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Operator
Good day and welcome to the CBRL Group conference call.
Today's call is being recorded and will be available for replay starting today at 2:00 p.m.
Eastern and run through May 26 until 8:00 p.m.
Eastern, by dialing 888-203-1112 and entering confirmation code 5412694.
At this time, for opening remarks and introductions I would like to turn the call over to the Chairman, President and Chief Executive Officer, Mr. Mike Woodhouse.
Please go ahead, sir.
Mike Woodhouse - Chairman, President & CEO
Thank you.
Well, good morning, everyone.
Thank you all for joining us this morning.
We're looking forward to the opportunity to talk about our third quarter and to shed some light on the outlook for the fourth quarter.
As usual, Larry White our CFO is with me, so to get the proceedings underway I will ask Larry to give us his financial update.
Larry White - CFO & SVP - Finance
Thanks, Mike and thank you to our listeners on the conference call 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 third quarter results and providing guidance for our earnings for the fourth quarter.
As a reminder, we don't review or comment on our earnings estimates made by other parties, nor do we provide continuing updates of or express continuing comfort with our own guidance and trends, except in broad public disclosures such as we have done this morning.
We urge caution to our listeners and readers in considering the information on current trends and earnings guidance.
The restaurant industry is highly competitive and trends and guidance are subject to numerous factors and influences that can 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 to you read that language carefully.
The Company disclaims any obligation to up date 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.
I will add to this that I will not be going into the changes for convertible debt and lease accounting that we made earlier this year.
But rather refer you on those subjects to our very complete earlier disclosure of those changes.
With those cautionary reminders aside, let's review this morning's good news - - this morning's news.
As apparent in our - - it is apparent our third quarter results came in below our expectations.
Our most recent guidance issued on March 29 was for diluted net income per share of $0.54 to $0.56 compared with last year's $0.49.
But the $0.52 we reported today falls short of those expectations.
Before I get into details of the big picture is as follows: Revenues were either at the low end of the expected range, or in the case of Cracker Barrel retail revenues, disappointingly below that range.
Total revenues were up 7.5% from a year ago, compared with our latest guidance of 8% to 9%.
While labor expense as a percent of revenues was similar to last year, we had expected improvements.
We were disappointed by higher-than-expected labor at Cracker Barrel, including costs related to the seasonal menu and other scheduling issues.
As an aside, I will note that there were also some other unexpectedly high costs related to the seasonal menu, in supplies for example.
Labor also had some pressure from higher-than-expected group health costs at Cracker Barrel related to an unusual recent incidence of large claims for which we are self insured.
We also recorded and asset write-down expense of approximately $400,000 for an older Cracker Barrel unit that we have approved for relocation in fiscal '06 to a better highway interchange in the same market.
Partly offsetting these issues was lower G&A expense reflecting lower bonuses and lower net legal expenses; including an insurance recovery related to some prior year litigation expenses.
But these G&A improvements were themselves partly offset by claim settlements and other litigation matters and higher professional fees related to lease accounting changes made this year and Sarbanes-Oxley 404 review.
In short, while G&A was down, unexpected costs and soft retail sales led to results below our expectations.
Let's look at some of the details.
Revenue in our fiscal third quarter ended April 29, 2005, increased 7.5% from last year's third quarter.
That's approximately $628 million, compared with approximately $584 million.
The increase came primarily from new unit openings and from increases in comparable store restaurant sales in our Cracker Barrel Old Country Store concept and in Logan's Roadhouse.
Cracker Barrel comparable store restaurant sales for the quarter were up 2.9% from the year-ago quarter, reflecting a 4.3% higher average check, including just 2.6% higher average menu pricing but guest traffic was down 1.4%.
So the mix, including the favorable trade-up on our seasonal menus, contributed about 1.7% or about $0.13 to our average check.
Although sales were positive, guest traffic wasn't.
And weakness was primarily in our weekend business across all parts with trends in the upper Midwest continuing to lag other regions.
But even though there have been some challenge, Cracker Barrel restaurant comparable store sales have been positive in 19 of the last 21 quarters.
And our third quarter traffic comparison was against the strongest traffic quarter last year.
I would like to speak a little bit about menu pricing.
We're very cautious about pricing more aggressively than our guests will accept.
We test our proposed price increases in a group of selected stores and watch for changes in guest traffic and mix trends relative to a geographically similar control group and to the system as a whole.
When we're satisfied that the increase works, that is that it doesn't harm traffic trends, we roll it out.
But when we do roll it out, we also hold back some stores and observe guest traffic and mix trends in those stores relative to the system.
Just to double check that we haven't broken that value contract that we have with our guests.
Recently, we also engaged on a outside consultant to do a statistical analysis of guest behaviors and product elasticity when we've had price increases or periodic instore promotions.
That analysis, and a test of it, helped us design our most recent menu price increase which we rolled out in April.
The April increase, when the whole back stores will be increased will be about 2.1% to 2.2% in most of the system, with a higher minimum wage related menu price increase in Florida.
In May, we're carrying approximately 3.8% of average pricing, which will increase to a little over 4% later in the quarter, as the whole back stores are increased.
And remain at that level until we lap an effective 1.6% increase taken during October last year.
Neither our pretest nor our hold back stores have exhibited any adverse guest reaction to the price changes.
With just over an $8 average check we believe we continue to offer a great value and our nearly 1200 guests a day on average per store are a testimonial to that.
We continue on the store report.
Cracker Barrel Store retail sales struggled against a strong 6.2% comparable store increase a year ago.
This year's third quarter comparable store retail sales were down 3.8% from last year's very strong quarter.
And that was below our expectations of being flat to down 1%.
Softness compared with our expectations was primarily on seasonal product.
And we've been able to adjust our merchandise buy to adjust partly for these lower sales so we haven't had an inventory issue.
In fact, our inventories are down from a year ago in spite of store growth.
Fundamentally we believe two things contributed to the sale softness.
First, our merchandise assortment, included more repeat products from last year than is optimal, in other words not enough freshness.
We've already begun correcting that.
Secondly, we believe there may be some consumer sentiment or discretionary income squeeze affecting buying habits of our impulse related retail merchandise.
In a few minutes, Mike Woodhouse our CEO will tell you more about what we've been doing to improve our retail results.
Rounding out our comparable store sales results, our Logan's Roadhouse concept recorded an increase of 3% comparable restaurant sales, against a very strong quarter last year that was up 7.3%.
Average check was up by 4%, and guest traffic was down by about 1% against the prior year when guest traffic was up a very strong 5.7%.
Included in the average check increase was an average menu pricing of 3.8%.
Logan's took a price increase averaging 1.5% in April, including the effect of higher pricing in Florida, and enters the fourth quarter with menu pricing of approximately 2.4%.
We continue to view responsible alcohol sales at Logan's as an opportunity.
And in about 9% of total sales, alcohol sales mixed did improve by approximately 50 basis points from the year-ago quarter.
And our alcoholic beverage sales per guest were up about 9% from last year's third quarter.
So we believe we're making steady progress.
During the third quarter, we opened six new Cracker Barrel Old Country Store units and five new Company operated Logan's Roadhouse restaurants.
For the full fiscal year, we continue to expect to open 25 Cracker Barrel stores, including nine in the fourth quarter and 17 Company operated Logan's restaurants including one in the fourth quarter.
We also expect four Logan's franchise openings for the full year including two in the fourth quarter.
Let's touch on a few more highlights in the third quarter.
Operating income for the third quarter was up 1.3% on a 7.5% revenue increase.
