Cracker Barrel Old Country Store Inc (CBRL) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the CBRL Group conference call.

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

Eastern Standard Time through February 27, 2007 at 11:59 p.m.

Eastern Standard Time by dialing 1-888-203-1112 and entering passcode 6895940.

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, sir.

Thanks, Melanie.

Welcome to the call, everyone.

Thanks for joining us this morning.

As usual, we have a lot to talk about both for the quarter and our initiatives for the future so we'll follow our usual format and I'll ask Larry for his financial remarks to get us going.

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

Hopefully everyone's had an opportunity to see this morning's press release announcing our fiscal 2007 second quarter results and providing an update on our outlook for the full fiscal year of fiscal 2007.

As a reminder, we don't review or comment on earnings estimates made by other parties nor do we provide continuing updates of, or express continuing comfort with, our own guidance and trends except in broad public disclosures such as we have done this morning.

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

We urge caution to our listeners and readers in considering the information on expectations, 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 these factors are described in the cautionary description of risks and uncertainties found at the end of this morning's press release, and we urge you to read that language carefully.

In addition, a more completion discussion 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 broad disseminations such as press releases or in our filings with the SEC.

We recognize that there is some room for confusion as we continue reporting on a continuing operations and discontinued operations basis and have not fully completed our recapitalization which we began last year.

Additionally, our prior year quarter has several somewhat unusual or otherwise notable items affecting results, some of which affected Logan's Roadhouse and as such are reported in discontinued operations.

I will try to explain the effect of these notable or unusual items during my review.

But first let me comment on the status of our recapitalization and strategic initiatives.

As you know, we closed on the sale of Logan's Roadhouse in early December.

All that remains of that transaction are settlement of customary post-closing adjustments for working capital and capital expenditures as of the closing date and possible sale of some or all of the three Logan's properties as CBRL retained and continues to lease to Logan's.

With respect on our recapitalization, since the conclusion of our second successful Dutch Auction tender offer, we've been active in the open market since the beginning of our third quarter under a 10b5-1 plan repurchasing shares under the previously announced $100 million authorization using proceeds from the Logan's disposition.

That's in addition to the approximately $250 million repurchased in our second quarter with our successful Dutch Auction tender offer.

Our second quarter tender offer was successful in acquiring over 5.4 million shares at a tender price of $46.00 per share.

Since we began our recapitalization initiatives last year, we've repurchased over 22 million shares or approximately 47% of shares outstanding when we began for just over $950 million or approximately $43.00 a share.

That was in two successful Dutch Auction tender offers, and we continue our efforts with the open market program presently underway.

The key remaining component of our recapitalization effort is our outstanding convertible notes or lions which have a dilutive effect of approximately 4.6 million shares or 18% of the shares actually outstanding as of the beginning of the third quarter that we're presently in.

The lions become callable and have their next put date in early April, and we presently are evaluating our alternatives with respect to this component of our capital structure.

We can't be more specific today, but we expect to have more to say on this in the next few weeks.

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

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

Bottom line, we recorded diluted income per share from continuing operations of $0.60 for our second fiscal quarter versus $0.53 a year ago, an increase of about 13%.

We are benefiting from the reduced diluted share count resulting from our recapitalization efforts.

While after-tax income from continuing operations of $20.5 million was lower than the prior year quarter, that was the result of interest expense from added debt taken on with our fiscal 2006 recapitalization, partly offset by interest income from the cash proceeds of the Logan's divestiture.

Cracker Barrel comparable store restaurant and retail sales continued to be positive in the quarter, but higher hourly labor, bonus, retail cost of goods sold and advertising expense more than offset the benefits of the positive sales and lower food costs and utilities as well as the net favorable year-over-year effect of several non-recurring items.

The net result was a 40 basis point reduction in operating margins at 6.9% of revenue compared with 7.3% last year.

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

Revenue from continuing operations in our fiscal second quarter ended January 26, 2007, increased 4.3% from last year's second quarter.

That's approximately $612 million compared with $587 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 2.2% from last year reflecting 19 new store openings, partly offset by seven store closures that occurred a year ago in February.

During the second fiscal quarter, we opened four new Cracker Barrel Country Store units, and we ended the quarter with 12 more Cracker Barrel units than a year ago, and with positive comparable store restaurant and retail sales.

Cracker Barrel comparable store restaurant sales for the second quarter were up about 0.5% from a year ago reflecting a 1.2% higher average check fully reflecting higher menu pricing and guest traffic that was down 7/10 of a percent.

During December, we took menu pricing of approximately 7/10 of a percent and we have lapped approximately 2/10 of a percent from a year ago, presently giving us approximately 1.5% of higher menu pricing than we had a year ago at this time.

We are hopeful that lower gasoline prices and the 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're pleased that our guest traffic trends have compared favorably with overall comparative performance, however.

Breakfast has been our strongest, especially on weekends, and dinner generally our weakest, especially weekdays.

In the second quarter, our new units opened in fiscal 2006 achieved average unit restaurant sales almost 4% higher than the stores open in fiscal 2005 and total average unit sales including retail were almost 5% higher.

Cracker Barrel comparable store retail sales continued positive in the second fiscal quarter, up 5.5%.

While we are pleased to have turned retail sales back into the positive column, improvement is less than we expected after last year's very soft retail sales.

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

However, we were also more aggressive in pre-Christmas markdowns this year than we were last year.

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

Operating income from continuing operations for the second quarter was down 1.1% on the 4.3% revenue increase.

Operating margins were lower at 6.9% of revenues compared with 7.3% a year earlier.

Both store operating margin and G&A were unfavorable compared with the prior year in spite of a net favorable effect of non-recurring items in both areas.

Store margins primarily were affected by higher hourly labor and advertising while G&A reflected higher bonus accruals.

Cost of goods sold benefited from a benign commodity inflation environment while still carrying menu price increases as well as favorable food cost management, but we had the unfavorable mix effect of higher retail sales which carry a higher cost of goods sold than restaurant sales, and we also had higher retail markdowns than a year ago.

On the food cost side, commodity inflation was actually down about 1.5% from a year ago with favorability in chicken, butter, beef and bacon.

At present, we have contracted approximately 75% of the remainder of the fiscal year at moderate overall expected inflation of 1.5% to 2%.

While the rate is moderate in absolute terms, it represents a sharp increase from our trends to date.

In the remainder of the year, we see increased inflationary pressures from produce, chicken, eggs, and fish.

Retail cost of goods sold was higher than in last year's second quarter primarily reflecting higher pre-Christmas markdown activity.

Because retail product carries a higher cost of goods sold than restaurant product, the mix effect of stronger retail sales also had the effect of increasing overall cost of goods sold.

