Cracker Barrel Old Country Store Inc (CBRL) 2005 Q1 法說會逐字稿

Good day, everyone.

Welcome to the CBRL Group first quarter 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 November 25th until 8:00 p.m.

Eastern time by dialing 888-203-1112 and entering confirmation code 831389.

At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mike Woodhouse.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Thank you for joining us this morning on our first quarter conference call.

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

We're pleased with the results for the quarter, especially given the external environment, so our intent this morning is to put some color on the first quarter results and share with you our outlook for the second quarter and the remainder of the year.

First, let's start with Larry's financial review.

Larry?

Thanks, Mike.

Thank you also to our listeners on the conference call and webcast this morning.

We appreciate your interest and participation.

Hopefully everyone's had an opportunity to see this morning's press release which announced our fiscal 2005 first quarter results and provided guidance for our earnings for the second quarter and full-year 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 disclosure such as we have done this morning.

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

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

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

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

With those cautionary reminders aside, let's review this morning's news, and we think it's good news.

Bottom line, we recorded diluted net income per share for our first fiscal quarter of 61 cents versus 56 cents a year ago, that's an increase of 8.9% on a revenue increase of 6.3%.

We're very pleased with this outcome considering the adverse external issues of continued high commodity costs, 4 hurricanes and uncertain consumer sentiment.

That marks 12 out of the last 13 quarters in which we've increased diluted net income per share from the comparable year earlier quarter.

In spite of significant commodity cost pressures, we had only a 10 basis point reduction on operating margin from 8% of revenues to 7.9% of revenues quarter-to-quarter year-over-year.

Furthermore, we had positive comparable store restaurant sales at both Cracker Barrel and Logan's.

We generated strong cash provided by operating activities, while resuming our share repurchase activities.

We had the first increase by 9% of dividend declarations under the new quarterly dividend policy that we adopted a year ago.

That's a lot of good news in our opinion, and we'd like to look at some of the details.

Revenue in our fiscal first quarter ended October 29th, increased 6.3% from last year's first quarter.

That's approximately $613 million compared with approximately $576 million.

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

We estimate that net loss sales during the quarter as a result of the 4 hurricanes was approximately $2 million.

Cracker Barrel comparable store restaurant sales for the quarter were up 2.3% from the year-ago quarter reflecting a 3.2% higher average check including just 2.1% higher average menu pricing.

And guest traffic was down approximately 0.9%.

In early October, Cracker Barrel took a price increase of approximately 1.7% with rounding that means that we're carrying approximately 3.3% accumulative pricing into the second quarter until we lap the January 1.7% increase.

Although sales were positive, guest traffic wasn't.

And weakness was broad based with slightly greater weekend and breakfast effects and also in one of our Midwest regions.

But even though there have been some challenges, it is important to observe that Cracker Barrel restaurant comps have been positive in 17 of the last 19 quarters.

Cracker Barrel comparable store retail sales struggled against an unusually strong 10.3% comparable store increase a year ago.

This year's first quarter comparable store retail sales were down 5.4% from last year's strong quarter.

While we were disappointed that retail sales did not meet our expectations, we are pleased that we only gave up part of the gain we recorded last year.

So we're up nicely from 2 years ago.

Softness compared with our expectations was primarily in seasonal product and we've been able to adjust our merchandise buy to adjust partly for those lower sales.

So we don't expect an inventory issue of the same magnitude.

In a few minutes, Mike Woodhouse, our CEO is going to tell you more about what we've been doing to improve our retail results.

Rounding out our comparable store results, our Logan's Roadhouse concept recorded an increase of 3.9% in comparable restaurant sales with the average check up by 5% and guest traffic down by 1.1%.

Included in the average check increase was average menu pricing of 3.2% reflecting the partial quarter effect of a 0.9% price increase taken in early fiscal October.

Logan's also lacked increases of 0.7% taken the first quarter last year, so we entered the second quarter with menu pricing of approximately 3.2% cumulatively.

We continue to view alcohol sales at Logan's as an opportunity and while still below 9% of total sales, alcohol sales mix did improve by approximately 10 basis points in the year-ago quarter.

