Cracker Barrel Old Country Store Inc (CBRL) 2007 Q1 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 today from 2 p.m. eastern time through November 28th at 6 p.m. eastern time by dialing 888-203-1112 and entering confirmation code 9451314.

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

Please go ahead, Mr. Woodhouse.

Thanks, Jessica.

Thank you all for joining us this morning.

I apologize for the short delay here on the front-end but at the advertised time we still had quite a number of people dialing in and so we chose to wait for them.

As usual I have Larry White, Chief Financial Officer, with me.

We have a positive story to tell about the quarter.

We're building momentum in Cracker Barrel and will continue to move towards the closing on the Logan's transaction, after which, of course, it will be much easier to see the full effects of the operating performance of Cracker Barrel and the effects of the recap and divesture.

Let's jump right in and I will ask Larry for his financial review.

Thanks, Mike.

Thank you also 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 2007 first quarter results and providing an update on our outlook for the full year fiscal 2007.

As a reminder, and in compliance with reg FD, we don't review or comment on earnings estimates made by other parties.

Nor do we provide continuing updates of or expressed continuing comfort with our own guidance and trends except in broad public disclosure, such as we've done this morning.

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

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

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

Some of those factors are described in the cautionary description of risks and uncertainties found at the end of this morning's press release.

We urge you to read that language carefully.

In addition, a more complete statement of these risks and uncertainties is contained in our annual report on form 10-K for the fiscal year ended July 28, 2006.

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

We recognize there is room for confusion as we begin reporting on a continuing operations and discontinued operations basis.

This is our first quarter to report in that manner as we work to complete the previously announced divesture of Logan's Roadhouse.

And results for Logan's, including divestiture related expenses incurred at the CBRL Holding Company, are included in discontinued operations.

We announced the definitive sales agreement on Logan's on October 30th, and I can assure you that all parties and their advisers are working diligently and expeditiously to complete as soon as possible the sale of Logan's to LRI Holdings and the related sale leaseback transaction.

There is not much more to report to you in addition to the announcements we've already made.

When the transaction is closed and our board approves the use of proceeds, we'll be making further updates.

Although we expect the net proceeds will be used in some combination of share repurchases and debt reduction, we don't intend to speculate as to what the relative amounts might be.

Our income from discontinued operations reported this morning includes among other things a charge for approximately $1.5 million related to recognizing permanent differences between book and tax basis as required by EITF 9317.

Income from discontinued operations benefited from lower food costs, positive comparable store sales, lower advertising expense, new unit development and credits for forfeiture of unvested share based compensation.

With that background aside, let's review the other information released this morning, specifically about continuing operations.

I will be discussing continuing operations in most of my remarks this morning.

Bottom-line, we recorded diluted income per share from continuing operations of $0.45 for our first fiscal quarter versus $0.44 a year ago, an increase of 2.3%.

While after-tax income from continuing operations of $15.2 million was lower than the prior year's quarter, that was the result of interest expense from the added debt taken on with our fiscal 2006 recapitalization, in which we repurchased 16.75 million shares in a modified Dutch Auction tender offer.

We estimate that the effect of the recapitalization was approximately neutral on diluted income per share from continuing operations in the quarter, with the effect of the higher interest offset by the lower weighted average diluted shares outstanding.

Cracker Barrel guest traffic and retail sales recorded a turnaround in the quarter and favorable food, labor and other store operating expenses more than offset higher retail cost of goods sold and bonus expenses, which are in general and administrative expense.

That allowed us to achieve a 10 basis point improvement in operating margins, 6.9% of revenue compared with 6.8% last year.

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

Revenue from continuing operations in our fiscal first quarter ended October 27, 2006, increased 4.3% from last year's first quarter.

That's approximately $558 million compared with $535 million.

The increase came primarily from comparable store sales improvements and a net addition of units since the year ago period.

Our operating weeks for Cracker Barrel increased about 2% from last year, reflecting new store openings partly offset by the store closures we had in February.

During the first fiscal quarter we opened five new Cracker Barrel Country Store units and we ended the quarter with 11 more Cracker Barrel units than a year ago and positive comparable store guest traffic and positive sales in both restaurant and retail on a comparable store basis.

Cracker Barrel comparable store restaurant sales for the quarter were up 1.4% from the year ago quarter, reflecting a 1.2% higher average check which included about 9/10 of a percent of higher menu pricing and guest traffic was up about 2/10 of a percent, our first quarter of positive comparable store guest traffic since fiscal 2004, 2.5 years.

We're hopeful that the lower gasoline prices and what we believe is deeply ingrained dining out habits will bring more guests back more frequently, but the recovery in industry trends has been less than many expected.

