Cracker Barrel Old Country Store Inc (CBRL) 2007 Q3 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 time through May 29, 2007 at 11:59 p.m.

Eastern time by dialing 888-203-1112 and entering the passcode 5106426.

At this time for opening remarks and introductions I'd like to turn the call over to Mr.

Michael Woodhouse, Chairman, President and Chief Executive Officer.

Please go ahead, Mr.

Woodhouse.

Thanks, Steve.

Welcome, everyone.

Thanks for joining us this morning.

I was thinking of a phrase to use to introduce this call and I think "interesting times" was about the most direct I could come up with.

Interesting because we're in a transition, or coming out of our transition into a single concept operating company, and of course the industry, both the restaurant and retail industries are going through some very interesting times, but I think we're on the right course.

Everything we're doing is building on the power and differentiation of the brand and I think that's coming through in our relative performance over the last few months.

And we're also on track to improve our Cracker Barrel business model.

I'll talk about all of that some more in my remarks, but to lead us off I'll ask Larry to give us his financial report.

Larry?

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

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

It was a challenging quarter from an operational standpoint, but we are benefiting from our successful restructuring and recapitalization initiatives.

We also benefited from some unusual items and we continue to do well relative to our full-service competitors as reported by Knapp-Track.

As a reminder, we don't review or comment on earnings estimates made by other parties nor do we provide continuing updates 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 only as of the date it is given.

We urge caution to our listeners and readers in considering the information on our 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 complete 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 dissemination such as press releases or in our filings with the SEC.

We recognize there may be confusion as we continue reporting on a continuing and discontinuing operations basis, and have not fully completed our recapitalization which we began last year.

In addition, both the current and prior year quarters have several unusual items effecting results.

I'll explain the effect of these 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 Logans Roadhouse in December and used $350 million of the proceeds for share repurchases.

We used $250 million of that amount in our second successful Dutch auction tender offer that we completed in January.

And we used the remaining $100 million in repurchasing shares in the open market under a 10b5-1 plan, which we completed early in the present quarter.

Since we began our recapitalization initiatives last year, we have repurchased 24.3 million shares, or approximately 51% of the shares outstanding when we began the recapitalization in the third quarter of fiscal 2006.

We spent just over $1.05 billion, or approximately $43.39 a share during that restructuring.

The key remaining component of our recapitalization effort is the redemption of our outstanding convertible notes which currently is under way and scheduled to occur on June 4th.

Our capital structure previously had approximately $422 million principal amount at maturity of our original, or old notes outstanding, with an accretive value of approximately $200 million.

These old notes, which are convertible into 10.8584 shares of our common stock per thousand dollars in principal amount of maturity, had a dilutive effect of approximately 4.6 million shares, or 15% of diluted shares for the third quarter.

During the third quarter, however, we undertook an exchange offer in which 89% of the old notes were exchanged for new notes, which have a net share settlement feature.

The net share settlement feature allows us to satisfy a large portion of our obligations upon conversion of a new note in cash rather than in shares of stock, which significantly reduces the dilutive effect.

Because of the success of our exchange offer, we have only approximately $22 million in accretive value, or $46 million value at maturity, of remaining old notes that would be settled in shares if converted which will result in the issuance of just over .5 million shares.

There are approximately $376 million principal amount at maturity of new notes that will require payment of their accretive value of about $180 million in cash plus issuance of shares to make up the difference between the new notes conversion value, which relates to the current market value of our stock obviously, and $43.97, which is the accreted share equivalent value of the new notes.

So if our share price is above $43.97 a noteholder would realize greater value by converting, and if all of the old notes and the new notes were converted, we would issue just over .5 million shares for remaining old notes.

We would pay approximately $180 million in cash for the new notes, and we would issue some number of additional shares for the net share settlement feature of the new notes.

That additional share settlement would be just over 260,000 shares at a $47 share price, which would increase or decrease by approximately 80 to 83,000 shares if the share price were $1 higher or lower.

So I hope that gives you a little better understanding of how our share count might vary during the remaining quarter of the year.

We have authorization to repurchase any shares that are issued in settlement of the notes, both the old notes and the new notes, and we expect to enter into a 10b5-1 plan to do that in open market purchases.

The actual dilutive share count effect of the convertible debt in the fourth quarter will depend on the timing of repurchases of any shares issued in settlement of note conversions, but the exchange offer, which resulted in the new notes having the net share settlement feature, itself reduced the dilutive effect of the notes from approximately 4.6 million shares to just over .5 million shares plus the additional shares for the net shares settlement feature that will vary with share prices I've described.

We'll use a combination of cash on hand and the available financing of the delay draw term loan entered into a year ago as part of our new credit facility.

We use that to fund the note redemption and share repurchases which we expect to complete in the fourth quarter.

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

I'll be discussing continuing operations in my remarks.

Bottom line we recorded diluted income per share from continuing operations of $0.44 for our third fiscal quarter versus $0.37 a year ago, an increase of 18.9%.

Diluted income per share is benefiting from the reduced diluted share count resulting from our capitalization efforts, and as I've just described, it will benefit further as a result of the settlement of our convertible notes.

