Cracker Barrel Old Country Store Inc (CBRL) 2004 Q2 法說會逐字稿

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

Today's call is being recorded.

The replay will be available starting today at 2:00 eastern time and will run through February 26th until 8:00 P.M. eastern time.

You need to dial 888-203-1112 and enter the confirmation number 196227.

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

Please go ahead.

Thank you.

Good morning.

We welcome you all and appreciate you joining this morning as we're serving up this fiscal year's second quarter.

I trust you all have a copy of our earnings release.

I hope you've had time to digest that.

And that you found it at least tastefully done.

Without further adieu, I'll turn this over to Larry White as Larry gets into the details.

Thanks, Dan.

Thank you to our listeners on the conference call and webcast for your interest and participation this morning.

Hopefully everyone's had an opportunity to see this morning's press release announcing our fiscal 2004 second quarter results and providing an update on current sales trends and the company's guidance for earnings for the remainder of fiscal 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've done this morning.

We urge caution to our listeners and readers inconsidering 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.

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 filings with the SEC.

With those cautionary reminders aside, let's review the information released this morning.

Bottom line, we recorded diluted net income per share for our second fiscal quarter of 57 cents versus 48 cents a year ago.

An increase of 18.8%.

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

A big part of the increase this quarter came from a 60-basis point expansion of operating margins compared with last year's second quarter.

The ninth consecutive quarter of year-over-year operating margin expansion.

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

Even in the face of mounting commodity cost pressures.

Furthermore, we had positive comparable store sales increases throughout our business with continuing strong trends reported for this very early stage of our third fiscal quarter.

That's a lot of good news.

I'd like to look at some of the details.

Revenue in our fiscal second quarter ended January 30, 2004 increased 8.8% from last year's second quarter.

That's approximately $613 million compared with $563 million last year.

Increase came primarily from new unit openings and from increases in comparable store restaurant retail sales and our Cracker Barrel Old Country Store concept and in Logan's Roadhouse.

Cracker Barrel comparable store restaurant sales for the quarter were up 2.4% from the year ago quarter reflecting a 1.4% higher average check including just about a half a percent of higher menu pricing and guest traffic up about 1%.

The half percent of higher menu pricing primarily reflected a modest 1.7% increase taken in mid January.

Our first menu price increase at Cracker Barrel in approximately 14 months.

We believe the competitive environment is good for us to take a modest price increase.

Many full service restaurant companies have indicated their intent to take or have already taken price increases of 1.5 to over 2% in response to increase in commodity cost pressures in our industry.

Our 1.7% increase, our first in 14 months is both beneficial to us and competitive.

Cracker Barrel restaurant comps have been positive in 15 of the last 16 quarters.

Importantly, the quarter also saw guest traffic growth in our comparable store sales with all three day parts, breakfast, lunch and dinner positive for the full quarter.

Cracker Barrel comparable store retail sales continue to be exceptional in the 2nd fiscal quarter, up an impressive 7%.

When guests come to a Cracker Barrel store, their primary purpose is to eat.

Retail purchases tend to be more discretionary.

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

This quarter, our merchandise planning had the 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.

Rounding out our comparable store sales results, our Logan's Roadhouse concept recorded an increase in 4.1% comparable restaurant sales including increased guest traffic of approximately 3.3%.

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

In July 2003, Logan's lapped a previous menu price increase and we took additional modest menu pricing, only about 7/10 of a percent late in the fiscal first quarter.

Clearly, we've been judicious with our menu pricing in both concepts, going over a year between modest price increases, focusing on keeping a strong price value position for what has been an uncertain economic environment.

We've been successful in achieving improving operating margins.

With what appears to be an improving economic condition and with many competitors initiating price increases in response to increase in commodity costs, we see some opportunity emerging for additional modest price increases for the future of Logan's as we recently did at Cracker Barrel.

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

We've been testing variations of menu changes and price increases at Logan's.

We have not yet pulled a trigger on the system-wide increase.

In the meantime, our results continue to show strong sales increase trends.

We continue to view alcohol sales at Logan's as both a challenge and opportunity with our alcohol beverage mix off about 50 basis points from the year ago quarter.

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

We're also testing some initiatives to improve alcohol mix at Logan's and Mike will have comments on that shortly.

During the second fiscal quarter, we opened four new Cracker Barrel Old Country Store units, or eight year-to-date and two new company-operated Logan's Roadhouse restaurants or seven year-to-date.

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

We also have one new Logan's franchise opening in the second fiscal quarter.

Let's touch on a few more highlights in the second quarter now.

Operating income for the second quarter was up 17.5% on the 8.8% revenue increase.

