Cracker Barrel Old Country Store Inc (CBRL) 2004 Q3 法說會逐字稿

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

Today's call is being recorded and will be available for replay starting today at 2:00 p.m. eastern time and will run through May 27 until 8:00 p.m. eastern time by dialing 888-203-1112 and entering the confirmation code of 242246.

Again those numbers, the dial in number is 888-203-1112 and entering the confirmation code of 242246.

At this time I would like to turn the call over to the President and Chief Executive Officer, Mr. Michael Woodhouse.

Please go ahead, sir.

Good morning, everyone.

Welcome to the third quarter conference call.

Thanks for joining us this morning.

I have with me Larry White, our CFO and James Blackstock our General Counsel.

Dan Evins had long standing travel plans and wasn't able to be with us today.

As usual we will talk about the last quarter and the outlook for the current quarter and then we will be happy to entertain questions.

We have a lot to talk about.

With that I would like to hand the call over to Larry to talk about our financials.

Thanks, Mike.

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

Hopefully everyone has had the opportunity to see this morning's press release announcing our fiscal 2004 third quarter results and providing an update on current sales trends and commenting on the outlook for the fourth quarter 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 disclosures such as we have done this morning.

We urge caution to our listeners and readers and considering the information on current trends and outlook.

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

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 S.E.C.

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

Bottom line, we recorded diluted net income per share for our third fiscal quarter of 52 cents compared with 46 cents a year ago, that was an increase of 13%.

That was consistent with our guidance made throughout the quarter, a percentage growth up to the mid teens.

In a nut shell, the benefits of strong revenue performance were held partly in check by the continuation of the high commodity cost environment that we began to report on several months ago.

Those costs, and higher retail cost of goods sold, were offset by favorable cost performance in other areas.

We achieved our 10th consecutive quarter of solid double digit year-over-year operating income both but operating margins were flat compared with last year's third quarter, unfortunately breaking a string of nine consecutive quarters of year-over-year operating margin expansion.

While margins were flat this quarter that itself was a solid achieved conservative strategies even in the face of extraordinary cost pressures.

Let's look at some of the details of the quarter.

Revenue in our fiscal third quarter ended April 30, increased 10.8% from last year's third quarter.

That's approximately $584 million compared with $527 million last year.

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

Cracker Barrel store comparable store restaurants for the quarter were up 4.9% from a year ago quarter reflecting a 2.1% higher average check which include just 1.7% higher menu pricing, and we had guest traffic that was up 2.8%.

Cracker Barrel restaurant comps have been positive in 16 of the last 17 quarters.

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

Cracker Barrel comparable store retail sales continue to be exceptional in the third fiscal quarter up an impressive 6.2%.

When guests come to a Cracker Barrel store, the purpose primarily is to eat and 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 of 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 well ahead of restaurant sales increases.

Rounding out our comparable store sales results our Logan's Roadhouse concept recorded an increase of 7.3% in comparable restaurant sales including increased guest traffic of approximately 5.7%.

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

In July, a year ago, Logan's lacked our previous menu pricing increase, and we took an additional modest menu pricing only about 7/10 of 1% late in the fiscal first quarter, back in the September-October time range.

Clearly we have been judicious in our menu pricing in both concepts, going over a year between modest price increases in both and focusing on keeping a strong price value proposition in what has been an uncertain economic environment.

Yet we have been successful in maintaining operating margins, with many competitors initiating price increases in response to increasing commodity costs, we saw some opportunity emerging for additional modest price increases in Logan's as we did in January with Cracker Barrel.

In early May, we introduced a new menu with a price increase of 2.3% in Logan's, now giving us year-over-year pricing, totaling approximately 3%.

We continue to view alcohol sales in Logan's as both a challenge and an opportunity, with our alcoholic beverage mix off about 20 basis points from last year's quarter.

But that is the lowest decline we have had in several quarters.

Our alcohol mix was under 9% in the third quarter, however, and Logan's has just introduced a happy hour initiative here in May to begin rebuilding this profitable component of that business.

During the third fiscal quarter we opened eight new Cracker Barrel Old Country store units or 16 year-to-date and four new company-operated Logan's Roadhouse restaurants or 11 year- to-date.

For the full fiscal year we expect to open 24 Cracker Barrel stores including 8 in the fourth quarter and we completed our fiscal '04 development schedule for company operated Logan's restaurants.

We also had two new Logan's franchise openings in the third fiscal quarter.

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

Operating income for the third quarter was up 11.3% on a 10.8% revenue increase, while operating margins were basically unchanged at 7.3% of revenues.

This marks 10 consecutive quarters of solid double-digit year over year operating income growth.

Although cost of goods sold was under pressure from previously-reported commodity cost increases, and retail markdowns, market contributions were made in the other three cost areas, labor, other store operating expenses and G&A expenses.

While we are putting our challenges from time to time in individual cost elements of the business, were pleased that our focus on continuing incremental improvement and operating margins, allowed us to overcome some extraordinary challenges in the third quarter.

