Cracker Barrel Old Country Store Inc (CBRL) 2006 Q4 法說會逐字稿

Good day.

Welcome to the CBRL Group conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks and introductions I would like the turn the call over to Chairman, President and Chief Executive Officer, Mr. Michael Woodhouse.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Thanks for joining us on our year end conference call.

We believe we have some good news to share both in terms of the fourth quarter operations and our first look at the outlook for fiscal 2007 and a look at a freestanding Cracker Barrel business.

As usual, Larry White our CFO is with me and I will turn the call over to him for his financial review.

Thanks, Mike, and thank you to our listeners on the conference call and Webcast for your interest and participation this morning.

Hopefully, everyone has had an opportunity to see this morning's press release announcing our fiscal 2006 fourth quarter and full year results.

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

And also, we're unable this morning to go into great detail on the Logan's results or to discuss Logan's outlook at all.

But we can tell you that our divesture process continues and we believe that we're in the final stages for reaching a successful conclusion.

We'll make appropriate disclosures at appropriate times but we can't give much detail today.

We've included what we hope is helpful pro forma information at the end of this morning's press release to give you a perspective on the historical financial results of the Company excluding Logan's.

And we're discussing the fiscal 2007 operating outlook for the Company on that basis, even though Logan's won't be considered discontinued operations until our Board of Directors has approved a final transaction.

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

And we think we're reporting some good news.

We're pleased that the bottom line results for the quarter were strong given the uncertainties we faced, particularly in revenues, as many in the restaurant industry have experienced softness related to consumer spending habits in the face of high gasoline prices throughout the summer and even before that.

In spite of those pressures on the top line, we increased store operating margins.

And in spite of expensing stock options this year, which we didn't do last year and incurring other expenses related to our ongoing 2006 strategic initiatives, that's the Logan's divesture process and our recent recapitalization; we increased operating income dollars.

Other significant changes from prior year include higher interest expense and fewer diluted shares outstanding as a result of our recapitalization and a lower than expected effective income tax rate.

These items below operating income had a significant affect on the quarter, combining to allow us to report a 39% increase in diluted net income per share.

I would like to take you through some of the details now.

Revenue in our fiscal fourth quarter ended July 28, 2006, increased 1.7% from last year's fourth quarter.

That's approximately $671 million, compared with $660 million.

The increase came primarily from new unit openings, partly offset by decreases in comparable store retail and restaurant sales at Cracker Barrel and the effect of closing seven Cracker Barrel units and three Logan's restaurants earlier in the year.

We ended the quarter with 14 more Cracker Barrel units and 17 more Company-operated Logan's restaurants than a year ago.

The comparable store sales were down at Cracker Barrel for the quarter.

If you've been following us, you know that our reported August comparable store sales, the first period of the new fiscal year, improved from the fourth quarter trends.

Cracker Barrel comparable store restaurant sales for the fourth quarter were down 3% from a year ago, reflecting 1% higher average check, including approximately 0.9% higher menu pricing.

And our guest traffic was down about 4%.

Softness was widespread across day parts, breakfast, lunch and dinner and both weekends and weekdays, although dinner was our softest meal period.

We continue to believe there are external factors that have contributed to the softness, including discretionary spending squeeze, because of higher gasoline and utilities prices.

But our objective is to overcome those kind of issues and increase sales and traffic at each store.

In May we took a 0.6% price increase at Cracker Barrel and we're carrying approximately 0.9% of menu pricing in our average check right now.

While Cracker Barrel comparable store retail sales continued to be soft in the fourth fiscal quarter, down 4.9%, that was an improvement from where we were in the first half of the year.

And I think you probably know that we have seen marked improvement early this fiscal year, as we reported positive retail comparable store sales for our August fiscal period.

Seasonal product sales in the fourth quarter benefited from earlier markdowns on garden products, which began in August last year.

And earlier availability this year of fall and harvest product, as we began to improve our merchandise planning and allocation.

We also had some other categories of some increases as well but we experienced offsetting softness in certain other product areas including apparel and home decor.

The average price per item sold was down about 5% in the fourth quarter from last year.

Rounding out our comparable store sales results for the fourth fiscal quarter, our Logan's Roadhouse concept recorded flat comparable restaurant sales, while guest traffic was down 1.7%.

