of higher menu pricing.

And guest traffic was down .2%.

We have now lapped that .9% of menu pricing here in November.

And as is our practice, we don't disclose specific future menu pricing plans.

However, as we'll discuss in a moment we are evaluating a future modest future menu price increase which will be our first in over a year.

Although sales were positive, guest traffic was not.

And only breakfast recorded positive guest counts for the quarter, with increased traffic recorded both on weekdays and weekends for breakfast.

Even though there have been some challenges, it is important to observe that Cracker Barrel restaurant comps had been positive in 14 of the last 15 quarters.

And we're not getting there through an aggressive pricing as I noted.

Our pricing has been fairly modest.

Cracker Barrel comparable store retail sales were the heros in the first fiscal quarter.

Up an unusually strong 10.3%.

Although we benefited from prior year sales that were affected adversely by the supply disruption related to a threat in the West Coast dock strike, that is only part of the story.

When guests come to a Cracker Barrel store, their purpose primarily is to eat and retail purchases tend to be more discretionary and probably even more so in a tough economic environment.

Part of our developing retail strategy has been to increase the freshness and broaden the appeal of our retail merchandise selection, and add greater variety at lower price points to encourage more frequent and impulse purchases.

This quarter, our merchandise planning and other retail initiatives paid off with retail sales increases substantially in excess of restaurant sales increases.

A trend that has continued into the early part of the present fiscal quarter.

In a few minutes, Mike Woodhouse, our CEO, will tell you more about what we've been doing to achieve these strong results.

Rounding out our comparable store sales results, our Logan's Roadhouse concept recorded an increase of 1.7% in comparable restaurant sales, essentially all of which reflected increased guest traffic.

As with Cracker Barrel, our menu pricing strategy has been conservative at Logan's.

In July, Logan's lapped its last menu price increase, and we took additional modest menu pricing, only about .7% late in the first quarter.

Which contributed less than a tenth of a percent to sales for the quarter.

Clearly, we've been cautious with our menu pricing in both concepts, going over a year between modest price increases and what has been an uncertain economic environment.

Yet we've been successful in achieving improved operating margins nonetheless.

With what appears to be improving economic conditions, and with many competitors initiating price increases in response to increasing commodity costs, we see some opportunity emerging for additional modest pricing increases in the future in both of our concepts.

However, as has been our policy, we don't preannounce either the amount or timing of such increases.

Continuing with Logan's, we continue to view alcohol sales at Logan's as both a challenge and an opportunity with our alcoholic beverage mix off about 50 basis points in the year ago quarter.

Our alcohol mix was under 9% in the first quarter.

During the first quarter, we opened four new Cracker Barrel Old County Store units and five new company-operated Logan's Roadhouse restaurants.

For the full fiscal year, we expect to open 24 Cracker Barrel stores, including three to four in the second quarter, and 11 company-operated Logan's restaurants including two in the second quarter.

We also presently expect two Logan's franchise openings in the quarter.

Late in the first quarter, we also opened a replacement unit for an old Cracker Barrel store here in Tennessee.

Let's touch on a few more highlights of the first quarter.

Operating income for the first quarter was up 21.7% on a 9.3% revenue increase.

And operating margins improved 80 basis points from 7.2% of total revenues to 8%.

This marks eight consecutive quarters of solid operating income growth of more than 15% from the prior year.

The improvements in the first fiscal quarter primarily reflected lower general and administrative expenses, labor and related expenses and other store operating expenses, while costs of goods sold was higher as a percent of revenue.

The emerging story in the restaurant industry is that after a long period of favorable commodity costs we're beginning to see some pressure in several areas.

First and foremost is beef.

Which in fiscal 2003 accounted for approximately 17% of our consolidated food purchases.

Beef is at record price levels and owing to the dynamics of cattle herd rebuilding, supply disruptions from Canada, and strong consumer demand, the pressure is expected to continue.

Perhaps for as long as two years.

We have benefited in recent months from a contract at Logan's that has held our beef costs below market.

Although it is sharply higher prices than last year.

That contract expires at calendar year end and we are building into our planning assumptions significant double-digit increases in related costs beginning in January.

Cracker Barrel has several beef contracts for its varied product offering, with various expiration dates from December through July.

And while the outlook is not without risk we see less pressure than at Logan's but still higher prices than a year ago.

More significant at Cracker Barrel is the current cost of eggs.

A staple of our breakfast all day concept.

Other commodity pressures compared with a year ago are seen in certain pork products especially bacon and ribs and certain dairy products.

So after a long run of low commodity cost inflation, there is some clear pressure developing.

The current menu prices, we can see more than 40 to 50 basis points of year over year and net commodity cost pressure in the remainder of the fiscal year before any menu price changes.

Also contributing to the apparent pressure on gross margin is the fact that strong retail sales carry a higher cost of sales than food cost of sales.

And to a lesser degree, the combined effects of both lower alcohol sales at Logan's, as well as higher alcohol cost than a year ago.

So we face some relatively new pressures on the cost of sales line.

Fortunately, we have continuing supply initiatives and menu price opportunities to mitigate but not entirely offset some of the pressure. e are evaluating our next menu price increases at both concepts where our strategy of modest price increases has kept us in a favorable position as our competitors announce plans for price increases.