Operating margins improved 60 basis points from 7.1% to 7.7% of revenues.

This marks 9 consecutive quarters of solid operating income growth of more than 15% from the prior year.

The improvements in the second fiscal quarter primarily reflected lower labor and related expenses, other store operating expenses and general and administrative expenses while costs of goods sold was higher than prior year as a percent of revenue for the second quarter in a row that we've experienced that.

We're going to have challenges from time to time and individual cost elements to the business such as costs of goods here recently.

We're pleased that our focus on continual incremental improvement operating margins allowed to us overcome those challenges in the second quarter.

The significant challenge in the restaurant industry is that after a long period of favorable commodity costs, we begun to see pressure in several areas.

First and foremost is probably beef, which fiscal 2003, it counted for approximately 17% of our consolidated food purchases.

While there's been some price volatility related to market reaction to an instance of mad cow disease in Washington state and some resulting export disruptions, the underlying trends are for high prices.

The dynamics of cattle herd rebuilding, possible continuing supply disruptions in Canada and strong consumer demand are likely to cause continued pressure perhaps for as long as two years.

We had benefited in prior months from a contract at Logan's that held our beef costs below market, although at higher prices than the prior year.

That contract expired at calendar year end and we renewed it within our expectations with significant double digit increases in the related costs, which began in January.

While the increase is significant to Logan's, it is within our own previous expectations and because Logan's beef purchases are estimated at less than 5% of our consolidated costs of goods sold it's not quite so material to our consolidated operations.

Cracker Barrel has several beef contracts for its varying product offering with various expirations dates through July.

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 than a growing list of higher than expected increases at other areas.

Most recently in butter and earlier in such items as poultry, egg and bacon.

We also had less success than expected in achieving savings in other areas including recent trends at higher than expected waste, primarily at Cracker Barrel.

Also contributing to the pressure ingross margin is the fact that strong retail sales carry a higher cost of sales in and restaurant sales.

We expect to increase our retail markdown activity this -- for the remainder of this year as we work through inventory imbalances, particularly in seasonal apparel from the calendar 2003 spring and fall lines.

To a lesser degree the combined effects of lower alcohol sales at Logan's as well as higher alcohol costs than a year ago also is contributed to lower gross margins.

So after a long run of low commodity costs inflation and gross margin expansion, there's some clear pressure and higher cost of goods sold compared with prior year experience in the first half is expected to continue in the final two quarters of this fiscal year.

While costs of sales is under some pressure, we've been recording improvements elsewhere and will continue to seek more improvements as we work at our objective of continual incremental improvement on operating margins.

Labor and related expenses were improved as a result of generally favorable worker's compensation and group health as well as another quarter of favorable year-over-year hourly wage inflation, especially at Cracker Barrel.

Our other store operating expenses reflected lower depreciation, advertising and insurance expense and our general administrative expense was favorable in the second quarter.

Primarily reflecting lower outside professional fees and other expenses compared with last year.

I'll note that our second quarter income tax rate of 36.1% increased from 35.7% in the first quarter and from 35.5% a year ago.

This reflected the effect on our year-to-date and expected full-year tax rate of the expiration of certain tax credits, including the work opportunities tax credit.

We expect the Congress will renew those credits and hopefully retroactively and unless and until they become law again, we expect our tax rate to be 35.9% for the remainder of the fiscal year.

Wrapping up the second quarter, net income of $29 million was improved 17.8% from $24.6 million dollars a year ago.

Diluted net income per share of 57 cents was improved 18.8% from 48 cents reported in the second quarter last year and solidly in line with our guidance of 15% or more growth.

Once again, we delivered on the objectives that we set.

I have just one more observation I want to make about the second quarter.

During the quarter, we suspended activity on our existing share repurchase authorization when there seemed to be an increasing likelihood of developments in certain legal matters.

Those matters are discussed in greater detail in this morning's press release.

Mike will have a few comments in that regard in a few minutes.

However, as it relates to the share repurchase strategy, I want to emphasize this is not a change in philosophy or intent.

The suspension solely reflected our concern that increased discussions with other parties in those legal matters might have resulted in a material development.

In view of that, we thought it was inappropriate to be active a market in such a potentially dynamic situation.

With today's disclosure and the absense of other material developments, we presently expect to resume share repurchases during the present quarter.

In addition to share repurchases, we are continuing our new quarterly dividend policy having declared the second dividend under this policy in the second quarter and paid it in the early part of the third quarter.

We think 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 more favorable tax treatment now given 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 we disclaim any obligation to update this information other than in filings with the SEC from time to time.

Also, we will not offer 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.

