Cracker Barrel Old Country Store Inc (CBRL) 2006 Q1 法說會逐字稿

Good day and welcome to the CBRL Group first quarter conference call.

Today's call is being recorded and will be available for replay starting today at 2:00 p.m.

Eastern Time and run through November 28 until 8:00 p.m.

Eastern Time by dialing 888-203-1112.

And entering confirmation code 4651019.

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

Please go ahead, sir.

Thank you.

Good morning, everyone.

Thanks for joining us this morning.

As usual, I have Larry White, our CFO, with me.

And we know you are very interested in hearing what is going on in the business and we're equally interested in telling you what's going on.

So, without further ado I ask Larry for his financial comments.

Thanks, Mike.

Thank you for the 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 2006 first quarter results.

And providing an update on how current sales trends might affect the outlook for the second 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.

Now do we provide continuing updates of, or express continuing comfort, with our own guidance, outlook and trends; except in broad public disclosures such as we have done this morning.

In other words any guidance we give speaks as of the date it is given.

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

The restaurant industry is highly competitive.

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

Some of those factors are described in the cautionary description of risks and uncertainties found at the end of the 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, outlook 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.

You may remember the story about former heavyweight boxing champ Mike Tyson; who when told that an upcoming opponent had plans to defeat him, observed that everybody's got plans until they get hit.

Well, that's a pretty good summary of our first quarter.

We got hit.

By hurricanes, gasoline prices, consumer sentiment.

And our sales and performance suffered as has happened to many in our industry.

Bottom line, we recorded diluted net income per share for our first fiscal quarter of $0.51, including approximately $0.04 from adoption of option expensing.

That's versus $0.57 a year ago when we did not have option expensing.

That's a decrease of 10.5%, or 3.5% before option expensing.

That was below our guidance issued on September 8 of $0.53 to $0.57.

Substantially reflecting continued sales softness, especially in retail as we have been reporting in our monthly sales updates.

Guest traffic and retail sales were under pressure throughout the quarter.

But favorable cost performance, especially in cost of goods sold and hourly restaurant labor, and menu pricing partly offset those pressures.

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

Revenue in our fiscal first quarter ended October 28, 2005, increased 3.4% from last year's first quarter.

That's approximately $633 million compared with $613 million.

The increase came primarily from new unit openings, partly offset by a sharp decrease in comparable store retail sales.

We ended the quarter with 28 more Cracker Barrel units and 15 more Company operated Logan's Roadhouse than a year ago.

But comparable store retail sales were down 11.6% for the quarter.

Cracker Barrel comparable store restaurant sales for the quarter were down 0.4% from the year ago quarter.

Reflecting a 3.8% higher average check, including approximately 3.7% higher menu pricing.

And guest traffic was down 4.2%.

As we have reported in our monthly sales updates, guest traffic softened notably during the quarter.

And we think that a number of factors are at play.

First, while we generally haven't been affected historically by gasoline prices, we believe that recent environment has reached a tipping point where some consumers, especially those living on a tight budget, made adjustments.

We're hopeful that lower gasoline prices and deeply ingrained dining out habits will bring more guests back more frequently but the environment remains difficult.

We also believe that other real and perceived pressures and concerns, including consumer sentiment following the exceptionally disruptive hurricane season and mounting consumer obligations for car payments, mortgages, and credit card bills, have affected other spending habits.

Consumers are at record high ratios of financial obligations to disposable personal income, stretching their budgets just as energy prices are soaring.

Our greatest concern in the coming months, in this regard, is the possible impact of record high home heating costs this winter.

It remains a highly uncertain consumer environment.

In October, Cracker Barrel lapped a year-ago menu price increase of approximately 1.7%, without taking a new price increase.

We are presently averaging - - carrying about 2.4% of menu pricing at Cracker Barrel.

Cracker Barrel comparable store retail sales also softened in the first fiscal quarter, down 11.6%.

We believe the same economic factors that have affected restaurant traffic have had an even greater impact on retail sales.

When guests decide to go to Cracker Barrel, they already have made the dining decision.

But the retail purchase decision is highly discretionary and impulse driven.

So, the easiest way for guests to manage the costs of the visit is by foregoing or deferring a retail purchase.

Or by limiting purchases to lower price point items.

Our greatest sales declines have been in seasonal products;

Halloween, fall, Thanksgiving, and Christmas.

Hopefully, representing at least some demand that has been deferred until the post-Thanksgiving shopping season.

In addition to the decline in seasonal product sales, and the effect of lower guest traffic during the first quarter, we also have had lower average selling price per item sold.

The lower average price is due in part to our strategy of offering more product at lower price points to encourage greater frequency of purchases by our significant number of restaurant guests.

Also, we had earlier markdowns on Halloween product but also reduced average price points.

We believe that the macro factors have had a greater effect than the lower price points.

Possibly helping with the possible - - the lower price points, possibly helping us to maintain almost the same frequency of purchases as a year ago.

And we're continuing to evaluate all of these effects on sales performance.

Rounding out our comparable store sales results for the first fiscal quarter, our Logan's Roadhouse concept recorded an increase of 0.5% in comparable restaurant sales, while guest traffic was down 1.8%.

The average check included approximately 2.5% of higher menu price versus a year ago.