We are very pleased, given that environment, to have positive guest traffic this quarter.

Breakfast has been our strongest day part and dinner our weakest and Florida was our weakest region, Texas and the western states our strongest in terms of comparable store sales changes, and that's a continuation of earlier patterns that we described.

In the first quarter our new units opened in fiscal 2006 achieved average unit restaurant sales approximately 5% higher than the class of fiscal 2005 and total average unit sales, including retail, were approximately 7% higher.

So we view that as an encouraging development for the quarter.

Cracker Barrel comparable store retail sales also turned positive in the first fiscal quarter up 4.4%.

While we're pleased to have turned retail sales back into the positive column, the improvement is less than we expected after last year's very soft retail sales and in this regard our experience mirrors softness reported from a number of retailers.

Our greatest sales increases have been in seasonal products, especially Christmas themes, but we've also had year-over-year strength in apparel and in collegiate themes as we believe we have significant improvements in our offered merchandise this year compared with last year.

However, we also are more aggressive in markdowns this year than we were last year.

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

Operating income from continuing operations for the quarter was up 5.6% on the 4.3% revenue increase and operating margins were higher at 6.9% of revenues compared with 6.8% a year earlier.

Store performance was the hero, which offset higher G&A expense.

Cost of goods sold benefited from a benign commodity inflation environment, while still carrying modest menu price increases.

And we also had favorable food cost management in the quarter, but we had the unfavorable mix effect of higher retail sales, which carry a higher cost of goods sold in restaurant sales and we had higher retail markdowns.

On the food cost side, commodity inflation was up a modest 6/10 of a percent from a year ago.

At the present time we have contracted almost 60% of the remaining three quarters of the fiscal year at moderate overall inflation of less than 1% expected overall.

Retail cost of goods sold was higher than last year's first quarter, primarily reflecting higher markdown activity.

It appears this holiday -- it appears that this holiday season will be seeing many retailers marking down product to maximize sales and we expect to do so as well.

Labor and related expenses were 20 basis points lower than last year as a percent of revenues, primarily reflecting lower Workers Compensation, group health and preopening labor partly offset by higher field bonuses, which are resulting from our solid store level sales and margin performance.

We did experience modest inflation, about 2%, at Cracker Barrel in non-tipped hourly wage rates, but we expect additional pressures later in the fiscal year as recent minimum wage ballot initiatives in several states will increase the wage that we pay to our tipped employees in those states.

The minimum wage changes are not expected to have a significant impact on non-tipped employees as prevailing market wage rates generally are already well above minimum.

We have not yet finalized the specifics of how we will address those upcoming wage pressures, but we will advise you of those changes in future conference calls.

Other store operating expense also was favorable by 30 basis points compared with last year's first quarter.

Utilities, while high in absolute terms, were about the same as last year as a percent of revenues, and favorability was in several categories including maintenance and advertising.

We also benefited from sales leverage on fixed expenses as well as from non recurrence of last year's extraordinary hurricane season.

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

Primary causes were higher bonus accruals relative to last year's low levels, reflecting stronger performance relative to our internal plan and other bonus programs and awards.

We also had the expense of our annual store managers meeting, which was cancelled last year, so that we could have full management staffing in the stores following the hurricane disruptions.

Interest, of course, was substantially higher than last year reflecting the recapitalization that we implemented in the latter part of fiscal 2006.

Our first quarter income tax rate was 35.9% for continuing operations, slightly higher than last year's first quarter rate of 34.6%, and that reflects the absence of certain expired tax credits.

Wrapping up the first quarter, income from continuing operations of $15.2 million after tax was down from $22.1 million a year ago, primarily reflecting the higher interest as our operating income from continuing operations, and that's before interest and taxes, actually increased 5.6% on the 4.3 revenue increase giving us increased operating margins also.

Diluted income per share from continuing operations of $0.45 was up 2.3% from $0.44 for the first quarter last year with the recapitalization benefits of reduced share count offsetting a higher interest and the lower after-tax income.

During the quarter we increased our quarterly dividend rate by 8%, from $0.13 to $0.14.

Our dividend payout, which reflected the earlier rate, however, in the quarter was $1.6 million lower than a year earlier on the reduced share count following our recapitalization.

Cash flow from operating activities was only $2.2 million lower than last year, in spite of the increase in interest expense and backing out the positive operating cash flow from Logan's.

Net capital expenditures at $23.6 million were up just slightly from a year ago for continuing operations.

Finally, in this morning's press release we updated our outlook for the full year of fiscal 2007.

I again urge you to consider the cautionary discussion of risks and uncertainties at the end of today's press release, as well as those discussed in our form 10-K and to understand the inherent risks associated with trends, targets, guidance and estimates in a competitive industry such as ours.