Average check increased 1.7%, of course, all of which was menu pricing.

And we had our ninth consecutive quarter of higher alcohol sales mix, which offset slightly lower food menu mix.

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

During the fourth fiscal quarter, we opened four Cracker Barrel Country Store units and we opened seven Company operated Logan's Roadhouse restaurants.

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

Operating income for the fourth quarter was up 0.8% on the 1.7% revenue increase.

And operating margins were lower at 8.9% of revenues, compared with 9% a year earlier.

Operating margins benefited from favorable food costs, improved hourly labor and workers' compensation expense, favorable gift card breakage, gains on the disposition of previously closed locations, insurance recoveries from last year's hurricanes, lower advertising expense and lower annual bonus accruals.

But these were offset by stock option expensing, fees and accruals associated with our strategic initiatives, previously announced severance expenses at Cracker Barrel, and higher utilities expenses in retail cost of goods sold.

All of these items, while notable for their somewhat unusual nature, had little net impact on year-over-year operating income comparisons.

On a pro forma basis, we showed that operating margins, excluding Logan's, were approximately 10 basis points higher than what we reported on a consolidated basis today at 9% of revenue.

And we're up approximately 0.1% of revenue compared with the fiscal 2005 fourth quarter pro forma operating margins, excluding Logan's.

Cost of goods sold benefited from a benign commodity inflation environment again, while we were still able to carry small menu price increases.

We also had favorable waste performance at Cracker Barrel and the mix effect of lower retail sales, which carry a higher cost of goods sold than restaurant sales.

Retail cost of goods sold on its own, however, was actually higher than the year earlier period, primarily reflecting higher markdowns.

On the food costs side, commodity inflation was down approximately 0.2% from a year ago, that's negative inflation versus a year ago.

So, overall cost of goods sold in the fourth quarter was about 30 basis points lower than last year.

Labor and related expenses were approximately 60 basis points lower than a year ago, primarily reflecting favorable workers' compensation expense and hourly labor.

As we do every year, we completed an actuarial study of our self insurance losses in the fourth quarter.

And as we expected, the actuarial estimates are beginning to show the favorable effects of lower loss development, reflecting improvements we have made in recent years, such as return to work programs and change in our claims administrator.

We did experience modest inflation, about 2.2%, at Cracker Barrel in overall wage inflation.

Other store operating expense, which was up approximately 0.2% as a percent of revenues, primarily reflected continuing high utilities expenses, partly offset by lower advertising expenditures and the recovery of business interruption losses from the hurricanes last fall.

You will note on the P&L that we recorded about $1.5 million of gain from disposition of properties closed earlier in the year.

This primarily reflected higher valuations realized on the sale of properties that were not written down earlier, they were closed but they weren't written down in an earlier impairment.

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

The primary causes were this year's adoption of stock option expensing, with approximately a 40 basis points effect, and the expenses and accruals related to our strategic initiatives, which were another 40 basis points, as well as previously disclosed severance for organizational changes at Cracker Barrel.

Interest expense was a significant increase from last year, reflecting borrowing under new credit facility to finance the Dutch tender offer in the third quarter to buy -- under which we bought back approximately 35% of our outstanding shares.

Our fourth quarter effective income tax rate was just 22%, substantially lower than last year's 34.5%, reflecting lower effective state and local income tax rates, favorable conclusion of certain tax audits, and higher than expected credits, including credits related to last year's hurricanes.

The fourth quarter benefited from the effect on the full-year effective tax rate of 30.8%, comparing favorably with 34.1% effective income tax rate estimated through the first nine months of the year.

Last year's full rate was 34.6%.

Wrapping up the fourth quarter, net income was $35.8 million, down 4.7% from $37.6 million a year ago.

Substantially reflecting the recapitalization effects of higher net interest expense, partly offset by a lower effective income tax rate.

The benefit of recapitalization appears in our lower diluted weighted shares outstanding.

So the 5% lower net income is offset by 31% lower diluted shares, which results in diluted net income per share of $1.03, up $0.29 or 39.2% for the $0.74 reported in the fourth quarter last year.

We're very pleased with these results, both operationally and from our recapitalization, and in a very challenging sales environment.