So, the difference from our 2.3% average check reflected unfavorable mix, net of improving alcohol sales.

Alcohol has continued to improve, even as we have lapped last year's sales building initiatives.

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

Logan's has lapped a 0.9% year ago price increase in late September.

And has rolled out a new menu and taken new price increases of approximately 1.3%.

S,o we're presently carrying about 2.8% higher menu pricing.

During the first quarter, we opened 8 new Cracker Barrel Old Country Store units and five new Company operated Logan's Roadhouse restaurants.

Including the first of a new prototype opened in August in Oklahoma.

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

Operating income for the first quarter was down 13.1% on a 3.4% revenue increase.

And operating margins were lower at 6.6% of revenues, compared with 7.9% a year earlier.

In addition to sales softness, operating income and margins also reflected the beginning of recorded stock option expense, under FAS123R.

Which added $2.8 million in pre-tax expense and reduced margins by approximately 0.4% of revenues.

Cost of goods sold was a hero in a tough sales environment.

While we benefited from a benign commodity inflation environment, while still carrying menu price increases, we also had the mix effect of lower retail sales.

As retail sales carry a higher cost of goods sold than restaurant sales.

On the food costs side, commodity inflation was actually down approximately 1.8% from a year ago.

At present, we have contracted over 80% of our fiscal second quarter expected needs, at slightly negative inflation compared with last year.

And nearly 50% of the second - - of our needs for the second half of the fiscal year at just moderate overall inflation.

We recently reached an agreement on our Logan's beef supply through July.

And given the present seemingly irrational state of beef and cattle markets, we are quite pleased with the added comp.

Labor and related expenses were higher as a percent of revenues.

Primarily, reflecting the deleveraging effect of lower sales.

Partly offset by favorable hourly labor performance, lower bonuses, menu pricing, and favorable group health expense.

We did experience modest inflation, about 1.6% at Cracker Barrel, in nontipped hourly wage rates.

And overall wage inflation was approximately 1.9%, reflecting pressures from minimum wage changes that affected tipped employees, primarily in Florida.

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

We expected - - we had expected higher natural gas and electricity prices but the effect is greater than we planned.

With utilities up approximately 50 basis points from a year earlier, an area of expected continuing pressure.

G&A was 10 basis points higher as a percentage of revenues this first quarter than last year.

The primary cause was adoption of option expensing with approximately 40 basis points of effect.

Various other expenses - - higher expenses, were substantially offset by lower bonus accruals.

Our first quarter income tax rate was 34.6%, slightly lower than last year's first quarter, but in line with full year fiscal 2005.

Wrapping up the first quarter.

Net income of $25.7 million was down 14.1%, from $29.9 million a year ago.

Before the $1.8 million after-tax effect with stock option expensing, net income would have been down 7.9%.

The diluted net income per share of $0.51, including approximately $0.04, for stock option expensing was down 10.5% from $0.57 reported in the first quarter last year, and below our September 8 guidance of $0.53 to $0.57.

During the quarter as expected, we did not repurchase any shares.

And we had approximately 800,000 remaining shares under existing previously announced repurchase authorizations.

We did increase our quarterly dividend by 8% during the quarter.

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

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

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

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

I remind you that our outlook reflects conditions as the date given and we disclaim any obligation to update this information other than in filings with the SEC from time to time.

Also, we will not offer any further guidance or outlook.

Nor after today express continuing comfort with today's disclosure, other than in public filings or by other broadly disseminated means such as press releases from time to time.

This discussion of trends and outlook, like other earlier parts of today's discussion and press release contain 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 uncertainties described in more detail in this morning's press release.

As discussed earlier, our recent sales trends, especially in retail, have softened significantly.

Consumers being squeezed and our sales outlook is highly uncertain until we see how the consumer adapts to this situation.

Consumer sentiment remains weak.

And additional pressures on consumer spending from high winter heating costs and rising interest rates are possible.

Trends could be affected favorably, however, by adaptation of consumer spending to moderating gasoline prices, mild winter weather during the holiday travel season.

Increased purchases of seasonal retail product as the holiday shopping season begins.

And an extended spring travel season with the later Easter holiday this year.

But right now, we just don't have good visibility as to how long this squeeze will last or how deep it will go.

The unusual level of uncertainty, especially before we begin the important holiday shopping season, makes us believe that guidance is just too strong a word.

So instead of guidance, we have tried to give an indication of where we would expect results to come out, if trends continue at a similar level for the remainder of the fiscal year.

In other words, it is more of a "what if" scenario than an actual expectation.

We simply need to see more sales trends, especially in retail, to make a firmer call.

We're focusing our attention not only on serving our customers, but also on managing costs to mitigate any continuing sales softness and pressures from increased - - such as increased utilities expenses.

In light of these uncertainties, we estimate that a continuation of current trends and sales for the second quarter and full fiscal year could result in total revenues that range from 3% to 6% above prior year.

Without a significant change in trends, comparable store retail sales at Cracker Barrel could range between down 1% to up 1% from prior year.

And comparable store retail sales could be down 5% to 10%.

Trends in Logan's comparable restaurant sales could range from up 1 to 4% from prior year.

With these revenue trend, the Company could achieve diluted net income per share between $0.60 and $0.67 before approximately $0.03 to $0.04 per diluted share of stock option expense for the second quarter of fiscal 2006.

