Cracker Barrel Old Country Store Inc (CBRL) 2008 Q1 法說會逐字稿

Good day and welcome to the CBRL Group conference call.

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

Eastern through December 7th at 11:59, by dialing 888-203-1112 and entering passcode 8904462.

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

Michael Woodhouse, Chairman, President, and Chief Executive Officer.

Please go ahead, Mr.

Woodhouse.

Thank you.

Good morning, everyone.

Thanks for joining us this morning.

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

We are here to talk about our first quarter.

As far as the headlines go, we are obviously in an environment where it is getting tougher and tougher for this industry, and we can see it in the industry numbers as we and others report.

We are very pleased to be maintaining a healthy positive margin in traffic versus the industry.

We had a little bit of a late start this season in retail, but both restaurant and retail have improved in November which will we will be reporting next week.

Our hourly labor and food costs in the quarter were in-line with our expectations.

We had other cost pressures, especially from group health and maintenance, and we will be discussing those in more detail, but we are confident here on the right track.

We are going to talk in more detail about all of this over the next 30 minutes or so.

With that, I would like to turn the call over to Larry White for his financial review.

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

Our press release announcing our fiscal 2008 first quarter results, and updating our outlook for fiscal 2008 in total, was released before the market opened this morning.

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

We remind you that we don't review or comment on earnings estimates made by other parties.

In addition, any guidance that we give speaks only as of the date it is given, and we do not update our own guidance or express continuing comfort with it, except in broadly disseminated disclosures, such as this morning's press release and this call.

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.

Many of these factors are summarized in the cautionary description of risks and uncertainties found at the end of the this morning's press release, and are described in detail on our filings that we make with the SEC.

We urge you to read this information carefully.

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.

Let's review the first quarter fiscal 2008 information released this morning.

We recorded diluted income per share from continuing operations of $0.57, versus $0.45 a year ago, an increase of 27%.

Income per diluted share benefited from a 32% reduction in diluted share count resulting from our successful recapitalization efforts over the past two years.

After tax income from continuing operations of $14 million was lower than the prior year quarter, primarily reflecting higher labor and other operating costs, as well as charges related to closing of two stores in the fiscal 2008 quarter, and those were partly offset by lower incentive compensation accruals, and lower income tax rates.

Revenue from continuing operations in our first fiscal quarter which ended November 2, 2007, increased to $581 million, up 4.1% from last year's first quarter.

During this year's first quarter, we opened six new Cracker Barrel Old Country Store units, and closed two stores.

In addition to these we also opened a store to replace a location that we closed in a nearby community.

The two closed stores that were not replaced, were closed based on business trends, future expected capital expenditures needs, and in one case a lease renewal decision.

On a comparable week basis, Cracker Barrel comparable store restaurant sales for the first quarter were up 1.8% compared to a year ago, which included a 2.9% higher average check.

Average menu prices were 3.5% higher than a year ago, which included a 1.9% price increase that we took in mid-August, and guest traffic declined by 1.1% for the quarter.

While we are never satisfied with negative traffic, we are nonetheless pleased that in a very, very tough consumer environment, our guest traffic trends have continued to compare favorably with overall industry performance as measured by KNAPP-TRACK.

Our television advertising test had a minimal effect on comparable store sales in the quarter, because it is in a small portion of the system, and began late in the quarter.

Mike will comment further on the test in a moment.

While the advertising test markets are running stronger guest traffic relative to a control group, we believe it is too early to gauge the potential for broader application at this time.

Cracker Barrel comparable store retail sales were down 2.1% in the first quarter of fiscal 2008 on a comparable week base.

Excluding the impact from reduced Porch Sale clearance events however, in this year's first quarter, comparable store retail sales would have been flat with the prior year.

The reduced Porch Sale activity also benefited our retail margins because of lower markdowns.

Our retail sales trends are not as strong as we had expected, however.

Retail purchases are the most discretionary for our guests, and we believe we continue to experience the effects of pressure on consumer discretionary income.

Softness has been most notable in apparel and seasonal products.

We had expected seasonal sales to be softer due to assortment availability timing, but we expected an offset in other merchandise increases that didn't occur to the degree expected.

Operating income from continuing operations for the first quarter was $36 million.

That was down 5.8% from the first quarter of fiscal 2007.

Operating margin of 6.2% of revenues was below last year's operating margin of 6.9%, primarily reflecting higher hourly and management wages, including the effect of minimum wage increases for tipped employees in several states, and higher group health expenses, in addition to higher advertising, supplies, and maintenance expenses, and expenses related to the two stores that we closed.

Partly offsetting these pressures were lower incentive compensation accruals that resulted in lower G&A expense than last year.

Going down the P&L, gross profit margin was flat with last year, reflecting higher food costs offset in part by lower retail markdowns.

