Cracker Barrel Old Country Store Inc (CBRL) 2008 Q4 法說會逐字稿

Good day everyone.

Welcome to the CBRL Group fourth quarter conference call.

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

Eastern Time through September 30th, 2008 at 11:59 p.m.

Eastern, by dialing 719-457-0820 and entering passcode 9326974.

At this time for opening remarks and introductions, I would like to turn the call over to Diana Wynne, Senior Vice President of Corporate Affairs.

Please go ahead, ma'am.

Thank you, Sean.

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

Our press release announcing our fiscal 2008 fourth quarter and full-year results, and our outlook for fiscal 2009 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 this morning's press release, and are described in detail in our filings that we make with the SEC.

We urge you to read this information carefully.

The Company disclaims any obligation to update, disclose information on trends or guidance, and should we provide any updates after today, they will be made only by broad dissemination, such as press releases, or in our filings with the SEC.

We plan to release fiscal 2009 first quarter earnings and same restaurant sales for fiscal August, September and October, on Monday, November 24th, 2008 before the market opens.

On the call with me this morning are CBRL's Chairman, President and CEO, Mike Woodhouse, CBRL's interim CFO and General Counsel, Forrest Shoaf, and Cracker Barrel's Senior Vice President of Finance, Doug Couvillion.

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

We will then respond to your questions.

With that I will turn the call over to Mike.

Mike.

Thanks, Diana.

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

Our 39th year of operation was one of the toughest ever faced by the restaurant industry.

Consumer confidence fell to 16-year lows, as a result of high gasoline price, rising food costs at the grocery store, falling home values, and the shrinking job market.

So no one is surprised people responded by cutting back on the number of times they dined out.

The good news is that Cracker Barrel Old Country Store remains the preferred choice for many, a space where multi-generation families can gather.

It is also one of the few places where travelers and locals alike can find consistently great tasting country cooking.

By providing honest value, which we define as high quality food with ample portions at a fair price, which incidentally means that we have not reduced quality or portion sizes in response to current cost pressures, we outperformed many in the casual dining industry, as measured by comparable store sales published by KNAPP-TRACK.

With an average check of $8.59, we continue to offer a great value without discounting or coupons.

The impact of commodity market changes on our the cost of goods, especially the effects of heightened global demand for corn and other grains, was a 6.6% increase in food product prices in the fourth quarter, and a 6% increase for the year as a whole.

While we were more efficient in the use of labor hours, the cost of utilities and supplies continue to increase.

It has always been our goal to offset margin pressures from higher costs with selective price increases, our goal in 2008 was to use pricing to offset the dollar impact of commodity and labor cost increases, and we achieved that goal for both the fourth quarter and for the full year.

In the retail business we carry more low margin domestically sourced prices, and we use more markdowns, which along with surcharges on freight also increased our costs.

Despite the pressure on profits, we continue to generate strong cash flows, net cash from operating activities was $124.5 million, which funded an $87.8 million of capital expenditures.

We also returned capital to shareholders by paying a dividend of $0.68 per share, and repurchased $52 million of stock outstanding, retiring approximately 7% of the total stock outstanding at the beginning of the fiscal year.

Our brand is as relevant today as it was in 1969, when we opened our first store.

It is all about the experience including a strong emotional attachment to the Cracker Barrel brand, and winning the best Family Dining Chain Award from Restaurants and Institutions Magazine for the 18th consecutive year, helped to prove the point about the power of our brand.

We also know that loyalty can't be taken for granted.

We want our guests to receive a great Cracker Barrel experience each and every time.

It takes great people to make that happen everyday.

We believe we have a unique advantage in attracting and retaining top caliber employees with our wages, benefits, and training programs.

We continue to make good progress in reducing turnover in fiscal 2008, and we will again make that a focus in fiscal 2009.

The Rising Star Program we introduced in 2007 has helped reduce hourly employee turnover to below 100%, which is a remarkable number in the full service restaurant industry.

Our management turnover is below 20%.

Another measure of our focus on refining job responsibilities, in order to provide our guests with the absolutely best dining experience.

Lower employee turnover begins a positive chain reaction that results in higher guest satisfaction, increased productivity throughout the store, and lower costs of training and hiring.

Our restaurant initiatives continue to focus on improving the speed of service and improving margins.

We found that when guests wait less than 15 minutes for our food, they are much more likely to return and recommend our restaurant to others.

Our seat-to-eat initiative includes process simplification, and new types of equipment, and a new kitchen and service configurations, we are currently testing this package in three districts.

Assuming success in this expanded test, we will start the roll-out across the system in the second half of fiscal 2009.

Another way to increase speed of service is to simplify the menu.

We are testing another version of Best of the Barrel Menu currently.

This menu has several new products added to attract back the guests who had their favorite item removed in the original Best of the Barrel test.

We have added three fireside country breakfast skillets, ham and cheese, smoked sausage, and vegetable.

We also brought back the popular Lemon Pepper Trout, that comes on both a country dinner plate and a Fancy Fixings dinner.

We are testing this version of our Best of the Barrel menu in an expanded group of stores right now during the first quarter, and will evaluate the results before the end of the second quarter, with a planned roll-out in the third quarter.

Separately in fiscal 2008 we successfully completed the elimination of artificial trans fats from our food, without in any way affecting the quality or the taste.

To build up profitability we continued our focus on our outlier stores.

The stores with the greatest opportunities for financial improvement.

We developed tools and management processes, to improve margins by focusing on food waste, labor productivity, and supply and maintenance costs.

By focusing efforts on these stores we added $4 million of profit to fiscal 2008.

