Cracker Barrel Old Country Store Inc (CBRL) 2006 Q2 法說會逐字稿

Good day and welcome to the CBRL Group conference call.

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

Eastern time and run through February 28th until 8 p.m.

Eastern time by dialing 888-203-1112.

Once again, 888-203-1112, and entering confirmation code 468-4618.

Once again, confirmation code 468-4618.

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

Please go ahead, sir.

Thanks.

Good morning, everyone.

We're very pleased you could join us this morning.

We have some positive news about our 2nd Quarter operations.

We have an update on our longer term operating initiatives.

As usual today, I have Larry White, our CFO with me, and I'll turn the call over to Larry to lead off with the 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's had an opportunity to see this morning's press release announcing our fiscal 2006 2nd Quarter results and providing an update on currently expected sales outlook for the 3rd Quarter and full fiscal year 2006.

As a reminder, we don't review or comment on earnings estimates made by other parties.

Further more, as we recently disclosed, we won't be giving earnings guidance of our own until further notice because of our recently undertaken review of capital structure alternatives and other potential initiatives intended to enhance long-term shareholder value.

As you, no doubt, have seen in this morning's press release, we're reporting no updates of review at this time, and therefore we won't be taking any questions on the scope, progress, or status of the review.

We will make appropriate disclosures regarding the review at appropriate times, but not today.

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

We're pleased that the results for the quarter were stronger than we anticipated, especially given the uncertainties we've faced, particularly in revenues.

Bottom line, we recorded diluted net income per share for the second fiscal quarter of $0.61 and that included approximately $0.03 from adoption of stock option expensing.

And it compared with $0.63 a year ago.

There's a decrease of 3.2%.

But it was an increase of 1.6% before option expensing.

And very importantly, we had a number of charges and credits in the quarter netting to $0.05 per diluted share of expense, and we believe that those items deserve some clear understanding because of their unusual nature.

The results were at the high end of our last guidance, which was issued on December 28th.

And that was at $0.56 to $0.61 and even after the effect of the $0.05 of net charges.

Let's look some of details of the quarter beginning with those somewhat unusual net charges.

The charges included $6.8 million before income taxes from impairment of seven Cracker Barrel units and three Logan's restaurants that we decided, late in the quarter, to close.

The actual closings took place over the last few days.

The decision to close those locations came as a part of a comprehensive operational review in a difficult environment.

These are the first closings we've had since 2001 and bring the grand total of Cracker Barrel closings in its whole history, other than for relocation reasons, to just 16, or about 3% over more than 36 years of history, I'd say a remarkable record in this industry.

The Logan's units that we closed all were open by prior Logan's management teams, and have been on our watch list since 2001, when we last had closings.

In spite of various efforts to improve performance over the years, they just have shown no prospects for sustained improvement.

Not all of the locations were negative cash flow, but we determined they were unlikely to generate sufficient cash to justify the investment that we could unlock by either selling or subleasing the sites.

To that end, we estimate we should be able to generate approximately $10 million in net sales proceeds from disposition of these locations.

Because the actual closings themselves didn't take place until after the quarter ended, we're going to incur an additional estimated $3 million to $4 million related to lease reserves, severance, and incidental costs of closing here in this third quarter.

The closed stores contributed $4.6 million and $1.5 million to Cracker Barrel and Logan's revenues respectively in the second quarter, and $9.1 million, and $3 million, respectively, year to date.

In addition to the closing, our operational review led us to make some organizational changes at Cracker Barrel.

Mike is going to go into further detail in a few minutes.

But I will tell you, we recorded over $900,000 of expense before income taxes related to the departure of four officers.

With an associated realignment of responsibilities, we believe these changes will result in a more streamlined and effective operating structure, reporting to Cy Taylor, our continuing President and Chief Operating Officer at Cracker Barrel.

Partly offsetting these charges were net credits of $3.7 million before income taxes, related to revised estimates of insurance costs and certain settlements.

Most significant was a credit resulting from a mid-year actuarial update of our self-insured workers' compensation and general liability programs .

This is a reflection of a number of risk management initiatives that we put in place over the last few years, the benefits of which were not actuarially apparent, partly because of a new claims administrator, whose more accurate reserving practices have taken time to prove out.

By having more accurate reserves earlier, we've not had as much adverse claims development as in the past, a benefit that we believed existed, but is only now being supported by actuarial analysis.

Partly offsetting the actuarial benefit were expenses related to certain claims and estimates of associated insurance recoveries.

Taken all together, these certain charges and credits netted an unfavorable net charge of approximately $0.05 per diluted share in the quarter.

Now let's look at some of the more routine results of the quarter.

Revenue in our fiscal second quarter ended January 27th increased 4.1% from last year's second quarter.

That's approximately $694 million, compared with $667 million a year ago.

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

We ended the quarter with 26 more Cracker Barrel units and 16 more company-operated Logan's restaurants than a year ago, but comparable store retail sales were down 9.4% for the quarter.

Still, even with soft sales, our revenue results were slightly better than we expected when we gave our December 28th guidance.

