Cracker Barrel Old Country Store Inc (CBRL) 2005 Q2 法說會逐字稿

Good day and welcome to the CBRL Group Conference Call.

Today's call is being recorded.

A replay of this conference will be available starting today at 2:00 p.m.

Eastern and will run through February 24th at 8:00 p.m.

Eastern Time, the replay can be accessed by dialing 888-203-1112 and entering the confirmation code 2645662.

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

Please go ahead, sir.

Thank you.

Good morning, everyone.

Thanks for joining us this morning.

We have some good news, which we want to share with you.

As the airlines continue to say, we know you have a choice this morning so we really do appreciate your taking the time to spend some time with us.

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

So without further ado, I'll hand this over to Larry for his financial review.

But in the spirit of full disclosure, before I hand it over, I have to tell you it really is Larry.

He's been a little under the weather and his voice as a result, has changed.

But -- Larry?

Thanks, Mike.

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

Hopefully, everyone has had an opportunity to see this morning's press release announcing our fiscal 2005 second quarter results and providing guidance for earnings for the third 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 or express continuing comfort with our own guidance and trends, except in a 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 or 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 it 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 good news and for yet another quarter, we think its really good news.

But first, I want to talk about a few of the unusual things in the quarter.

First of all, the quarter included adoption of certain new accounting treatments, which required us to restate certain prior periods.

All those accounting changes both effected reported diluted net income per share, they have no effect on cash, and they have no effect on any obligation of the Company.

The restatements shouldn't be entirely unexpected, because we have previously disclosed the estimated effect of adopting EITF04-8, which requires if converted accounting for contingently convertible debt, regardless of whether the contingencies allowing debt holders to convert have been met and it affects our calculation of diluted net income per share.

As a reminder, the change does not affect the financial statements themselves or the terms of our convertible debt, rather, it requires us to calculate diluted net income per share as if the conditions required for the debt to become convertible have occurred, even though those contingencies have not yet been satisfied.

The debt presently can't be converted until the share price exceeds $48.85 for a specified period of time, and this contingent conversion trigger price accretes over time as well.

In other words, I think it'll be very good news when the trigger price is achieved.

This adoption of EITF converted accounting requires us to calculate diluted net income per share including the effect of the shares into which the debt can be converted, and excluding the effect of the after-tax cost of the debt.

It had approximately a $0.03 impact on diluted net income per share in the fiscal second quarters of both 2005 and 2004.

The other item that was part of the statement also may not be unexpected if you've been watching recent financial reporting in the restaurant industry.

We have changed our accounting for certain leases, as have several other public companies recently, to reflect a change in industry practice.

This change also is resulting in a restatement of certain historical periods' financial statements but it also has no net effect on cash flow.

I think it's important to understand the background of those restatements, which will now be deemed an error, which we got acknowledge, certainly deserves a deeper understanding.

Since 1985, Generally Accepted Accounting Principles in the United States or GAAP require the leases for which there are rent increases over the term of the lease be accounted for the average rent payment over the applicable term.

This typically results in accrued rent expense in the early years being higher than cash rent payments, and a deferred rent liability is recorded on the balance sheet for the difference.

In later years of the lease, cash rent payments therefore typically, are higher than the average rent and the difference is recorded by reducing the deferred rent liability.

In effect, rent payments from the later years of the lease are partially accrued in the earlier years of the lease.

Well, GAAP generally requires that this average, or straight line rent, be calculated over a minimum term where the lessee would incur no economic penalty from terminating the lease.

The restaurant industry has long and widely interpreted this to mean the base term of the lease, that is not including option or renewal periods because not renewing a lease generally, is an economic advantage because it allows the lessee to cease operations at a poorly performing site or it can commence operations at a superior site.

However, the restaurant industry also generally, has depreciated leasehold improvements over a longer period, the expected life of the property, which may often include optional renewal periods.

The reason for the restatement is to conform the period used for straight line rent calculation with the estimated useful life used in depreciating leasehold improvements.

This generally means that rent expense accrued in a given period will include rent that will not actually be paid until an even more remote future period, often more than 20 years hence.

If and which there is no actual obligation until a renewal option is actually exercised.

Again, often more than 20 years hence.

If the lessee determines not to exercise a lease option in the future, the rent accrued in early years of the lease for that later option period would be taken as a credit to income, even though there had been no cash transaction.

Additionally, the restatement corrects the applicable lease term also to include the pre-opening period during construction in which the Company is obligated to the lease, but not making payments.

It would incur a substantial economic penalty by terminating the lease.

Typically, rent payments do not commence until a restaurant opens for business and the company, consistent with industry practice, has used the earlier of commencement of operations or rent payments, the earlier of those two, as the date on which it began to accrue rent and that was under the principle of matching revenues and expenses.

The restatement has no impact on cash flow from operations and the income statement effects are summarized in a table in this morning's press release.

