Cracker Barrel Old Country Store Inc (CBRL) 2008 Q3 法說會逐字稿

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

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

Eastern through June 11th, 2008, at 11:59 p.m.

Eastern by dialing 719-457-0820, and entering pass code, 8422317.

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

Diana Wynne, Senior Vice President of Corporate Affairs.

Please go ahead, Ms.

Wynne.

Thank you, Katie.

Welcome to our third quarter 2008 conference call and webcast this morning.

Our press release announcing our fiscal 2008 third quarter results and updating our outlook for fiscal 2008 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 our 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 it with, 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 though end of this morning's press release, and are described in detail in our filings that we make the SEC, and 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, in our filings with the SEC.

On this call this morning with with me are CBRL's Chairman, President and CEO, Mike Woodhouse; and Cracker Barrel Senior Vice President of Finance, Doug Couvillion.

Mike will begin with the review of the business, Doug will review the financials, and then Mike will return to discuss the outlook.

With that I will turn the call over to Mike Woodhouse.

Mike?

Thank you, Diana.

Good morning, everyone, thanks for joining us this morning.

As I talk to you today about the progress we are making as well as the challenges we face, there are a few key themes I would like you to remember.

First, we expect to see a lot of people on the road this summer.

Second, we have just begun our first national promotion, geared to capture a greater share of those summer travelers.

Third, Cracker Barrel remains a top-rated brand and a great dining value.

And fourth, we are getting better as restaurant operations, but we still have more work to do to build traffic.

With that, may we begin by acknowledging that we are in a very challenging consumer environment.

We're often asked how the high gas prices will affect summer travel.

First about 60% of our customers are local, and our focus is to drive traffic from the local market, as well as the traveler.

But to answer the question directly, a AAA study released a couple of weeks ago said 1% fewer people were expected to travel by car over the holiday weekend.

Our studies show that 70% of Cracker Barrel guests are planning to travel as much or more than usual.

Our Greatest Family Road Trip game, which rolled out on Memorial Day, rewards the frequent local guest, as well as the a traveler.

We believe that our strong value proposition is continuing to generation restaurant traffic that has outperformed the casual dining industry for eight straight quarters.

I want to make it clear that we are not reducing portion sizes, and we're not altering the quality of our ingredients.

At an average check of $8.70, we continue to offer a great value in an environment that caters to the entire family.

Our cost management initiatives to control labor and operating expenses are showing positive results in helping to mitigate higher costs for food and pressures on retail gross margins.

Specifically food waste, hourly labor, supplies, and maintenance expense, all areas of concentration, are each down as a percent of sales for a total of 40 basis points in the quarter.

G&A expenses were also lower because of lower incentive compensation accruals.

We're confident that we're on the right track, and Doug Couvillion will be providing you with more detail on the numbers in a few minutes.

As always I'll proud to speak about the strength of the Cracker Barrel brand.

Since the last earnings call, we have once again been voted as the most RV-friendly sit-down restaurant in America, by the Good Sam Club.

This is the seventh year in a row.

Good Sam Club is the largest membership organization of RV owners.

We were also ranked as the top-rated full service restaurant in Fortune's Most Admired Companies Listing of food service companies.

Overall, we were behind only three very large companies, Starbucks, McDonald's and Yum!

Brands, none of which is full service.

We were especially pleased that the quality of our products and services were ranked second overall behind only Starbucks, as they were last year.

Another way to measure the strength of the Cracker Barrel brand is through the guest experience.

We look at our guest satisfaction scores at every store every month, and our overall satisfaction score has improved in eight of the past ten months and in the other two, it was maintained.

Speed of service, as reported by our guests, has improved in five of the six past months, and in the one month that it didn't improve, it was maintained at the same level.

It all goes back directly to our mission of pleasing people.

Our number one focus is on employees trained to deliver a pleasing experience to our guests, each and every time.

Turnover of our new hires, our rising stars is almost 1/3 lower than in the middle of last year before we started the initiative, which means that we are recruiting and training 16,000 fewer new employees annually.

Our overall hourly turnover is at 95% year to date, down from 113% at the same time last year, which is outstanding for the restaurant industry.

We know that as you improve the retention of your people, their ability to provide a better guest experience also improves, and this in turn will lead to higher sales and should contribute to higher profit margins.

Now let me update you on two of our initiatives.

The Best of the Barrel menu, and the Seat-to-Eat project.