Food cost was higher year-over-year, with about 4.2% commodity inflation, which was in-line with the guidance given in our fiscal year end call back in September.

Food cost inflation was partly offset by higher menu pricing on a margin basis.

The increase in commodity inflation from a year ago was primarily due to increases in dairy, eggs, oil, and grain products.

At this time we have contracted for over 70% of our estimated product needs for the remaining three quarters of fiscal 2008, with overall commodity inflation expected to continue between 4 and 4.5% for the remainder of the year.

Labor and related expenses as a percentage of revenues were about 80 basis points higher than last year, reflecting higher hourly and management labor costs, as well as higher group health insurance.

We experienced significant wage inflation, approximately 4.6% in hourly wage rates, as a number of state mandated minimum wage increases affected the wage that we paid to our tipped employees in those states, and we are also seeing prevailing wage rates for non-tipped employees increasing at a higher rate as well.

Although these wage rate trends are not surprising, they are just a little higher than we had anticipated.

We also have been experiencing higher group health claim payments than last year for which we are self-insured.

Based on group health cost trends last year, we expect the degree of year-over-year pressure for group health to be reduced over the remaining quarters of the fiscal year, relative to our performance in the first quarter.

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

Other store operating expenses were pressured by higher advertising expenses of about $1.8 million due to the TV advertising test, including production costs of just over $1 million.

Maintenance and supplies expenses were also higher than a year ago.

Supplies were pressured by large increases in flatware costs, reflecting among other things global metal demand.

As indicated earlier, we also incurred charges related to the closing of two stores in the quarter, which are in a line item on the income statement broken out separately, and we had lower G&A expenses, primarily as a result of lower incentive compensation accruals.

Our first quarter income tax rate for continuing operations was just under 34%, which was lower than last year's first quarter rate of just under 36%.

The Company adopted FIN 48 at the beginning of fiscal 2008, which resulted in a number of balance sheet adjustments that will be discussed in more detail in our first quarter form 10-Q.

The adoption and implementation of FIN 48 in the first quarter did not have a material effect on the Company's first quarter tax rate.

We are projecting that our second quarter tax rate will be similar to the first quarter tax rate, and in the third and fourth quarters, the rates are expected to be lower.

The effective tax rate for the full fiscal year of 2008 is presently expected to be between 31.5 and 32%.

Cash flow from operating activities was a use of approximately $3 million.

The net use was more than accounted for by a greater decrease in accounts payable than last year, as a result of the timing of normal trade payments.

Capital expenditures were $24 million, only slightly higher than we spent in 2007.

Dividends while being paid at a quarterly per share rate of $0.04 greater than a year ago were slightly lower in aggregate than last year, because of the 7 million fewer shares outstanding resulting from our recapitalization efforts.

Finally in this morning's press release we updated our outlook for fiscal year 2008.

Again, I 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 2007 Form 10-K, and understand the inherent risks associated with trends, targets, guidance and estimates in a competitive industry such as ours.

Based on current trends, we presently expect fiscal 2008 total revenue to increase approximately 3 to 4%, over the $2.35 billion of total revenue from continuing operations in fiscal 2007.

Fiscal 2007 included the effect of a 53rd week, which provided an additional $46 million in revenue.

The projection for fiscal 2008 includes the opening of 17 projected new Cracker Barrel units, which is a reduction from our initial projected openings.

We decided to defer three openings into fiscal '09 rather than force too many into the fourth quarter, where they provide little benefit to this year's operating results.

Our projected comparable store sales increase of 2 to 3% for restaurant sales includes approximately 3.5% of menu pricing.

Comparable store retail sales expectations are being lowered to flat to up 2%, again given the pressures on the discretionary income of our customers that appears to be reflected in recent trends.

Excluding the effect of the 53rd week in fiscal 2007, the projected 2008 revenue increase would be about 5 to 6%.

That is excluding that $46 million in fiscal 2007.

With continuing inflation and food costs and hourly labor, as well as non-recurrence in 2008 of the 53rd week that benefited fiscal 2007, partly offset by expected G&A savings, we expect operating margins to be down in fiscal 2008.

Our present projection is for operating margins in the 6.7 to 6.9% of revenues range, which compares with fiscal 2007's operating margin of 7%, on a basis excluding the favorable effect of the 53rd week.

That 53rd week had about a 20 basis points favorable impact on fiscal '07.

Both net interest expense and depreciation are projected to be approximately $60 million in fiscal 2008.

The diluted weighted average share count is expected to be between 23.5 and 24 million shares.

I discussed the impact of the adoption of FIN 48 earlier, and overall we expect the effective tax rate for the fiscal year 2008 is going to be between 31.5 and 32%.

We presently expect income per diluted share from continuing operations to be in the range of $3.00 to $3.15 for fiscal 2008, compared with $2.52 per share in fiscal 2007, a significant increase.