The Company will file an amended Form 10-KA for fiscal 2004 and an amended Form 10-QA for its first fiscal quarter of 2005 as soon as practical.

And the current filings therefore should not be relied upon.

I apologize for this lengthy prelude, but I think these are important concepts to understand.

Now let's get back to what we think was another great quarter.

Bottom line, we recorded diluted net income per share for our second fiscal quarter of $0.63, versus a restated $0.53 a year ago.

That's an increase of 18.9% on revenue increase of 8.9%.

At March 13 out of the last 14 quarters in which we have increased diluted net income per share from the comparable year earlier quarter.

In spite of continuing commodity cost pressures, we improved operating margins from a restated 7.6% of revenues last year to 7.7% of revenues this year.

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

We generated strong cash provided by operating activities while continuing our share repurchase activities and buying back approximately 1.2 million shares during the quarter.

That's a lot of good news.

Let's look at some of the details.

Revenue in our fiscal second quarter in January 28, 2005 increased 8.9% from last year's second quarter.

That's approximately $667 million compared with approximately $613 million.

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

Cracker Barrel comparable store restaurant sales for the quarter were up 3.2% from the year ago quarter reflecting a 4.1% higher average check including just 3.1% higher average menu pricing and guest traffic that was down 0.9%.

In January, Cracker Barrel lapped a price increase of approximately 1.7% taken a year earlier.

With the effects of certain menu tests and putting increasing prices for stores that were held back from pricing in October, that means we are carrying approximately 2% of the cumulative pricing into the third quarter.

As always, now we don't preannounce future price changes, so we're not going to be commenting on that further this morning.

Although sales were positive and as I know that guest traffic was not, our weakness was in our weekend business across all day parts was trends in the upper Midwest continuing to lag other regions.

But even other habits and challenges, its important to observe that Cracker Barrel restaurant comps have been positive in 18 in the last 20 quarters.

Cracker Barrel comparable-store retail sales, and struggle against an unusually strong 7% comparable-store increase a year ago.

This year's second quarter comparable store retail sales were down three tenths of a percent from last year's comp quarter.

While, we were disappointed that retail sales did not meet our expectations, we remained pleased that we only give up part of the gain recorded last year and were up very nicely from two years ago.

Softness compared with our expectations was primarily in seasonal product and we have been able to adjust our merchandise buy to adjust for these lower sales, so we don't expect that inventory issue at the same magnitude, as the sales weakness.

In a few minutes, Mike Woodhouse, our CEO, will tell you more about what we have been doing to improve our retail results.

Rounding out our comparable store sales results, our Logan's Roadhouse concept recorded an increase of 4.4% in comparable restaurant sales, with average check up by 4% and guest traffic up by four tenths of a percent.

Included in the average check increase was average menu price of about 3.3%.

Logan's enters the third quarter with menu price of approximately 3.3%, also.

We continue to view alcohol sales at Logan's as an opportunity and while we're still below 9% of total sales, alcohol sales mix did improve by approximately 20 basis points from a year ago quarter.

And our alcoholic beverage sales for gas rose by about $0.08 from last year's second quarter, so we believe we are making steady progress, I should probably say continuing to make steady progress.

During the second quarter, we opened five new Cracker Barrel Old Country Store units and four new company operator Logan's Roadhouse restaurants.

For the full fiscal year, we continue to expect to open 25 Cracker Barrel stores, including seven in the third quarter and 18 company operated Logan's restaurants including six in the third quarter.

We also had two Logan's franchise openings in the second quarter.

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

Operating income for the second quarter was up 10.1% on the 8.9% revenue increase.

And operating margins improved 10 basis points from the restated 7.6% a year ago to 7.7% of revenues this year.

We are pleased to have recorded these relatively strong margins during a period of high commodity costs, which is continuing and but we did begin to lap during the second quarter.

And our outlook is much more benign, which we';l talk to in a moment.

During the quarter, we recorded an increase to our retail inventory obsolescence reserve of approximately $1 million to recognize what we estimate will be the remainder of the aged and slow-moving inventory that we first mentioned about a year ago and that is what we expect to have left over after some upcoming sales initiatives.

We also recorded a credit of approximately $0.8 million for uncertain insurance recoveries and expected recoveries related to certain past litigation and hurricanes during the first quarter.

So that was a positive in our numbers for the quarter.

The continuing story in the restaurant industry, as we have noted for some time now, is that there continues to be a significant pressure in commodity costs.

And although we are lapping the onset of those pressures, absolute levels remain high, even if further increases don't appear to be a major concern at this time.

First and foremost has been 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 most of our beef needs during the second quarter, we still experienced approximately 8% year-over-year inflation.

A major win in our beef outlook was locking in our Logan's calendar 2005 beef contract on the best day, I have seen since for the futures market.