Cracker Barrel comparable store restaurant sales for the quarter were up 1.1% from the year-ago quarter, reflecting a 2.7% higher average check which included approximately 2.4% of higher menu pricing.

Guest traffic was down about 1.6%.

There's really little new color to add to the challenging traffic environment.

Weekend dinner in the Midwest, apart from the milder winter weather effects we had this January, are showing continued softness, but we don't mean to isolate the issue.

The trends are below expectation in almost any day, part, and region.

We believe there are economic factors that are contributing to the softness, but our objective is to overcome any issues that we face and grow the number of customers we serve at each store.

Other than pricing and test stores, Cracker Barrel has had no menu price increases yet this fiscal year.

Cracker Barrel comparable store retail sales continue to be soft in the second fiscal quarter, down 9.4%.

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 made the dining decision. but the retail purchase decision is highly discretionary and impulse-driven.

So, the easiest way for guests to manage the cost of visit is by forgoing or deferring a retail purchase or by limiting purchases to lower price point items.

Our greatest sales declines have been in seasonal products, especially Christmas, which -- a significant part of which, we believe, resulted from a less effective merchandise selection this year.

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

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

It also reflects higher markdowns this year than last year.

And that particularly was true for our Christmas product.

Included in the organizational changes at Cracker Barrel were changes in our retail business, and Mike will address these shortly.

Rounding out our comparable store sales results for the second fiscal quarter, our Logan's Roadhouse concept recorded an increase of 3.2% in comparable restaurant sales, while guest traffic was down 0.4%.

The average check included approximately 3% of higher menu price versus a year ago, so the difference from our total 3.6% average check increase reflected favorable mix, including improving alcohol sales.

Alcohol sales have continued to improve, even as we have lapsed sales-building initiatives begun more than a year ago.

Responsible alcohol sales remain an opportunity, and we're pleased to have broken the 9% mix barrier this quarter.

There were no notable price changes during the quarter at Logan's beyond the carryover into the quarter of an increase taken in the first quarter.

During the second fiscal quarter, we opened three new Cracker Barrel store units and five new company-operated Logan's Roadhouse restaurants plus one franchised Logan's.

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

Operating income for the second quarter was down 5.3% on the 4.1% revenue increase, and operating margins were lower at 7% of revenues, compared with 7.7% a year earlier.

However, the net charges that I described earlier had a $4 million unfavorable pretax effect before which operating income would have been up 2%.

In addition, operating income and margins also reflected the beginning of recording stock option expense under FAS 123R, which added $2.4 million of pretax expense and reduced margins by approximately 0.4% of revenues.

So, in spite of the sales softness, we believe our operating results were encouraging when viewed apart from some of these other items.

Cost of goods sold was the 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, which carry a higher cost of goods sold than the restaurant sales.

On the food cost side, commodity inflation was up approximately 0.4% from a year ago.

At present, we have contracted over 85% of our fiscal third quarter expected needs at slightly negative inflation compared with last year, and nearly 75% of our fourth quarter needs also had negative overall inflation.

The big change there that's causing us to have negative inflation year over year is a new poultry contract which is quite favorable to us.

Labor and related expenses were lower as a percent of revenues, primarily reflecting the benefit of an actuarial update on workers' compensation expense, but also by favorable hourly labor performance, lower bonuses, and menu pricing.

We did experience modest inflation about 1.8% at Cracker Barrel in non-tipped hourly wage rates, and overall wage inflation was approximately 2.5% reflecting pressures from minimum wage changes that affected tipped employees, primarily in Florida.

Our store operating expense reflected the closed store impairment and also higher utilities expenses with the improved actuarial estimates and general liability insurance and other estimates of claims and expected insurance recoveries offsetting each other.

We had expected higher natural gas and electricity prices, but while the effect has been greater than we planned, it was actually late in the quarter, a little less than our most recent expectations. which were reflected in our guidance.

But utilities were up approximately 60 basis points from a year earlier, and that's an area of expected continuing pressure.

G & A was 50 basis points higher as a percentage of revenues this second quarter than last year.

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

Higher salaries, organizational restructuring charges, and litigation expenses net of expected insurance recoveries were substantially offset by lower bonus accruals.

Our second quarter income tax rate was 34%, slightly lower than last year and our first quarter, reflecting our present estimate of the effect of certain tax credits.

Wrapping up the second quarter, net income of $30.8 million was down 5.5% from $32.6 million a year ago.

Before the $1.6 million after-tax effect of stock option expensing, and the $2.6 million after-tax effect of the net charges described earlier, net income actually would have been up 7.3%.

Diluted net income per share of $0.61 including approximately $0.03 for stock option expensing and $0.05 for the net charges described earlier were down $0.02, or 3.2% from the $0.63 reported for the second quarter last year.

But we're very pleased that diluted net income per share was at the high end of our December 28th, guidance in spite of all of the pressures going on.

During the quarter we did not purchase any shares.

And we have approximately 800,000 remaining shares under existing repurchase authorizations.

Because of the previously announced review that we have underway of capital restructure alternatives and other potential initiatives to enhance long-term shareholder value, we don't expect to be making any repurchases before announcements related to the progress of that review.