Capital expenditure plans for fiscal 2008 include the 17 new stores, and expenditures of approximately $95 million.

That $95 million includes spending on planned fiscal '09 openings, which are not reflected in the store count of course, as well as various other in-store and corporate office initiatives.

We expect cash flow from operations to exceed our capital expenditures and dividend payment outlays once again in fiscal 2008.

So in summary, we are reporting results that while below our expectations, are in an exceptionally difficult consumer and cost environment for our industry.

These issues are going to be with us for the remainder of this fiscal year, and our team is focused on overcoming them whenever and wherever possible.

Despite these challenges, I will point out that last year's recapitalization is substantially benefiting diluted income per share from continuing operations, and we expect to continue to have solid cash flow from performance to support our increased dividend and our capital expenditures needs, and we have one of the strongest brands in the industry.

When the headwinds abate, and they will abate, we believe we will be well-positioned to take advantage of an improved operating environment, and deliver even better results.

With that, thank you for your attention, I am going to turn the call back over to Mike Woodhouse.

Mike.

Thanks, Larry.

Good morning again everyone.

Let's start with a quick review of the headwinds that Larry just talked about that are affecting the full service restaurant industry.

As was just reported this week, consumer confidence is at the lowest level since September 2005.

We also know from industry data that people are eating out less.

Although the unemployment rate remains below 5%, a number of factors are weighing heavily on the minds of consumers, relating to common and discretionary incomes, this list includes, declining home sales and home values, rising energy prices, with gasoline averaging now $0.85 higher than a year ago, and the subprime credit crunch, and on top of all that the recent declines in the stock market only add to the negative wealth effect.

While we are not happy with our same-store sales numbers in the first quarter, we are ahead of industry guest counts, as Larry mentioned as reported by KNAPP-TRACK, and if we exclude the impact of having shorter and fewer Porch Sale events, which help us in terms of markdowns and margin, our retail same-store sales were flat, and as we discussed in the release earlier today, November restaurant sales, and we have just three days to go in the month, our accounting period ends on Friday of this week, restaurant sales in November are ahead of October, and ahead of Q1 as a whole, and our retail sales are slightly ahead of restaurant sales.

However, if we look back at the first quarter, our ability to protect market share and grow revenues, didn't translate into improved bottom line results as we would have wished.

Cost pressures resulting from minimum wage increases implemented during 2007 by a number of states, especially those that raised the cash wage for tipped employees, higher group health expense, and higher commodity costs in general were felt throughout the quarter.

We took about a 2% price increase in mid-August, resulting in an average price increase for the quarter of approximately 3.5% over last year.

The price increase is intended to offset the higher food and labor hourly labor costs we expect in fiscal 2008 as a whole, and in fact pricing more than offset those cost increases in dollar terms in the first quarter.

We also benefited from improved markdowns in retail, so our gross profit margin in the quarter was flat with last year at 69%.

On the labor line over 50 basis points of the 80 basis points increase was the result of the group health expense situation that Larry has already explained.

Below the labor line, the highest store operating expenses included TV advertising, were the main factors that negatively impacted store operating margins.

While we don't anticipate recurring production costs for our commercials, the combination of continued TV tests and higher cost for certain suppliers will keep pressure on margins until we get some leverage from added sales growth.

Next I would like to update on the status of our strategic initiatives, designed to increase restaurant traffic, retail sales, and operating margins.

As you know, we rolled out our TV advertising test in October in 6 markets, which represented about 15% of our stores.

Given that the TV campaign is directed at building brand awareness, rather than being product driven, we expect traffic to build over time.

The results from the first flights have been positive, but not as strong so far as we hoped.

We have tweaked the creative for the second flight, to include current seasonal promotional item, which are our roast beef dinner and holiday breakfast sampler.

Let's look at the restaurant initiatives, in keeping with our theme of simplify, focus and execute, restaurant execution requires improving speed of service while maintaining a quality guest experience.

To speed up service the starting point was a simplified menu, one that was easy to read that would also drive a more profitable mix of orders in the kitchen.

Our new Best of the Barrel menu has been expanding to a 30 store beta test, and we expect to roll it out companywide in April.

Our goal for the Best of the Barrel menu is to improve ticket times, and to improve dollar margins per guest by highlighting high margin products that are fast out of the kitchen.

For example, the menu features a new lunch section with high value, high margin products, it also eliminates a number of low volume sellers to reduce waste, and reduces the number of slow-to-make items, such as sandwiches.

Along with the new menu we greatly simplify the point of sale screens to increase the speed and ease of order entry.

In addition we have trained servers on how to communicate the changes in the menu positively to our guests, and the guest responses have been generally positive, resulting in higher tips for the servers.