The significant challenge in the restaurant industry is that after a long period of favorable commodity costs, we have been seeing pressure in several areas.

A lot of our peers have reported on these pressures, but we were among the first to discuss the amount impact several months ago.

Some called it a perfect storm or the equivalent of 100-year flood or the HARBINGER of future general inflationary pressures, but regardless of however you label it, it is the reality of our industry today.

Historically we have enjoyed a relative benefit in our industry by having such a widely diversified menu in Cracker Barrel with more diversification provided by the Logan's business.

But historically, we just haven't seen pressures among so many product categories.

As I said earlier, we were among the first restaurant company to begin discussing these cost pressures that have been plaguing the industry, and I am not going to go back and rehash all those details.

Our most notable recent pressure has been on dairy products, including eggs, which probably account for less than 10% of our food costs, and it's an area in which we have most of our short-term supply arrangements, we are not contracted for as many products in that segment of our food cost.

Pressures there have risen from both rapidly escalating prices for milk, butter, eggs and cheese only a portion of which is under long-term contracts, and from a supplier change we made recently.

During the third quarter, we discontinued supply from a major butter vendor, because of quality concerns, and that resulted in both higher costs of alternative supplies because of pressures in the butter market but also some yield loss because we had a change away from using a proportion product to doing positioning in the stores.

Also contributing to pressure and gross margin was higher markdown activity on our retail product, especially apparel markdowns during a successful porch sale that we held in the third quarter.

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

We expect the pressures in gross margins are going to continue throughout the fourth quarter.

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 in our long-term objective of continuing incremental improvement and operating margins.

Labor and related expenses were improved as a result of generally favorable year-over-year hourly wage inflation, especially at Cracker Barrel, and other store operating expenses reflected lower depreciate , advertise, and other various expenses.

Our general and administrative expenses were favorable in the third quarter, primarily reflecting lower outside professional fees and lower bonus accruals.

I will notes that our third quarter income tax rate of 35.9% increased from 35.5% a year ago, which reflected the expiration of certain tax credits, including the work opportunities tax credit.

We expect that Congress will renew these credits, hopefully retro actively, and the Senate has passed a bill that would restore the benefits, house and likely in conference after that, and passage of that bill into law would reduce our tax rate.

Wrapping up the third quarter, net income of $26.2 million, was improved 11.9% from the $23.4 million a year ago.

Diluted net income per share, 52 cents, was improved 13% from the 46 cents reported on the third quarter last year and was in line with our guidance of percentage growth up to the mid teens.

Once again, we delivered on our objectives.

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

During the quarter, we resumed activity on our share repurchase authorization, spending nearly $51 million to purchase approximately 1.3 million shares in open market transaction.

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

We continue to think this is an appropriate and effective way to add a component to our shareholders return, given our strong balance sheet and expected cash flow, and the more favorable tax treatment now given dividends.

Finally, in this morning's press release we updated our current sales trend and commended on our outlook for the fourth quarter of fiscal 2004.

I again urge you to consider the cautionary discussion discussion of risks and uncertainties at the end of today's press release, and to understand the inherent risk associated with trends, targets and outlooks 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 S.E.C. from time to time.

This discussion of trends and outlook as we will as other parts of today's discussion in the press release contains forward-looking statements provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

They should be evaluated in the context of the uncertainties described in more detail in this morning's press release.

As indicate in our press we recently have experienced softening of sales or guest traffic trends from what we are learning early in the third quarter.

In this early stage of the fourth quarter fiscal quarter Cracker Barrel comparable store restaurant sales are down approximately 1.5%, reflecting 2.5 to 3% lower guest traffic, and that's more than offsetting a 1 to 1.5% higher average check.

The quarter to date trends include, within that check, the 1.7% of menu price increases reflecting if January increase I mentioned earlier.

Quarter today retail comparable store sales are down approximately 1.5 to 2% to a year ago, from a year ago period.

Encouragingly Logan's comparable restaurant sales, while softer than third quarter trends, are up approximately 4.5% quarter to date, including approximately a half to 1% higher guest traffic and 3.5 to 4% higher average check, including the approximately 3% of menu pricing I described earlier.

Because these changes are so recent, and fairly dramatic, we are not comfortable making projection of how the trends might change or continue over the remainder of the quarter.

Especially after the season strong summer dining season begins around Memorial Day.

I would remind you that we have a disconnection in that Memorial Day weekend is one week later this year than last.

I am often asked if we are concerned about gasoline prices affecting travel or dining habits.

Well, none of us has a perfect crystal ball, but I know, we do know that the price of gasoline historically has not materially affected our sales.

Although during the oil embargo periods of the '70s, there may have been an effect when availability was a concern.

If you think about it, if you took 1,000 mile driving vacation and used 40 or 50 gallons of gas you are looking at a fairly minimal effect on the cost of your vacation from increased gas prices, probably not much more than 20 or $30, if that, So again, although we can't know this time it will be different than before, the past tells us gasoline prices themselves should not be a sustained concern as it relates to travel.

