Cracker Barrel Old Country Store Inc (CBRL) 2004 Q4 法說會逐字稿

Good day, everyone, 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 September 16th until 8:00 P.M.

Eastern Time.

You may access the replay by dialing 888-203-1112 and entering confirmation code 564927.

At this time for opening remarks and introductions, I would like to turn the conference over to the President and CEO, Mr. Mike Woodhouse.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining us this morning for our year end conference call.

As usual, I have with me Larry White, our CFO, and Jim Blackstock, our General Counsel.

I know that for many of you, we have some competition for your attention this morning, so thank you for choosing to spend the next hour or so with us.

We have a lot to cover so we'll get things underway with Larry's financial review.

Larry?

Thanks, Mike, and thank you to our listeners on the conference call 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 fourth quarter and full year results, and providing an update on current sales trends and the initial outlook for our first quarter and full year of fiscal 2005.

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 in considering the information on current trends and earnings guidance.

The restaurant industry is highly competitive.

Trends and guidance are subject to numerous factors and influences that can cause future actual results to differ materially from such trends and guidance.

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

The company disclaims any obligation to update disclosed information on trends or guidance, and should we provide any updates after today, they will be made only by press release or in our filings with the SEC.

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

I'm going to focus my remarks on the quarter, with just a few full year perspectives at this time.

There's more detail on the full year in the press release.

Perhaps one of the most notable elements of the quarter was the recording of a charge to reflect a mediated settlement in principal on a certain litigation that's been reported in our public disclosure since as far back as Fiscal 1999.

This charge of $0.07 per diluted share in the quarter and $0.06 on the year is included and described fully in the press release and a Form 8-K filed today, but I'm going to discuss results this morning before settlement charges in most cases.

So, please refer carefully to the press release details to understand how the charge effected results.

The bottom line, we recorded diluted net income per share for our fourth fiscal quarter of $0.67 before settlement charge versus $0.70 a year ago, a decrease of about 4%.

That was consistent with our most recent guidance of $0.65 to $0.68.

A continuation of the high commodity cost environment that we began to report on several months ago was accompanied by softer sales trends at Cracker Barrel, among other effects.

Because of the cost pressure and the softer sales, operating margins were down approximately 100 basis points before settlement charges at 8.9% of revenues compared with last year's 9.9% of revenues in the fourth quarter.

This is our first reported quarter with a decline in operating margin in this tough cost environment, although the third quarter was flat versus prior year.

I'll point out that, excluding the effect of the settlement charge, operating margins were slightly improved for the full year of fiscal 2004 compared with fiscal 2003.

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

Revenue in our fiscal fourth quarter, which ended July the 30th of 2004, increased 4.7% from last year's fourth quarter.

That's approximately $607m compared with $580m a year ago.

The increase came primarily from new unit openings and from increased in comparable store restaurant sales and Logan's Roadhouse.

Cracker Barrel comparable store restaurant sales for the quarter were down 0.6% from the year ago quarter, reflecting a 1.9% higher average check, including just 1.7% of higher menu pricing.

In guest traffic, it was down about 2.5%.

Although Cracker Barrel comparable restaurant sales have been down, they were positive about 2% for the full fiscal year, including positive guest traffic of about 0.3%.

That's the fifth consecutive full year of positive comparable restaurant sales for Cracker Barrel.

We don't mean to excuse the recent soft sales, but we're confident that we'll get back to positive comps.

We continue to get high ratings from the consuming public, with recent important awards, including our 14th consecutive year as Restaurants and Instruction's Magazine's "Best in Family Dining."

And we're best in family dining in our core regions and an inaugural survey done by J.D.

Powers & Associates.

We continue to be one of the most highly and successful concepts in the industry and customers rank us very highly.

Cracker Barrel comparable store retail sales also softened in the fourth fiscal quarter, down 3.1%, and Mike is going to discuss this in a little more detail, including the potential impact of the fact that our retail sales are more discretionary in nature and some of the pressures on consumers might be reflected there.

Winding out our comparable store sales results for the fourth fiscal quarter, our Logan's Roadhouse concept recorded an impressive increase of 5.6% in comparable restaurant sales, including increased guest traffic of approximately 1%.

In July, 2003, a year ago, Logan's had [lapped] a previous menu price increase and we took additional modest menu pricing, only about a 0.7% rate in the fiscal first quarter.

Then, with a new menu and many competitors taking pricing increasing, we also increased prices by approximately 2.3% in May.