Compared with $0.63 per share in the second quarter last year.

Including stock option expense, the first quarter would be $0.57 to $0.63 this year.

For the full year of fiscal 2006, diluted net income per share could range between $2.42 to $2.59 before approximately $0.12 to $0.14 per diluted share of stock option expense.

Compared with $2.45 for the full year of fiscal 2005.

Including stock option expense, the fiscal 2006 full year could be $2.30 to $2.45.

With these revenue trends, combined with expected improvements in cost of goods sold, but other pressures including utilities, operating margins for the second quarter and full fiscal year, before an estimated 0.3% to 0.4% of total revenue effect from stock option expense, could fall below prior year.

We presently expect to open three new Cracker Barrel units in the second quarter, one of which is already open.

Five new Logan's Company operated unit, and one new Logan's franchised unit.

For the full fiscal year of fiscal 2006, we continue to anticipate opening 26 new Cracker Barrel stores.

And presently expect to open 20 to 22 new Logan's Company operated units.

And 2 new Logan's franchise units.

We also presently expect our income tax rate for fiscal 2006 to be equal to fiscal 2005.

And as mentioned earlier, we have about 800,000 shares remaining to be purchased under our previously announced authorization.

Our next sales update will be November 29.

That's next Tuesday.

When we will report fiscal November sales.

And our next earnings outlook update will be December 28, when we also report fiscal December sales.

So in summary, we reported results affected unfavorably by a tough sales environment.

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

And we're not alone in our industry facing these challenges.

Even if the impulse nature of retail sales at Cracker Barrel is unique among our competitors.

But we continue through this period of uncertainty with a strong balance sheet.

A record of solid financial performance, even in some difficult situations.

Two strong concepts and management teams who are eager and confident about the future.

With that, I thank you for your ear during my financial review.

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

Mike?

Thanks Larry.

Good morning, again, everyone.

I plan to follow the same format today as I did last time, starting with a review of of the first quarter results.

Then some comments on the short-term outlook and forecast.

And finally an update on our progress on our longer-term initiatives.

The headlines on these are as follows.

And first quarter was obviously very challenging, as the results this morning indicated.

In the Cracker Barrel concept, both restaurant retail sales were negative, in the quarter.

But Logan's delivered positive sales for the tenth consecutive quarter, albeit with it a higher check offsetting negative traffic.

As Larry discussed, cost of goods was a brought spot.

With improvements coming from cost management, initiatives and food purchasing.

Good operational control of food costs in both concepts especially in Cracker Barrel.

And continued improvement in initial mark-ups in Cracker Barrel retail.

Labor costs, especially in Cracker Barrel, came closely in line with our targets in the quarter, which helped offset the deleveraging effect of the negative traffic.

The headlines on the short term outlook are; although there's been a substantial reduction of gasoline prices since the immediate post-Katrina spike;

We still believe that consumer sentiment remains weak, with the prospect of high heating bills and interest related costs still to come.

As a result, as Larry mentioned, there continues to be a significant uncertainty in industry trends and in consumer confidence.

And I say industry, because published trade information indicates factors affecting sales at Cracker Barrel and Logan's also appear to be similarly affecting a number of other food service chains.

On the brighter side we continue to see an improved product cost environment.

And we're pleased with several new purchasing contracts that we've recently entered into.

And thirdly, we're making progress on the longer term strategic initiatives that we believe are the right ones for the business.

These are the Cracker Barrel front of the house and kitchen efficiency initiatives.

Cracker Barrel retail productivity.

Cracker Barrel and Logan's cost of goods improvement.

Logan's operational consistency.

And the Logan's prototype and planned strategy.

And I will be talking more about those in a little while.

So let's look at all of these in a little more detail.

First, on the quarter.

In Cracker Barrel, restaurant sales were a little below expectations in the quarter.

However, they there were some regional highlights, especially in the relatively stronger performance west of the Mississippi.

Where developmental markets continue to perform well, and were supported by a strong operations, and a continuously growing awareness of the brand.

Even in the east north central area, where we appear to be sharing the misery of a weak consumer environment with many other concepts, Cracker Barrel sales in October were ahead of the casual dining industry taken as a whole.

Retail continues to perform below expectations.

Driven roughly equal parts by soft restaurant traffic and the decline in the average price point of purchases made.

Providing more attractive price points to encourage impulse purchases continues to be an important part of our retail strategy.

And I believe we may have well have lost more retail sales if the lower price point merchandise had not been available.

While we have provided EPS estimates, assuming no underlying change in sales trends, that has entirely to do with the current uncertain environment and does not reflect what we certainly hope will happen in the upcoming months.

It is certainly possible, perhaps even probable, that retail trends will pick up as we move into the holiday season.

To encourage sales pickup, at Cracker Barrel, retail, we will be taking markdowns on Christmas merchandise earlier than usual, and in line with the overall retail industry trends this year.

As I reported last quarter, there are two positive trends in retail.

First, the retail gross margins continue to improve, through a combination of improved initial markdowns, and the reduction in the level of aged inventories requiring deep markdowns.

Second, our music strategy is working well.

We've achieved sales of $2.5 million in six months with the exclusive Alison Krauss & Union Station CD.

We followed that CD with the exclusive Charlie Daniels compilation that went on sale on October 25.

