Cracker Barrel Old Country Store Inc (CBRL) 2006 Q3 法說會逐字稿

Good day and welcome to the CBRL Group conference call. [OPERATOR INSTRUCTIONS] 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.

Thank you.

Good morning everyone.

Thanks for joining us this morning.

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

The story this morning has two main features.

We think we have a strong operating performance in a soft sales environment and we made progress on -- we are on track with our two major strategic transactions.

So with that I will turn the call over to Larry for his financial review.

Thanks, Mike.

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

Hopefully everyone has had an opportunity to see this morning's press release announcing our fiscal 2006 3rd quarter results.

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

Furthermore as we recently disclosed we won't be giving earnings guidance of our own until further notice because of our continuing initiative to pursue a potential divestiture of Logan's Road House.

As you no doubt have seen in our press release we are reporting no updates on that initiative at this time and therefore won't be taking any questions on the scope, progress or status.

We will make appropriate disclosures at appropriate times but not today, at least beyond some basic factual third quarter information.

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

We are pleased the bottom line results for the quarter were strong given the uncertainties we've faced particularly in revenues as many in the restaurant industry have experienced softness apparently related to consumer spending habits in the face of rising gasoline prices.

While we reported a nominal decline in net income and other measures we believe it's important to consider certain noncomparable or infrequent items that affected this quarter compared with last year.

We've included a table on this mornings press release to reconcile our reported earnings with earnings before those unusual items.

I would like to address those items first.

The first item is expensing of stock options under FAS 123 R. Fiscal 2006 is our first year of adopting the new accounting.

So while we had option awards in the prior year there was no recorded expense.

Option expensing, all of which is in G&A expense, had the following effect of on our reported Q3 results: operating and pretax income were reduced by $2.4 million, operating margins by approximately 40 basis points, net income by $1.6 million, and diluted net income per share by about $0.03.

Next is reported in the second quarter back in February, we made a decision to close seven Cracker Barrel units and three Logan's restaurants.

We recorded impairment of those locations back in the second quarter to write them down to estimated net realizable value.

We indicated them because if the actual closings were to occur in the third quarter we would incur an additional $3 million to $4 million in closing expenses including the estimated future net lease liability.

Our actual recorded expense in the third quarter was $3.6 million and included a provision for impairment related to renovations of a facility that we own here in Lebanon, Tennessee, and used for housing over 1,000 management trainees each year.

The prior year quarter also included an impairment.

That was approximately $400,000 and it was for one Cracker Barrel unit that was expected to be closed but didn't actually close until this year's third quarter.

It was among the seven stores that we did this year.

So the net effect on our year-over-year comparisons of the charges this year versus the charges last year was to reduce operating income comparisons by a net $3.2 million, operating margin comparisons by approximately 50 basis points, net income comparisons by $2.1 million, and diluted net income per share comparisons by approximately $0.03.

Finally our expense associated with the previously announced capital structure and strategic initiatives including accrual previously announced success in retention bonuses, and a writeoff or expensing in certain deferred and current financing costs reduced operating income by $3 million, operating margin by approximately 40 basis points, interest expense was increased by about $800,000, pretax income was reduced by about $3.8 million, and net income by $2.6 million, and diluted net income per share by approximately $0.05.

Bottom line then before the effect of these items our diluted net income per share for our fiscal third quarter was $0.59 versus a preimpairment $0.53 a year ago.

That's an increase of about 11%.

And on a 2.6% revenue increase in a tough sales environment we increased operating income before these charges in the quarter by over 10% with an associated 50 basis point improvement in operating margins.

The year on operating income was COGS and I will describe that in more detail in a moment but first let's look at revenue.

Revenue in our fiscal third quarter ended April 28, 2006 increased 2.6% from last year's third quarter.

That's approximately $644 million compared with $628 million.

The increase came primarily from new unit openings partly offset by decreases in comparable store retail and restaurant sales at Cracker Barrel.

We ended the quarter with 19 more Cracker Barrel units and 11 more company-operated Logan's restaurants than a year ago.

The comparable store retails were down 5.4% for the quarter.

Still even with soft sales our retail revenue results were better than we experienced in the first half of the year when comparable store retail sales were down just over 10%

Cracker Barrel comparable store restaurant sales for the third quarter were down 2.1% for the year ago quarter reflecting a 1.2% higher average check which included approximately 1.8% higher menu pricing and our guest traffic was down 3.3%.

The six tenths of 1% of unfavorable menu mix reflected relatively softer dinner sales and also including lower dessert and beverage sales while the lower check breakfast day part was up slightly.

So it was a mix effect among day parts as well.

Only our regions comprising primarily western and southwestern states recorded positive comparable store sales including positive positive comparable store retail sales in one region that includes the area from Mississippi through Texas.

Florida was our softest region in the third quarter for both restaurants and retail.