The remainder of our average check increase comes from favorable mix, reduced constant voids, as we've discussed-- as we've increased our focus on making things right with our guests ad not falling back on simply comping meals, and also improving alcohol sales.

Yes, we finally got a year-over-year increase in alcohol mix this quarter and we think it's reflecting our new Happy Hour initiative and the focus of our new management team, led by Tom Vogel [ph].

Alcohol remains an opportunity.

It's still less than 9% of sales, but we're very pleased with this initial positive result.

Those of you who follow us know that that's been something we've been trying to turn around for some time, so it's good news this quarter.

During the fourth fiscal quarter we opened 8 new Cracker Barrel Old Country Store units, or 24 for the full year, and no new company operated Logan's Roadhouse restaurants.

We reached our 11 for the year at the end of the third quarter.

We also have one new Logan's franchise restaurant opened the fourth fiscal quarter.

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

Operating income before settlement charges for the fourth quarter was down 5.9% on the 4.7% revenue increase.

While operating margins were lower at 8.9% of revenues before settlement charges compared with 9.9% a year earlier, this, as expected, breaks 10 consecutive quarters of solid double-digit year-over-year operating income growth.

Cost of goods sold was under pressure from previously recorded commodity cost increases on the restaurant side of the business.

While retail shrink was very close to last year for the year, our approval was higher than last year for the fourth quarter and we recorded some reserves against specific slow moving items, just about $0.5m for those items.

The significant challenge in the restaurant industry has been after a long period of favorable commodity costs.

We've been seeing pressure in several areas for several months.

Some have called it a perfect storm or the equivalent of 100-year flood or a harbinger of future general inflationary pressures.

But, regardless of how you label it, it's the reality in our industry today.

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

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

We believe that the worst is behind us, assuming no new external events, but general price levels remain somewhat high.

We believe we have good visibility in the near term on our commodity expectations.

We have more than 85% of our expected food purchases contracted for the current quarter, approximately 60% contracted for the second quarter, and almost 50% for the full year.

We also are pursuing cost savings initiatives.

It's not just a matter of what the markets are doing for us.

We're looking at ways to improve our costs.

For example, a recent change in the specification of our whipped butter individual serving cups should save us over $1m this year.

Labor and related expenses were slightly higher as a percent of revenues, primarily because last year's quarter was somewhat favorable in Workers Compensation and Group Health expense.

We did experience modest inflation, about 0.2%, in Cracker Barrel in non-tip hourly wage rates, the first year-over-year increase after six quarters of declines.

But, a modest increase.

In other store operating expenses reflect a higher loss on asset dispositions for equipment replacement, higher general liability insurance expense after somewhat low levels in the quarter a year go, supplies expense related partly to menu rollouts, and utilities expense at Cracker Barrel.

Advertising was lower than a year ago, primarily in Logan's.

Our G&A expense, before settlement charge, was favorable in the fourth quarter, primarily reflecting lower bonus approvals on the down quarter.

Litigation settlement charges, which are in G&A, were approximately $5.2m pre-tax.

I'll note that our fourth quarter income tax rate continued at 35.9%, reflecting the expiration earlier this year of certain tax credits, including the Work Opportunities credit and the Welfare to Work tax credit.

We expect that Congress will renew these credits, hopefully retroactively.

The timing is very uncertain.

Competing bills in the Senate and House of Representatives need to go to Conference Committee before that can become a reality.

Wrapping up the fourth quarter, net income of $33.3m before settlement charge was down 6.4% from $35.5m a year ago.

It was down 15.8% including the effect of the settlement charge.

Diluted net income per share of $0.67 before the settlement charge was down 4.3% from $0.70 reported in the fourth quarter last year, and it was in line with our guidance of $0.65 to $0.68 per share.

Diluted net income per share in the fourth quarter was down 14%, including the effect of the settlement charge.

There are just a couple more observations that I want to make about the fourth quarter and year.

During the quarter, we suspended activity on our share repurchase authorization pending developments in the mediation on the litigation matters.

We expect to resume share repurchases in the near future and we presently have authorization to repurchase approximately 2.9 million shares.

In addition to share repurchases, we're continuing our new quarterly dividend policy, having declared the fourth dividend under this policy in the fourth quarter and paid it in the first quarter of fiscal 2005.

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

I'd like to point out that our cash flow from operations in fiscal 2004 was just over $200m and exceeded our $145m capital expenditure outlays by nearly $56m.

That's five consecutive years in which we've generated more cash from operations than we needed for capital expenditures, and it's four consecutive years that the surplus has exceeded $50m.

We presently expect an even greater surplus in fiscal 2005.