And the latest offering in this series is the Sarah Evans exclusive CD that is scheduled for a December 6 release.

At Logan's, we saw positive sales in the quarter.

Including very encouragingly, because we're now two quarters into lapping our happy hour rollout last year, the continuation of the positive trends in liquor, beer and wine sales as a percent of total sales and in terms of dollars per guest.

We made further progress with our menu strategy.

We rolled out a menu update on September 26.

This included the introduction of several new products including the Onion Brewski.

And the Logan, which is our signature 12-ounce sirloin, which retails for $11.99.

We also took a price increase with the menu rollout of 0.8% and we have subsequently taken a 0.5 price increase related to nonalcoholic beverages.

And as I reported last quarter, we opened the new prototype in Tulsa, Oklahoma in the first week in August.

And we have seen favorable initial results.

Sales have settled in at above system average level.

But more importantly, we have seen the improved kitchen speed and the food quality that we expected from a totally new kitchen design.

Turning now to the short-term outlook.

There was clearly a downturn in industry sales trends in August, as the result of increasingly uncertain consumer sentiment linked to high gasoline prices and higher interest rates affecting - - or beginning to affect mortgage payments and credit card payments.

And of course, this was compounded by the sharp spike in gasoline prices following Hurricane Katrina.

And while we have worked through all of the store closing and lost days caused by Katrina and subsequently by Rita and Wilma. we still have as of today, six Cracker Barrels and three Logan's operating on limited hours as the result of staff shortages and/or curfews.

Given these factors, it remains very difficult to determine what the underlying run rate for each concept is, or where they're both going to settle.

So as a result, the earnings projection provided today, while they are our best estimate, really reflect a "what if" scenario based on continuation of current trends, given the extremely uncertain operating environment.

In both concepts, the focus remains on execution, which means the best possible guest experience every time.

And we have continued to believe this is the best way to sustain and build business for the future despite the difficult operating circumstances today.

This means we're not going to cut the cost of the store level and affect the guest experience.

And we're very focused on continuing to deliver the strong value that is clearly associated with both concepts.

However, we are looking very hard at all the discretionary and non-time bound expenses, so that we can prudently manage the P&L wherever we can, in anyway that we can do so without negatively affecting the two brands.

And of course at the same time, we have some important and unchanged long-term goals and we need to keep pressing forward on those.

So let's review where we are with those long-initiatives.

At Cracker Barrel, the goal is to deliver positive same store sales and improvement in operating margins over time.

Driven by operationally focused initiatives that enhance execution and accelerate table turns.

While these typically are lower risk and lower investment initiatives, they are priorities because they are focused on opportunities to leverage the key areas that have high potential impact for Cracker Barrel.

The priority - - the initiatives under development are;

First of all the speed of food, with emphasis on the point of sales system and a new kitchen display system.

The goal of this initiative is to reduce waiting time once the food has been ordered.

And also ultimately to improve the staging of the order, so that all food items on the check are ready at the same time to maximize quality.

We have developed training and rollout tools for this initiative.

And our next step is to test these tools in a ten store rollout.

Following which, we will be determining the timetable for a systemwide rollout.

The second initiative is table optimization.

Where we have expanded the test of four stores.

And we're going to continue to monitor the results through the holiday season.

This initiative is all about improving the overall seating efficiency, and therefore improving our throughput measured by sales per seat and overall sales per hour.

And in the retail space, we are testing the two variations on the hostess and cash register layout.

And we are in the process of evaluating the results of those tests.

The IVR system. which I talked about last quarter. has now been rolled out.

So, we have the ability to have consistent feedback at store level.

This is going to allow us to ensure that we're achieving expected results on these major initiatives.

And also improve - - also measure execution against the key parameters that are most important to the guest.

One of the interesting things of the idea is; that it allows us to see the derived importance.

In other words, what does the guest think is important versus what we think is important.

And to the extent that there is any difference, we're obviously going to be focusing on what is important to the guest.

The other important thing with the IVR in terms of measuring the expected results, is to make certain that as we roll out these major initiatives, we are achieving and capturing the benefits that we see in the tests.

We also have the ongoing cost of goods initiatives.

Where we're working to drive our costs without negatively affecting the guest experience.

And as I mentioned earlier, we have several contracts recently put in place and more in the production line that will help us achieve this goal.

In retail, we are continuing to see the expected improvement in the initial mark-on for the new trading Company relationship we established.

But we still have more opportunity to come in this area.

We will continue to work on applying the learning that we gained from our seasonal menus, especially in terms of managing margin and controlling labor cost and applying that learning to the base menu.

The simplification of the base menu, using these principles, is an important goal.

I will be reporting on progress on that in due course.

We have seen some preliminary findings of the bindery research study.

And while there were were no big surprises in the sense of things we didn't expect, there are some very encouraging confirmation of the degree of differentiation and the components of differentiation of the Cracker Barrel brand.

And some key insights on how we can leverage the strength of the brand.

And I expect to be able to share this important information later in the year when we've had time to evaluate how we're going to incorporate these findings into our marking strategies.

At Logan's, the short and long-term focus is to build traffic, first with operational consistencies, supported by the IVR feedback.

We are using again with Logan's, using the system specifically to focus on the areas that our guests tell us are the most important.