As you know, the Best of the Barrel menu is in a 30-store beta test.

This menu is designed to improve speed of service, and therefore traffic, and improved all our margins for guests by highlighting high margin products on the menu, and by eliminating certain low volume products to reduce waste and simplify operations.

The menu has been an operational success, and we have achieved some improvement in margins; however, we're still short of our goals for generating growth in traffic, and we know that we can do better with this menu.

For example, the Best of the Barrel is a paired-down menu, meaning that certain items are no longer available.

Even though it might be only a very small percentage of customers who were disappointed to see their favorite product disappear, we need to be able to bring a greater focus to what's new on the menu.

That's why we're accelerating the development of some exciting new offerings, including a new breakfast category, some additional seafood items, and some interesting new side dishes.

While the execution focus is to simplify operations and improve speed of service, we cannot let up on our efforts to attract new people to Cracker Barrel and to encourage them to come back again and again.

The Seat-to-Eat project also continues to move forward.

Our project team is focused on expedited cook and hold platforms and window management solutions.

Increased through-put capacity during peak periods, as well as sales increases during the weekday lunch in order to meet guest lunch hour time constraints, are key outcomes for the Seat-to-Eat initiative.

The results of the cook and hold platforms and the window management improvements have shortened the time from sitting down to the table, to receiving food at the appropriate temperature.

New hot-hold units, bread cabinets, pass-through window applications, and grid line set-up are being rolled out across two districts by the end of this fiscal year.

During the first quarter of fiscal 2009, we'll monitor traffic and speed of service improvements to determine the success of our test.

Now let's look at the retail business.

Our comp store retail sales were down 2.1% in the quarter, and early Easter (inaudible) people coming in to eat hurt our sales; however, we planned for lower sales due to the timing of Easter, and although sales of Easter items were down 32% from last year, we ended the quarter with lower Easter inventory than we had last year.

Certain items did sell well in the quarter, including toys, especially the Webkinz; and decor items for the home, such as quilts and lighting, also sold well in the quarter.

We're also benefiting from offering a broader spring collegiate product line, that includes women's and children's apparel and accessories.

And we continue to be encouraged to see increases in the average selling price and the dollars spent per check in our retail business.

Our retail strategy includes cross-departmental themes to encourage customers to explore all product presentations throughout the retail store and tie in with the restaurant promotion.

The chocolate theme that ran during the quarter was very successful, nearly doubling the sales in the same footprint last year.

The theme included not only candy and sweets, but also novelty serve ware and products designed exclusively for Cracker Barrel, such as apparel and ceramic ware.

This quarter we're offering an Americana theme, which features our new packaging, designed exclusively for Cracker Barrel, as well as items for the Greatest Family Road Trip.

Travelers will discover just what they need for their trip, with snack favorites, guidebooks, car accessories, and travel-themed apparel.

Spending time traveling in the car could be fun with more new toys, games, activities, books, and art supplies for the kids.

Outdoor picnics, lawn games, and reminiscing about favorite family memories are reflected in our ceramics, our photo keepsakes, and picnic accessories.

As I mentioned earlier, we recently kicked off our first ever National Summer Travel promotion, to drive traffic into our locations.

During the Greatest Family Road Trip promotion, guests receive a game card when they visit our stores.

Each guest will also receive a game piece, bearing a word or phrase associated with summer travel or Cracker Barrel on every visit.

The object is to collect a winning game piece or collection of game pieces.

We're giving away over 90,000 instant winner gift cards, worth $7.50 each.

400 guests who collect both "next" and "exit" stickers will win a Tom Tom navigation system, and a guest who collects the "good country cookin" stickers will win the $250,000 grand prize, which is either a Monaco RV and spending money for a full week road trip, or $250,000 in cash.

We're also continuing the television advertising test in the three markets during the fourth quarter.

Since the last update we have continued to see positive traffic trainers in the test markets, relative to the control group, and we're in the process of reviewing the test results as part of developing the marketing plan for fiscal 2009.

We're on track to open 17 net locations in fiscal 2008, so far in the year we have opened 16 stores.

We have two more to open in the fourth quarter, one of which is a replacement of the store closed in Georgia earlier this year.

Although we have not slowed down our new store openings, our goal is to sustain the opening sales momentum that we achieved in many of these new locations, and achieved target profitability in a shorter period of time, and we're making progress in that area.