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

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

This discussion of trends and outlook, like other earlier parts of today's discussion and press release, 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 detail in this morning's press release and in our form 10-K.

You will recall that because of the uncertainties around the timing of and the use of expected proceeds from the Logan's divesture, we're providing guidance on revenues and operating margins both from continuing operations, and we're unable to comment on interest expense, share count or diluted income per share expectations.

Our guidance for full -- the full fiscal year of 2007 remains substantially unchanged from previous guidance although some underlying assumptions have changed.

Retail sales trends, while positive, are not as strong as we expected previously, and we expect to make greater use of markdowns in achieving our sales projections.

However, we presently expect restaurant sales to be slightly firmer than our previous guidance.

We're looking for comparable store restaurant sales to be up 1% to 3% for the year and comparable store retail sales to be up 5% to 7% for the full year.

For the full year we expect to open 19 new Cracker Barrel stores.

We also expect to see new pressures from minimum wage increases and the effects of greater markdowns are expected to be, as well as the effects of greater markdowns on retail I described, we expect those pressures to be offset by lower Workers' Compensation expense and G&A costs that are lower than we previously expected.

We look for revenues of approximately $2.4 billion from continuing operations, and that includes a margin neutral 53rd week and we expect to have flat operating margins for the year.

Our capital expenditure outlook is $105 million from continuing operations.

Our next sales update will be November 28th, next Tuesday, when we'll report fiscal November sales.

So in summary, we reported positive results in a tough sales environment for many in our industry and including notably positive comparable store restaurant guest counts and retail sales.

Our guidance remains substantially unchanged in spite of new external issues from minimum wage increases and more challenging retail sales and our balance sheet and cash flow remains solid.

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

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

Mike?

Thanks, Larry.

Good morning, again, everyone.

I am pleased to report this morning that in the first quarter we continued to make progress in all aspects of the strategic direction that we established earlier this year.

First of all the recapitalization, that we largely completed earlier this calendar year, has already benefited shareholders with a buyback accomplished with a Dutch auction tender offer and would also leverage the ongoing growth in operating income from Cracker Barrel.

The divesture of Logan's is nearing completion, following the agreement that we announced at the end of October.

And I am very pleased to be reporting this morning that in a continued difficult environment for our industry through the focused efforts of everyone at Cracker Barrel we've delivered positive traffic, positive retail sales and an improvement in operating margin in the first quarter.

Finally, we've also made progress in our business model initiatives and I will be reporting on these in a few moments.

Larry's covered the status of the Logan's transaction in as much detail as the lawyers will allow us, so I am going to concentrate my remarks this morning on the Cracker Barrel business with a review of the first quarter and then a discussion of the second quarter and the rest of the year, including the business model and [INAUDIBLE].

First let's look at the first quarter.

As previously reported in our monthly sales updates, Cracker Barrel restaurant sales and traffic were positive in September and October with a result that traffic for the quarter as a whole was positive.

Retail sales were positive in all three months and therefore, of course, for the quarter with the result that this was the first time since the third quarter of fiscal 2004 that both restaurant traffic and retail sales were positive in the quarter.

This combination is important since our plans for the long-term success of the business are built on growing traffic and using the unique -- our unique business model to leverage the benefits of the traffic growth for retail sales.

Internally we're establishing a winning environment at Cracker Barrel and the first quarter was an important first step in building positive momentum.

The traffic growth is especially pleasing in an environment where the casual dining industry as a whole has been experiencing sustained negative guest traffic over a significant part of this calendar year.

The positive retail sales were lower than our expectations going into the quarter, but they should also be viewed in light of the mixed performance being reported by other retailers, especially in October, and I will come back to this when I discuss the outlook later.

We were pleased with the 60-basis point improvement in store operating margin with improvements in cost of goods, labor and store operating expense.

In food costs the focus of the stores is on managing waste to our standard.

We're supporting that objective with a promotional strategy featuring a single here entree on a menu insert instead of a free standing seasonal menu.

In this case the product was roast beef.

Not only is this a product that is simple to prepare, fast out of the kitchen and has a high dollar margin with low waste, but it also reinforces the importance of uniqueness in our brand strategy since it is a traditional home-cooked product that is generally not available in the casual dining competitive set.

With labor costs focus is on staffing to support our expected sales increases, but on the cost side we saw reductions from employee benefits coming from design changes in the group health plan in the current year, and we also saw continued improvements in Worker's Comp expense coming from a very focused approach to managing claims over the past several years.

Offsetting these improvements were increases in bonus expense at the store level as a result of improved year-over-year performance and of course we're always pleased to see increases in that particular line item.