After-tax income from continuing operations of $12.1 million was, of course, lower than the prior year quarter, primarily as a result of the higher interest expense from the additional debt taken on with our fiscal 2006 recapitalization, but it also was affected by a higher income tax rate and slightly lower operating income.

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

Revenues from continuing operations in our fiscal third quarter, which ended April 27, 2007, increased 2.8% from last year's third quarter.

That's approximately $549 million compared with $534 million.

The increase came primarily from a net addition of 18 units since the third quarter last year, including four in last year's fourth quarter.

Our operating weeks for Cracker Barrel increased about 3.1% from last year, reflecting the 18 new store openings in the past year, but average unit volumes were down.

During this year's third quarter we opened five new Cracker Barrel Country Store units for a total of 14 year-to-date.

Cracker Barrel comparable store restaurant sales for the third quarter were flat compared to a year ago, reflecting a 1.4% higher average check including about 1.5% of menu pricing and guest traffic that was down 1.4%.

We're hopeful that deeply ingrained dining out habits will bring more guests back more frequently but the recovery in industry trends has yet to occur.

In such a tough consumer environment, we're pleased that our guest traffic trends have continued to compare favorably with overall industry performance as measured by Knapp-Track, however.

Cracker Barrel comparable store retail sales were down nine-tenths of a percent due to reduced sales from the Porch Sale clearance event in April as well as severe weather in February and March.

The good news about the Porch Sale-related reduction is that it's a reflection of having less clearance merchandise on hand which reduces markdown pressure and Porch Sale distraction away from our newer undiscounted merchandise.

However, our retail sales trends, while better for non-clearance items than a year ago, are not as strong as we had expected.

We attribute this softness to guest traffic declines and to cautious consumer sentiment.

Operating income from continuing operations for the third quarter was down seven-tenths of a percent on the 2.8% revenue increase and operating margins were lower at 5.5% of revenues compared with 5.7% a year earlier.

In the third quarter of fiscal 2006, we had a non-recurring charge of approximately $3.2 million for impairment and store closing expenses related to the closure of seven Cracker Barrel units a year ago.

And in the third quarter of this year we realized gains on the disposition of properties of approximately $1.2 million and refunds of prior year's Worker's Compensation and sales taxes which totaled about $1.6 million.

Store margins were affected by higher labor, group health, general insurance, advertising and maintenance expenses, which more than offset the favorable effects of the unusual items that I described that benefited the comparison of last year.

Partly offsetting lower store margins G&A expenses were favorable as a percent of sales compared with the prior year, reflecting a portion of those unusual gains I mentioned earlier, and higher bonus accruals were the primary reason for the dollar increase in G&A.

Gross profit improved by 40 basis points reflecting improved retail gross margin and slightly lower retail sales as a percent of total sales.

Retail products carry a higher cost of goods than restaurant sales and retail gross margins improved primarily because of lower markdowns.

Food costs was slightly higher with 1.8% commodity inflation partly offset by higher menu pricing.

The increase in commodity inflation from a year ago was primarily due to increases in produce and fish products.

For the last quarter of fiscal 2007, we have contracted over 84% of our estimated needs with an overall expected inflation rate of approximately 2%, 2.5%.

While the inflation rate is moderate in absolute terms, it represents a sharp increase from the first half of fiscal 2007 when we actually had commodity deflation.

In the remainder of the year we expect to see continued inflationary pressures from produce, fish and coffee, and greater inflationary pressures in fiscal 2008.

Labor and related expenses as a percentage of revenue were about 70 basis points higher than last year primarily reflecting higher hourly and management labor costs.

We experienced significantly increase in wage inflation, about 4% in hourly wage rates, as a number of state mandated minimum wage increases affected the wage that we pay to our tipped employees in those states.

The prevailing wage rates for non-tipped employees have also began to increase at a higher rate.

We also have been running higher hourly labor as we focus on improving speed of service.

Partly offsetting the wage rate pressure was the credit discussed earlier for a refund of prior year's Worker's Compensation payments.

Other store operating expenses also were unfavorable by about 60 basis points compared with last year's third quarter.

Offsetting the previously mentioned unusual refund for prior year sales taxes on purchases from vendors and the gain on sale of a property, other store operating expenses were pressured by higher general insurance, advertising and maintenance expenses, as well as the deleveraging effect of softer sales on non-variable expenses in this category.

Interest expense, of course, was substantially higher than last year, reflecting the recapitalization that we implemented a year ago.

Partially offsetting the expense was higher interest income related to the short-term investment of proceeds from the Logans divestiture.

Our third quarter income tax rate was 34.4% for continuing operations, higher than last year's third quarter rate of 33.6%.

The principal reason for the higher rate is higher estimated state taxes.

We presently expect our fourth quarter tax rate to be approximately the same as our third quarter rate, or 34.4%.

Wrapping up the third quarter, income from continuing operations of $12.1 million after-tax was down from $18.3 million a year ago, primarily reflecting the higher interest expense as our operating income from continuing operations, which is before income, interest and taxes, of course, was down only slightly from the same period a year ago.