Our alcoholic beverage sales per guest were up about 8 cents from last year's first quarter.

So we believe we're making steady progress.

During the first quarter, we opened 5 new Cracker Barrel Old Country Store units and 7 new Company-operated Logan's Roadhouse restaurants.

For the full-fiscal year, we continue to expect to open 25 Cracker Barrel stores, including 5 in the second quarter and 18 Company-operated Logan's restaurants including 5 in the second quarter.

We also have had 1 Logan's franchise opening in the second quarter.

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

Operating income for the first quarter was up 5.8% on a 6.3% revenue increase, but operating margins declined about 10 basis points from 8% to 7.9% of revenues, still well ahead of the 7.2% of 2 years ago.

We're pleased to have recorded these relatively strong margins during a period of high commodity costs and costs associated with 4 hurricanes.

In addition to the estimated $2 million net sales impact of the hurricanes that I previously mentioned, we also incurred approximately $600,000 net of estimated insurance recovery of costs for property damage and expenses of restoring operations in the stores affected by those storms.

The continuing story in the restaurant industry is that there continues to be significant pressure on commodity costs.

First and foremost is beef, which in fiscal 2004 accounted for approximately 18% of our consolidated food purchases.

Beef has been at record or near record price levels, and while we were contracted for much of our beef needs during the first quarter, we still had high single-digit year-over-year inflation.

Our overall pork purchases of various products incurred inflation in the high single digits, also, and dairy as a category was up in the low double digits.

Tomatoes with the crop damage by hurricanes in Florida, California raining conditions and insects in Mexico began to skyrocket late in the first quarter, but the greater effect for us would be felt in the second quarter until new growing areas began to produce crops.

In total, we estimate or first quarter food product inflation at about 5%, approximately what we expect for the second quarter, also.

While costs of sales was under some pressure, we have been recording improvements elsewhere and we'll continue to see more improvements as we work on our objective of continual incremental improvement in operating margins.

Our general and administrative expense was favorable in the first quarter reflecting lower bonus accruals.

Labor and related expenses were improved as a result of favorable hourly labor expense and lower retail management bonuses, which are based partly on sales performance and were both high last year and low this year.

Higher other store operating expenses reflected higher utilities, credit card fees and various other expenses.

Our income tax rate of 35% was improved from 35.7% in last year's first quarter and from our earlier expectation as President Bush signed the retroactive restoration of the Work Opportunities and Welfare-to-Work tax credits, which had expired at the end of calendar 2003.

That's the key reason why our tax rate improved picking up those tax credits again.

Wrapping up the first quarter, net income of $30.3 million was improved 7.5% from $28 million a year ago.

Diluted net income per share of 61 cents was improved 8.9% from 56 cents reported in the first quarter last year and slightly stronger than our guidance of percentage growth up to the mid-single digits.

Once again, we delivered on our objectives.

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

First, during the quarter, we resumed repurchased shares under previously disclosed authorizations from our Board of Directors.

We purchased approximately 1.1 million shares during the quarter at an average price of approximately $36.25, a total outlay of nearly $40 million.

Funds for those repurchases came from cash-on-hand at the beginning of the quarter, very strong cash flow from operating activities, including the effect of increasing trade payables to more normal levels from the low levels we had at year end.

And draws on our revolving credit facility.

Our total indebtedness, while higher than at year end, was within our stated target at the end of the quarter.

Secondly, for the quarter, we announced -- during the quarter we announced the first increased payment under the new quarterly dividend policy that was adopted a year ago.

We increased the per share dividend by about 9% from 11 cents per share to 12 cents per share.

That increased dividend payment totaling just under $6 million was made last week.

We're pleased to continue and increase this component of our shareholders' returns given our strong balance sheet and expected cash flow, and more favorable tax treatment now given to dividend income.

Finally, in this morning's press release we gave initial guidance for the second quarter and updated guidance for full fiscal year of 2005.

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

This discussion of 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 on the context of the uncertainties described in more detail in this morning's press release.