In general, however, trends were below expectation in almost any day part and region.

We believe that there are external factors that are contributing be to the softness including a discretionary spending squeeze because of higher gasoline and utilities prices.

Our objective continues to be to overcome such issues and increase sales and traffic in each store.

In May we took a six tenths of 1% price increase at Cracker Barrel and we are currently carrying approximately 1% of menu pricing in our average check.

While Cracker Barrel comparable store retail sales continue to be soft in the third fiscal quarter, down 5.4%, that was a notable improvement from the trends in the first half of the year.

Our Easter merchandise line was down from prior year in line with overall same store sales and the quarter benefited as previously reported from stronger reported sales in April.

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 have 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 the visit is by foregoing or deferring a retail purchase or by limiting purchases to lower price point items.

Our average price per item terms sold was down approximately 6% in the third quarter from last year with items sold approximately flat in our comparable stores despite the decline in guest traffic.

Rounding out our comparable store sales results for the third fiscal quarter, our Logan's Roadhouse concept recorded an increase of 0.5% in comparable restaurant sales while guest traffic was down 2%.

The average check increased 2.5% all of which was menu pricing, as higher alcohol sales mix offset lower food menu mix.

Logan's last price increase was in October and we are carrying approximately 1.7% of pricing as we enter the fourth quarter.

Because of the status of our strategic initiatives with respect to Logan's we are unable to discuss further details of their results at this time, however.

During the third fiscal quarter we opened six and closed seven Cracker Barrel Country Store units, and we opened three and closed three company operated Logan's Road House restaurants plus we had one franchise Logan's open.

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

Operating income for the quarter before the effect of the items I described earlier was up 10.4% on a 2.6% revenue increase and operating margins were higher at 7.4% of revenues compared with an adjusted 6.9% a year earlier.

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

COGS was the driver of operating income and market performance 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 COGS than restaurant sales.

On the food costs side commodity inflation was down approximately four tenths of 1% from a year ago and and retail COGS reflected net favorability as well and was from higher initial markons partially offset by higher markdowns.

Labor related expenses were approximately the same as last year as a percentage of revenues, primarily reflecting the effect of lower sales off is set by favorable group health expense.

We did experience modest inflation, about 2% at Cracker Barrel, and overall wage inflation including pressures from minimum wage changes that affected tipped employees primarily in Florida.

Other store operating expense primarily reflected continuing high utilities expenses and the effect of lower sales partly offset by lower advertising expenditures.

G&A was 100 basis points higher as a percent of revenues this third quarter than last year.

The primary causes were this year's adoption of option expensing with approximately 40 basis points of effect and also nonrecurrence of last year's insurance recoveries related to certain litigation.

Interest expense as I described included the approximately $800,000 related to writeoff of deferred financing costs and other expenses related to the new credit facility as described earlier.

Our third quarter income tax rate was 33.6% slightly lower than last year's 34.6% and our first half rate of 34.3% and that reflected the favorable conclusion of certain tax audits partly offset by expiration of certain job creation tax credits.

Wrapping up the third quarter, net income before the items described earlier was $30.5 million, up 13.6% from similarly adjusted $26.9 million a year ago while GAAP net income of $24 million was down from $26.6 million.

Diluted net income per share before those same unusual items was $0.59, up $0.06 or 11.3% from the similarly adjusted $0.53 reported for the third quarter last year.

We are very pleased with these results in what has obviously been a challenging sales environment.

During the quarter we committed two significant phases of our capital structure and strategic initiatives that we had announced previously.

First, we entered into a new credit facility which includes a $725 million term loan, a $250 million revolving credit facility and a $200 million delayed draw term loan facility that can be used for future refinancing of our outstanding convertible notes or for other general corporate purposes.

The two term loan facilities expire in seven years with modest amortization requirements and the revolver at five years.

The $725 million term loan is LIBOR plus 150 basis points, and was used for the seconds phase of our restructuring, completion of our modified Dutch auction tender offer.

I'd like to point out, we also entered into a swap, by the way, to fix the rate on substantial portion of the term loan at less than 50 basis points over the initial LIBOR draw.

Under the tender offer, let's go back to that, we repurchased 16.75 million shares, tendered at $42 per share, with settlement occurring early in the fourth quarter.

So our balance sheet in the third quarter reflects a transaction in other long-term obligations which reflects our ability and our intent to settle with the draw from our term loan which in fact occurred earlier in the fourth quarter.

That 16.75 million shares represented approximately 35% of our common shares outstanding.

We understand this was one of the largest tender offers successfully completed in the last six years.

Finally because of ongoing disclosure limitations related to the potential Logan's divestiture aspect of our strategic initiatives project we are not providing guidance this quarter.

Sorry for any inconvenience this may cause you but we are adhering strict to the those limitations and we just can't answer any question this morning about that ongoing review or outlook for the quarter.