And operating margins declined 40 basis points from 7.2% to 6.8% of revenues.
That's softer than our expectations of about flat to down slightly, operating income margins.
I touched already on some of the important reasons for the change in our expectation.
Most notably retail sales softness and higher than expected labor
So, let me now describe some of the changes from last year.
Now that we're lapping extraordinary pressure that began over a year ago in commodity prices, our cost of sales comparisons are improving.
Food costs was up year-over-year, but was offset by favorable retail gross margins.
While we were contracted for much of our beef needs during the quarter, we still experienced approximately 1% to 1.5% 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 seen since then for the futures market.
And we estimate our beef inflation at Logan's will be about 1.5% for the remainder of both fiscal and calendar 2005.
Our overall pork purchases of various products incurred inflation of about 4%, but dairy as a category was actually down 2% to 3%.
Tomatoes and lettuce were under severe weather related pressure during the quarter and the prices were up well into the double digits compared with last year.
In total, we estimate our third quarter food product inflation at 1% to 1.5%, which is well below the 4.5% to 5% that we experienced in the first half of the fiscal year.
Food costs was also up for waste and mix related to the seasonal menus at Cracker Barrel.
Retail cost of sales was lower this quarter than in the third quarter last year, with somewhat higher markdowns offset by higher initial mark-ons.
And generally as a goal, along with keeping our lower - - with keeping lower price points, to encourage impulse purchases and we achieved in all of these.
But in fewer unit sales.
Labor and related expenses were flat with last year for the quarter, reflecting primarily lower hourly labor expense at both concepts and lower store bonuses as a result of weaker performance than expected.
Offsetting that was higher group health reflecting an unusual increase in large self insured claims and higher management wages and to a lesser degree higher worker's compensation expense.
Other store operating expenses were pressured by advertising, as we expected.
With Logan's running as planned, tests of electronic media with the associated media production costs.
And Cracker Barrel also running slightly higher than last year.
Overall, advertising spending was up approximately 30 basis points from last year's third quarter.
We also had some pressure in utilities, maintenance, preopening, credit card fees.
And as noted earlier, we recorded an impairment of just over $400,000 for a store that we have approved for relocation to a stronger highway interchange in the same market in fiscal 2006.
Our general administrative expenses as a percent of revenue were down 40 basis points from the third quarter, for the reasons I've described earlier.
Our income tax rate of 34.6% was improved from 35.9% in last year's quarter, reflecting the retroactive restoration in late calendar 2004 of the work opportunities and welfare to work tax credits, which had expired at the end of calendar 2003.
For the remainder of the year, we presently expect a continuation of our year to date rate of 34.6%.
Wrapping up the third quarter, net income of $26.6 million was improved 2.9% from $25.8 million a year ago.
Diluted net income per share of $0.52 was improved 6.1% from $0.49 reported in the third quarter last year.
That's not in line with our objectives or our expectations.
And we're striving to get performance back on the reasonably steady track that we've delivered over the last five years.
Our retail sales have been in line with our expectations.
A reasonable 40% flow-through would have resulted in our reported bottom line results in line with our guidance.
With some of the favorable results I've described offsetting the seasonal menu execution pressures.
That didn't happen, and we expect better.
And I will talk about our outlook shortly.
I have just one more observation I wanted to make about the first nine months of the fiscal year.
With strong operating cash flow of $223 million, compared with $137 million last year, partly benefited by a return to a more normal levels of accounts payable from where we were at fiscal year end: We continued share repurchases, buying back approximately 3.4 million shares year to date, including 1.1 million in the third quarter.
For a total outlay year to date of approximately $132 million.
We had approximately 1.5 million shares authorized for an additional previously announced authorizations at quarter end.
Finally, on this morning's press release we gave guidance for the fourth quarter of fiscal 2005.
I again urge you to consider a 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 filings with the SEC from time to time.
Also, we won't offer any further guidance nor after today express continuing comfort with today's disclosure other than in public filings or rather 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 fourth fiscal quarter is $0.73 to $0.76 compared with $0.63 a year ago.
For comparison purposes, we're excluding last year's litigation settlement, which reported a year ago results down to $0.56.
We're comparing with pre-litigation settlement of $0.63.
We presently expect total revenue growth of approximately 9% to 11% in the fourth quarter versus last year.
Our guidance reflects achieving comparable store restaurant sales increases in the fourth quarter of both concepts with Cracker Barrel restaurants 5% to 7% positive and Logan's 2% to 4% positive.
We expect Cracker Barrel retail comparable store sales to be flat to down 3% for the full fourth quarter.
At this time, we estimate that we have approximately 85% to 90% of our commodity purchases locked for the fourth quarter.
We presently expect the third half food cost inflation to be slightly negative in the fourth quarter.
For both food and retail costs, expected to result in an improvement in gross margin compared to last year's fourth quarter.
We expect that G&A expenses are going to be higher than last year for the fourth quarter, keeping in mind that our comparison excludes last year's litigation settlement charges as I mentioned earlier.
However, we presently expect operating margins to be improved from last year for the quarter.
With that, I thank you for your patience with my financial review.
One final reminder, from the press release today, because of the Memorial Day holiday, we will be releasing our fiscal May sales results on Wednesday, June 1, instead of on Tuesday, as has been our practice this year.
Now, I would like to turn this back to Mike who has further remarks on operating trends and initiatives.
Mike?
Mike Woodhouse - Chairman, President & CEO
Thanks, Larry.
Good morning, again, everyone.
As have you seen in the press release this morning and you've heard in Larry's remarks, the results we reported today certainly didn't come up to our expectations.
And I'm going to spend some time in my remarks this morning to describe what we've identify as the problems to be fixed and how and when we intend to address them.
To put this in perspective up front, we see the quarter as a bump in the road and not any indication of a fundamental change in the business.
We will fix the short term issues that impacted the third quarter and we continue to have confidence that we have the right long-term goals and the strategies in place to achieve them.
So let's start with a review of Cracker Barrel.
On the restaurant side of the business, we reported positive sales in a period of mixed results for the full service sector of the industry.
The positive sales performance included the check increase of 4.3%, which is a combination of an average price increase of 2.6% and a positive mix effect of 1.7% coming mainly from the seasonal promotional menus.
Since the regular menu continues to be available during the promotions, we view the voluntary trade-up that comes from the promotions as a strong indication that pricing is not an issue for Cracker Barrel.
And as Larry described, further confirmation that pricing is not negatively impacting traffic comes from our standard practice of holding back the control group of stores from the most recent price increase in order to identify any differences in behavior as a result of the price increase.
At this time, there was no meaningful difference in traffic between the control group and the rest of the system.
And we saw the same outcome in the Florida stores where we took a more aggressive price increase to cover the effects of the minimum wage increase in Florida.
Labor costs in Cracker Barrel was one of the major factors impacting earnings and there are two principal reasons for this.
First, we were challenged in accurately staffing and scheduling hourly labor during the quarter, partly as the result of a change in Easter dates, and the associated large daily swings in sales.
That's an explanation.
It is not an excuse.
And paying attention to accurate labor scheduling is a top priority for everyone in Cracker Barrel operations in the fourth quarter.
Second reason for the labor cost pressure is the complexity of the seasonal menu program which leads to substantial training costs and higher ongoing labor costs.
We are basically just taking too long to get up to speed given that these are only eight-week promotions.
And when we do get up to speed, the labor needed to support the larger number of menu items is higher than normal at any given sales level.
The other impact from the complexity of the promotion menus is on food costs.