Diluted income per share from continuing operations of $0.44 was up 18.9% from $0.37 in the third quarter last year, with the recapitalization benefits of reduced share count offsetting the effect of higher interest.

Year-to-date cash flow from operating activities was approximately $22 million higher than last year, primarily reflecting favorable working capital trends.

We did have high income tax payments in the quarter related to the Logans divestiture.

Capital expenditures at $67 million were up just slightly from $64 million a year ago for our continuing operations, and dividends, while being paid at a $0.01 higher rate per share, are lower overall than last year because of the reduced shares outstanding resulting from a recapitalization strategy.

We also have had more stock option exercises proceeds this year than we did last year because of our improved share price.

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

I again urge you to consider my cautionary discussion of risks and uncertainties at the end of today's press release as well those discussed in our 2006 Form 10-K, and understand the inherent risks associated with trends, targets, guidance and estimates in a competitive industry such as ours.

We will provide an outlook for fiscal 2008 in the year-end press release in September.

Based on current trends and prior year performance we expect fourth quarter total revenue to increase 12 to 12.5%, over $563 million of total revenues from continuing operations in the fourth quarter last year.

The increase includes the benefit of a 53rd week in fiscal 2007 which will provide an additional 45 to $50 million in revenues this year, and the opening of five new Cracker Barrel units during the fiscal 2007 fourth quarter.

We recently took a price increase and menu prices are about 2% higher than a year ago, but below the commodity and wage inflation rates that I've described.

However, while not as large as the percentage inflation increases, the 2% pricing is expected to be sufficient to cover the dollar increases in commodity costs and higher wage rates.

Retail sales trends have not been as strong as we expected, but we expect some trend improvements in the fourth quarter, which we have observed in the initial weeks of the quarter thus far.

We look for comparable store restaurant sales to be flat to up 1%, which reflects expected continued industry softness in guest traffic and comparable store retail sales to be up 4 to 5% in the fourth quarter reflecting merchandise improvements from last year.

With the benefit of higher sales and continued favorable retail margin performance, offset by continued labor cost pressure, we presently expect to have fourth quarter operating margins of 8.5 to 9% of revenues compared with 9.3% last year.

I've already described how the convertible note redemption and share repurchases are expected to affect our diluted share count and I've indicated our expectation of our fourth quarter income tax rate.

Because of the remaining certainty around completing the details of the convertible note redemption, we don't expect to resume diluted income per share guidance until fiscal 2008.

Our full-year capital expenditure outlook is approximately $90 million for continuing operations.

We expect to have significant cash outlays for the remainder of the year for redeeming the convertible notes for share repurchases and for income tax payment, and our next sales update will be May 30th, it's a week from tomorrow, when we'll report fiscal May sales.

So in summary, we're presently operating in a tough industry sales environment compounded by mounting cost pressures in labor and commodities.

Our focus is on overcoming those issues and building restaurant guest traffic and retail sale, and as always we're pleased to report that our balance sheet and cash flow remain very solid.

With that, I thank you for your attention during my financial review and I want 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'm pleased to be able to report on the progress we're making here at Cracker Barrel despite the headwinds that are affecting all of us in the full-service restaurant industry.

As usual, I'm going to start this morning with a high-level review of the quarter followed by an update on the strategic initiatives that we announced last year and then I'll finish with some comments on the outlook for the fourth quarter.

The restaurant and retail industries continue to face pressures from soft consumer demand.

While we're not pleased with our absolute same-store sales numbers in the third quarter, we're pleased, yet again, to be ahead of casual dining guest counts as reported by Knapp-Track, and to be ahead of retail in general especially in April where our seasonal strategy produced results that were relatively quite strong.

Even with a strong relative performance, we're focused on hitting our own internal goals and it was encouraging to end the quarter with a month of positive restaurant traffic.

And early in the fourth quarter, we're continuing to outperform Knapp-Track guest traffic and we're seeing positive retail sales.

Cost pressures resulting from the minimum wage increases implemented on January the 1st by a number of states and higher general commodity costs continued to make themselves felt in the quarter.

Longer term we'll continue to address our operating cost structure with a number of initiatives aimed at improving the overall business model.

And in the short-term we've taken a price increase of 1% on April 30th which means that the check average is now running at 2% over last year, as Larry said, and this is sufficient to offset the $1 margin loss from minimum wage and food cost increases at the present levels.

The operational focus as we move forward in Q4 will continue to be on the speed of service.

We completed the rollout of our new billboards in all of our markets early in April and we've received positive comments from our customers.

As we enter the summer travel season, we'll focus on building traffic through our speed of service initiatives inside the restaurants and by leveraging the strength of the Cracker Barrel brand to appeal to new customers across multiple generations.

Speaking of the strength of the Cracker Barrel brand, we've won several awards recently.

CBRL Group moved up to number three in Fortune's Most Admired list for foodservice companies just behind Starbucks and McDonald's, which are obviously two companies with a much larger footprint than we have.