At Logan's, we went over a year before the recent price increase of just .7 of a percent.

The previous increase taken 15 months earlier was itself only 1.1%.

And at Cracker Barrel, we're more than a year beyond its last increase, which was just .9 of a percent.

We have not gone to the pricing real often which we believe is a good place from which to come in the present environment.

And we will continue to be judicious users of menu pricing.

While cost of sales is under some pressure, we have been recording improvements elsewhere and we will continue to seek more improvements as we work at our objective of continue incremental improvements in operating margins.

Our general and administrative expense was favorable in the first quarter versus a year ago.

Reflecting lower outside professional fees, lower management training expense at Cracker Barrel, and certain other expenses.

Labor and related expenses were improved as a result of the generally favorable workers' compensation and Group Health, as well as another quarter of favorable year over year hourly wage inflation, especially at Cracker Barrel.

In other store operating expense reflected lower depreciation, advertising, insurance, and other expenses, partly offset by higher maintenance and utilities.

Wrapping up the first quarter, net income of $28.2 million was improved 22.5% from $23 million a year ago.

Diluted net income per share of 56 cents was improved 24.4% from 45 cents reported in the first quarter last year.

And solidly in line with our guidance of 20% or better growth.

Once again, we delivered on our objectives.

Just a couple more observations I want to make about the first quarter.

First, during the quarter, we did not repurchase any of the approximately 660,000 shares remaining under authorizations previously approved by our Board of Directors.

This is not a change in philosophy or intent.

As we had emphasized frequently we are committed to our capital structure objectives and instead of purchasing shares in the first quarter, we made other use of our cash while maintaining those capital structure objectives.

During the quarter, our cash flow went substantially toward building inventory to support both our current strong retail sales trends, as well as to put us in good position for the holiday retail season.

And also toward paying down accounts payable from fiscal year end.

We presently expect those inventories to be a good source of cash flow in the second quarter, during which time we expect to resume share repurchases.

Secondly, during the quarter, we announced a new dividend policy.

Changing from our recent annual dividend of two cents per share, to a new quarterly payment policy with an initial declaration of 11 cents per share.

That initial dividend payment totaling approximately $5.3 million was made last week.

We think that this is an appropriate and effective way to add a component to our shareholder's returns given our strong balance sheet and expected cash flow, and the more favorable tax treatment now given to dividends.

Finally, in this morning's press release, we updated our current sales trends and earnings guidance for fiscal 2004.

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 you that we disclaim any obligation to update this information other than periodic filings with the SEC from time to time.

Also, we will not 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 from time to time.

The discussion of trends and guidance as well as earlier parts of today's discussions and press release contains forward-looking statements, provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the uncertainties described in more detail in this morning's press release.

At this early stage of the second quarter, of fiscal 2004, we are pleased to report continuing favorable sales trends.

Cracker Barrel comparable store restaurant sales are up approximately 1.5 to 2% reflecting primarily a higher average check.

The quarter to date numbers include .6 of menu price increases, as we recently lapped the .9 increase from a year ago, so that .6% represents the period early in this quarter before we lapped the .9 of a percent.

Retail comparable store sales were up approximately 11.5 to 12%.

An even stronger rate than the 10.3% reported for the first quarter.

And encouragingly Logan's's comparable restaurant sales were up approximately 4.5 to 5%, including the modest .7% of menu pricing taken later in the first quarter.

Obviously, that means Logan's is achieving very solid increases in guest traffic.

Our present guidance for diluted net income per share for the second fiscal quarter is for 15% or better growth, compared with the 48 cents we had a year ago.

We presently expect total revenue growth in the high single digits in the second quarter versus last year.

And our guidance reflects achieving modest comparable store restaurant sales increases for the full second quarter, with Cracker Barrel restaurants up to 2% positive, comparable store retail continuing to be strong in the upper single digits for the full second quarter, and Logan's's comparable restaurant sales up approximately 4% positive.

I've already discussed in some detail the emerging commodity cost pressure that we expect, but we believe we can achieve further operating margin improvement in the second quarter, but at a lesser amount than in the first quarter.

For each of the remaining quarters of fiscal 2004, we presently expect diluted net income per share growth in the mid teens.

And revenue growth in the low double digits in the third quarter and that is against the easier comparison of last year's severe winter weather and revenue growth in the high single digits in the fourth quarter.

Let me emphasize, we're looking in the second half of the year to be in the mid teens on diluted net income per share growth.

Operating margins are expected to be up only slightly in the third and fourth quarters compared with last year.

Primarily because of higher commodity costs.

While these expectations are not without risk, or opportunities for that matter, if we achieve present projections, we expect to exceed our long-term objective of 15% growth in diluted net income per share compared with the full year of fiscal 2003.

So we reported good results this morning.

We reported a 24% increase in diluted net income per share for the quarter.

Solid and improving sales trends.

And we're disclosing solid guidance for the remainder of the fiscal year in the face of a difficult commodity cost environment.

As I said at the beginning of my remarks, we think that is a lot of good news and very pleased to be reporting this morning.

With that I want to thank you for your patience with my financial review, and I would like to introduce Mike Woodhouse our President and Chief Executive Officer who has further remarks on operating trends and initiatives.