This comes from increased waste because we have more featured products than our traditional promotional approach, we inevitably sell fewer of each item.
Which results in problems both in estimating the total quantities of new materials required, especially if these are unique for the promotion.
And on a daily basis in estimating the quantities to pull from the freezer and to prepare.
All of this results in the potential for more waste or equally can result in running out of the promoted products, which obviously defeats the object of the promotion.
Once we've identified these issues, we took action and we modified the next scheduled promotion which is the summer promotion starting on June 13 and running through the beginning of August.
We've reduced the number of entrees and we've also reduced the number of unique raw materials to address both the labor and the waste issues.
After the summer promotion, the game plan is to further simplify the seasonal promotions to eliminate the negative cost impacts we've recently experienced and to validate the cost assumptions prior to rolling any promotion with careful operational testing.
We believe that with the simplified promotion process, the promotions can continue to deliver the variety and interest for the guests that we intend them to do and also provide margin improvement opportunities for us.
In retail, sales for the quarter were below our original expectations as Larry indicated.
The story here continues to be the evolution of the merchandising strategy to one of increased newness and freshness in the assortment at all times.
This is a continuing process.
And we expect it to be fully implemented for our seasonal merchandise by the end of the first quarter next fiscal year when the full assortment of fall, Halloween and Christmas merchandise will be in the stores.
In the third quarter, however, we continue to see the effect of too much repeat purchases of previous merchandise in both the Easter assortment and also in the apparel area.
The good news is that we continue to be on track with the sell-through of the aged apparel inventories that we reported on in prior quarters.
And the new themes that we've developed on to the new strategy of selling well.
Initial sell-through rates on the themes that have reached the stores so far are about double historical sell-through rates for new themes.
So the outlook for the fourth quarter in retail is for continuously increasing percentage of newness in the mix.
And of course, the fourth quarter is the summer travel season and travelers have a substantially higher propensity to make a retail purchase than our local guests do.
All of this within the current environment, discretionary spending appears to be under some pressure and could affect our retail business.
Improvement of margins is another goal for the retail business and we will be making steady progress in this area.
We expect further improvement from our new relationship with a major trading company that will oversee the sourcing of product from China.
Historically we've managed the sourcing ourselves with only one full-time employee in China.
So the potential leverage coming from the new arrangement is considerable.
On the people side, we made an important addition to the retail team.
We've hired a new Divisional Vice President of Retail Operations who will oversee all of our retail operations.
And he comes to us with a strong background in the retail industry.
Turnover remains low and stable in Cracker Barrel with hourly turnover in the quarter at 106% compared with 110% last year.
And management turnover was 22.5%, compared with 22.8% a year ago.
At Logan's, we were pleased with the continuing positive sales in the quarter.
And this improvement included the continued increases in alcohol sales per guest that Larry mentioned.
And these are the result of three things: The result of - - the happy hour program that we rolled out about a year ago.
The increased featuring of alcoholic beverages in our promotional stand-alone menus.
And of course, continued management focus.
We rolled out an updated menu in Logan's in April which included a 1.5% price increase.
It also included some new items, including two new salads and a very popular seafood item.
And this is continuing part of our strategy to broaden the appeal of the menu and provide more varied and interesting choices for the guests.
Many a development is going to be an ongoing process at Logan's and we have a number of new products in the pipeline, which will be rolling out, some with the next stand-alone menu, which rolls out in June.
And some with the next menu update which we expect to be in the first half of fiscal 2006.
We've completed the test of the new advertising creative at Logan's., We're in the process of evaluating the results and deciding what if anything we want to change before rolling it out next fiscal year.
And I expect to be commenting in more detail on our advertising program at Logan's at the next conference call, which will be the fiscal year end conference call.
And in the development area at Logan's the new prototype restaurant is on track and we will be opening that early next fiscal year.
As I've previously mentioned, we are developing an interactive voice response system in both concepts to provide guest feedback on individual store execution as well as providing an additional research tool for broader consumer and product issues.
At Logan's, the system is now fully rolled out and we expect it to be a powerful tool to assist in achieving the goal of consistently excellent execution, across the system and over time.
And we're also going to be able to use it to validate the brand attributes that we consider to be important, as we continue to work on our brand positioning at Logan's.
So in summary, the third quarter was a combination of steady progress, with our strategies in all parts of the business.
With some important lessons learned at Cracker Barrel, that we will be applying over the next two quarters.
I confidently expect more progress in the fourth quarter at Logan's.
We will see continued focus on raising the bar in execution, and we will see more variety in units in the menu offerings.
At Cracker Barrel we should see the benefits of the simple promotional menu and continuous improvement in retail as the new merchandise arrives in the stores.
And with the majority of our food and retail purchases for the quarter already locked in, we believe we have a high visibility in cost of goods for the quarter.
We continue to have confidence in the strong management teams of the operating businesses and their ability to maintain a clear long term direction while at the same time executing to our standards on a daily basis.
And also being able to identify and deal objectively and quickly with short term problems, should they occur in the business.
And with that I'd like to turn the call over for questions.
Operator
Thank you. [OPERATOR INSTRUCTIONS] We will go first to Matthew DiFrisco of Thomas Weisel Partners.
Matthew Difrisco - Analyst
Hi, I got a question actually for Larry.
I just needed some - - a little bit more specific on the other operating expenses.
It sounds as though in the third quarter, a lot of that was one-time occurrence, rollout and the moving of the store.
For your guidance for 4Q do you expect that to be up as a percentage of sales year over year or flat or down?
Larry White - CFO & SVP - Finance
Yes, it is going to be kind of in that range.
It is going to be basically flat, could be up or down a little bit.
I mean our net of labor and other operating expenses ought to be approximately flat to down very slightly in the fourth quarter.
We didn't comment on them because year-over-year there is nothing particularly notable to comment on those line items at this time.
The big thing for Q4 is we expect gross margin improvement from both food costs and retail costs year over year.
And we expect to have higher G&A.
Matthew Difrisco - Analyst
Okay.
And then within the G&A for 3Q, you mentioned insurance recovery.
How much was that?
Larry White - CFO & SVP - Finance
We have to evaluate our disclosure obligations on that, because it is a legal matter.
But what we wanted to bring up was that there was a real positive in there.
It was also partly offset by some other negatives that I described as well.
So I just have to defer on that right now.
Matthew Difrisco - Analyst
Okay.
And then last question, I guess, for Mike.
You mentioned that you don't think that the pricing is having an effect on the traffic and have you the hold back stores to look at.
How do those hold back store does on the retail side?
Your average check is very high the last three quarters, north of 3% in the restaurant.
How do you know you're not taking - - it is not a macro thing, but your restaurant is taking dollars from your retail?
Mike Woodhouse - Chairman, President & CEO
The simple answer is I don't know what happens in retail specifically.
We chose the hold back group focusing on getting a balanced control group for the restaurant side.
And we don't look at it from a balancing it from a retail point of view.
So I think clearly, as I said in my remarks, there is some discretionary income pressure out there, which is affecting more than just us.
I think it is affecting the whole restaurant industry and it is affecting retail especially at the lower income levels.
So I don't know that we can measure that in our stores directly like that.
Matthew Difrisco - Analyst
But is that the reason - - then why are you taking pricing, I guess?
If you're having commodity costs come down, why take so much pricing at the Cracker Barrel store level?
Mike Woodhouse - Chairman, President & CEO
Well, we're really not taking - - as we tried to describe, half of - - essentially half of the check we're running right now is coming from the promotion, which is not a price increase.