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

In related initiatives we are taking a fresh look at how we can improve our throughput, by simplifying recipe process, and improving labor deployment.

We are currently testing elements of combinations of all of these initiatives in a number of stores.

We expect to be able to record measurable results over the next several months.

We are all about measuring results in Cracker Barrel.

Over the years we found that one thing that has the highest correlation to growing our sales and profitability, and that one thing is lower employee turnover.

Our new Rising Star program focused on our new hires, new hourly hires, continues to show marked progress in reducing turnover, and reduced turnover leads to improved skill levels, and enhanced guest experience.

Turnover for our hourly employees as a whole is at 102% this year-to-date, versus 121% last year year-to-date at the end of the first quarter.

Another measure of the success of this program, and our overall focus to the guest experience is our continuing trend of fewer guest complaints.

Now let's look at the retail business.

Clearly our retail sales have been soft along with many other retailers, that will make signals coming into the holiday season with predictions of lower holiday sales for retailers in general.

Reports from this past weekend following and including Black Friday, indicated that more people were shopping although their purchases were smaller.

This hopefully bodes well for the stronger holiday season for us, and we did see a strong pickup in retail sales starting on Black Friday.

As we look back at the first quarter, warmer fall weather resulted in lower demand for women's and children's outerwear and fall apparel.

Our Harvest collection sold well in the quarter, but our seasonal sales were down as a whole year-over-year.

Our decision to delay the full set of Christmas products and store decoration until October, resulted in a decline of about 20% in sales of seasonal merchandise season to date.

Last year we benefited from a few very popular Christmas products, which sold out in the first quarter of fiscal 2007, and those products were not offered for sale again this year.

The good news is we have had growth areas.

Toys, including the Perfect Pet, Webkinz, and games and puzzles continue to sell well, and gifts for the home and candle products were also strong sellers.

Media sales were up double-digits in the quarter, due to the popularity of our exclusive CDs by Josh Turner and Merle Haggard, as well as 35 new DVD titles.

Other music initiatives include two more exclusive CD offerings introduced in November.

Lone Star's, 'My Christmas List' and the live collection of 'Classic Alabama Hits' recorded during the American farewell tour.

Food products, vastly candy, were up approximately 6% in the quarter.

Our updated point-of-sale systems provided new opportunities for better pricing and bundling of products than was available last year.

For example, our pricing change on thin sticks candy to increase the price from $0.10 to $0.15 each, or offer 10 for $1 increased sales and units almost 40%.

We are using the new capabilities to drive volume through BOGOs ahead of traditional markdowns.

For example, Christmas ornaments this year we are able to offer 'Buy 4, get 1 Free.'

Looking forward, we have a number of exciting new things going on in retail.

First, as Christmas merchandise begins to sell down in the middle of December, we are bringing in new products in the garden, inspirational and rooster ranges in time for gift giving.

Second, in the spring retail presentations will include more across departmental themes to lead customers to explore the store throughout all product presentations.

An example is a chocolate theme that will include not only candy and treats, but novelty servewear, whimsical gifts, and apparel.

This theme is timed to run through Valentine's Day and Easter without being specific to either occasion.

In line with our focus on uniqueness, much of the product for this theme will be designed exclusively for Cracker Barrel.

Third, we are reviewing the fit and cut of apparel, to make sure we haven't left the traditional Cracker Barrel apparel customer behind, as we look to broaden the appeal.

We're also adjusting the mix of sizes we are buying, and now have for the first time the ability to replenish by size.

We expect these changes to lead to improved sales and reduced markdowns in our apparel business.

As we look forward to the Spring, we will have new presentations every month, and we will have new product categories.

An example of that would be novelty lamps.

Moving now to our other marketing initiatives, we already updated you on the TV test and music programs.

We have added Kroger, Rite-Aid, Winn-Dixie, as well as approximately 800 Wal-Mart locations to our third party gift program compared to last year, the first quarter gift card sales were up 42%.

Along with these additional sales the gift cards give us a way to communicate our brand in many other new locations.

We are also exploring summer traffic driving promotion ideas, with Cracker Barrel's unique combination of restaurant and retail, and the brand's powerful association with travel, we believe is an opportunity to design promotions that leverage these brand strengths, and build on the summer travel potential in the fourth quarter.

Looking at new store openings in fiscal 2007 we had three off-interstate stores, which broke opening week sales records, Huntsville, Alabama, Sherman, Texas, and Lubbock, Texas.

On November 12th, we opened another off-interstate store, this one in Midland, Texas, and it set a five-day retail sales record.

This performance, the Huntsville, Sherman and Lubbock stores continue to perform better than projected.

This performance supports our conviction about the strength of the brand and the viability of our ongoing development plans, but I want to be clear, however, that we still need to work on sustaining the opening sales that we are achieving, and achieving profitability faster in our new stores.