There have been some comments elsewhere about the effect of gasoline prices on discretionary income which could affect the entire industry, and Mike will touch on that in a moment.

With that said, however, we have experienced downward changes in sales trends, and they have occurred during a period of substantial pressure in cost of goods sold.

Because of the uncertainty, the outlook related to sales trends for the quarter, were not yet sufficiently comfortable in projecting sales patterns for the remainder of the quarter.

Consequently we are not in a position to confirm our earnings guidance or to provide an update on earnings guidance at this time.

We will be watching developments closely, and will be reporting on updates on our regularly scheduled press releases during the quarter, and we will be looking for ways to minimize any unfavorable effects.

So, we reported good results this morning for our quarter.

We are reporting a 13% increase in diluted net income per share for the third fiscal quarter, even in the face of difficult, of a difficult commodity cost environment.

It's a tough and uncertain environment in the near term, but we remain confident in our strategies and initiatives, and we will endeavor to keep you informed.

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

Now I want to turn this back over to Mike Woodhouse who has further remarks on operating trends and initiatives.

Mike.

Thanks, I am pleased to be reporting a strong quarter for CBRL Group.

With EPS up 13% which was in line with our guidance for quarter, and as Larry has emphasized, despite the unusually strong commodity cost pressures we faced along with the restaurant industry.

I will be discussing outlook for the fourth quarter in a few minute but first I'd like to touch on the highlights of the third quarter.

As always we believe in having a clear game plan and clear priorities that are communicated throughout the organization.

Execution continues to be our top priority both in terms of the quality and consistency, and the strong sales results for the quarter in all three components of our business speak to the focus of the leadership teams in both Cracker Barrel and Logan's in delivering the best possible guest experience every time.

As I said on previous calls, we are pleased that the margin management actions we have been taken over the past few years will allow us to expand margins while taking only modest price increases, this means that we have been well positioned to take some price, especially as we see competitors taking price steps as the commodity increases.

At Cracker Barrel as I reported last time we took a reported 1.7% price increase in January at Logan's we took a 2.3% increase with a rollout of the new menu in the beginning of May.

Although we are experiencing significant food cost pressures in the quarter we were still able to offset these with favorable labor, other operating and G&A costs to maintain constant operating margins year to year.

In Cracker Barrel we again achieved positive restaurant same store traffic, which means this will be positive for 16 of the last 17 quarters.

As Larry said we sold positive traffic in all three day parts of the quarter.

We are continue to be encouraged by the positive dinner traffic which started last quarter.

The retail strategies we developed over the past several years in Cracker Barrel have continued to pay off, an important aspect of our approach to retail is the recognition that our opportunity is to sell to more to a captive audience who have come to eat at Cracker Barrel, destination retailer and the purchases are generally impulsive in nature.

So our target item [inaudible], and our commitment to affordable price points support this overall direction.

We continue to see year to year improvements in the key metric of retail sales as a percent of total sales.

On the people front, year-to-date hourly turnover Cracker Barrel at the end of the quarter was 109% down from 114% last year.

Management turnover for the quarter was 23%, down from 26% last year.

The development strategy for Cracker Barrel continues to be to focus on building our interstate presence and core markets while building selectively in developmental markets. [Inaudible] development will continue to be pursued on a very selective basis and only in core markets as we continue to prove out the marketing, which we rolled out at beginning of the current quarter to support these off interstate locations.

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

The results of the operating focus speak for themselves with positive traffic of 5.7% in the quarter.

Work on the brand position continued in the third quarter with testing of the happy hour program and the new menu, both of which have been rolled out at the beginning of the fourth quarter.

On the Logan's people front, hourly turnover was 94% down from 108% last to year, and year-to-date management turnover was 20% up slightly from 18% in the prior year.

We continue to see positive results from the work we have done to upgrade the Logan's site selection and process.

In the third quarter, nine of the eleven restaurants opened this year exceeded their pro forma sales in every month they are open during the third quarter.

Again this speaks not just to the average strong performance of the new stores but also to the much improved consistency over our previous experience.

The star of the group this year, which opened in March, and, therefore, still in its honeymoon period, exceeded the comp store average by 77% in April.

Turning now to the outlook for the remainder of the years, we stated in the release today, Larry has discussed in some detail, we have experienced the softening of traffic trends in the past few weeks.

The change showed up in both concepts, with a similar magnitude.

We are not certain what caused this.

We will need more time to understand, if this is a new ongoing trend and if so where it will take us.

As we seek answers, we do believe that one possible factor is the high level of gasoline prices and especially, the very sharp run up in the first two-weeks of May when most of the country started seeing $2 a gallon prices at the pump.

We think this could be putting both real and perceived pressure on discretionary incomes.

We see others including Wal-Mart make similar suggestions.

I should make it clear that I am speaking only to the effect of gas prices on customer spending in general and not about any effect of travel.

The external forecast of summer travel continue to remain bullish.

We have only limited data on sales trends for the rest of the industry, but the information we have for the first full week in May suggests that the industry, outside of California, saw a similar drop in that week.