Our present guidance for diluted net income per share for the second fiscal quarter is for a percentage increase up to the low double digits compared with 57 cents a year ago.

We presently expect total revenue growth of approximately 7 to 8% in the second quarter versus last year.

Our guidance reflects achieving modest comparable store restaurant sales increases for the full second quarter with Cracker Barrel restaurants at 1 to 3% positive.

Comparable store retail sales continuing to be under some pressure, down 0 to 2% for the full second quarter with a tough comparison again to last year's 7% positive retail comps in last year's second quarter.

We expect Logan's comparable restaurant sales of approximately 2 to 4% positive for the quarter.

I've already discussed in some detail the commodity cost pressures that we've been experiencing and expect, about 5% inflation on food purchases overall.

I'll add that nearly 1/4 of that inflation is estimated to result from high tomato prices.

In the second half of the year, we believe that commodity inflation will moderate substantially.

At this time, we estimate that we have just over 80% of our commodity purchases locked for the second quarter, just over 60% for the third quarter and just under 50% for the fourth quarter.

The primary risks are in pork and dairy and in the fourth quarter Logan's beef, which we have locked through the fiscal third quarter.

We presently believe that other store operating expenses will be under some pressure in the second quarter as we run higher advertising and incur higher utilities cost, but we believe that some margin leverage may be realized in labor and G&A expenses to offset a portion of the other pressures, however, we presently expect operating margins to be down slightly from last year.

For the full fiscal-year 2005, our expectation continues to be for percentage growth in diluted net income per share in the mid-teens above the 231 that we use as our base for fiscal 2004.

That 231 base excludes the effect of certain litigation settlement charges that we took in fiscal 2004 and we described fully in earlier discussions.

If we included that in our reported diluted income per share was actually 235, so our comparison is based off a higher number.

We presently believe that with food cost pressures subsiding in the latter half of the year, we can achieve full-year operating margins that are approximately equal to last year's pre-charge margins on revenue growth in the high single digits.

2 other issues to point out.

In the recent elections, 3 states in which we have stores, Florida, Illinois and New York voted for increases in the state minimum wage, including effective increases in the tip credit wage paid to tipped employees.

We are in the process of developing plans to deal with this sudden increase in the costs of doing business in those states, but we have incorporated the cost effect in our guidance, approximately $1.2 to $1.3 million in the fourth quarter and substantially less than that in the second and third quarters.

And finally, our press release discusses the potential impact of a change in accounting that we have discussed previously.

The Emerging Issues Task Force of the Financial Accounting Standards Board under its EITF 04-8 has determined that a change must be made in the way that diluted net income per share is calculated to reflect contingently convertible debt such as we have.

The key feature of this debt is that it can't actually be converted until the common share price trades for a period of time above a trigger price, in our case, presently $48.53, and increasing each quarter.

Under present GAAP, this debt is not considered to be dilutive until that contingency is fulfilled.

Which in a $48.53 or higher share price is something we will all welcome.

But under the EITF 04-8, the dilutive effect must be recognized right away, even though the shares -- the debt cannot actually be converted.

That will include restating prior periods calculation when such debt was outstanding.

Most importantly, I want to emphasize the change has no effect on the financial statements themselves.

Only in the calculation of diluted net income per share.

And the change also has no effect whatsoever on the terms of the convertible notes.

They still can't be converted until a contingent convergent price is achieved.

In other words, it's an economic non-event, but also the source of some potential confusion.

This morning's press release describes this in more detail, including the estimated impact of this year's reported results and a table of the impact of historical periods for which diluted net income per share will be restated.

The EITF is meeting literally at this very hour to discuss timing of the new accounting requirement and there appears to be a high likelihood that it will become effective this quarter.

The guidance discussed earlier does not reflect this change, but our press release describes the estimated effects, including the fact that we don't believe it will be material enough to change our percentage growth guidance since both the historical and perspective periods will be restated.

So, in summary, we reported good results this morning in a tough environment and we're disclosing solid guidance for the remainder of the year.

We think that's good news and we're very pleased to be reporting it this morning.

Our next report will be on November 30th, when we give a sales update with fiscal November results.