Labor and related expenses were about 30 basis points higher than last year as a percent of revenues primarily reflecting higher hourly labor.

We did experience increasing wage rate inflation, about 2.5% in hourly wage rates, and that inflationary pressure increased to 3.4% in the month of January as a number of state-mandated minimum wage increases affected the wage that we pay to our tipped employees in those states.

Minimum wage changes, including anticipated federal minimum wage legislation, are not expected to have a significant impact on non-tipped employees' wages as prevailing wage -- as prevailing market wage rates generally are well above the minimum.

However, there is expected to be an unfavorable impact on our income tax rate as increases in federal minimum wage and possibly provisions of the legislation itself reduce the amount of credit allowed on employer-paid FICA taxes, tipped income of our servers.

Further adding to impending wage rate, wage-related pressures, we recently have determined that as a result of reductions to guideline hours that were built in over the last couple years, our labor -- internal labor charge guidelines are not consistent with our best practice -- best practices labor guidelines, and we're evaluating both our best practices and our labor charts to improve labor scheduling and to improve service in our restaurants.

We've not yet finalized the specifics in how we're going to address these upcoming and ongoing wage pressures but we are working on that, as I've said.

Continuing in labor expense, I will remind you that last year we recognized a pick-up in workers' compensation expense in the second quarter as a result of a limited scope actuarial update.

We performed a similar update this year and recognized a slightly more favorable effect, partly offsetting the hourly labor cost pressures.

Other store operating expenses also were unfavorable by about 20 basis points compared with last year's second quarter.

Last year, a limited scope actuarial review resulted in a reduction in our general liability expense.

As with workers' compensation, we performed another update this year, but it instead resulted in an increase in required reserves having a net unfavorable effect of $3.4 million compared with last year.

We also had higher advertising expense this year than last year, but we had a partly offsetting benefit from receiving our share of the settlement of credit card class action litigation shown separately on the income statement as the year-over-year benefit of non-recurrence of last year's $3.7 million impairment charge related to the third quarter year-ago closing of seven Cracker Barrel units.

G&A was about 20 basis points higher as a percent of revenues this second quarter than last year.

The primary causes were higher bonus accruals relative to last year's low levels reflecting stronger performance relative to plan and other bonus programs and awards.

Partly offsetting the higher bonus expense was non-recurrence of last year's severance charges and certain legal settlement accruals.

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

Partly offsetting the expense was higher interest income related to short-term investment of proceeds from the Logan's divestiture.

Our second quarter income tax rate was 34.9% for continuing operations, slightly higher than last year's second quarter rate of 34% and slightly lower than the first quarter rate this year of 35.9%.

Key changes in the rate were reinstatement of certain employment related tax credits partly offset by an increase in our estimated effective state income tax rate.

Our six-month rate of 35.3% is our best estimate right now of our expected rate for the full year.

Wrapping up the second quarter, income from continuing operations of $20.5 million after tax was down from $26.7 million a year ago primarily reflecting the higher interest as our operating income from continuing operations, and that's before interest and taxes, was down about $0.5 million or 1.1% on the 4.3% revenue increase.

Diluted income per share from continuing operations, however, of $0.60 was up 13.2% from $0.53 for the second quarter last year with the recapitalization benefits of reduced share count offsetting the effect of higher interest and lower after-tax income.

Cash flow from operating activities was approximately $57 million higher than last year with higher taxes payable on accrued compensation and a lower reduction in trade payables than we had last year among other smaller effects.

More than offsetting the increase in interest expense, and that more than offset the increase in interest expense, and the backing out of the positive operating cash flow from Logan's operations which are shown as discontinued operations.

Capital expenditures at $47 million were up just slightly from $45 million a year ago for our continuing operations, and dividends, while being paid at a higher rate per share, are lower than last year because of the reduced shares outstanding resulting from our recapitalization strategy.

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 2006 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 outlook reflects conditions as of the date it is given and we disclaim any obligation to update this information other than in filings with the SEC from time to time.

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

This discussion of trends and outlook, like other earlier parts of today's discussion and press release, 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 and details of our remaining recapitalization strategy we are 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 2007 fiscal year remains substantially similar to previous guidance although some underlying assumptions have changed.

Retail sales trends, while positive, are not as strong as we expected previously and we have tightened the range of expected restaurant sales performance.

We look for comparable store restaurant sales to be up 1% to 2% and comparable store retail sales to be up 5% to 6% for the full fiscal year.

For the full year, we expect to open 19 new Cracker Barrel stores and we look for revenues to increase by approximately 6.5% to 7.5% from last year's $2.219 billion for continuing operations and that increase includes a 53rd week.

Considering sales pressures in the restaurant industry and increasing pressures in commodity costs and labor, we've been evaluating discretionary planned expenditures for deferral or elimination and as a result, we presently expect to have full year operating margins of 7% to 7.2% of revenues.

Our full year capital expenditures outlook is approximately $95 million for continuing operations, but we expect to have significant cash outlays for the remainder of the year for share repurchases and income tax payments.

Our next sales update will be February 27th, next Tuesday, when we'll report fiscal February sales.

So in summary, we reported solid growth in diluted income per share from continuing operations and a tough sales and emerging tough labor and commodity costs environment.

We are reacting to those pressures by evaluating our discretionary spending and by focusing our operations on building guest traffic and retail sales.

Our guidance remains substantially similar and our balance sheet and cash flow remain solid.

With that, I thank you for your attention during my financial review and I'd like to turn this back over to Mike Woodhouse who has further comments on operating trends and initiatives.

Mike?

Thanks, Larry.

Good morning again, everyone.

I am please to report again this morning that we've continued to meet progress on all aspects of the strategic direction that we implemented early last year and which we continue to refine.

In the second quarter, we completed the divestiture of Logan's at a price that was at or above most expectations, and we also successfully completed our second Dutch Auction tender offer in January so the strategic restructuring of our business that we began in March last year is almost complete, and now we have only to deal with the refinancing of the convertible debt.

I am pleased to be able to report that although we didn't achieve our goal of positive restaurant traffic, we missed by about 7/10, Cracker Barrel traffic continues to consistently outperform the overall industry by a meaningful margin.

And finally, we continue to make progress on our business model initiatives, and I will go into that in more detail in a few minutes.

Before I discuss the quarter, I would just like to say how pleased I am that the aggressive and substantial strategic initiatives that commenced last March have been so successful.

Credit goes to those internally and externally.

We put every effort into ensuring that we had a well thought through plan followed by first-class execution.