We recently announced the promotion of Doug Barber to cheap operating officer.

Doug brings strong leadership skills and high standards of execution to this expanded role, and we're looking forward to making continued progress on both the day-to-day operations of the business and the operation initiatives that will take Cracker Barrel to the next level.

I'm pleased to announce that Nick Flanagan, one of our regional restaurant Vice Presidents, has been promoted to Vice President Restaurant Operations, and will continue Doug's high energy leadership with the restaurant side of the business.

And with that, I'll turn the call over to Doug Couvillion for his detailed financial review of the quarter.

Doug?

Thank you, Mike.

Now let's review in more detail the third quarter of fiscal 2008.

We reported diluted income per share from continuing operations of $0.46, versus $0.44 a year ago, an increase of 4.5%.

Income per diluted share benefited from a 24% reduction in diluted share count, resulting from the strategic initiatives that we completed in fiscal 2007, and the additional share purchases earlier this fiscal year.

Third quarter fiscal 2008 after-tax income from operations of $10.5 million, compared to 12.1 million in the third quarter of last year, reflected lower operating income, and lower interest income.

The interest income in the prior year was generated from the short-term investment of the proceeds from the sale of Logan's Roadhouse.

On a recurring basis, our interest income is generally not significant.

Revenue from continuing operations, in our fiscal third quarter, versus $12.3 million last - - I apologize - - revenue from continuing operations in our fiscal third quarter increased 567 million of 3.3% from last year's third quarter.

Contributing to this increase, was the opening of six new Cracker Barrel units, and positive comp store restaurant sales.

Year to date, we have opened 16 locations and our 17th and final unit scheduled for the fiscal year will open in June.

Development for fiscal '09 is under way, and our first six units for fiscal '09 are under construction.

Cracker Barrel comparable store restaurant sales for the third quarter were up 0.2% from a year ago, our fourth consecutive quarter of positive comparable store restaurant sales increases.

Our average check was 3.5% higher, reflecting menu price increases of approximately 3.7%.

We took a modest price increase this year at the beginning of April, and lapped a similar prior year price increase at the end of the quarter.

For the third quarter, our menu price increases in dollar terms more than offset the impact of food and labor inflation.

Our thinking on pricing continues to be geared toward providing a great value to our guest, while covering the dollar cost of inflation pressures.

We believe the strategy is working for us, and although guest traffic declined 3.3% in the quarter, our traffic continued to run ahead of the industry as measured by the GNAT track index.

Cracker Barrel comparable store retail sales were down 2.1% in the third quarter of fiscal 2008, Easter sales were approximately 1/3 lower than last year, primarily because of an early Easter.

Our retail team planned accordingly, and Easter product inventory ended below 2007 levels.

Our toy category continues to be a strong performer primarily because of the popular Webkinz plush animals.

Home products also performed well, with a broad offering of quilts, lighting, and gift items.

We offered a wider spring collegiate collection this year, including women and children's collegiate apparel and accessories.

Our general apparel continues to be weak, and is consistent with the soft apparel trends noted by other retailers.

We are encouraged by May month-to-date comparable store retail sales, and expect to finish the month up 2% to 3%.

We will report the full month sales next Tuesday, June 3rd.

Operating income from continuing operations of 27.7 million for the third quarter of fiscal 2008, as a percentage of revenues, was down 60 basis points to 4.9% of revenues, This compares to $30.1 million, and 5.5% of revenues in the third quarter of fiscal 2007.

Operating income margin was favorably affected by higher sales and lower general and administrative costs, but were offset by higher retail product costs and food costs.

Cost of goods sold was higher than last year's third quarter by 120 basis points, and reduced our gross profit accordingly.

About half of the 120 basis point increase can be attributed to retail cost of goods sold; another 40% relates to food cost commodity inflation, net of menu pricing.

The balance is due to increases in fuel and freight costs in both restaurant and retail.

Retail cost of goods was higher this quarter, due to increased apparel and port sales markdowns and lower initial margins, and to a lesser degree, increases in retail shrinkage and other inventory reserves.

Lower initial margins are due to a higher mix of domestically sourced products, which have lower margins than most imported products, and the loss of higher margin Easter sales due to the shortened selling season.

Food-related commodity inflation was about 5.8% in the third quarter, which was slightly higher than our expectations, Eggs, oils, dairy, and grain-based products, all posted double-digit inflation in the quarter, compared to last year.