That was back in December, the mark -- the futures market hit a low and we locked in our contract for calendar '05 on that day.

We estimate that our beef inflation at Logan's will be only about 1.5% for both the remainder of fiscal and calendar 2005.

Our overall pork purchases of various products incurred inflation in the 6.5% range and dairy as a category was up 7 to 7.5%.

Tomatoes, with the crop damage by the hurricanes in Florida, the California rainy conditions, and insects in Mexico, began to skyrocket late in the first quarter and prices were up almost 50% in the second quarter compared with last year, accounting for a big part of our quarterly food cost inflation.

In total, we estimate our second quarter of food product inflation was about 4 or 4.5%, which was slightly lower than what we experienced in the first quarter.

Retail cost of sales was higher in the quarter than in the second quarter of last year, with that obsolescence reserve increase and somewhat higher markdowns and shrink partly offset by higher initial mark-ons.

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

Labor related expenses were notable with a year-over-year improvement of approximately 90 basis points, reflecting primarily lower hourly labor expense in both concepts and lower retail bonuses as a result of weaker than expected retail sales going up against such a strong quarter last year.

Our general and administrative expenses, as a percent of revenue were approximately flat in the second quarter, reflecting lower bonus accruals and certain insurance recoveries offset by other expense increases while other operating expenses were higher than last year's restated quarter, primarily reflecting higher credit card fees

Our income tax rate at 34.2% was improved from 36.1% in last year's second quarter and from our earlier expectation as the retroactive restoration of the work opportunities and welfare to work tax credits, which had expired at the end of 2003, calendar 2003, it's proving to be higher than we had estimated.

For the remainder of the year, we presently expect our year-to-date rate of 34.6% to be good.

Wrapping up the second quarter, net income of $32.6 million improved 13.7% from a restated $28.6 million a year ago.

Diluted net income per share of $0.63 was improved 18.9% from a restated $0.53 reported in the second quarter last year.

Even excluding the improved income tax rate relative to the first quarter, diluted net income per share would have been up 17% from last year's restated results.

Once again, we delivered on our objectives.

I have just one more observation I want to make about the first half of the fiscal year.

With strong operating cash flow of $137 million compared to about $77 million last year, partly benefited by returning to more normal levels of accounts payable from where we were at fiscal yearend, we had resumed share repurchases, as you all know, buying back approximately 2.3 million in shares for a total outlay of approximately $87 million, and approximately 1.2 million of those shares were reacquired during the second quarter.

We have, at the end of the second quarter, approximately 600,000 shares authorized under previously announced share repurchase authorizations.

Finally, in this morning's press release we gave initial guidance for the third quarter and updated guidance for the 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 understand the inherent risks associated with trends, targets, guidance and estimates for a competitive industry such as ours.

We'll 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 on 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 in 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 third fiscal quarter is for a percentage increase up to the mid teens, compared with a restated $0.49 a year ago.

We presently expect total revenue growth of approximately 9 to 10% in the third quarter versus last year.

And our guidance reflects achieving modest comparable store sales increases for the full third quarter with Cracker Barrel restaurants 3 to 5% positive, comparable store retail sales continuing to be under some pressure, flat to down 1% and for the full third quarter, and that's against a tough comparison to last year's 6.2% positive retail comps.

We expect Logan's comparable restaurant sales to be 2 to 4% positive this quarter.

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

At this time, we estimate that we have approximately 80 to 85% of our commodity purchases locked for the third quarter and approximately 70% for the fourth quarter.

We presently expect second half food cost inflation to be slightly positive, and, potentially, even be negative in the fourth quarter.

So that's quite a change from where we have been over the last year.

Presently, we believe that other store operating expenses will be somewhat higher in the third quarter than a year ago, as we run higher advertising and incur higher utilities costs.

But we believe that some margin leverage may be realized in cost of sales, labor and G&A expenses to offset a portion of the other pressures.

However, we presently expect operating margins to be flat to down slightly from last year for the quarter.

Again, that's primarily because of the advertising, utilities and related costs and other store operating expenses.

For the full year of fiscal 2005, our expectation is for percentage growth and diluted net income per share in the mid to high teens, above the restated $2.18 that we use as our base for fiscal 2004.

The $2.18 base excludes the effect of certain litigation settlement charges that we took in fiscal 2004 that we described fully earlier, including -- if we included those charges, our restated diluted net income per share was $2.12.

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 could achieve full year operating margins that are approximately equal to and perhaps better than last year's restated pre-charge margins, a revenue growth in the high single digits.

One other issue to point out, as previously disclosed, three states in which we have stores, Florida, Illinois, and New York, voted for increases in state minimum wages, and that was to include effective increases in the tip credit wage paid to tipped employees.

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

We have total, system-wide, about -- I believe it's 86 stores in those states.

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

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

With that, thank you for your patience with both my voice and my financial review.

