Cracker Barrel Old Country Store Inc (CBRL) 2005 Q4 法說會逐字稿

Thank you for standing by, and welcome to the CBRL Group conference call.

Today's conference is being recorded and will be available for replay starting today at 2 p.m.

Eastern time and run through September 15 until 8 p.m.

Eastern time by dialing 888-203-1112, and entering a confirmation code of 5056845.

Now at this time, I would like to turn the conference over to the Chairman and CEO, Michael Woodhouse.

Mr. Woodhouse, please go ahead.

Thank you.

Good morning, everyone.

Thanks for joining us on our fourth-quarter and year-end conference call.

I have with me as usual today Larry White, our CFO.

We have a lot of ground to cover today, so without further ado, I will turn the call over to Larry for his financial review.

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 fourth-quarter and full-year results and providing an update on current sales trends and an initial outlook for the first quarter and full-year of fiscal 2006.

As a reminder and in compliance with regulation FD, we don't review or comment on earnings estimates made by other parties, nor do we provide continuing updates of or express continuing comfort with our own guidance and trends except in broad public disclosures, such as we have done this morning.

In other words, any guidance we give speaks to the day on which it is given.

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

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

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

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

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

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

My comparisons this morning will be against prior year results that exclude from net income a $3.3 million aftertax litigation settlement charge -- that was $5.2 million before taxes, the details of which can be found on our SEC reports for last year.

So for comparability purposes, we are excluding those.

This morning's press release also includes a reconciliation between fiscal 2004 reported numbers and the results excluding the litigation settlement charge.

Bottom line, we recorded diluted net income per share for our fourth fiscal quarter of $0.74 versus $0.63, excluding a $0.07 litigation charge in the year-ago quarter -- a year ago -- that was an increase of 17.5%.

That was consistent with our most recent guidance of being at the low end of our previous $0.73 to $0.76 range.

Guest traffic and retail sales were under pressure during the quarter; but favorable cost performance, especially in cost of goods sold and menu pricing offset those pressures.

Let's focus on the details of the quarter.

Revenue at fiscal fourth quarter ended July 29, 2005 increased 8.6% from last year's fourth quarter.

That's approximately $660 million compared with $607 million a year ago.

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

Cracker Barrel comparable store restaurant sales for the quarter were up 4.1% from the year ago quarter, reflecting a 4.5% higher average check, which included approximately 4% higher menu pricing and guest traffic that was down 4/10 of a percent.

Although Cracker Barrel's comparable restaurant guest traffic has been down, fiscal 2005 marked the 6th consecutive year of positive comparable restaurant sales for Cracker Barrel.

We aren't satisfied with soft traffic, but the sales environment has been tough, especially recently; and while we are under traffic pressure like many others in our industry, we are highly regarded by our guests.

We continue to get high ratings from the consuming public and recently won our 15th consecutive year as Restaurants and Institutions Magazine's Best in Family Dining, and we continue to be one of the most highly differentiated and successful concepts in the industry.

Cracker Barrel comparable store retail sales also softened in the fourth fiscal quarter, down 2%.

While we did have some merchandise availability issues during the quarter, we believe that macro factors also are affecting retail unfavorably.

While certainly we haven't held a strong correlation between our sales and gasoline prices, except during periods of [INAUDIBLE] supplies in the '70s oil embargo period, we believe that we are being affected now.

When guests decide to go to Cracker Barrel, they've already made a dining decision, but the retail purchase decision is highly discretionary and impulse driven.

With soaring gasoline prices, we think that the squeeze on our customers' discretionary incomes is having an effect on our retail sales.

There may be other macro factors related to higher mortgage payments and new car payments, as sales activity in both these areas suggest that many consumers are stretching their income for big fixed obligation purchases.

While we can't measure those effects directly, we can see how our guests are behaving when they visit us.

In addition to the modest decline in guest traffic during the fourth quarter, we also have had fewer retail transactions per guest, measured by the incidents of checks that include a retail purchase.

These trends concern us, and we are evaluating ways that might make the retail purchase decision more compelling.

Rounding out our comparable store sales results for the fourth fiscal quarter, our Logan's Roadhouse concept recorded an increase of 1.9% in comparable restaurant sales against a strong prior year quarter when comparable store sales were up 5.6%, or guest traffic was down 4/10 of a percent.

The average check included approximately 2.5% of menu price increases versus a year ago, so the difference from our 2.3% average check increase reflected unfavorable mix -- net of improving alcohol sales, however.

Alcohol has continued to improve as we lap last year's happy hour initiatives.

Responsible alcohol sales remain an opportunity of still less than 9% of our overall sales at Logan's, but we are pleased with this continuing positive trend.

During the fourth fiscal quarter, we opened nine new Cracker Barrel Old Country Store units, or 25 year to date, and one new company-operated Logan's Roadhouse restaurant, giving us 17 year to date.

There were also three franchise stores opened during the year.

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

Operating income for the fourth quarter was up 11.3% on the 8.6% revenue increase, while operating margins were higher at 9% of revenues compared with 8.8% a year earlier.

Again, on all income comparisons, I am excluding the litigation settlement charges from the prior year results.

Cost of goods sold was the hero in improving margins against a tough sales environment.

While we benefited from a benign commodity inflation environment while still carrying menu price increases, the greatest improvement was in retail, where higher initial mark-ons more than offset higher markdown activity.

We also had favorable retail shrink relative to the first half of the year and to last year.

On the food cost side, commodity inflation was actually negative, as expected, at negative 7/10% year-over-year.

The improved commodity environment is a welcome relief from the pressures we were experiencing a year ago.

At present, we have contracted approximately 80% of our fiscal first-quarter expected needs for 2006, over 50% of our fiscal second-quarter needs, and over 25% for the second half of the year at moderate overall inflation.

In fact, as was the case in the fourth quarter reported today, we expect negative inflation again in the first quarter and minimal inflation in the second quarter.

We expect to see higher fuel -- fuel surcharges for the delivery of retail and restaurant goods to our locations, but we don't expect it to be materially harmful at this point, perhaps adding 10 basis points of pressure to consolidated cost of goods sold.

Labor and related expenses were lower as a percent of revenues, primarily reflecting lower retail bonuses, menu pricing against modest wage inflation and favorable group health expense.