Finally in this morning's press release, we updated our current revenue outlook for the third 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 risks 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 outlook reflects conditions 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 or outlook, nor, after today, express continuing comfort with today's disclosure other than in public filings or in other broadly disseminated means such as press releases from time to time.

The discussion of trends and outlook, like other earlier parts of today's discussion and press release, contains forward-looking statements provided pursuant to the safe harbor provisions in the Private Securities Litigation Reform Act of 1995 and should be evaluated on the context of the uncertainties described in more detail in this morning's press release.

As discussed earlier, sales trends, especially in retail have been soft and uncertain.

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

We're hopeful that with improvements in consumer sentiment, we may see some benefit from an extended spring travel season with a later Easter holiday this year, but right now we just don't have good visibility of how long the squeeze will last or how deep it will go.

Additionally, we believe our merchandise selection has not been as strong as in the past, a situation we're trying to improve in the short term as well as the long term.

In light of these uncertainties, we estimate that continued soft sales for the third quarter and full fiscal year could result in total revenues that range from 3% to 5% above the prior year.

Without a significant change in trends, third quarter and full fiscal year comparable store restaurant sales at Cracker Barrel could range between down 1% to up 1% from prior year, and comparable store retail sales could be down 6% to 9% in the third quarter, and 8% to 10% for the full fiscal year.

Trends in Logan's comparable restaurant sales in the third quarter and full fiscal year could range from up 2% to 4% from prior year Given the harsher winter weather that we've experienced in February, we would expect February comparable store sales to be below these averages that we're expecting for the quarter.

We presently expect to open six new Cracker Barrel units in the third quarter, four new company-operated Logan's units, and one new Logan's franchise unit.

For the full year fiscal 2006, we continue to anticipate opening 21 new Cracker Barrels and presently expect to open 20 to 22 new Logan's company-operated units and two new Logan's franchise units.

So in summary, we report our results affected by tough sales environment and certain net charges as we've made decisions about positioning the company for better performance in the future, but in spite of the pressures, we reported a solid quarter that was at the high end of our expectations.

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 attention during my financial review.

I'd 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.

This morning I want to cover three topics.

The first is a review of the second quarter results, the second, some comments on the store closings at Cracker Barrel and Logan's and the organizational changes at Cracker Barrel, and last, an update on our long-term operating initiatives.

The headlines on the second quarter were as follows.

This was a positive quarter for operating results.

Comp store sales in both Logan's and Cracker Barrel were modestly above our expectations, and earnings per share was substantially above our expectations when adjusted for the charges for store closings and insurance credits.

Logan's string of positive comps is now 11 quarters and 29 of the last 30 months.

And the improvement and consistent control of food and labor costs at Cracker Barrel that began earlier this fiscal year continued in the quarter.

On the negative side, Cracker Barrel retail continued to underperform throughout the quarter including the critical Christmas season.

So let's look at the quarter in a little more detail starting with Cracker Barrel.

Restaurant sales again positive but with a higher check offsetting negative traffic.

Reversing this decline in traffic at Cracker Barrel is a high priority.

We expect to accomplish this through improved execution, supported by effective marketing programs.

The organizational changes and the long-term initiatives I'll speak to in a few minutes are directed at improvements in execution, especially the speed of service.

As we gain traction on the execution side, it will be important for us to make progress with our marketing efforts, but in the near term, execution will be the priority.

Improvement -- improved management of food and labor costs at Cracker Barrel has continued to pay dividends in the form of cost consistently at or near target, and the programs we have -- we're working on to reduce structural costs, and food, and hourly labor are continuing to have a positive effect.

Examples this quarter are the new poultry contract that Larry referred to and tighter controls over the use of the shift leader position in the stores.

As Larry reported we recorded a benefit from the mid-year actuarial update of our self-insured workers' comp and GL programs.

This has been a very important area of emphasis both for the change in the third party administrator three years ago and more focused claims management processes internally.

It's taken a little while for the benefits to show because of the initial effect of more accurate initial reserving practices and the associated lag in the improvement of the actuarial numbers, but going forward, I believe we're going to continue to see lower costs in this area.

At Logan's, as I mentioned earlier, we had another quarter of positive comp store sales, and we also saw alcohol -- liquor, beer, wine sales continue to be positive and we now now have seven quarters of positive comp store sales in liquor-beer-wine.

Operation execution is the top priority today at Logan's, and we filled the open position of Senior Vice President Operations during the quarter.

The focus here is on consistency of execution, and ensuring that we have management talent in place throughout the field organization to support the growth of the business.

The review of the new Logan's prototype is continuing.

We're evaluating both guest satisfaction and operating performance.

Guest satisfaction is obviously a critical metric for the new design, and scores for the Tulsa location are favorable compared with recent new market openings.

As well as turning up the brand image, the new prototype is intended to deliver improved unit economics, and we're currently in the final stages of that analysis.

Rollout of an updated prototype is still scheduled for fiscal year 2007.

As we announced today, we've closed seven Cracker Barrels and three Logan's restaurants in the past several days.

Our most recent store closings before last week were in 2001.