Finally, because of ongoing disclosure limitations related to the potential Logan's divesture aspect of our strategic initiatives project, and our inability to estimate either the timing, the amount or the application of proceeds from the divesture; we're initiating our guidance for fiscal 2007 based on operating income from continuing operations excluding Logan's.

And our press release includes an unaudited pro forma perspective of what that would have looked like historically.

We also are adopting a policy of discussing only a full year outlook, not quarterly.

And updating it only at the beginning of each quarter when we release the previous quarter's results as we're doing today.

You'll find, in this morning's press release, a schedule of our expected financial disclosure press releases for the coming year, including our continuing reporting of monthly comparable store sales.

With our report for fiscal September coming out next week.

To continue on, as I talk a little bit about the outlook.

I 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.

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 the time.

Also, we will not offer any further guidance or outlook, nor after today express continuing comfort with today's disclosure, other than in public filings or by other broadly disseminated means such as press releases from time to time.

This discussion of outlook, like other earlier parts of today's discussion and press release, contains forward-looking statements provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the uncertainties described in more details in this morning's press release and in our filings with the SEC.

We presently expect to achieve revenues at Cracker Barrel of approximately $2.4 billion in fiscal 2007, based on comparable store restaurant sales that are flat to up 2%, comparable store retail sales that are up 7% to 9%, which reflects correction of the merchandising issues we had last year especially in our Christmas seasonal selection and availability.

It reflects the opening of 19 to 20 new stores and $45 to $50 million of revenues from a 53rd week in fiscal 2007.

We also expect operating margins to be flat to up 0.2% as a percent of revenues, including continuation of expenses related to our strategic initiatives and a margin neutral 53rd week, as we expect to spend on marketing and our other initiatives attempts to strengthen the Cracker Barrel brand and operations for the future.

We have approximately 55% of our commodity needs contracted for the year at an expected overall inflation rate of approximately 0.4%.

Depreciation and amortization should be modestly higher in fiscal 2007, and we presently expect capital expenditures of up to $115 million.

So in summary, we reported solid fourth quarter results affected by a tough sales environment.

We began to realize the benefits of our balance sheet recapitalization.

We believe that our outlook is solid.

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

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

Mike.

Thanks, Larry.

Good morning again, everyone.

We're talking today of an important time for CBRL, not least because the first Cracker Barrel opened on September 19, 1969, here in Lebanon, Tennessee.

And so we're celebrating our 37 birthday today.

And I'd like to take this opportunity to wish a happy birthday to those listening in at Cracker Barrel.

I've tried to persuade Larry joining me in singing happy birthday, but the lawyers said that the securities laws prohibit us from being entertaining on conference calls.

More importantly and more seriously, we're closing in on the final stages of the strategic initiatives that we first announced on March 17.

The recap is behind us, and we expect to complete the divesture of Logan's in the near future.

So, our purpose today is to report on the fourth quarter and the fiscal 2006 as a whole and then take a first look at 2007.

And in the process, add some visibility to the direction and expectations for Cracker Barrel.

So first, let's take a look at the fourth quarter.

We've attempted in the earnings release and in Larry's remarks to provide some clarity to a complex situation.

Excluding the effects of the Logan's transaction, and after the substantially offsetting effects of the somewhat unusual items described in our press release and in Larry's remarks, such as expenses associated with the reorganization at Cracker Barrel and gains from the sale of closed stores, we believe that the underlying operating performance was strong in light of the sales softness.

As we have previously reported in our monthly sales updates, Cracker Barrel restaurant sales were soft in the quarter.

But based on industry data and individual reports by others, we believe that were affected by the overall weakness of impact in the food service industry as a whole that was and continues to be caused by economic pressures on the core users of the segment.

So here on a relative basis, Cracker Barrel restaurant traffic in fourth quarter was not out of line but of course, we don't take relative dollars to the bank.

In any event, we were pleased to see the improvement in August as we reported in our release on August 29.

In the fourth quarter, we continued with the refocused promotional program with a single hero entree featured on a menu insert instead of the freestanding seasonal menu.

In this case, the product was chicken and rice.

The goal here is to use a single product that's simple to prepare, fast out of the kitchen and has a high dollar margin and low waste.

We intend to continue with this straightforward approach for the at least the first half of fiscal 2007 as we revisit our menu strategy, and I will speak a little more about that later.