And our next earnings guidance will be on December 28th when we also will give December sales results.

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

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

Mike?

Thanks, Larry.

Good morning again, everyone.

Despite another challenging quarter with hurricanes compounding the ongoing effects of high commodity prices and continued sluggish sales for the full-service restaurant industry, I'm pleased that we're able to report another successful quarter with EPS 2 cents above the first call mean, ahead of our earlier guidance and up 8.9% from the first quarter last year.

Building on that base, we communicated this morning our guidance for the second quarter, which is for a percentage increase in EPS up to the low double digits.

As in the first quarter, our guidance for the second quarter reflects the fact that we still haven't fully got the severe increases in commodity prices last year and also reflects the uncertainty in how the holiday season will play out for our Cracker Barrel retail business.

These situations are not unique to Cracker Barrel.

The commodity issue is one we share with other restaurant companies.

And the retail uncertainty is common to other retailers.

As usual, I'll touch on the highlights of the first quarter before discussing the outlook.

At Cracker Barrel, the menu we rolled out in May continued to perform well.

And the daily dinner specials introduced with the menu are performing well, averaging 7.1% of all-day sales in October up from 6.3% earlier in the quarter.

Retail sales continue to be softer than we'd like in the quarter, but of course, one of the things we're running against the very strong comps at this time last year.

And as Larry said, on a 2-year basis, retail comps are about 5% positive.

So we've maintained a substantial part of the gain we made last year.

Generally, we believe that the pressure on discretionary spending being experienced by our target audience is neglectively impacting retail sales.

We also had some shipping delays early in the quarter affecting our seasonal merchandise as a result in the bottleneck in the parts of California, but as of today, we are caught up and have been caught up for sometime.

Management turnover at Cracker Barrel was 21% in the quarter, down from 24% last year.

And hourly turnover was 108% in the quarter, down from 121% last year.

At Logan's, we saw our sixth consecutive quarter of positive sales and we'll continue to achieve these positive sales without the benefit of media advertising which is on hold, as I mentioned previously, until we develop a new creative strategy.

The improvement liquor, beer and wine as a percent of sales, as I reported last month, continued through the first quarter and we've seen an improvement in liquor, beer and wine percent each month since we rolled out the Happy Hour program in May.

As Larry said, we took a menu price increase of 0.9 in October at Logan's, so now we're running a 3.2% menu price factor, and we have additional check coming from the increase in liquor, beer, wine, some product mix changes and also improved controls over comps and voids.

Management turnover at Logan's was 27%, which is up a little bit from 25% a year ago, and that's primarily the result of some higher level of involuntary terminations as we continue to focus on our standards of execution.

Hourly turnover at Logan's is also up a little at 112% compared with 93% last year.

Turning now to the second quarter and the remainder of the year.

We expect restaurant comp sales in the second quarter to be overall at similar levels for the first quarter for both Cracker Barrel and Logan's, and we expect some improvement from first quarter levels in Cracker Barrel retail as we progress through the holiday season.

In Cracker Barrel, we introduced the new seasonal menu, which I mentioned last time.

At the beginning of November, this is a stand-alone piece.

It has a primary product feature, and in this case it's turkey and dressing, which is one of our traditional products at a $7.99 price point.

It also has 2 trade-up options and a new salad plus several other supporting products including a new soft drink.

Radio support for the promotion started running November 8.

The campaign is an evolution of the brand campaign we've been using for several years with the same tone and pace, but with stronger focus on the promotional offerings.

The radio covers about 40% of the system compared with 20 to 25% last year, with essentially the same spending for the year as a whole, although there will be quarterly timing differences as we line the radio more closely with the promotional calendar.

We achieved this additional extension of the coverage by modifying the flighting [ph] and the weights that we're running based on an analysis of the performance last year and also by more precisely matching stations with the trade areas of the stores.

As I've said before, measuring operational execution objectively is a priority for both concepts this year.

And at Cracker Barrel, the interactive voice response system we've been using on a limited basis for several years now, will be rolled out to the entire system in the third quarter.