So in summary we recorded solid third quarter results affected by a tough sales environment that were ahead of last year before the effect of the charges we described.

And we completed two significant phases of our capital structure project.

We think that's a successful quarter.

With that, I thank you for your attention during my financial review and I am going to turn it back over to Mike Woodhouse who has further remarks on operating trends and initiatives.

Mike?

Thanks, Larry.

Good morning again everyone.

This morning I intend to cover four topics, the first to -- some further comments on the tender offer and the Logan's divestiture, second, headlines on the third quarter performance of Cracker Barrel, then some comments on what we see and what we will be doing in the fourth quarter, and finally an update and perspective on longer term initiatives at Cracker Barrel.

These specifically aimed at driving traffic, improving the guest experience and lowering our structural costs.

As we disclosed to you in the quarter we lost the tender offer on March 31 and the tender period closed on April 27.

The offer was oversubscribed at $42 which was below the ends of our range so we applied a 71% proration factor.

At the same time the settlement of the tender shares we drew on a term loan portion of the new credit facility and concurrently as Larry said, effective August 3, swapped out a portion of the load from the fixed rate for the remained of the seven-year term.

So we view the tender and the credit facility as a success and we have one of two major transactions that we announced on March 17 behind us.

The second transaction which is the divestiture of Logan's is still in process and we are working diligently on that process and as Larry said I'm sure you will all understand that we have some securities laws restriction that preclude further comments at this time but we will be disclosing progress as permitted as soon as we can from time to time.

The headlines on the quarter are as follows, pro forma EPS before the charges we referenced in the lease were 11% above last year despite a difficult sales environment for the industry as a whole.

Sales trends were affected on a monthly basis by the shift leased from the March period last year to the April period of this year, and trends in April softened substantially in the second half of the period we believe as a result of primarily as a result of gas prices hitting $3 the attendant media frenzy around that.

It also appears to us that the timing of the slow down in both Cracker Barrel and Logan's was currently with overall industry weekly trends.

Day-to-day both restaurants and retail sales at Cracker Barrel have improved modestly from the April average when we adjust hat average for Easter.

In retail in the quarter we ran porch sales with some new features.

We ran four days instead of three days and we ran maximum markdowns of 60% compared with our traditional 75%.

These charges resulted in sales higher than last year's porch sales and which had an overall positive impact on the five-week period between 3% and 3.5%.

Comparable store sales of the Easter merchandise over the season as a whole were down own 3% only 3% on a comp store basis which is an improvement over the retail run rates since the beginning of fiscal 2006 and importantly this was merchandise that was purchased before the management changes I reported last quarter.

In other words, by the previous teams.

So we still have merchandise purchased by our new team in the pipeline ahead of us.

In April we transitioned back from the free-standing seasonal menus to the traditional insert that we have been using for a number of years.

The early free standing seasonal menus were operationally complex and didn't produce the intended traffic margin improvements.

By using the insert format and reducing the number of offerings we can simplify operations including reducing the substantial training costs and also increased fee for service along with achieving margin improvements.

For example, the new inserts features just one entree, chicken and rice, and the sales mix in the current promotion is two weeks is 5.2% for that item.

At the same point in time last year the seasonal menu was generating 5.6% from three entrees two of which were grilled items which resulted in substantially longer ticket times.

We simplified the other categories in a similar fashion, for example, desserts where strawberry shortcake is the only featured item this year.

It is running at the same percent as the three promoted items combined last year.

I'll discuss the whole idea of speed of service when I speak about the new longer-term initiatives in a few moments.

As Larry said we were very pleased with achieving 11% increase in pro forma EPS and an associated 50 basis point improvement in operating margin margin despite the difficult sales environment These numbers speak to the focus that we were able to maintain on day-to-day operations while also working on two significant transactions.

Turning now to the fourth quarter.

As we stated in the release, we will not be providing any guidance until the completion of the Logan's divestiture but I would like to cover some areas of focus for Cracker Barrel in the fourth quarter.

First, operational execution in the restaurant is focused on speed of service.

This is a key factor in improving the guest experience and I have already mentioned the promotion, chicken and rice, that we are running to support ticket speed and also as we know from previous promotions that's a proven guest favorite.

The IVR system, interactive voice response system, that we use to get guest feedback rolled out earlier this has provided excellent data on performance against a number of attributes that guests tell us are important.

And it's especially important to any initiative against speed of service by providing weekly reporting by store.

As part of the testing of the kitchen display system that I will talk about a little more in a few moments we developed the capability to match the actual ticket with an individual IVR respondent so we can measure the actual performance against what they are telling us and what we have seen is a very strong and consistent correlation between the guest perception of speed and the actual ticket time.

On the retail side we are going to be focusing on a number of short term priorities.

We've introduced a new Barrel Bargains category for early mark down of slow movers within an assortment.