As I'm sure you know, the promotional menu itself lays alongside the regular menu, so the pricing we're taking is in the 2% range.
We've been very careful over the last four year, as you know, to take modest price increases.
We are in a routine of pre-testing, as Larry said.
And we only go ahead when we see there is not a problem and then we validate that with the hold back.
So we're pretty comfortable that we're not affecting traffic and that we're getting a neutral to a potentially positive response from the guest.
Matthew Difrisco - Analyst
So you don't think you're holding back your retail potential by having a higher average check in the restaurant?
Mike Woodhouse - Chairman, President & CEO
No.
Matthew Difrisco - Analyst
Okay.
Thank you.
Mike Woodhouse - Chairman, President & CEO
Thank you.
Operator
Thank you.
We will take our next question from Robert Derrington of Morgan Keegan.
Robert Derrington - Analyst
Yes, Mike, could you give us some color - - as you look at the seasonal menus, typically, you've had about 5 to 6 items anyway on those seasonal menus.
Is the plan to skinny that down somewhat so there are fewer selections, less back of the house prep time, et cetera?
Mike Woodhouse - Chairman, President & CEO
Yes, if you recall, before we had the - - we've in effect had some seasonal menus for several years.
Which for the in-serves was a single major offering and maybe a couple of subsidiary offerings.
And in the last fall, the new promotional program, we've substantially added to the number and complexity.
We haven't focused on tying the products together, so that we are using the same protein, for example, as you see some of the other chains doing.
And running variations on steak or whatever it is.
So the game plan is to go back to putting more energy behind the hero offering that gives us a number of things.
It actually helps us drive more mix behind that because we will be able to line up the poster at the dining room door with the table and the promotion.
And make certain that that entree is something that is strong margin, quick preparation, and attractive to the guest.
And limit the number of different things we do.
And then the whole idea of unique, bringing in unique raw materials is a challenge.
Because as you know, we were running on a single promotional item some years ago.
And we were running in the high single digits in terms of product mix.
Well, if you take that equivalent product mix and spread is over four or five items it is much more difficult to be highly accurate in projecting how much you're going to need.
So I feel positive about it because I think we've done a great job with the creative.
I think everybody believes in the seasonal menu program.
The question is now making it much more operationally efficient.
Larry White - CFO & SVP - Finance
When you look at - - along that same line, Mike, when you look at those item, typically it seems like a disproportionate number of those tend to be newer items that aren't on the menu.
Robert Derrington - Analyst
Would you consider using some of those that you already have some efficiency in operational execution with?
Mike Woodhouse - Chairman, President & CEO
Well, I mean it is important to have - - it is a good way of testing newness and it is a good way of adding some - - kind of extending the reach of our menu a little bit.
So we've got to keep that in mind.
We have another project which I didn't mention in my remarks, where we're looking at the base menu, in terms of efficiency.
And that's a longer-term project.
When we get that done, we will be able to readdress adding some more variety through the promotions.
But right now, I think we're going to be offering what the guests want.
And driving sales and traffic is great, but if we cannot put it to the bottom line, it is not getting us anywhere.
Robert Derrington - Analyst
One other, if I may.
On your retail business, I know that you've talked about testing a reset of the counter.
Any kind of color you can provide us at this point?
Mike Woodhouse - Chairman, President & CEO
Well, we're doing several things.
One, is we've been rolling out the stadium effect, so-called, of the fixtures.
Where we go low in the center and high at the sides, And we're - - we have about 10% of the system like that.
We're evaluating what that does for us.
We think it is going to be positive.
On the registers, we are going to be very soon putting two tests into stores - - tests into two stores.
Putting the register in the center of the retail later for all the reasons we've talked about in the past.
Robert Derrington - Analyst
Okay.
Larry, if I may, one quick question.
Option expensing, it looks as though it will come up for your Company beginning with the start of this next fiscal year, I believe.
Over the last couple of years, that option expense dilution has come down.
And I think the last couple of quarters, it's been running around the 6% range, if I remember correctly.
Can you give us any color on that, as it relates to this coming fiscal year?
Larry White - CFO & SVP - Finance
Well, only to agree with what you're saying.
That we have been deliberately working on our share compensation programs over the last few years, to bring that down.
And I don't - - I think it will be down from what we've reported as an estimate in the past.
But we're not ready to comment on fiscal '06 until we do our year-end conference call.
Robert Derrington - Analyst
But in fact, do you expect to begin that process with Q1?
Larry White - CFO & SVP - Finance
Yes, it will be begin in Q1, that is correct.
Robert Derrington - Analyst
Okay.
Super.
Thank you.
Operator
Thank you.
We will take our next question from Sue Perram of Avondale Partners.
Sue Perram - Analyst
Good morning.
Could you give us your outlook for advertising given that it ran higher this quarter?
Would you expect it to run about the same amount for next quarter?
Larry White - CFO & SVP - Finance
No, it will be less.
We had the tests going on at Logan's.
Plus the production expense for all the media that we did in Logan's in Q3.
That won't be repeated.
And we ran a little bit higher in Cracker Barrel as well.
So no, it won't be a repeat of that kind of pressure.
Sue Perram - Analyst
And why did Cracker Barrel run higher?
Larry White - CFO & SVP - Finance
I think part of it was some other miscellaneous testing going on and probably also just on a relative basis to the fourth quarter, just relative revenues.
Sue Perram - Analyst
Two questions on the seasonal menu.
You mentioned that you saw increased labor and other costs with this particular seasonal menu.
Why didn't we see that with the winter menu?
And also you mentioned large daily swings in sales.
Can you explain why that is happening?
Mike Woodhouse - Chairman, President & CEO
Let me take the last one first.
Cracker Barrel is obviously a very travel influenced concept.
So if you look at a holiday period like the Easter weekend, we get big shifts from our regular pattern, for the same day of the week.
So when you get an offset - - I think it was two weeks this year, Larry, or three - - you are going to get the extreme ends of both of those.
You get the reduced travel - - this year, Easter was early, so we got the higher travel early, compared with an average last year.
And then we got the average versus the Easter a year ago.
So that's just a fact that influences Cracker Barrel more than other concepts because the travel influences it.
It is no different than it ever is.
And as I said in my remark, we're not using this as an excuse, we just did not do as good a job of scheduling labor and estimating sales over that period, as we should have done.
On the effect of the menus: The first season menu we ran was the holiday and that featured Turkey and dressing, which is a traditional Cracker Barrel promotional item as the hero.
So we didn't have as much of an effect, because we got pretty strong feelings on.
And then as we moved into the other, which ran us into January through March and then onwards; we started seeing more of an effects.
So most of the time we had seasonal menus out there - - the new variety of seasonal menu, was in the third quarter.
Sue Perram - Analyst
Thank you.
Operator
Thank you.
We will take our next question from Steven Rees of J.P. Morgan.
Steven Rees - Analyst
Thank you.
I had a question on unit growth at Logan's.
Are you still committed to the 20% growth rate beyond this fiscal year?
And just how long can you achieve this growth rate by backfilling existing markets before you would have to enter new market markets where maybe the competition is greater and you wouldn't necessarily have the advertising efficiency?
Mike Woodhouse - Chairman, President & CEO
Well, our goal is still 20%.
It that happens be 19% one year and 21% the next, so be it.
But 20% is what we're planning on as we go through our current five-year planning process.
We are going into a combination, of existing markets and opening up new markets, primarily contiguous so they can be operationally efficient.