Combined, these categories made up about 25% of our purchases for the quarter.

On a positive note, beef and pork prices were down compared with the third quarter of last year, and our operators have made improvements in controlling food waste.

Improvements in controlling food waste during the upcoming high-volume months is important to maintaining or improving our operating margins.

We expect fourth quarter commodity inflation to be in line with our full-year expectation, which we have increased 50 basis points to up 5.5 to 6% for fiscal 2008.

We have contracted about 80% of our estimated needs for the fourth quarter.

We'll provide you our outlook for fiscal '09 commodity inflation when we release fourth quarter earnings on September 16th.

Labor and related expenses were approximately 10 basis points higher than the third quarter of last year.

As a percentage of sales, favorable restaurant and retail hourly labor costs, including 2.4% wage inflation, were more than offset by higher management and group health insurance costs.

We believe the benefits of lower hourly turnover, which is down 15% from last year, is increasing our ability the deliver our guests the best experience possible, and is contributing to improve productivity.

Other store operating expenses improved 10 basis points to 18.2% of sales.

General insurance and advertising expenses were lower in the quarter, offset by higher utilities.

Although we continued to run TV advertising on a test basis in the third quarter of fiscal 2008, advertising was higher in the third quarter of fiscal 2007, because of a broad use of radio, and completing the rollout of the new billboards last year.

Our focus on controlling expenses has gained momentum, resulting in holding maintenance expense for the quarter flat in dollars, and lower as a percentage of sales.

General and administrative expense was 60 basis points lower than the third quarter of last year, due to lower incentive compensation accruals, which are based on year-to-date performance.

Our third quarter income tax rate for continuing operations was 22.5%, compared with 34.4% in the third quarter of fiscal 2008.

The lower tax rate was due do a higher level of non-deductible items in fiscal 2007, the rolling off of FIN 48 reserves, related to expiring statutes of limitations, and lower effective state tax rates.

We're projecting that our fourth quarter rate should be lower than the nine-month rate for the year, and our effective tax rate for the full year of fiscal 2008 is expected to be between 30 and 30.5%.

Year to date, cash flow from operating activities was 84 million, compared to $100 million in fiscal '07.

The decrease reflects the timing of accounts payable payments at quarter end.

Capital expenditures were $61 million year to date, compared to 67 million in the same period last year.

We have lowered our capital expenditure guidance five million for the year, to $85 million reflecting lower maintenance CapEx run rates, and the timing of capital spending in the fiscal '09.

While quarterly dividends of $0.18 are $0.04 more per share, total cash dividends paid were slightly lower compared to last year, because of the lower share count.

In summary, we reported growth and top-line revenues and earnings per share, and because of the focused efforts of our operations teams and home office teams, we're seeing positive results in many areas of our business.

Positive comparable store restaurant sales, improving comparable store retail sales, lower food waste, effective labor management, and consistent improvements and other controllable expenses, have served to offset the external pressures on margins.

Although we do not expect relief from the external cost pressures in the fourth quarter, we believe the positive indications I just mentioned and the Greatest Family Road Trip promotion will help us to drive traffic and retail sales in the fourth quarter, and offset some of the margin pressures we are experiencing.

That completes my financial review, so I'll turn the call back over to Mike for review of our fiscal 2008 outlook.

Thanks, Doug.

Let's look now at the update to the outlook for fiscal 2008.

In light of continued industry trends and our year-to-date results, we have updated our projections of same-store sales and overall revenue growth, and with the benefit from our cost control initiatives, we've narrowed our EPS guidance for the year to a range of $3.02 to $3.12.

As you remember, earnings per share in fiscal 2007 was $2.52, which included $0.14 per share from the 53rd week in the year.

We're now projecting approximately 2% revenue growth over the 2.35 billion of total revenue from continuing operations in fiscal 2007.

The additional week last year added $46 million of revenue, so on a 52-week basis, we're projecting revenue to grow approximately 4%.

We're projecting full-year comparable store restaurant sales up one to 1.5%, which includes about 3.6% of menu pricing and is consistent with what we have seen in the first nine months of fiscal 2008.

Based on the results year to date in fiscal 2008, we further narrowed the range on full-year comparable store retail sales to flat, to up 0.5%.

With the May month-to-date results and the summer travel promotion for June and July, we believe that we can bring comparable store retail sales back to positive territory.

As I mentioned, we are maintaining our plans to open 17 net Cracker Barrel units, of which 16 are open.