We did experience modest wage inflation, about 1.2% at Cracker Barrel, in non-tip hourly wage rates, and our overall wage inflation was approximately 1.7%, reflecting pressures from minimum wage changes that affected tipped employees, primarily in Florida.

Other store operating expense reflected higher utilities, advertising and maintenance expenses.

Again, excluding the litigation settlement charge, which increased last year's general administrative expenses by $5.2 million, our G&A was higher as a percentage revenues this fourth quarter.

Primary cause was higher bonus accrual, as last year's quarter had a minimal accrual, reflecting the sudden softness in sales and operating results that occurred in the year-ago quarter after three stronger earlier quarters.

Our fourth-quarter income tax rate was approximately 34.5%, an improvement over last year's 35.9%, reflecting the retroactive renewal earlier this year of certain tax credits.

Wrapping up the fourth quarter, net income of $37.6 million was up 14.1% from $32.9 million, which excluded the litigation settlement charge a year ago.

It was up 27% including the effect of the settlement charge.

Diluted net income per share of $0.74 was up 17.5% from $0.63 before litigation settlement reported from the fourth quarter last year, and in line with our guidance of being toward the lower end of an earlier projected $0.73 to $0.76 range.

Diluted net income per share in the fourth quarter was up 32% including the effect of the settlement charge a year ago.

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

During the quarter, we repurchased approximately 700,000 shares under previously announced share repurchase authorizations.

At this time, because we expect to be building working capital for the holiday shopping season and we expect higher capital expenditures than last year, I don't expect us to make any additional share repurchases against our approximately 800,000 remaining share repurchase authorization during this first fiscal quarter as we aim to maintain our target capital structure.

I'd like to point out that our cash flow from operations in fiscal '05 was approximately $280 million.

That exceeded our $171 million capital expenditure outlays by over $100.

That's six consecutive years in which we've generated more cash from operations than we needed for capital expenditures, and 5 consecutive years that the surplus has exceeded $50 million.

Finally, in this morning's press release, we updated our current sales trends and outlook for the first quarter and full year of fiscal 2006.

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 risk associated with trends, targets, guidance and estimates in a competitive industry such as ours.

This is particularly true in the current highly uncertain sales environment.

We remind you that our guidance reflects our expectations as of the date it is given, and we disclaim any obligation to update this information other than in 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 the public findings and by other broadly [INAUDIBLE] means, such as press releases from time to time.

This discussion of trends and guidance, like other earlier parts of today's discussion and press release, contains forward-looking statements provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

As indicated in our press release, our recent sales trends have softened.

In fiscal August, Cracker Barrel comparable store restaurant sales were up approximately 9/10 of a percent, reflecting 2.8% lower guest traffic and a 3.7% higher average check.

The average check included a 4.1% of menu price increases carried over from the fourth quarter.

Fiscal August retail comparable stores -- comparable store sales were down approximately 9.5% from the year-ago period; and Logan's comparable restaurant sales, which also softened versus fourth quarter trends, were up approximately 1.4% in August, including approximately 7/10% lower guest traffic and a 2.1% higher check, including the 2.5% of menu pricing that I discussed earlier.

Subsequent to fiscal August, we have seen continuing sales pressures.

With unfavorable effects from Hurricane Katrina and the recent rapid escalation of gasoline prices, which have now hit records even in inflation adjusted terms.

The consumer is being squeezed, and sales outlook is highly uncertain until we see how the consumer adapts to the situation.

As we begin fiscal 2006 and provide our initial guidance of our expected financial outlook for the year, three things are of particular note.

One, as already mentioned, it is an unusually uncertain consumer environment, particularly since Hurricane Katrina, and we will have more to say about that.

Second is Hurricane Katrina itself and the direct effects on our business; and third, fiscal 2006 is our year of adoption of FAS123-R, under which we begin to expense stock options.

Let me deal with the last item first.

For the last few years, we have been examining our equity compensation plans and evaluating where we can be most effective in using this form of compensation.

As part of that process, we've made a concerted effort to reduce the amount of equity awarded.

We've reduced our annual awards from nearly 5% of shares outstanding in fiscal 2002 and before to less than 2% in fiscal 2005 just completed.

That compensation has been replaced with other more meaningful forms of compensation to the people who no no longer are awarded options.

As a result, we presently estimate that the impact of option expensing in fiscal 2006 will be $0.03 to $0.04 per diluted share per quarter, or $0.14 to $0.16 per diluted share for the full fiscal year.

The impact should be approximately 40 basis points on operating margins.

Because we are among the first to adopt this accounting change, I point out to remind you to consider that impact, not only as you look at our year-over-year performance, but also as you look at our results relative to others who have not yet adopted this change.

Next, Hurricane Katrina.

Most importantly, we as yet have no reports of deaths or serious injuries to our employees or their families; but, of course, many did suffer property damage.

Mike Woodhouse will tell you some of the things we are doing to assist our employees through this difficult time.

To date, we have lost approximately 95 days of operations as a result of closings related to the storm. 25 stores were closed at least one full day.

None of our stores were destroyed, but four remain closed as of today.

It is possible that one or two of those two could be reopening within the next week or two; but at this point it is best to describe the overall outlook for reopenings as undetermined.

Also undetermined is the total impact of the storms for property damages, lost sales and insurance recovery.

Our best estimate at this early stage is that it could cost $0.01 to $0.02 per diluted share in the first fiscal quarter.

Most significant, the inherent uncertainty always surrounding sales outlooks and projections is even greater than usual in the present environment.

As you would expect following an enormous catastrophe as Katrina, with its enormous repercussion on gasoline prices and consumer sentiment, our sales have softened notably since the disaster.

No one really can know how long or how deep the situation will continue, and hence our initial guidance for fiscal 2006 contains an unusual amount of uncertainty.

We can't control consumer sentiment or natural disasters, obviously, but we can and are focusing on the controllable aspects of our business, as Mike Woodhouse will discuss shortly.

Our initial earnings expectation for the first quarter of fiscal 2006, which ends on October 28, is for deluded net income per share after $0.03 to $0.04 of stock option expense of $0.53 to $0.57, compared with $0.57 during the first quarter of fiscal 2005, which had no stock option expense.