This discussion of trends and guidance as other earlier parts of today's discussion 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 context of the uncertainties described into more detail in this morning's press release.

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

Cracker Barrel comparable store restaurant sales are up approximately 6 to 6.5% primarily reflecting higher guest traffic.

The quarter to date numbers include 1.7% of menu pricing increases reflecting the January increase I mentioned earlier.

Retail comparable store sales are up approximately 11% beginning the third consecutive quarter in which retail sales increases exceed solid restaurant increases.

And encouragingly, Logan's comparable restaurant sales are up approximately 9 to 9.5% including the modest 7/10% of menu pricing taken late in the first quarter.

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

Let me point out that the results, as good as they are, are early in the quarter or less than three weeks in and reflect favorable comparison to severe winter weather last year.

We expect comparable store restaurant sales for the full quarter to be up in the mid single digits in both concepts and up in the high single digits in retail.

Our assessment and expectation is for solid underlying continued comparable store sales growth.

Our present guidance for diluted net income per share for the third fiscal quarter is for percentage growth up to the mid teens compared with 46 cents a year ago.

We presently expect total revenue percentage growth in the low double digits in the third quarter versus last year.

I've already discussed some of the details about continuing cost pressure that we expect in cost to goods sold.

But we presently believe we can achieve operating margins approximately comparable to the prior year.

For the fourth quarter fiscal 2004, we presently expect diluted net income per share percentage growth up to the mid teens also from last year's 70 cents on total revenue percentage growth in the low double digits.

With those -- while those expectations aren't without risk or opportunities for that matter, if we achieve present projections, we expect to exceed our long-term objective of 15% growth and diluted net income per share compared with the full fiscal year of 2003.

So we reported good results this morning.

We're reporting an 18.8% increase in diluted net income per share for the second fiscal - quarter.

Solid and improving sales trends.

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

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

Now 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.

Good morning, everyone and thank you for joining us this morning.

I'm pleased to be again reporting another strong quarter for the CBRL Group with earnings per share up 19% in the quarter.

We're now at 10 consecutive quarters with EPS growth at or above our long-term goal fo 15% or better.

I'm also pleased to be again providing earnings guidance as a whole in line with that same goal.

So reported previously, we believe our continuing successful results come from having a clear game plan and sticking to it.

The plan is all about focusing on the quality of execution throughout the business with the aim of providing the best possible guest experience every time and at the same time continuing to find new and better ways to do everything we do while never compromising the quality of the guest experience.

Although there are signs of improvement in the economy and we believe we're well positioned to take advantage of those improvements, we along with the rest of the industry have been facing more commodity cost pressures than we've seen in a long time.

The guidance we are providing today includes our current estimate of the effects of those cost pressures and the benefit of the actions we're taking to deal with them.

One of the things we can do is obviously to increase prices as I said in previous calls and as Larry mentioned today, we're pleased that the margin actions we've taken over the past three years allowed us to expand margins while taking only modest price increases.

This means we're well position to take prices both at Cracker Barrel where we took a 1.7 increase in January, and Logan's, where we expect to take modest pricing action in the near future.

Especially as we continue to see competitors taking price to offset the commodity increases.

Fortunately about the outlook for the rest of the year, I'd like to spend a few minutes in the second quarter.

At Cracker Barrel, we again achieved positive restaurant same-store sales in traffic.

This means we've now been positive for 15 of the last 16 quarters.

As Larry said, we saw positive traffic in all three day parts of the quarter and we're particularly encouraged by the first increase in dinner traffic in six quarters.

Thanksgiving, as usual, is a very strong day for Cracker Barrel with sales up 3% on the day where the average unit restaurant volume is 12,600 and the highest volume store was at 28,600.

All of this on a large percentage of the orders with the $7.99 Thanksgiving dinner special.

The ability to continue to build sales on the high volume base speaks to the success of our focus on speed of service and turning tables.

Retail, of course, continued in a starring role in the quarter with the same-store sales increase of 7% and an increase in retail sales is a percent of total Cracker Barrel sales from 28.2% last year to 29.1% this year.

The elements for our retail game plan remain the same in the nostalgic merchandise, automated replenishment, the planning function involved throughout the buying and execution process.

Improvements in operations, attractive price points and the freshness of the selection for both seasonal and everyday products.

And fundamentally recognition of the opportunity for Cracker Barrel is not to be a destination retailer but to sell a retail item to each of the 1,200 people that come each day every day to eat at each Cracker Barrel.

Which is why we regard the percent of total as one of the key metrics in our retail business.

Hourly turnover in Cracker Barrel for the quarter was 109% down from 116% last year.

The turnover for the key par four employees who represent 25% of our total workforce holding steady at 24%.