In retail, the same-store sales trends in the fourth quarter were similar to those in the third quarter, and we spent our time in the fourth quarter rolling out the newly developed seasonal merchandise.

On the people front, management turnover at Cracker Barrel was 24% in the quarter, bringing the annual turnover to 22%, which was in line with the previous year, and hourly turnover for the year was 118%.

Moving onto the current quarter and to fiscal 2007.

We recently reported first month of 2007, with an improvement in restaurant sales to down 1.5%.

And in retail, sales were up to 2.2% positive.

We also indicated that for the second half of August retail trends improved as the new seasonal merchandise reached the stores.

As we move towards the important holiday season, important especially for Cracker Barrel in retail, we've made some key improvements all geared to improve the overall shopping experience.

We have updated and more appealing merchandise for the fall and Thanksgiving season.

We're returning to what I would describe as a full Christmas strategy, including five themes compared with three Christmas themes last year.

Cracker Barrel has always been known for its Christmas merchandise and for the strong visual appeal of the store during the holiday season.

And we're returning to this tradition this year after unsuccessfully experimenting with a lower key approach last year.

We're putting a strong emphasis on the uniqueness, meaning not just product that's only available at Cracker Barrel but also distinctive and special product, and we have some great examples with our designer quilts and our new apple collection.

And we're also returning to dressing up the store and the front porch in line with each season.

For example, we'll have hay bales, pumpkins and other seasonal artifacts as we move into the fall harvest season.

This reinforces the strong experiential appeal the brand and it's also something that Cracker Barrel is uniquely positioned to do.

Operationally, in retail we've rolled out an upgraded visual display program, which allows the retail managers to achieve a higher and more consistent level of merchandise display.

The Barrel Bargains program, where we mark down slow movers early on a selected basis, is working well, and overall markdown levels so far this year are below last year.

We're also removing the Clearance Corner during the peak three months of the holiday selling season to maximize space available for holiday merchandise and reinforce full-price sell through.

Our retail music program continues to perform well.

The most recent exclusive compilation, which is "Hymns for the Journey," by Amy Grant is selling well.

And we recently announced a new CD of -- the title of which is "Songs of the Year."

It's compilation of songs that won Song of the Year from either the Grammy's, The Country Music Awards or The Academy of Country Music, and these are in new performances by well known artists such as Trisha Yearwood and Randy Travis.

The release of the CD will be supported by a televised concert by the artist on the CD.

We continue to believe that when it is executed correctly, music and especially country music, is not only profitable for us but can reinforce the brand and stimulate trial by a broader audience.

A good example of how we're approaching this is the tie-in of the Amy grant CD in a full page ad we ran recently in "USA Today" to thank our guests and employees for our 16th consecutive year as the winner in Best in Family Dining in the annual Choice In Chain Survey.

Another change in retail from last year is a renewed focus on quality.

The quality of our regional products has a halo effect on the entire brand, so getting it right is critical to the overall business.

Fortunately, we believe that we've corrected the weaknesses from last year, and we've done that without sacrificing any margin.

Organizationally in retail, we hired a very experienced VP of Planning and Allocation in July, and we're close on a decision on a General Merchandise Manager.

Then the addition of a VP of Product Development will complete a strong retail team under Terry Maxwell's leadership.

Our immediate priority for the Cracker Barrel business has been and is to simplify and focus.

The direction to the field is to deliver positive restaurant traffic and retail sales.

Success with this direction will build momentum, create a winning environment, and with our proven ability to manage costs, will allow us to also improve margins.

An example of simplify and focus, is the promotional strategy I mentioned earlier, that not only features higher margin, simple to prepare products but avoids adding new raw materials wherever possible.

We also believe it is important to establish expectations before we commence the development on any new menu item, so that we avoid allocating resources when the expected returns are unacceptable.

Another area where we've taken the same approach is in marketing.

Where we've eliminated programs that, even if they were successful, wouldn't make a measurable difference.

This has allowed us to focus resources, both dollars and people, against the three important areas.

And those are billboards, which are fundamental, advertising medium, we're working on a fresh creative approach with the billboards.

Radio, where we're going to reestablish a baseline awareness program.

And television, where we're developing a creative strategy to test in conjunction with radio later in the fiscal year.