In retail same-store sales trends improved during the quarter with a rollout of Christmas merchandise, with greater emphasis on children's apparel instead of men's, and success with an upgrade in expanded collegiate assortment, including a new line of collegiate rockers.

Another success was the reintroduction of Halloween costumes for kids, which had been dropped last year.

On the flip side we saw reduction in sales of housewares where we deliberately reduced the number of themes to focus on seasonal items.

We think that the trade off of every day items for a stronger seasonal experience is key to our strategy of leveraging the uniqueness of the brand.

On the people front, management turnover in the quarter was 23% compared with 22% a year ago, and hourly turnover was 118% down from 122% last year, which is an encouraging start to this year's operational focus on reducing the high turnover we experienced in the first month of employment.

Let's move onto the current quarter and the outlook for fiscal 2007.

As we move towards the important holiday season in retail we're confident that the more extensive and appealing seasonal merchandise, compared with key visual improvements designed to improve the overall experience, will generate the positive retail sales we're anticipating.

As well as updated, more appealing merchandise, we've returned to our traditional Christmas strategy, including five themes compared with three 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 after unsuccessfully experimenting with a lower key approach last year.

Walk into one of our stores today and it should look and feel like a Christmas shop.

Continuing emphasis on uniqueness is important, meaning not just merchandise that's only available at Cracker Barrel but also merchandise that is distinctive and special.

And we're returning to dressing up the store and the front porch in line with each season and we've done that with the fall harvest season and now doing the same thing for Christmas.

This reinforces the strong experiential appeal of the brand and is something that we are uniquely positioned to do.

We're fine tuning the upgraded visual display program that we rolled out in the first quarter.

During the process of the rollout we realized in some store layouts we have the opportunity to further increase the inventory levels on the floor and we're in the process of making that adjustment.

Our retail music program continues to perform well.

The songs from the Earth CD was launched in October followed by a very successful concert by the artists performing on the CD that was held here in Nashville and was recorded for multiple broadcasts by Great American Country Television in a two-hour program that will be broadcast twelve times throughout calendar 2007 reaching their 44 million cable subscribers.

We continue to believe that executed correctly music, especially country music, is not only profitable for us but can also reinforce the brand appeal across multiple generations.

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

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

We believe that we've corrected the weaknesses that we had last year without sacrificing any margin.

With all of this preparation for a successful season in retail, we still have to be very aware of the competitive environment and consumer sentiment, which so far seems to be weaker than most retailers had hoped.

So with that in mind, we began Halloween and harvest markdowns earlier than last year and will continue to review our markdown strategy frequently and adjust as appropriate.

As I mentioned last quarter, the overall simplifying of focus approach that we're taking throughout the business is being applied in marketing, where we've eliminated marginal programs and are keying in on those that we think can make a meaningful difference.

This has allowed us to focus our resources, both dollars and people, against the important areas, the first of which is billboards.

During the quarter we've developed a new outdoor campaign featuring signature food and retail items and we believe that these boards offer a exciting visual appeal and are much more distinctive than the existing boards.

So, with over 15 different executions and over 1500 boards in the system, we'll create a renewed awareness of the brand for the interstate traveller.

The boards will be rolled out across the entire system between now and February.

With our radio advertising we've increased our radio levels back to historical levels after a significant reduction in spending last year.

We're on track to develop a TV creative strategy that we're going to test in conjunction with radio in the third quarter.

We've now rolled out the sale of gift cards through third party retailers that I mentioned last time.

This is a growing area for all restaurant chains and, while it is difficult to predict the upside, we're almost certain we have been missing an opportunity by not being there.

As I reported last quarter the keys to improving the Cracker Barrel business model have been sorted into short-term and longer term initiatives.

Short-term initiatives include an update of our labor deployment standards.

An immediate priority here was to schedule cashier hours against the peak demand by aligning cashier hours with both restaurant and retail sales instead of just restaurant sales, so that as we enter the peak retail season we can be as efficient as possible in serving the guests.

We completed the project at the end of October and rolled it out in early November.

Next step in labor deployment is to take a fresh look at the labor model and the management tools we have to support it and we have a project team working on this.

The table optimization initiative has been updated and alpha tested during the first quarter.

We're going to conduct a beta test in Q2 in an expanded number of stores, and also to develop -- we're going to develop a plan to roll out a substantial number of stores in the third quarter in readiness for our highest volume quarter, which is the fourth quarter.

We determined that the one thing that would measurably increase guest traffic is improved speed of service.

Several initiatives that we've tested have now been rolled into a more comprehensive effort focused on speed of service.