Cracker Barrel was the top full-service restaurant on the list; the number two in the food service category for quality of products and services.

Earlier in May, Zagat conducted a survey of Today Show viewers on quick-service and full-service restaurants.

They voted Cracker Barrel as the top full-service restaurant in facilities and service, which of course is an area of focus for us every single day.

And most recently at the National Restaurant Association show over the weekend Kanbay Research Institute released their study on the restaurant and beverage industry for 2007.

In that study Starbucks and Cracker Barrel were the only restaurants to make the most desired list and Cracker Barrel was at the top of the casual dining list.

The study commented that we excel in providing an experience, not just a meal and remain consistent to our business strategy that appropriately blends restaurants and retail, and with a unique focus on travelers.

We believe that these awards validate the strength and high degree of differentiation of the Cracker Barrel brand that were key factors in our decision last year to devote all of our resources and efforts to a single-restaurant concept operating business.

Going forward we have a great opportunity to leverage the strength of the brand to appeal to new customers across multiple generations.

So let's move on now for an update on the status of our strategic initiatives aimed at driving shareholder value and increasing restaurant traffic and sales.

First the recapitalization initiatives.

Larry has already covered these in some detail so I'll just stick to the highlights.

Since we began the recap initiatives last year we've repurchased over 24 million shares, or approximately 51% of the shares outstanding at the start of the initiative for a total of $1.05 billion, or approximately $43.39 a share.

The key remaining component of our recapitalization effort is the redemption of the outstanding convertible notes, which originally had a dilutive effect of approximately 4.6 million shares, or 18% of the shares actually outstanding as of the beginning of fiscal 2007 third quarter.

On May the 1st, 89% of the old notes were exchanged for the new notes which have a net settlement option that results upon conversion in fewer shares issued and therefore less dilution.

The number of shares added to the basic share count in May to arrive at the diluted share count will be significantly reduced due to the net share settlement feature of the new notes.

On June 4th, the notes will be called; however, the holders may convert their notes at any time up to June the 2nd.

We intend to repurchase through open market purchases any shares issued upon conversion of either series of notes.

Now let's switch to how we're doing with our restaurant initiatives.

In keeping with our theme of simplify and focus, restaurant execution requires improving speed of service while maintaining a quality guest experience.

Although we receive very high marks for our service in the Zagat and Kanbay surveys, we still believe that we lose too many customers to our long wait times.

While we aren't able to quantify the positive impact from achieving lower wait times, we believe that we have the opportunity to sustain higher traffic across our system even in today's soft consumer environment.

The table optimization initiative has been rolled out in 60% of the stores in time for the higher traffic volumes of the fourth quarter, and we've seen record hourly sales on a store-by-store basis as the initiative was implemented.

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

We've engaged outside consultants to help us take a fresh look at how we can improve our throughput both by simplifying kitchen processes and improving our labor deployment.

As we've reviewed the findings to date from the team working on these initiatives, it's become increasingly clear that the complexity of the menu is a part of the problem.

We can't expect to reduce the time from seat to eat without simplifying the menu.

We're going to be working on that and we hope to field a test of a simplified menu early in fiscal 2008.

Overall our goal is to establish a stronger business model for our existing stores with traffic increases coming from throughput improvements.

This in turn will result in operating leverage, which along with direct cost improvements we hope to achieve, will produce higher margins.

The end results should be an even better guest experience with an improvement in return on capital and an improvement in cash flows.

Labor costs are a challenge for us and the key area within that is turnover.

The impact is not just in recruiting and training costs, but also in the guest experience because of the lower levels of proficiency that we see with higher turnover rates.

We significantly reduced the turnover on our Part 2 level employees in the last few months and we've made progress on the other levels.

The program for our new hires, which includes calling them "Rising Stars," has shown some early improvements in reducing turnover.

Over all in the quarter, our annualized hourly turnover year-to-date is 109%, down from 114% last year.

This reduction equates to an annual reduction of over 3,000 employees to train.

As you are aware, a lot of preparation takes place in our kitchens to retain the home-style country taste and feeling of our food.

We're reviewing certain items that could be shipped to us in a semi-prepared form to help speed throughput.

As always, our number one rule is that any changes must meet the test of same or better guest experience and we thoroughly test with consumers any new proposed process or recipe before we approve it.

With our promotions we're continuing with our tried and true approach to the seasonal promotions.

Our current promotion is broccoli cheddar chicken, which was very popular.

In fact, I think, one of our highest ever selling promotional items when it was promoted for the first time several years ago.

Future promotions are going to be similar.

We're not going to introduce new items into the kitchen but look for ways to come up with innovative combinations of what we already have.

In retail our sales benefited from a new inspirational theme and from improved execution in our Easter and spring seasonal assortments.

We're particularly pleased with the execution of our Easter assortments where we saw an improvement in same-store performance of 13.9%, with one week less of selling opportunity because of the switch in Easter dates.

The assortment mix provided for better delivered average unit retails and we ended the season with less residual inventories.

As for spring seasonal, which emphasizes our garden assortments, we offered the guests two complete themes this year for the entire quarter.