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

Mike?

Thanks, Larry.

Good morning again, everyone.

I intend to keep my remarks this morning focused on the operations of the business and on the very positive performance in the quarter.

I'll say this, because so much of our release today and Larry's remarks are devoted to accounting changes we've been required to adopt, and necessarily have to describe.

But I don't want to divert any more attention than absolutely necessary from the operational performance.

We think the strong -- continuing strong performance validates the clear and consistent strategies we've had in place for some time now.

So, I'll limit my editorial on accounting changes to say that at the end of the day, the underlying economics of the business have not changed in any way, and our performance and future expectations continue to be strong.

So let's start with the highlights of the quarter.

Diluted earnings per share were up 19%, which was a little higher than our expectations.

The positive Cracker Barrel comparable store restaurant sales mean that we've been positive for 18 of the last 20 quarters.

Logan's comparable store sales were up 4.4%, which extends the string of positive quarters to seven.

Cracker Barrel retail sales improved substantially in January to plus 6.1%, which is the first positive month since April last year.

Operating income margins improved despite continuing commodity pressures, and year-to-date, both cash flow from operations and free cash flow, have increased substantially from last year.

And with our updated guidance for the year, we're on track to meet our long-term goal of 15% or better annual growth in earnings per share.

So, we're continuing to meet our goals of continuous growth in the top line, coupled with improvement in operating margins that comes from consistent execution, and with a strong cash flow, we'll continue to repurchase our stock to leverage the operating performance.

The Cracker Barrel, in the quarter, we completed the first of the new seasonal promotions, which was the holiday promotion, and after a two-week hiatus, we moved into the winter promotion on January 17.

This new promotional format seems to be very popular with our guests, and with the learning that comes from each promotion; we're able to make improvements as we go in future promotions.

We're also in the process of understanding the impact of a new approach to the radio advertising buy at Cracker Barrel.

As I mentioned last quarter, we've modified the buy in terms of the flighting (ph) and weight to allow us to advertise against 40% of the system compared with 20 to 25 of the system last year for approximately the same spending.

As I mentioned earlier, retail comparable store sales were positive in January and down only slightly for the quarter.

Although January was negatively impacted by the shift of Christmas Day from December last year to January this year, a strong sell-through of Christmas merchandise after Christmas resulted in a positive performance for the month.

And for the season as a whole, Christmas merchandise, which represented 33% of our total retail sales in the quarter, was positive on a comp store basis.

As I've mentioned, we've also made substantial progress and selling through the aged and slow moving merchandize inventory that we've discussed in previous calls and as we reported today we've increased reserve for obsolete inventory to cover the estimated remaining net expense.

One of the new tactics we've introduced during the second quarter in retail was the clearance corner, where we marked down older inventory and put it all together in one corner of the shop clearly identified by signage as the clearance corner.

We believe that everyone is a bargain hunter at heart and the clearance corner will become a must visit location for many of our guest.

The clearance corner is located at the front corner diagonally opposite to the entrance of the dining room, and this also helps us achieve one of the goals are track and flow project, which is to encourage guest to browse and shop in areas of the sho that have historically been lower traffic.

In addition to the clearance corner, we will continue to use regular porch (ph) sales to sell through the oldest merchandise in the system.

Finally, on Cracker Barrel for the quarter management turnover was 19%, down from 20% last year and year-to-date hourly turnover was 108%, down from 113% a year ago.

At Logan's, we saw seven consecutive quarters of positive sales again achieved without any media advertising support.

And as I mentioned, liquor, beer, wine as a percent of sales continue to improve and added three tenths of 1% to the overall check for the quarter, which represent a nearly 8% increase in alcohol sales per guest.

The happy hour program continues to be a contributor to the improvement and is now supported by greater focus on alcoholic beverages in the promotional standalone menus.

Management turnover at Logan's was 22%, compared to an unusually low 10% last year and hourly turnover continues to run somewhat above last year at 104%, compared to 94%.

Looking forward now to the remainder of the fiscal year, first I remind you that our full-year guidance is for diluted earnings per share to be up in the mid-to-high teens.

Our visibility on expected sales and earnings was supported by the opportunity presented in the fourth quarter by the industry wide sales softness in the same quarter a year ago and we also have increased visibility and moderating inflation in commodity costs for the third and fourth quarters.

In both concepts, the basic of the execution are day-to-day priority, but we're also focusing on top line growth and continue to work towards longer-term goals.

The Cracker Barrel seasonal promotional program will be the central focus in generating excitement among both our employees and our guests.

And with the increased emphasis on product and price in the radio creative and the first time experience of the seasonal menus for our summer travels, we expect the impact of the promotions on sales to continue to build.

Our price increase strategy of Cracker Barrel continues to work.

The latest price increase, which was 1.7%, which we took back in October, was successful as measured by the average check, which is running above the calculated increase suggesting that the guests are not trading away from the price increase, which is usually the case when they're unhappy with an increase.