As Doug mentioned we've lowered our CapEx guidance by $5 million, reflecting lower maintenance CapEx and a shift in the timing of some spending into fiscal 2009.

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

We will not be making any addition share re-purchases this year, because we already purchased the maximum allowed under our credit agreements.

In the press release this morning, we announced that beginning in fiscal 2009, we will not be issuing monthly sales releases.

Most of the casual and family dining industry has moved to reporting quarterly sales results when they release their quarterly earnings, and we are going to follow that trend.

We will, however, provide monthly sales details with the quarterly releases.

While our restaurant traffic and retail sales were not as strong as we would expect in the quarter, we are pleased with the way the fourth quarter has started.

We believe that our first ever national promotion, the Greatest Family Road Trip game, will generate new excitement for Cracker Barrel during the summer travel season.

We continue to represent a great dining value, and now we're providing more reasons to stop and see what's new.

We continue to expect earnings per share to be substantially better than the fiscal 2007, which included the 53rd week, as a result both of our strong operating focus this year, and the benefit of the recapitalization initiatives that we began back in fiscal 2006.

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

Thank you.

(OPERATOR INSTRUCTIONS).

We'll take our first question from Dan Lewis with RBC Capital Markets.

Mr.

Lewis, your line is open.

Thank you, Mr.

Lewis, you might try re-signaling.

We'll go next to Shawn Dodge with Sun Trust Robinson-Humphrey.

Good morning.

Given what you guys know now from the advertising test results, do you still anticipate rolling out to a larger store base in fiscal '09.

Well as I said in my remarks, we're planning our advertising for next year.

We do see a measurable traffic lift when we run this advertising, so it becomes a question of which markets can we do that from a cost-effectiveness point of view.

We haven't laid that whole map out yet, but we will be doing that over the next month or so.

Okay.

And then, could you just give us some type of indication of what Memorial Day looked like this year relative to the last?

Well, you know, we don't want to get down to day by day sales disclosure here.

We did talk about what we expect the month to be.

We would always like sales to be higher.

The travel season is just beginning, and there was a lot of these - - I think you probably saw a lot of media publicity around good reasons to stay home this Memorial Day.

So, as I said, I don't want to give individual daily updates.

We're confident and comfortable with the outlook for the month, and we're confident and comfortable with our guidance for the fourth quarter.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Steven Rees with JP Morgan.

Thanks.

Mike, controlling expenses, particularly on the labor and operating lines this year, has allowed you to meet your earnings targets, despite a slowing revenue environment.

I guess as you look out in the next year or two, how much more do you see in the way of expense controls and what could be a softer - -

Let me first of all make clear, when we're talking about controlling expenses, we're not talking about cutting costs below the levels they need to be at.

We're talking about running this business at its standards, and the areas that we have been focusing on, food, waste, and labor, are areas we know how to do.

We haven't necessarily been as focused in the past as we could have been.

The future is all about how we transition with some of these initiatives to get better at the cost control side, as well as building traffic.

For instance, on the labor front we have a new labor deployment system that's in test, which will allow us to schedule labor more accurately against sales on a hour by hour, shift by shift basis, which should help us to continue to improve our labor management.

And on the food-cost side, we will continue with the - - when successfully test the Best of the Barrel menu and roll it out, we expect to see some benefits on the food cost side.

So this is not a one-time shot, and I really want to emphasize it's not a "cutting back wherever we can" just to survive a difficult period.

We really, really are focused on continuing to deliver the quality and the portions.

We hear and see, and I don't want to point fingers at anybody, but we do hear about portion cutting going on, as well as price increases in the industry.

We're not going to do that, because we think there's a strong trust relationship with our guests.

It's all the about delivering what they expect.

Okay.

And then just the labor management tool that you mention is in test, could that be an '09 initiative, or do you think more testing is required?

I could see us beginning to roll it out in '09, yes.

Okay.

My other question was on commodities, I know you are pretty much locked in I think 80% for this fiscal year, but am I safe to assume that a lot of your commodities are locked in on a calendar year, and what sort of visibility do you have as we roll in to the second half of this calendar year, and are you comfortable with the pricing you just took to offset that going forward?

Lots of questions there.

We don't lock in on a calendar year basis automatically, or a fiscal-year basis automatically.

We used to do some of that, because it made planning and budgeting easy when you knew of the costs.