And the new markets we're going into are ones where we can see achieving advertising efficiency within a relatively short period of time.
So that we're not exposed over a five or 10 year period without the ability to support them.
So as we map that out and we look on a five-year basis, we see that we can keep doing that over that extended time period.
Steven Rees - Analyst
Okay.
And how much next year will be impacted by the advertising?
Larry White - CFO & SVP - Finance
We haven't developed our fiscal '06 plan.
But I would expected that we would have more advertising next year, because that's the plan for Logan's.
Steven Rees - Analyst
Okay.
Great.
Thanks.
Mike Woodhouse - Chairman, President & CEO
Thank you.
Operator
Thank you.
We will take our next question from Janice Meyer of Credit Suisse First Boston.
Janice Meyer - Analyst
Thanks.
Just to go back on your pricing comments.
Your - - I mean my numbers show you've been running maybe 1% to 2% in pricing kind of fiscal '03, and into '04.
And now, you're running more like 3 to 4, so it is a stronger rate of pricing.
At the same time, you talked about the consumer being weak and pulling back on discretionary income.
So just, sort of intuitively, does it make sense to be running the strongest menu price increase that you've had in a while, at a time when you actually think the consumer is weakening?
And just as a follow-up to that, again, your test stores show that consumer has no negative reaction.
So maybe it is not, hurting your customer traffic but do you think again your comments about a customer that may be impacted a little on the discretionary side.
Do you think the pricing hurts your ability to grow customer traffic?
Larry White - CFO & SVP - Finance
I think intuitively, I understand exactly where you're coming from, Janice.
But we would - - because we have exactly that concern, we do what from my experience is an extraordinary amount of evaluation of these things to make sure that we're not doing anything wrong.
As I indicated, on using the current pricing increases as an example.
We tested it, with a group of control stores.
We watched how they ran compared not only with the system as a whole but with a geographically similar control group, specifically.
We also, in designing that price increase, utilized the assistance of an outside consultant who did an elasticity evaluation of our menu and our customer behaviors.
Their recommendations were used in developing the price increase and were included in the tests that we did.
And then when we did the price increase with the actual price increase, we held back stores.
And we continue not to see any difference in behavior among the hold back stores and the rest of the system.
Intuitively, I mean I absolutely understand where you're coming from.
But the fact of the matter, which we've been very careful to evaluate, just have not shown an issue.
I think that people come to us with the express purpose of eating.
People don't come for a broader occasion per se.
They're coming to dine with us.
And when they're there, they then make a decision about whether they're going to buy something in the retail shop.
And Mike and I described some of the reasons why we think there has been some weakness there.
But there just is no indication yet that we've seen that pricing is affecting our customer traffic.
Mike Woodhouse - Chairman, President & CEO
And Janice, I totally agree with that.
I think for us, the impact of any discretionary income squeeze is much more in retail.
Which is generally very much a discretionary purchase and an impulse purchase.
And we've seen, as you've heard us talk about before, we've been working on lowering our average price points, in retail and we've seen the effects of that.
We've seen more units at lower price points.
But that's the way we want to go, and we have been very focused on the target item at the register where we've been most successful with a $0.99 item or $0.9 items because that is an even - - even in today's environment, that is essentially a no-brainer kind of add-on to a $15 or $20 check for the party.
Janice Meyer - Analyst
Right.
Mike Woodhouse - Chairman, President & CEO
So yes, it is - - I understand the question, as Larry said he did.
But we have been super cautious in measuring the effects of all of this.
And we feel that we're in the right place right now.
We will continue to be very cautious going forward as well.
We're not going to get in the habit of running 3, 4 - - you know, 3% price increases.
Janice Meyer - Analyst
Thank you.
Larry White - CFO & SVP - Finance
Thank you.
Operator
Thank you.
We will take our next question from Bryan Elliot of Raymond James.
Bryan Elliott - Analyst
Good morning.
I wanted to clarify, I'm not sure that I heard this correctly, the - - you mentioned, I think your average ticket - - just clarify the pricing versus average ticket.
I things think you mentioned that the effect of the promotions - - can you hear me okay?
Larry White - CFO & SVP - Finance
You bet.
Bryan Elliott - Analyst
The effect of the promotions created the - - a 3 to 4% type pricing but I think you used a 2% number as your actual sort of nonmix change price increase is that correct?
Larry White - CFO & SVP - Finance
For the quarter, we had 2.4% average pricing at Cracker Barrel.
Bryan Elliott - Analyst
And that would be just raw price assuming no mix?
Larry White - CFO & SVP - Finance
Correct.
Bryan Elliott - Analyst
And then with the purchases of the promotions and the mix impact of that, and other mix impacts, the average ticket rise was more - - had a 4 handle on it, is that correct?
Larry White - CFO & SVP - Finance
That's correct.
Bryan Elliott - Analyst
Okay.
All right.
And also, a clarification, you had a number of sort of nonoperating kind of things, a few plus, a few minus, the legal recapture offset by worker's comp, and some other things.
Is the net effect of that negative?
Larry White - CFO & SVP - Finance
It may be slightly positive.
Bryan Elliott - Analyst
Okay.
Thank you.
Larry White - CFO & SVP - Finance
Thank you.
Operator
We will take our next question from Joe Buckley of Bear Stearns.
Joe Buckley - Analyst
Thank you.
And I had a couple of questions.
Mike, I know your strategy has been to get to lower price points in the retail merchandise.
The mix of what you're selling tell you anything about how the consumer is acting or show greater caution on the consumer's part?
Mike Woodhouse - Chairman, President & CEO
Well, the average unit price of retail items sold in the third quarter this year was lower than the unit price a year ago.
Part of that is deliberate.
Because we've changed the offering so that the average price available is lower as well.
So they're behaving the way we would like them to, is buy more units at a lower price.
We now would need to work on even more units than that.
I think it is going to be interested when we get into the fourth quarter when we do get the travel component, I think that summer travel will be less price sensitive on retail than regular retail purchases.
But that is only speculation on my part.
We will find out when we get there.
But we have not - - we will not give up on retail being a key component of our strategy.
I mean we'll do this in small steps.
The first step is to get retail sales running in line with traffic and after that move it up so we can increase our retail percent to total.
We absolutely think - - as I mentioned the sell through rates and some of the new themes, which are showing very positive sell through rates, so there is the newness and the difference is working.
As we get more of that, it - - I expect to see that impact the total sales.
Larry White - CFO & SVP - Finance
I think that sell through rate issue is one of the clear things about consumer behavior.
As we look at those sell through rates on the new merchandise, it is substantially higher than the sell through rates on the product that was repeated from last year.
Joe Buckley - Analyst
A question on your fourth quarter same store sales guidance for Cracker Barrel, it sounds like you're going to be running a 4% price factor for most of the quarter.
So you are forecasting some traffic increase.
Do you see any signs of business getting better or is that simply a function of easier comps?
Larry White - CFO & SVP - Finance
If you'll remember last year, the industry, including us, a a real change in trends at about this time.
So I never like to talk about easier comps unless there there is a blizzard in the prior year.
But clearly something was going on, which we think will be a benefit.
Joe Buckley - Analyst
Okay.
And then one more question on the pricing.
You talked about the control group of store and then the hold back group of stores.
Is your frequency of use by your customers high enough to really get a good read on their reaction to price increases?
I mean how long do you have to run those tests to - - particularly with the traveling component of your customer base, to get a true read?
Mike Woodhouse - Chairman, President & CEO
Well, we have an unusually high frequency among our regular users and so we get a pretty good read on the people who are coming once a week or four times a month or better, we get that read very quickly.