As I said last quarter, we've seen success in a number of tests but we have concluded that a meaningful improvement in system wide speed of service will be best achieved by combining the simplified menu, the management of the window, the ultimum deployment of our managers and we've added a fourth string, which is the say the hard look at our kitchen processes.

Longer term the development of an effective model for off interstate locations, as smaller markets continues to be a top priority, and I firmly believe that a fresh look at the building size and capacity, including the kitchen and operating processes, will lead to overall operating efficiencies as well as potentially lower development costs.

This objective in no way detracts from the continuing development of on interstate locations and expect that we'll be able to apply some of the ideas generated in the process to the current business model.

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

First, we've cut back the number of new units to open in fiscal 2007 to 19.

This is intended to improve the quality of execution at opening and also to divide diverted resources from the existing base of locations.

Secondly, we've reviewed the new unit opening process and developed a new three-part approach that continues the 30, 60 and 90-day operating marketing reviews that we historically performed, but also adds a more rigorous countdown process with all involved parties meeting regularly ahead of the opening to review plans and the status for each new store.

And then laid on top of these two processes in a new quarterly strategic review of the successes and issues surrounding new unit performance against our business model.

In summary, we're very pleased with the quarter and our progress on both the strategic initiatives and the performance of the operating business.

The effects of simplify and focus are beginning to show in the results and I am pleased to say that the majority of the improvements are still to come.

With that I will turnover the call to questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Matthew Difrisco with Thomas Weisel.

Thanks.

Michael, you spoke about the gift cards and you spoke about them, I think, being incremental this year.

Can you talk about where they're being offered this year versus last year?

Are you in thirty party retailers such as regional Wal-Marts or drug stores, et cetera?

Yes.

We have not offered them except inside the Cracker Barrel stores until this year, so we are offering through a selection of supermarkets, drug stores, big box retailers.

Okay.

Is Wal-Mart one of them?

No.

Okay.

Can you give us, Larry, can you give us some guidance with respect to the tax rate?

It sound like you had expired tax credits.

Is this the tax rate we should model going forward for all of '07?

I think we're not giving guidance, Matt, below operating income because the effect of the Logan's transaction can have a significant impact on numbers below operating income.

I don't think it is a bad number.

I think a big uncertainty out there is whether the lame duck Congress or the new Congress reenacts those tax credits.

It is the work opportunities and the welfare to work tax credits, potentially doing that in conjunction with some other things that they might do, say minimum wage.

That's probably the big unknown and it is probably a net opportunity for us.

Okay.

I just have two more questions.

With respect to the change in, the modest change in margin guidance, flat now from prior, I think, it was flat to up 20 basis points, what is the incremental change?

I heard you say labor and I heard you say markdowns for the retail side.

Are both of those incremental or did you already have in there modeled in your prior guidance expectations for minimum wage to go up?

We had some minimum wage in our plan and it appears that there will be a greater impact than we expected.

I think, frankly, there is, the jury is still out on what could happen with federal minimum wage and if that were to effect tipped employees.

Right.

I am wondering are you factoring in federal now or are you -- I guess we knew what the original ones were --

We have provided a small amount of potential for additional minimum wage, not specifically Federal, but potentially for other local or state initiatives that could happen.

We're looking -- we provided for that late in the fiscal year, but it is a relatively small number.

Okay.

And then the second part of that question, the retail side, is that incremental to markdowns or did you already forecast to markdown?

We were projecting higher markdowns than last year and we're projecting still higher markdowns now than we were the last time.

Both of those are incremental.

Okay.

My last question just with respect to part of the initiative I think was or some of the use of the cash of the new debt, use of proceeds from the new debt you took on, was to change the structure with the [Lyons], I believe, when you can call them in the fourth quarter of '07 potentially retiring them.

Is that still out there and can you help us understand what would be the impact to the income statement?

I believe it is a reduction of share count and a loss of the interest add back.

Is that correct?

Yeah, that's correct.

The Lyons, the convertible debt has its next put date and its first call date in April, and we have provided in the recapitalization that we did earlier this calendar year for a delayed draw term loan that could be used to refinance that debt.

And if that happens, the impact will be that interest will be real interest as opposed to being added back, but we would have approximately 4.6 million fewer diluted shares.

As of April going forward if you were to restructure that?

Correct.

Okay.

Thank you.

Our next question comes from Larry Miller with RBC Capital Markets.

Mr. Miller, your line is open.

Hello.

Are you there?

We're here, Larry.

We're here.

This is actually Dan Lewis for Larry Miller.

Hi, Dan.

Hi.

I wanted to ask about the minimum wage increases that you'll experience in the latter half of the year.

Have you determined what kind of price you might need to take to offset that?