Our focus now is to evaluate each of our major commodities on its own basis, what is that commodity doing, what are the influences, what is the outlook, and take either a long or short position on that commodity, based on that evaluation.

We have seen commodities, as I am sure you have seen, ease a little bit, but ease doesn't mean they are going down in most cases, it means they are coming off of some very strong highs, so we have some partial lock-in for the first half going beyond the first half of next year, and we are staying deliberately open in some other areas, where we expect to see some easing in cost.

Okay.

Thank you.

Overall, we expect commodity inflation as a percent to be lower.

Lower in the second half of this calendar year?

Correct.

So less than the 5.5 to six?

Correct.

Okay.

Thank you.

Our next question comes from Robert Derrington with Morgan Keegan.

Thank you.

Mike, could you give us some guidance on how to consider the costs associated with this fourth quarter promotion?

How will that flow through the P&L?

Well, first of all, Bob, let me remind you, that you are not allowed to win, okay?

I know you go to Cracker Barrel a lot, so you are going to get a of the game pieces.

Okay.

The cost of the promotion is a straight charge to the marketing line that's used in other store operating expenses.

All right.

That's fine.

And then, you know, you mentioned, you continued to test a number of items that could be rolled in to the restaurant, side dishes, entrees, and things.

We have seen a lot of restaurant chains use what they call is a barbell menu strategy, a number of items priced higher, a number of items priced lower, do you have any kind of thought on how new items will be added to the menu, or as featured promotion items?

Higher priced, lower priced, any kind of color there?

Well, first of all, as we have talked about before, one of the reasons we haven't had as much new product activity over the last 18 months is we expect to see in the future is we have been focused on transition to trans-fats, and also we have been working very hard on the process improvements, which are going to help us in the kitchen in terms of speed going forward.

We turned our focus very much onto new product development, and we have a number of ideas, which are more than ideas, which we are accelerating to get in to the Best of the Barrel test, which we expect to be rolling that out at the end of July or thereabouts

In terms of pricing, I personally believe there's a risk in going to the higher price, that you get a halo effect over the whole menu that is a negative, especially in a value proposition like ours.

I really want to be hitting a sweet spot, which is very appealing, probably at or a little below our check average, but delivering really good margin.

You know, Mike, in times past, you have had seasonal menu promotions, or seasonal offerings, and you have tested a number of things other time.

One of the inserts typically would have two or three or maybe four items on it.

And I think that was more cumbersome inside the restaurant.

And then in more recent times you have had some that have only featured one item.

Right.

Traditionally as you will recall, we used to feature one item, or maybe one item plus a salad, and then two or three years ago, we got into these multiple products, and what we found was the product mix effect was the ame whether we had one or four products and by putting four products on, we just got ourselves into very inefficient food costs and labor costs in the kitchen.

But I do think as we look at these new items going forward, one of the things we're looking at is to have a new category or two, rather than a single product, which we think will bring some big excitement to our menu.

Okay.

A couple of guidance points, within the release, there were a couple of items that were tightened up.

I think depreciation was tightened up, last quarter the guidance was 60 million, now it's 57 to 58.

And also I think interest experience was tightened from 60 million to a similar number, 57 to 58.

Any kind of color there you can share?

As you go through the year you know more.

Industry expense is obviously a function of how much we're borrowing, what our cash position is, and the rate at which we do cash, as well as our operating cash flow.

The rate at which we do share re-purchases has some bearing on that, so we are just further into the year and have a just tighter handle on that.

Same with depreciation, we start the year with planned capital spending.

It doesn't always go at the rate we want to.

In this case, we're not going to end up the year spending at our planned level, and therefore we're coming in with lower depreciation.

There were no major business issues going on there.

It is reasonable to expect, Mike, that development likely won't change from what the trend has been?

In the fourth quarter?

On an annual basis going forward, fiscal '09.

Well, I think we're going to have to wait until September for that, Bob, because the initiatives we have been talking about, some of them have capital spending associated with them that we haven't got final timing plans around, so by September we'll be ready to talk about that, which will give a better handle on cash flow and on depreciation for '09 and subsequent years.

Gotcha.

Great.

Thanks, Mike.

Thanks, Bob.

And we'll take our next question from Larry Miller with RBC Capital Markets.

Hi, guy, one of the things I'm actually struggling with a bit here is your guidance (inaudible) improvement it seems toward sales run rates for the rest of the quarter, and it sounds like it's the road trip promotion, is that what you are basing it on, is that right?