We are going to continue to focus on a stronger selection across the price point range to mitigate some of the lower price point trade downs that we saw last year.

We are focusing on a cleaner transition between seasons, in this case moving out of the season into the fall season later in the quarter, using a combination of the Barrel Bargains, the Clearance Corner and the porch sales.

We are also rolling out the successful task of an exclusive quilt assortment and a build a watch program.

We are also working to improve the quality of our signature rockers and expect to have those in the stores during the quarter.

And finally on retail we are emphasizing retail food for travelers, snack offerings that are going to be prominently displayed to build on our current positive trend in retail food.

For the next fiscal quarter and beyond the key goals for Cracker Barrel remain the still that have been for some time.

First grow system sales and traffic consistently by delivering consistent positive results in same store sales and traffic and opening new stores at sales levels consistent with exceeding our hurdle rate for our internal rate of return and then by leveraging the restaurant traffic by increases in retail sales.

Second goal is consistent margin expansion over time at a rate greater than the leverage that comes from positive traffic.

And the third goal is to consistently improve return on invested capital and cash flow generation in both the existing store base and our new stores.

We believe that with the demand we generated as evidenced by the wait times in most stores at peak periods increasing speed of service and therefore through put provides us with the best opportunity to generate positive traffic in the short and medium term.

One important piece of evidence for this is the wide range of hourly sales rates that we achieved by similarly configurated stores during periods on the wait.

So if we raise all stores to the level of the best stores we will see significant traffic improvements.

We are tracking the opportunity in several ways.

First we are revising and reinforcing the best practices already in place for staffing, scheduling and management of the pass through window.

Second, we expect to roll-out the kitchen display system that I discussed previously starting in the first quarter of fiscal 2007.

We see an improvement in table turns and traffic in the test of this system when it's combined with the best practices staffing levels and we plan to use the fourth quarter to confirm these findings.

Thirdly we expect to roll-out the table configuration initiative where we have also seen improvements in traffic in test stores.

Again we plan to use the fourth quarter to provide further support for this conclusion.

Longer term, the simplified menu which is currently in test and new initiative to streamline kitchen processes will also enhance speed of service by reducing ticket time standards and averages.

These initiatives will also improve labor costs by leveraging the fixed components of labor.

On the cost side, we are continuing with the purchase initiatives we began two and three years ago and we believe there is a real opportunity ahead of to us manage our structural costs as well as improving visibility in management commodity prices.

A current example of these initiatives is a national produce management system that we expect to roll-out in the near future.

And also next year we have an in depth review of the supply chains on both the restaurant and retail side of the business upon our agenda.

Another simple but important example of our commitment to attacking structural costs is our initiative to automate the washing of pots and pans.

With our rather low check average and our commitment to made from scratch food this area is a significant pressure point in the labor cost for us and we've been testing new equipment that in tests have shown to reduce labor costs meaningfully.

We are planning the roll-out for the next fiscal year.

On the broader front we are working on ways to leverage strength of the Cracker Barrel brands.

This is a comprehensive review and we will talk about it more in fiscal 2007 as ideas and plans become firmer.

So to summarize where we were it was a difficult quarter from a sales point of view with good operating results.

We are clear on the long-term goals for Cracker Barrel.

We are confident that the operating initiatives we're putting in place will position us to achieve those goals.

The organizational changes in retail restaurant operations that we made in January and I reported on in February are paying dividends in the form of increased focus and better understanding of our priorities.

And we are actively working on brand initiatives to the Cracker Barrel brand and extend its scope and reach.

Finally I would like to thank the management teams at Cracker Barrel, Logan's and CBRL on maintaining focus on day-to-day operation, making substantial progress on the two strategic transactions and not losing sight of long-term goals that we established for ourselves.

With that I would like to turn the call over for questions.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Matthew DiFrisco with Thomas Weisel Partners.

Can you give us your current price increase that you have now at Logan's or what the factor is on the Logan's menu.

Logan's is carrying about 1.7% right now, Matt.

Was that recently upped as well at the same time that you did [inaudible]

No.

The last increase at Logan's was in October.

And then I guess are you then not able to give Cracker Barrel guidance even though peers of yours who have divested other brands in the past have given going forward business forecasts for the going business, going forward business, or is it also that in the past when gasoline and uncertainty of macro things you have also not felt comfortable with guidance.

I'm trying to figure out why we are not getting guidance on the Cracker Barrel side of the business.

Because of the overall uncertainty of we are not reporting Cracker Barrel, we are reporting CBRL Group, and we have various uncertainties that we can't report on at this time.

Admittedly we understand that it is an uncertain sales environment.

There is no secret there and I think you've seen that with some other restaurant company's reporting their April results.

Let me just reinforce what Larry is saying, it's driven by the fact that we have the Logan's transaction and the uncertainty surrounding the timing of that and the outcome in terms of the value realized.