Management turnover was 20% down from 22% last year.

We opened five Cracker Barrels in the quarter, including the rebuild of a 28-year-old store.

This brings the total number of new stores for the year-to-date 12 including three opened so far in the third quarter.

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

Our interstate market will continue to be pursued but on a very selective basis and only on core markets as we continue to improve our marketing programs necessary to support these locations.

At Logan's, there was no change in our priorities for fiscal 2004, which continue to be consistency of execution and sharpening the brand positioning.

The results of the operations focus speak for themselves with positive traffic of 3.3% in the 2nd quarter and acceleration so far in the 3rd quarter to 7.5 to 8% positive traffic.

Hourly turnover at Logan's was 103%, down from 108% last year, and management turnover was 10% down from 17% the prior year.

We opened two new company-owned and one franchised Logan's restaurants in the second quarter bringing the total year-to-date to seven new company-owned and one new franchise restaurant.

We've been working since last year to upgrade the Logan's site selection approval process.

We're very pleased with the results we're seeing from the new restaurants we've developed under the new process.

In the second quarter, every restaurant opened this year exceeded its pro forma sales in every month it was open during the quarter.

Previously, while we saw on average positive results from new Logan's units, there was a substantial lack of consistency among the individual units.

Turning now to the outlook for the remainder of the year, the first thing to say is we're very pleased for the strong sales in all three parts of the business so far in the third quarter.

While we benefitted from easier comps resulting from the severe window weather last year, the underlying trends are very encouraging.

We've been very realistic in our assessment of the commodity outlook in developing our earnings guidance.

As I mentioned earlier, we've already taken pricing action at Cracker Barrel and expect to do the same at Logan's within the next three months.

Again, we believe in both concepts, conservative pricing strategy has put us into a position to be able to take some price now without negatively impacting traffic.

In addition to the price increases, we'll continue to see purchasing initiatives to protect our ability to continue to improve margins over time.

And as ever, in all of our cost management initiatives, we remain committed to a low compromise approach when it comes to food quality, portion size and service levels.

Some examples of the behind-the-scenes activities where we've seen success in controlling costs are the worker's comp and group health programs.

In the case of worker's comp, we've been focused in substantially improving the way in which we're managing claims, and at group health at Cracker Barrel, we're been approving a plan design to drive out unnecessary costs and creat incentives for participants to help manage costs.

As a result of these initiatives, we'll continue to see better than expected results in these areas which in addition to the hourly wage controls in both concepts, are allowing us to achieve favorable labor numbers to help offset the cost of goods pressures.

In Cracker Barrel, execution remains the key to success and building restaurant sales.

We're upupgrading our best practices programs to reemphasize the importance of table turns, scheduling and staffing for peak periods.

As I discussed last time, we view the dinner date part as an opportunity for Cracker Barrel.

While trends have been steadily improving since the third quarter last year, we believe there remains a significant opportunity dinner.

In addition to the increased focus on quality of operations at dinner, we've been testing a new menu that includes support for the dinner day part in the form of new daily dinner specials priced at $7.99.

Overall, the menu has been designed to be easier to read to increase -- to see variety and to increase margins through product placement.

The results of the menu tests have been successful in both increasing traffic and improving margins.

We're now in the process of gearing up to roll out the menu across the system in the near future.

In retail, the priorities to maintain the momentum we've achieved in the first half of the year is a result of all of the changes made in the past three years coming together.

As I mentioned last time, one of the things we're learning in Cracker Barrel retail is the importance of maintaining freshness in our seasonal inventory by both planning to buy optimally and also by using markdowns more aggressively to serve through in the back end.

One area we've not applied this process so far is in apparel.

One of our short-term goals is to get the seasonal apparel inventory current and build on that base.

We continue to find ways to improve all aspects of retail.

For example, we've taken the successful target item program whose intended primarily cause guest interaction but also resulted in strong sales increases for the products involved and we've added a second target item each month which is suggestively sold at the register when the guest is paying.

These are value priced impulse items and we're seeing very good results.

For example, the registered target item in February is the 99 cent nostalgic Hershey bar.

This is a product where Hershey developed exclusive packaging for us based on advertising materials from the early 1930s.

In the first two weeks of the program, we sold 368,000 bars, which is 64% better than our goal for that time period.

So the sales program and retail is still in the process of rolling out across the system.

So we have more upside to come from this program and we're just about to test the new floor layout ideas which came as a result of the retail traffic flow study.

We expect to see improvements in retail sales coming from this test.

As I mentioned previously, we also hope to see some benefit in restaurant traffic by removing the bottleneck at the hostess stand and the entrance of the dining room.