We now have the system fully integrated into field operations.

And we are getting valuable trend data at all levels in the operation.

As I mentioned earlier, we're very pleased with the performance of the new prototype.

And we're now in the process of developing the next generation of the prototype to be ready to use in our new store openings in fiscal 2007.

We expanded the new advertising campaign, as I mentioned last quarter.

But the timing unfortunately coincided with the change in sales trends in September, both on a store by store and a regional basis.

So very difficult to, if not impossible to read the results.

So we are reworking and developing extended test program to be rolled out later in the fiscal year.

Before I turn the call over to questions, I would just like to reiterate that we're very positive - - continue to be very positive about the long-term success of this business.

Even if in the immediate term, we believe that we and the rest of the full service segment faces some significant challenges.

The Cracker Barrel research is reaffirming the considerable strength for the brand and supports our confidence in the long term plans for the concept.

We're very comfortable that we're on the right track with Logan's and that we have both the right strategies, and the right management team in place to deliver our expectations to the concept.

With the strong, conservatively managed balance sheet and our expected ability to generate substantial free cash flow at our targe long term growth rate; we're very well positioned to deal with short term, external challenges.

And we believe that we have the right strategy in place throughout the organization to achieve those earnings goals.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] And we will go first to Matthew Difrisco with Thomas Weisel Partners.

Hi there.

Can you address a little bit - - I think there is a little bit of different guidance number now for Logan's opening?

I didn't catch you talking about that.

I think you're looking for, you lost 22 - - two Company owned stores and went down from 22 to 24 down to 20 to 22.

And then the franchises went down to two from four.

Has that anything to do with the new prototype or can you give us some details on that?

I think it is fundamentally Matt, to proceed cautiously in this uncertain environment and these - - we're not changing the overall goals.

We're fundamentally pushing these back into fiscal '07.

They weren't going to contribute much in fiscal '06.

In fact, they would probably being late in the year openings, have negative impacts on fiscal '06.

So, we're just pushing them back.

But also the franchisees - - are the franchisees still on board?

Or are they just - -?

Yes, they are.

And both actively looking at and considering new sites.

Okay.

And then I guess given the struggles or the greater struggles at Cracker Barrel, we're sticking to 26, though.

Is there - - you mentioned on the last conference call, that you might have seen that you were growing a little too close, or that they were starting to get close together and might be an explanation for some of the traffic in the retail side.

Do you still feel that way?

Or have you seen recent trends that suggest something differently now?

Well, we hope we learned from - - it is really I guess in the last couple of years that we had been building stores closer together than we had been the couple of years before that.

We hope we've learned from it, both in our ability to predict sales for new sites and in our new sites selection strategy.

I don't know that I have anything specific to add to that.

We are very aware of it and trying to make those adjustments.

I think one of the things that we did was we overestimated, given a sort of a broad trade area that would encompass an existing store and the new store.

We felt like we did a good job at estimating the amount of sales that would be taken away from the existing store.

But we did not do a good job in capturing the total sales that could be gained by the whole trade area.

So we've tried to learn from that.

I think we're doing a better job.

But as you know, with new stores, it takes a while for that to prove out.

Matt, one of the things that is important in Cracker Barrel that we're focusing on is the potential growth in the trade area, where we're putting a new store.

We've always had growth in traffic on the interstate but we're adding to that and increased focus on growth and the economy and the population of the local business.

And as I mentioned earlier, western Mississippi, we're seeing some good trends over several years.

Largely because we have been focusing on operations, and the brand awareness is building.

But also because those are typically are markets where there is a substantial amount of population growth.

So, we think that is a more important factor.

It's always has been an important factor, but it's become a more important factor in our consideration of new stores.

So, I think it is going to be interesting to see some of the stores as we've been filling in, especially things like Florida, over the next three to five years.

What happens where we have seen some amount of cannibalization as we've done this.

I think logic would say as the population grows, we will see some recovery.

We have not seen the degree of recovery we would like in some of those up to this point.

Okay.

And I just had two other last questions.

Just on the options expensing, if you could just explain to us how that changes prior guidance 14% to 16% for the full year, dilutive now at $0.12 to $0.14, has there been - - I would assume that is only based off of vesting.

So I don't see where that would have changed unless someone has left that was going to vest.

And then another point, just on the new guidance, of the - - I guess the 2.30 to 2.45 range versus 2.41 to 2.55 for the full year.

Can you give us, what was the rough ballpark assumptions of comp back behind that 2.41 to 2.55 with options; if we were to - - what would we need to get to get back there?

Is that just the traditional historical 3% Cracker Barrel restaurant comp and flat to maybe retail?

Well we did have stronger comps.

And retail in particular, was quite a bit stronger than what we've got in our current outlook.

On the options, a number of things changed.

First of all, we get a better handle on how many options we're going to be awarding as time goes on.

And secondly, the valuation is based on share price.

And our share price has been soft.

So I think those are the two most important factors that have changed.

But options are - - the ones that you're recognizing now for expensing, are those becoming vested that you awarded in years prior?

There is a combination.

You carry over - - in the year of adoption you carry over any unvested shares that were awarded in prior years.

And so those are continuing to be expensed but you also pick up new option awards.

And we generally have our option awards in the first half of - - most of our option awards in the first half of the fiscal year.