Our ability to do this successfully gives me confidence that we'll be equally successful with our operating strategies and for the same reasons.

In reviewing the quarter, the big win was to continue to outperform the industry in traffic coupled with the second consecutive quarter of positive retail sales.

These positive results, viewed in the context of overall industry trends, speak to our focus on execution and the strength of the Cracker Barrel brand in continuing to attract loyal guests.

In keeping with the theme of simplify and focus, restaurant execution has been all about the basics with speed of service the number one goal.

Our opportunity in the short-term is to take advantage of the continued strong demand for Cracker Barrel as evidenced by the long waits by improving our speed of service.

Our IVR research program has been in place for over a year now.

The system for reporting IVR scores includes the unique ability to prompt individual GMs with remedial action suggestions to deal with weak scores or negative trends.

While our scores are strong by industry norms, what really matters is our ability to improve both sequentially and year-over-year.

Overall scores are improving, and the consistency of performance is certainly increasing.

We've also introduced a new dashboard reporting system that shows traffic, retail sales, turnover and key cost factors.

The dashboard is a great example of the application of simplify and focus with key metrics available at a glance in color coded form and drill down details available as required.

In retail, the positive sales in the quarter were built on the success of our strategy to restore Christmas merchandise as the focal point of the holiday season following last year's low key approach.

Sales of Christmas merchandise were up 20% in the quarter supported by positive sales in apparel, home decor and a new line of candles.

Since Christmas, we've completed a full review of our performance over the holiday season, and will build the findings into the buy for next year.

The overall change will be to reduce the presence of Christmas on the floor until after Halloween in order to increase the impact of the fall harvest seasonal merchandise and then to increase the impact of Christmas for the full floor set after Halloween with an even bigger presence than last year.

At the end of January, retail inventories were the cleanest they have been for a number of years as a result of an increased focus on sell-through and more accurate allocation.

Retail shrink in the first half of the year was at the second lowest level for at least seven years, again as a result of consistent focus on operational execution.

As Larry mentioned in his remarks, store operating margins did not improve as we would have liked in the quarter.

The external pressure from state level increases in minimum wage that increased the cash wages for tipped employees was a major factor, and this is clearly an issue that we and the rest of the full service industry will have to come to grips with.

Other areas of labor costs, correct scheduling, management staffing and use of shift leaders, are within our control and we'll be focusing on these during the second half of the year.

One key area of labor cost is turnover.

The impact is not just in recruiting and training costs but also in the guests' experience as a result of lower levels of proficiency.

With the power system, we have low and stable turnover.

It's about 25% annually of our more tenured Par Four employees but turnover at the par entry level, Par Zero, is high, and we launched an initiative to address this.

The focus of the initiative is on increasing GMs' involvement in the hiring and evaluation of the new employees with the expectation of better quality hires and a new level of voluntary -- a lower level of voluntary turnover.

To reinforce the importance of new employees to Cracker Barrel, they will now be called Rising Stars instead of Par Zeros, and when you visit our stores, you will see a shooting star emblem on their aprons.

We believe that a meaningful reduction in turnover at the entry level is achievable and we look forward to seeing results over the course of this year.

In the quarter, annualized management turnover was 19% compared to 18% last year and annualized hourly turnover year-to-date is 114% down from 117% last year.

In marketing, we're on track to complete the rollout of the new billboard campaign by the end of March.

So far over 1,000 of the 1,500 boards have been updated.

The rollout of the third party gift program was a success.

Despite a later than expected arrival in retail outlets, we hit our dollar goal for sales of the new cards over the holiday season and total gift card sales, including the new cards, were up 21%.

Next year with full distribution from the beginning of the season and the potential for additional outlets, we expect to see further increases in the sales of third party cards.

New unit performance continues to be a priority and the countdown process I mentioned last quarter where all involved parties meet regularly from sixteen weeks ahead of the opening to review plan and the status of the opening is now up and running.

And along with this more rigorous monitoring process, we're looking at ways to better manage the natural learning curve that comes with opening a new unit.

One thing we're testing is a simpler opening menu to reduce complexity in the kitchen, and also to avoid bottlenecks in the kitchen, we're bringing in experienced grill cooks for an extended period following the opening.

Since you only get one chance for the restaurant to make a first good impression, we're doing everything we can to get every new store off to the best possible start.

And we have some late breaking news.

We opened two stores yesterday, one of which was in Florida City, Florida, which has broken our all time opening day record.

The restaurant sales were $21,400 and retail was $8,400.

The previous opening day record for a restaurant was in Jacksonville a couple years ago, was a little over $19,000.

So now turning to the outlook of the remainder -- for the remainder of the year.

We continue to focus on positive restaurant traffic and positive retail sales.

As we said in the outlook in the release this morning, we're projecting same-store sales in the 1% to 2% range for the full year and retail sales in the 5% to 6%.

We're going to continue with our menu strategy of featuring single entree promotions with proven appeal, strong dollar margin, attractive price point and fast out of the kitchen.

Right now, we're running a chicken and dumplings platter and next up in the spring will be our broccoli cheddar chicken which was the strongest performing promotional item in certainly the last seven or eight years.

In retail, we're fully set for Easter at this point and we also have some new themes.

We have a new sentiment and inspirational themes and spring collegiate which was available only in a limited basis last year, is now available in most of the system.

And with the low levels of aged inventory, we're planning to run more limited port sales going forward which will benefit retail margins and retail labor costs.

As I previously mentioned, the billboard rollout will be completed by March, and we expect a positive impact in the fourth quarter from the new creative since it is going to be in place for the beginning of the summer travel season.

And also on the advertising front, we're on track to test newly developed TV creative beginning in the fourth quarter.

The table optimization initiative will be rolled out to a number of stores during the third quarter and 60% of the system, including stores where no change was found to be needed will be at optimum by May, again in time for the high traffic volumes of the fourth quarter.

The comprehensive seat to eat initiative is progressing, and the scope includes kitchen processes, window management, manage and deployment and front-of-the-house service methods.

The goal is to establish and improve business model for the existing stores with traffic increases coming from throughput improvements and margin improvements coming from the leverage of the traffic increases and from direct cost improvements.

The end result should be an improvement in guest experience and an improvement in operating margins and return on capital.

We're planning to alpha test the components of this initiative over the next several months and then combine them in a new store which will feature the complete initiative opening early next calendar year.

And then following this test as quickly as possible, we'll move to a rollout to the entire system over a period yet to be determined.

With Cracker Barrel now our only business, we're devoting more -- we can devote more resources into developing a next generation prototype.

I'd expect this new prototype to incorporate many of the features of the seat to eat initiative but with the added benefit of a purpose build kitchen and a from-scratch building design.