Finally, in this morning's press release, we updated our current sales trends and outlook for the first quarter and full year of fiscal 2005.

I again urge you to consider the cautionary discussion of risks and uncertainties at the end of today's press release.

And to understand the inherent risks associated with trends, targets, guidance and estimates in a competitive industry such as ours.

We remind you that we disclaim any obligation to update this information, other than in filings with the SEC from time to time.

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

The discussion of trends and guidance, like 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 the context of the uncertainties described in more detail in this morning's press release.

As indicated in our press release, our recent sales trends have been mixed, but are encouraging.

The fiscal August Cracker Barrel comparable store restaurant sales are up approximately 1.8%, reflecting 1.1% lower guest traffic and a 2.9% higher average check.

The average check included 1.7% of menu price increases reflecting the January increase, our last menu increase in January.

Fiscal August retail comparable store sales were down approximately 1.6% from the year ago period.

Logan's comparable restaurant sales, while a little less strong in the fourth quarter trends, were up approximately 3.9% in August, including approximately 1.3% lower guest traffic and a 5.2% higher check, including the 3% menu pricing that I described earlier.

We observed no material impact on overall sales for the month from either the Olympics or from Hurricane Charley.

We certainly had some store closings-- specific stores that closed related to Charley, and more still from Hurricane Frances, which occurred in September.

But, property damages were limited in both cases.

It appears that Frances has reduced the quarter to date restaurant sales we recorded in the press release this morning by 0.5% to 1% for Cracker Barrel and by 0 to 0.5% for Logan's.

Retail sales losses were somewhat greater, approximately 1% to 1.5%, because of lost porch sale opportunities over the Labor Day weekend.

But in any case, not huge effects for us overall in the context of the quarter and the year.

You'll note in the press release that we'll be changing our protocol of reporting sales trends and earnings guidance this fiscal year.

We think that will improve comparability and understanding relative to others in our industry, and the press release includes comparable fiscal 2004 period sales results and the expected content of future announcements to help you understand what to expect.

Our initial earnings expectations for the first quarter of fiscal 2005, which ends on October 29th, is for up to a mid-single digit increase in diluted net income per share from the $0.56 earned in fiscal 2004.

A lot of assumptions and uncertainty goes into these projections, but we presently look for comparable restaurant sales increases for the full quarter of 1% to 3% in Cracker Barrel, 4% to 5% in Logan's.

And we presently expect Cracker Barrel retail comparable store sales to be flat to up about 2%.

That, along with the opening of five new Cracker Barrel stores and seven new Logan's restaurants should result in overall revenue growth in the high single digits and operating margins that are down somewhat, primarily because of the commodity cost environment.

For the year, our present expectation is for percentage growth in diluted net income per share in the mid-teens, from $2.31 before settlement charges in fiscal 2004.

Our goal is based on achieving approximately $2.6b in revenues and flattish operating margins before the settlement charges in fiscal '04.

We expect to open 25 new Cracker Barrels and 18 company operated Logan's, as well as 5 franchised Logan's this year.

Capital expenditures are expected to be in the $160m to $165m range, and we expect cash flow from operations to exceed our capital expenditure outlays by as much as $100m to $110m, contributing to cash available for resumed share repurchases.

One specific risk to our guidance is worth noting.

Recently, the Emerging Issues Task Force of the Financial Accounting Standards Board proposed a change in accounting for convertible debt contingent conversion features, sometimes called "COCOs."

Our debt has COCO features under which the notes actually cannot be converted until our share price exceeds a trigger price for a specified period of time.

That contingent conversion trigger increases over time and, presently, it's $48.21.

That's more than 48% above yesterday's closing price.

Under current GAAP, the diluted shares inherent in those instruments are not recognized in the calculation of diluted earnings per share until the conversion contingency is satisfied.

In other words, until the share price is up to the level I just described.

Under the proposal, however, it would be necessary to recognize those shares immediately and it appears to restate historical diluted earnings per share for this [inaudible].

There are approximately 4.6 million shares into which our notes could be converted after the share price satisfies the contingent conversion trigger.

We estimate that the effect of the proposed accounting change would have been to reduce diluted net income per share from the reported $2.25 in fiscal 2004 - and that includes the settlement charge - to approximately $2.12.

More importantly in our opinion, the proposed accounting treatment would have no economic effect on the business because there are no changes to the terms of the notes.

We've not yet determined what response or change in policy, if any at all, we would make if the new rule is adopted.

So, we reported results in line with our guidance this morning.

We put some long, outstanding litigation behind us.