And as Larry said, we've had a watch list of underperformance in both concepts.

Generally when a store appears on the watch list, we develop specific action plans designed to improve sales and/or profitability, and only when those efforts are exhausted ,do we make the final decision to close as we have in this past month.

Along with the store closings, we've made -- recently made some important organizational changes at Cracker Barrel.

These changes and the store closings were the result of a thorough analysis of our business performance intended to ensure that we are as well placed as possible to compete and grow in the current economic and industry environment.

Cracker Barrel is a strong, established brand, and Logan's continues to emerge as a recognized casual dining chain.

But brand recognition by itself is not enough.

Relentless execution against a well-defined strategy is the key to superior performance in what is becoming a more and more competitive industry.

Having the right people in the right place in a well-designed organization is more critical than ever.

The organizational changes that we made are designed to create clearer reporting lines and greater accountability.

On the restaurant side of the business, we recreated the role of Senior Vice President of Restaurant Operations and eliminated the Divisional VP layer.

These changes increased the focus on key priorities and set us up for success on improving execution, especially in the speed of service both in the base operation, and from the key initiatives I'll address in a few moments.

We also saw the departure of two -- of 10 restaurant regional vice presidents as a result of the review process.

On the retail side of the business, we've created the role of Senior Vice President of Retail, bringing all of retail under one leader, and recognizing the very real need for retail operations and merchandising to be on the same page.

We've also added the position of VP of Planning and Allocation, to report to the Senior Vice President of Retail.

We have searches under way for this new position, and also for a new General Merchandise Manager to run the merchandising function.

When we announced these changes, they were very well received by the Cracker Barrel organization, and there's a very positive attitude and a clear understanding of performance expectations throughout the organization.

The new retail team is developing plans to restore sales momentum.

We have some clear conclusions that have emerged from our review of the retail business.

First, we have some new research data that suggests that guests rated their overall satisfaction with retail substantially below their satisfaction with the restaurant experience.

The research also indicates that the most appealing price range for our guests in retail is the $10 to $20 range.

And that's where we're under-represented relative to other price points.

We also have seen our quality levels have slipped in the past year, and importantly we were under-bought for Christmas.

We had a strategy to -- this year to sell more non-Christmas merchandise as gift items at Christmas, and as a result, we were substantially under-represented in Christmas merchandise itself.

We're working on all of these factors, and we expect to see results over time.

Of particular importance is the Christmas buy, where we intend to return to the traditional Cracker Barrel positioning of being a special place at Christmas time.

Moving on to the long-term initiatives.

First, at Cracker Barrel, the kitchen display system that provides visibility to cook times and the time that the food sits in the pass-through window.

We've rolled this system out to 10 further test stores using the training tools I mentioned on the last call.

And with this experience, we intend to roll out to additional stores in the third quarter and the fourth quarter, and have a total of 30 stores installed by the end of the fiscal year.

The full rollout schedule for next year will be determined during our annual planning process in May and June.

The table optimization program at Cracker Barrel has been installed a total of 12 stores now, and is now also included in all new store openings, so we'll have 25 stores using the new configuration by the end of the fiscal year.

Again, the rollout schedule for fiscal 2007 will be determined as part of the annual planning process.

The simplified menu at Cracker Barrel, which is designed to improve speed of service and reduce food and labor costs, has been in a 60-store test since early in the second quarter.

We're now working on modifications based on the results to date, and expect to move to a phase two test later in the current quarter.

At Logan's, the new prototype is the key long term initiative, and, as I mentioned earlier, we're on track with revisions to the initial design to be ready for the fiscal 2007 rollout.

So, to summarize where we are today, this was a very important for CBRL, despite only modest improvements in sales over expectations, operating performance on the bottom line, excluding the unusual items we've discussed, was substantially better than originally expected, given the challenging environment and the continued shortfall in retail performance.

We conducted a thorough review of the operating businesses and made some significant adjustments in Cracker Barrel designed to improve the ability of the leadership team to achieve its strategic objectives.

And of course, we announced on January the 24th that we're in the process of reviewing capital structure and other alternatives to enhance shareholder value.

As Larry said, that process is not complete, so we're not able to talk about it today, but we'll be reporting back as soon as we're in a position to do so.

And now I would like to turn the call over to questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Matthew Difrisco with Thomas Weisel Partners.

Good afternoon.

Regarding your quarter that you just reported, I think the upside, or top end of guidance you initially gave was around $0.63, and adding back in the $0.05 you get to $0.66 or the net charges of $0.05 that you detailed.

I was just curious with the comp coming in where you expected it , can you describe where that upside came?

It sounds like from your comments it was mix and COGS.

Was there something else in your initial guidance that topped it?

I couldn't figure out how beneficial utilities, for instance, might have been.

I think our last guidance was $0.61 on the high end.

But revenues did come in better than we expected.

And I think we were probably generally a little conservative on a lot of cost areas.

Some of the notable ones, while we had a lot of pressure in utilities, utilities weren't as bad as we thought they might be when we gave that guidance.

I think part of that was the mild weather that we've had this winter.

And we also had some benefits relative to our expectations in group health expense.