The goal here is to further enhance the unit economics and substantially extend the flexibility of the development potential of the brand by including off-interstate and smaller market variations.

With this flexibility, we expect to be able to directly target media efficiency in our development plans, something we haven't been able to do in the past.

As we look forward to maintaining and building the appeal of the Cracker Barrel brand, two important conclusions have emerged from our research.

First is we can expect a large segment of the aging baby boomers to fit the call and customer profile of the Cracker Barrel brand.

Secondly, there is a strong multi-generational appeal to Cracker Barrel that affords us the opportunity to reach different age groups at the same time without having to segment our offering as may be the case with other concepts.

Our advertising, our menu and our retail merchandise strategies will incorporate these conclusions as we go forward.

So I would like to say in closing that the overall theme of simplify and focus, supported by clear, consistent and frequent communication, seems to be working well for us, and I expect a report on progress as we move through the remainder of this fiscal year, and now I would like the turn the call over to questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Matthew DiFrisco from Thomas Weisel Partners.

Thank you.

Larry, can you, I know you're not going to give specific guidance on the share count, but can you help us get some tools to understand it better?

What was the -- I guess what is the minimum that we would look at -- I am sorry, the maximum share count that it possibly could be if you were to buy back nothing incremental from today going forward, meaning the share count didn't go down in the second quarter on a diluted basis from the first quarter although you retired 5.4 million shares through the Dutch Auction.

Can you just help us with the math on what would be the maximum number that the shares possibly could be if you did not use anything of the 100 million incremental left to buy?

Well, our actual share count at the beginning of the quarter is just over 26 million shares and that's shown on the balance sheet as 26.1 million in shares.

The two dilutive effects that we have, the big one is related to the convertible debt, and that's approximately 4.6 million of shares.

The other dilutive effect that we have is on stock options, and the treasury method of calculating that dilution.

That number is difficult to predict because it is dependent on share price and also the share count is dependent on any option exercises that we have.

So the best guidance I can give you is we're beginning the quarter with actual shares outstanding of 26.1 million.

The dilutive effect going into the quarter of the convertible debt is approximately 4.6 million shares, and then there is an additional dilutive effect related to option dilution calculations and option exercises.

Which I guess in the prior quarter, just as a point of reference, the difference between basic of 30.8 and 36.0, the lion's share were literally lions, the 4.6 million and then the remainder would be the [Black Shoals] method.

Those are the only two factors?

Yes.

Okay.

And then also, can you just talk about the timing of the rollout of the new -- where do we stand as far as the billboard advertising?

How much of the country has seen it already?

When will it fully be rolled out, et cetera?

Thanks.

Hi, Matt.

We have 1,500 billboards.

We have a little over 1,000 already rolled out.

We'll be finished by the end of March.

We focused two -- we focused on efficiency in terms of printing similar sizes and so on, but we also made a priority to put billboards in Florida because Florida has been a weaker market for both us and I think the rest of the industry.

So we'll see them out there well ahead of the fourth quarter.

Just add to that, to clarify what Mike said, we didn't necessarily go on a market by market basis.

We did it by efficiency and printing, so it was really based on billboard size and dimensions, so we had -- didn't necessarily convert a given market on a given date.

It has been phased in over time.

Okay, and then lastly, can you just update us on the G&A line?

If we look at the second half of '06, where do you stand as far as comparable bonus accruals?

Is the year going to be more normalized now on a year-over-year basis looking at it or are there some lumps where potentially third quarter or fourth quarter might have some greater accruals in '07 than they occurred in '06?

Yes, we're still expecting G&A pressure and we're continuing to evaluate that.

I am hoping that we will find some additional savings to be realized in G&A, but we're looking at G&A being up year-over-year in the second half.

As a percent of sales?

Yes.

Thank you.

We'll take our next question from Larry Miller of RBC.

Yes, hi, guys.

Larry, can I just follow up on that question with the share count because maybe I wasn't following it so well, and it is obviously important relative to what you guys are doing today.

It doesn't look like there was a big change in actual share count from Q1 to Q2 of the year.

The convertible is still going to be in there.

Presumably the option expense is going to be in there but yet you bought back, like Matt said, about over 5 million shares in the quarter.

Maybe the end of the quarter, so I guess what we're all trying to figure out is what is an effective weighted average share count going forward?

It looks like it should be 5 million less.

Is that not right?

Well, yes, the weighted average share count in the second quarter reflects the fact that we didn't complete the tender offer until late in the quarter, so the 5.4 million shares that we bought back are in the weighted average share count for the quarter.

Okay.

That's helpful.

Thanks.

Also, just one other housekeeping item.

The credit that you guys got for self-insurance and workers' comp, that's in the labor line or is that G&A?

It's in -- part of it is in labor and related expenses.

Part of it is in other store operating expenses, and there is a little bit in G&A.

Okay.

I guess there is no way for us to break that out, then.

And finally, Michael, I was wondering if you can give us a little bit of flavor in terms of with all the merchandising resets you guys have done and the work you've done at retail, just if you can kind of look back and say, hey, we really did this well, and fill in this, obviously, and maybe what we could have done a lot better and how we're going to apply that going forward to the spring reset?

Thanks.

Well, I think one big piece of learning over the last several years is that we let our inventories get out of control several years ago, and as I said in my remarks we got the cleanest inventories in terms of low level of aged merchandise that we've had in living memory, and for sure we're not going to let that get out of control again.

We have a much more disciplined approach to buying and planning and allocation, so that piece is a big win and one of the things that will come out of that is porch sales have been an interesting way of dealing with some of that inventory over time, but we've had stuff that has been put out ten times on a porch sale and not sold, and that's not a particularly efficient thing to happen.

We don't see that happening in the future.

The Christmas theme is a win.

We had downplayed it last year, a year ago, and we rebuilt it this year, and as I mentioned, we're going to really focus on having a big impact.

We had five themes in Christmas on the floor this year.

We may have six or seven next year but we're going to hold back and put most of that at once, so it will be a big visual impact after Halloween rather than starting in August with a slow build.

I think we still have a lot of opportunity in retail.

We've been rebuilding our team.

We've got a very solid team in place now who really haven't had a chance as a complete team to show us what they can do, and this coming summer, but especially starting with Christmas, we're really going to see the benefits of everything we've learned.

So I think this continues to be strong potential for retail above and beyond where we are today.

Great.

Just one follow-up on that.

The upside is clean inventories is obviously lower markdowns, but the downside is potential stock outs.

Is that something you're not worried about?

No, no.

The two things don't necessarily go hand-in-hand.