We're also rolling out the sale of gift cards sold through third party retailers.

This is a growing area for all restaurant chains.

And while it is difficult to predict the upside, we almost certainly have been missing an opportunity by not being present in this -- in that environment.

An important rallying point our organization is the brand positioning.

We believe that we have one of the strongest brands in the industry, and it is critical to be able to maintain the clarity and identity of the brand.

We've developed a clear brand architecture statement that will be used in assessing all of the brand decisions we make.

We're going to be communicating this throughout the organization, starting at the Annual Manager's Conference, which takes place later this month.

Following the organizational changes that we announced last month, we've not only worked on ways to simplify and focus the business, but we've addressed the medium to long-term that were already underway and we're developed a more focused and, we believe, effective approach.

To facilitate the review and prioritization of these initiatives, we've developed a structured innovation process led by Simon Turner who joined the Company as Senior Vice President of Marketing, Innovation and Chief Marketing Officer in July, after he had been working with us as a consultant for a period of eight months.

The first step was to document all of the active projects throughout the Company.

This, as you might imagine, resulted in a rather extensive list.

First thing we then did was to develop a kill list of initiatives that don't support our long-term goals of sustained same-store sales coupled with margin expansion, improved return on investment.

Some of these were potentially good ideas but not impactful enough in the short-term.

And I expect we'll revisit some of them at some point in the future.

The continuing initiatives have been segregated into short-term and longer-term, and in some cases, refocused or grouped together.

The short-term initiatives that we're working on include an immediate update of our labor deployment standards.

Three examples that we're focusing on.

Our cashier hours have not been tied to overall sales and that causes us to have fewer cashiers on when we're at peak periods.

Our labor chart that our managers use to manage the business is not consistent with our best practices for labor, and we're going to realign those two.

They somehow became out of line a couple of years ago.

We're also working on management of the pass-through window, which is a major bottleneck in our efforts to improve the speed of service.

Another initiative is the roll-out of the table optimization program that I've talked about in previous calls.

We have a new project team, and the part of the new Innovation Department led by Simon Turner will refine the test results we already had, consider some new and important operational input and determine the rollout schedule for fiscal 2007.

Several other initiatives that have been tested will be rolled into a more comprehensive initiative focused on the speed of service, and we're focusing on the what we call the seat to eat time.

As we reviewed the various projects that were being tested and listened to the operational input, it became clear that while we've seen success in a number of these tests, a meaningful improvement and systemwide speed of service will be best achieved by combining some of these initiatives.

Specifically, combining the simplified menu, the management of the window, the deployment of our managers within the front and the back of the house.

And also the kitchen display system and the paging system that's tied to the kitchen display system, which help us measure our speed and improve our front of the house speed.

There is a very strong belief we can be successful with this approach and a new sense of urgency among the members of the executive team to move forward and make some real progress during fiscal year 2007.

We've also had some strong positive feedback from the operators about the new clarity and focus of the direction they're getting.

Longer term, the development of an effective model for our off-interstate locations at smaller markets is a top priority.

As I mentioned in our conference call in July, the approach is going to be to develop a new business model from scratch.

We have the opportunity to leverage the appeal of the brand, achieve improved unit economics and expand the base of developmental opportunities for the brand.

Cracker Barrel has always grown organically and I believe that a fresh look at the building size and capacity, including the kitchen and retail space, will lead on overall operating efficiencies, as well as potential lower development costs.

This objective in no way detracts from the continued development of on-interstate locations, and I expect we'll be able to apply some of the ideas generated in this new initiative to the current business model.

The quality of our new unit openings is a priority and we're doing two things designed to improve new unit performance.

First, we cut back the number of new units that we're going to open in 2007 to 19 to 20.

And this is intended to improve the quality of execution at the new unit openings and also to limit the amount of resources that we have to divert to new store openings from our existing base of locations.

And secondly, we're reviewing the new unit opening process to identify improvements that we can make as soon as possible.

I hope I have been able to convey the enthusiasm, the sense of direction that I am feeling throughout the organization.

We're still operating in a very tough external environment, but I believe that we're better positioned today than we've ever been to move forward successfully.

And with that, I will turn the call over to questions.

[OPERATOR INSTRUCTIONS] We'll go first to Steven Rees with J.P. Morgan.