We haven't determined what we're going to do to address that.

As I said, we will explain that in future conference calls.

Pricing is really -- it is not simply something that you do in reaction to cost pressures.

You have to look at consumer sentiment and you have to look at competitive actions, and so you can't restrict yourself just to pricing, and we have not yet determined what we're going to do.

Okay.

And as far as the new menu initiatives, will there be any material change to the mix based on those initiatives?

Right now the -- we had tested a simplified menu and we're rolling that, as I said in my remarks, into an overall speed of service initiatives.

So don't expect to see a new menu out there in the very near future.

It is going to take a little while to bring all that together.

And then let me just add to what Larry said on the pricing piece.

We always test any price increases before we take them.

And of course we just found out about the (INAUDIBLE) initiatives a couple weeks ago and we're very focused, as I also said, on positive traffic because in the long-term that's the thing that makes the difference.

And we're beginning to build some track record there.

We're certainly by difference from the casual dining industry building a positive track record, so we don't want to do anything with aggressive pricing that would jeopardize that.

Okay.

Thank you.

Thank you.

Our next question comes from Bryan Elliott with Raymond James.

Good morning.

A couple of questions.

First of all, housekeeping item for Larry.

What, if any, short-term debt is in the current liabilities you gave us on the condensed balance sheet?

None.

There is no revolver draws.

Okay.

And more substantively like to drill down a little deeper into the new unit performance.

It is a pretty impressive improvement and the turn around in a trend.

You mentioned that some of the changes, Mike, in the preopening procedures and sort of the monitoring and management of the preopening and post opening processes.

Can you point to anything else geographic differences, off versus on interstate, mix differences between the two classes that might also have contributed to the significant improvement there?

Brian, it is Larry.

Let me take that one.

I think that some of the things that Mike talked about operationally I doubt that we've had a huge impact from them yet because they're relatively new.

I think these are better sites.

I think we've learned from some of the things we've done in the past and I think we picked stronger sites here.

And hopefully we continue to learn and find still better results.

Brian, we put Larry in charge of real estate.

That's the real answer.

These were chosen before that.

You've been opening more and more stores just it appears from my observation traveling around in sort of what you might characterize as sort of residential type areas, I know here in Atlanta and also in Tampa recent observations.

Is there a mix difference this year versus last with respect to that component of the site selection process?

No, not really.

And how are those stores doing, the sort of residential stores, if that's a correct way to characterize them?

They generally do stronger relative to system average in restaurant and a little softer relative to system average in retail.

All right.

Very good.

Thank you.

Keep up the good work on sites, Larry.

Thanks.

We will now move to Robert Derrington with Morgan Keegan.

Thank you.

Larry, if you could clarify a couple of things for us.

You had mentioned that the expectation was that there would be lower G&A now versus previous expectation, can you clarify what that -- what would have changed?

Well, I think we were probably a little conservative in our assumptions before.

We assumed full staffing of all of our G&A departments and we've gone in and taken a harder look.

It does not reflect a reduction in force or any cuts or anything like that.

It is just a harder look at places where we can -- are likely to be deferring some spending and things like that.

It is nothing really dramatic other than that.

But I thought you had also said that you expected higher management bonus accruals?

Are those management bonus accruals separate from the store level?

Are those in G&A or outside G&A?

We're experiencing higher bonus accruals in both and the most significant impact year-over-year on G&A was the higher level of bonus accruals.

Okay.

All right.

And then if you'd clarify another piece for me, you talked about the higher minimum wage rates that we all expect.

How does that balance out with the lower Worker Comp expectations?

Is there an offset there?

Is it a net plus or a net minus between the two?

It is a net plus favorable, but the qualifier on that is will anything else happen with minimum wage either local initiatives or federal later in the year.

Okay.

All right.

That's great.

And as far as CapEx goes, the previous expectation was 115 million, now it is 105 million.

You've reduced your store count by 1 it appears versus prior.

1 to 2, yeah.

So how do we -- what's the difference in the $10 million?

It seems like one store wouldn't just be the 10 million.

Is there something else?

Well, again we just went back and looked, took a tighter look at things.

I think we were conservative in our earlier assumptions.

We looked at how much spending we would have in fiscal '07 on fiscal '08 openings.

The one store does have an impact -- one of the two stores does have an impact.

We looked at our expectations for maintenance CapEx harder and we just don't think we're going to spend that kind of level.

Even at 105 million we're up sharply from where we were last year, but I think we were overly conservative in our assumptions before.

Got you.

And one last one, if I may.

When you look at -- when we look at or try and think through the after-tax proceeds in the sale of Logan's, how much difference would we -- should we or would we expect between the $486 million sale price?