For the person who comes once a year, obviously, we're not going to hold a test open for a year to see what happens when they show up.
But I think we're better placed than most concepts because of the concentration of the heavy users.
Joe Buckley - Analyst
Okay.
Do you know how much of your business is attributable to those heavy users?
You may have given us these numbers at the analyst day.
I don't remember.
Mike Woodhouse - Chairman, President & CEO
It is about - - it is about 20 - - in the high 20s, percentage of guests represent in the low 70's percent of all occasions.
Joe Buckley - Analyst
Okay.
Thank you.
Mike Woodhouse - Chairman, President & CEO
Thank you.
Operator
Thank you.
We will take our next question from Jennifer Grass of Trustco Capital.
Jennifer Grass - Analyst
Good morning.
I just wanted to talk briefly about the five new Logan's stores you opened.
Did those perform up to your expectations?
Larry White - CFO & SVP - Finance
We had a little softness in the latest Logan's openings.
Jennifer Grass - Analyst
Did they underperform the rest of the stores?
Or were they in line?
Larry White - CFO & SVP - Finance
They're about in line.
They're probably about in line.
Jennifer Grass - Analyst
And is there anything you particularly attribute that to?
Or was it just less advertising?
The area you opened them in?
Or something else?
Larry White - CFO & SVP - Finance
I think we're probably doing some learning on our new store development there, and I don't know that I can point to any one particular thing.
Mike Woodhouse - Chairman, President & CEO
Yes, I think we do have a couple of the new stores that are early in terms of retail development, the restaurant development around them, so they will take time, more time to build than we initially expected.
But we will continue to - - it is a continuous learning process on everything to do with our new store development, including site selection.
And I think we've learned a lot, by some reviews we've done recently over the whole history of Logan's new stores that will help us going forward.
So we're not - - don't take this as a signal that we got a weakening in the trend, other than taken as a group they're a little softer than we would have liked them to be.
Jennifer Grass - Analyst
Thank you.
Larry White - CFO & SVP - Finance
Thank you.
Operator
Thank you.
We will take our next question from Scott Waltman of Piper Jaffray.
Scott Waltman - Analyst
Hi, gentlemen.
Thanks.
Actually, I have a couple of questions.
Mike or Larry, can you give us what the sales mix that you're seeing on the new seasonal menu items, can you - -?
Larry White - CFO & SVP - Finance
As a group, it has run - - it varies from week to week, but north of 10%.
Scott Waltman - Analyst
And that's been pretty steady since you brought out those items or it has been a slow build or - -?
Mike Woodhouse - Chairman, President & CEO
Well, no, what typically happens is we establish a run rate early in the promotion.
And then there is somewhat of a decline towards the end of the eight weeks, which is natural because there is going to be a lot of trial because of the newness.
And then people go back to - - some people will go back to eating their traditional favorites.
Scott Waltman - Analyst
Right.
Larry White - CFO & SVP - Finance
That's no different than it was when we were running single product promotions.
Scott Waltman - Analyst
And have you - - I mean you've talked a lot about the pricing and the fact that you don't see the consumer, balking at these - - these obviously are some higher-priced items.
Any evidence that the consumer is giving you credit for maybe viewing you more as a casual diner now, versus maybe what they have done in the past?
Versus being a family diner and maybe some evidence in terms of dinner business now, in just the last couple of quarters, versus the lunch business?
Mike Woodhouse - Chairman, President & CEO
I don't know that we have any hard evidence.
I do know that some of the newer products, for instance, the strawberry pecan chicken salad that is on the current menu is selling better than expectation.
And that is a little bit different than one would normally traditionally expect at the Cracker Barrels.
And that's part of the intent.
But again, we are going to get there.
We just have to regroup a little bit here and make certain that we don't shoot ourselves in the foot from a bottom line point of view, as we do this.
Scott Waltman - Analyst
Right.
And actually, this is a follow-on to what Joe was asking earlier.
I think when we go into your stores, when we check out the person at the register always asks us for the zip code.
And I'm assuming that is one way you have of tracking who your customers are.
And that suggests that you are doing some consumer research with that information.
Besides knowing sort of who the customer is and how often they are using you, is there anything else you're learning from getting that type of data?
Mike Woodhouse - Chairman, President & CEO
Well, yes, we're doing a systemwide zip code study right now.
We've been using zip code studies on an individual store basis primarily as we look at new locations and we think about potential cannibalization.
But the study will give aus pretty good in depth snapshot of where our customers are.
The only challenge we have, and this is a kind of a reminder to ourselves, is you don't get the weighting of the frequency when do you that.
So you don't know whether that person comes every day or comes once every two years.
But we are continuing to focus on understanding the dynamics of this business.
The travel component is absolutely critical.
But we do well off interstates and we really want to understand that mix.
The big opportunities as well as attracting the traveler is, to build our local business in our interstate stores and then to take our learning and go off in the state.
So the more we can understand where people come from, the better off we are.
And it is not going to be an always kind of thing, because, I'm one of those people who hate to go to Radio Shack because they always want some private information from me.
And I don't believe - - I think it is good to do it for one thing but I don't think we're going to do it forever.
Scott Waltman - Analyst
And just finally, switching over to the retail side of the business, you mentioned a new Divisional Retail President.
How is he fitting in, in terms of overlapping with the existing management?
You'd brought in some new merchandising personnel over the last year.
So can you explain to us sort of what the overlap is there?
Mike Woodhouse - Chairman, President & CEO
Yes.
On the merchandising folks are responsible for identifying purchasing, sourcing products.
They're also responsible for how to display that product.
The operations side of the retail is all about running the business, training the people, restocking the inventory, selling.
So structure is we have a general merchandising inventory, Carol Norman, who oversees all of the merchandising and she joined us in August of last year.
On the operations side of the business we have two Divisional Vice Presidents operating one-half of the country each on the restaurant side.
And we have one Divisional Vice President running operations for all of the retail side of the business.
And that's what this new person is going to do.
The previous incumbent was promoted, Terry Maxwell was promoted to SVP over all of the operations a few months ago.
So this is a replacement following a promotion.
Scott Waltman - Analyst
And then on the merchandising lines, when you talk about being fully implemented in the fall with the new merchandising lines.
Is that sort of a time frame that you're talk - - that we should think of in terms of the merchandising issues, the sell-through issues going from being negative, if you want to call it that, to a neutral to positive situation?
Mike Woodhouse - Chairman, President & CEO
Yes, I wanted to be clear on what I said.
What I said is we will be fully implemented for all of our seasonal merchandise.
We basically got, the seasonal stuff that comes in for the obvious seasons, Christmas, Easter, Halloween, et cetera.
And then we've got the baseline merchandise as well.
Where we think there is some continued opportunity for refreshing that.
But the focus today is on the seasonal merchandise.
So we should look and we are looking internally by then to have all of our seasonal merchandise be - - have been bought under our new strategy.
Now, we're not going to be perfect the first time around.
So we will obviously learn from that.
But I think we are looking for some good things.
And if we see the kind of sell-through rates, the major seasonal items, which we will have in place by then, that we are seeing on the new stuff now, we will be very pleased.
Scott Waltman - Analyst
Thanks a lot.
Mike Woodhouse - Chairman, President & CEO
Thank you.
Operator
Thank you.
We will take our next question from Juan Espinoza of Wellington Management.
Juan Espinoza - Analyst
Just a minor question going back to the discussion about the retail side, maybe being affected by the restaurant side.