And while that wasn't really notable on a year-over-year basis, it was better than we expected when we did our guidance.

So there were a variety of areas, Matt.

Okay.

So then I guess on a going forward, continuing basis, what we see in the effect on the COGS coming in where they did, is that something --

We're not giving any guidance as we described.

I apologize for that, but I think under current situation we've got to stick to that rule.

So we're not getting any COGS guidance?

Other than I did describe to you where we stand on commodities.

Right.

Okay.

Thank you.

And we'll go next to Robert Derrington with Morgan, Keegan.

Hi, yes.

A couple of questions.

Mike, you had -- the company had hired a consultant to help with the retail planning and strategy a couple years ago I believe it was, and in light of the changes that have gone on recently within retail, is there anything that's come from that study that you have been able to use and bring into the retail business, or is it really a situation where the execution is so poor or the purchasing has been so off, can you kind of give us some color there?

Yeah, the consultant that you're referring to, Bob, was focused on the floor plan and the layout and the shopability and so on and so forth.

We've had two different ideas coming out of that in test for a period of time.

We're not a simple retail operation, obviously, we've got a couple of things going on.

One is we've got the interaction with the dining room and the flow there.

So, one of the tests we've been doing is to move the registers to the opposite wall of the shop to allow a better flow in and out of the dining room.

We had some concerns about whether that really is working as well as we'd like.

And in the other test, we put the registers in the center.

Those tests have been ongoing.

Frankly they have not been as important to move forward with, as has been important to figure out the merchandising selection.

You will note that I commented on quality, and I think we may have overreached in our pursuit of margin on retail to the detriment of quality.

That doesn't mean we're going to lose a lot of margin.

I just think we have to be much more focused on quality.

And the other thing -- reason we're different is, is we want to be an old country store, so looking like a state-of-the-art mall retailer, in terms of layout, may not be the right way to go.

And we have some feelings that we may have become a little more -- too well organized with some of our efforts there.

So focus is on merchandising, what kind of merchandise, how do we put Christmas back in our lives, how do we get the right price points to match what the consumer wants, and then we'll come back and rework on the shop layout.

Along the lines of your Logan's business, it seems to be fairly stable; things seem to be going fairly well there.

Can you give us some color on that management team that's in place, and do you anticipate any other changes, Mike?

No.

I certainly don't anticipate any changes.

We took a hard look at all of our business in the last month or so, the Senior Vice President of Operations position had been open for six or seven months.

So we feel that as a result a search, we're very happy with that, and now we have -- we're in position to really do both the things we want to do, which is the whole brand development with the the prototype and the marketing and the menu, and also have somebody out there every day worrying about consistency of execution.

Okay, and then, Larry, two housekeeping items, if I may.

When do we lap the remaining menu pricing at the Old Country Store?

The next lap, I guess, is in April.

In April, okay.

And then, as far as the stock option expense, which lines did the $2.4 million fall?

It's in G & A?

It's all in G & A?

Yes.

Okay.

All right.

Super.

Thank you.

Thanks, Bob.

Our next question comes from Bryan Elliott with Raymond James.

Good morning.

Just a couple items.

First, Mike, you mentioned speed of service I think it was the first initiative and focus on operations at Cracker Barrel.

Is that indicative of just a perceived opportunity, or have we fallen back some on that measure?

I continue and have believed for some time, it's a real opportunity.

The new initiatives are very much focused -- the kitchen display system, getting the food out faster, and the table configuration which allows us to optimize the number of seats occupied, both are focused on that speed.

We rolled out an IVR system -- Interactive Voice Response -- in the fall last year, and we're getting good data.

What we don't have is trend data over time.

We're seeing pretty decent numbers, but I think, I don't know whether, I don't quantitatively know how to answer your question.

But have we fallen back?

I think we may well be on a plateau, and we need to get moving off the plateau.

And one of the primary priorities of our new Senior Vice President of Restaurant Operations is to instill that focus on the speed being the critical thing that we can do, both for ourselves and for our guests, and first using our best practices and then building on that with the rollout of the initiatives.

All right.

Thank you.

Larry, a couple modelling things.

We all have to build models here, which is different and fun.

The breakouts, are they one time items?

You said the options are all in G & A. Can you help us allocate the gross credits and charges relating to the other items properly through the income statement?

Yeah, we've got -- let's see -- we have about $5.5 million of credit in labor.

This is all pre-tax.

About $6.8 million of charge and other store operating expenses.

That's the store closings, right?

Yes.

Net of -- there's a couple of other things going on there related to insurance, but that's substantially what that is.

The other thing is more or less offset.

And then the remainder is in G & A.

Very good, thank you.

We'll go next to Steven Rees with JP Morgan.

Thanks.

I just wanted to ask about the advertising at Logan's, I think you've used some in the past.

I just wanted to know if you did any in the second quarter, and what the plans were if the second half in terms of advertising.

We are, as a result of the advertising we ran in the first half of the year, we're reworking flighting and the weights we want to use.

We're going to be running what is best described an extended test in the second half of the year to -- to support what we believe is the most effective way to use the advertising, so we're not rolling out beyond where we had been before in terms of dollars, Larry do you have --

No, I don't have that with me.