Thanks.

I just had a question on the operational initiatives that you reviewed briefly, specifically, the KDS tables for two and perhaps the menu simplification.

It sounds like the tests are going relatively well.

But I am just trying to get a sense of when those initiatives could be rolled out and when we would start to see some of the benefits in the operating results?

We have to separate them.

On the tables, we have been testing the table configuration.

And what we found is we're getting some measurable success.

We also found that by some experimentation by the operators we have a more optimal solution, we believe, that we're going to review and then start moving that out during fiscal 2007.

The challenge of that is very simply, that not every store is built the same.

And specifically, we have some smoking and some nonsmoking stores, so the configuration of the walls are different.

So, there is no one size fits all.

So, we're going to go for the maximum impact, the maximum number of stores we can effect with that as we roll it out.

The operators love it.

The guests give us positive feedback.

I really think it adds to the experience.

So, we're going to move quickly on that.

I do not have a number to give you, simply because we're really taking a hard look at what we have before we just blindly move ahead.

We want to make certain we know what we're doing.

I am sure that we're going to be successful with the tables.

The other piece, as I said in my remarks, we have a number of moving parts that we've been testing out there.

And what we really concluded was that the kitchen display system is great, but it really measures our performance.

And that's a tool and unless we have the other pieces in place, just having the tool isn't going to change anything.

Very specifically, the way in which we manage the window and the application of a simplified menu we found gives us a lot of leverage when we have a kitchen display system in place.

We will be putting the KDS in new stores, simply because it is cheaper to do it that way.

But we are going to combine with a -- come back with a combined approach, which is going to be -- the earliest we'll be rolling it out will be somewhat later in this fiscal year.

Okay.

Great.

Thanks.

I just wanted to ask on the retail quickly, just why are you so optimistic that you can get 7% to 9% this year?

With restaurant traffic still expected to be slightly negative, are you seeing a pickup thus far in September or is it easier comparisons or is just expectations for the merchandise?

Thanks.

Well, we'll be reporting our September sales next week, so the world will see that.

The things I talked about, the quality of the merchandise, quality both in the sense of things don't break and all of that good stuff but just the overall feel is much stronger, and we're getting tremendous guest feedback.

It is a up-road challenge obviously with the external environment, but you saw the August numbers, which give us some confidence.

We're also, I think Christmas we really are going to be what we always have been at Christmas, which is a place that is special and really very enjoyable to be in at Christmas.

And last year we didn't have any of that.

I think the Christmas season will really substantially help us.

Okay.

Great.

Thank you.

We'll go next to Joe Buckley with Bear Stearns.

Thank you.

I just had a couple of questions.

You mentioned a lot of expense items in the fourth quarter.

Wondering if you can quantify some of them just to give us a feel for what the underlying margins look like?

Well, as I said, Joe, there are a number of expense items, but they're also a number of credits and those things all net/net pretty much wash out.

And I delineated them.

Some of them are laid out specifically.

We've got $2.3 million in options expense, which I described.

And we've got $1.5 million gain from closed stores.

We picked up in another number of other areas but we also did in other things.

The positives were things like the gain on sales of some of our closed stores, a recovery of business interruption losses on hurricanes from last fall, gift card breakage increase, workers' compensation as a result of the actuarial study, which is beginning to show the results of some of the initiatives we've had in the last few years.

And then offsetting that were things like expenses related to our ongoing strategic initiatives, options expensing, severance at Cracker Barrel, which we described last quarter, and that sort of thing.

So, net/net, they are essentially a wash but they're notable because there are a number of unusual things going on.

Okay.

And then a question that you mentioned that pressures on the consumer, and I think we're all very conscious of that, gasoline prices have subsided quite a bit.

Any signs of that pressure alleviating?

Well, we'll be giving a sales update next week, and really don't want to go into those specifics but clearly, we're hopeful.

I wish that the good news got as much attention in the media as the bad news did when it was going to $3.

Okay.

And then one more.

FX before Cracker Barrel only you had talked about 115 million.

I think last year -- you were just reporting today was 89 million.

With store openings fairly close in number, is there something major going on on the remodel front to push that number up?

No, not really.

We are providing for some -- for the potential for rebuild or remodel but that's a relatively small number.