At Logan's, the consistent execution we've been focused on will be reinforced by the rollout of the upgrade to the high five program which will improve food consistency, anticipate and deal with any slow tickets and reemphasize the importance of the check back at the table after the food is delivered.

Sales of alcoholic beverages are an opportunity for Logan's and over the past three years I have reported from time to time on some initiatives we've implemented in an attempt to improve alcohol sales.

Competitively, Logan's has been at a disadvantage for having no regular happy hour.

During the second quarter, we tested a happy hour program and we're pleased with the results in terms of margin improvement and traffic increases.

We're continuing the development of an improved brand strategy at Logan's and expect to roll out the happy hour program later in the third quarter as one component of the strategy.

The marketing strategy and menu strategy are still under development and as a result, we've chosen not to spend any money on broadcast media at Logan's so far this year.

Although the spending levels were relatively modest last year, we're nevertheless pleased to be achieving a level of sales increase you've seen without advertising this year.

And finally on Logan's, we're making good progress in ramping up the development process and rebuilding the pipelines so we can get a 20% annualized growth rate by the end of fiscal 2005.

On a different topic as we disclosed in the release today, there were some developments in the private litigation and department of justice investigation during the quarter.

In the private litigation, the Plaintiff's attorneys and we have been working with a federal mediator in an attempt to reach a satisfactory resolution of the issues.

No agreement has been reached at the present time and we continue to believe that Cracker Barrel has substantial defenses to the claims and we'll continue to defend itself vigorously in the event that the mediated resolution cannot be achieved.

In the department of justice matter, Cracker Barrel has been engaged since December in discussions with the department seeking to achieve a negotiated agreement.

Since all of these discussions are confidential, we're not at liberty to discuss further details at this time.

Finally in closing, I would like to say how pleased we are with the second quarter performance.

We believe this comes, as I've said, from a consistent game plan and sticking to that plan.

And also from the efforts and hard work from everybody at both organizations coming to work every day and playing their part in delivering the positive guest experience that is critical to our success.

Looking forward, we believe that we're well-positioned to be able to come out of these cost pressures that are affecting the industry and continue -- expect to continue to beat our earnings goals and guidance.

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

Thank you, sir.

Today's question and answer session will be conducted electronically.

If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch-tone telephone.

Once again, ladies and gentlemen, star one for any questions.

We'll go first to Howard Penney at Sun Trust.

Thanks very much.

My question has to do with the top line.

If you could comment on 15% sustainable earnings growth.

What do you think is the corresponding sustainable top line revenue growth that equates to the 15% earnings?

I think what we've talked about for quite sometime is we're looking at -- I'll give you the pieces of it, Howard, in Cracker Barrel, we're looking at about 5% unit growth over time.

We're looking at Logan's at ramping up to about 20% unit growth by the end of fiscal '05.

In addition to all that, we expect to see some small changes improvements in, you know, the range of a few percent, the low to mid single digits kind of numbers and comp store sales.

Probably with a little leverage -- continuing leverage in retail at Cracker Barrel as we've been improving that part of the business.

All that translates into over time that we can be up in the high single digits or potentially at some point to the low double digits kind of numbers for top line growth.

Thank you.

You're welcome.

We'll move next to Robert Derrington at Morgan Keegan.

Yeah, hi.

Questions on a couple points.

One, Larry, what does it look like is required as far as the same-store sales growth to cover the commodity pressures you see inherent in the business right now?

There's so many moving parts, I haven't laid out a number that, you know, that specific item.

We look at our projection, our guidance and overall basis, and I think we've given pretty clear guidance on both parts of those things today.

So I don't look at it as being we need to get X% in same-stores to recover wide percent of commodities increase.

It's too many moving parts in the business.

That's fair enough.

When you look at, Mike, on the 70-store test, what features of that test look as though they could be the bigger contributors, you know, in -- to a rollout and to better comps to come?

Is it the dinner test?

We've seen, as I said, we've seen positive traffic and marginal improvement coming from the menu test.

We see positive traffic in all three day parts relative to the rest of the system.

So we think we've served up a pretty good balanced menu.

As I said, it is easy to read.

I think the anecdotal feedback is the guests like it.

It's not a major departure in terms of kind of appearance but it's much easier to handle.

I think that dinner business will build.

I think the dinner specials in the test we saw some pretty good sales from them, and I think it becomes a habit-forming thing because these are analogous to the daily lunch special.

I know on a Tuesday I can go to Cracker Barrel to get my favorite dinner item.

That's the focus we've got here.

So it's essentially managing the mix on the menu?