Last year we staggered the introduction of the second theme.

We also refreshed the assortment this year part way through the quarter to give new life to the assortment.

Inspirational gifts sold well leading into Easter in our candle program and our collegiate assortments continued to sell well.

In the toy section the Perfect Pet and die cast vehicles were strong performers.

In April, which was generally one of the worst retail months in many years, our retail sales would have been positive except for a smaller Porch Sale, and of course a smaller Porch Sale, which is in line with our strategy means better margins.

At the end of April retail inventories were about flat with a year ago after having fewer days of Porch Sales in the quarter.

We always want to have the right amount of product to drive sales, but not enough to generate sales growth at the cost of large markdowns during our Porch Sales.

We completed our retail team in April with the addition of Deb Evans as new Vice President of Merchandise product development.

Deb has over 20 years of experience at JC Penney and Kohl's, most recently at JC Penney, and we're looking forward to her contribution to enhancing our product offerings in the gift shops, especially by focusing on the brand relevance of the offerings.

In marketing we completed the roll of the new billboard campaign by Easter.

Anecdotally, we've heard only positive comments about the new designs and we believe that they played a role in our better than industry performance in the quarter as people traveled around the country during spring break.

Our test of TV advertising has been pushed back until the first quarter of fiscal 2008.

This will allow us to make certain that the stores in the test are set up to handle the expected volume increases.

In our music program we launched the Josh Turner concert tour here in Nashville on April 19th.

We're a sponsor of the tour and we'll be offering CDs from the concert in our stores starting on July the 2nd.

And next week we'll be introducing a Merle Haggard CD available exclusively at Cracker Barrel.

New store opening performance is obviously a critical part of our game plan.

When we announced second quarter earnings we'd just opened the Florida City, Florida, store which had set a one-day record.

It went on to set four-day and seven-day records for Interstate locations.

Taking what we learned at Florida City, we've opened five more stores since February the 20th and our opening in Sherman, Texas, last week has broken the opening day and seven-day sales records for off-Interstate stores.

For the remainder of the year and into fiscal 2008 we'll continue to focus on positive restaurant traffic and retail sales.

We expect a positive impact in the fourth quarter from the new billboards for the summer travel season.

The strong multi-generational appeal of Cracker Barrel offers us the opportunity to reach different age groups at the same time without having to segment our offering as the case may be without a concept.

And the summer travel season is an ideal time for us for that reason.

When we release our fourth quarter results, we'll provide guidance, initial guidance on fiscal 2008 and in October we're planning an investor day where we can go into greater detail on our plans to continue to build the appeal of the Cracker Barrel brand.

In closing, as you know, fiscal 2007 is a year of transition for CBRL.

We've completed the strategic initiatives -- almost completed the initiatives to achieve the appropriate capital structure.

We're now operating a single brand that continues to receive top ratings for food, facilities and customer service, and our theme of simplify and focus is intended to drive increases in both traffic and retail sales.

Finally, we expect the cash flow from Cracker Barrel to remain strong and more than sufficient to service the higher debt levels that we now have, and also to finance our restaurant initiatives and our unit expansion.

At the same time we're going to continue to distribute a portion of the cash generated to our shareholders through dividends and share repurchases.

And with that, I'd now like to open the call for all questions.

Thank you.

[OPERATOR INSTRUCTIONS] We'll take our first question from Matt DiFrisco with Thomas Weisel Partners.

Thank you.

Larry, can you just -- I just want to clarify.

You said that the charges, the $1.6 million that was in labor, and then the 1.2, was that fully in other operating expenses?

No.

The charges were spread around to different line items.

In labor we had about half of that, about $800,000.

The other $800,000 was in other store operating expenses of that $1.6 million.

Two refunds, different things.

One was Worker's Comp, one was sales tax that we had paid to a vendor over the years and got a refund on.

We also had about $.5 million from one of the property gains in other store operating expenses and about $700,000, just under that, in general and administrative expense related to the other property gain.

Appreciate you going through that.

Thank you.

And then I guess just, you guy have been referencing Malcolm Knapp's number.

Is it, you guys are not included in Malcolm's Knapp's number, correct?

Yes, we are.

You are included in that one.

Okay.

Because I thought he used to classify you guys as family dining and didn't have you because of no bar.

But I guess now the Cracker Barrel brand is in Malcolm Knapp's casual dining number?

Yes.

Okay.

I was curious, do you look at the competitive set, though, as far as if you look at your price point and your real estate location being on the highway, seems to overlap a little bit more with some of your QSR competition or even Bob Evan's and looking at their trends, are you somewhat, do you see that as concerning that maybe McDonald's and Bob Evan's are outpacing you right now on the restaurant side?

Or how do you, do you look at that as a competitive set as well aside from the in-store neighborhood bar and grills?

Well, I, we obviously look at all restaurants, all foodservice opportunities as competitors, but based on our customer defined competitive set at breakfast, we generally seem to be competing with those restaurants that provide breakfast, which is typically not casual dining.

But at the lunch and dinner, which are, even though we're a very strong breakfast place, lunch and dinner comprise 75% of our business.