Let's look at the update to the outlook of fiscal 2008 where we lowered projected same-store sales based on the first quarter results, as well as the current uncertainty in the industry and the overall economy.

We would expect sales and operating margin to improve in the second half of the year, as we gain some benefits from the initiatives we are testing.

However, given the negative external pressures, we are taking added steps to reduce discretionary spending, and focusing on ways to increase sales and reduce costs.

We expect cash flow from Cracker Barrel to remain strong, and more than sufficient to service our debt to finance our restaurant and retail initiatives, as well as our unit growth, and to continue our share repurchases, and to fund our dividend payouts.

As you know in September we increased the dividend 29% to $0.18 per share for the quarter.

It is the fifth year in a row we increased the dividend.

Simplify, focus, and execute, is our call to action to drive increases in both traffic and retail sales for 2008.

We are keenly aware of the potential volatility of earnings per share because of our new capital structure, and we are determined to leverage the capital structure to significantly grow earnings per share.

We have put together additional resources to successfully implement the Best of the Barrel menu, to build brand awareness, to drive restaurant retail sales, and to improve conversion of higher sales to bottom line profits.

Our goal is to deliver a premium brand to our customers, and a premium return to our shareholders.

With that, I would like to open up the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We will go first to Matt DiFrisco with Thomas Weisel Partners.

I might have missed this.

Did you mention how many shares were repurchased in the quarter?

There were no repurchases in the quarter, Matt.

Was there any restriction to that?

No.

Any reason why?

No.

I guess the key reason is the first quarter, is a fiscal quarter which is typically a low cash flow quarter, and we decided not to make any repurchases during the quarter, and borrow on our revolver to make those repurchases.

G&A, as far as being down, it looks like on absolute terms, what's the outlook given your outlook for accruals on a year-over-year basis for the remainder of the year?

We expect favorable performance for the balance of the year in G&A as well.

So favorable meaning relative G&A leverage?

Yes.

Okay.

Just looking at the COGS line, it looked like it it was a little higher than I expected, and I am trying to figure out that.

Is there any effect happening with the lower U.S.

dollar?

I know that a lot of your toys are imported, but I presume most of those are coming from countries that are pegged to the dollar.

Is there any adverse effect you are seeing as far as product margins at the retail store?

I don't think there is anything material there related to the dollar.

That is something we do have an eye on, but nothing really material there.

Any concerns going on with shipping costs or fuel costs, and getting things to you during the Christmas time?

Our Christmas product is all delivered at this point, so that is really not an issue.

Okay.

And then lastly just on the value menu approach, do you think, have you tested anything about that, or maybe tried to look at your menu, and if you look at the success of the fast feeders, which seem to be outpacing casual dining the last two years, I guess the tiered menu strategy, is there a way maybe you can cross into that line, and also sort of bring an attention to your customer of more of your value-oriented items a price point to them?

Well, we have done that in the test menu with the lunch items, so we are trying to focus people on value item that is also benefit, value in and of itself, low price, I guess, in and of itself is not something that we want to focus on, because our challenge is how do we think through at busy times we are always on a wait, so we don't want to give up margin just to have a lower price point.

We think our menu is pretty good value compared with most others that we compete with, and compete with in the customer's mind, so I don't think we want to go chasing that.

We do want to do things from a promotional point of view that reinforce the fact that we overall represent very good value, if you take into account the food and experience and everything else.

Is there one lynchpin that you can point to, that you think would be something over the next 12 months, that could accelerate the table turn, or the line flow, or increase capacity of sales capacity during those high peak times that we should look for?

Well, I think the main goal of the Best of the Barrel menu is to improve speed of service.

That is something we think once we get it right, we can roll out through the whole system.

The other initiatives are having some benefit.

They are a little more complex, and I don't want to go into the details of what is happening, but we are seeing some positive results in terms of speed in the kitchen, which will help as well.

I think that the menu is the #1 priority right now.

Okay.

Last question.

What is the timeframe for Larry, and are you in the process of seeing any candidates internal, external?

We have a national search under way.

Larry's departure will be the end of January, and we hope to be on-track to have somebody aboard on or before that date.

Okay.

Thank you.

Thank you.

We will go next to Joe Buckley with Bear Stearns.

Thank you.

A couple of questions on the cost side.

You gave us the hourly wage rate inflation.

Does that diminish as you lap Election Day, or diminish as you lap maybe January 1st, because of some of the state initiatives from a year ago?

Yes, there will still be some resetting going on, some of the states have indexed to consumer price indexes, and that sort of thing, so I think for the remainder of the year we are still going to see some high wage inflation.

As high as the first quarter, Larry, do you think?

We are hoping that it is going to be a little less than that, Joe, but we are trying to manage it as well, but I think that the exposure is still there, and that is reflected in our risks and opportunities on this projection.