I described earlier, the progress we've made in working through the retail inventory problem and with a clear game plan is now in place to maintain lower levels of older inventory, the entire focus is back on the freshness, overall appeal, and brand fit of the new merchandise.

Examples of our recent success in retail, are the American legends music CDs and a range of classic TV shows on DVD.

We believe that music is a real opportunity for Cracker Barrel both in terms of retail sales and in the role music plays in reinforcing the connection the guest feels with the brand.

In recent months, we've entered into sponsorship agreements with the Grand Old Opry and with Alison Krauss and Union Station for their current tour.

And as part of these relationships we're developing more music products to sell in retail.

For example, in the case of the Grand Old Opry, we're launching next month the series of CDs with exclusive content from the earlier days of the show.

At Logan's, we're making progress on the strategic initiatives as well as on shorter-term issues.

The menu is one of the major components of our brand strategy and we have a reverse process in place, which has helped us develop new and more interesting and favorable products for the base menu and for the promotional standalone menus.

And this supports our objective of broadening the part of the menu while at the same time maintaining the brand positioning around the affordable high quality steaks.

As an evidence of the success in both menu development progress, Logan's has been recognized as the category winner for the best menu revamped in the Nation's Restaurant News annual Menu Masters event.

These awards recognize product developments that set new industry standard with innovations and in Logan's case specifically recognizes the impact on the brand positioning.

With the momentum in liquor, beer, wine sales already established by the Happy Hour program we're now conducting a thorough competitive analysis of our liquor, beer, and wine offerings to ensure that we optimizing the competitive opportunity.

The development of the new prototype at Logan's is on track for an early 2006 opening and we're developing specific success criteria, so that we can start meeting the performance compared with our expectations as soon as possible.

The development of new advertising creative is also on track and we expect to be on the air with the television advertising test before the end of the third quarter.

One very important aspect of the business that doesn't always make its way to the earnings releases but has contributed to our performance over the past years is our focus on organizational development and the importance of building strong teams in the operating businesses and here at the holding company.

In the past few months, Dan Evins has stepped down from his role of a Chairman and Don Turner has retired from his position of Cracker Barrel -- the President of Cracker Barrel.

Despite the potential impact of these changes, we think it is a credit to the team based leadership style and the succession planning process we've developed, and of course, the skills of Cy Taylor, our new President, the changes have been well accepted, and the Cracker Barrel business has to be succession planning.

It is an ongoing process and we're developing robust processes in all parts of the business to build depth and bench strength for the future.

So, to summarize, we've reported another strong quarter.

We've provided guidance that meets our long-term earnings per share goals.

We're on track with our strategic direction, and the management processes we put in place over time are working to add value to the performance of the business.

And with that, we'll open the call up for questions.

Thank you.

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

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

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

Again, that is "star" "one" for any questions at this time.

We'll go first to Dennis Forst at Keybanc Capital Markets.

Good morning.

I wanted to understand the coco (ph) effect a little better.

Larry, can you tell us what the total debt related to cocos are and what the net interest expense that was backed out to come up with the extra 2 cents a share?

The debt -- the long-term debt you' see on the balance sheet is all the convertible debt.

So there is no debt?

No, we had no revolver there.

Got you.

Okay.

And we backed out approximately -- this is not precise, but approximately 1.4 million of interest expense.

There was also approximately $400,000 of amortization of financing costs during the quarter, and both of those would be tax affected at the tax rate for the quarter.

That fundamentally is the way it works going forward, except that we will fully amortize the deferred financing cost during the third quarter, I think we only have about $250,000 pretax of those expenses in the third quarter.

And then in the fourth quarter it would be zero?

Correct.

There will be no amortization remaining.

And then, the shares into which the debt can be converted are just under 4.6 million shares.

Right.

And then, what was the number of shares outstanding at the end of the quarter?

As always, it's in the press release and it was 47,879,000 shares.

I must have missed it.

Okay.

Thank you.

And our next question comes from Sue Perram from Avondale Partners.

Good morning everyone.

Taking a look at Logan's and your full-year goal still of 18 stores, given the openings that you had this quarter and what you anticipate for next quarter complying only one new store in the fourth quarter, can you explain how that's laying out and what your expectations are there?

I'm not sure I understand, Sue.

Well, if you're only opening 18 stores for the year...

Okay, I think I understand.

We generally try not to have a lot of openings in Logan's during the summer months.

Okay.

And this one, I think, originally might have been planned to be in the third quarter, and just moved into the fourth quarter.

But it doesn't really signal anything special.

Okay.

And revenues looked a little higher than now I was expecting.

The new store averaging net volumes coming in higher than they were previously?

We're still seeing some pressure on the Cracker Barrel side on new store average in volumes.