It's been a very tough and uncertain environment, but we remain confident in our strategies and initiatives and we'll endeavor to keep you informed as we proceed.

With that, I'd like to thank you for your patience with my financial review and I want to turn this back over to Mike Woodhouse, who has further comments on operating trends and initiatives.

Mike?

Thanks, Larry.

Good morning again, everyone.

I'm pleased to report it's been a very challenging quarter for both CBRL and for the rest of the industry.

We achieved earnings, excluding the litigation settlement charge, in line with our guidance.

The challenges in the quarter came from the general softening of sales trends, which impacted many chains beginning in May, and also from the ongoing commodity pressures, both of which we commented on during the third quarter conference call.

As a result of the fourth quarter performance, EPS growth for the year as a whole fell below our long-time earnings growth goal of 15% or better, but was still double digits and was a whole consecutive year of double digit EPS growth, averaging 20.3% over that period.

We're expecting to be back on track in fiscal 2005, and our operating plans support our mid-teens guidance, with emphasis on sales building initiatives supported by focused management of operating costs, including substantially improved visibility on commodity prices.

While we confidently expect the year as a whole to be mid-teens, you'll note that our guidance for the first quarter is below that level, primarily because we have not yet wrapped the sharp rise in commodity accounts which took place during the second quarter of last year.

Before talking about the outlook for the new year in a little more detail, I'd like to just spend a few minutes on the fourth quarter.

For Cracker Barrel, we successfully introduced a new menu in May and we got a very positive response, both from our guests and from our operators.

We achieved the margin improvement goals that we had set for the menu and we're generally very pleased with the new daily dinner specials, which are averaging 6.3% of sales - and that's all day sales, including breakfast - and continue to increase in the fourth month after the rollout.

The new low carb menu section was well received.

However, we believe that the peak of the low carb fad is behind us and the future will be a broader interest in nutrition and diet.

Our plans to respond to this at Cracker Barrel, including making nutrition available to our guest on request, and we expect to start doing that sometime during fiscal 2005.

Retail sales were softer than we would have liked in the quarter.

Some of the softness was a result of the lack of consumer acceptance of the new Dream Pets line of toys, coupled with our initial deliberate reduction in other toy inventories to accommodate the Dream pets.

More importantly, we believe that overall discretionary spending for our target audience was squeezed by high gas prices in the quarter.

We expect that, as the economy continues to improve and gas prices abate, along with the price of crude oil, there will be some reversal of this trend.

But, we still expect our retail growth to be more modest this year than last year, at least in the first half of the year because of the very strong comps in the first and second quarters last year.

Last quarter I reported that we were making good progress on bringing inventories of seasonal [inaudible] in line, and I'm pleased to report that this continues to be the case, although we still have some distance to go.

The Cracker Barrel management turnover was 24% in the quarter, bringing the year as a whole to 22%, which is down from 23% in fiscal 2003.

Hourly turnover continued to trend down and we ended the year 113%, down from 115% last year.

At Logan's, same store sales continue to be strong in the fourth quarter at 5.6%.

And I think it's important to note that the positive sales of Logan's throughout the year were achieved without the benefit of advertising, following our decision earlier in the year to defer advertising until we completed the brand positioning work.

As I reported last time, we rolled out the new Happy Hour programs in the system in the fourth quarter.

And as Larry mentioned, in the quarter we saw an improvement in year-on-year liquor, beer, wine as a percent of total sales, and that's for the first time in over four years.

The management turnover at Logan's was 24%, bringing the total year to 20% compared with 18% in 2003, and hourly turnover was down 102%, compared with 103% last year.

Let's turn now to the new fiscal year.

And let me say, first and foremost as we often do, that execution is the number one priority for the leadership teams at both Cracker Barrel and Logan's.

At Cracker Barrel, that means continuous improvement in the enforcement of our best practices, coupled with continuous enhancements to the management training programs.

At Logan's, execution focus means continuing to use the high five's best practices program, supported by strong and consistent communication of goals and priorities through the [inaudible] impact meetings with restaurant managers.

Both concepts are upgrading the tracking of execution as measured by guest satisfaction.

At Cracker Barrel, we're introducing an improved interactive voice response systems to monitor all stores on a monthly basis.

We had successful experience with the use of IVRs to measure the performance of new stores and to provide some insight into the performance of problems stores.

We think that, by extending these across the system, we're going to have some good, objective and consistent actual information to help us focus on opportunities for improvement.

Logan's plans to phase out its use of secret shoppers this year and replace it with an IVR system.