The way we developed our projection was to look at a base projection, and then look at what we might get from the road trip, that's right.

But we're not talking huge numbers in terms of the same-store sales we're expecting from the road trip.

But we're pretty comfortable that we can get the kind of lift that we have built in to the numbers?

I guess I'm just thinking about the delta, you know, from the current trend.

Can you help me understand how you think about that?

Is it the road trip?

It sounds like it might not be?

It's partially the road trip, and it's partially looking at a stabilized projection.

We're not expecting to see continued - - April was a softer month for us.

Okay.

We're not expecting to see that continue, and wait until you've seen our May projection numbers.

Okay.

No, that's fair.

I was just trying to understand that, and then just one other questions, the covenants that prevent you from buying back stock, how that l that affect 2009?

Will that basically continue, based on the levels of outstanding debt, and will we be prevented from buying back stock in '09?

We won't be prevented.

We will be permitted to buy stock.

The allowance goes up each year, and added to the fixed allowance, or the dollar in the credit agreement, we can also spend whatever we receive in terms of proceeds from option exercises.

Okay.

And then what is the authorization that you currently have out right now?

It is complete, right so you'd have to have a new authorization?

Yes, we'd have to have a new authorization, but that's a simple matter of taking it to the Board.

Okay.

And then just finally for me, you mentioned that you had some contracting for the second half of 2008 from commodities, and typically you talk about a percent, can you just tell us what percent you might be contracted on for the balance of the year, calendar?

We're in the 40 to 50% range for the first half of our next fiscal year.

Okay.

Thank you very much, guys.

Thanks.

We'll go next to Bryan Elliot with Raymond James.

Good morning.

I appreciate, Mike, the color on the Best of the Barrel test, but I wondered if you could elaborate a little more on the lack of traffic traction.

My understanding is one of the goals is simplified operation in the kitchen, therefore a little faster table turns, therefore, a combination of some of the people who are typically waiting for a seat.

Are we seeing the number of folks who are waiting diminishing, and that's presenting the traffic from the faster table turns, or help me square that circle a little bit.

Well the conclusion we have drawn is that by doing what we did, which was to basically, and I'm sure you have seen the menu, is to highlight certain products, but take a number of items off.

It was all, for some of our guests, it was all take-away and no replacement.

There was no new news, no excitement there, so that's where our focus is, and that's where we expect to pick up that traffic.

Is there a line issue?

Did you measure your line system wide, how long you're going to wait, for example?

Has there been a material change that in the last few months or quarters?

No, we don't measure it system wide.

We measure it from from time to time, primarily looking at the turn-away, the folks that will not wait.

Notice any change there?

I haven't seen any recent numbers that would indicate a change, no.

Okay.

And last question, I know you have been busy, you may have missed it.

Elliot Spitzer is now going to jail, so does that mean that analysts can now win prizes?

Okay, it's not April 1st.

You disbarred poor Bob, and I just wondered if I happened to luck in to a good piece, if I'm going to have to surreptitiously give it to somebody else or - -

Brian, I'm sure you'll find a way to deal with that situation in your usual creative manner.

Thanks a lot, see ya.

We'll go next to Brad Ludington with KeyBanc.

Morning, thank you.

And I have to apologize if this was asked previously, I had to drop off the call for couple of minutes, but if you look at cost of goods in the fourth quarter, excluding higher commodity and retail cost, if you just look at fuel, should we assume that around 20 basis points of pressure on that line would continue if gas prices stayed around the same?

For just fuel alone something probably in the 15 to 20 basis point range.

Okay.

And then I know you are probably not ready to give any guidance on fiscal '09 CapEx, but considering some of the initiatives coming up, possibly rolling out that labor management system and some others, is it safe to assume CapEx does go up some from this year's level?

Yes, it is, I don't have a number yet, but - - have a number that we're ready to put there, but yes it will go up.

Okay.

Thank you very much.

Thank you.

We'll go next to Amy Greene with with Avondale Partners.

Hi, guys this is an easy one.

Any update on the search for a CFO?

We're looking at some candidates, hope to get to a conclusion pretty quickly.

And then lastly, we've been seeing some articles over the last week or so, about a Supreme Court case that you all were involved in, is there any comment you guys want to make on that, or does it mean that we'll see any increase in legal expenses, anything like that in the forward quarters?