I understand.

Larry, regarding the swap that you spoke of, 50 basis points, I didn't catch that how you called that off of the LIBOR drop, can you give us an absolute rate in the range that that swap should fall into in terms of your going forward interest rate?

Yeah, the underlying rate is about 6.57%, how is that for an about?

And it will of course be affected by the applicable spread at any time.

Right now our spread is 150 basis points.

And the last question, just your long-term goals for Cracker Barrel brand as far as annual type of growth or annual run rate of openings, can you give us an update on that on how you currently feel about that?

We haven't changed, in terms of store openings as you know we slowed down this year but our overall long-term run rate, around 5%, hasn't changed.

Okay.

So that hasn't changed at all given the new debt burden or anything like that, or your near term form focus on paying down debt.

Correct.

Right.

OKay.

Thank you.

Thank you.

We will go next to Mike Smith with Oppenheimer.

Good morning.

A couple of questions.

Since you've done the Dutch auction, are you back in the marketplace actively by buying your stock back at the present time?

We are in a quiet period right now, Mike, because we've been reporting, we haven't made any other determinations about future share repurchases at this time and we normally report that after the fact.

Why --

We do have an outstanding authorization of about 800,000 shares.

Why is it that you are not carrying Logan's as a discontinuing operations now that you've already determined to sell it?

Because the board has the right and the authority to improve any final transaction at Logan's until that is done.

It couldn't be accounted for as a discontinuing operation.

In terms of your last press release where you announced these initiatives, you were undecided at that time or at least were revealing at that time what would you do with the proceeds of Logan's?

I think you phrased it you would either buy back stock, reduce debt or use it for general corporate purposes.

Has there been any change to that statement?

We are not talking about any forward-looking statements this morning, Mike, at all.

We've it will become clear as we can make appropriate disclosures at appropriate times.

Thank you.

We'll go next to Bryan Elliott with Raymond James.

Good morning.

Several questions, actually a follow up on that.

Is my recollection wrong that the potential proceeds of any sale of Logan's isn't that already pledged against the debt?

There is an associated requirement to pay down a certain amount of debt with that transaction.

But we are not going to go into any details on it.

So the magnitude of that obligation is currently undisclosed, correct?

I believe so, yes.

It relates to a leverage ratio post transaction.

Okay.

Fair enough.

Also clarifying the debt, so did, do I understand you correctly to say that your locked in effective interest rate is 6.57% and it's been locked in for the full seven-year term.

Not exactly but that gets you the gist of it.

Fundamentally our initial draw was a floating rate draw but it's a three-month draw.

So we are actually locked in for the first three months at a lower rate.

Our swap begins to take effect in August and it does not swap out the entire balance but swaps out a substantial portion of it.

And we do have some additional floating rate on top of that.

Okay.

Fair enough.

Thank you for that clarification.

Now, my question is relating to the labor cost line which was flat despite negative comps.

Were there, on the Cracker Barrel side of the business, I know that we've been doing a lot of menu initiatives, et cetera, you referenced the simplification of that here this year and going forward, but just trying to reconcile the declining labor costs with the declining per store sales, are we cutting back on hours or is it more that we had unusual training and other costs last year and this quarter that made the comparison easy on the Cracker Barrel side of the business?

As we said before Brian, no comparison is easy in this business, one of the focuses we've had in the last, most of this fiscal year is to get our management of labor and food costs back to standard and that's what we've been doing.

So that's not an easy comparison, that's hard work that gets us to, back to standard which is part of the reason that labor is flat.

We did have pressure on the fixed components of labor related to the sales softness.

We also had as I said about 2% wage inflation, hourly wage inflation in Cracker Barrel.

But we also had menu pricing and we had favorability in group health.

So we have not cut back hours essentially?

No, we have we try to match the labor hours with the expected sales.

So in an absolute term if sales are down then are labor hours but we are not squeezing labor and reducing service in order to preserve margin, absolutely not.

I'm sorry, actually I had one other question as well real quick.

In the tender offer disclosure there was some performance bonuses for senior management that I believe totaled close to $5 million.

Were those reflected in Q3 numbers or will we see those in Q4?

Both.

They are being accrued over the estimated vesting period.

Vesting period, I thought they were upon completion?

No, they pay six months upon completion of all the transactions.

Okay.

Very good.

Thank you.

We'll go next to Conrad Lyon with KeyBanc Capital Markets.

Hi, good morning.

First question, can you talk about the fourth quarter , here you talk about 16.8 million shares being repurchased in the fourth quarter.

Can you talk about what you might expect for diluted share count in the quarter?

If you -- well, the best, I don't want to go into forward looking statements in that regard.

It's pretty simple in the sense that it would be substantially a reduction to what we had in the third quarter.

The wildcard is really that there is a dilution effect related to our share price and how many options are in the money.