You can get an idea of what the book effect is by our balance sheet.

We showed discontinued operations broken out on the balance sheet.

Our tax basis is somewhat lower and not prepared to go into that right now.

Okay.

All right.

Super.

Thank you.

Our next question comes from Mike Smith with Oppenheimer.

Well, I was, I guess, going to ask the same questions, so I think I will pass.

We'll move to Chris O'Cull with SunTrust.

Good morning, guys.

Mike, on the last call you mentioned the current restaurant seating capacity at Cracker Barrel was about 70%.

Can you give us an update on that figure based on some of the changes or some of the initiatives you put in place?

Yeah.

That was a number that expresses the efficiency of our party size versus number of tables and seats.

With the project we're testing right now we're seeing an increase in our ability to seat parties in the 5% plus range.

Okay.

Okay.

Great.

Now, are you -- is there a lot of training involved in terms of just making sure that the table configurations are optimal at each of the day parts or is it -- is there a lot of involvement by the staff in making sure that happens?

Well, there's certainly some training involved.

We have to make certain that the kitchen can react to a larger initial seating at the beginning of each meal period, so there is a kitchen issue.

There is a front of the house issue in terms of the hostess managing the tables appropriately and still being able to have the flexible to anticipate large parties.

That's one of the things we've been testing.

And that's one of the things we're going to really nail down as part of the beta test because just putting some tables in there without doing anything else is asking for trouble.

We're very -- as I said before on other calls, it is one thing to test something.

It is another thing to achieve the benefits in rollout.

We know we can get benefits out of this so we are going to make certain we can roll it out right.

How many stores are going to be in the beta test?

Low double-digits, low teens.

Okay.

Larry, one last question.

At what price are the Lyon holders incentivized to convert the bonds in the April date.

What price would we look at where they would be incentivized to do that?

I don't remember it specifically.

It is in the high 40's.

I just don't remember what the number is specifically, Chris.

Has anyone tried to tender thar notes to date?

Today?

Right.

Not certainly not before today.

I don't know about today.

I would assume not.

Okay.

Okay.

Great.

Thanks, guys.

Thanks, Chris.

Our next question comes from Matthew Difrisco with Thomas Weisel.

This is Jake Bartlett in for Matt.

I had a quick question on options and whether the level reported of option expense in this quarter should we extrapolate that for the rest of the year or is there something -- it was lower than last year's options just alone in the Cracker Barrel?

Yeah.

We'll see some increase here going forward.

We award our field management options at this time of the year and that's going to happen next week.

So there will be some increase for that, but -- and that of course will be based on the share price as of that day, so there probably will be a little bit of an increase going forward.

Did you mean an increase from this quarter or from the year ago period?

From this quarter.

Regarding the conference that you had this year, not last year, about how much did that add to G&A?

It was about $1.2 million.

It was real nice.

Great.

And then also at the Cracker Barrel level, excluding Logan's, it looks like G&A was lower this quarter than last, but yet you're talking about some increased bonus accruals.

Can you clarify that?

I am sorry, apart from the bonus you're talking about?

You're talked about bonus -- increased bonus accruals, but then the absolute number was lower.

Sorry, D&A.

D&A lower than last year despite more stores on this quarter, is there -- do you expect that to continue or is there an explanation for that?

I think we'll see D&A go up, depreciation and amortization go up quarter to quarter as we expand, but the difference between last year mostly would reflect some capital expenditures from several years ago being fully depreciated.

Okay.

Thank you.

We'll now move on to Steven Rees with J.P. Morgan.

Thanks.

I just wanted to ask about kitchen display system and sorry if I missed this I know you were testing that in at least a few stores and just wanted to get an update as to how that was going and if that was going to be rolled out to the system this year?

The kitchen display system, you're right, that we have tested it and mechanically it works just fine, but the conclusion we came to, as with all of these other tests, if we don't combine them, the kitchen display system is a terrific measurement tool.

But if we don't fix the other things, all we'll know is how slowly we're operating and it won't in and of itself improve our speed.

So we bundle it up with this whole speed of service initiative and we'll be rolling it out as part of that.

Okay.

Assuming that the increased testing of the table optimization goes as planned here in the second quarter, how long would it take to roll it out to the system?

Is it something that we could expect to happen before the end of the fiscal year?

Not in the whole system, no.

As I said in my remarks, a substantial number -- what happens is you get the big chunks of stores that are configured in the same way, but as you go further down the list of stores you find a lot of unique configurations that all have to be addressed individually.

We're biting off the big pieces first.

Okay.

And then on the new store development, it sounds like there might be a few more stores in more suburban type areas.