Would you know when is it that most of your customers do the purchases at the store?
Is it before they sit down or after they sit down?
And I guess it might have to do with how quickly they can sit down, I mean which might be, depending on the time of the day but - -.
Mike Woodhouse - Chairman, President & CEO
It is both.
I mean it is both in that they will shop before.
But typically, they are only going to do that when we're on a wait.
If we're not on a wait, people will want to go and sit down.
And then we see a lot of behavior with a study we did two years ago, of people shopping, looking at stuff and then going into the dining room eating, coming back and making the purchase.
One of the things we do just from a control point of view is we ask people to not take stuff into the dining room with them.
So we will hold things at the register.
Or they will purchase afterwards.
But in terms of the wait: Our ideal with the wait is to speed up the table turns that we're working on, so we get more people through and keep the wait about the same or maybe come down a little bit.
So the wait is something that helps us in retail.
Juan Espinoza - Analyst
Another question, my final question, I got a bit lost in the discussion as far as to the cost increases that you confronted in the recent quarter.
And what - - at what speed you can go back to a cost structure that you feel comfortable with, on the other expenses side.
I'm not sure if I understood that it was going to be a pretty quick situation that you get fixed - - get that fixed organization it takes a few quarters?
And thank you for the question.
Larry White - CFO & SVP - Finance
Well, there are some parts of it that were unique to the quarter that we talked about.
So, I assume you don't mean those.
The other things related to operational scheduling and execution of the seasonal menu for the most part.
And we have focus underway now to get those things back in line.
And it is our expectation it will get back in line relatively quickly.
But that is the big issue that faces us.
The other ongoing thing that I spoke to was commodity cost.
And I indicated that we expect to actually will have year over year negative inflation and deflation in our commodity costs in the fourth quarter.
So that will improve further still from where it was in the third quarter.
Juan Espinoza - Analyst
Thanks.
Operator
Thank you.
We will take our next question from Mike Smith of Oppenheimer & Company.
Mike Smith - Analyst
Well, just quickly, in terms of Logan's, and the disappointing openings you've had, how many Logan's are you anticipating opening in 2006?
Larry White - CFO & SVP - Finance
We haven't finalized that yet.
As you know, Mike, we're on our way, and as Mike has indicated, to a 20% growth rate.
But we have not given guidance yet on fiscal '06.
Mike Smith - Analyst
Thank you.
Operator
Thank you.
We will now take a follow-up from Matthew DiFrisco of Thomas Weisel Partners.
Matthew Difrisco - Analyst
Hi.
You mentioned briefly about media efficiency at Logan's and backfill.
How do you measure that?
Is that a number of stores per population?
Or is it number of stores in a market?
Can you give us - - or give us a sample of what markets are at media efficiency now, so we can see how you're going to grow into that?
Mike Woodhouse - Chairman, President & CEO
Well, when we describe media efficiency, we're talking about a spending level with - - on broadcast media, which is a percentage of sales.
And so we match up the cost and then we match up the cost of running radio and TV, at the weight levels and flighting that we think we need to do in the market with the number of dollars of sales it requires to arrive at the percentage that we're willing to spend.
So it is a simple math to do that.
And so every time we look at a new market or a new site, we have - - we go in saying this market was a single store market, it is a two-store market, it's a three-store market or a four-store market and how quickly can we get to that efficiency level.
Now, we're expecting from a business model pont of view that the sales that come out of that level of spending will more than pay for the advertising.
And that's what the test has been all about, to look at that return.
We will undoubtedly at some point do some investment spending in some markets so that we can boost the sales.
But we're not planning to do a lot of that.
We're planning to kind of boot strap our way in spending in the fixed level as we go.
Matthew Difrisco - Analyst
So just to be clear, you're going to give TV support even into markets where you might have one store?
Mike Woodhouse - Chairman, President & CEO
Well, sure, there are some markets where the cost of TV allows us to do that.
Matthew Difrisco - Analyst
But are all your markets going to have TV support, I guess is my question?
Mike Woodhouse - Chairman, President & CEO
No.
I mean we want as many as possible.
We've said before that with our development schedule, we will have 50% of our markets be media efficient on the basis that we plan to run media, as of the end of this fiscal year.
There will be some markets, for instance, we're in the DC market with a handful of stores, that is going to take an awful long time to be media efficient.
Matthew Difrisco - Analyst
Okay.
So you have 50% that are at media efficiency now, and then you have how many stores - - how many of your Logan's get media support right now, as far as TV support?
Mike Woodhouse - Chairman, President & CEO
Well, we've only just run the tests with TV across - - on an ongoing basis.
The other thing that happens, Matt, is as I'm sure you know, is that at some point you cross that boundary, where you have critical mass and you can actually run national TV and get to the whole system at an efficient rate.
We're not anywhere close to that at this point.
But at some point, we will get there.
Matthew Difrisco - Analyst
Are you national cable?
In any markets?
Or have you looked at that before?
I mean that's been helpful for saving some cost force other brands.
Mike Woodhouse - Chairman, President & CEO
I'm sure it has.
The question is, do we know whether it was effective.
Matthew Difrisco - Analyst
So you're not on cable then?
Your network - -
Mike Woodhouse - Chairman, President & CEO
We're only on TV in markets - - now, define cable.
Obviously we deliver our commercials over cable to people who purchase cable.
Matthew Difrisco - Analyst
Right.
Mike Woodhouse - Chairman, President & CEO
You're talking about a --
Matthew Difrisco - Analyst
Cable networks.
Mike Woodhouse - Chairman, President & CEO
Cable networks, right.
Matthew Difrisco - Analyst
It is a cheaper form of advertising to get on a broader base ahead of your store openings in some markets.
Mike Woodhouse - Chairman, President & CEO
Well, okay, I don't debate that, because again, I know the costs, I don't know the results.
Matthew Difrisco - Analyst
Okay.
Larry White - CFO & SVP - Finance
And fundamentally, we ran a test late in the third quarter.
And that test is being evaluated as to effectiveness.
And it had some of the test stores had TV, some had a combination of TV and radio.
There was some variation among the test stores and how the message was delivered.
And all that is being evaluated to establish a media plan for fiscal '06.
And we ought to be able to talk in a lot more detail about it when we start giving guidance on '06 with our year-end conference call.
Matthew Difrisco - Analyst
Okay.
But just a final, to be clear here, the advertising incremental increase that was somewhat unexpected or a little bit higher, this is predominantly TV?
It's not your billboard Cracker Barrel advertising?
Those are three-year contracts, correct?
Larry White - CFO & SVP - Finance
Yes.
Let me do a number of clarifications there.
First of all, it wasn't unexpected.
We knew we were going to have pressure in other operating expense, which is where the advertising resides.
So this was planned.
It was high year over year, it was planned to be high year over year.
The unexpected issues came primarily in retail sales performance and in labor.
So, we were expecting the pressure that you saw in other operating expenses.
And I think we even talked to that at the beginning of the quarter.
And the Cracker Barrel billboard, yes, they're typically from one to three-year leases.
Matthew Difrisco - Analyst
Okay.
But that's not in effect at all in that number then?
Mike Woodhouse - Chairman, President & CEO
No, I think one thing to remember, Matt, is that the accounting rules require us to expense the cost of production of TV commercials when we put them into use, all at once.
So we're basically - - we had the cost of producing a high quality radio go national TV commercial, which we had to take in the quarter against the test.
Matthew Difrisco - Analyst
Got it.
Thank you.