And we just can't predict that.

Right.

Fair enough.

Switching gears, retail operations, merchandise, can you talk about what's different between the new merchandise team, the old merchandise team in terms of what's been purchased, what's different about the product that might be on the shelves?

Well, in terms of the team I talked about that on the last call--

--Well, not the team itself but the actual merchandise, I'm just trying to get a feel for what might be different in terms of actual merchandise?

The two important things that we've pointed out some of the softness last year, one was price points as Larry mentioned we still are seeing a flat number right after being purchased but the average price is down.

Part of that is that by buying a mix which includes lower price points we were creating too much of an opportunity to trade down.

We are changing that.

It doesn't mean that we are moving to the other extreme.

We are trying to have a more balanced view of the price points as I mentioned last time in our research when you ask somebody what they are willing to pay $20 seems like a good number.

So we are rebalancing that.

We've been working on quality.

I mentioned the rockers.

We've had some quality issues over the last year to two years with rockers.

We've been working with the manufacturer to fix those.

We are looking looking at the whole range in terms of where we have quality issues.

We are very focused on having a balanced offering across the range of appeal but also making certain that we don't lose that key customer.

As with any other retail business it's the core customer that buys a significant percentage of the merchandise and I think we probably lost our focus on that.

That would be typically a woman we think probably in the 40s and 50s, middle income, and we want to go back to making certain that we are appealing to that core, loyal customer.

Okay.

Thank you very much.

Let me make a correction, I think I may have misspoken a little earlier.

I think I said that our interest rate was 6.57% plus 150 but it's 5.57 plus the spread.

Okay.

Thanks.

We will go next to Steven Rees with JP Morgan.

Can you talk about how you new Cracker Barrel units are performing compared to the system, I think you opened about 25 last year.

I think as we reported earlier they are not performing as well as we would like.

Although we have some exceptional performers on a fairly regular basis.

We opened in Abilene,Texas a few months ago, had a roaring success.

We just opened this past week in St. George, Utah, which is pretty far west for us and had a very, very strong opening week.

So we, one of the reasons that we slowed down this year in our openings was to refocus and revisit our whole process all the way from site selection to our opening process and to get more focus on cannibalization.

So the '06 is not as good as we would like it to be.

Certainly not the end of the world because as I think we mentioned before our hurdle rate includes some fairly significant cushion relative to our true cost of capital and we are always measuring success against our hurdle rate not against our cost of capital and I probably should have mentioned this in my remarks as part of our initiatives.

The performance on new units is going to be one of the key areas of focus as we go forward.

Okay.

Great.

You talked about evolving the brand over the long-term by perhaps broadening the scope and the reach.

Can you just tell us perhaps what you have learned from your customer research what they want from the brand and can you provide some more color on these comments?

Several things.

One is that we have a degree of loyalty to the brand that none of us have seen in any other restaurant chain.

There are some boundaries.

There is a strong travel association.

We want to stay with that.

But primarily it's all around the idea of comfort and heritage and feelings of safety, security and reliable and very affordable, all those good things.

So what, the thing we are looking at which I'm not prepared to talk about in detail right now because we have several major initiatives that we are going to flesh out here over the next few months going into next year.

And not all of them are likely to be successful.

I'm not certain we can tackle them all.

But it's going to be recognizable.

Anything we do will be recognizable as being part of Cracker Barrel to the extent that if we were to advertise the Cracker Barrel brand across the range of things we are thinking about we should be able to use similar brand advertising.

I know that's a fairly vague way of describing it but these things are important and what I don't want to do is put ourselves in a position where we feel like we are being compelled to do something faster than we reasonably can do it.

Okay.

Thank you.

Thank you.

We will go next to Robert Derrington with Morgan Keegan.

A question if I could on labor costs.

Obviously in a weak sales environment the fact that you kept it flat was pretty commendable.

I'm curious, Larry, could you help us understand, was there anything, how material was the lower group benefit contribution to keeping that flat?

Well, overall it was over 20 basis points approaching 30 basis points of effect and it offset the pressures we felt from lower sales and higher wage rates.

And then of course that was part of the off partially offset by our menu pricing as well.

Was there anything within the change of the area of training supervision that affects that line?

Yes, there is within that line but that is not a material change.

Okay.

All right.

Along the cost of sales, that likewise was very, very impressive, and I'm just wondering to the extent if it was a 40 basis impact due to lower or better commodities in the quarter, were those commodities bought toward the end of the fiscal year or calendar year or how should we understand that piece?

It wasn't a 40 basis points impact.

Our deflation if you will on our margin basket of commodities was about four tenths of 1%, so negative inflation or deflation of about four tenths of 1%.

So not 40 basis points impact.

Okay.