Mike?

Thanks, Larry.

Good morning, everyone.

Once again I am pleased to be able to report another strong quarter for CBRL Group.

Earnings per share up 24% which is a string of quarterly results at or above our long-term goal of 15% to nine.

Also pleased to be providing earnings guidance for the current year as a whole to exceed that same long-term goal.

We operate in an industry where success comes from relentless repetition, so I'm going to be repetitious this morning in saying that our success continues to come from having a clear game plan and sticking consistently to it and that plan is to drive sales by focusing on the quality of execution to make certain we're providing the best possible guest experience every time and at the same time finding new and better ways to do everything we do while never compromising the guest experience.

We've been living through a challenging economy for some time now and while there currently appear to be some indications of more positive consumer attitudes we plan to continue to focus on managing those things within our control.

As an industry, we're facing more commodity cost pressure than we've seen for a while.

And the guidance we are providing today includes our best estimate of the effects of those cost pressures, and also the benefit of the actions we're taking in response.

We're very pleased the at the things we've done in the past three years to contain and reduce costs to allow us to expand margins while taking only modest price increases.

This means today as we look at taking some price which we expect again to be relatively modest, we are in better relative shape at both Cracker Barrel and Logan's to be able to do that, especially as we see the competition also taking price to offset these commodity increases.

As usual, this morning, I will cover some highlights from the quarter and then talk about our expectations for the remainder of the year.

In Cracker Barrel, we were pleased to see positive same store restaurant sales which means we have now been positive for 14 of the last 15 quarters and the improving trend has continued so far into the second quarter.

As usual, execution is the number one priority, but we're also pleased with the success of the promotions we ran and continue to see year to year improvement in the sales mix generated by promotions.

The annual Turkey and Dressing promotion which ran in the quarter is a good example of this and it's encouraging that we are able to take a 20 cent price increase over the previous year and still generate increased cash.

Cracker Barrel retail, of course, was the star of the quarter.

As Larry indicated we did experience some benefit from lapping the inventory shortages last year but nevertheless we are very pleased with the consistently strong retail performance in the quarter.

This performance is the result of a comprehensive game plan which we developed over three years ago and the strong retail performance since mid-summer is the result of all the components in that plan coming together at the same time.

Some of the best sellers in the quarter were apparel which was up 25%.

The Halloween seasonal product which was up 63%.

And this is a great example of the various aspects of retail working well together.

Our planners decided to put Halloween on the floor earlier than normal, which created one of the things we looked for, which is uniqueness.

We were the only place to buy Halloween products for a period of time in the summer.

We also had more appealing merchandise than ever, which is fundamental to our retail success, and we had a lower average price point to increase the impulse purchase opportunity.

So that the 63% sales increase came from a 138 increase in units sold.

Final example of a success in the quarter was Christmas which was up 54%.

This was an area that clearly benefited from the full inventories this year compared with last year.

But again, they appeal to the product as a major sales driver.

Rounding out the Cracker Barrel report for the quarter, hourly turnover was at the 118% which was down from 125% last year, and management turnover was 23%, down from 25% last year.

We opened four Cracker Barrels in the quarter, plus the rebuild of an old unit that originally opened in 1976 and we expect to open 24 new Cracker Barrels plus the rebuild in the year as a whole.

The development strategy for Cracker Barrel continues to be a focus on building out our interstate presence in core markets while selectively building in developmental markets.

Our interstate development will continue to be pursued on a very selective basis and only in core markets as we further refine the marketing support programs throughout interstate locations.

At Logan's the two priorities for fiscal 2004 are continuous improvement of execution and shopping the brand positioning.

The sales results in the quarter speak to our success, in increasing the focus in operations by reducing extraneous and distracting activities and constantly reinforcing the key priorities.

The result of this execution focus have come not only in positive guest traffic but in strong cost controls, so for example Logan's is experiencing minimal hourly wage inflation.

Hourly turnover at Logan's was up slightly in the quarter 118% and management turnover was 24.5%.

We opened five new company operated Logan's in the quarter and expect to open 11 for the year as a whole.

We're concentrating development at Logan's in existing markets and contiguous markets to maximize operational efficiency and the longer term priority is to maximize advertising efficiency as we evolve the Logan's business model to one where support from broadcast media plays a greater role.

As we review our expectations for the second quarter, and for the remainder of the year, we see possibilities for strengthening the company but we also expect the commodity cost pressures to resolve in some industry wide pricing activity.

We've taken what we believe to be a very realistic look at the commodity outlook in developing our projections of which our earnings guidance are based, and as I mentioned earlier, we expect to take some price in both concepts but we believe we will be doing that from a position of relative strength that comes from our conservative approach to pricing over the past several years.

And in addition to price increases, we will continue to pursue purchasing initiatives to protect our ability to continue to improve margins.

And as ever, in all of our cost management initiatives, we remain committed to a no compromise approach when it comes to food quality, portion size and service levels.

We expect to be taking the pricing action late in the second quarter or early in the third quarter, and we're monitoring very closely competitive activity to make certain that we stay conservatively in line.

This is especially important in the steak house segment where price comparisons tend to be easy for the consumer because of the similarities of the products.