In retail, the external environment continues to be soft with I think a general expectation that Christmas activity will come later than usual this year as consumers manage the discretionary spending until the holiday season is on top of them and they have to act.

Internally, we'll continue to develop the next phase of our merchandising strategy with the arrival of our new general merchandising manager in July, we've already improved controls on reordering to keep inventories more closely in line with sales trends and we'll focus on further improving the freshness of the merchandise.

We'll achieve this by letting go of products on a declining trend earlier, and also by increasing the percentage of new items year-to-year in our seasonal collections.

Given the seasonal nature of the business and the long lead times associated with imported products, it's going to take some time for the strategy to take full effect.

We're also continuing to work through our apparel inventories, but as I said before, this also will take some time given the seasonal nature of much of our apparel.

The 2 major operational initiatives of Cracker Barrel, as I've mentioned on previous calls, that's the retail floor plan and traffic flow project and the kitchen layout and procedures reengineering continuing through the development and testing process.

They're on schedule and we have no further results to report at this time and we'll be reporting as we have those results.

And finally, on Cracker Barrel, development continues on track.

We've opened 6 stores so far this year.

We're on track to open the 25 that we planned.

The focus at Logan's continues to be on consistently high levels of execution and sharpening of brand positioning.

The focus on operations continues to be check building through suggestive selling of beverages and appetizers, and we'll also continue to work on speed of service at lunch where there's a real opportunity to build sales.

Many developments is a priority at Logan's, and we're looking at several new things, plate presentation, some new appetizers, new salads and new seafood items to broaden the appeal of the menu, while at the same time maintaining the brand positioning built around affordable high quality steaks.

We expect to have an updated menu in tests, including these new elements in the near future and we'll be looking at a rollout sometime later this year.

Alcohol remains an important focus, and as well as reinforcing the execution of happy hour, we just introduced a frozen version of our signature Roadhouse Tea, that we believe can have broader appeal than the original product.

Working on the branding initiatives is continuing.

We expect to have some TV creative in test in the first calendar quarter.

Keith Thompson, who has just joined Logan's as our new Marketing VP will be leading the brand initiative going forward.

Keith brings with him extensive restaurant industry experience which he gained while working with Coca-Cola in its food service division.

One more comment on marketing at Logan's.

We recently ran an FSI [ph] in served markets offering $5 off 20.

This was the expansion of a test we ran last year in support of a limited number of lower volume restaurants.

While we may use this tactic in a limited way in the future, we do not intend to do anything which could devalue the potential of the Logan's brand at this early stage of its development.

Real estate development is on track at Logan's to open a total of 18 new restaurants this year.

And as I previously reported, we expect to be at a point where close to 50% of the system will be advertising efficient by the end of the fiscal year.

At CBRL holding company, we've recently made 2 governance changes.

First is the adoption of the mandatory stock ownership levels for certain key officers and the Board of Directors.

And we'll be posting these on our website in the near future.

The second is the election of a lead independent director which will become effective in our shareholder meeting next week.

So to summarize, we're pleased with the performance in the first quarter and we expect positive performance in the second quarter.

As I've said over the past few years, our priority in both concepts is to focus on what we can control and make certain that we have a strong business model with high consumer appeal.

In Cracker Barrel we have a highly differential concept with strong consumer appeal, and we have a clear strategy to grow the market rate, preserve and enhance the brand differentiation and continuously increase returns by improving the business model in a way that is transparent to the customers.

At Logan's, we have the potential for a robust and highly differentiated concept and our strategy is to achieve clear brand positioning through a combination of creative strategy, building design and menu development and to accelerate the growth rate to achieve operations and meet our efficiency.

We have strong leadership teams in place to support those strategies, so I'm confident that we're going to achieve continued success in the future.

Finally, since our last conference call, we've had one more leadership change here.

Founder and long-term Chairman of the Board, Dan Evins has decided not to run for reelection this year and that's 1 year before reaching the Board's mandatory retirement age of 70.

As you may have noticed over the past 3 years, Danny's gradually stepped away from the day-to-day activities of the business, so his decision was not totally unexpected.