But no key member has left to change that vesting amount in '06?

No, that's not a big issue.

I'm sure there have been some forfeitures on the number, but that is not a big issue.

Okay.

We've just had a very broad-based option program historically.

And we've reduced the scope of that, the number of people.

And of course we have forfeitures all the time as people leave but that's not a major factor.

Okay.

Thank you.

And we will take our next question from Dustin Tompkins with Morgan Keegan.

Good morning.

Larry can you qualify the sales impacts from the lost store operating days during the quarter?

Well, I think the important thing is that net-net, year-over-year, there really wasn't a material affect from the direct impact of the hurricanes.

Remember, last year, we had four hurricanes in the first quarter.

And so the net impact year-over-year either on a sales effect, or a dollar impact, really wasn't material.

And that's why we haven't gone into those details.

But I think the bigger issue this year has been the indirect impact, which is impossible to measure.

And that's the fact that it was such a disruptive hurricane season, particularly with Katrina and the concerns that followed Katrina, that we think it had a broader impact on consumer sentiment.

But the direct measurable impact was similar this year versus last year.

Okay.

And you guys rolled out your holiday menu at Cracker Barrel sometime around a year ago or so.

Are we lapping - - are we anniversarying that rollout?

Yes.

Okay.

And then as far as menu pricing, you said that we recently rolled over a menu price increase in October.

And how much do we have going forward in Cracker Barrel?

We're carrying right now I think 2.4%.

Okay.

And that should be good until - - I think there was an April increase last year?

Is that right?

Yes, if you remember, we have gone over the last couple of years to a sort of testing approach to our menus.

So, we always have some hold back stores.

And any given price increase, takes a few periods to have its full impact.

So, we will be slowly lapping some of that impact of that year-ago increase that we took in October last year.

So, the next major increase a year ago was - - as I said, in April, 1.7%.

Okay.

And then you also mentioned that with Logan's, you locked in your beef needs for I guess calendar 2006.

Can you - - how is that relative to last year?

We locked in through July.

Not the full calendar year.

We have agreed not to go into the details of that.

We will just say that we are very pleased with the way it came out, considering the unusual situation of the beef and cattle markets right now.

They are unusually high.

They don't seem to be consistent with economic factors that are going on.

And we're pleased with the way we're able to arrange for our beef supply through July.

Now, let me just add to that, we have a new VP of Purchasing at Logan's and we have an SVP, of a title of Strategic Initiatives at Cracker Barrel, which is purchasing supply chain.

And the beef contract at Logan's was the first contract that the two people working together have put together.

And we now expect to be taking a potentially different approach but certainly thinking through where we're going to go with managing the commodity side of beef, going forward.

So, we are very pleased for the short term and have high expectations for the long term.

Okay.

And then lastly, as we look at the options expense, I guess the 1.8 million after tax, is there a rule we can look at as far as how much of that is going to go through G&A versus - -?

It is all in G&A.

It is all in G&A?

Yes.

Okay.

Thanks.

And our next question is from Dennis Forst with Keybanc.

Yes, good morning.

I had a question about the dilutive earnings.

What was the CoCo add-back in the quarter, Larry, to get to the $0.51 fully diluted number?

The interest is about $1.4 million, just slightly over that.

And so you have to add that back to - -

Pre-tax.

Pre-tax income.

And tax affect the way that the tax rate, and that gives you the revised earnings to use on the - -.

Okay.

And the total debt, you had a balance sheet in the press release, but it showed long-term debt.

What about the current portion of the long-term debt that would have been in current liabilities?

It is all in long-term debt.

There is no current portion.

There is some real minor amount related to old capital lease obligations.

But we record all of our revolver draws and [Lyon's] debt in long-term debt.

Okay.

Good.

And the comp numbers that you gave for the quarter, those included all the zero sales days?

Yes.

And then lastly, I wanted to understand the new kitchen design at the Logan's prototype.

How is it so much different and how much time are you saving on that?

Maybe you or Mike could answer that.

Well, first of all, it is the first time that we've designed a kitchen from scratch in Logan's.

The kitchen that we've been using over the years has evolved from the original conversion that we did back in 1991.

It is - - it uses some newer technology.

Using some [clam chalas] to grill.

It is laid out in a highly efficient manner, just in terms of the flow.

In our existing kitchens, we find ourselves replating the food at least twice just to get from the grill to the table.

So not only is it coming out faster, it is coming out harder and better in that process.

And the best way, I'm not going to give you numbers in terms of speed, but the best way I can say it is when I visited the new restaurant about three weeks after opening, the challenge was for the servers to keep up with the speed of the kitchen.

So, it is a real machine in terms of getting the food out.

Okay.

Will there be some remodeling done on older Logan's to try and emulate this?

There are a couple of things we can do in terms of changing some equipment.

We're not likely to be going back and changing the whole configuration of the kitchen.

That would be a fairly major - - but in terms of equipment, we can do some things and in fact of having that in several restaurants right now.

And the other thing we can do, and plan to do, is there are some design elements coming out of the new - - nothing to do with the kitchen but just the overall feel of the building inside and outside that we can retrofit.

As we get comfortable with where the new prototype is going, so that we have a consistent look and feel across the system.

Okay.

Thanks.

And we will take our next question from Bryan Elliot with Raymond James.