And now that primarily relates to a handful of stores that have come in below what our expectations were.

But I don't know that we have a marked improvement at this point, but we're certainly hoping for that.

Okay.

And then, one last question on the profitability at retail; if you would take out the inventory adjustment, how l did profitability look given the change in the markdown strategy this year versus last year?

Well, we don't break out retail profitability per se, but we still had some very good results with the retail.

Our margins were probably under a little bit of net pressure, but a big part of that represented the obsolescence reserve charge.

Right.

Right.

Thank you.

Nice quarter.

Thanks.

Thank you.

And we'll now take a question from Stephen Reese at JP Morgan.

Hi, thank you.

My question is on the menu mix.

Recently you've been having success in driving the average check at Cracker Barrel above that of price.

And it looks like going for with a little bit less price, the menu mix will be a more important part in hitting your comp target.

So maybe can you talk about what is driving this menu mix shift?

You know how much can be attribute it to the recent seasonal menu initiatives and what opportunity do you see in the future to maybe evolve your menu towards higher priced entrees?

Well, first of all, on the menu mix giving us a slightly higher check than the calculated (ph) price, that's been true for several years now and we think it is part of this very careful price increase strategy that we have.

But part of the goal of the seasonal menus is to create an opportunity for trade-up, as we talked about on the last call.

We don't want to force higher menu prices, but we think that given an opportunity for higher priced entrees along with a central entrée on the promotion, which is typically going to be in the $7.99, below $8 price point, we'll create an opportunity.

And we design the menus looking at the margins and thinking pretty hard about the trading effect.

Obviously, it doesn't help us at all to achieve higher check and not drive that to the bottom line.

Okay.

Thanks.

And then on the retail, I just want to get a sense of what your current outlook and you are expecting retail to be flat to down one, but your comp outlook is pretty strong.

Is it -- transactions that are down or just people buying lower-priced items?

I think we're still working through some improvements in our retail business.

As you probably know, we brought in a new general merchandising manager, last summer and while she is having some great positive impacts and all, she is not going to have a complete ownership of what we're buying and selling until we get into the fall season.

And so we're still cautious and we're going up against some solid numbers a year ago, so we're conscious in that regard.

Let me just reinforce that, as Larry said, the reason for the caution is we've been through a bumpy patch in retail.

A, we've been comping against some very strong numbers a year ago for several months but also with this transition and dealing with this older inventory, it does not give us as clear a visibility as we'd like on the underlying retail sales, I would hope there' s an upside to what we're looking for.

But we don't want to bet on that until we see it.

Another piece on retail, I think is important and we haven't talk about this morning.

Larry mentioned that we are seeing some improved initial markdowns as part of the mix in the second quarter.

One of the opportunities, we see with our new leadership in retail is to look at some of the supply chain and how we source products and so on and so forth.

And we expect out of that to see some continuous improvement in retail.

We're not ready to talk about the details yet, because we don't have everything in place.

But at some future point we'll be talking about that.

Okay.

And just on the inventory, the obsolete inventory, did that come from any particular category that you are not going to be committed to going forward?

No, it's not that per se, but a year ago, we first began to talk about this.

We had accumulated primarily various seasonal merchandise issues.

A lot of it was in apparel.

We've been working our way through that over the last year and we've made substantial progress on doing that and we also have some plans for some continued reduction on that with some targeted events.

And what this represents is what we would estimate to still have at issue after we wrap it all up.

Great.

Thanks.

Thank you.

And next is Robert Derrington of Morgan Keegan.

Hi, Larry.

This is Justin Tomkins (ph).

I wanted to clarify something with you.

It sounded like in your prepared remarks on your third quarter guidance you talked about earnings growth or EPS growth up to the mid-teens from 49 cents.

But in the press release, I think, it says 48 cents.

Yes.

We noticed that right before I came down there.

Actually, it says both in the press release.

If you look at the table at the end of the press release, it correctly shows 49 cents but the verbiage in the press release under fiscal 2005 earnings guidance, says a restated 48 cents.

We will be fixing that here shortly to say -- a restated 49 cents.

Okay.

Thanks.

And then Mike, if you could just give us a little bit more on the kind of the evolution of retail.

You know, we have heard about the reset of the Cash Station and some of the changes in merchandise and some of that stuff?

Okay.

Well, the number of pieces going on that we talked about before.

The reset of the floor and the moving of the Cash Station is something that we're testing.

We want to be very certain about the results of that before we make an investment throughout the system with that and conceivably, we could do it in selected stores only, but we think it's going to really work.

We certainly think that some of the changes we made so to, so the displays is to lower the displays, improve the sight lines and give a more open feeling and if you've been in some of the stores recently, you will have seen them feeling more open.

We think that's really going to be a benefit.

On the merchandising side, this is a very seasonal business, so with long lead times, because of the percentage of imports, so we're going to see over time the impact of the new leadership and new buying process on merchandise.