Stock-outs are all about better allocation, and we've brought in a VP of Planning and Allocation last summer, and he's having an impact and we're going to be focusing on making certain that we don't have broken assortments too early and all of that kind of stuff but we are a seasonal business so selling through is part of what we do.

So we'll lose some potential top line sales from the effect of selling the stuff we were selling in the porch sales at the level we're selling, but we're actually not making money on those, so the bottom line effect is going to be positive.

Great.

And if I can just ask one more question, Michael, just so I understood the labor that you talked about, that initiative, the scheduling and best practices.

Was that in response to possibly not having enough servers on the floor?

Is that what you were describing and therefore we might have more staff on the floor?

Well, we've got a disconnect.

We have two things going.

We have our labor chart which tells the operators how much labor they can use at a given sales level -- given expected sales level, and then we have best practices which deals with how to schedule and how to staff the store.

There is an inconsistency between those two that I wasn't aware of until a few months ago, but apparently started two or three years ago.

We're bringing those in line, and looking at the whole notion of how do we deploy better so that we, for example, at the beginning of the rush at lunch and any meal period, we're fully staffed to handle that volume and move it through.

So it is all about getting the labor in place to handle the sales, and sales should build if we do that better.

Now if the sales don't build, then we'll spend more labor to have sales not building but I am pretty comfortable that we'll see sales building.

Thank you very much.

Thank you.

Next we'll go to Chris O'Cull from SunTrust Robinson Humphrey.

Yes, good morning, guys.

Just to follow up on the labor question.

Can you tell us -- did labor productivity fall in the second quarter?

Yes, it did a little, but that's relative to chart.

As we said we're looking at chart to see if it really reflects what we think we need to do in the stores so, yes, on the basis of our chart, productivity fell some, but that's a questionable benchmark for us to be working on.

Could you give some color on how that was related to your budget for the year?

I mean, was it -- did it contribute to significant labor cost increase?

I guess significant is in the eye of the beholder, but yes, I would say it had some significant pressure.

Okay.

And then Mike, I know you're taking a different approach to some of these sales initiatives like the table optimization initiative.

Can you elaborate on some of the benefits you have seen from the test results and I wasn't sure how many -- what percent of the system actually has the seating configuration today?

We -- what I said was we'll have by May, we'll have 60% of the system at what we believe to be optimum.

Now we have different prototypes, different configurations within the dining room, so it has been a pretty big task to identify all the different groups and deal with them.

What we found was that in fact since we've been talking about table optimization as always happens in restaurant companies, the operators hear about stuff and they get ahead.

So there was optimization going on as not part of the initiative but part of some entrepreneurial spirit out there which is good.

So the actual number of stores that we've actually had to go in and change is fewer than we had originally expected.

But we'll have 60% set up.

Now one of the important things that we talk about internally is that optimizing the tables is great, but unless we -- and I think I said this at the beginning of this process, unless we train, especially our hostesses and our servers to deal with that, we're not going to get the benefit of the new capacity so we've got to follow on focus which is about using the new optimized dining rooms to their maximum benefit.

Is this the seat to eat project that you're talking about?

No.

Okay.

So this is in addition to that?

Yes, I will give you an example is that if you think about, it it is really obvious, but what really matters is are you optimized in terms of the guest seating at the beginning -- when you go on a wait.

It is not when you are on a wait because they're sort of determined by who finishes eating at that point so we really have to focus on seating parties of two at two-tops while we're building to a wait and we haven't done as good a job as could on that so we're not getting all of the benefits at this point, but we understand what we have to do to get there.

What's your goal for seating capacity utilization during peak periods?

I know in the past you mentioned it has been around 70%.

Well, it is difficult to have a goal because the -- we're dealing with a lot of averages here.

The average party size we know, but we also know you can drown in a river that is 6" deep on average, so be wary of averages because within a week, any given stall, the party mix will change.

One of our focuses has been not to lose our flexibility on Sundays where we typically attract large parties, so but the goal was -- originally we talked about I think increasing by about 10 percentage points.

Okay.

Thanks.

Thank you.

Next we'll go to Mike Smith from Oppenheimer.

Good morning.

Three questions actually.

One concerns the lions.

I wonder, Larry, if you could go through your thought process on what you do when those come up for either callability or putability in April.

The other one concerns, I heard, I think, Michael, you said that you were going to be trying a new menu when you open stores.

And the third is what has happened to the music initiative?

How well has that done?

And those are my questions.

I will take the lions.

It was directed at me, and it is easiest to answer.

Sorry, Mike.

I can't talk about it today.

I am sure that's a little frustrating, but we're pretty close to being able to say something about our intentions with the convertible debt and I think would just be more appropriate to make that announcement specifically when we finalize that determination.

As you know, I will point out, as you know, that a year ago, as part of our recapitalization and establishing a new credit facility, a component of that credit facility was a delay draw term loan that could be used for the purpose of refinancing that line, but the specifics will be announced in the next couple of weeks.

Mike, on the simplified menu, we're doing a number of things with our store openings because we want to make certain that we can handle -- we want large volume, and we want to be able to handle it.

The simplified menu has been tested in, I guess, one store.

The notion there is to take out some of the items that are more complex and slow us down in the kitchen especially.

Combined with that is what I also mentioned is the idea of putting some experienced grill cooks in place because the grill line is the most complex and the level of expertise required to run the grill line in a Cracker Barrel is higher than in most restaurants because of the breadth of the menu and the things that we're trying to manage especially with our breakfast all day.

So combination of those two things is intended to take away potential bottlenecks in the kitchen because the worst thing that can happen is that we attract a large audience at opening or immediately after opening and then we put them on an hour or hour-and-a-half wait.

So more to follow, but I think it is going to be in some fashion an ongoing part of our opening.

Music.

I guess I didn't mention music.

Where we left music is that we've got a continuing strategy to sell CDs, produce and sell CDs with exclusive content from big name country music stars.

We have three or four names that are lined up or in the process of being lined up, so we will sequentially continue to do that.

We held a very successful concert in the new symphony hall here in Nashville back in November for our songs of the year CD which is a compilation of big name country artists selling -- singing songs that were number one or voted best song of whatever year in the past.

Having said all of that, music is a strong part of our business, but it is not a large percentage of our sales, but it has some really good strong brand connections, so the benefit of doing all of that, especially the coverage we got with the concert and now I think 12 repeat broadcasts on GAC over the course of the calendar year, will get us an awful lot of exposure for the Cracker Barrel brand, so all of that is working really well.

Thank you.

Thank you.

Next we'll go to Amy Vinson from Avondale Partners.

Hey, guys.