Good morning.

Just wondered if you had any feel through your anecdotal research and other data capture on whether there has been a significant difference between the travelers and the local guest counts here during this period of sales softness at Cracker Barrel?

I suspect there is some, Brian.

I don't know that we have anything that captures it directly.

But I know that the trends have been a little weaker in the on-interstate sites than the off interstate.

We don't have a huge number of off-interstate but there probably is some factor going on there.

Do you track zip codes from credit card usage or anything?

I know in the early days, you sent people out to look at the counties on license plates.

Do we have any kind of more systemic data or is it all just - -?

We can do it - - we don't have a realtime tracking mechanism.

We do zip code studies in connection with our new store development.

And the big picture research we've been doing also captures travel.

But it doesn't get us our realtime last three months.

And so the numbers I've seen, I agree with Larry, there is a small difference between off-interstate and on-interstate.

But it is not enough to explain the overall drop, which we think has much more do with discretionary income screen than it is to do with limited travel.

Which would imply that then most of the decline or the decline would be disproportionate to the local customers rather than the travelers?

The squeeze on discretionary spending among the more low income locals rears than than the more affluent customers who are doing either business or discretionary travel?

I don't know, that is a theory I guess but I think it is a little stretch there.

I think I'm being led to a conclusion but I'm not certain what the conclusion is I'm supposed to be led to.

I think we obviously have a broad range of demographics.

I think that when people are planning a vacation, they will have decided how much they're going to spend and then the price of gasoline certainly continues to put a squeeze on that in terms of what they can afford to buy.

But as Larry said in his remarks, the big thing about Cracker Barrel is when people show up, they come us to because of the dining room.

They come to eat.

And the retail piece is discretionary.

So on the retail side, we have to figure out how we're going to capture more of that.

I don't think that our traffic trends, as I said earlier, are substantially out of line with the industry, as we see it on a weekly basis.

All right.

Thank you.

And our next question is from [Cal Hemmer] with Ironworks Capital.

Thanks.

Could you share the components of the net changes and other assets and liabilities, the $30 million cash used in the quarter on the cash flow statement?

It is primarily accounts payable, which last year was - - if you're looking at relative to last year, we didn't have the same increase in accounts payable that we have last year.

Okay.

Thanks.

And our next question is from Peter Oakes with Piper Jaffray.

Hi, actually, I have a few.

I was curious, you made mention a few times of the higher interest rate environment.

It seems to be impacting the consumer either directly or indirectly.

Can you remind us as to what percent of the transactions are generated from credit cards and what was that approximately a year ago?

I think what we're talking about is a more general issue, Peter.

That if you look at statistics on consumer financial obligations, which is house payments, car payments, credit card bills, et cetera, they are at a record high ratio relative to disposable personal income.

So people are really - - and this is no great news, or big surprise, but people have been building up their financial obligations and a part of that is higher interest rates.

And as an unfortunate result of that is, it is happening at the same time that energy prices are soaring.

And so we think that consumers, particularly on the monetary, are under a quite a squeeze.

And to the specifics of our credit card mix, I don't have an update on that right now.

Okay.

The - - flipping over to Logan's for a second here, the ad penetration is, if I remember, is that about half?

And if it is not, can you share with us what that is and again, what was that approximately a year ago?

So what is kind of the delta that contributed to the performance there?

The penetration was a little bit under half of the system.

But as I said, very difficult to read what is going on because we - - the amount of noise in our store by store or region by region numbers is much greater and has been for the last couple of months.

And I think that is probably true of most systems.

Going forward, we will be cutting back on that as we rebuild a test, which will be after the holidays.

I don't have the numbers on that yet.

Okay.

And Mike, you mentioned that you're kind of evolving the prototype there for Logan's, and you went into a couple of things.

But should we think about the bulk of of the attention, is it more on the cost in the unit economic side?

Or is it trying to enhance the consumer experience?

Well, the simple answer is it is both.

We wouldn't want to take - - we think there is an opportunity on the unit economics driven by two basic things.

One is the simple format of the footprint, which we've changed from being wide and shallow to being narrow and deep.

So, that we can get on to pieces of land that are narrower.

And therefore, we're paying for less linear prime frontage in any situation.

And then the other piece of the economics is the speed of that kitchen, and our ability to achieve high throughput in peak times.

Okay.

And then lastly, Larry, you mentioned Florida, this has been a little bit surprising to you, because the cannibalization.

How about the units in Florida that really weren't as exposed to cannibalization?

Are you seeing Florida as a whole starting to underperform the system?

Thanks.

No, Florida, sorry you hung up, Peter because I didn't say Florida was surprising us from cannibalization.

I said what had happened was over the last couple of years, we saw a greater effect of building stores relatively closer together than we had seen in the couple years before that, when they were substantially further apart.

I think two things on there Peter.

One was, I think what Larry was talking about specifically, was something that is obvious, but unfortunately wasn't totally obvious to us.

Which is not the effect on existing stores, but on - - when you put them close together, but the sub-optimal performance of the now store because the existing stores take away some of the potential.

And that's what I was talking about in terms of future growth.

If we're putting those stores in between existing stores, a little tighter, and achieving little or lower results than expected but we're putting those in high growth trade areas, we should see faster than normal growth from those stores in the future.