Yes, managing the mix but creating a better dinner opportunity.

Lastly, on the retail opportunity to continue to drive sales, you know, once we get, I guess, into the summer months, we start lapping some of the initiatives you put in place last year.

You know, can you give us some kind of sense on those things to come that are yet continuing to build that part of the business?

Well, I think we've tried to convey in all of these calls with retail in the last year that we are, we put some very focused programs in place because we've gone along and learned some things.

We're building on that learning.

I think we can continue to get better at the planning piece.

We can continue to get better replenishment.

I think the apparel, the light bulb going off that apparel is really a seasonal business is a substantial breakthrough.

Operationally, we're still rolling out this major service sales program, and it's going to take until the fourth quarter to have that throughout the system.

And I really believe, and we haven't got the tests under way yet, we're about to, that this floor layout.

We learned very interesting things about guest interaction when we did the traffic flow study and retail about the increased propensity to buy when an employee interacts with a guest who's looking at a product.

It is a very substantial number.

So we think we've got some real tools there that we're going to test and then roll out.

So I think retail has been a great contributor this year.

I think we're goefing to continue to, as we lack of course, it gets a little tougher, but we're certainly expected to see positive retail sales.

Frankly, I think almost 400,000 Hershey bars in two weeks is a good indicator of finding unless you bought them all.

Kudos to you and your team, Mike.

Thanks.

We'll move next to Bryan Elliot with Raymond James.

Hey, couple of follow-ups on that retail.

You mentioned on plans to take more aggressive markdowns.

I assume that that's bulk of that is the apparel that you referred to and the need to seasonally be quicker on that?

Yeah.

We haven't been as -- apparel is one of the last areas in which we've been doing some things about planning improvements and working with our vendors on getting a better prediction of what we're going to sell.

We find that we do have more seasonal apparel both from the spring season last year and the fall season of '03 that we're going to have to work our way through.

We've adjusted our buys for the spring apparel for 2004 to help us with that.

And we're expecting we'll be doing some additional markdown strategies.

We're also doing things like for example with the spring apparel, working to get the appropriate apparel into some of the spring vacation corridor kind of stores.

You know, up and down the east coast going into Florida Interstate 75 sort of stores to where we know we'll have a lot of traffic and hopefully sell through some of that.

Would you expect Q3 given the markdown expectations you now have for retail margins to be below prior year?

Yeah.

I think that's a possibility.

Okay.

Was Q2 retail margin above prior year?

I know you had very strong and successful markdown strategy Christmas a year ago.

Did that prevent you from being able to see further margin improvement in this past Christmas?

I really don't want to get into individual product line margins like that.

That hasn't been our practice.

So let me just leave it as saying we do see some pressure in retail margins here in the coming quarters.

Fair enough.

One other question, if I may.

The department of justice commentary, my recollection was that several class action lawsuits had been dismissed in court, and we're basically gone, the FLSA, you know, long standing continues.

What was the genesis and what's this DOJ process?

I thought we were behind all of this, essentially.

As you will see from our previous disclosures on this matter, we've been in continuing dialogue with the department of justice since August of, I think it was August of 2002?

So this is a continuation of a process we have never declared it to be over.

But the genesis of the DOJ discussions was the filing of the lawsuits that have subsequently all been dismissed, correct?

I don't know that we can say that.

We know that we became involved and started asking questions in parallel with the lawsuits, but I don't think one leads to the other.

Okay, fair enough.

Thank you.

Bryan, the lawsuits haven't been dismissed per se.

There's been denial of class certification in lawsuits, but true.

That's right.

Forgot that detail.

Thank you.

Thank you.

We'll go next to Dennis Forst of McDonald Investments.

Yeah, Larry, you had commented I think at the outset about operating expenses being down because of depreciation down, advertising down.

Were there other catalysts?

Those were the most notable.

I mean, there were a lot of different cost elements that go into that.

Did not see as much pressure as we've seen in some other quarters on things like utilities, but those were the most notable items.

Okay.

Why is depreciation down?

I can track depreciation by restaurant week and it's down pretty significantly.

It was even down on an absolute basis year-over-year, even with more stores.

I think it's basically coming, from you know, in the up until the late '90s.

We were pretty aggressive in our expansion.

Cracker Barrel had gotten up to opening 50 stores a year, and have begun to see some of the asset base being fully depreciated on things like FF&A.

So we should see that same trend then in future quarters?

We should see lower depreciation for a while, yeah.

Then g&a has actually been quite benign.

I think it's -- it was down in the first quarter on an absolute basis.

It was flat in the second quarter.

Is that going to accelerate?

Yeah.

I expect to see some higher g&a expense in the second half of the year right now.