Reflected in these assumptions are comparable restaurant sales for the full quarter of down one to up one at Cracker Barrel, and up 1% to 3% at -- at Logan's .

We presently expect Cracker Barrel retail comparable store sales to reflect a mid to single high digit percentage decline.

That, along with opening seven new Cracker Barrel stores and five new Logan's restaurants, plus one franchised Logan's, is expected to have an overall revenue growth of 4 to 6%, and operating margins that are down year-over-year, reflecting not only option expensing, but also sales softness and certain higher operating expenses, including utilities and advertising.

For the full fiscal year, our present expectation is for diluted net income per share, reflecting $0.14 to $0.16 of stock option expense, of $2.41 to $2.55, compared with the $2.45 reported today for fiscal '05 which had no stock option expense.

Our goal is based on achieving a revenue percentage increase in the mid to high single digits, and lower operating margins reflecting sales softness and operating -- and options expense, as well as higher income tax rate, by approximately 80 basis points.

We expect to open 26 new Cracker Barrel units and 22 to 24 Company-operated Logan's restaurants, as well as approximately 4 franchise Logan's locations.

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

With an ever-increasing complexity and demands on financial reporting including the addition of stock-option expensing and an increase in Sarbanes Oxley Section 404 reviews and documentation, we are adding a few days to our calendar to ensure ample time for management reviews.

A schedule of our expected reporting dates and content is included in the press release.

So in summary, we reported results for the quarter in line with our guidance this morning.

And our outlook, as you would expect in the present environment, has a greater-than-usual amount of uncertainty.

But we enter this period of uncertainty with a strong balance sheet, a record of solid financial performance even in some very difficult situations, two strong concepts, and management teams who are eager and confident about the future.

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

I would like to turn this back over to Mike Woodhouse, who has further remarks on operating trends and initiatives.

Mike?

Thanks, Larry.

Good morning, again, everyone.

I plan to cover three topics in my remarks this morning.

First, the positive results from the fourth quarter.

Second, some additional comments on the short-term outlook and guidance.

And last but not least, where we stand on our long-term strategies.

The headlines on these three topics are as follows: First of all, I want to make certain that the positive things in the fourth quarter don't get lost in the midst of the current environment.

We reported EPS in line with our most recent guidance.

We had positive restaurant sales at both Logan's and Cracker Barrel in a difficult environment.

And our cost controls, especially related to the adjustments we made to the seasonal menu at Cracker Barrel are working, and we saw improvements in operating margins.

And unfortunately, on the less positive side, retail sales were certainly disappointing.

The headlines on our short-term outlook: First of all, our number one priority is to take care of our employees and guests, especially those directly impacted by Katrina.

We have been doing numerous things to make certain that we take care of our employees and their families.

As Larry said, we have had no reports of any injuries or deaths among our employees, and we have accounted for all of our management teams in all of the affected stores.

Second thing in the short term, the impact of higher gas prices, higher mortgage payments and auto loans, which we believe was already being seen in consumer behavior in our fourth quarter, has certainly been compounded by Katrina.

So as a result, there is low visibility on short-term -- short-term industry trends and consumer confidence; but on the brighter side, we internally are seeing some improved product cost environment, as Larry mentioned.

And then thirdly, on the long-term strategic initiatives, we are still focused on the same initiatives we have been focusing on, and we continue to believe they are the right ones for the business.

And they are the Cracker Barrel front-of-the-house and kitchen efficiencies, Cracker Barrel retail productivity, Cracker Barrel cost of goods improvements, Logan's operational consistency and Logan's prototype and marketing strategy.

And I will be talking about each of these in a little more detail in a few moments.

So let's drop down to the detail level on the three topics.

First of all, in the fourth quarter, in Cracker Barrel, we were very pleased to report positive restaurant sales in a difficult industry environment.

All four quarters were positive in fiscal 2005, which means that Cracker Barrel restaurant sales were positive 18 of the last 20 quarters.

Last quarter, I reported what I described then as a bump in the road that came from the complexity of seasonal menus impacting food, labor and supply costs in Cracker Barrel.

So in the fourth quarter, we modified the summer seasonal menu to reduce number of entrees, reduce the operational complexity and the number of unique raw materials.

The result was improved [products] and performance in the fourth quarter as measured by labor efficiency and product waste.

The Fall promotion, which we rolled out last week, includes further improvements, and we expect to see similar results.

As we said a moment ago, retail sales were disappointing the fourth quarter and continue to disappoint with a declining trend in August.

This, we believe, is the result of a number of factors.

First of all, the negative restaurant traffic.

If people aren't coming, we don't have the opportunity to sell retail items to them.

Overall pressure on consumer discretionary spending, some time limits issues and the availability of new product during the fourth quarter and into August, and then there's some weakness in our ability to develop new product during the process of rebuilding the merchandising department.

We've put a number of tactics in place to stimulate retail sales in the short term.

We are holding our September Porch Sale this weekend, and because we have done a pretty good job over the last two years of reducing our aged inventory, the -- the merchandise that makes it to the Porch Sale as part of our normal process will be younger than historically, and we hope more attractive to our guests.

Secondly, we are planning a buy one, get one with Yankee Candle.

It's the first time we have done that -- it will be interesting to see the results of that.

But we are feeling positive about that.

We are also working on some alternative timing scenarios so we can optimize the timing of our seasonal markdowns depending on how our traffic is going and also what you see in the greater retail world.

And we have several other things we are not ready to talk about yet which will be coming in place over the next few weeks.

I have two pieces of good news in retail.

First, the -- as Larry said, the retail margins are improving through a combination of initial markdowns.

We've worked through a lot of the aged inventories which require major markdowns, and we saw lower shrink in the second half of last fiscal year coming from our continued operational focus on shrink.

Secondly, our music strategy is working well.

We sold $3 million worth of the exclusive Allison Kraus and Union Station CD in the three months from its introduction.

We are going to follow that with an exclusive compilation by Charley Daniels which goes on sale in October.

And then following that, we have a Sara Evans CD being produced for release in February 2006.