Recognizing Danny's unique role, the Board of Directors named him Chairman Emeritus, and as such Danny will continue as an advisor to the Board from time to time providing his unique insight into the Cracker Barrel culture.

And we can all thank Danny for his intuition in creating the unique Cracker Barrel concept.

I personally am honored and excited to have been selected to step into the role of Chairman effective at next week's annual shareholders meeting.

But I want to affirm with everybody that this change does not signal any change in direction.

As I've described today, we have a clear, strategic path in both concepts, for CBRL as a whole.

The values that Danny's established will continue to stand us at good stead, as we work to continued success in the future.

And now we'll open up the call for questions.

Thank you, sir. (Operator Instructions).

First up, Matthew DiFrisco with Harris Nesbitt.

Hi.

I've got a couple of questions here.

First on the retail side, regarding, I guess, your guidance of down 2 to flat.

You have a similar comp in the month of November than you had in the month of October, but should we -- at the year-ago comp being 10% in both months, should we presume given your conservative nature, but your improved outlook that you're already seeing that improvement from the down 5 that we ended the quarter with potentially the low end of the down 2 range?

I really don't want to get in the habit of commenting on interim sales trends, Matt.

We established a new protocol reporting this year and we want to stick with it.

So our next update will be November 30.

Matt, let me try it a different way.

I obviously agree with Larry, but in my remarks I suggested that we'll see a bunching up, if you will, of Christmas activity as people reach the point where they have to do something.

For example, Halloween this year, which is a much smaller volume, but it obviously is seasonal product, we saw some early softness.

As we actually came to the Halloween date itself, our sales were up year-to-year.

I guess also that would follow suit in that your December comp is meaningfully less.

It's only 4% that you are lapping year ago.

So, I mean, that should assist as well, I would think, in your logic of getting to your guidance?

Yeah, that makes sense.

Also, you've talked in the past about your change in margin, or at least your change in discounting at the retail store.

Maybe discounting less but earlier rather that be after the event and drastically.

Should that have a positive -- is that into your guidance as far as potentially seeing some seasonal improvement on the margin for the retail business in that maybe you are discounting 15, 20% on December 23rd and 24th, rather than say 50, 75% on December 26th and 27th?

It could have a positive effect.

Over the long term, I think that is the goal and we fully expect that as we continue to work through this apparel situation.

The volume of markdowns is larger today than it will be in the future.

So that kind of offsets a little bit.

But certainly in the future, the goal is to achieve on a season-by-season basis a better overall margin than we otherwise would have by marking down less but early.

And I guess last question here.

The Midwest market weakness.

Is that something that -- can you put a point to maybe competitive entrance or is it an economic problem in that?

I mean, obviously from this last election, we saw that you have some disparity and some real economic concerns, at least in the Midwest especially, say, Cleveland for instance in those Midwest markets.

It was on their mind more.

Is it an economic problem in that you think when the economy rebounds you will or is it a competitive entrance of someone specifically?

Because Bob Evans had, obviously, much broader weakness and they have the Midwest exposure, so I'm just trying to figure that one out.

Yeah, it's one of our regions which covers the big part of the Midwest, but not all of it.

We have some stores, also that would be considered Midwest and another region a little further to the west that aren't affected as much, but that's the closest thing to a measurable sort of regional affect.

I suspect that you're right, that there are some economic issues going own there.

I've heard what the competition has said about that region, but we will just continue to watch that.

So you would just assume, you would say it's economic not, say, agressive discounting by a lower-end QSR or an upper-end casual diner?

Not that we can really measure.

I can't say that's absolutely not the case, but it's one of those things we just continue to watch.

Okay.

Thank you.

Thank you.

Next question from Dennis Forst with KeyBanc Capital Markets.

Good morning.

I wanted to understand the share repurchases and the number of shares outstanding, et cetera.

Let's see, Larry, you have -- do you have a 2 million share repurchase authorization currently?

We entered the quarter with about 1.8 million, so yeah.

You're close.

Okay.

So -- and you bought back 1.1.

So you're getting pretty close to running out of that authorization.

Yeah.

We've made some pretty good progress.