The competitive set that our customers tell us they are in when they're making a Cracker Barrel decision is casual dining and specific casual dining chains.

Okay.

Can I also, my last question.

In respect to the table optimization being rolled out in 60% of the base now, have any of those stores tested or have implemented regigering or re-engineering the square footage to give or integrate the retail store so it gives more square footage towards the dining area so you can take advantage of those times when you do have waiting?

Since you have somewhat capacity and space but maybe not needing to increase the labor to move tables, why don't you just add more tables?

Well, I think one of the important things about our concept is, is the appeal of the retail, not just as a place to buy things, but as a place to browse and shop while waiting, and it's our waiting room, if you will, which is very different than is typical in casual dining or QSR for that matter, where there's really no defined space, so it's a fine balance.

We need that space to accommodate the large numbers of people who are waiting to go in the dining room.

Now the question is could we build a bigger box?

Obviously we can and we've done that in some cases.

We've expanded some of our stores so that we have north of 210 seats in a store that has a regular retail-sized shop.

Okay.

And then I actually have a last, last question.

I understand you can't give the EPS guidance for the out years because of the capital structuring's still unknown, but if, can you give us what you are -- what you think the going-forward Cracker Barrel brand is for longer term EBITDA growth?

No.

We're not giving any guidance on fiscal '08, Matt, at this point.

We'll do that in September as we always do when we do the year-end, the fourth quarter results.

Well not necessarily for '08.

Just what you think the brand is as it's constituted today with the cash flow that you have.

Are you saying longer term growth over like several years growth?

Is that where you're going?

Yes, your sustainable EBITDA growth targets internally.

Again, I think we ought to save that for later disclosure and discussion.

Maybe analyst's day.

Okay.

Thank you.

Next we'll hear from Bryan Elliott with Raymond James.

Thank you.

Good morning.

Wanted to follow-up, Mike, on your throughput and simplification comments, and also clarify if I heard correctly that the stores, 60% of the chain has the table optimization and has been setting record hourly sales rates, and yet the comments about simplifying the menu would seem to indicate that there's a, you know, bottleneck issue and could you reconcile those two comments and make sure I heard them correctly?

Yes, I think that there's a constraint because of the complexity of our menu.

Two things about that.

One is we obviously do breakfast all day, the full breakfast menu on top of our lunch-dinner menu which makes it, puts a lot of pressure on the grill, for example, so the complexity of the menu is slowing us down in the kitchen.

It's slowing us down in fact at the point of taking the order, because the guests, especially a non-frequent user, are finding the menu fairly complex to navigate around.

So it's not an either/or kind of thing, it's a, we can increase the physical capacity by having table optimization, but to get that food out of the kitchen faster, which is a big part of that, we believe that the real opportunity is with a simplified menu, and that's reinforced by our experience in the new stores that we've opened with a simplified menu where we're seeing faster throughput.

Certainly absolute volumes being very high and although we haven't made any decisions around what our simplified menu would look like at this point, we're seeing encouraging results in terms of check and margin in the new stores with the simplified menu.

Could you elaborate a bit on what the new stores are not carrying that the full menu has on it?

I mean, in other words, what is simplified about the new store's simplified menu?

There are a whole range of changes.

We're interested in not having as many sandwiches out there, we've cleaned up the breakfast menu.

It's -- when you look at the pinch points, the places that really slow us down, there are just a number of those.

We've taken those out.

I think there's more to be gained.

I think that a really focused effort against what do we learn from the menus in the new stores will get us even further than we were.

The big challenge is on the consumer side, not on the menu.

We can come up with a fast menu, but we have a pretty big base of very frequent users, so we hear from them if we take something off.

And because we've had a relatively unchanged menu over the years, that's the challenge.

I think we can work through that because we worked through it in these new stores and anecdotally, I think the guests would rather have fast service than necessarily their favorite item if we communicate that in the appropriate way.

I guess I'm still a little confused though.

Bear with me.

If we're seeing, you know, record hourly sales at 60% of the chain but we're still seeing flat, nominal, same-store sales, does that, I guess that would imply that the times that you go on a wait and come off wait during peak meal periods is shrinking and, or we're not getting as many people coming in during non-wait time periods?

That seems a bit -- I need a little reconciliation on that as well.

Well I think one of the things that we're very focused on is that you can't run a chain of 550 some stores at the level of the best store.

That's going to be a function of the management team and the employees at that store.

We have to have a business model where the center, the 80% of our management teams and employees who are in the middle there can achieve it.

So what happens when we implement the table optimization is we go in there, we put trainers in there, we put a big bright light on, and it's something I believe called the Hawthorne effect from a long time ago, where we know that we can get those higher hours when there's a big bright light and a lot of focus store by store.

The challenge is how to capture that in the whole system?

And so the simplification of the menu is a big piece of making it easier for everybody in the system to get faster.

So if I understand you correctly then, what you're saying is when you -- right behind the table optimization change and the presence of the trainers and the intensity and focus, the stores are able to increase their throughput, but once that sort of becomes the norm again, we have the new tables, but we sort of slip back to hourly throughput levels that we were seeing before?