As the release indicated, we will be providing upgraded guidance when we have better visibility of sales trends, which will be sometime after we go through the effect of the shift in the Memorial Day holiday, which is occurring this week and next week.

Meanwhile we will continue to focus on execution and we have some exciting and positive things in both concepts.

In Cracker Barrel, we just rolled out a new menu, following a successful test.

We have a number of objectives for this new menu, the first is to increase traffic, with increased frequency, driven by some new menu items and increased [inaudible] variety.

We are looking for improve margin from product placement on the menu, we look to include dinner sales with the introduction of daily dinner specials throughout the week, and we have made some changes in design, which we think will help make the menu easier to use, and, finely, we have introduced a low carb section on the menu, both breakfast and lunch, dinner menus as a service to those guests who are following a low carb diet.

We have made the menu rollout a major focus internally, to create energies, high sales season for Cracker Barrel and we are looking forward to seeing similar positive results to those we experienced during the test.

Concurrently with the menu rollout we also introduced a Spanish/English menu featuring text in both languages which eliminates language barriers between our guests and employees.

It is at all of our stores, and we believe the menu format will help eliminate mistakes by insuring we understand what the guest is ordering and helps introduce good country cooking to go a community that is not so familiar with Cracker Barrel.

In retail, the priorities to maintain the momentum we have achieved in the first three quarters by continue target traffic focus on retail initiatives, and also by fine-tuning and taking advantage of our proven successes.

One example of this is ready to sum bell version of our traditional rockers, rocker home in a convenient way or have it shipped at a nominal cost.

Rockers are the largest dollar sales retail product that we have and we hope that this new development will result in increases in those sales.

We will continue to welcome apparel inventories and making good progress in bringing these in line with our other seasonal products, although we still have some work to do as we go through the fourth quarter and into next year.

Over the Memorial Day weekend, we will be running our first sidewalk sale to kick off the summer travel season, and that will provide an opportunity for us to continue to sell through the apparel.

At Logan's as I mentioned earlier we rolled out the new menu at the happy hour program at the beginning of the month, 2.3% price increase built in.

It was designed to protect the strong value that Logan's enjoys.

For example, no items were taken through the $10 price barrier, including best-selling 9 ounce sirloin stake which sells for $9.99 and we introduced several new and interesting products in both the appetizer and the entree section.

As we said for some time, sales of alcoholic beverages are an opportunity for Logan's, and we have taken some initiatives overtime to attempt to improve these sales.

Competitively, Logan's have been at a disadvantage by having no regular happy hour and we tested this happy hour program during the second and third quarters, and we are pleased with the results in terms of margin improvements and traffic increases.

The happy hour program was rolled out, varies by state, depending on local regulations, but is generally focused on two for one offers, low price offers, and supported by POS support in the form of banners, inside and outside the store, T-shirts for our employees and tabletop collateral.

As I report in the prior call, the overall marketing strategy for Logan's is still under development and as a result we chosen to not spend any money on broadcast media so far this fiscal year.

Although spending levels were relatively modest last year we are nevertheless pleased to achieve the level of sales increases we have seen without any advertising.

Finally on Logan's we are making good progress in ramping up the development progress and rebuilding the pipeline so we can get to a [20%] annualized unit growth rate by the end of fiscal 2005.

To close, I would like to again say how pleased we are with the performance of the business in the third quarter.

We believe that this comes from a consistent game plan, sticking to that game plan and also as a result of the efforts and hard work of everyone at both Cracker Barrel and Logan's who come to work every day, play their part in delivering the positive guest experience which we know is critical to our success.

Looking forward, while we've had some recent sales trends that have played some uncertainty we continue to believe that the strategies and plans that we have in place are the right ones and they are working for us, and I am confident that we will get back on track to meet our long-term goals.

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

Thank you, today's question and answer session will be conducted electronically.

If you would like to signal to ask a question, please press the star key followed by the digit 1 on your touchtone telephone.

If you are using mute function please make sure your mute is turned off to allow your signal to reach our equipment.

Again, that is star 1 for signaling for question today.

We will take our first question from Matt DiFrisco with Harris Nesbitt.

Please go ahead.

Hi, I have a couple of questions.

With your prior guidance of teen EPS type growth in 4Q, can you just refresh us again, what is the BOGEY on the comp that you need to get back to that type of EPS growth?

The previous guidance we said would have low double-digit total revenue growth, and that implicitly had in it low to mid single-digit kind of comp store sales growth, probably a little leverage on the Logan side and on the Cracker Barrel retail side, a little bit higher for those.

Okay, and then, can you give us some detail on the quarter to date trends.

I know it is early, but let me give you a couple of things I am thinking about.

The Orlando, we have seen that Orlando flight and discount airlines have gone down a lot now, it's pretty cheap to fly to Orlando now.

Have you seen a slowing of traveler in any region, is it tied to the incident in Virginia to the soup, is it a reaction to the new menu, can you give us some color on the decline of Cracker Barrel restaurant to date?

We have seen declines in all of our regions.