I'm just wondering to the extent that you can share, are there trends in that piece of the business on cost of sales that you think are sustainable that --

--I think we talked for awhile that it's a generally favorable commodity environment after a couple of pretty bad years and along with our not giving a forward-looking statements and guidance at this point I don't want to go into selective detail on those thing.

But we've been saying for quite sometime that we expect a benign commodity environment.

And historically you will forward buy your beef and poultry over --

--We contract for many things, so even for a given product like beef or poultry we have numerous suppliers and numerous contracts.

And they come due or are renewed at various points in time.

So it's not a matter of beginning of the fiscal year or whatever that we are suddenly renewing our contracts.

It's an ongoing exercise.

Fair enough.

One last question.

Could management consider not exiting the Logan's concept depending on market conditions?

Didn't we say we weren't going to talk about Logan's, Bob?

Okay.

Thank you.

We go next to Joe Buckley with Bear Stearns.

Thank you.

I just wanted to revisit the success plan bonuses.

Could you clarify how much of that was in the third quarter and what the vesting period is, how much that will it extends if it does extend to fiscal '07?

I would rather not, Joe, because that would give an estimate when we expect all transactions to be completed.

That's still an estimate at this time and that would be dealing with forward-looking statements.

So unfortunately I can't go into that detail right now.

Does it tends the tender offer piece, though, is that piece being paid out already or that's set presumably?

Well, the amount has been determined for that but the -- it's one plan and it vests six months upon completion of all transactions.

Okay.

A question, just on the I guess the pledge of using the provides from Logan's to repay debt.

Are there restrictions on repurchasing stock in those debt agreements?

There are customary and usual restrictions but we are not totally precluded from doing anything like that.

Okay.

Then lastly given the 2006 new unit performance why wouldn't you cut back expansion in the short run then kind of focus on the base business?

That's what we've done, Joe.

We cut back -- all of the things I mentioned in my remarks are things that would, redoubling our focus on since we made the operation management changes back in January.

So we haven't announced how many we are going to open next year.

What I said earlier was that our ongoing run rate, 5%, is a reasonable assumption in terms of exactly when we get on track.

We haven't then talked about -- we are not going to continue to open bad stores, that's for sure.

Okay.

One more question on trying to leverage the brand, I think at different points in time the Company experimented with mail order, maybe with free-standing retail, things of that sort, are either of those the direction you are going?

The free standing retail for sure didn't work so I doubt if we want to repeat that experiment.

We have a Web site and we do have mail orders so those are existing initiatives.

We are looking at some other things that we l we think will have greater promise than both of those, will have greater promise.

We also have Cracker Barrel wallpaper in Home Depot.

You may have noticed that.

It's not one of our major initiatives but it exists.

All right.

Thank you.

Thank you.

We'll go next to Matt Laing with Avondale Partners.

Thanks.

I was hoping you guys could give us an update on turnover levels both at the store level and in corporate kind of given the uncertainty we've seen in the last several months?

Yeah, let me give you that.

These are Cracker Barrel.

In the quarter management turnover was around 26%.

A year ago it was 23%.

I don't think it has anything to do with anything other than I think an increasing -- I hear it from other places -- exiting from industry, I think there was more of that going on.

Those are annualized numbers.

It was an annualized number for the quarter.

And then for hourly we are at 114 versus 109.

So there is a little bit of an upward trend there.

I think that ties into a little bit of an upward pressure on wage rates for the industry in general.

As soon as wage rates start moving up a little bit people start moving around for relatively modest increases go from one place to another.

In terms of the corporate area, we haven't traditionally quoted specific numbers but we've seen no change in the run rate of turnover.

We don't have any sense of people feeling that the uncertainty is such that they want to exit.

I think they are focused on the job at hand.

They are also focused on the fact that Cracker Barrel when we get through these transactions there is a lot of positive upside, we believe, and I think that we've communicated that in a way that causes people to want to stick around.

Okay.

Then I guess just one last question.

On the simplified menu test you guys have going on right now, you don't seem to be moving quite as fast on that as some of the other initiatives.

I'm just wondering, A., can you remind us of how many stores that is in place and kind of what your learnings are?

We've heard anecdotally that it's not maybe the greatest sales driver but has helped profitability and impact of stores?

It's in about 70 stores and it's in phase II.

We've refined it from the first go-around based on what we learned.

It's important and it's a very important part of our long-term future.

There are only so many things that we can throw at a system as big of this and be effective and one of the things that we are preaching right now is focus, focus, focus on whatever the very small number of key priorities are.

And the whole notion of speed of service using existing tools like our best practices and then starting to roll-out the initiatives I spoke to right now are a higher priority than the simplified menu.

We will be back talking about it as we go forward.

Thank you.

Thank you.

We will go next to Scott Walton [ph] with Piper Jaffray.

Thanks.

Larry, Mike mentioned a goal of improving cash flow perform at the store level if I'm not mistaken.