And finally, on Cracker Barrel, we were both pleased and proud to receive the Choice In Chains Best in Family Dining award for the 15th straight year, with an overall score of 71.4 up from 70.3 last year; and of the individual attributes that the guests measured us on, the value score is particularly important to us -- we were best in the Family Dining category with a value score of 62%, 7 percentage points of the next best and up from 58% last year, which we see as validating our overall menu and pricing strategy and the [INAUDIBLE]behind them.

At Logan's, we saw positive sales in the fourth quarter, lapping a strong fourth quarter a year ago.

We continue to make further progress on our menu development strategy, with new products successfully tested and in readiness for a menu update, which will be rolling out during this quarter.

We also, as Larry mentioned, saw our liquor, beer, wine trends continue to be positive, even as we lap the happy hour rollout in 2004.

So we think that initiative is working pretty well and continues to have potential.

Although this is technically not a fourth-quarter event, I'm pleased to report we that we opened the new prototype in the first week of August and we are seeing favorable initial operating results.

In terms of the short-term outlook, as -- as you all know, we are in the middle of a major economic impact from Katrina.

And this is on an economy where we believe the consumer sentiment is already -- already uncertain, as a result of higher gas prices, house payments, and auto payments.

And internally, we are seeing a lot of noise in the short-term trends.

We have the store closings as -- as we indicated in -- in the release this morning.

We have been dealing with -- obviously the news will travel pattern with people seeking refuge from the -- the Gulf area.

We had a Labor Day weekend where we that believe road travel was significantly less, and we are lapping the landfall of Hurricane Frances last year, which also caused us some discretion in numbers, especially from our Florida region.

So it's difficult to determine right now what the underlying run rate is or if it's going to settle.

So as a result of that, the guidance we've provided today is our best estimate in the circumstances.

Operationally in the short term, our first priorities are our guests and our employees.

We are making certain we are there, especially in Cracker Barrel, where we are seeing travel patterns.

We want to make sure we are open and providing a great experience, the focus on both Cracker Barrel and Logan's are on execution, making certain we do deliver the best possible experience every time.

We are taking stock of our discretionary and movable expenses so that we can prudently manage the P&L whenever we can without any way affecting the -- the guest experience.

And then, of course, we have our important and unchanged long-term goals.

So let's -- let's talk about those.

The Cracker Barrel -- we believe that we have a major competitive advantage focused on the quality of our operations.

Our initiatives to enhance execution and accelerate table terms are still areas that can meaningfully impact growth.

And these are also lower risk and lower investment opportunities, so we want to make certain we are leveraging the areas that will give us in the long term the highest potential impact.

Each of the initiatives I am going to talk about will take some time to roll out when we commence the rollout, so the impacts to the -- the benefit to the income statement in the short term in 2006 will not be as great as it will be in subsequent years.

First focus is on the speed of the food, getting the food out of the kitchen fast; and there, we are emphasizing the point-of-sale system and some kitchen management tools that we have been testing.

We are looking at some savings in kitchen labor; initially, we are focusing on the dish area.

We have been testing -- or are testing -- table optimization, a scheme where we've tested new configurations to match party size and table sizes; and interestingly, the brand research we are doing is giving us some feedback that what we are doing in that test is in line with what our guests are looking for in terms of a little more comfort, lower noise level, and some booth seating that we are introducing into the mix as part of the test.

And then in the retail space, we have two variations on layout.

One is in test, the other will be going to test next month, both focused on the locations of the hostess [INAUDIBLE] and the cash.

At Cracker Barrel, next month, we are rolling out the IVR system which has been in test to provide consistent feedback of the store level and make sure we are achieving the expected results as we roll out each of these initiatives.

We also have our ongoing cost of goods initiatives, which we've been talking about for some time, where we are working to drive our costs without negatively impacting the guests.

In retail, as I mentioned, we are seeing the expected improvement in initial mark-on that's coming from our new Trading Company relationship in Hong Kong, and we have more opportunity to to come in this area.

And food costs, we are seeking further improvements by moving further towards a commodity-based purchasing strategy.

As we've reviewed the impact of the seasonal promotions on kitchen, speed and food costs and made the changes that we've made in the summer menu and the Fall menu, We are taking that learning and using in a review of our base menu at Cracker Barrel.

This project is still a work in progress, but we believe there are worthwhile benefits to be achieved in terms of speed and quality of food and -- and food costs.

And we are also, as I mentioned, in the latest stages our brand research study.

And a lot of the focus there is going to be on determining how we can build marketing tools which are more directly aimed at stimulating traffic growth than we've had in the past.

At Logan's, the short and long-term focus is to build traffic with a number of things.

First of all, operational consistency, supported by IVR feedback.

We now have the system fully up and running, and we're specifically focusing on those areas of our guests which are the most important to them.

We will be running TV and radio advertising [INAUDIBLE] later this quarter for 58 Logan's restaurants, which is a little bit under half of the system.

And we are monitoring the performance of the new prototype closer against expectations.

The key metrics we are looking at are sales dollars per hour, speed as measured by ticket times, and productivity as measured by labor costs.

And we are also focusing on development costs.

We are very pleased with the operating performance in all areas so far; but as always, the development cost of the first prototype will need some work to get us to a place where we can roll the prototype out in 2007.

And then also at Logan's, the menu development to reinforce the brand differentiation is ongoing; and as I mentioned earlier, we've been testing and updating an outdated menu for rollout, which is going to happen later this quarter.

And finally, before we turn this over to questions, I'd just like to reiterate that we are very positive about the long-term potential of this business, even though in the immediate term, we believe that the full service segment of our industry faces some significant challenges.

We will start off this [INAUDIBLE] with a conservatively managed balance sheet, and our ability to generate substantial big cash flow to our positive long term managed growth rate will [INAUDIBLE] our position to deal with short term [INAUDIBLE], and we believe that we have the right strategies in place to keep those earnings goals.

And with that, I'd like to turn the call over to questions.

Very good. [OPERATOR INSTRUCTIONS] .

Our first question will come from Matt Difrisco with Thomas Weisel Partners.

Thanks.

My question is regarding the price increase.

And I guess your logic behind taking a price increase when you are seeing the consumer struggle, economic pressures rise on that lower end consumer, and also you are seeing a deflationary commodity cost environment.