And how many units are affected by that test?

I think it's going to be in the low 20s.

Okay.

And then if you could just give us an update on, I think you hired a new corporate-wide general purchasing manager in the first quarter.

Can you just update us on the cost savings you're seeing there, and basically, how much you expect to save in terms of going COGS forward?

I don't know that I can quantify the numbers.

The numbers that we've achieved are built into Larry's remarks about negative inflation.

We've been working on some major things, such as the Logan's beef contract, which we now have through the end of the fiscal year.

We have new chicken contract in both concepts where we've taken a broader different approach rather than just renewing an annual contract or updating an annual contract.

We stood back with chicken and said where strategically do we want to be?

Where do we see the commodity going, and we've locked into somewhat longer time period at very, very attractive prices.

So those are the kinds of things we'll be working on.

There'll be more to follow, but they'll show up in our guidance as we talk, when we get back the giving guidance as we talk about cost of goods.

Okay.

Thank you.

Thank you.

We'll go next to Dennis Forst with Keybanc.

Yeah, Larry, I wanted to clarify the debt numbers at the end of the quarter.

In the balance sheet it showed, I think, $208 million of long-term debt.

Was there any short-term debt at the end of the quarter?

That included about $15 million drawn under our revolver.

And there was no short-term debt other than that.

Okay.

So the 208 --

-- Included $100,000 or $200,000 of current maturities of long-term debt.

It's really minor.

Yeah.

And then what about the add back for the [cocoas], do you know what that number was for the quarter?

Is that gone?

On the income?

Yes.

Earnings per share?

Yes.

It's a 3% annual accretion rate.

I don't have the specific number.

Get it off the cash flow.

The cash flow statement should have that?

Okay.

Yeah, I looked in there.

So the accretion of zero coupons was $2.8 million for the six months.

Half of that.

Got you.

Okay.

Thanks.

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

Hi.

Good morning.

First off, I was hoping to focus a little bit on the stores that were actually closed.

The 10 of them and just kind of back of the envelope.

It looks like based on first half sales and realizing the seasonality of the business, but looks like for both Cracker Barrel and Logan's there were about $1 million less in [AUV] than the system as a whole, so what I was curious as to the magnitude of pretax loss for the units that have been designated to be closed.

Are there any others in materiality that are losing money?

Thanks.

Well, they were not material in terms of the losses that they were incurring.

In fact, I indicated most of them were positive cash flow and well, what we decided and determined was that we could realize greater benefit from them by selling them.

They, in effect, didn't justify from their cash flow not selling them.

What we think we can realize in sales proceeds is greater than what they're getting as a return on those sales proceeds.

So it really was not a significant impact, bottom line.

Okay, Larry.

So even on a pretax basis, I'm just trying to figure out what, potentially, what kind of pickup you are able to generate from the closings.

You're saying that even down to pretax, including the D&A, it's really not going to be of material nature.

They did not have -- they were not a significant number on the operating income line.

Okay.

Bigger picture, I understand there's speed of service initiatives and some operational efforts underway, but it seems like the bigger issue for the Cracker Barrel brand at this juncture is the raw appeal from a consumer standpoint.

So Mike, I'd be curious, if you'd like to take a step back and just kind of share your thoughts as to what efforts are underway to enhance the appeal as both the Cracker Barrel format and really the category as a whole seems to be under some pressure from other components of food service that are out there.

Category as a whole being family dining?

Yes, more in the family dining side.

Right.

Well, the research that we've conducted recently confirms what we've believed and seen from former research, which is that, first of all, the consumer does not see us as part of a category.

They see Cracker Barrel as being pretty unique in terms of a brand and an experience.

We do, however, have to compete against others.

We have a pretty good fix on our competitive set right now as a result of the most recent research.

And at breakfast, as you would expect, it's the others that do breakfast, which is primarily the family diners.

At lunch, primary competition, at lunch and dinner, the primary competition is some mid-priced casual diners, not the family dining set.

So knowing that, we can start thinking much harder about what are we going to do from a direct competitive appeal point of view.

The reason we're so focused on speed is that what we -- as the competitive environment continues to be more competitive simply because everybody's building out, we're finding, and we would historically pioneer many, many interstate sites, we're finding others coming and sitting beside us.

The guests' propensity so wait is something we're very focused on.

So the extent that we can maintain or increase the speed of service and increase the throughput will capture more volume.

We don't think the people are not coming to us because of the lack of appeal of the concept.

We think they are not coming to us because in today's world, they have more and more alternatives.

So increasing our capacity is absolutely the number one priority.

The next piece of the puzzle, as I intended to indicate in my remarks, is that we have a very clear idea what it is that the guest finds appealing about Cracker Barrel.

We have to convert that into some marketing that will trigger a reason for a visit, either trial or an additional visit -- increase in frequency.

That's something that is, again, a high priority, but I don't want to -- I want to get the operational piece really going the way we want, see a little bit more of a trend on our guest feedback from the IVR, to know we're making progress there before we go out and flip a switch to bring people in.