From a kitchen output standpoint?

I think, Bryan, one of the things that unfortunately we don't show the world that's interesting about this chain, relative to everywhere else I've been because of the travel component is that the daily -- the swings in daily sales by store and the best store every day versus the worst store in every day are very substantial.

There's a fluctuating demand out there.

So it's not, unfortunately, the uniform supply people lined up at the door and we can process them as if we were a manufacturing plant and it's a complex operation.

You know, we, I would suggest that there are very few other chains with full-service that have anything like the complexity of menu to support that we do.

And most others focus correctly on keeping things as simple as they can in order to keep the quality up.

So what we're saying is not that we're not capable of operating, we're saying that we have to create a machine that we can run better with our management teams.

We have some of the best management teams in the industry.

The job is more complex than most.

We pay typically more for our GMs than we pay, most casual diners pay their GMs.

You might want to go down to Florida City and look at the menu.

I'd be interested in your perspective without reference to an existing menu whether you can see the changes.

All right.

Very helpful.

Thank you.

Next we'll hear from Amy Vinson with Avondale Partners.

Hi, Mike.

Wanted to see if you guys could give us a little color -- you said that in the stores where you're doing the speed of service or where you've got the table optimization you are running higher labor.

Could you kind of quantify that for us?

Higher labor?

I thought in your comments you said you had that higher labor component particularly as you were implementing the seat to service.

What I said was we're seeing higher hourly sales.

So you're not running more people to necessarily implement some of the things that you have going on in the initiative?

Well I'm not going to say yes or no on that because one of the ways that you build sales in this industry is to add labor, and if you do it right then you get better sales and you get better labor costs.

So it's not a question of not adding, it's a question of adding them correctly, and one of the things we're looking at separately from the table optimization is our whole labor deployment.

How do we get the right people in the right places at the right time.

How do we anticipate the rush and how do we make certain that we're set up to, when we fill all those seats, get the food out of the kitchen.

So adding people isn't necessarily a bad thing provided you're doing it in a way that builds sales, which is what our whole focus is.

So do you feel like that you have the systems and you have the mechanisms in place get that right balance now or are we still kind of working through some of the inefficiencies?

We're still working through some of that.

Yes, Amy, I think maybe the confusion, this is Larry, is partly that we have as part of other initiatives, not specifically table optimization, been looking at our labor deployment model.

We've got some tests out there evaluating that, and part of the labor pressure relates to running higher labor hours than we had been running.

There was a squeeze going on a year-ago in effect, and we're overcoming that so we have some things to improve the efficiency and effectiveness of the business model.

And the other 40% of the stores, do you, can you give us a time line on when you think you'll have the rest of the stores completed?

Well, the reason we did the 60 is that that was the groups which, where we had the most in a given prototype given the layout.

So we can attack them as groups.

The rest of the system is much smaller or like stores, groups of like stores, and I don't know that there's an awful lot of upside on those.

I think there's a bigger upside in speeding up the kitchen and getting this menu simplified, and getting, one of the things I touched on was this whole window management thing.

I think -- an area where we historically have been weak is that we don't manage the window.

We have a lot of people doing a lot of stuff around the window and trying very hard to do it as fast as they can, but we don't have anybody in the window as an expert at it or a manager who is controlling the whole flow in and out of the window, and that's a big area of opportunity as well.

We'll probably look at some individual cases where we get feedback from the regional Vice Presidents that are operating those stores.

Where they think there's an opportunity specifically we may do some on a case-by-case basis, but not a general rollout.

Okay.

Thanks, guys.

Thank you.

Next we'll hear from Steven Rees with JPMorgan.

I just wanted to know if you could comment on the last 18 or so units you've opened up over the last 12 months?

You know, how those units performing versus the system average in both new and existing markets?

Well, our '07 openings have been open long enough to kind of settle through their honeymoon period, or most of their honeymoon period are doing better than our '06s have been doing, which were doing better than our '05s.

That's the good news.

The bad news is they're still running below our expectations and overall we need to see some improvement in our new store performance.

Okay.

And then the last couple years I think your unit growth rate has been about 3 to 4% or slightly below your 5% long-term target.

In hindsight, was that the right pace of development, or do you think it should have been brought down more and should we expect that growth rate going forward?

I don't think we're ready to discuss our growth rate going forward.

Again, just to keep everything about '08 and beyond, in a context to be discussed later.

I don't know, I think that the growth rate itself hasn't been an issue for us.

We've had some things to learn along the way to improve performance.

I don't feel like we have strained the organization by that growth rate.

Okay.

And then just quickly on the retail side.

It sounds like much better inventory management is helping lower markdowns and helping the overall margins of the business, and I think you're also getting some benefit from more global sourcing.

What opportunities are left in the retail business to drive better margins beyond just the expected sales improvement?

Well, I think that one of the things we're looking at is how much pricing power do we have in retail?

We've been pretty adamant that we're, you know, for an $8 check average restaurant, we've got to have retail pricing that's appropriate.