What is the pressure you are seeing that you need to take the pricing?

And then I have just a follow-up if you can answer that.

Matt, as we talked about before, at great length, we did an incredibly thorough job of evaluating the price increase that we took back in the -- the April time frame.

We tested it on the front end, evaluated it there.

We held back stores when we rolled the price increase to the system, evaluated it there.

We observed, as expected -- we also used an outside consulting firm to help us develop that price increase, and we did not use all of their -- their recommendations.

They recommended a number of products that they viewed by observing our customer behavior as not being [INAUDIBLE] to price increases.

We, as I've said, tested those very thoroughly on the front and back end -- to an extraordinary degree to my experience.

Saw no observable difference in customer behavior between the stores that got the price increase, the stores that didn't get the price increase, either in restaurant activity or in retail activity.

I don't know what else to -- to tell you about that.

That's kind of old news.

We have been saying it over and over again.

Sometimes there are inelastic spots on your menu that you have an opportunity to take a price increase on, and that's what we did.

Yes, Matt, let me just reinforce that.

As I mentioned, the value equation seems to be improving based on the Choice In Chain, so I mean -- which is a pretty extensive national [INAUDIBLE], but also I just want to -- in case anybody else on the call or anybody else listening to the replay of this, thinks by the question that we have taken another price increase.

As Larry said, this is the same price increase we discussed on the main call.

Right.

I was just -- okay.

I appreciate that.

I was just wondering on the flipside of it, though, what are you seeing on the operating side?

I know you've addressed how you have seen it -- that the consumer -- you saw data that suggests they could take the price increase.

I was just curious on what you are seeing on the operational side that warrants, or drove you to take the 3.5%, 4%-type price increase over the last couple of months.

Well, two -- first of all, the two separate price increases.

And then secondly, one of our goals is -- has always been -- since 2000 -- to rebuild our margins, and we have been very cautious with pricing.

Our internal belief is that we have absolutely a premium brand in Cracker Barrel, and I think over time, a premium brand should deliver premium returns, and part of that is the ability to price appropriately; and again, we are not seeing anything negative directly relating to the pricing.

It does help to support our margins and restore our margins.

Commodities may have flattened, but they have not gone down substantially, so we are still operating under a relatively high historic commodity level.

Understood.

Okay.

And just as a follow-up -- or a little bit of a different topic here -- as far as historically, have you been -- or can you point to a time where maybe the high gas prices or the traveler specifically pulled back a little bit and you were successful where maybe you were able to drive traffic from a local consumer a little bit heavier, that five-mile radius area?

And to that point, have you been able to break out your current comp trends -- the August comp trends or what you are seeing September to date -- as far as health of the consumer coming in from the five-mile radius versus the traveler.

You did allude to Labor Day being down a little bit on traffic, as everyone would expect.

Have you seen, though, similar trends in the consumer on the five-mile neighborhood radius, or has that guy been coming back equal or even supplanting -- taking place of some of that drop-off on the tourist side?

That's my last question, thanks.

Yes, that's -- that's a very difficult thing to measure on a short-term time frame.

I am not sure where the five miles comes from, because typically when we're defining travel versus local, we are looking at a bigger radius than that.

We are looking at county, or more than 50 miles or measures of that kind, because in a lot of our markets, our local customers are coming into town from more than five miles to do whatever they are going to do -- shopping or whatever, and then they eat at the Cracker Barrel.

But historically, as we've said many times, the only time we have seen issues were back in the '70s when there were shortages of gas, and that may have been an impact on the short term here because clearly for a few days after Katrina, there were some shortages and some gas stations not operating, certainly around here.

So I think there is that fear, which will hopefully quickly go away over time.

But in terms of measuring behavior, we're really focused on the fact that the discretionary spending power of our target audience is decreased by the high gas -- I'm sure for everybody else as well, but it's a bigger percentage most likely with our a target audience.

It is impacted by the gas prices, not so much the whole notion of just travel.

Our next question will then come from Bob Derrington with Morgan Keegan.

Yes, hi, Larry, Mike.

Specific question.

If you could give us some color on the sales weakness that you saw in -- in the most recent period, I guess, the month of August, as it relates to this last quarter.

Was it at lunch?

Was it at dinner?

Was it at weekday lunch?

Was it weekend?

You know, can you give us some color there?

There's really not a lot of material difference to add to it.

I mean, yes, we've had relative softness in the midwest.

There's nothing really new to report there.

And I would say while there are some differences from time to time in day part or day of week, it's some -- it's more general softness.

Okay.

And as far as advertising, I think for Logan's, you're going to do some.

You know, is there any plan to support the Old Country Store brand beyond normal?

No.

We are continuing, obviously, the billboards -- on the billboards, and we are continuing with the -- the install support of our promotional menus, and we're continuing at this point with radio, similar levels to the levels we had last year.

As I said in my remarks, one of the things we are looking to get out of our research is to -- is to find the -- the things -- the specific things that stimulate somebody to want the Cracker Barrel experience and focus our marketing efforts on specific traffic build.

As you know, we have never done that in the past.

We have never been able to find that particular magic solution, primarily we think because of high percentage of travelers, it's sort of difficult to -- difficult to focus on.

But we're hoping to get that; but in the short term, though, no plans to change until we figure out the research.

Any thought on additional pricing, Mike?

We will continue to be very conservative with our pricing approach.

I'm very comfortable, as I've just said, with the current pricing.

I will -- we will always have the next price increase on the shelf.

And we will get to it when we get to it; but I think this is -- this is going to be an interesting environment in terms of price sensitivity and value, and we really want to do everything we can to reinforce the value side of -- that doesn't mean low price.

It means, you know, they feel good about what they take from the experience.

What I am trying to figure, you know, as we stop and, you know, put all these pieces together into the mosaic, you know, you -- in the month of August, you lapped a comp comparison for the Old Country Store of about a 1.8% last year.

In the next couple of periods, you come up against a slightly tougher comp comparison, and yet your guidance is still for a plus 1 to a minus1 percent.

I'm just wondering, you know, is it reasonable?

Do we -- you know, the risk of downside to that expectation?

Are you -- are you asking whether or not we have another price increase in the current quarter's guidance?