Okay, when you say higher, do you mean dollars or percentages or both?

Certainly on dollars perhaps and on percentages.

Okay.

So we should not model flat to down percentages of g&a?

Yeah.

Versus a year ago?

And there's uncertainties in that as in any cost element, but that's my current expectation.

Then lastly, will you remind us on the stock authorization how much stock is there still available on the current authorization?

A couple hundred thousand shares.

Okay.

So that wouldn't take very long at all to reacquire.

I would assume the board is going to address that?

I can't speculate on board agendas or deliberations.

Okay.

Very good.

Thank you.

Okay.

Once again, ladies and gentlemen, it was star one for any questions.

If you find that your question has been answered, you can remove yourself by pressing the pound key.

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

Hi, guys.

Quickly, the seasonal merchandise that you've had thus far last, I guess Valentine's and I see Easter's already in, are the sales that you're getting out of that what you're looking for?

Yes.

And just because we're hearing a lot about it from everyone else, are you all seeing any impact from low carb or planning on doing anything to the menu to address it?

Two parts to the answer to that.

One is, I think Logan's has with the other steakhouses, is an obvious place for somebody interested in low carb diets.

I don't think it takes much effort to figure out how to use those steakhouse menus.

I think we're pretty comfortable that we probably are getting some benefit from it.

We are not able to quantify that.

With Cracker Barrel, we are planning as part of our menu to create a low carb user-friendly approach so we can point people to the appropriate things on the menu and help them get there.

And regarding the markdowns, I think you said that you had some fall apparel left over from last year as well.

So should we see the markdown strategies and inventory kind of working to the inventory to continue into the fourth quarter as well?

Oh, yes.

Okay.

Let me talk about apparel just a little bit.

We've had this realization that we haven't been thinking about it the way we should, which is on a seasonal basis.

So we've had aging apparel for quite sometime.

What we're focusing now is how do we get caught up and get that as fresh as everything else?

We think with the strength of the sales we have right now, we can use more aggressive markdowns and get us there.

And then lastly, a quick question about something you said earlier regarding retail.

It looked like the purchase incidents was up when the person was actually spoken to by an employee within retail.

Does that imply if you were to follow down that road that we would see you have a higher staffing level in retail at some point going forward if you wanted to kind of capitalize on that?

Well, couple of things.

We're not going to become the aggressive sales people and impose on our guests, but I don't know that it requires additional staffing.

I think it requires training in the appropriate practices so that we've got them focused on what's important when they are on the floor.

Okay, thanks, guys.

Thank you.

We'll move now to Janice Myer with Credit Suisse First Boston.

Hi.

Two questions.

One is, and forgive me if I missed this.

In the third quarter, you said you gave your top and bottom line and then you said flat operating margins.

In the fourth quarter, you gave your top line and bottom line growth rates but I don't think you gave any indication on where you think operating margins would be.

So if you could give a little insight into the fourth quarter operating margins.

Secondly on apparel, given you are learning so much about it, it is seasonal and you are going to catch up now, do you -- do the learnings that you are having now change at all the way you think you are going to use apparel in the mix at the retail shops over the next few years?

I'll touch on margins first and then Mike can hit the apparel.

Yeah, we did not specifically give guidance obviously with the kind of top line growth that we're looking at, and other things.

We're not going to be looking for substantial improvements in margins.

We see the margin pressures continuing throughout this -- the remainder of this fiscal year.

You're saying flat for the third quarter.

Would it, in your opinion, is flat the worst it'll be in the fourth quarter?

I'm going to defer on that, Janice.

I think there's a range that could be there, but we're not -- I'm just going to leave it as we're not going to expect a substantial improvement.

We're seeing the pressures continue through the remainder of the year.

Okay.

On the apparel, Janice, several things.

One is, it is an important part of our business and we see a good opportunity.

A couple of things we've tried in the last year or so, we made a concerted effort with T-shirts.

Instead of having them scattered around the store, we built a T-shirt wall on the back of the store so everything was together.

We then found out when we did our traffic flow study, we put the T-shirts in an area of the store where only 5% of our guests ever go.

Nevertheless, we had substantial T-shirt sales.

So we think if we move them somewhere else, that creates some significant opportunity by a more focused approach.

Another thing we did was we put out some Woolrich branded products and that sold very well.

So getting focused on quality.

Getting focused on the breadth of appeal and continuing to focus on price points, I think the apparel is a significant opportunity.

We had tended to walk too far up the price level in my opinion over the last several years, and we need to get back in that middle range that's attractive.

Again, I think all of this would try to convey a sense of we learn, we figure out how to use the learning and then improve the business and continue to do that, which creates future opportunity.