Mike, can you give us a little more color on what all is involved in the seat to eat program?

Well, it is a complete relook at everything involved, essentially from preparing the food in the kitchen, getting it correctly and quickly out of the window to the table, and it involves rethinking all of the obvious things.

Wherever we do things differently than others is an opportunity to learn.

It is about managing the window.

It is about reducing complexity in the kitchen, and it is about other ways to have the server spend more time in the dining room than -- because as we all know from experience of Cracker Barrel, the server is spending a fair amount of time in the server alley, out of sight, and with a combination of the paging system tied to the KDS that we've already tested and we know that works, and that basically is where -- when the food is in the window, the server is buzzed on a silent pager so she knows to go back and get the order, she can spend more time in front.

We're even considering putting the terminals out in the dining room.

All of this is we have a huge list of things to look at.

We've got a pretty aggressive timetable to work through all of those, test them in independent components.

As I said before, the reason we got this total approach is that the individual components have not really helped us.

We've got to put the whole thing together.

So we'll test the individual pieces and then roll them up into a store to be opened early next year in a location to be announced later on.

Okay.

And then the speed of service initiatives and some of the stuff you were just talking about, does that have the opportunity to bring costs out of the kitchen, reduce labor, et cetera?

Yes.

I mean simple math says if you got a fixed number of people in the kitchen and you're moving more food through, you're going to get some labor benefits, but I think that there's going to be some tradeoffs.

I think that we may see some tradeoffs in terms of bringing in some things that are more prepared than we bring them in right now.

We do not at all want to impact the guest experience, the quality of the food, and the freshness and the appeal of the food, but we take made-from-scratch to an extreme that nobody else does, and there are probably some opportunities there.

So it is both leverage from the traffic and some direct -- some direct cost benefits.

And let me just add and emphasize on that that that would be great if we do find some opportunities to improve cost structure as a result of that, but our focus is on improving guest traffic and retail sales.

We have one of the strongest guest traffic concepts in the restaurant business.

It is an extremely strong and well-liked concept. 1,100 customers a day, substantially more than that on weekends.

The magic to be had is to running those people through the store effectively so that they have a great experience and we get as many as possible through the store.

And then to that point, Larry, table optimization, what has the customer feedback been?

What I found has been pretty good, but what overall have you all seen?

Yes, the intercepts that we've done have been positive from the customers.

And then in stores, are you -- I guess is there -- are you managing peak time wait, et cetera, differently in those types of -- in the stores that have the two-tops than you do in the normal stores?

Well, in theory we are, and I think that's one of the learning challenges of getting us to a larger number of stores that we really have to get people thinking differently about how the business is going to operate.

As Mike said, when you begin that rush period, you need to have parties of one and two sitting in two-tops to get -- so you begin the rush period with the maximum efficiencies.

There is some real training to go on with this.

Okay, thanks, guys.

Thank you.

Next we'll go to Conrad Lyon from FTN Midwest.

Hey, good morning, everyone.

I have to ask my diluted share question as well.

Okay, I think we know that you said you're buying back shares in the open market, and then the 10b5-1 plan is in place till the end of March, so I think by my calculation, should we expect so see another 2 million share reduction by the end of March?

Well, our authorization is, first of all, let me say I am not -- it depends on which starting point you're using.

As I pointed out, we have 26.1 million shares outstanding at the beginning of the quarter.

Okay.

We have a $100 million authorization related to use of the proceeds from the Logan's disposition, and we are presently in the midst of a 10b5-1 plan that is working against that $100 million authorization.

So yes, I think in broad terms, your math works out based on where the share price is, but I can't be precise because I don't know what the share price will be in any given day when we're exercising that.

Got it, but the intent it to use the entire 100 million?

Yes.

Got it.

Okay.

Top line question here.

You talked about the wait times here at the restaurants.

Any idea of what percent of the system you're dealing with here?

In terms of what percent of -- ?

Yes, like how many units or percent of system that you're having these issues with the wait times?

Well, it is pretty much the whole -- certain days and certain meal occasions, it is pretty much the whole system.

Okay, all right.

You don't do 1,100 customers a day on average without having a wait problem a good part of the week and a good part of the system.

I think it is more the exception that probably doesn't run into --

Okay, that's what I wanted to hear.

Let me talk about Florida City.

I think that was the unit that you said was off the charts.

Is there anything that you've identified that you can translate into other units?

Are there any particular critical success factors that you've identified?

Well, with all respect, we had one data point which is the opening day sales which was yesterday.

We've done some of the things that I talked about, certainly in getting the kitchen prepared.

I have not talked to the Regional Vice President.

He worked about an 18-hour shift down there yesterday, so we're leaving him alone today, but certainly we'll take a look at what allows us to perform so well.

I mean it is not just a question of the demand.

Obviously moving that number of people and meals through a store in a single day is a huge -- with a new crew is a huge achievement, so we will be finding out.

And let me add to that also, Conrad, I think we mentioned this before that we're formalizing or further formalizing some of our post-opening reviews.

We do a couple of operational reviews after we open a store to evaluate what have we done right, what have we done wrong, what have we done differently than we expected to do in that store from an operational standpoint, and it also covers things like billboards and any advertising support that a store might get, and then secondly, we have the real estate team, the people who are making the initial store selection decisions to review after the store has been open for three months and discuss the things that we can learn in our site selection process from that.

Now that's relatively new that we're doing all those things, but we are trying to be more deliberate in evaluating the store performance.

Yes, I guess my question is more akin to was there any demographic shift that you identified or maybe the market -- pre-opening marketing, was that any different?

It is South Florida.

I think we're probably getting good snowbird activity right now.

Yes, probably.

Okay.

All right.

Thank you very much.

Thanks.

Next we'll hear from Joe Buckley of Bear Stearns.

Thank you.

I had a couple questions as well.

I saw the capital spending budget coming down $10 million, $105 million to $95 million, is that a preview of expansion numbers possibly slowing for fiscal '08?

No, I think it is a continuing conservatism in our projections, Joe.

We are expecting right now to spend less on this year's store openings.

I don't think we have any notable change in how much we're going to spend this year on next year's store openings.

No, it has nothing to do with that.

We did have a provision in for potentially having a couple of land bank acquisitions, and that was purely provisional, but at this stage of the year, more than halfway through the year, we don't see much likelihood of adding to our land bank, and a land bank is simply when we see a site that we think in a couple, few years from now will be ripe for expansion, we sometimes lock it in, and we took a couple of those out of our expectations for the remainder of the year, so this does not signal anything related to our future expansion rates.

Have you talked about plans for '08 on the expansion front yet?