I think that the greater declines have been, from our previous trends, have tended to be in the midwest, northeast and maybe to some degree mid-Atlantic sort of region.

Mike, do you want to comment on that, on the other?

On the incident in Newport News?

Yes, we obviously don't comment on individual store sales.

We did see an effect at that particular store.

I am not, I don't believe we have seen the effect of that has spread anywhere else.

Okay.

My last question regard the COGs, you mentioned in Q3 you had an apparel, you were discounting apparel a little more aggressively.

Is that, how much of a basis point effect did that have on the COGs in 3Q along with the negative alcohol mix at Logan's?

Should we view those two as somewhat 3Q related and not continuing at the magnitude in 4Q, some easement on COGs with no relation to those?

No, first of all, the impact on Logan's, as I said in my remarks, is relatively miner but it is one of those components that is affecting us.

I don't expect to see a change in that particular item, because we will be, with the happy hour promotion that we have begun, we may have a little more pressure as it relates to alcohol sales in Logan's.

But when you consider Logan's is a relatively small part of overall revenues and that Logan's alcohol sales are below 9%, you will see that doesn't have a huge impact on the cost of goods sold, it does contribute to the pressure.

On the retail, as Mike indicated, we have made some progress with the apparel that we talked about.

He indicated that we are going to have a sidewalk sale on Memorial Day weekend, so there will be some markdowns associated with that, and as we described back in January, I guess, that that apparel buildup that we have was a seasonal issue, included both spring, summer and fall apparel, so we are still going to be dealing with the fall apparel in the fall, in the fall selling season, so we expect to see cost of goods sold continue to have the kind of pressure that is we have been experiences.

Let me comment a little on the sidewalk sale.

We have sales which are essentially clearance events, which is where we are taking product, heavily markdown, selling it outside very effectively.

Sidewalk sale is bringing out product which primarily will be marked down but at levels, probably bringing cool drink out on the porch selling cool drinks and generally creating a beginning of summer kind of feeling.

So we think it will generally help the focus of retail holiday sales on the weekend.

Thank you.

We will take our next question from Janice Meyer from Credit Suisse First Boston.

Please go ahead.

Hi, thanks.

You mentioned in your prepared remarks that if same store sales remain slow, we will take steps to minimize the effects.

Can you talk about what some of those steps might be, and what kind of offset they might, they could be, to the slowing comps?

I think, really, Janice, it's just, I think, as any responsible management team would do, we would look for avoiding discretionary expenditures and things like that.

We are doing things like the sidewalk sale that Mike mentioned that we hope will be a positive to us.

I don't know if there is any one particular notable thing that we would expect to do, but those sorts of things.

On your operating cost line, you have been benefiting from the lower G&A and the lower advertising expenditures.

Can you talk about where your advertising is right now, as this percent of sales from Cracker Barrel and Logan's, when you anticipate media gearing back up at Logan's and also, could you quantify how much that has helped you?

At Cracker Barrel, we haven't changed dramatically in advertising.

We continued to run just under 2% of revenues.

Logan's, we have, we have dropped from prior year.

I don't have the specific impact on that margin line, but that did contribute, as Mike indicated, we haven't really done any media in Logan's, but last year they were probably running only about 1.5 to 2% total advertising.

So we are, we are certainly less than the 1% and the kind of money we are spending now would be on print collateral sort of things that are point-of-sale orients.

Janice, along the long-term outlook at Logan's, we pulled back, because we did a lot of research late last calendar year to help us rethink the brand positioning of Logan's and out of that obviously will come our marketing strategy.

We think Logan's will be an advertised concept in the future, given its competitive set, so our development is focused on building out markets where we can both media and operationally efficient.

We haven't finalized our marketing for next year but I would suggest we would have testing of broadcast media, new creative for broadcast media and getting ready to roll that out in the following year.

Okay.

Thanks.

Thank you.

We will take our next the question from David Schamus from Raymond James.

Please go ahead.

Yes, good afternoon.

Could you please discuss more specifically which commodity it is you are locked in for and on those commodities, how long you are locked in for.

Also, with the commodities you are not locked in on do you have any intention of locking them in over the near term or do you intend to wait out the storm?

Thanks.

I am going to hold my remarks here to the fourth quarter at this point.

We will be giving more color on fiscal '05 at a later date.

In the fourth quarter, the key area where we have the smallest portion of our commodities locked in, is in the broad area of dairy, which is milk, butter, cheese and eggs, all of which are under some pressure.

There may be some additional pressure in the fourth quarter there, particularly as it relates to milk, but that whole area amounts to less than 10% of our food purchases.

So we don't see a lot of near-term additional exposure, but I will remind you that the whole commodity environment, just about across the board, is under pressure.

Okay.

So is it fair to assume that there hasn't been any major change within terms of you locking something in recently that last quarter was now locked in on?

That's fair to say.

The biggest change, as I said, that we experienced in the third quarter, and we will have some continuing effect of that, was the change in butter, and that was a contract that we had, and we have gone to, basically, a spot or monthly purchases on butter from that contract.

Okay.