In Cracker Barrel we will continue our typical promotional calendar and the promotions will be supported by radio in about 20% of the system.

By now, Cracker Barrel we're gearing up for Thanksgiving day which is a major annual event for us, and of course we will be featuring our traditional Thanksgiving dinner special, as well as the six person Thanksgiving dinner to go, offering that we introduced last year.

We are also putting more focus this holiday season behind whole pies and whole hams.

Dinner remains the largest day product opportunity for Cracker Barrel improving dinner sales as a priority.

We are continuing to address execution, so our table turns and staffing best practices and especially working on scheduling to ensure we have strong players scheduled against the important dinner day point.

Supporting dinner is also one of the aims of the new menu we started testing last week.

The primary goal of the menu is to build dollar margin per guest by encouraging pressures of higher margin items through placement on the menu and the use of graphics to draw attention to selected items on the menu.

It is also easier to read in the existing menu and is intended to increase perceived variety.

The dinner support comes from a new dinner daily specials, similar to the long standing daily lunch specials that we have on the menu.

The new dinner specials are priced at $7.99 and are designed to be high appeal and high margin products.

As we've seen from the numbers, retailers currently perform at very strong levels and this is a great example of our overall approach to managing the business.

Where we support clearly defined goals with focused initiatives.

In the case of retail the goal was to achieve a significant increase in retail sales relative to restaurant sales.

We established that goal over three years ago.

And there were a number of initiatives involved in achieving the goal.

The first step was to realign the merchandising selection of the Cracker Barrel brand and we achieved this by making nostalgia the central theme.

Over time we've refined the approach most importantly by recognizing that everyone has their own time and place references to what is nostalgic so that allowed us to evolve our approach and increase the breadth of the appeal.

Secondly, we have recognized our retail opportunities for sales to each of 1,200 people who come to Cracker Barrel every day to eat.

In other words, we're not a destination retailer.

So we made improving retail percent of total sales the most important metric and we've incorporated this into our bonus plans.

We also put in place the systems to ensure high data integrity of the SKU level, which provides the platform for automated replenishment and provides for reporting and planning tools for our new planning department.

In operations in retail, after a somewhat slow start, we operated the leadership and now we have much improved standards and training programs that are currently being rolled out to the system.

And finally, and importantly we have more appealing merchandise in all areas and in many cases at lower price points again to encourage impulse purchases.

As we work through all these initiatives we continue to learn so that for example, we have today a much better understanding of the importance of maintaining fresh inventory, by using mark downs more aggressively to sell through the seasonal merchandise.

And we still have more opportunity in retail.

The new service sales initiative is only just beginning to roll out.

And we just completed a retail traffic flow study to help us understand how guests behave in the retail space.

Improving the traffic flow on retail will not only help retail sales but we hope to see some benefit in restaurant traffic if we can remove the bottleneck at the hostess stand and the entrance to the dining room.

At Logan's, as I said earlier, the two priorities are continuous improvement in execution and improving the parity of the brand in the consumer's eyes.

In the short term, the priorities for sustaining strong sales [Inaudible] by executing to our current standards with an emphasis on improving consistency across the system and over time.

The branding work continues based on the comprehensive research we conducted over the summer and as I reported in September we're in the process of developing a new marketing strategy, a new menu strategy, and revisiting the design of the building.

We're making very good progress against our internal goals on these initiatives and I expect to be reporting in more detail on all of this later in the current fiscal year.

To support these brand initiatives we've added two key members to the management team in the past two months, a Senior Director of Food and Beverage and a Vice President of Concept Development.

Both of these individuals bring a wealth of experience relevant to moving the Logan's concept to the next level.

We also continue to rebuild our development process and the pipeline of new locations.

And as I reported last time, our goal is to be in the 20% analyzed unit growth by the end of 2005.

In closing, I'd just like to say again how pleased we are with our performance in the third quarter which we believe comes from having a consistent game plan and sticking to it.

It's also the result of the efforts of about 65,000 hard working people in Crackle Barrel and Logan's who come to work every day and play their part in delivering the positive guest experience that's critical to our success.

Looking forward, we believe that we are well positioned to deal with the commodity cost pressures that are affecting the industry and we expect to continue to meet our earnings goals and guidance.

And with that, I would like to open the call up for questions.

Thank you.

The question-and-answer session will be conducted electronically.

If do you wish to signal for a question, you may do so by pressing the star key, followed by the digit one on your touch-tone phone.

Once again, that is star one on your touch-tone phone to signal for questions.

We will come to you in the order that you signal and take as many questions as time permits.

Our first question will come from Matt DiFrisco with Harris Nesbitt.

Hi, just had a couple of clarity -- just wanted to get clarity on the pricing and I had a question on the new menu.

You touched on the pricing effect for currently going on in what was implied behind your 2Q trend so far, for Cracker Barrel.

I think you said .6 of a percent.

But then earlier, you said that you're done lapping it.

So today, right now if I was to look at a comp number it would not have any price effect?

Is that correct?

That is correct.

The .6 of a percent represents going for the first week and a half or two weeks or so, with that .9% before we lapped it.

So as of today, as of this week, we've been going with zero percent year over year menu pricing at Cracker Barrel.

Okay.