Would you say from an apparel standpoint that increased apparel sales in the midst of retail will come from changing the locations of the existing apparel or do you actually think over time you are going to be expanding your apparel purchases for sale at the gift shop?

We're not going to try and outdo the Gap.

I think apparel has a very important role, but I think it's a balance.

Is there sort of a percent of retail mix that you're targeting for apparel?

Yes.

Can you tell us what that is and where it is now maybe?

No.

I think I really don't like to share that level of detail on the business as you know, but all I'm trying to convey is apparel is an important, strong part of our business.

Big opportunity.

Thanks.

Thank you.

We'll go now to Matt Difrisco with Harris Nesbit.

First, jsut to clarify the guidance a little further, EPS for third quarter and fourth quarter looks as though you are using the terminology mid teens.

Not to split hairs here and then you say for the top line, low double digits and flat operating margins.

Obviously low double digits is lesser than mid teens.

Getting us to that EPS growth and you are talking about a higher tax rate for the back half of the year.

Should we assume then you are using the share repurchase heavily to get to that mid teens to make up for the -- to accelerate the EPS growth ahead of sales?

Yeah.

We talked about approximately comparable operating margins, you know, that gets you about there and it's clearly it's not a specific point that we can necessarily hit.

When you are that close, it has ups and downs that could potentially hit it.

We also do see some benefit from the share repurchase activity later this fiscal year.

Okay.

Then moving over to your costs to goods sold outlook.

You said you have several staggered contracts coming off at Cracker Barrel.

The assumptions that you're using now, should we assume that that is the current market prices for these commodities if they were to hold these prices and you to lock in given your fourth quarter guidance or could there be upside if we see further abating in the stock market?

It represents two things.

First of all represents our expectation of where we might have increases.

We also do have some active purchasing initiatives that we're following through on to try to get improvement from where we are.

And that's baked in there as well.

So it's the net effect of everything that we expect to see changing of the remainder of the year.

Last question, excuse me if I missed this and you explained it earlier.

But the reason for g&a to accelerate in the back half of the year as a -- or be equivalent as a percentage of sales seems rather high given your high comp trends right now and the last two quarters of levering that.

Is there an incremental expense?

I said we expect to see certain dollars higher as an expectation.

Perhaps percent and the dollars come from such things as professional fees.

That's probably the most notable thing.

But aren't we cycling off professional fees where you were fighting against the class action lawsuit from a year ago?

As we indicated today, we intend to continue to defend those actions vigorously.

We believe we have substantial defenses and we're going to continue to defend them vigorously.

If we reach some other resolution through a mediated settlement, our expectations could change a little.

Got it.

Thank you.

Again, as a final reminder, star one for any questions.

We'll go now to Linda Donnelly with Wachovia Securities.

Thank you.

I was cut off just as the q&a began, so if I'm redundant on a couple of these, I'm sorry.

I believe in a prior call, you gave us guidance in the year for expenditures and depreciation.

I had 140 to 145 on capital expenditures and 68 on depreciation.

Are those still valid?

The 140 to 145 is.

I couldn't quite understand the other number.

I had 68.

That's a little high.

Okay.

And also I probably missed the number of Logan's you anticipate opening in the third and fourth quarter and what the total will be for the year.

We're going to finish our Logan's development in the third quarter with four openings.

All right.

And let's see here.

On the apparel, where you have units there are clothes, have you considered doing any NASCAR-related apparel?

We've had some history with NASCAR, and we, in fact sponsored a race several years ago.

That's not something that's high on our list at this point in time.

All right.

And finally, you mentioned, of course, amounts you have accrued for potential results of the mediation.

Have you or would you let us know the amount that has been accrued so far?

It's in our financial statements or the footnotes to our financial statements.

We accrued $3.5 million a couple of years ago.

And relate it specifically to the FLSA case.

All right.

And finally, as I live in California, I don't have the opportunity to go to Cracker Barrel or Logan's very often, do you by chance still have a catalog?

No, not as such.

We have -- we now use a travel almanac.

We'd be happy to send you one.

If you go online to our website, we feature all of our menu items and a lot of our retail items.

Great.

I will take a look.

Thank you very much.

All right.

Thank you.

And gentlemen, at this time, there are no other questions standing by.

I'd like to turn the conference back for any additional or closing remarks.

Thank you, everybody, for joining us to talk about our second quarter.

We'll be back three months from now and looking forward to reporting another good quarter for the third quarter.

Thank you.

Thank you.

Ladies and gentlemen, this will conclude today's teleconference.

We do thank you for your participation.

You may disconnect at this time.