Thank you.

We will go next to Joe Buckley from Bear Stearns.

Please go ahead.

Just to follow on the same lines, would you just run through some of the other key commodities and what you have covered and how far you have them covered?

Well, we have other things that are substantially covered, Joe, and we have got our beef pretty well set, both in Cracker Barrel and Logan's for the remainder of this quarter, and in some cases beyond.

Same with poultry.

There is some pork product, but a relatively small amount that we are purchasing on a monthly basis, and that's, that's not locked in.

But, most of our other products, there are things like produce and all that you buy locally, but can't, can't lock in.

But of our key products, most of it is set for the quarter.

You mentioned several times during the discussion of the quarter, you had a relatively modest price increases you have taken, any plans to bump up prices near term at Cracker Barrel?

I realize you did at Logan's at the beginning of the month?

Two things on that, Joe.

Answer this question, we don't advertise our price increases ahead of time for competitive reasons.

We also have a strategy of almost having the next price increase on the shelf so we can look at the timing, we have price, especially in this environment, under constant review, but the balance, obviously, is we want to, we don't want to give up traffic for the sake of short-term price benefit, so we are trying to keep that in balance.

We will certainly continue to look at those, and as soon as we do something, we will let everybody know.

Okay.

Mike, I am curious too, you referred oh some industry data, at least to the first week of May, indicating it was similar to your trends.

Could you elaborate a bit further on that?

We subscribe to a weekly tracking report, which showed for the first full week in May that there was a drop in traffic trend for the industry group covered by that research.

Is that a family restaurant industry group or a casual dining, full service or?

Full service.

Okay.

And my last question, you had made reference to Logan's and getting it back to 25% year-end expansion.

I think you said by the end of '05, so is that more of like a fiscal '06 kind of goal?

Yes.

It is a 20% run rate by the end of next year.

The goal is to get there and build Logan's to 20%.

And we are on track to do that.

I'm sorry, to get -- you wouldn't be applying 20% year growth for all of fiscal '05 though?

No.

No.

All right -- okay.

All right, thank you.

Thank you.

We will take our next question from Amy Bensen of Annandale Partners.

Please go ahead.

Good morning guys, have you historically or typically had sidewalk sales and porch sales so close together on the calendar.

No, I thought I said sidewalk sales are something that is new for us, I am sure you have seen reports of holiday weekend being a big travel weekend.

We just like to be ready and create some excitement around there.

This is part of the what can we do, given where sales have been for a little while, to get, get something moving, especially to get it internally to get people pumped up and really excited.

Okay.

It won't, I think you did say in your comments about it, that it won't be as significant a discount as you typically do on the porch sales, you will have more of the modest discounting?

We are basically taking, we always have some products on markdown as part of our selling through strategy.

So we will basically be taking those, and literally putting them outside and moving our Coca-Cola drink cooler out there, and just giving people more reason to be outside while they are waiting to eat and enjoying Cracker Barrel.

Okay.

And then regarding the off interstate versus interstate locations.

Are you seeing any.

Is there any difference in the types of declines in traffic that you are seeing and the two different types of units, or are they pretty similar?

They are pretty similar.

Okay.

And then, lastly, regarding the Logan's growth that you will be ramping up as we get to the back half of '05.

Are you going to be focusing on new markets or back selling in existing markets?

It's going to be primarily back selling.

We obviously have to add new markets to continue our long- term expansion, but the focus is building out markets to get to that advertising and operational efficiency.

Now, some smaller markets, that may just mean two units, but that's, that's the general focus.

Okay.

Thanks, guys.

Thank you.

Next the we will go to Robert Darinton from Morgan Keegan.

Please go ahead.

Yes.

Mike, can you give us some color on the 70-store menu test that you had run.

You are obviously running it throughout the system right now.

But can you give us some color, how did it affect the different day parts, pricing differences, any comp difference between the core business?

I, you may not think this is enough color, but I can say, I think I said in the last call, what we saw some positive traffic relative to the rest of the system and we saw some margin improvement relative to the rest of the system.

So that's what we would be looking to see as we roll this thing out.

We've had a number of different meant U.S. out over the last several years, one of the big benefits of doing what we are doing right now, basically going to a single menu with different price tiers and one or two regional products but basically the same layout and same core products everywhere.

So we will be taking away some confusion.

We have some great products, I am sure you tried them but if you haven't, the steak salad, which is in the low-carb section is great.

The $7.99 price point for the dinner feature, adding a beverage puts that check somewhere in the roughly $9.50 to $10 range, have you seen the benefit from the check average for that menu?

Where are you buying your beverages?

I'm sorry?

We are not selling $2 beverages.

Okay, $7.99 to, let's say, $1.50?

I'm sorry, we have, we have goals for those, they were part of your tests, the first two days we were exceeding the individual product goals.

We are pretty happy with those.

We think it's the right price point.

It's where we have typically been promoting.

It's not a 10 or $12 kind of entree.

It's a very good value, if you look at the whole, the whole picture.