And then the COGS guidance of 40 to 50 basis points ahead, is that --

Let me clarify that.

The commodity pressure that we see, the net commodity pressure, net of some of the initiatives we're working on, could, absent any menu pricing, add as much as 40 to 50 basis points to our cost of goods sold.

That's total cost of goods sold as a percent of total revenues.

So that's what that is intended to be.

We hope to mitigate that partly with some modest menu pricing at some point.

But that's versus last year's basis or sequentially the quarter that you just reported.

Versus last year.

Okay.

Because that's less than the rate that you just experienced of 80 basis points, correct?

Yeah.

And again, there were a number of things going on in there, remember our cost of goods sold also includes retail, retail is having very strong sales trends, and it carries a higher cost of goods sold than food cost sales.

So there were a number of dynamics going on in there, some of which we will expect to see continue.

Okay.

So then the sum is that 40 to 50 isn't literally comparable for the 80.

That's 40 to 50 from food and then there is some effect from the margin effect from having a greater shift in great retail numbers, correct?

Correct.

Okay.

And then with the new dinner menu, can you just give us an update or I'm sorry in the new Cracker Barrel menu in total, can you give us an update on where are you in the testing and what is a test to you?

Is it one market?

Is it across the board?

When can we expect it across the board?

We put in place last week so we just literally started and we have a fairly substantial representation geographically in the test.

And we would expect it to run it for a pretty reasonable period of time here, so we're not looking to be reporting in a month or so, but rolling out a new menu it takes a little longer than that.

It takes for mix effects to settle down with any new menu.

And if I can get in one last question, sorry for taking up this.

Logan's bar trends at the new stores, are you seeing comparable sub 9% liquor mix or are you seeing new stores opening up a little bit greater than that 9% pace?

I don't know that we can generalize.

We see some areas where we do better and some where we're at about that level or so.

So it is probably a little early to generalize, but net net, I wouldn't say it is significantly different.

Okay.

Thank you.

Great quarter.

And our next question comes from Dennis Forst with McDonald Investments.

Good morning.

I had a question about the lower depreciation and then I wanted to ask about G&A going forward.

Why was depreciation down $1million, Larry?

I think the biggest piece was that we're beginning to feel the effects of the more rapid rate of development that we had up until the late '90s, of new unit development and some of the depreciable assets are coming off of depreciation base.

So we will kind of see that trend going forward, also?

Yeah.

And I understand why G&A was off in the first quarter, versus the professional fees, and other things in the first quarter a year ago.

But can you remind me why the fourth quarter was only $28 million of G&A?

Was there any adjustments there?

I'm just looking out for the rest of the year trying to model G&A for the whole year.

Right.

I don't recall that there was --

Anything out of the ordinary?

Yeah.

There may have been some you know bonus adjustments and things like that that can happen at year-end.

But I don't recall a specific --

Do you want to give us any guidance on G&A total percentage increase for the year?

It is certainly not going to be down like it was in the first quarter, but is it going to be up low single digits?

Yeah, I think about all that we can say, because there are some real uncertainties in there, as with any other cost line, but barring any major uncertainty, we would expect to see G&A dollar growth be less than our revenue growth.

So we expect the G&A certainly has the potential to contribute to our operating margin expense.

Okay.

Good.

And then lastly, on the partial quarter that you already gave us included how many days?

Was that through yesterday, being the first 19 days of the quarter?

It was through Tuesday's business.

Through Tuesday.

So that is 18 days.

Right.

Okay and when will you give you next interim update?

December 18.

December 18.

Okay.

Great.

Thank you.

You're welcome.

And our next question comes from Amy Greene with Avondale Partners.

Hi, guys.

I wanted to see if you had any insight on what is driving the traffic numbers at Logan's.

And if you had any comment on any best of practices that you were taking from Cracker Barrel and applying over to Logan's, and if you were still kind of working that direction.

The driver at Logan's right now is execution.

We have actually not been running any radio at this point, as we work through the thinking through the brand positioning and the marketing strategy, we decided not to run the old creative because we felt it wasn't particularly effective so the sales we've been achieving is strictly based on execution at the store level.

On the best practices piece, want to be careful how we think about that, we have best practices approach in both Cracker Barrel and Logan's, as a concept we believe very strongly in, and the specifics of what we're doing, in terms of training, and so on and so forth, those are both unique to the concepts.

We're not taking application of any of the things from one concept to the other.

We are taking the concept of best practices and some general ideas over which I think is helpful to Logan's.

And then to stay at Logan's for a second, what have you seen from a traffic standpoint at lunch versus dinner?

Are they both up or is one stronger than the other?

Lunch is stronger.

Lunch is stronger but they're both up.

Okay.

And then lastly, I think you said you would start the share repurchase back up in the second quarter, but just congratulations on such a great quarter without it, guys.

And that was correct, you will start it again this quarter?

That's correct.

Okay.

Thanks.

Once again, that is star one on your touch-tone phone to signal for questions.

We will go next to Joe Buckley with Bear Stearns.

Thank you.

I have a couple of questions as well.

You mentioned monitoring competitors' pricing activity as you assess what to do in the menu pricing.

I guess I'm curious for Cracker Barrel, Logan's I think is a little more obvious, but for Cracker Barrel, what competitors do you think the pricing is relevant on a competitive basis?