The key thing is really timing of expenditures for the development schedule including the following year's development schedule, so it is not any particular unusual kind of expense.

It is just basically the timing of when we're spending money for the various development schedules.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go to Matthew Difrisco with Thomas Weisel Partners.

My question is with respect to the --.

Matt, we can't hear you.

My question is with respect to the margin guidance where you say flat to improving 20 basis points.

You say operations but then after that in the next sentence you also say the absence of non-recurrence of certain impairments.

Are you using as the basis, when you say flat to up 20 basis points, the pro forma 7.1 operating income margin that you have on the last page of the release?

Correct.

Okay.

And then can you give us the specific dollar amount in the fourth quarter in G&A that is related to the strategic initiatives?

It is between $2.5 and $3 million.

Okay.

That's going to be -- or can you give us the pennies effect of that so we can actually get an operating number for the fourth quarter?

I haven't calculated that specifically.

We have to let you do the math.

And there was -- with the significant change we had in the tax rate, there's probably different ways to come at that, but it is between $2.5 and $3 million pretax.

Okay.

Will you be available off-line with respect to numbers like this, nothing to do with Logan's?

Diana will, and she can field questions.

Diana Wynn will be able to field questions and if there is something that she doesn't have, we will get to you.

And then last question, the aggregate 5 million or so in '06 related to the strategic initiatives, is that number going to be or the number associated with strategic initiatives in FY '07, is that going to be less or more going forward?

it's still to be determined because we're still in the process.

Okay.

Since that wasn't -- since I didn't get a full answer on my last question, can I just ask one more, which is what is the ending share count in the fourth quarter?

I believe that's in the press release.

I got the average but I didn't see the ending.

I am sorry.

It is in there.

Let me find it for you. 3.927 million shares.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Mike Smith with Oppenheimer.

Good morning.

I have two questions.

One of which I am pretty sure you're not going to answer, but is your tax rate for '07 expected to be somewhere in the 30% to 31%?

Did I hear that when you were making your comments, Larry?

No, you didn't.

We haven't made a projection of our tax rate.

I think it would likely get back to more normal levels that would be somewhat higher than this.

We had pick-ups this year related to higher than expected credits, including some hurricane related credits and also the conclusion of some tax audits but we had some pick-ups.

So, I would expect higher rate but we have not given guidance on that yet until we get further into the year.

This question I am sure is going to embarrass me.

But if I divide your net income by your average diluted shares outstanding, I don't come up with $1.03.

You have to add back the tax effect of the convertible debt interest, which is just under $1.5 million.

So, those -- the shares into which that debt can be converted are included in the diluted share count, so you don't also have the interest expense.

They're treated as if converted.

And my last question is one I think you won't answer, does relate to Logan's.

And are you disappointed that that wasn't accomplished in July as you had indicated on the last time you had a conference call?

Well, I think we'll answer that one.

As we said, we're pleased with the progress and where we are.

I think what we've said all along is we expect it to be done either in the fourth quarter or the first quarter.

And we're pleased with our progress right now.

Thank you very much.

Are you still at registration?

Yes, we have filed an S-1.

Thank you.

And we have a follow-up question from Joe Buckley with Bear Stearns.

Thank you.

A question on the senior management bonuses related to the strategic initiatives.

Is some of that expense in the July quarter or is that all yet to come in fiscal '07?

We've been accruing that all along and that's included in that $2.5 to $3 million number that I mentioned.

It will continue to accrue until they divest.

So, that's one of the ongoing expenses that we'll have in fiscal '07.

Okay.

Is the divesting completed in '07 or does it go on beyond that?

It completes in '07.

Okay.

And is that included in the -- I am sorry.

That's fine.

Okay.

And we have no further questions at this time.

I would like the turn the call back over to Mr. Woodhouse for any additional or closing remarks.

Thank you.

Thanks again everyone for joining us this morning.

This is the ragweed capital of the world, so that's why my voice is different than perhaps it always is.

I hope you share with us your positive outlook for the Company.

We're going to be, obviously, reporting on our normal protocol.

We'll be reporting on any developments at Logan's as we're permitted to and as appropriate.

And look forward to talking to you next time.

Thank you.

Thank you.

That does conclude today's conference call.

You may disconnect at this time.