We are trying to do with what we have done with the daily lunch specials, which is what we have done over the years which is to create a habit, a kind of craving habit, if you will, I have to go to Cracker Barrel on Tuesday for butter baked chicken or as we have seen big time, have to go to Cracker Barrel on Friday for the fish fry.

Okay, and the final question, the prototype for Logan's, where do you stand with that at this point in time?

We are getting pretty close.

We have finalized in terms of the design, we have not reduced it to architectural buildouts that we call buildup units.

That's what we are working on at this point.

Great, thank you.

Thank you.

We will go next to Dennis Forst from Key Bank Capital Markets.

Hi, first of all, Larry, the three-week numbers for May, was that through Tuesday the 18th?

Yes, a little under three weeks.

18 days.

Are you going to announce your next 28 days prior to the investor day?

Our next announcement is, I guess, June 17.

Okay.

That will be through Tuesday the 15th?

Yes.

I wanted to understand better the off interstate focus, Mike.

I missed most of what you said about that.

Can you repeat that?

You said you were only going to open off interstate and core markets?

We are going to do them on a very selective basis and only in core markets where we have existing awareness.

Our primary focus continues to be building out the interstate.

You know, we have built a brand that is highly associated with travel, especially interstate travel, and we want to make certain that we own that and own it everywhere that we are, so we are really focusing on building out both in newer markets and filling in existing markets on the interstate.

Where would the newer markets be?

Where would the newer markets be?

Yes.

Well, were not go jumping off like we did a few years ago to Montana and places like that.

A good example would be St. Louis, we just put it on our development list, core market list, opening three new stores in that area next year.

Okay.

And the fact that you are going to be very selective about off interstate.

Is that any indictment about how those stores are doing?

No, no.

They have a slightly different mix as we said before.

More food, less retail?

Yes, which is the travel piece.

The travelers tend to buy the retail.

But we have more food.

It is a slightly different model in terms of supporting them.

We tend to sit more in the competitive environment where the competition is spending more than we do on advertising.

We, we think that building about 5% unit growth is the right place to be to be able to do quality development both from a real estate and a people point of view, and we are choosing to allocate that primarily to interstate because that's what we are and we are not going to give that up to anybody.

The off of interstate is also a great opportunity that is there.

So we are not in any way being negative about it.

Okay.

Let me make a couple of comments about that.

Over the last few years, as we have gotten more rigorous in evaluating our potential real estate opportunities, we do see more opportunities on the interstates than we thought were there.

So as we really firm that up, we see, we have got more chances to do that in our business model, you know, has been built around the success of the interstates.

We spend less than, less than 2% on advertising, and, yet, our grand awareness is very high and comparable, according to our research, with the casual diners who are spending 3, 4, 5% of our revenues on advertising, and we think it's because that interstate model is so effective on establishing the brand.

Yes, I think just to continue on with that.

One of the things we are finding as we apply this is we become better at filling in and excepting maybe some cannibalization which we quantify and take into account in our financial analysis, so that we are still hitting or exceeding, including the cannibalization effect, which allows us to basically get in there and dominate and I go on real estate trips, real estate folks say we turned this thing down five-years ago because they thought it was too close to another store.

But as we are getting much better at all of this, we continue to really take advantage of those kinds of situations.

Okay.

And then, lastly, this may be too nitpicking, but of the 18 days in May that you have already released, was there any change in that trend?

Or was it consistently off 1, 2% at Cracker Barrel?

I mean --

That probably is more detail than we want to get into.

I don't see anything that I would say would be a change in trend, but you know, from day to day, you do see swings that can more than 1 or 2%.

But I don't see anything that I would call a change in trends during that.

One way or another.

That period.

Yes.

Okay.

Thank you.

Thanks.

We will go next to Adam Wise with Chilton Investment.

Please go ahead.

Sort of with Dennis's question, do you see any correlation between your sales trends this month and the press release that went out the first week regarding the settlement of the lawsuit?

Well, it was one of the things we pointed out throughout the conversation this morning, is we have seen the same change in traffic trend in both Cracker Barrel and Logan's occur at about the same time and there is obviously no connection at all with Logan's and the press release that went out.

Okay.

Thank you.

We will return to Janice Meyer from Credit Suisse First Boston.

Please go ahead.

Thank you.

Looking at your labor line, you got less leverage this quarter than in past quarters, despite actually better comps that you have had in the past quarters as well as more pricing.

So, can you talk a little bit about what is changing on the labor line and maybe what your outlook for that labor ratio is.

Can you get leverage going forward and maybe what kind of comp do you think you need to get leverage?

Well, I will comment on the quarter just passed, but we are really not in a position, Janice, to give any more guidance really on the next quarter.

But I think the, the year-ago had some benefit in it from -- the year ago third quarter had some benefit in it from somewhat lower workers' comp expenses.

Right.

And may have been somewhat slightly lower group health.

I don't recall that.

So, I would say a more normal rate this quarter.

And, I thought some of those benefits, though, the workers' comp and group health were continuous benefits that you were making progress on it actually, that it wasn't just a one quarter event since you had nice declines in labor, the first quarter of this year and I think the second quarter of this year, you had nice labor declines.