I think ,I have a lot of confidence that we are taking the same kind of thoughtful thought through to approach the retail that we've done in some other areas of business, and we're going to see a continual build.

We saw a really good positive over a year ago and it wasn't a false start, but it was certainly, we didn't follow through as well as we could Now, I think we are beginning to have the resources in place to be able to fully realize the benefit of our retail business.

Great.

Thanks.

Larry, hope you get to feeling better.

Thanks Justin.

And our next question comes from Bryan Elliott of Raymond James.

Well in the interest of having Larry feel better I won't ask the question I was to going to ask.

No, just kidding.

A couple of questions.

Actually, did we restate last year?

It looks like prior year numbers were a little different in some of the line items at restaurant level in G&A?

Yes.

If you look at the very end of the press release, Bryan, you'll see a series of tables that tries to break out the geography of where changes are and...

Okay.

I'm sorry, I apologize, I did not get that far through it.

Was it lease accounting or...

Yes.

Still pre-lease accounting?

Yes.

The stuff that affects the income statement per se, all relates to lease accounting.

And the restatement related to EITF 04-8 has no impact on the...

Line items.

On any line item in any of the financial statements.

None of these changes are cash and...

Understood.

Yes.

Okay.

So what then we have incorporated the lease accounting changes and we're going to see an 8-K shortly, which will have the restatements backwards.

Yes.

We'll formally be doing a 10-Ka and a 10-Qa and again, I apologize for you not having any chance to see the details, but at the end of the press release there are three tables that give a lot of detail as to the geography of the changes and give you the magnitudes of where the changes are.

Fair enough.

My apologies for not getting to that.

You mentioned in your third quarter guidance, advertising as a increased cost item year-on-year.

Have we -- is that a timing issue or are we allocating a higher percentage of revenue to advertising on a more strategic basis?

Brian, there are several pieces to that.

First of all, with Logan's as we've said, a year ago we were not running any advertising.

We're going to be testing TV, so that causes an increase.

In Cracker Barrel, part of it is timing, part of it is we're going to be allocating some more funding to research.

We've done a lot of research.

We have a pretty good fix on lot of things, but we want to take a real in-depth look at the Cracker Barrel brand tied into our whole focus on the relevance of the brand going forward and how we continue to do that.

So a good part of that spending is happening in Q3.

All right.

Very good.

And last question on the retail side, you talked at the Analyst Day some time ago and you referenced it a few times in your remarks about how -- one of the key opportunities in retail was restructuring of the floor.

Yes.

You mentioned the bargain corner et cetera.

Do you have a number of different experiments going on right now or could you elaborate a bit more on from a floor plan standpoint, what you might be looking at and how far through the experiment process you might be?

You must be thinking about my scientific background to use the word experiment.

We call them tests here -- but that's....

I like multi-syllabic words.

It helps keep people off balance.

Actually it's polysyllabic but that's okay.

We've got a number of things going on.

The whole sort of a full blown test and then some lesser, we've made some adjustments already in terms of some of the layouts as I try to indicate, to open up the store.

The full blown test, which includes moving the registers, is something that's about to happen.

And we have a timeline.

I want to see some results before I start talking externally, because I think that we need to figure out what our timeline of, assuming success, which we do, what our timeline of rollout might be.

Because we obviously, have to plan for it and we know that you want to model it as well.

So we'd rather have harder data at this point.

And we'd rather not expose those tests to scrutiny in the form of false leads by telling everybody in the world there's something going on in the store.

So apologies for that, but we're going to have some positive stuff.

Fair enough.

Let me ask the question this way, I know you're a big baseball fan.

Would you say we're in the second inning of the tests or more like the seventh or eighth inning?

Where I come from, they play cricket for five days, so we're probably, the morning of the second day.

And that would be of a five-day match?

It would be a five-day match.

It would be early innings, Bryan.

Thanks a lot, as always.

Thanks, Bryan.

And we'll go next to Peter Oakes of Piper Jaffrey.

Hi, gentlemen.

I'd say couple of things, is one Larry, if you can answer in the shortest words to try to save your voice here, but you did mention that for second quarter tomatoes were the preponderance of the food cost pressure.

Can you quantify that some way, because obviously in the cost of goods, you also have the, the retail dynamics?

I said they were a significant part.

We had -- our tomato cost increase was, on a consolidated basis, was up almost 50% from a year ago and that represented somewhere in the neighborhood of one-fourth, one-fifth of our total food cost inflation.

The other parts weren't insignificant, beef, for example was higher from a year ago and pork and dairy and all that, too, so.

Maybe another way to ask it Larry is, what that telling was what the gross margin specifically was, with retail were tomatoes like 1 or 2 cents pressure for the earnings for the quarter?

Let me think.

I think, they would probably be in the 1-cent range.

Okay.