And again, for the same reasons of providing consistent and objective data.

At Cracker Barrel, we're looking to do execution supported by radio and a quantified promotional strategy to drive top line sales in fiscal 2005.

As I described earlier, execution is the number one priority.

And by focusing on actual metrics, we expect to be able to raise the bar from underperforming stores and, thus, raise the average performance for the system as a whole.

The radio support, radio advertising support, will be similar to fiscal 2004, about 20% to 25% of the system, and we'll be using a brand message enhanced by product and promotional messages.

The menu strategy of Cracker Barrel is build around refining the seasonal strategy that we've been working on for several years.

Promotions will be more directly tied to the seasons in terms of product offerings, and we'll be featuring a lead product with the usual characteristics of an attractive price point, high quality, strong dollar margin, and a brand reinforcer.

But now, we're going to support that with other products with the same characteristics but at a slightly higher price point, which we'll offer against a tradeoff opportunity and an opportunity for us to achieve a higher margin.

The first of the new promotions will be the holiday promotion, which begins on November 1st.

And we're very excited about the way we're going to communicate in-store-- the promotion and look forward to all of you having a chance to come and see for yourselves early in November.

As Larry indicated, we're working continually on improving our visibility on commodity prices.

And at Cracker Barrel, where we have a very broad exposure to commodities because of the nature of the menu, we've substantially upgraded both our people resources and our reporting systems since this time last year.

As a result, we expect to be able to meet or beat our internal goals for raw material prices and, at the same time, we'll be better able to focus on the purchasing initiatives, which are a key part of achieving our long-term margin improvement goals.

These initiatives, which we've talked about before, deal with such things as eliminating non-industry standard specs wherever possible and taking cost out of packaging, as well as adding vendors to increase competition or, in some cases, rationalizing the number of vendors for a single product.

As I've said many times in the past, the fundamental rule is that none of our cost reduction initiatives can be allowed to negatively impact the guest experience, which for food purchasing, means that anything we do must maintain or improve quality and maintain portion size.

In Cracker Barrel retail, we're now running against the very strong comps from last year.

And as we said in the release today, we're expecting retail same store sales to be in the 0% to 2% positive range for the first quarter.

The plan for the near year in retail is to continue to build on the successes we saw last year in the areas of merchandise and strategy, improve sell-through, and freshening with both seasonal and non-seasonal products to realize the benefits from the rollout of our service sales best practices initiative in fiscal 2004.

Retail is a very critical factor in our success.

It provides a major competitive advantage from the point of differentiation.

And to reflect the importance of retails, we've added the position of General Merchandising Manager to lead the merchandising and planning teams.

We filled the position from the outside and our new GMM is a member of the executive team of Cracker Barrel to give retail an important voice in the overall leadership of the business.

We have two operational initiative that we'll be testing in fiscal 2005 in Cracker Barrel.

Both are intended to enhance the guest experience while improving sales and lowering costs.

They both have the potential to have a major positive impact on the business.

The first, which we began testing last year, is the retail floor plan initiative, designed to improve traffic flow from the front door to the dining room and from the dining room to the cash register and, at the same time, improve the ease of shopping and the presentation of the merchandise.

We're moving to a second round of testing right now and we expect to have a rollout plan in place by the end of the fiscal year.

The second initiative is the application of industry best practices to the kitchen and potentially to the front of the house.

And it's designed to decrease wait of service times in the dining room and, at the same time, improve food quality and, as a byproduct, lower labor costs.

We've been through the analysis and markup phase and we'll be field testing this in fiscal 2005.

The goal this year is to develop a new kitchen design and new service processes for use in both new stores and for retrofitting cost effectively to our existing store base.

The development strategy at Cracker Barrel continues to be the focus on building out our interstate presence in core markets, as well as building selectively on the interstate in developmental markets.

Off interstate development will continue to be pursued on a very selective basis in the near term.

We recently published a long-term potential goal for Cracker Barrel of 1,000 total stores.

This number is based on a detailed market-by-market plan and does not include the West Coast states of California, Oregon and Washington.

And should we decide to pursue development on the West Coast, these will add to the 1,000 store total potential.

Finally, but definitely not the least important for Cracker Barrel, we recently announced a leadership transition at Cracker Barrel. [Cy Taylor], who's been with Cracker Barrel since 1978 and most recently is SVP of Operations, will succeed Don Turner as President when Don retires at the end of December.

The goal of identifying a successor for Don was to find the best possible new leader for Cracker Barrel, whether from the inside or outside the company.