What we don't want to do is make the waiting worse by bringing more people in who find that they have to wait 30 or 45 minutes or longer.

So it's a dilemma of having a very attractive product that a lot of people want, and we have to be able to open the channel to let them experience it more.

Great.

But the competitive challenges whether it be from above or below, those likely are not necessarily going to go away.

So, improving the convenience, it seems like there's a bigger issue of trying to grow who your customer base is also.

Well, I think we've got to be careful that we don't try to be all things to all people.

We have a pretty good handle on our customer base.

I think there's absolutely a little bit of an older skew to our customer base, but one of the things that we see from the research very clearly that was right in front of our eyes but we didn't focus on it as much is the multigenerational family experience seems to come back as a really positive attribute of Cracker Barrel.

Kids go with their grandparents, three generations go together, and focusing on that will broaden our appeal or focusing on that particular experience will, I think, broaden the appeal.

It will also, over the long-term, allow us to extend across the generations, and I would remind everyone that the big bulge of baby boomers is sitting right there at about the sweet spot for our age profile.

So, we don't think we're going to run out of customers over the next 10 or 20 years.

Okay, and then lastly, with the organizational changes, as far as streamlining the personnel, is there anything material there?

From -- is that a couple million dollars of savings or is that --

Wasn't done for a savings point of view.

It was done so that we -- we, took out the divisional layer so we don't have two divisions both trying to work on the same things, maybe in slightly different ways.

We wanted to have absolute focus and wanted a level less of communications from the top to the bottom so that one less opportunity for things to get muddied as they go down the communication line.

To the extent we might save a few dollars, that's fine, but that was not the intent.

Okay thank you.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next Gary [Murwitz] with Investment Counselors.

I apologize if you already answered this.

Pricing in April, once you lapped the price increases.

What is your plan right now?

We never preannounce our pricing plans.

We always try to have future considerations in test and that sort of thing, but we never preannounce for competitive reasons.

Okay.

Thanks very much.

Our next question comes from Aaron Cowen with Karsch Capital.

Hi.

Good morning, gentlemen.

In the section about charges, you mentioned that there's a relatively positive prospects for proceeds from the dispositions of the closed locations.

Can you just elaborate a little bit on that?

How we should be thinking about that?

Well, I think there's only a couple of those locations that are leased and we think that they're both candidates for favorable disposition, as well, where they're sub-leased or something, something else.

So, the rest are owned properties, and we expect that we'll be able to sell them for net proceeds of about $10 million.

How many locations is that?

That would be 8 of the -- of the 10 total locations.

Thank you.

And we'll now go to a followup from Matthew Difrisco with Thomas Weisel Partners.

Hi, just a bookkeeping question here, Larry, on the accruals and the assessment of the insurance and the workers' comp.

Obviously that is all from a [inaudible] Does that include any prior year corrections as well?

Yeah.

It reflects updated estimates of our ultimate losses for the last couple of years.

It's a combination of lower expense for this year, lower loss pick for this year and lower reserves for last year.

The last couple years.

If -- can you provide for us or can I get it offline how much is -- falls in or is attributed to this year, so that we can just get an accurate operating number for this year?

Yeah.

I don't know that we're going to break that out.

We have to, we have to look at that.

You have to understand that that whole actuarial arena is an area that changes and fluctuates a lot.

So every year, you have some adjustment related to a better estimate of your pick for prior years, sometimes it's up, sometimes it's down.

So I think it's -- I don't know if there's a lot of meaning to be had by splitting it out any further other than to tell you that we expect to have more favorable cost recognition now.

Okay, but given it's a second quarter, I guess the majority of that was then from prior years?

Yes.

Okay.

And then also a comment you made on the retail side where, Michael, where you said about the average checks at the retail store, you see an opportunity between $10 to $20.

Looking on a historic basis, can you give us a sense where we sit today versus the better times as a percentage of sales or just to get a feel for -- is it an average check issue that we're dealing with, or is it a converting that restaurant consumer over to a retail consumer?

What's your impression of that?

Well, I think it's both.

I think we have lost a little in terms of the average check -- or, the average price point that they're purchasing at.

Part of that, it would appear, is self-inflicted, because we moved our price points down with the objective of creating greater volume, but when we ask them what do you think you would spend on an item at Cracker Barrel, the majority fall into the $10 to $20 range.

That's probably a little bit inflated, just like they probably inflate their household incomes when you ask them, but, nevertheless, that's a long way above the average price point for a single item now, that we sell, which is in the mid-to-low single digits.

So, it's difficult to quantify the opportunity.

It does say that we've got to do something pretty quickly, and we'll find out when we do that, how much of that research turns into real numbers, but I think it could be meaningful.

Okay.

Thank you.

Thanks.

We'll go next to Robert Derrington, Morgan, Keegan.

Yeah, hi.

Couple questions.

Larry, first one for you if you could help us out.

We have, I guess, a total of 10 stores that are being closed, 7 Old Country stores and 3 Logan'sRoadhouse, and of those 10 stores, I think it was mentioned, a net proceeds and sale of those properties of about $10 million.