Then kind of moving on, I was curious Mike, you talked about Bryan's question about stepped-up marketing and really want to take a harder look at how the consumers position you from relevance.

Can you give us a little sense what your expectations are going in, are you thinking of that against traditional casual dinners?

Are you thinking it as you how Cracker Barrel was positioned itself, historically, just is there a new benchmark that you're thinking about here?

Well, couple of things.

One is I think, we've mentioned this before, but when we've conducted focus groups in the past, we've asked the members of the focus group to categorize different restaurant chains.

We, Cracker Barrel ends up pretty much being by itself, we get the steakhouses, we get the coffee shops, we get the pizza places, and so on.

But Cracker Barrel tends to be unique and separate in their minds, which is a positive thing.

But the real, simple way of thinking about this is we need to continue to understand why they find us so unique and what it is as everything changes in the world, people's eating habits, the competitive offerings, and so on., what are those that will allow us to continue to hold that unique position.

Okay.

And then, If we look at the bigger picture, what's going on with Cracker Barrel and actually consumers' eating habits as a whole, the whole low carb phenomenon, clearly, looks like it's peaked and you guys carved out quite a bit of space on the menu when you introduced that a few quarters ago.

Would it be reasonable to expect that something you might be taking a look at or freeing up some menu space over time?

Well, we took the space that was not being used specifically for food at the time, we used the back panel.

Yes, it clearly has peaked, in terms of our numbers, we've seen modest percentages coming from that.

I think we need to take a look at the individual product offerings and maybe move them on the menu within the regular categories, so that people who do want the low carb alternatives can see them but not necessarily have the section.

Okay.

And then lastly I noticed in your current promotion you're running a Chicken Caesar salad, although it's not peak salad season, from a relevancy standpoint, it seems like that is definitely trying to integrate the product a little bit more.

Are you getting encouraging feedback from consumer mix and sales, despite, what's actually a pretty aggressive price point that some of these new promotional items are meeting pretty good receptivity?

Yes.

Absolutely.

I think you're looking at the winter menu, the current one..

Yes.

Yes, the Caesar salad is a good example of relevance.

It's taking what's a pretty mainstream product these days in casual dining and introducing it as an alternative.

So we avoid the veto vote.

And then some of these other items on here, you can see are not, they fall within our comfort food category, but they are intended to be highly competitive with casual dining.

Good, thanks a lot, guys.

Thank you.

And we now have a question from Richard Diamond of Inwood Capital.

Yes.

Good morning gentlemen.

If food pricing normalizes by falling, is it fair to expect margins will continue to improve over time?

As we indicated, we see a very benign food cost inflation environment in the second half of the year and that should continue into the next fiscal year, although we haven't done any of projections or guidance there.

We're looking at our food cost inflation being up just slightly in the third quarter, but slightly even down in the fourth quarter.

So, commodities costs continue to be high in absolute terms, but the worst from all appearances is behind us and that should bode well as we go forward.

Secondly, how should we think about stock buybacks going forward once the 2.9 million share authorization is filled?

And just as a comment, we love to have company as we're buying stock.

Yes.

As a matter of policy, we don't try to guess what our Board will approve, but if you go back over several years now, the Board has been pretty regular in approving our continuing share repurchase authorizations from very strong operating cash flow that we have been running in the business and expect to continue to run.

So, I don't have any specifics, but at the proper times will be making the appropriate announcements.

And, I think just to add to that, we have a part of our overall strategy is to use management of capital structure to leveraging the operating businesses.

So, we're managing to a target capital structure, so as you run your models going into the future, you'll be able to see the cash that should be generated from this business.

Well, congratulations on a excellent quarter, especially, in light of a very, very difficult operating environment.

I can't wait to see what happens when actually we have a positive operating environment.

Thank you.

Thanks

Thank you.

And we'll now return to Dennis Forst and KeyBanc Capital Markets.

Just I want to get an idea of capital expenditures for the remainder of this fiscal year and next year, Larry if you can help us out.

We haven't, yet, made any -- given any guidance on next fiscal year.

I would expect it'll be up because we'll be building more stores in both concepts.

And we really have got no change to our previous guidance for this year, which I think our latest was 160 million or 165 million.

Yes.

Okay.

Thank you.

And again, that's "star" "one" for any question.

And it appears we have no further questions.

Mr. Woodhouse, I'd like to turn the call back over to you for any additional closing remarks.

Thank you.

Well, thanks again everybody for joining us.

We do think we have good news.

We didn't think we have a very positive outlook and we continue to see that the way this business is running is a continuous process based on our strategy.

So we're pleased with the outcome.

I'd like to especially thank Larry for making it through this week and through today and we look forward to seeing and talking to all of you in the next quarter.

Thank you

Thanks, everyone.

Once again ladies and gentlemen that does conclude today's conference.

You now disconnect.