Yeah.

We had and have a 10B51 plan in place that's operating on those share repurchases.

Okay.

And at the end of the quarter, do you have the number of shares outstanding, the primary shares?

It's in the press release.

A little hard to find sometimes, but it's 48.3 million shares.

It is, okay.

So the fully diluted number's probably about a million more than that?

Where is that buried, because I did look for it?

Well, if yours prints out the way mine does, it's at the top of the final page which is labeled "supplemental information."

All right.

I'll find it.

I won't look for it now.

The next subject I wanted to ask about was the lower bonuses that helped the G&A.

Is that going to continue?

Will G&A be up 1 to 2%?

We hope not.

We hope that the results will be really great and that won't continue.

But I think it's appropriate that when actual results aren't as strong as we planned that there ought to be a mitigating effect from lower bonus accruals, but by the same token when we do really well there ought to be stronger bonus accruals.

So we -- that fundamental is what we're looking at.

Okay.

And when you say the fundamental results don't justify it, does that mean the single-digit increase in pretax or what are you looking at primarily when you're judging bonuses?

Well, you know, as we said, we think this was a really strong quarter considering all the external issues that we had.

But we certainly didn't anticipate those external issues when we entered the quarter and when we were doing our planning for this year.

So frankly, our quarter is below plan.

Okay.

And then lastly, on the minimum wage increases taking place in a few states.

Will you price your menus differently in those states to offset some of that impact?

We're developing plans.

The New York and Illinois effect, which is pretty minor because we don't have as many stores there, is in January, but the Florida effect, which is more significant, takes place in May, I believe.

May, right.

Not till next May?

Yeah.

Okay, great.

Thank you.

Thank you.

Our next question comes from Howard Penney, FBR.

Hello?

Mr. Penney, your line, sir.

Thank you very much.

My question is around the pricing that you've taken and have taken in the past.

I know you haven't been that aggressive with your pricing, but it seems currently a little bit more aggressive.

What are you doing to mitigate history repeating itself in the sense that your consumers became sensitive to your price increases over time?

Is there something you are doing differently within the store, within the menu and the way you're taking prices to help mitigate consumers being sensitive to price increases?

Howard, I assume you are speaking of Cracker Barrel, specifically?

Yeah.

The Cracker Barrel concept, I'm sorry.

I think what happened back in '98 was a culmination of a number of different things.

We had let -- operationally we had let things slide so not only were we taking aggressive price, we were delivering a much lesser experience, slower service, cold food and so on and so forth.

We have been very focused, as I'm sure you've heard over the last 4 or 5 years about our operational standards.

So first of all, the product we're delivering is far superior to the one we were delivering in '98.

The second thing is that we're not piling the increases into 1 section of the menu as we did back then, if you recall we took very strong price increases over and over again on the country dinner plate section.

We're also with the seasonal menu, I don't know if you had a chance to see one, but it has a variety of things on it.

It has the turkey and dressing $7.99 which is typical price points for our main feature promotions, we're allowing some trade-ups, but we've also got -- we've got an open-face sandwich, we've got a salad, so we're offering a greater variety of price points in our promotions and featuring than we have in the past.

So I think all of those things together give the consumer, A, a better product, and B, an opportunity to manage their check better than we've given them in the past.

The result is they're not managing the check down, so we feel that the experience is fairly valued at this point in time.

Thanks very much.

Thank you.

We'll go next to Sue Paron with Avondale Partners.

Good morning, everyone.

My first question is on the tax rate.

Do you anticipate that 35% tax rate to flow through for the rest of the year given the tax credits?

Yes.

Okay.

Were you expecting or did you see any increase in traffic due to the hurricanes?

I know that there were costs associated with that, but in that particular region, did you happen to see any increases as people were hitting the highways to get out of town and needing a place to eat and sit?

Sure.

And the sales impact that we gave this morning is the estimated net impact.

We try to look at the contiguous areas and watch how their sales performed during those evacuation periods.

But still, we had a net reduction in sales.

And would you attribute that to the Midwest region?

No.

I'm talking specifically to the hurricane impact that we had was a net reduction.