And after an in-depth process which took several months, I was very pleased to be able to name [Cy] as Don's successor.

We have the unusual luxury of an [inaudible] transition.

And to maximize the benefit from that, we've created an office of the President, where Don and [Cy] are going to be working side-by-side for the next four months.

At Logan's, brand clarity and consistent high quality execution continue to be the main priorities for 2005, just as they were last year.

The leadership team built by Tom Vogel over the past 12 months is entering is first full fiscal year together and is operating with a business plan developed by the team to take Logan's further towards the goal of becoming a national chain.

The brand development focus will be on menu development, a new creative strategy that will be tested later in the year, and on the new prototype that we expect to open around the end of the fiscal year.

Menu development is focused around the "fun, fast and flavorful" attributes supporting our Roadhouse positioning and we've put in place a rigorous and effective product development and rollout process which reduces the elapsed time from the initial idea to rollout and improves the probability that only successful products will make it to rollout.

The promotional strategy is designed to improve sales and margins using standard menus with a combination of new and existing products.

New products will generally be introduced by being treated in a promotion and then selectively added to the menu based on their performance.

The successful rollout of the Happy Hour will be reinforced by prominently featuring alcoholic beverages on the promotional stand-alone menus.

And while beer is always likely to be the most popular alcoholic drink at Logan's, we plan to develop a range of specialty drinks to compliment the signature of Roadhouse teas.

The development strategy at Logan's continues to be the backfill for operational and advertising efficiency, and to carefully add new markets where advertising efficiency can be reached in a reasonable period of time.

By the end of 2005, almost 50% of the Logan's system will be in markets which are advertising efficient at the expected level of spending.

We selected a new advertising agency recently and a major part is the agency is to develop new TV and radio [inaudible] to be tested in selected markets later this year.

Operationally, we're going to be focusing on sales building initiatives, including improving the execution of suggestive selling of alcohol and appetizers, and also on the opportunity to maximize the speed of service at peak periods, especially at lunch.

We've made some changes to bonus plans for the field operators and we're going to include a profitability component for the first time.

The previous bonus plan rewarded sales and the control of food and labor costs.

But, we think the addition of the total restaurant level profit component will encourage the total mindset and we think it will lead managers to want to further optimize the performance of the units.

In closing, I'd like to say that we're very pleased to announce today the resolution of the major litigation that we've been involved with for about five years.

Now is the time to look to the future and I'd like to spend a final minute on how we see the strength of our two concepts going into the future.

We believe that we have two quality concepts led by two strong leadership teams.

In both cases, the leadership teams are deliberately established to combine in-depth experience of the business and talents and experience of newcomers from the outside.

Cracker Barrel is a strong, highly differentiated maturing brand with a long future of moderate and increasingly profitable growth.

The strength of the brand and the [inaudible] are clearly evident in the 14th consecutive Choice [inaudible] Award and also in the excellent scores of the J.D.

Power survey, where Cracker Barrel was substantially ahead of all other family diners, and number two in its core regions, when measured against all other concepts.

Logan's is a young concept with substantial growth potential.

And under the new leadership team, we have a clear idea of our objectives and the strategies to achieve them.

One very important measure of the strength of our two concepts is the quality of the same store sales growth.

In an environment where couponing and discounting are prevalent, we achieve our sales without the use of those tactics, and with very limited broadcast advertising.

What we have is a commitment to strong and clear brand positioning, backed up with a consistently high standard of execution.

We believe very strongly that this is going to be the foundation on which our long term success will be built.

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

If you would like to ask a question, please press star, one on your telephone at this time.

If you are using a speakerphone, please be sure that your mute function is turned off to allow that signal to reach our equipment.

Once again, that is star, one on your telephone for questions.

We'll take our first question from Matt Difrisco with Harris Nesbitt.

Hi.

I have two questions, actually.

First, on the retail, if you can give us a little better detail.

It doesn't seem to be obviously as bleak as it was trending earlier, and certainly lapping at 10% comp.

Looking at the fourth quarter trend, you said it was down 3.1 and traffic for the restaurant was down 2.5.

Would it be correct to assume then that the spend per person is still around the same at the retail?

You're still getting the same transference of basically about one-third of your consumers that go into the restaurant are buying at the retail and that the dollar value at the retail level hasn't dropped yet?

Yeah, Matt, it would be correct to make that assumption.

If we sound a little disappointed in retail it's because we have very high standards and expectations.

We saw some great results coming out of all of our initiatives come together about a year ago.

And I do think there's been a slow down in the impulse buying because of the squeeze on discretionary spending.