Okay.

And question on food costs.

I got the impression that at the Analyst Meeting that things might be coming in a little bit better than you had expected at that point, and now seems like you are back to your original expectations of 4 to 4.5% food cost inflation.

Was my impression right, and did something change to kind of kick it back up again a little bit?

I think probably the biggest single item has been in produce, and I think specifically in lemons if I recall, and things are volatile out there and change.

We are essentially in-line with what we projected before, and our expectation for the whole we're is probably going to be slightly favorable to what with we expected before, but we are still talking about high food cost inflation in the 4 to 4.5% range.

Again, question on the Best of the Barrel menu.

I guess at the time of the meeting you were testing it in four units, and now it sounds like it is has been expanded to 30.

Give us a sense of how streamlined the menu is, and what have you seen in those stores in terms of service times?

The menu is streamlined, Joe, in the terms that we have taken some slow moving items off, the total item count we took off was relative to dollar number, but in terms of product mix it was a relatively small number.

What we have seen in stores are higher, some record dollar sales per hour, and that is really the goal now.

Now we have to translate those dollar sales per hour into higher traffic, and if you think about the opportunity we have, which is that we have waits, and we have people divided into two groups, those willing to wait at any point in time for the quoted time, and those that are not.

It will take a while as we increase throughput, which we are as mentioned by the higher dollar sales per hour for those that aren't willing to wait, to realize the wait is shorter, so it will be a building process, but it is very encouraging that we are seeing the hourly throughput at the levels we are.

Okay.

Has the expanded test been in place for any length of time, or is that just starting now?

It started the beginning of the month, beginning of November.

Okay.

If all goes as planned, you would think you will roll this out in April, did you say?

Yes, but I reserve the right to change the date.

We are going to do it right.

April is the target, but to the extent that we want to tweak something or check something, we will do it.

We are not just going to blindly roll out a system-wide menu.

That sounds good.

Thank you.

Thanks, Joe.

We will go next to Steven Rees with JPMorgan.

Hi.

Thank you.

Just on the sequential acceleration that you saw in the same-store sales trends in November, was that consistent throughout the month, or did it accelerate towards the end of the month, and was there any particular day part or geographies where you saw more improvement?

Retail is markedly better beginning with Black Friday as Mike indicated, and there is a lot of noise throughout the month other than that.

Okay.

Just on the retail margins you talked for several quarters about improving margining for retail.

Are they still up year-over-year, and what further opportunities to you see to improve the margins there from less markdowns?

Yes, they are running, of course the combined and the overall cost of goods, and we expect to continue to see fewer markdowns in the first half of the year, which is the remainder of this current quarter, and then when we get to where we are lapping the reduced Porch Sales, the opportunity will be apples-to-apples kind of basis, so we will continue to see it for a while, and then we will be at the new higher level.

We are doing a number of things at a fairly detailed level.

I talked about the BOGOs, we are selling things lieu at less than the full markdown on our clearance apparel, for example, we are up where if you buy 1, you get 40%, buy two you get 50%, if you buy 3 pieces, you get 60%, which is better than obviously putting everything out there at 75%, and that escalating percentage is a real sales driver.

We are doing a lot of things to manage markdowns.

Where we do take markdowns to be less of an impact in the past.

We are just getting better at all of this stuff.

The goal is to keep the Porch Sales to a minimum going forward.

I would say last year and the second half of the year we had some pretty good retail gross margin numbers, and I think we will probably see a little net pressure in those in the second half of the year.

Okay.

Thanks.

Quickly on the table optimization program, perhaps you can talk about an update there.

How many stores have tables for two, whether or not you have seen expected traffic improvement there?

The story is pretty much where it has been for a little while now on that, that we went through that process, and that is really getting the stage set for all of these other initiatives that will actually help us improve throughput, so we have been optimized, the opportunity wasn't as big as we first had thought at first, because a number of our operators had already got ahead of the program, because they figured out the opportunity there, but I think right now we will see on an opportunistic store by store basis there may be possibility, but we are really looking to the menu and then these other initiatives, to use that platform we built with the table optimization.

Okay.

Great.

Thank you very much.

Thank you.

We will go next to Chris O'Cull with SunTrust Bank.

Good morning.

Good morning.

Mike, I believe you guys monitor your price increases by comparing trends to a control group.

Would you elaborate on the guest count trends in the control group versus the rest of the system?

Are you seeing any differences there?

No.

Okay.

Great.

We do it both ways.

We test ahead of time, and then we do a hold back, so we get a measurement at both ends, and have not seen any meaningful traffic differences, so we are pretty comfortable that the increase in August has stuck, and that we are comfortable with running 3.5% total price.

Our traffic would suggest that we are not damaging ourselves by price.