What I'm trying to understand is the average proceed per store relative to some time ago when you completed a sale lease-back transaction and the average, I think, price on those properties back then was well over $2 million.

Yeah, I think, over the years I've had that kind of question a lot of times, and I don't think you can extrapolate from the sale lease-back stores from several years ago.

And I don't think you can extrapolate from these.

All stores have their unique situations, and the case of these stores with them being underperforming, we -- they may not be in the best locations to get the best real estate value.

So none of this should be construed an an indicator of what our real estate portfolios were.

Okay.

That's fair enough.

And then Mike, a question regarding management turnover, hourly turnover within the system.

Obviously there's a level of uncertainty given the company is going through some strategic evaluations.

And I'm just wondering from a person in the field's view, or, I guess, your take, how do you keep the troops focused on the tasks at hand, given the possible uncertainty of changes that could affect their daily lives?

Well, I don't think it's as much of a field issue, because I think the world of a district manager or a general manager is a fairly confined one, and nothing is happening that should concern any of them.

I think in terms of the corporate leadership in Cracker Barrel-Logan's and CBRL here, that the number one thing I'm doing is communication of staying in touch with everybody.

Being very open when we have decisions coming out of the strategic process, we will communicate them and will deal with them then.

I don't have any sense at all that we have -- we're at risk right now.

Well, I'm just wondering if, I thought you had mentioned you had eliminated a level of management out in the field.

Well, we have -- we had at Cracker Barrel, two restaurant divisional vice presidents, each having essentially half of the system.

That was a new level -- layer that we put in about four years ago.

And we're taking it back out.

Okay.

All right.

So that's the --

One was promoted; one retired.

Okay.

And so generally the field staff still report to the same type folks that they did before?

Oh, absolutely.

Okay.

All right.

Very good.

Thank you.

Thank you.

Go next to Bryan Elliott, Raymond James.

Hey, Mike, wondered if you could address the Cracker Barrel stores that are closing, and give us a sense of what characteristics they may share or not share.

And also a sense of your view today of, given that new store performance has been, been spotty for a while, what your sense of the ultimate potential footprint of Cracker Barrel as a concept might be.

I don't think that, across the seven, that there's a common theme at all, other than the fact that when we do the analysis that we do, based on an opportunity cost of realizable value, we're not getting a return.

They range in age, they range in types of location, one off-interstate, and I think, Larry, and the other's on interstate, so I don't think we can draw conclusions from this group that there's some fundamental group that's at risk within the system at all.

You know, we really continue to be amazingly fortunate that we have such a strong concept that, up and down, we can make money at relatively low sales levels.

So I don't think that's an issue.

I think this is one of -- it's five years since we took a hard look, here we are with group of stores, two of which are fairly unique in their own ways.

In terms of the overall footprint in Cracker Barrel, I don't think this changes anything at all.

I continue to believe that we can get to the thousand plus without going to the West Coast..

I actually think, when we continue to work them on that, we may see that number grow rather than diminish, but I'm not willing to commit to that at this point in time.

I don't feel bad at all about the fact that we've been tough-minded, dealt with a very small number of unproductive assets, and now we're moving on.

Could you clarify that last point a little bit in context of the fact that average weekly sales have been lagging same store sales pretty consistently for several years now, which in one sense, indicates the most recently opened units are not as productive from a sales standpoint as the older units.

Is that an improper read of that statistic on my part, because,if it is not then it would indicate possibly some saturation or other issues with respect to longer term growth prospects.

Well, we do have some cannibalization that's been going on over the last several years.

We've been deliberately filling in in our core markets.

Florida would be a great example of how we've done that.

We've seen a little more cannibalization than we've projected in some cases.

We think we have a better model now, to predict cannibalization than we had several years ago.

We're also working on a cannibalization recovery program so that when we do cannibalize an existing store, we have a specific sales rebuilding program.

In a lot of cases where we're seeing cannibalization, we're also expecting substantial population growth in the marketplace and some of -- some of the higher volume stores which have taken some cannibalization will have the opportunity to rebuild, but would not have had a substantial opportunity to build beyond where they were, so the read is right.

We've seen as a result of new stores, some lowering of average unit volumes.

We are -- on the new stores themselves, as opposed to cannibalization, it's -- we have -- not everything would be a number one priority, but way up there on the list is making certain that when we project sales and then we open a store, we get it right, and I think everybody at Cracker Barrel is very focused on that.

But it doesn't change my view of where we can go with the brand.

All right.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS] We'll go next to Peter Oakes with Piper Jaffray.

Hi, I was just curious, those seven that are closed are there any geographic concentration?

It didn't sound like it, but I was curious if there is.

No, more of them are in the Midwest, but I don't know, if that's per se something.

They're spread out in seven different states.

Okay.

Thanks, Larry.

And at this time we have no further questions, I would like to turn it back to Mr. Woodhouse for closing remarks.

Thank you.

Let me thank all of you again for joining us this morning.

We think we've had some positive news to talk about.

And we look forward to talking to you again at our next conference call,

Thanks.

Thank you.

This does conclude today's conference call.

Once again we thank you for your participation.

You may disconnect at this time.