No, we haven't yet, and my estimate would be that we would do that in September which is when we typically do it with our year-end press release.

Okay.

And then quick question on the bonus part of G&A.

Can you walk us through the bonuses related to the success plan?

Does all that hit sometime later this fiscal year?

I know there has been some impact already.

I am assuming there is some impact in the numbers you reported today.

But does it all sort of wind down by the end of the fiscal year or should we expect heavier bonuses in third and fourth quarter?

No.

We're accruing the success plan ratably over the life.

There have been some small variations from quarter to quarter because the plan vests and pays out six months after the completion of the two key parts of the strategic initiatives they cover.

That was the initial recap, the credit facility and the divestiture of Logan's, so the Logan's transaction closed on December 6th, and so the payment will be in early June, so we are accruing through early June on the success plan, and that -- we'll have a similar accrual in the third quarter to what we had in the second quarter, and we'll have just a residual amount to accrue in the fourth quarter.

Okay.

And then --

That is unusual in the first half of the year.

That is unusual versus prior year.

We didn't have it until the third quarter last year.

We weren't beginning to accrue that, so it is different thus far this year versus last year.

I see.

But the year-over-year impact actually diminishes then in the back half of the year?

Correct.

Okay.

And then, Larry, question on the lions, and I know you don't want to get into your plans, but what are the mechanics or what are the factors that you consider?

This is a non-cash interest expense that's going through the income statement, is that correct?

Correct.

Okay.

So if you refinance some, you would have some cash levels of interest, but the 4.6 million shares that are factored into the share count would disappear?

That is correct.

Okay.

Okay.

Thank you.

Next we'll go to Steven Rees from JP Morgan.

Thanks.

I just wanted to ask about the advertising expenses.

You mentioned that it was higher in the quarter and perhaps you could quantity how much and if you expect this to continue beyond the completion of the new billboard strategy rollout?

Well, I think that was primarily a function of last year.

We had a very low level of media, and it really related to doing some more radio this quarter than we did a year ago, and we did essentially none.

We are looking at our advertising spending for the remainder of the year, both the continuing radio levels that we'll do and we're looking at, as Mike touched on, a -- beginning a television commercial test in the fourth quarter.

Okay.

And what is the new strategy with the billboards going forward?

I think in the past they really haven't changed much.

Do you think you need to change them more often to keep the message fresh?

Yes, I think so.

We haven't even finished putting these up but we now have essentially an 18-month lifecycle on the new vinyl that's up there, so I think the combination of being absolutely clear that these are Cracker Barrel brand.

We don't want to be confused with anybody else.

We've got to keep focused on that.

But I think the freshness will help.

I also think that the basics of the billboards, especially for our traveling guests, is brand and directional, so we're not going to lose sight of that.

We're not going to go to the point where they're fun but nobody knows what they are.

We're going to continue with what is true to the brand.

I think this refreshing has been good because it's rebuilt awareness, and as I said in my remarks, the summer traveler hasn't seen many of these yet so as they see them when they're traveling, I think that will be a positive, and then eighteen months from now, we'll be back with probably something new and different.

Great.

You talked about the opportunity to target both the aging baby boomer and perhaps a younger consumer.

Do you think this can be achieved through better or new advertising or do you plan on making other changes to the concept?

We're not putting a playground out front if that's what you're thinking.

It's more to do with -- what we discovered in the research and it is obvious if you go to a Cracker Barrel, but we really focused on it is that you find teenage kids, pre-teens or certainly teenagers who would never go to a Cracker Barrel themselves.

They love going with their grandparents or with their whole family for dinner or breakfast on a Sunday or whatever and that connection, that whole family occasion is something we think is pretty unique to Cracker Barrel.

So the focus is on building around that, reminding through advertising about that, and just paying attention to what that means in terms of the menu and in term of the environment in the store.

We want to make certain that we're user friendly to all of our guests at all ages.

Great.

Thank you.

Next we'll go to Robert Derrington from Morgan Keegan.

Thank you.

Larry, can you give us some kind of perspective on when you begin looking at your commodity contracts for fiscal '08?

It is an ongoing thing, Bob.

Our contracts -- there is not a date by which we contract all of our stuff for the next year.

We're just constantly having contract renewals for different products at all times so it is not really conducive to that.

Some of the stuff that we have locked in for the remainder of this year is locked in for next year as well.

So what we've tried to do is give the color of how much we have locked in for the remainder of the year.

It is about 75% of the second half needs, and I don't really have a calculation on how much of that goes into to fiscal '08 as well.

I think, as has been reported quite a bit and will be reported for us, I think, is we will be seeing more commodity pressures in the coming months, and if I had to bet on it today, I would guess they will be greater in fiscal '08 than they're going to be in the second half of fiscal '07.

Is it possible when we look forward, given what's going on both with wage rates as well as with the commodity, I guess juxtaposed with your table optimization program as well as your seat to eat, can you offset those pressures with the programs you have in place?

Well, we're going to do our best to offset them the best we can.

Our focus primarily is getting at improved guest traffic and retail sales.

That's where the real leverage is on the business, and that's where the real opportunity is given the waits that we have in so much of the system so much of the time so that's really the focus.

Yes, we hope it will have some offsetting effect but we're not ready to say it is going to -- to what degree that effect will offset.

Sure, and then one last thing.

Looking at G&A going forward, at some point is it reasonable to expect that we would see some leverage on that line item versus prior year?

I certainly hope so.

That's certainly an objective that I have.

It would be reasonable, Bob, and we are reasonable people.

Okay.

Thank you.

Next we'll go to Bryan Elliott of Raymond James.

Good afternoon.

Quick financial question and then a conceptual question.

Larry, the cash flow statement you gave us showed $270 million of proceeds of Logan's asset sales and then another $150 millionish, I think it is, down in the cash and discontinued ops.

Can you reconcile those two numbers relative to the gross -- previously gross proceeds reported of 480 something, I think?

The number that you see in continuing operations, the 267, that relates to the sale of the stock of Logan's.

The proceeds from the sale leaseback transaction that we did are down in the discontinued operations line.

Okay, and that was done prior then to the sale of stock obviously?

Yes.

Okay, and was not included in your gross number that you gave us before?

Yes.

The total consideration was approximately $486 million and that included the sale of leaseback proceeds, the sale of the stock of Logan's, and we retained three properties that we are leasing to Logan's, and which we are evaluating for possible sale as well, so the whole consideration involved those three pieces.

And so it looks like taxes -- capital gains taxes were pretty low?

Yes, they were relatively low.

Okay.

All right.

Conceptual question I guess for Mike or both of you, but it sounds like in reviewing all the thinking about all the commentary and discussion here and previously, that we really are looking at a sort of a process barrier to sales growth.