Well, not so much.

I'm just trying to understand your logic behind, you know, a sales projection of plus or minus 1% for the Old Country Store when you come up against a little bit tougher comp comparisons in -- you know, in light of the current situation.

Right.

I don't think the very immediate situation is going to last for an extended period of time.

As we -- as we've said several times this morning, the issue of visibility, it's not just us.

Everybody I am sure out there is trying to figure out the same thing.

How do we take short-term trends and figure it out?

We just basically spend a lot of time looking at what we thought, given all the factors you just talked about, is a reasonable range, given what we know for this point in time.

Now circumstances could change.

We don't know that, but we're using our best -- best -- I was going to say best guess, but I don't want it to sound like we use a dartboard too much around here.

All right, thank you, Mike.

Appreciate it.

Thank you.

We'll next go to John Ivankoe with JP Morgan.

Oh, hi, thanks.

It's actually it's actually Steven [Reiss].

I just wanted to ask you, on your seasonal menu initiatives, it looks like you did a better job this summer managing costs.

But if I look at the fall menu, it's looks like you're now running two items versus what -- you know, it certainly would have been historically five or six.

Just want to know what's driving the change in the strategy, whether it's complexity of operations, or are you seeing consumer weakness into the higher price points?

Yes, this is -- the -- the fall menu that we just rolled out is one step simpler than the summer menu, because we don't have a featured beverage; but the things that are important are to make it simpler in the kitchen, make certain that we don't have too many unique raw materials that we don't normally have.

So we think that the fall menu is pretty much in line with the summer menu in terms of -- compared to complexity --maybe just a little simpler at times in the preparation of the [INAUDIBLE].

So it's not -- you know, the whole thrust behind the seasonal menus is doing [INAUDIBLE] variety for our regular guests, to keep them coming, create an incentive for an additional visit to increase frequency, and to manage our margins, both from a theoretical point of view and from now, specifically from an educational point of view that we are not adding cost in the kitchen or the front of the house just because of the promotional menu.

Okay, great.

And then if I could just go to -- on the operational initiatives that you're working on at the restaurants and the retail, in terms of, you know, more flexible seating arrangements and some of the -- you know, the stadium layout that you are doing at retail.

Exactly how many units will you test those in, and you know, what sort of timeline are we looking at in terms of when you'll make a decision regarding the broader rollout for the system?

Well, the testing processes is ongoing with some of these things.

In terms of the number of units, it will depend on the specific application.

One of the things I would like to reinforce is -- and I mentioned in my remarks regarding the IVR; and that is, I have seen in my previous experience and watching other restaurant companies, so many things work well in tests and then when they are rolled out, don't capture the full impact.

So we are very, very focused on making certain that we both capture and measure the impact we are expecting as we roll things out, and we don't just spend a lot of time and energy and capital rolling out something that looked good because we did it in a local store and now we don't know what happened when we rolled into Ohio, Kentucky, so on and so forth.

So we will get more specific as we have each one nailed down.

These are all -- all of the things I mentioned are happening in terms of tests as we speak.

We are committed to all of them.

We will be finalizing our priorities; and more to follow, I guess, as we go forward.

Great, thanks.

Thank you.

Next question is from Jill Eft with Avondale Partners.

Good morning.

My question is on your comments regarding share repurchases, and specifically what your plans are as far as Cap Ex spending and working capital needs, and how much of that Cap Ex is rebuilding from hurricane damage versus new stores?

Okay.

First of all, share repurchases.

We indicated this morning that we still have approximately 800,000 shares remaining under previously announced authorizations.

I don't, however, anticipate right now that we will be making any share repurchases during the first quarter, and that's because of working capital needs and capital expenditure needs as we continue to target a capital structure target that we want to achieve.

So our cash will be going toward those -- those other needs, and I don't anticipate any share repurchases during the quarter.

We do, however, continue to expect to have share repurchases be a fundamental part of our -- our strategy of returning capital to shareholders, and I am just pointing out that specific because I think it is important to note for this quarter.

We're evaluating our capital expenditures for not just the quarter but for the full year, and we're -- we ran higher expenditures in fiscal '05 than we expected on spending for our fiscal '06 openings, and we are evaluating to what degree that we will see that same pattern in fiscal '06 for fiscal '07 opening.

So we will be updating guidance and expectations with respect to cash flow from operations and capital expenditures in our 10-K, but we are in the midst of doing that evaluation right now.

Okay.

And then on the retail side, what's been the impact of China's currency strategy?

Nothing yet.

Okay.

We're -- as you can imagine, we buy ahead by seasons.

We do recognize there are some potential risks there; that's considered in the latter part of the year in our guidance, but there's a lot of moving parts to that, as with anything else.

We think we are going to have better buying success in the future as a result of our relationship with the Li & Fung Trading Company, and so we don't see it being a real material issue at this point.

Now, there clearly is talk that in spite of the small reevaluation that's happened so far that that can be continuing, and pressure to see that.

We will just have to continue to watch that.

I think one of the good news issues with that is that, as I said, we tend to be bought out, and we will see it before it's actually beginning to impact the business.

Okay.

Final question.

We've noticed Christmas merchandise out in the retail stores since -- well, since July or August.

How does that compare to last year?

We are pretty much on the same schedule.

We are actually a little bit slower with some things because we have had some delays in shipping.

So we haven't accelerated Christmas at all.

Okay.

Thank you very much.

Thank you.

Next question from Joe Buckley, Bear Stearns.

Thank you.

Just a couple of questions.

Mike, just to follow up on the last comment, the delays in shipping.

I think you mentioned the timeliness of merchandise a couple of times, and is there anything special going on or anything unusual going on with receiving merchandise?

No.

No.

We've -- as I think I've said in my remarks, we've been -- we have been -- you know, we have a -- pretty much a brand-new merchandising department, and it has taken us about a year to work through that since Karen [INAUDIBLE] came aboard.

So inevitably, one or two things slips through the cracks when you go through that kind of transformation.

So that's all that's happening.

We don't -- we don't -- there's nothing fundamental, either externally or internally.

We don't like it when it happens, but it's -- there's nothing built into our business model that's going to cause us -- that to be a problem in the future.

Okay.