I think with dinner it is both casual dining and family dining.

At lunch, it is everybody.

Logan's as I tried to say in my remarks, we really are looking hard at the steak house competitors and looking at like offerings.

With Cracker Barrel it is more of a general sense of where people are taking, we look specifically at things like beverages and so on, but overall we're looking at how the competition, what kind of percent, what kind of impact that might be having.

But Cracker Barrel is unusually positioned as I think we've discussed before, when we go to our focus groups and ask the participants to try and put Cracker Barrel in a category, they have trouble with that.

They tend to group the casual diners with steak houses, the family diners and tend to leave Cracker Barrel sitting in the middle as kind of unto itself, which I think is really great, but we also have to pay attention to the fact that they see it as a little bit different but I think it is a real strength for the concept.

Okay.

And I think just a mechanical question on the zero coupon convertible issue.

Can you run through the mechanics of when those shares might be included in the share count just based on stock prices?

Basically, they have to trade at a premium for 20 of the last 30 days of a quarter, and we're still several dollars per share below where that would be, and that number of course increases over time.

And acretes with the value of the converts.

So we're still some ways away from that at this point.

Okay.

That number is up in the low to mid-40s some place?

No, it is higher than that.

It is up in the mid to high 40s.

Okay.

Thank you.

Thank you.

We will go now to Janice Meyer with CS First Boston.

Hi, thanks.

A couple of questions on the retail side.

Your numbers were very strong and consistent during the quarter.

So any reason why you think the trends will slow going into the holiday season or are you just being more conservative or are you seeing anything in specific?

And then, secondly, on the gift COGS, you have seen nice improvement there, can you talk a little about that?

Are you continuing to see improvement in gift shop COGS, where is it coming from, et cetera?

On the retail sales, Janice, we're very, obviously very pleased with what we've seen.

It is a little difficult to gauge exactly what the effect of the shortages last year, we did see some inventory challenges last year with the dock strike, it wasn't a dock strike, it was a threatened dock strike so we moved a lot of inventory to the East Coast and the West Coast and lost out on a lot of seasonal opportunities, so we will have a better sense as we fully lap that, which we will be doing in the pretty near future here.

I also think that Christmas is a highly competitive season.

Every retailer out there is really pulling out all the stops for their Christmas sales.

I think it is prudent to be a little conservative in what we expect as we run through the rest of the holiday season.

On the COGS, Janice, in the first quarter retail, it is actually marginally favorable in cost of goods.

There are a number of things going on there, we've been getting better initial mark-ons on our product, it is a part of our merchandise selection that it is doing well.

We do have an intention and a strategy to be a little more aggressive with mark-downs to keep, as Mike mentioned in his remarks, to keep the product assortment fresh and move the product out.

That's one of the benefits that we're getting out of this new merchandising planning function.

They're helping us plan that aspect of the retail business better.

And one other thing that is going on in retail is the cost of import freight is going up, and we are working on finding ways to mitigate those costs and increases as well, but there are several moving parts in the retail cost of goods base as well.

Do you think this year, that you can see, continue to see beneficial cost of goods in the retail side?

I wouldn't expect it to be significantly beneficial.

As I said, we're just marginally positive in the first quarter.

And I wouldn't expect to see a significant movement.

On the flip side, I mean you wouldn't expect to see a significantly negative, swing negative, either, is that fair?

That's fair.

Great.

Thank you.

Thank you.

And we will go next to Dan Belcore with Coast [ph] Asset Management.

Good morning.

A question about dividends.

You made a rather significant change this quarter going from 2 cents a year to 11 cents a quarter.

This comes out to about a 20% payout rate versus trailing 12 months earnings, and about a 1.1% yield.

Can you give any kind of parameters as to what might happen with dividends in the future?

In other words, this was a very major change.

Is this sort of a new level where you would anticipate increases roughly in line with earnings progress?

Or could we suddenly expect to see 22 cents a share a quarter or two from now or next year?

Again, I think we had had a significant change, and as I said in my remarks, there were numerous things behind that, including we felt that it was time to add a new component to shareholder returns, it signals some confidence in our financial condition, and our outlook, and plus the new tax treatment of dividend income entered into our decision as well.

I think it is too early to speculate what our Board of Directors might do in the future.

Clearly, this was a very dramatic change.

And there's no reason to expect a similar dramatic change, but I think our Board is committed to the quarterly dividend policy as a new way to reward our shareholders.

Thanks very much.

We will go now to Barry Stouffer with BB&T.

Good morning.

Larry, could you discuss a little bit more the improvement in labor and operating expenses and G&A, you went pretty fast and I had a hard time catching all of that.

Yeah, the improvements in labor were in some of the overhead or benefits kind of areas like worker's comp and Group Health, primarily at Cracker Barrel, we've continued to see very modest wage inflation.

In fact at Cracker Barrel this quarter, once again, was actually negative on average wage inflation year over year for our nontipped hourly employees.

That is not us cutting wages for people.

That represents us making greater use of part-time employees, managing the wages and the new hire process and all that sort of thing.

So those were the key kinds of things in the labor and related expenses line.

In the other operating expenses line, we've already noted the depreciation reduction, as well as we had reduced advertising expenses in the first quarter relative to a year ago.