So, yes.

We're holding our own on retail.

Our goal is to do better than that.

Right.

I totally understand.

Then the next question, I guess.

Looking at your pretty robust forecast for free cash flow north of $100m, there seems to be an implied favorable working capital, big favorable working capital swing.

Can you just give us some detail on what's driving that?

Yeah, I think the most significant part of that is we think that we can manage our payables to a higher level.

We've been pretty aggressive in terms of paying down our payables because of the-- not applying cash to share repurchases.

If you look at the kind of accounts payable levels that we've had historically, you'll see that we're a little on the low side.

So, that's probably one significant contributor there.

OK.

Thank you.

We'll take our next question from Amy [Vincent] with Avondale Partners.

Hi, guys.

First question is kind of-- well, is the hurricane going to have any impact on you guys?

I know, from a commodities standpoint, I know that you buy a heck of a lot of orange juice and things like that.

Are you seeing that going sky high for you in '05?

Singular or plural?

You can pick.

I can answer the orange juice question.

We're locked in for the next four months.

Yeah, we're locked in through the end of the fiscal year.

There potentially will be an effect on fiscal '06 as the packing seasons comes in the spring.

And potentially prices can be affected then, but that remains to be seen.

We're locked in for the remainder of this fiscal year.

OK.

And for the Logan's store openings, you all are still on track hoping to get the new prototype out at the end of the year and still get to that 20% square footage growth as we get towards the back half of '05?

Yeah, we said in the release that we're going to open 18 this year.

The 20% is a run rate.

At the end of the year we'll pretty much be there.

The new prototype, we have a site identified.

We're working on the design and all the architectural stuff.

It'll be right close to the end of the year or in the first week or two of the following year, so we're on track.

OK.

Thanks, guys.

Once again, if you do have a question, please press star, one at this time.

We'll take our next question from [John Weiss] with [Glenhill Capital].

I have two questions, if I may.

First, you alluded to a loss on the disposition of some equipment in the fourth quarter.

It looks like that was as much as $0.02 a share after tax.

Is that correct?

That might be a little heavy, but it was non-trivial.

We had a lot of replacements in HVAC and that sort of thing.

Secondly, what were the retail inventories at the end of the fourth quarter?

Retail inventories per store were actually a little bit lighter than they were a year ago.

We'll be breaking out those details in the 10-K, which we'll be filing in a few weeks, but we actually saw retail inventories per Cracker Barrel store a little bit lower than last year.

Thank you.

Our next question comes from Matt Difrisco with Harris Nesbitt.

Hello?

We hear you, Matt.

OK.

Let me just pick up the phone.

Hi.

I had a question regarding the Logan's franchises.

You weren't really growing that in the years past.

You're growing that a little bit faster it appears now.

Can you just give us the guidance on the opening schedule for fiscal '05 of those franchises coming out?

And also, have you signed up a new franchisee or is this just an existing franchisee getting some cash and looking to develop out his area development schedule a little bit faster?

These are our two existing franchisees, who were in the system when we acquired Logan's five years ago.

That's all we have today.

That's all we're anticipating for this year.

We're looking for about five openings this year.

We clearly don't have the same level of precise control over their openings that we do over our own, so I think for your assumptions, just spread them over the year.

Got it.

OK.

Thank you.

We'll go next to [Dustin Thompkins] with Morgan Keegan.

Good morning, guys.

Could you guys provide a little bit more color on just the improving sales trend that we saw in August?

If we compare to kind of what we saw in July, was there something that was driving the business?

Was there more highway traffic, vacationers in August or something?

Can you speak to that?

Unfortunately, we don't have current travels.

It's tough to get travel information.

We get lots of predictions from the AAA and then we get the DOT numbers about three or four months later.

So, we don't know the answer.

I think that I'll come back to discretionary spending and something we talked about a year or two ago, which is the destinations of choice concept.

The idea that when people have limited money to spend, they're going to go to a safe - safe from the point of view of I know I'm going to get a great experience - place.

And I think that the consistent execution of both concepts is benefiting us in that regard.

And I think early in the quarter, there were a lot of bad things happening in terms of the general environment and all of the talk about gasoline prices and all the talk about what was going on in Iraq and all of that.

And of course, the political rhetoric continues and is probably increasing.

But, I think there are a lot of things that potentially were impacting consumers sentiment.

And as you know, [Dustin], we weren't the only ones out there that felt things, some pressure, particularly early in the quarter.

No, sure.

I agree.