And you give us an update of where cash flow performance at the store level stands and how it's recently trended, ideally the number of stores flowing cash flowing negatively if any, versus last year and specifically at the retail business, how that looks year-over-year?

Well, that's a lot of questions most which have we don't disclose.

But I think the numbers tends to speak for themselves.

I think that we don't see quite the level of improvement this year that we've seen in some recent years.

And that's primarily related to sales softness and primarily to retail sales softness.

We don't split out restaurant retail even internally but we know from analysis that we've done that we get a similar kind of incremental flow through and incremental sales dollars in both sides of the business and then you lose that when sales are soft.

So a combination of softness and same store sales and as Mike spoke to some of the softness in some recent openings have put pressure on that but we are still pretty solid cash flow.

And I think you can see that from the details in the cash flow in the press release.

I will point that that while our operating cash flow this year is not as strong as it was last year, that is almost entirely a function of the timing of accounts payable.

Over $90 million of that difference in cash flow relates to last year accounts payable being a source of cash as they were doing during the year and this year being a use of cash as they were paid down.

The remainder primarily relates to income tax payments.

So those are just kind of some unusual timing things and I think beyond that that that the cash flow compares very favorably.

Thanks.

We will now go back to Bryan Elliott with Raymond James.

I just wanted to clarify the interest expense.

I know we are floating until I believe it's August but so after August and for the full term of seven years, we will be paying 5.57% plus 150 bits or an actual 7.07% interest for that seven-year period.

Is that correct?

For a substantial portion of the term on that is correct but it is not all the term loan.

Right.

Would very substantial be closer to 95% or closer to 75%?

Closer to the former.

Thank you.

Our next question is from Matthew DiFrisco, Thomas Weisel Partners.

Just a question regarding the last couple of calls the word cannibalization has come up as one of the things on the drawing board as one of the problems with the store or the landscape where you are putting the new stores.

Have you also tested perhaps given that you have a high volume business as a defined period of the day and knowing that you have pretty fast table turns have you ever tested a bigger dining room area and taken a portion of the retail stores especially in those markets where maybe the store is not the first store or maybe a tenth or eleventh store within a state, tried to take that extra space for the demand that you have at the given time for the restaurant rather than waiting for the retail sales to build?

I think, Matt, the retail areas serves two fundamental purposes.

One is obviously the opportunity to buy product or browse while you are waiting but the other one is simply it's a waiting room.

And the bigger the restaurant traffic the more we need that space.

There are only so many people that you could fit on the porch and certain parts of the year the weather doesn't support that.

So I don't think the fact --our [inaudible] that our that we could for that.

Where we do have lower retail sales but we need that space for waiting just as much or more than we do on the [inaudible] store, it's not expensive space.

I don't think it's, cutting back on retail.

The question is can we have bigger dining rooms?

We do have a number of stores where we have bumped them out and added seats up to another perhaps 20 or 30.

Where we see the demand and the other way we are addressing that now is the table configuration whereby changing the ratio of different size tables we are going to better match the typical mix of parties.

So in fact we will expand the dining room simply by being able to seat more total individuals at any one point in time, and as we need the retail space so we get the both of both worlds.

Have you given all the initiatives that you have gets out there ranging from the KDS to the produce management system, are these costs that were already seeing in the run rate, the G&A, or are these going to be meaningful incremental costs for our sake and purposes for forecasting going forward?

I'm not certain what the question is.

We have a very small amount of G&A dedicated to purchasing on a roll out basis and also on the initiative.

We are not going to see a build in G&A costs related to those two specifics.

That answers my question.

That's what I was asking.

Thank you.

Okay.

Thanks.

We'll go next to Mark Sheridan with Johnson Rice.

Mike, on the table configuration can you talk or remind us a little bit operating expense to what your seat utilization is during peak meal periods on average?

On average we are below 70% in terms of seat utilization.

Thank you.

And as you go for better table configuration and improve that seat utilization have you noticed any operational strain on the kitchen during peak meal periods in terms of getting out more meals?

Obviously as with any restaurant in any configuration if you get behind at the beginning of the rush, you stay behind so you have to focus on having that kitchen staffed appropriately to a standard.

It's not a question of going beyond the standard but we are going to be sure we focus on and if we do that right then we don't have any problems.

Thank you.

Thanks.

Ladies and gentlemen, at this time there are no further questions.

I would like to turn it back to Mr. Woodhouse for any closing remarks.

Thank you all,l thank you again for joining us this morning here in Lebanon and Nashville and pretty much all over the country.

We are going to get our heads down and work on our fourth quarter performance.

We are going to continue to work on the Logan's transaction.

And we are going to be back in September to report on our progress and we will have interim reports as appropriate on the Logan's situation.

Thank you.

Thanks, everyone.

Ladies and gentlemen, this does conclude our teleconference for today.

Once again we thank you for your participation and you may disconnect at this time.