And those are the key favorable items.

We saw some higher R&M expense, repair and maintenance expense, and slightly higher utilities expense, both of which we think we will continue to see here in the remainder of the year.

And can you help us at all with the progression of G&A expense the rest of the year in absolute dollars relative to the first quarter?

Yeah, I think really about the only guidance I want to give at this point is that the growth is going to be -- we expect for the most part to be less than the growth in revenues.

And I think that ought to give you some help.

We shouldn't think in terms of sequential comparison of the first quarter, but morel to revenues on a quarterly basis?

Yeah, I don't see huge increases in our G&A expense in the coming quarters.

We potentially can see it actually be slightly less than what we've had in the first quarter.

The first quarter tends to be a little high.

One reason, for example, is both Cracker Barrel and Logan's hold their annual store manager's meetings.

That's a fairly significant bill.

And we have a few other expenses that hit in the first quarter.

So we may actually see general and administrative expense on a dollar basis be less than the first quarter and future quarters.

Okay.

Last question.

Are you concerned at all about the changes in trucking rules having any spillover to food costs?

We see some impact on the change in trucking rules in retail.

It potentially can get to us on food costs, although we do have a contract on our food distribution that we would have to come to an agreement on any change there.

But we do see some freight pressures potentially on the retail side.

Any comment on magnitude?

No, I think it is too early for us to be comfortable with what that might be.

Okay.

Thank you very much.

Robert Derrington with Morgan Keegan.

Yeah, Mike, the new menu that you have in test right now, is that consistent across the system?

Do you have the same format, the same pricing, et cetera?

In the test areas, yes.

I'm curious, it looks like there has been more thought in the menu engineering on this menu relative to the last one.

Can you give us some color about the thought process there?

The shifting of some items around on it, the daily dinner feature over on the left, the fact that the half pound burger section is not on there?

It sounds like you've been to one of our test stores.

We're working hard at it.

As you know, we had a test menu that we put out there at the beginning of this calendar year which is our first attempt at this and we learned a lot, which was the first time that Cracker Barrel ever seriously looked at using menu placement as a way of driving preference.

We learned a lot from that, so this is really, we're taking that learning and you know, we learned the same rules about where the I-scan goes and all of that good stuff, and as you will see some of the graphics that try to push people to, in addition to the placement on the menu, push people to specific high margin items, the goal is always the high margin, high speed.

The daily dinner feature which is up on the top level panel, as you will see, we already had some great success with fish fry for the last couple of years, we had the Sunday homestyle chicken for a while, we have our chicken and rice which is always a high preference product and promotion as our Saturday dinner special which is really we think going to drive both traffic and table turns on Saturday.

And we got uniform pricing at $7.99 across the whole week.

So we see a pattern of behavior on the specials with lunch special people will come, specifically on a day of the week, because they can only get a particular product at Cracker Barrel.

We try to pull some of that uniqueness into the dinner special menu as well.

The pricing on this menu appears almost imperceptible.

Is there some targeted increase that you are looking in the way of a price increase?

Yes.

You can give us any color on that?

No, we really don't want to -- one of the things that we're looking for is some shift in mix.

So it is a combination of mix and some fairly subtle price changes.

I'm glad you couldn't find them.

That probably means that normal guests will not be able to find them.

We will see.

All right.

Great.

Thanks, guys.

Thanks.

Our next question comes from Bryan Elliott with Raymond James.

Good morning.

A couple of cleanup questions.

In the current liabilities, is there any short-term debt in there?

No.

Okay.

Also, what was cap spending in the quarter?

And do you have a range for the year?

Or actually cap spending is in there, cap budget for the year, the range?

Capital budget for the year continues to be in the $140 to $145 million range.

Okay.

And also, clarify, you mentioned beef at 17% of corporate food costs, was that --

Yeah, consolidated food purchases.

Okay.

Thank you.

In fiscal '03.

And we will go now to Peter Oakes with U.S. Bancorp.

Good morning, gentlemen.

Actually I have a couple of questions, if I may.

The first is related to retail.

We appreciate, I think it was Mike who clarified, the success you saw with the seasonal Halloween and Christmas merchandise.

But if you were to back those two components out, can you give us kind of a sense where that 10% comp would have come across?

Thanks.

Hey, Peter, welcome back.

I don't know that it is appropriate to back those out because two things we've really learned in the last year is, and they kind of go together, one is the freshness of inventory, because we have a lot of regular users having fresh, new stuff for people to buy is really important.

And we thought for several years now, that the whole old country store theme and positioning plays well into the whole seasonal rotation, things are different in each season so we've really been reinforcing that seasonal change through the seasonal merchandise.

So it is tough to kind of look at any numbers that separate those out.

Because it is all part of the overall strategy to have better, fresher changing inventories in the mix.

I'm not trying to avoid the question, I just think it is not the right way to think about it to pull those out.

And we will go now to Mike Smith of Oppenheimer.

Hi, asked and answered.

We will take a follow-up question from Matt DiFrisco.

You guys give a statistic there where you said 20% of your markets in Cracker Barrel are covered by radio.

Can you give us a comparison of what that was last year?