Is there anything different in terms of the prototype or perhaps the retail format in the new stores that you're building?

I don't think we said that.

We were responding to a question about that.

Really, we have a smallish number of off interstate stores in the mix that we'll continue to have, some of which are in suburban locations as opposed to smaller rural markets.

We use the same prototype at this point.

Okay.

Great.

We think that could be a future opportunity.

Great.

Thanks.

[OPERATOR INSTRUCTIONS] We'll now go to Mark Sheridan with Johnson Rice.

Mike, good morning.

I had a question for you on the marketing side.

You talked about changes in billboards with 15 different billboard displays to run in your 1500 -- on your 1500 billboard units.

Can you talk a little bit more about specifically -- I mean, certainly, I think most of us are familiar with your traditional billboard effort.

Can you talk at all more specifically about what you're trying to achieve maybe just with the new billboards?

Well, yes, obviously we're not going to change the importance of the brand awareness and direction.

First and foremost these things are directional in nature to let people know that a Cracker Barrel is coming up so that if they want to find a Cracker Barrel they can, and hopefully we'll preempt them going to somewhere else.

Directional is going to be critical, but over time, we've had the same billboard design out there for five years, and even the words are different on each one, the design and colors are the same in all of them, and they tend to, as I am sure you experienced you drive by the same billboard over and over again, it sort of disappears into the landscape.

We've added some stronger colors, some very good food and retail item shots, not your typical plate of food that you can't recognize but some very distinctive food treatments along with the background colors and then the tag line we're using is Coming Right Up, which has the at least the double meaning of from a travel point of view it is just down the road and the thought of coming right up and coming right out of the kitchen.

So the whole notion is to basically have effectively 1500 brand new billboards that people will notice.

We'll be putting out a release on that in the very near future, which will have examples of the design.

I think you will like them.

That's interesting.

I know historically, and this goes back a ways, your research or some of your research showed that customers, while kind of familiar with it with the name of the concept, weren't necessarily familiar with the fact that they could get -- that it was a restaurant.

Thought it might be a food.

We've tested these boards and got very positive reaction.

It is interesting.

It is just one more step down the road of trying something new.

Certainly makes a lot of sense.

The last question I had, and I apologize if you expanded on this and I missed it as I have been scribbling, but when you talk about or when you added one thing, you said kitchen processes in terms of addressing speed of service.

Right.

That was, I think, in addition to the list of items that you had mentioned on the last quarter call.

Can you expand on that a little bit?

We did a lot of work, and I think we talked about it three, two or three years ago.

We may have talked about it at the last analyst meeting in looking at the efficiency of our kitchen.

Basically we have got a kitchen that grew organically along with a menu that grew organically.

We have some incredibly under-utilized pieces of equipment and we have -- I will give you one example, there were many.

Our grill cooks take more steps in performing their job function than any other concept that the consultants we worked with had measured.

Those kind of things, if you look at the whole way the kitchen is set up, make a substantial difference.

Okay.

Thank you.

Thanks, Bob.

We have a follow-up question from Matthew Difrisco with Tom Weisel.

Real quick follow-up question.

Can you just give us a comment on the pricing that you're seeing in the current environment on billboards?

I am sorry, the pricing on billboards?

What are you seeing as far as your contract pricing over the next year or so on the billboard advertising?

I think our silence means nothing particularly notable.

We have done a lot of work at improving our boards and getting better boards and all that sort of thing.

Nothing is coming up that indicates significant changes in pricing.

Now, you have got to remember our boards typically have up to three-year leases on them, so a change in today's pricing environment would take three years to be fully realized.

Well, I guess that's what I am also asking.

Are you seeing any change in the spot market that would -- ?

Nothing that's been notable, Matt, just I have heard some of the things you're talking about, but we have not yet seen anything notable.

Thank you.

We have a follow-up question from Bryan Elliott with Raymond James.

Just wanted to make sure, I probably missed this, but the options expense in the quarter was how much and what was the comparable pro forma Cracker Barrel only number prior year?

I didn't say what the amount was, Bryan.

The book number -- the income statement number is different from the cash flow number because of that tax situation, right?

Yeah.

Let me see if I can find that here.

I am afraid I don't have it at the top of my head.

I will follow up, then.

That's all I had.

Thanks.

Okay, thanks, Bryan.

There are no further questions.

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

Thanks again, everybody, for join us this morning.

I just want to leave you with the thought that we're on track with everything we set out to do in the last twelve months and the good news really is that we still have plenty of unrealized opportunity as we move forward.

So we'll be back next quarter and reporting on our further progress.

Thank you.

Thank you.

This concludes today's presentation.

Thank you for your participation and have a wonderful day.