We did see some pickup in areas where people evacuated to the stores that were directly impacted by the hurricanes, had a greater reduction in sales than we picked up elsewhere.

Thank you.

And finally, could you give us an idea on the percentage of customers that are purchasing retail items as they're coming through the stores?

It's approximately 1 in 3.

Over the course of the year.

Over the course of the year.

It obviously varies depending on the season. 2 major factors in the variability.

One is Christmas retail's a much bigger percentage of our sales and in the summertime, we have a bigger percentage of travelers who have a greater propensity to buy retail.

But over -- over time, over the year, across the systems about 1 in 3.

And are they still purchasing at the same level as you've seen them historically or is that starting to decrease?

Well, they're probably down from last year.

I don't know that we're talking about a real trend that's changing, that 1 in 3 over the course of the year, but we had very strong results at the beginning of last year.

So we're certainly down from that.

But I think I wouldn't say that 1 in 3 has changed by much yet.

Yeah.

We've been very focused in the last 2 or 3 years on the fact that we have a captive audience situation, we're not a destination retailer.

So the goal is to sell more to more people or more to the same people as they walk through the shop on the way to the dining room.

And we talk about percent of total as the metric and that's part of our bonusing plan.

Percent of total is the percent of retail dollar sales represent of total sales.

That number increased fairly substantially last year, and will have fallen back a little bit this year, but it's still higher than it was 2 or 3 years ago.

That number is difficult to be very precise on.

Just think about how the retail shop works.

Sometimes you'll have a party come out and somebody will be paying the food check while somebody else in the party is going off to browse in the store and decides to make a retail purchase.

Some people make a retail purchase before the meal occasion, so we don't have a precise period-by-period measure of that, but our experience and evaluation, observations tell us that that 1 in 3 is about the right number.

Thank you very much.

Thank you.

(Operator Instructions).

We'll go to Janice Meyer, Credit Suisse First Boston.

Hi, thanks.

The question's on the Cracker Barrel restaurant revenues, it looks like -- and I'm not sure I'm calculating this right -- that the newer stores, the ones not in the comp base are averaging sales levels, you know, 10% or more lower than the comp based stores are.

Can you just tell me, A, if that math is right, but, B, if that's in fact happening and if it is, why you think that's happening?

They are lower.

I don't know that it's quite 10%, but they are running a little lower.

Our openings in the last year or so, year, year and a half I guess, had been a little softer as they've settled down.

Some other pieces on that, Janice.

We approve on new stores based on hurdle [ph] rate, which is actually above our cost of capital being good, conservative folks.

We have seen -- so every individual store has to, on a pro forma basis, meet that hurdle rate.

We then can measure, obviously, sales and operating performance.

We have seen some softer sales, operating income at least in the first year has been pretty much on pro forma.

One of the things that we're doing differently now than we did in the past is a very high degree of focus on a store-by-store basis as they open.

So as they open and we see anything that's not where we would like it to be, we have tactical responses of all kinds of both operational and marketing.

So we don't see this as a trend because we're maturing, it's something that we're going to pay some attention to, and ideally, every store we open will increase the average, but if we have stores that are highly profitable and make their returns at a lower sales volume, I see no reason not to do that.

Sure.

As long as the cost structure is equivalently lower.

Yes.

Some markets just are that.

But you know in general, would you then expect, you know, maybe over the next year, year and a half for the new stores to start opening closer to the average, if not above, as to your point, you get a little more focused on early response?

Yeah, we've been focused on it, but hopefully everybody involved is listening to this call and they're going to be more focused as a result of this.

Thanks for your help, Janice.

Any time.

Thanks.

And there are no further questions in the queue at this time.

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

Thanks again for joining us this morning.

We've tried, as we usually do, to communicate both our performance and remind everybody what our goals and strategies are and emphasize the consistency of how we're moving towards those long-term goals.

Thanks again.

And we look forward to seeing you -- or talking to you again next quarter.

Thank you.

Thank you.

Once again, everyone.

That does conclude today's teleconference.

We do appreciate your participation and you may disconnect at this time.