We also have as I think you probably know an outside consultant that advises us on product sensitivity to pricing, and their evaluation of our most recent price increase in August, is that there is no effect on traffic, or adverse effect on mix either.

Okay.

Great.

And, Mike, I understand the Best of the Barrel menu is a streamline menu, but does fewer items equate to a narrower range of prices?

No.

I think the intent, the presentation, and the results are that the variety we see no reduction in the perceived variety except for those small number of individuals whose favorite product disappears.

We certainly hear from them.

I am sure.

Just to make sure I understand the throughput benefits, if you are able to decrease the meal duration period, and increase your throughput during peak periods.

Unless the wait time stays consistent with what it was, you wouldn't see an increase in the sales.

Is that fair?

Well, --

You need the wait time to stay at least where it was?

What we do know is that in any given wait time we know how many people say 'I am not willing to wait whatever that time period is', and we know that by day of the week and day part, so presumably if the wait time goes down, those people will fill up, and get back to where we were.

Okay.

Okay.

Great.

Refilling the queue, and that is one of the ways that the table optimization plays into this, because at the beginning of the rush at any point in time we can seat more people to begin with, so the quoted wait only goes down, if we are faster at putting out throughput on those people who are already seated, so it is a whole bunch of things have to happen at the same time.

You won't have as many turn-aways, people leaving.

Correct.

Potentially if the advertising starts to create awareness in trials, that should help build the waits as well?

Correct.

Larry, I believe last year in the second quarter retail sales benefited from the pre-Christmas markdowns, which negatively impacted the cost of sales.

Can you give us some year-over-year modeling advice in the second quarter, based on this year's seasonal retail plan?

I think that right now what we are looking at, we would probably expect retail gross margins for the second quarter to be flat to very slightly improved, not as much improved as in the first quarter.

Okay.

And then what was the impact of higher group health plan payments during the quarter?

You said you expected it to get better through the year?

Well, it was in the first quarter year-over-year it was about 50 basis points, and so it was a big number, and as we look at the trend of what our group health ran last year, and for the relative comparisons, we are going to see that pressure mitigate quite a bit over the course of the remaining course of the year.

Great.

My last question is the stock compensation expense during the quarter, can you tell us how much was in G&A?

Well, I don't have the dollar amount, but I will say that it fully accounted for the change year-over-year.

I think we had --

Is what is on the cash flow statement, what is in G&A?

Yes.

There is stock expense and stock option expense.

I think year-over-year we had about, also a bonus expense, we had about a $5 million benefit in G&A.

Great.

Thanks.

Thank you.

We will go next to Robert Derrington with Morgan Keegan.

Thank you.

Mike, can you give us a little bit of color on the TV advertising for a minute?

What did you learn as you tested?

Have you found that consumers found the production interesting, but the message didn't necessarily drive traffic, and so now you are moving to food?

Is it based on -- ?

It is driving traffic.

It didn't on day one.

It was a build which we expected because it is a brand awareness campaign, and just interestingly on Thanksgiving Day, which is obviously a very special day for us because we are one of the few restaurants open, and we have the Thanksgiving Dinner offering, the TV markets were up by the same amount as the most recent overall week, so clearly there is some traffic building going on.

We decided to put some product information in to see if we could stimulate building on the brand awareness piece, to stimulate further traffic, because we like the traffic to be higher.

I don't know if you have seen them in their new form, but it is really using the existing creative and blending in product charts.

How should we think about the impact on the operating expense line, as you go forward with the advertising spend through the balance of this year?

It is built into our guidance first of all.

Okay.

So I think that is the best way to think about it.

Okay.

All right.

The unusual thing in the first quarter was that we had the production expense.

Right.

Which was a little over $1 million, but then we will also have some level of advertising, the future flights are a little lighter than the initial flight, but we will have it through more of the quarter.

You showed us a lot of different food creativity at your Analyst Meeting earlier this year.

Are some of those newer items yet to be folded into the plan as we go through the course of this year?

One way of saying that is that none of those things you saw have been folded in yet.

There are some real opportunities there, and we are focusing back onto new food.

We have been focusing on restructuring the menu to generate all the benefits we talked about, in terms of speed and margin.

We have also had the product development folks working on some of the back of the house kitchen processes improvements that we have been talking about.

Now we are back fully focused on new products, so our goal is to have more new product excitement going on than we have had in the past.

Okay.

Very good.

Thank you.

We will go next to Bryan Elliott with Raymond James.

Good afternoon.

Good morning.

Just wanted to check on help me think about, Larry, the countervailing cost of goods line things that are happening?

You have got the retail margin improving but to a lesser rate, we got 4.5% or so food inflation, and the price increase that you quantified for us.

First of all, was sort of first quarter reflective fully of the price increase?