I'm assuming as you grow more, you're getting more markets that efficiently can use radio.

Is that correct?

That's correct in concept.

In fact, we were a little higher last year.

We've continued to work on off interstate, as I mentioned in my remarks, so we are putting some dollars against those and looking because the model's a little different off interstate, so it is roughly the same, maybe just a little less than it was last year.

As we figure out that off interstate stuff, yes, it would be reasonable to assume it would become more efficient over time and start building the coverage.

And then transferring that to billboard advertising, what should we expect for trends that you're seeing now, year over year rates for billboard advertising?

On renewals, we are seeing some benefits, some trends of rates coming down.

But remind you that our billboards typically are on up to three-year contracts, so they're continually circulating off a contract.

And so it would take time for anything to really build up.

One of our initiatives this year is to look at the efficiency level involved, make certain that we've got -- we want good boards and we're willing to pay for them and we don't want bad boards and spend money on those, so hopefully we can improve our effectiveness through a combination of having the right boards and paying the right price.

Great.

Thank you.

Thank you.

We will go now to Bryan Elliott with Raymond James.

Hi, I just wanted to make sure I take away properly your sales and pricing commentary.

As I understand it, we're now working with effectively no price on a go-forward basis with you are reserving the right to change that, as you monitor competition, and trends and costs, et cetera, correct?

As of now, we have no menu pricing year over year in Cracker Barrel.

We expect to have some sort of a price increase, a modest price increase in the future.

And at Logan's, we have just .7 of a percent of year over year menu pricing.

And we may see some additional modest price increasing there as well, in the coming months.

Okay.

We're also, at the Cracker Barrel store, seeing up traffic, breakfast; down traffic, lunch and dinner.

That was the first quarter trend, yes.

Okay.

And then we got some mix shift in the first quarter as well.

Looking at the strengthening of sales at the Cracker Barrel restaurant side so far this quarter, and the fairly confident guidance in the same store sales assumption embedded in that guidance, that would seem to imply either improving customer counts, and/or improving mix.

Can you kind of square those forward-lookings with the recent past?

We do expect to see modestly positive customer counts in Cracker Barrel, and as we're reporting this morning, and describing, we are seeing improving trends out there, in both sides of the business, Cracker Barrel and Logan's.

All right.

And the test menu is pretty broad spread across the system in different markets or even just kind of random stores, is that correct?

They're not random, but yes, it is widespread.

I mean by random, I mean if I get off exit 142, maybe it is there, if I go to exit 160, it may not be, et cetera?

Or is it more clustered?

No, the former is correct.

We try to spread across the system to get a pretty good read geographically.

If you would like your closest store we can probably tell you that.

Okay.

Since I'm getting on the road for Thanksgiving here, yeah, I will get with you on that.

Okay.

By the way there was some discussion, I don't want to take too much time on this, but you may recall some discussion a few quarters about whether the Ouija boards that you all sold were defective or not.

It appears I was incorrect and and mine is not defective, thank you. [ Laughter ]

And our final question is a follow-up from Robert Derrington.

Yeah a question on the -- could you help us with the retail pricing strategy for a second?

There is a number of items that are on the retail side that look to be clearly higher quality than what you carried before, but they're also at a lower price than what I would find at some of these little retail boutiques.

Is this strategy to try and keep velocity up on these items and discount relative to competition out there?

Okay.

We don't like the word discount.

But we have focused very much on adding some quality branded items where we can through our negotiations, structuring our business model with a vendor, we can sell at prices that would typically be great value compared with what department stores or other retailers might carry those items at.

I will give you one example, there are many examples, but we have a line of clothing from Woolrich that we just rolled out about two weeks ago, where the pricing is fairly substantially below what you would find elsewhere and you would find on the Woolrich website.

They are very comfortable with that because they see us as a great way to get their brand in front of a much bigger audience.

Overall, we're looking for -- we want value.

We want, when anybody to picks up a retail item at Cracker Barrel to say boy, that is great value.

We are also looking at absolute low price points for impulse.

The Halloween story I told in my remarks, we had Halloween candy as our target item which is the thing we use to kind of start a conversation for October, so we had a lot of low price point items, but it creates a momentum and creates a sale.

On the other hand, we're having great success this season with a music box which retails for $129.99.

That was not something that we typically would have considered two or three years ago, as we were trying to get the value creation going, but this happens to be great value from that vendor relative to price elsewhere and we have sold a substantial number.

I think we're approaching 20,000 units of that music box at this point.

So if we can bring the value equation in, it is not just absolute low price points, it is really value, and quality tied into the value.

Are you limited in the number of those music boxes that you can find, Mike?

Because there are a lot of stores that are out of them already.

We haven't sold everything we have.

I suspect this is going to one of those that we have a limited success last year because we kind of put our toe in the water, and this year, we had a much bigger buy, and I suspect we will be buying more of those next year.

Great.

Thanks again.

Thank you.

And gentlemen, that concludes our question-and-answer session.

I would like to turn the conference back to you for any additional or closing comments.

Once again, thank you all for joining us this morning.

We look forward to reporting our second quarter in February, and as Larry said, our next update on sales will be on December 18.

Thank you.

Thanks, everyone.

Thank you for your participation in today's conference call.

You may disconnect at this time.