Couple of things on that.

As you will have read, it was basically a clarification of law that we were seeking, and we got that.

Don't expect any - - the actual process of going to the Supreme Court is not particularly expensive, and that's behind us, and don't expect any increases in expenses going forward, coming out of this particular situation.

It doesn't necessarily open the door to any additional cases or anything like that, that you could see spring up because of it, or you don't see any pending sitting out there?

No it's just provides a separate or an extra avenue for somebody seeking to bring retaliation charges against us, but we don't have any sign of a backlog or an overhang, or anything like that.

Okay.

Thanks, guys.

Thanks.

And we'll take our next question from Jake [Hannemeier] with Ramsey Asset Management.

Hey, guys.

Was there any impact on your Q2 COGS, either positive or negative from retail business year of year, similar to what you saw here in Q3?

In Q2?

I'm just trying to get a sense of if you guys put up decent retails numbers because you were cutting prices and more promotions etcetera?

No, we had some fuel pressure in Q2, similar to what we experienced now, but back when we talked about the second quarter, we talked about managing markdowns in kind of a tough Christmas selling season.

The pressure this quarter was really from the change in mix, because of the Easter, and a few more markdowns, but I think we'll see some improvement in to the fourth quarter.

Got it.

Do you have any sense of your advertising budget here in Q4, versus Q4 of last year, and did the billboard rollout from Q3 of '07 spill in to Q4 at all?

We'll probably be up somewhere in the 30 to 40 basis points just on the advertising spend in the fourth quarter, but that's in our guidance.

And most of that increase is due to the promotion.

Okay.

Got it.

Thanks, guys.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll go next to Chris Blackman with Empirical Capital.

Couple of quick questions if I may, and thank you.

Would you comment any on the difference between your trends in store traffic on your interstate stores to your more urban-type stores that you have been moving to?

No measurable difference.

So changing gas price really hadn't shown any difference in those two concepts or two formats?

No.

Okay.

And then, longer range, I know for example, one of your stores in Hendersonville, Tennessee, I guess close to your home office, a store you opened up that's more of an urban-type store, just long-range, can you talk about your plans for that, for taking your brand and putting it more in those kind of locations?

Yes, our long-range plans, well, let me back up a second, just one data point.

We have talked about a potential for about 1100 Cracker Barrels in total, which is a little less than double what we have right now.

As we grow the system, the mix between on-interstate, and off-interstate, we'll start switching towards off-interstate, and we're looking at plans to specifically address off-interstate.

One of the differences is simply the retail offering, and our total sales per unit, about the same on and off-interstate, but there's higher restaurant, lower retail off-interstate, because retail is associated with the traveler, which makes quite a lot of sense.

So we're looking at what our retail offering might be when we're off-interstate, which would just add to the attraction of doing that.

We're also looking at the possibility of having a more scalable box where we could go into smaller trade areas, which would further add to the 1100 opportunities we have out there, and I would expect those to be primarily off-interstate.

The majority of the stores I have visited recently have been the off-interstate stores, and I have been impressed with the type of volume and traffic there.comparable.

One question that may be odd, that I seem to notice at though stores, is a lot of people drinking water with lemon.

And obviously there's a cost associated for you with that.

Well, let me tell you what our standard is, and I hope all of our operators are listening to this.

Our standard is lemon on request with water, we would obviously not deny a request, but the standard is not to serve lemons with the water automatically.

So, and yes, lemons cost money, and as I said in answer to another question earlier, we're not in the cost cutting to take away from the guest, but we're certainly in the mode of operating our system to our standard.

Is there any way possible in the future to start charging that?

For lemons?

Well, for water with lemons?

No, the next guy that follows me can do that, but - -

I know that's a tough one, but I don't think anybody wants to set that standard, but it just seems like - - any way.

All right.

Let's see if there's - - you answered CapEx.

I think that's all of the questions I have.

Thank you.

Thank you.

Thank you, with no additional questions in the queue, I would like to turn the conference back over to Mike Woodhouse.

Thank you.

And thank you all for joining us this morning, I will lift as my last act this morning, lift the ban on all of you going out and participating in our game.

Please visit as many Cracker Barrels as you can.

We'll be back at the end of the quarter.

We're feeling positive about the situation right now, and we hope to have great results when we come back in September.

Thank you.

Thank you.

This will conclude our conference call for today.

Thank you for your participation.