Just a question on Logan's .

The number of targeted openings is stepping up a little bit.

Did you have good new store experience over the past year?

Are you underlining that decision?

I think we have learned from some of the weaker experiences that we've had, and we've really have done a lot to improve, we think, the -- how much rigor we put into the site selection process using different sources of information about the customer base around our successful stores and all that.

So we believe we are making some pretty good progress there.

Mike alluded to the opening of a new prototype, which won't affect our fiscal '06 openings because we won't be opening those regularly until post-'06.

But we are seeing a lot of good indications, we believe we are making good progress and learning what makes Logan's successful, and this is all just part of the plan to see Logan's as our growth vehicle.

The other thing we've done, Joe, is we've put in a -- the Logan's management team has put in a pretty rigorous post-opening review process, somewhat along the lines of what we do at Cracker Barrel so when we open a store, we just don't leave it out to fend for itself.

So we can get immediate feedback -- learning and feedback -- from an execution point of view.

That will help us, both store by store, and that will help us also from an assistant point of view if there are any specifics that we find where we have repeated issues.

Larry, you mentioned the Cap Ex in '05 for the '06 store openings is up higher than you expected to be.

Is that building cost-driven, building supply-driven?

It also includes some land acquisitions that we didn't expect to make until fiscal '06.

Okay.

And then just the last question, Mike.

You mentioned a couple of times in the release that post-Katrina, things softened a little further.

Your first-quarter guidance, though, of plus-1 to minus 1 in Cracker Barrel and, you know, really across the board for retail and Logan's .

It's not much different from August.

You know, we are all sort of searching for short-term insight into what's going on.

Have you seen a fairly modest drop-off sort of post Katrina that underlies those -- that set of guidance?

Well, as I said earlier, it's really difficult to read the numbers right now, because we had the immediate effect -- we had not only the gas price increases but some shortages.

Then we had this unusual travel pattern over Labor Day Weekend, so -- and then we do have -- and it is a measurable effect.

We are lapping the effect of Hurricane Frances last year.

So just in digging through all of that, as we've said, the forecast is -- is built on everything we know today.

I -- I personally will say that we did better than I thought we might over the weekend.

Now, don't take that as anything other than feeling -- it was difficult last week heading into Labor Day weekend to know exactly what the impact would be over the weekend, so -- but it's day by day.

We -- we don't know, and we can't predict and we can't control the overall consumer sentiment, which I think is going to be the thing that's going to drive the rate at which we all recover from the current situation.

Okay, Thank you.

We'll next go to Peter Oakes with Piper Jaffray.

Actually, I had a couple.

In the past, Mike, you've noted that, you know, when you try to look at the behavior of kind of the consumer, you do at times see some variance as far as your store locations that are on north-south interstates versus east-west.

Is there anything showing up there as far as the magnitude of travel that way?

Well, we can't directly measure travel, as you know.

I mean, the --

Right, but sales trends for those units that are on the interstates that are more exposed north-south versus east, west.

Right; but again, I think in the very immediate term, everything is being moved upside down by people moving in all kinds of directions.

So I don't think we can really see that.

But I'm not aware of anything.

Larry, are you aware of anything?

No, we haven't really evaluated that yet, Peter.

I think the operative issue is there is so much noise in the system right now, just so many extraordinary events happening that this just bears some watching longer before we can really draw any conclusions on anything like that.

Okay.

On the retail side, with some slowdown in the traffic, as you've noted here, you know, both, of late, and obviously even going into the Labor Day weekend.

You know, second quarter is obviously a very important part for retail given the holidays.

Is -- are you making any modifications to your inventory expectations in light of that?

Well, at this stage, specifically on the -- I guess all the way from Halloween through Christmas, we are set in terms of supply.

That means the lead time is such that it's here.

It's either in the warehouse or in the stores.

The biggest thing that we are doing other than the things that I talked about earlier in terms of trying to move stuff through faster, we are really staying on top of when should we commence our seasonal markdown process.

And part of that -- we are not the only people who have large inventories of Christmas stuff right now.

So I -- it -- and we don't -- we can't play the game in isolation.

We do have to be aware of what others are doing when they have similar products.

So watching whether or not the industry is going to go for early markdowns.

Generally, the saying is that the early markdown is the cheapest markdown, and we have moved towards marking down early in a controlled fashion over the last couple of years.

So that would not be unusual for us, but that's the primary thing.

But part of it is watching what's going to happen here over the next couple of months.

Going into it at this point, have you reduced or cancelled any of your retail orders?

Yes, I think we have modified some orders and trying to -- to be as nimble as we can; but as Mike says, to a substantial degree, we are -- we are locked in on our supply.

Okay.

Actually, going over to Logan's, I think you've mentioned a couple of times on the call today about IVR feedback.

Could you tell us a little bit more what that is?

Is that basically where you call back on the phone number?

Yes, that's -- the IVR is Interactive Voice Response, and these days it's delivered either over touch-tone phone or increasingly over the Internet.

So that's what we are doing and it's for standard -- shows up on your guest chain and you have a website or a phone number to call.

But what's really interesting to me is that we can -- in the process of setting it up, we can establish the criteria that are specific to Logan's in terms of what the guests are looking for to the extent that they are a little different from Logan's from other restaurants.

We can really fine tune -- well, are we working on the important things or are we working on the unimportant things in terms of -- and how well are we doing against the important things versus the unimportant things?

So that to me is great value.

We -- it's rolled out and we did training at the annual Logan's [GM] conference, and it was very well received because operators just love to have tangible data to work with.

Okay.

No, that's helpful.

You did mention that Logan's is now at a point where about half the system is going to benefit from both TV and radio --

Yes, it's a little under half.

It's 58 locations, and our comp sale groups are a little over 100 right now.

And I -- but I don't know how many of the 58 are in the comp group.

Okay, and that 58, just approximately, how is it -- how is that number built over the last couple of quarters?

Well, we haven't been advertising other than the test that we did back in the Spring so --

Yes, it's essentially 58 stores that weren't advertised last year.

Right, correct.

Okay.

That's good.

And then lastly, the table optimization is -- is that above and beyond the -- when somebody comes up to the queue and says, you know, I've got a party of 2, that you're not -- making sure you're not putting them at a table of 4?