It just seemed like August was a difficult month for a lot of people beside yourself, and there were-- even though you didn't mention the hurricanes and some of the other influences weren't that severe, it just seemed like it was a difficult environment.

And it was a pleasant surprise to see that nice up tick there in August.

Let me just respond to that because I got myself in the middle of a mini-storm in May when I commented on general [inaudible] trends in the middle of the month.

So, we're very careful about focusing on our own business and let everybody draw their own conclusions about the competition.

Sure.

Thanks.

We'll take our next question from [Adam Weiss] with [Chilton Investments].

Good morning.

Could you just quickly review again what you're seeing in commodities, your outlook in the various categories?

Well, we're-- obviously, this being almost halfway through the first quarter, we're in very good shape there.

And we have something north of I think 85% of our commodities contacted for and locked in to this quarter.

Still pretty good numbers for the second quarter, 60% or so, which gets us to a full year also of those kind of numbers.

And we think we're being pretty realistic in terms of continued pressure.

We're not looking for some sort of major turnounds in the commodity markets this year.

So, we're going to feel pressure on those, the cost of goods sold line throughout the year.

The comparisons will get easier in the second half of the year, but for right now, we're definitely going to be under pressure.

It just seems in poultry and dairy categories that prices have come down.

Just curious as to what you were seeing and whether or not--.

We're clearly seeing that the worst is behind.

But, one of the tough things from your perspective, and it's even tough from my perspective, is diving into what's going on in the commodities market versus what's going on in a given restaurant company.

And that's because we're all contracting for different products, for different lengths of time at different points in time.

And the comparisons get mixed up by, not only that, but by what was the expiring contract and how did it relate to the commodities market.

So, it's a pretty complex picture to paint and there's not a simple five minute explanation to it.

What we're trying to convey is we have added a number of resources to that area to help us both have greater visibility and to manage our initiatives better in those areas.

And we're going to try to keep you apprised as to how much we have locked in as we go forward.

Are your normally locked in at this level, sort one quarter out, or are you sort of being more conservative now or less?

Adam, this is very hard to generalize.

I think we have a little bit of a bias right now to look for certainty.

We're not going to be foolish about that, of course, but I think there's some real premium to be had for certainty.

We've got some products that are contracted through the end of the fiscal year.

We've got other products that we'll be renewing contracts for over the next few months.

So, it just is not a simple subject to generalize on.

If you look at your-- the gross margin level that you've achieved kind of three, four years ago, the 65% to 66% range, is that a realistic number in a normalized commodity environment for you?

Well, as we've been saying for a long time, while we do have internal objectives on margins, whether they be gross margins or operating margins - and our focus frankly is more on the operating margins line - those are internal objectives and our external goal that we stated [inaudible] is to have continual incremental improvement.

Now, there is a pressure primarily because of commodities right now, so we're not achieving that.

But, we still believe in the long run that there is a lot of room to achieve that and there is room in the cost of goods sold line to get that as well.

Now, there are a couple of things going on in our business that make comparability to old historical numbers not work quite as well.

First of all, while our retail business is a little lower as a percent of sales than it was a few years ago, we intend to try to lever that business and that carries a higher cost of goods sold with it.

And Logan's also carries a higher cost of goods sold as a percentage of its revenues and Logan's will be growing faster than Cracker Barrel.

So, a lot of dynamics and I don't really want to get tied up into saying here's a specific target we have for a specific line item, but we're very definitely focused on getting improvements in operating margins in the long run and we think that there are a number of initiatives available to us to get hose improvements in the cost of goods sold line, too.

I appreciate your comments.

Thank you.

We'll go next to Scott Schumann with BB&T.

Good morning.

It appears that you're going to be doing some aggressive buy-back.

Is that baked into your expectations earnings?

Yes, it is.

And Scott, as we've described before, you know, there's a lot of uncertainties in all the elements that go into making these guidance projections.

That's one that's subject to uncertainty, over what period of time can we accomplish buy-backs and what prices might we have to buy back the stocks.

So, I don't want to get specific, but I would think that we would expect, with the 2.9 million share authorization that we have outstanding today, we'd be able to complete this fiscal year.

Great.

Thank you.

There are no further questions so, Mr. Woodhouse, I'll turn the conference back over to you for any additional or closing remarks.

Well, thank you again for joining us this morning.

We've tried to convey that we feel good about the year that we just started.

We had a bump - as everybody did - with commodities last year, but we feel back in control and have a very clear vision of where we're headed this year and into the future.

So, again, thank you for joining us and we'll talk to you next quarter.

Thank you very much.

This concludes today's conference.

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