What our guests tell us is that it's not so much just a matter of price point, it's a matter of the value that they see at any given price point, and I mentioned the focus on brand appropriate items in connection with Deb Evans coming aboard, and I think that as we improve the appeal of our product, we'll have some pricing power, so instead of working on the cost side, which is meanwhile we'll be working and will continue to work, I think there's probably an opportunity on the pricing side.

Okay.

Any new categories we should look forward to next year?

Next year?

Yes.

Well you should come in now and get the Americana stuff.

It's selling like crazy.

Okay.

Great.

Thank you.

Thanks.

Next we'll hear from Bob Derrington with Morgan Keegan.

Could you give us a little bit of color on the third quarter in G&A?

Year-over-year it was, on an absolute basis, it appears to be down versus last year, and I'm just trying to understand the dynamics by which it was lower, or appears to be lower than last year.

Were there some gains in there or --?

When you say "down", what specific -- are you looking at dollars or percent of revenues?

Dollars, Larry.

Actually I think we're up a little, but that includes a gain on one of the properties that we sold during the quarter, and the biggest item in there year-over-year that causes it to be up apart from that is increased bonus accruals from last year.

We actually have lower salaries and wages than we had because of some of the reorganizational changes that we had, but the biggest item is just timing of bonus accruals and degree of bonus accruals.

Okay.

All right.

Then in that context I'm trying to understand, you know, kind of a reasonable expectation as you go forward into the fourth quarter.

At one time I thought there was some discussion about there was going to be a TV advertising test, that now sounds as though it will be moved into the first quarter, but I think the discussion previous was that the cost of that would be borne in the fourth quarter through -- the extra week profit would be essentially invested into that TV test.

That's correct.

We're not ready to run that TV test yet, so it will happen in the first quarter, but that's not a G&A item; that's an other store operating expense item.

Okay.

All right.

Is it reasonable to expect, you know, some leverage, you know, in that G&A line as we come into the fourth quarter with the additional week?

Yes, that's -- we will have higher dollars than a year ago partly because of the additional week but I would expect to see some leverage as a percent of revenues.

Okay.

All right.

Super.

Thank you.

[OPERATOR INSTRUCTIONS] Next we'll hear from Joseph Buckley with Bear Stearns.

Yes.

I think my questions have been answered.

Thank you.

We'll move along.

We have a follow-up question with from Matt DiFrisco with Thomas Weisel Partners.

Hi.

With respect to compensation in G&A, is that still -- when you said it's incrementally up is that reflective of fundamental goals being hit or is that the execution of the capital restructuring and the bonuses associated with that getting that complete?

My purpose of the question is to ask for the, is to try and get some sort of outlook on basis for '08.

Is '07 a year weightier in bonus accruals and compensation tied to the capital restructuring execution?

'07 is.

The third quarter comparison isn't affected significantly by that.

There, we do have some higher accruals in the third quarter than we did last year because we just began that process about that time last year.

'07 generally is running higher incentive compensation expense because of those bonus accruals.

Linked to the capital restructuring, though?

To the capital restructuring and the Logans divestiture.

Okay.

Can you also just break out what the 123R expense is associated in G&A?

We can get that for you.

I've got that somewhere handy, but we can get that for you.

Okay.

And then just along those lines, just to end off.

Looking out if you were to, is G&A a source of leverage now that you're a one-store brand that's relatively mature?

Should we see this start getting back to, if you look at your Cracker Barrel only numbers in past years before Logans, you were in the low 5s.

Should you get to some of the other casual diners that actually grow a little faster in the mid-fours.

Is that targeted couple of years off or is that aggressive?

I think we'd rather off projections like that until we're ready to discuss fiscal '08 and the outlook at that point, but, yes, I think in general what you're saying is true.

We should see G&A as a point of leverage.

We should not grow G&A at the same rate as we grow revenues.

Thank you very much.

Thank you.

Bryan Elliott with Raymond James.

Hey.

I wanted to sort of go back to the TV advertising push back.

So the expenses of that will mostly be in '08 now rather than in Q4 '07?

Correct.

And so what will that make advertising in Q4 year-over-year?

Roughly flat as a percent of sales?

I think we might be up a little because we were doing essentially nothing last year.

Okay.

But I think we'll be up a little.

Okay.

And then with respect to the impact of the extra week, given that you'd earlier indicated don't factor in any leverage into your models from the extra week because we're going to spend it on TV, can you give us some help on, well, I guess you gave us the operating income range, a pretty wide one.

How much of that would be extra week leverage versus sort of underlying, you know, is there 30 bips from the extra week in your EBIT projection?

We're evaluating that, Bryan, and we'll give some more clarity on that later.

Okay.

Thank you.

Thank you.

You have no further questions.

Well thanks, everybody for joining us this morning.

As we said in the beginning, these are interesting times.

We're having a lot of fun figuring our way through these and we look for good things to be happening as we go forward, and we'll talk to you at the end of next quarter.

Thanks.

Thank you.

This concludes today's teleconference.

We thank you for your participation.

Have a wonderful day.