Can you go into that a little bit more?

Yes, we found based on our -- a study we did some time ago, just literally measuring party size -- distribution of party size versus the distribution of table size in a typical Cracker Barrel in different day parts, and we, as you know we are very regularly full, as defined as being on a wait at Cracker Barrel.

But when you see us full, we are not necessarily -- the tables are all full but seats are not all full.

So it's really getting that mix right so that when we are full, we have more people sitting down at any one time.

So the value of a table turn goes up.

Is there anything you can kind of quantify what you have seen from tests as far as your peak hour productivity related to that, or is it -- it's just way too soon?

It;s a little too soon.

We have some information that is encouraging, but it's too soon to go public with it.

Okay.

Thanks a lot.

Thank you.

Next question is from Paul Hudson of [Rombus] Capital.

Can you tell me when you took your two price increases this year?

Yeah, we took one -- the first one we took that is still carrying in our check, we took in October last year.

And as I have indicated, we had some hold-back stores.

So the full effect wasn't in place until January across the system.

The other one we took in April; and similarly, we had some hold-back stores who didn't have the full effect until June.

Okay.

And your guidance contemplates a further price increase for '06?

We don't specifically disclose our future price increases.

That's a long-standing practice, primarily for competitive reasons and to remain flexible and things like that.

Yes.

Let me just say -- having said that, our guidance is not price increase-driven.

I can say that.

That is correct.

Okay.

And last year, Hurricane Frances, was that a benefit -- I am confused.

Was that a benefit to you guys?

Yes.

In Florida and much of the Carolinas, people were running ahead of the storm and eating at Cracker Barrel.

Overall, all the hurricanes we had last year were probably a negative to us.

We had three hurricanes that impacted us last year.

Okay.

And lastly, you mentioned fuel surcharges.

Where -- what types of charges are you seeing there?

Well, our distribution agreements, both in restaurant and retail, include a surcharge that we pay if prices get above a certain peg level.

They have actually been above that peg level for quite some time.

And so we've been -- we have been incurring fuel surcharges for quite some time, and we are, I think, looking at probably $3-plus a gallon on diesel as being the sort of thing that's reflected in our guidance.

Okay, thanks.

Thank you.

And as a reminder, it is Star 1 for an initial question or a follow-up.

We have a follow up from Matt Difrisco with Thomas Weisel Partners.

Hi.

I just wanted to also just be clear on the ports and your importing.

I believe your East Coast ports are North Carolina for your merchandise, correct?

You're not affected by Louisiana are you?

We don't really used Louisiana to any degree, no.

Okay.

And then, did you give a date -- I might have missed that -- on the new prototype for Logan's opening in the market?

It opened in early August.

It was in -- it is in Tulsa, Oklahoma.

Okay.

An then also, the number of store openings, both for Logan's -- gross number of openings for Logan's and Cracker Barrel in 1Q?

I think that was in the press release.

Q1 we are looking at 7 Cracker Barrels and 5 Logan's.

Okay.

And just to be -- to help you out a little bit here, on the press release from last year, I think you said that in total for September, hurricanes hurt you down 5.

You did have an offset benefit you mentioned from the exodus, but also, I think you quantified it as a down 5, given days closed, et cetera.

Is that correct?

Yes.

As I said, the combination of the hurricanes was negative on us last year.

Okay.

And that's it.

Thank you very much.

Thank you.

And we do have one last question.

It then comes from Gary [Merlitz] with Investment Counselors.

I was wondering if you could talk about retail a little bit more and just -- you know, X-ing out Katrina and just about what your kind of thought process is as far as timing, where you'd really hope for turnaround there, and maybe what would drive it.

Well, August sales trends would be a good starting point.

Obviously, that was ahead of Katrina.

But I think I -- I do think there were some significant factors impacting discretionary spending and sentiment before Katrina.

So -- we are an impulse retail occasion.

We've obviously got to have attractive merchandise, which we think we have, to stimulate that.

We also have to have attractive price points.

Our average price point on the floor right now is lower than it was a year ago, so we are addressing or maintaining a value from a price point of view.

We'll see on the seasonal.

My personal point of view is that in these times, people will delay seasonal optional -- or not optional, but seasonal purchases later until they have to -- you have to have stuff for your kids for Christmas.

The question is, when do you buy it?

I think we have -- a lot of what we've done works towards making us more attractive as the consumer sentiment comes back.

I think a lot of it is going to be driven by today, as we speak.

I don't think you can take Katrina out of the equation, because it has raised the whole feeling of being a risk in genera; but also specifically, on gas prices and gas availability, it's going to take a little while.

I think all the people that went out and took advantage of those employee discounts in June and July and bought brand-new bigger cars, and are finding that now that -- they've got not only bigger car payments, but significantly more spending.

So it's going to take a while for that work through, but I don't think we are the only ones being affected by that.

Just a couple of follow-up issues.

One, I guess Wal-Mart is on a tape kind of saying they're going to be pretty aggressive at Christmas, I guess much more so than last year.

And then two, just from the standpoint of -- you know, you kind of have a new merchandising staff in place, I guess it's been better than a year now.

I am just wondering kind of -- what kind of -- I don't know, controls you have in place that say, okay, if we don't have some things changed by a certain point in time, we've got to re-evaluate again.

Well, specifically on Wal-Mart, that's what I was addressing when I was talking earlier about when we should take markdowns; and watching what is going on, clearly, Wal-Mart is some kind of leading indicator and very visible in terms of how they are establishing the pricing in any given season.

On the merchandising team, I don't think it's accurate to say we've had a merchandising team in place for a year now.

We've had a leader who has built a team and it has taken -- we now have a team together, which is working together as a team as we go forward.

We obviously have some clear expectations, as we have in all other areas of the business, about performance, and we will continue to have those in place.

Okay.

I appreciate it.

Good luck.

Thank you.

And I'd like to turn the call to Michael Woodhouse for closing remarks.

Well, thanks again, everybody, for joining us.

We will be back a quarter from now with results of the first quarter, and hopefully we will -- by that time we will all have some clearer sense of what the short and medium term future looks like.

So thanks for joining us.

Thanks, everyone.