That's probably not put that well, but that you have plenty of customers and the real focus on issues that seem to be focus points here are dealing with the crowds more efficiently rather than needing more crowds.

Is that a fair summary of what we've heard?

I would answer that by saying once we've dealt with these crowds efficiently, we would like some more crowds as well, but yes, we have the demand and it continues to be there.

We're not seeing any reduction in the number of people showing up wanting to eat at Cracker Barrel.

Obviously the some of the people that just aren't at any given weight not going to hang around, so it is really a throughput question, but it is focused on the guests' experience.

The worst thing that can happen is we ask somebody to wait 45 minutes and then we seat them and the food takes 30 minutes to show up, so we're really focused conceptually on improving the guest experience which will both give us throughput, but it will also give us all that great word-of-mouth stuff in terms of the improvement of the brand.

We're not waiting until the seat to eat initiative is out there to solve this problem.

In fact, I was talking to Doug Barber, our SVP of Restaurant Operations, right before we started the call, and we're very focused on having the operators be operators.

We've complicated our lives bit by bit over a long period of time than many have become more complicated.

As we get to be a bigger company, we have more bureaucracy and we're really looking to drive out all of the unnecessary stuff at all parts so that we're running a restaurant, running a collection of restaurants, and we're doing that as effectively as we can.

We're even talking about realigning some of what goes on here at the home office so that we can be as effective as we can in supporting the stores and driving out all of the unnecessary reporting and forms and time spent on things that aren't to do with the guests.

So the focus, as Larry has said several times this morning, the focus on top line, that's really a difference for this Company.

We've never run the Company as a top line focused operation.

We've tended to have such a strong brand that the top line took care of itself, but we let it take care of itself and then we focused on cost control.

It is a change in mind set, and it is a change in the simplification pieces, should not be -- it is very complicated to run a $4.2 million business in a 10,000 square foot box in terms of the operating details, but we have a tendency sometimes to make the whole running the whole thing more complicated than it needs to be, and we're really focused on a few priorities, doing them right, and to answer your question, yes, it is a process question, and we used to be able to do it.

We can do it in some stores.

We want to be able do it in all stores.

As a follow-up, is there -- as you think about it, is there a structural issue in the kitchen?

Will a reconfiguration and possibly a round of significant investment possibly be required from a kitchen configuration standpoint or do you lean more towards it being more or less a people and training and non-capital kind of a solution?

Everything is on the table.

We're not limiting our thought process here.

I don't think that we're talking about a significant capital expenditure expenditure exposure or need related to this, but if we need to do some things to change the way the kitchen is laid out, we'll do it.

That may involve taking some things out of the kitchen that we have there.

We have probably more equipment than we need in the kitchen, so it is going to be more of a configuration question than anything else in the kitchen.

Very good.

Thanks a lot.

Thank you.

Next we'll go to Barry Stouffer from BB&T Capital Markets.

Just two quick questions.

Larry, can you share with us the size of the income tax bill you referenced?

For Logan's?

Just in general.

You said you had a significant income tax bill.

That's primarily related to the Logan's transaction.

It is $30 million plus.

Okay.

And is there any debt in the current liabilities balance listed on the balance sheet?

Yes, there is a couple million dollars.

Okay.

That's all I had.

Thanks.

Thanks, Barry.

Next we'll hear a follow-up question from Matthew DiFrisco from Thomas Weisel Partners.

Hi.

I just wanted to also see, I guess as we're getting older here as a brand and also you're now focusing more on some simplifying the model for this $4.2 million in sales, is there ever an opportunity you think for franchising or have you -- what is your philosophy?

Has that changed at all?

I was tempted to say that forest reminded me the other day about what do you mean about we, joke, but I probably shouldn't say that.

We are getting older.

We don't have any intention to franchise.

This is a complex business.

Delivering it right is really critical.

Consistency is really important because of a travel point of view.

The retail is really complex as a retail business, and I don't see any need to get into the franchising business.

Okay, and then also, with respect to any sort of testing that you've done with the new billboard advertising or what you've seen early stage results, have you seen any change in the average check?

I presume you're focusing -- it sounds like more on food than we're an old country store at the next exit so the incremental new consumer knows you as a food place.

Are you trying to promote non-breakfast, higher ticket item as well?

Unfortunately it is kind of hard to read the direct impact because we generally have not been doing this on a market basis.

As we said, we've been doing it on a billboard size basis is the most efficient way to get it done by March, so we don't have a clean market that we can really look at and say here is the impact related to that, but it is not specifically aimed at trying to drive a higher check average.

Okay.

Thank you.

Next we'll hear a follow-up question from Larry Miller of RBC.

Yes, I just had three quick follow-ups.

Larry, the lions, when would they normally be due if you didn't seek to refinance those?

The second question was you say you're contracted on 75% of your commodities.

What about the other 25%?

What's the timing on that?

Is that something you normally contract on?

And then finally on the G&A leverage, given the outlook today what kind of same-store sales growth do you need to get some leverage on that line?

First on the amount that we're contracted.

The remaining 25% will just happen over the course of the second half of the year.

It relates to -- we know we'll have contracts that will be running out over the course of the remainder of the year, and our purchasing people are working on renegotiating those.

It is that kind of thing so there is not a date certain.

It just happens over the course of the year.

Presumably your guidance reflects what you're currently seeing in terms of those contracts?

Yes, and then we provisionally put in for the part that we don't have contracted, we look at our best estimates of where we think those things are going.

Second question was related to the lions?

I can obviously look this up and since I got you -- but when would they normally be due?

Due -- they mature finally in 2032, which is actually beyond my, I don't care.

Okay, and then G&A leverage?

What kind of comp or leverage in the margins anyway, what kind of comp do you need today?

I can't answer that that simplistically.

I mean it's one of those all other things being equal kind of situations and we have a lot of moving parts in G&A as we've described this morning in fact for the quarters, so there are a lot of things that can change that from quarter to quarter.

We haven't done our -- haven't really even begun our fiscal '08 planning yet to get a sense as to what we think we can do there.

That's why we really don't give guidance on '08 until we get to the September conference call.

Thank you.

And it appears there are no further questions at this time.

Thanks, everybody, for joining us this morning and thanks for sticking through 90 minutes, not an easy time for the industry, but we're pretty confident here that we know where we're headed, we know why we're headed there, and we know what we're going to get when we get there so we'll be back next quarter with an update on progress.

Thanks.

Thanks, everyone.

That does conclude today's teleconference.

We would like to thank you all for your participation.

Have a wonderful afternoon.