Mike Woodhouse - Chairman, President & CEO
Thank you.
Operator
Thank you.
We will take our next question from Peter Oakes of Piper Jaffray.
Peter Oakes - Analyst
Hi, good morning.
Looking back, retail has actually posted negative same store sales here for five straight quarters.
And we've had a nice discussion here about the seasonal merchandise and how you think you've got that addressed.
And Halloween will be kind of the first data point to really see where that gets a full measure as far as its effectiveness.
But outside of the seasonal, there is kind of the everyday food and candy and then the everyday kind of nonfood.
Can you share with us how the food and candy, which typically is a fairly significant portion of the sales, how those everyday purchases have been fairing?
And is that contributing to the comp decline?
Or is it exclusively in the seasonal where you are really having the difficulty?
Thanks.
Mike Woodhouse - Chairman, President & CEO
Well, lots of moving parts to that.
I would point out, the - - on a two-year basis, we're still running positive for the last three quarters in retail.
So we had an extraordinary level of increase from the first three quarters of last year.
So on an absolute basis, we haven't gone way back down.
When I talk about having a new strategy in place for specifically the seasonal merchandise, a few minutes ago: One of the areas that we're going to address are our staples including specifically the food and candy.
And there are some things that we are doing and plan to do in those areas.
I don't - - they're not running - - they're not under specific pressure.
The pressure has come from the seasonal, for Christmas - - actually, all the way back to Halloween last year, through the fall, through Christmas, and into Easter, we had too much repeat.
We had too many products that sold well the year before that we re-bought and brought back.
Thinking they would sell a second year.
And they don't, because if you've got a - - whatever it is, a pink Santa Claus, due necessarily want another one, identical pink Santa Claus this year.
So that's been a big part of what we're trying to do.
The basics in things like candy, the true impulse items are doing fine.
And apparel has been a big issue all the way through.
Peter Oakes - Analyst
Okay.
So Mike, it is really isolated.
It seems - - whether you didn't have the right color or whatever the case, in traditional retail merchandising.
And then you said apparel, which, you could argue it could not be quite a core competency at Cracker Barrel, the competition that's out there in the apparel marketplace.
Larry White - CFO & SVP - Finance
You didn't come through very clear on that one, it is hard to understand you.
Mike Woodhouse - Chairman, President & CEO
But I think were you playing back to the seasonal and apparel and we would agree with that.
Peter Oakes - Analyst
Okay.
Thanks a lot.
Mike Woodhouse - Chairman, President & CEO
Thanks.
Operator
Thank you.
We will take our next question from Margaret Blaydes of Citigroup.
Margaret Blaydes - Analyst
Hi, I'm sorry if you've already gone over this but it has kind of going over my head.
In terms of the gross margin that you're - - the gross margin expansion it sounds like you're looking for in the fourth quarter.
Just looking back, it looks like your gross margin has been kind of slowly down over the last, I don't know, two years, until this quarter, if my numbers are right.
And so I guess I'm just wondering, is it just because you think all the price increases you've taken are finally going to kind of hit and you're going to see margin expansion?
Or is there a pretty big pickup in retail that is implicit in that?
Larry White - CFO & SVP - Finance
Several things, Margaret.
The big thing.
The reason why we had pressure over the last year and a half or whatever period you're looking at primarily relates to commodity inflation, which has been extraordinary.
And we have begun to lap that.
Retail gross margin has been improving this year.
And that's been hidden to some degree by the commodity pressure, mostly through the first half of the year.
The first half of this fiscal year, we were running 4.5% to 5% commodity inflation year-over-year.
We began to lap that in the third quarter, we were slightly positive inflation, 1% to 2% kind of numbers.
And we actually expect to have negative inflation in the fourth quarter.
So a big part of what you're seeing is lapping - - is extraordinary underlying food and product cost increases that have been hitting our industry.
Margaret Blaydes - Analyst
Okay.
So implicit in there then would not be a meaningful improvement in the retail margins from - - like from third quarter or something?
Larry White - CFO & SVP - Finance
No, we're continuing to have - - as I indicated, margin expansion in retail.
Our - - while we've been using - - making greater use of markdowns, it has been more than offset by greater degree of initial mark-ons.
I think we're getting some improvement in the way we're buying.
We expect to see more benefit from that as we go forward.
And so retail margins have not been an issue.
Margaret Blaydes - Analyst
Okay.
Thanks.
Operator
Thank you.
We will take a follow-up from Robert Derrington of Morgan Keegan.
Robert Derrington - Analyst
Mike is, it likely that - - in a couple of weeks, I think you will come out typically with your seasonal promotion for the summer time.
Is it likely that we will see a kind of a skinnied-down version of that relative to the last one that you rolled out?
Mike Woodhouse - Chairman, President & CEO
Yes, it will be somewhat skinnied down.
As I tries to say in my remarks earlier, as we realized what was happening here, we looked at the pipeline and the summer promotion was pretty well developed at that point.
But we looked at it and slimmed it down a little bit.
The appearance is going to be the same in terms of the physical presentation.
And then it will be the promotions beyond the summer promotion that we will see the full effect of our rethinking of all of this.
Robert Derrington - Analyst
I'm sorry?
Does it seem reasonable to expect that with that skinnied-down promotion that we would be able to control some of those costs associated with that a little bit better than what we saw this time?
Mike Woodhouse - Chairman, President & CEO
Yes it is.
Robert Derrington - Analyst
And then last item, on the - - you mentioned you're seeing a strong sell through on some of the seasonal items on retail.
Can you give us some examples of that and will we see more of those in the mix in this coming quarter?
Mike Woodhouse - Chairman, President & CEO
To answer the second part of the question is yes.
We are roughly at 20%, I guess, of what's on the floor, as being part of the new strategy.
We think that that's going to climb as we go through the quarter and into the first quarter next year.
Some examples would be we have a new pet scene, which is stuff for your pet, gifts for dogs and cats or whatever.
Robert Derrington - Analyst
Sure.
Mike Woodhouse - Chairman, President & CEO
And all of that.
That is selling really well.
And we have a thing called camp grandma which is sort of a kid's focused.
It is apparel and travel, it is mugs and those - - cookie jars and those kind of things.
But the whole theme is associated around traveling in the summer to go see grandma.
So it's got a whole new fresh kind of a feel.
Those are the kinds of very focused themes that we - - which have a stronger impact an a more kind of cohesive feel to the theme.
And they are a little more contemporary.
A little less country than some of the things we had in the past.
Robert Derrington - Analyst
Great.
That's encouraging.
Thanks, Mike.
Mike Woodhouse - Chairman, President & CEO
I hope you have a dog.
Robert Derrington - Analyst
We do.
Mike Woodhouse - Chairman, President & CEO
Thanks.
Operator
Thank you.
There are no further questions at this time.
I would like to turn the conference back over to you Mr. Woodhouse for any additional or closing remarks.
Mike Woodhouse - Chairman, President & CEO
Okay, well I would like to thank you all again for joining us and staying with us through this conference call.
I hope we've been able to communicate what we saw happening in the third quarter and leave you with a clear understanding of what we're going to do to fix it.
And the confidence we have as we go forward into the fourth quarter and beyond.
We absolutely believe we're still on track for our long term goals.
And we have the people in place and we have the plans in place to achieve those.
So, we thank you for joining us and we will talk to you next quarter.
Larry White - CFO & SVP - Finance
Thanks, everyone.
Operator
Thank you for your participation.
That does conclude today's conference.
You may disconnect at this time.