Remind me when that went in, and are you on a fiscal year contract, or I think you might be more on a calendar year contract with some things, and is with the receipting of the benefit from the Porch Sales, et cetera, are we going to see a widening of the cost of goods pressure as we move through the year?

That is essentially my question.

There were a lot of pieces to that.

We had about 3.5% pricing in the first quarter, and that is consistent with what we are looking at for the year, so there might be some small fluctuations by quarter, but it is about what we are looking at for the remainder of the year.

I do expect to see some net pressure on gross margin over the remainder of the year, but I don't expect it to be flat.

Flat, the pressure being flat with the pressure we saw in Q1, or flat year-on-year?

Year-on-year.

Okay.

In other words the slight increase here in Q1 based on what you know today, and these countervailing trends you have talked about, should be reasonably consistent through the year as you see it right now, is that what you mean?

I am not exactly sure what you are saying, Bryan.

Let me take a crack at it here.

Let me help you (multiple speakers) you were up 5% in COGS for Q1, I think I heard you say that is a good number to use for the rest of the year through the year?

For our menu pricing, yes.

Given menu pricing, retail, et cetera?

Yes.

What I said was, and I think what you had asked me was, what was the situation on pricing in the first quarter and the remainder of the year.

As I pointed out we had 3.5% menu pricing in the first quarter.

That is about consistent with what we expect for the year.

There could be minor fluctuations quarter by quarter, but that is about what we expect.

I do expect, and we had flat gross margins in the first quarter year-over-year.

I don't expect flat, I expect there might be some net pressure on gross margins over the remaining course of the year.

All right.

Thank you.

Thank you.

We will go next to Conrad Lyon with FTN Midwest.

Good morning.

Let me shift back to the advertising for a minute.

One of the things you mentioned on your Investor Day is you really wanted to try to refocus folks that know your brand more so as a roadside stop, and try to get them to think of it more as a stop during a typical outing.

How is that evolving, or is that going to change with your new advertising, or changing your advertising a little bit here?

The overall goal is to improve top of mind awareness.

We think the opportunity is that we have a lot of people travel, use us when they travel but do not use us when they are at home, but if awareness is stimulated, love Cracker Barrel, and we that stimulating that awareness will cause them to use us more.

The adding of the product piece is we think that will be an added plus to the reminder of what Cracker Barrel is all about, plus oh by the way, come in and get our current promotion, so the goal has not changed.

As I said before, we are seeing some traffic growth.

We don't have a measure on whether that is local folks or travel folks.

That is a very difficult thing to measure obviously.

We will see what happens in the second flight.

Okay.

And in terms of when you may go into new markets, when might that be again, or expand your advertising?

That will be next fiscal year.

Okay.

So even if you see, say, some better than expected results, you wouldn't grow your exposure this year?

Our guidance doesn't reflect us going into additional markets this fiscal year.

We can be nimble if we see something that causes us to do differently.

Okay.

Great.

Let me shift gears just for a second.

We all know about the pump prices for regular gasoline.

Recently diesel has been going up.

Have you guys really tried to gauge how many truckers use your concept?

Truckers as in 18 Wheelers?

Yes.

They certainly don't show up with their 18 Wheelers.

Fair enough.

That is all.

Thanks.

Thanks.

We will go next to Mike Smith with Oppenheimer.

Good morning.

Good morning.

A couple of things.

One, the tax rate you indicated was going to be for the full year 31 to 32%.

I believe that means it has to come in considerably lower than in the second half of the year.

Why would that be?

Under FIN 48 as you have discrete events happening, you record the effect of those discrete events on your tax rate.

Under prior accounting for income taxes, you always use your expected full year tax rate.

Now you look at the changes in circumstances related to discrete events, and we expect to see some pickup later in the year.

What are those discrete events?

They relate to some of the assumptions that we have about uncertainty, and becoming more certain as the year proceeds.

Okay.

In the advertising you spent 1.8 million in the first quarter of which 1 million was production?

A little over a million.

And would you anticipate that your ad spending going forward would be about a million dollars quarterly?

That is I think getting a little finer than we really want to get in our guidance, but as we said, we will have continued media relative to what we had last year.

Thank you.

(OPERATOR INSTRUCTIONS) Next to Brad Ludington with Keybanc Capital Markets.

Thank you.

My questions have already been asked.

Thank you.

With no further questions in the queue, I would like to turn the conference back over to Mr.

Woodhouse for any additional or closing remarks.

Thank you.

Thanks everyone for joining us.

I hope we have conveyed the fact that we are as in the rest of the industry in some tough times, but we know where we are going, and how we are going to get there, and we look forward to talking to you at the end of next quarter.

Thank you.

Thanks, everyone.

Thank you.

We appreciate your participation.

That does conclude today's conference call.

You may disconnect at this time.