Okay.

So Florida isn't - -?

I used Florida as an example of where we've been actively - - we have 58 - - we've had a substantial increase in the number of stores in Florida in the last five years, which is a very good thing.

But we put them closer together than we would historically have considered.

Okay.

So there is really nothing material as far as Florida's trends versus the system as a whole?

That's really where I was going with that.

Yes.

Correct.

And then just kind of begs the whole question, with the weakness that you've obviously been experiencing here for a few months, is there anything you've run across, either day part, weekday, check, that might enlighten us as to parsing a little more of the deviation?

Not really significant, Peter.

In Cracker Barrel lunches, probably been less soft than breakfast and dinner.

But I don't really see anything that I would say is unusual, that is pointing to one particular issue.

I think it is just the general impact on the consumer behavior.

Okay.

Thanks, Larry.

[OPERATOR INSTRUCTIONS] And we will take our next question from Jill Eft with Avondale Partners.

Hi, good morning.

Can you walk me through a little bit your strategy on discounting your seasonal items earlier given that you think people are deferring those purchases?

And why that makes sense?

Well, I believe there is a good chance people are deferring because they are being squeezed on discretionary income.

But as the holiday season and Christmas approaches, obviously they are going to want to buy something for that.

The timing is an issue of what is going on around us.

And we are seeing already major retailers discounting Christmas.

And we expect to see a lot more of that happening even after Thanksgiving.

So, we don't want to be left standing with great stuff at full price while everybody else has moved.

It is not - - it is a recognition of the reality that, especially at Christmas, we are directly and highly competitive with a lot of other people.

We are more of a destination retailer for Christmas stuff than anything else.

Okay.

That makes sense.

And can you talk about the performance of the newer items, the more contemporary items that you've had in in retail?

Well, the - - I think Larry said in his remarks, the softness has been more in seasonal but it has been a fairly general softness.

We directly related, as I said in my remarks, to the traffic and a then little bit lower price point.

We've had good results.

We've done a very, very detailed analysis in terms of what works and what doesn't work.

We've been - - as you know, building a new term with Carol Norman, our GMM, who has been with us a year and a half.

I think it takes some time for a merchandising team to get a feel, especially with a concept like ours.

So, a lot of learning going on, but I think we feel positive about the future once we work through this rather difficult patch.

Great.

Thanks.

And we will take a follow-up question from Dennis Forst with Keybanc.

Larry, can you give us an idea of capital expenditures both for the second quarter and the full year?

We're still evaluating it, Dennis.

In this environment, we are looking at places where we might be able to defer some capital, and all that.

So we have not yet landed on a number of that we're ready to disclose.

Okay.

And given that was - - what is the explanation for no share repurchases at all in the first quarter?

I indicated back in the September 8 conference call that we would not be making share repurchases.

And fundamentally, it is because the first quarter is a working capital building quarter.

And so the earlier question, I answered it based on comparisons of prior year.

The single item that affected us most this year was building inventory.

And that's normal for the first quarter.

It is just that last year was offset by building accounts payable at the same time.

So, we were building working capital this quarter.

And with our targeted capitalization structure, we had to forego share repurchases to maintain a capital structure as close to target as possible.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] And we will go to another follow-up from Matthew DiFrisco, Thomas Weisel Partners.

Hi, I just had a bookkeeping question Larry, regarding the stock options, In trying to get an apples-to-apples comparison in the G&A side, I didn't see it in the relose and I'm sorry if you already answered this question on the call.

But do you just go to the cash flow statement and take the share base compensation and less than from the G&A?

Or do you gross it up by the current tax rate?

Or is there something more significant you have to do to it?

The stock option expense is about $2.8 million pre-tax.

It is all in G&A expense.

The same tax treatment as all our other expenses.

So simply apply that.

That that gives you an after-tax or net income effect of about 1.8. million, it's about $0.04 a share.

Then what is the - - on the cash flow statement, you see 3.1 million?

That includes restricted stock, which always has been expensed.

Okay.

So your restricted stock went up a little bit more than the 66,000 that you had last year?

Yes.

And then can you also just update us on how many stores you own building and land, both brands.

We are just under 70% overall, where we own the property fee simple and it is - - I call it is 70%, but we're higher in Cracker Barrel and lower Logan's.

And how much would you say do you own the land, if you do at all?

70%.

70% okay.

Just under 70% of the locations.

Land and building?

Correct.

And then how many just building?

The rest.

Oh, okay.

You own the building completely.

You don't have any - -?

It is 65 stores that we did sell lease back on, we sold the building.

Thank you very much.

And at this time, it appears we have no further questions.

I would like to turn it back to the speakers for any additional or closing remarks.

Well, let me thank all of you again for joining us.

The bottom line from our point of view, is there is nothing broken with our business.

It is an external environment issue, primarily.

We are very clear on the long term.

We have management teams who are very motivated to do whatever they can to mitigate the effects of the current environment, in terms of earnings for this year.

But at the same time, are very passionate about where we want to go with these two brands.

So again, thank you.

We will be reporting second quarter in February but we will be providing sales updates next - - on the 29 of November.

And then an earnings and sales update on the 28 of December.

Thank you.

Thanks.

This does conclude today's conference call.

We thank you for your participation and have a wonderful holiday season.