Right, but I think that --

We overlap that, in effect is what you are saying?

In effect, yes.

Regardless of the fourth quarter, just in general, now that you have overlapped those benefits, you know, what do you need to see over the next year, or what would you expect to see on comps to continue now to get labor leverage on a more normalized labor comparison?

We are just now ready to talk about our fiscal '05 outlook, that I think we are going to be expecting to see our greater opportunities to be in cost of goods sold in the future quarters.

Okay.

And that's pretty good.

Following up on that, maybe, can you talk about the magnitude of pressure on the food cost side versus the gift shop?

I think last quarter, the pressure at the gift shop was twice as much as it was on the food side because of the apparel markdowns.

Is that a similar type of comparison for this quarter as well, this past quarter, the third quarter?

No, both areas, I guess all three areas, if you county Logan's as separate.

Right.

Had pressure, and it was, in all cases, 100 basis points or more of pressure.

Was it more in any one particular area, Cracker Barrel food costs, Logan's food costs or gift shop?

I think Logan's was actually a little higher.

Okay.

That's a function of this year, we are under a new beef contract.

Last year's beef contract actually had us below market at this time last year.

And you talked about opportunities in '05 for COGs, is that as you, at the very least, overlap the aggressive markdowns that you are doing on apparel this year, so you should have better apparel margins next year?

Yes.

We will look for.

We will be looking for gross margin opportunities throughout the business.

I think, really, the issues that face us now, we will tend overtime to mitigate, and it's been a really extraordinary situation that we have been in, as I describe it, typically Cracker Barrel itself benefits quite a bit from having such a diversified menu.

That's not the case this time, because everything is up.

It's extraordinary, and so we are -- I don't think that those extraordinary events will continue forever, and I think at some point we will be able to see some, some benefits, and it's not simply market benefits, we have got our purchasing people working very carefully at trying to find new initiatives and ways to buy smarter and better, while maintaining the quality of the product.

So, there is more than just food cost shouldn't be as bad next year is what you are saying?

Yes.

I don't want to get into specifics on next year's guidance.

At this point we feel like there are relatively greater opportunities in cost of goods than the other areas, and it's not to say we are going to consider renew, seek improvements in the other areas, we think is a relative opportunity in cost of goods.

Thanks so much.

Okay.

And we will return to Robert Darinton from Morgan Keegan.

Yes, Mike.

In the Department of Justice settlement, I think there was some reference to training that was alluded to.

Can you give us some color on how that will affect payroll costs going forward?

Yes, in general, the whole agreement with the Department of Justice basically builds on things that we were already doing or planning to do.

I don't expect our training costs per se to increase much at all, if at all.

There are some specific requirements that we do some refresher training with our managers, which we will be doing in September, and in our annual manager conference, so we already have in place and time the travel constant and so on and so forth.

I think, as we said, I don't think we expect the ongoing effectiveness to have any material effect on our operating results.

Great.

Thanks, Mike.

Thank you.

And as a reminder, that's star 1 for questions.

We will take our next question from Dennis Forst from Key Bank Capital Markets.

Please go ahead.

I just want to get an idea of the cash flows and capital expenditures.

Do you have a figure for the fourth quarter?

No.

Finish the year of Cap Ex?

I think our Cap Ex is still going to be in the 140 to $145 million range that we talked about for, really, all year long.

Okay.

And then next year, I know you don't want to get into that, but thinking logically, if you are going to open more Logan's this year than last year, that number of Cracker Barrel should go up somewhat?

That's correct.

And how much more stock do you have to repurchase on your current authorization.

Is it 700,000?

About 900,000.

About 900,000 shares.

Great.

Thank you.

And we will return to Matt DiFrisco from Harris Nesbitt.

Please go ahead.

Just a followup on that.

The expense structure posts your DOJ and some of the class action lawsuits.

What if any effect are we going to see year over year in G&A, or what was that, weighed down to some of the, legal costs, are I guess your forecast for the fourth quarter, will we see something of a boost whereas in 3Q you are incurring some higher legal costs that won't be continuing into 4Q?

First of all, we are not making a projection of our fourth quarter results.

But, I think if you look at the trends, you will see that on a dollar basis for the last couple of quarters, that our G&A has been pretty constant and flat, and at this point I don't see any particular pressures on that in the fourth quarter.

Okay.

Thank you.

And there are currently no questions standing by.

I would like to turn the call back over to our speakers for any additional or closing remarks.

Well, again, I would like to thank you all for joining us this morning.

We have a little bit of uncertainty in our sales, as we have tried to explain.

We expect by the time we put out our next update we will have some better fix on where sales are going, but I really want to emphasize that this doesn't indicate any change in where we are heading long term.

We think that everything we are doing is the right place to be and we are looking forward to continuing success.

So, again, thanks for joining us.

Thanks, everyone.

And, ladies and gentlemen, this does conclude our conference today.

We thank you for your participation.

You may disconnect at this time