In 2009 we are making these analytical tools available to all of our stores, and we are adding utilities to the focus.

Next I want to talk about the progress we are making in our retail business.

In an extremely difficult retail environment, our comp store sales were up 0.8% in the fourth quarter.

This was an especially positive performance, because Cracker Barrel retail shops are not typically destination shopping places, and restaurant traffic slowed as consumers purchasing power declined in the fourth quarter.

We are seeing these positive results as the implementation of our new retail strategy, which we developed over the past year is kicking in.

In fiscal 2008, we introduced floor set location optimization into our retail business, which integrates all parts of the merchandising cycle.

In simpler terms this is part of our effort to generate higher sales dollars and profits from every square foot of retail space.

Also, we are always looking for new themes to link with retail offerings with our authentic restaurant experience.

For example, this year's Family Road Trip theme tied seasonal restaurant and retail items to a national summer promotion.

Each theme, each retail theme includes related impulse items, such as nostalgic candies or toys.

The goal is to set up, is to create a firm shopping experience, our customers call it 'The Thrill of the Hunt', discovering what is new in the retail store throughout the year.

We have also introduced iconic packaging to many of our retail products that reinforce Cracker Barrel's Old Country Store roots.

There is a lot more involved in retail than merely selling products.

We now measure the contribution of each product to our success, by evaluating product selection and customer feedback, as well as sourcing and supply chain costs.

One example is womens apparel, where we now have a much better understanding of customer preferences, and how to best source that product across the various locations, and when to reorder.

We have adopted a similar process to improve our pricing.

Other actions that are enabling us to drive improvements in the sales and profitability of the retail business, include enhanced point of sale capabilities, additional training of our retail staff, and more detailed market research.

Looking at specific trends toys, especially the Webkinz line continued to perform well in the quarter.

Home products also saw a substantial improvement driven by the quilts and the celebrations in the Family Forever themes, that tied in with the Greatest Family Road Trip this summer.

Apparel continued to be weak during the summer.

To drive traffic into our restaurant retail stores, we need to build awareness outside the four walls, billboards continue to be our primary form of advertising, as they quickly show the brand promise and provide directions to the next location.

We are testing new billboard designs around middle Tennessee right now, and we are looking to refresh the system later in fiscal 2009.

The new designs communicate our core brand messages, like breakfast all day, eat, shop, relax, and half restaurant, half store, all country.

At the end of fiscal 2008, we completed our TV advertising test, which was designed to stimulation awareness of Cracker Barrel as a local place to eat, as well as a much loved relaxing place for travelers.

While we saw meaningful increases in traffic and retail, enough to more than break even in the test markets, our overall geographic footprint limits the number of markets in which we can profitably run TV.

So we are in the final stages of running a combination of TV and radio advertising in fiscal 2009.

In some markets we will be featuring the new product offerings that I discussed earlier in the advertising.

We introduced our first national promotion in May 2008, the Greatest Family Road Trip.

We gave away over 30 million game pieces to our guests, with a chance to win free meals, GPS navigational systems, and the Grand Prize.

Betty Brown who eats breakfast every Sunday morning at our Princeton West Virginia store, chose the $250,000 cash alternative as the Grand Prize winner.

In addition, guests won 38,000 Cracker Barrel gift cards, and 52 navigational systems during the promotion.

It is always difficult to determine the full benefit of a promotion, especially when it is system wide.

We believe it was creative, it was certainly new, and it was fun for our employees and guests.

In fact in the months of June and July, despite some predictions that our guest traffic would be disproportionately affected by lower summer travel, we continued to outperform our industry in guest traffic.

Another program helping to bring more people to our doors is the Cracker Barrel gift card.

By doubling the number of major retailers who carry our gift cards in fiscal 2008, we saw gift card sales increase 16% over the previous year.

Country music goes hand in hand with down home country cooking.

We have continued to expand this important type of Cracker Barrel brand, with the sales of CDs available exclusively through our stores, offerings in the fourth quarter included music by Aaron Tippin and Ricky Skaggs.

The latest release by Kenny Rogers is now available exclusively through our Cracker Barrel Old Country Stores.

With that, I will turn the call over to Doug Couvillion for his detailed financial review of the quarter.

Thank you, Mike.

Thanks to our listeners on the conference call and webcast for your interest and participation.

Lets review in more detail the results of the fourth quarter of fiscal 2008.

First I would like to remind you that the prior year's quarter included an additional week, which contributed $46.3 million of revenue, $7.8 million of operating income, 60 basis points of favorable margin effect, and $4.4 million of after-tax income from continuing operations, or $0.17 of income per diluted share.

For the fourth quarter of 2008 we reported diluted income per share from continuing operations of $0.91, compared with $1.15 a year ago.

Excluding the effect of last year's additional week, diluted earnings per share is down 7%.

After-tax income from continuing operations of $20.6 million in the fourth quarter of fiscal 2008, compared with $28.2 million in the fourth quarter of last year, reflected lower operating income in the fourth quarter of fiscal 2008, and the non-recurrence of $4.4 million from the additional week in fiscal 2007, partially offset by a lower effective tax rate in fiscal 2008.

Revenue from continuing operations in our fiscal fourth quarter declined 4.8% to $601.8 million.

Excluding the extra week in the 2007 quarter, revenues increased 2.7%.

We opened one new Cracker Barrel unit in the quarter, bringing our total for the year to 17.

Although we continue to outpace KNAPP-TRACK comparable store sales in the quarter, comparable store restaurant sales declined 0.8%.

Our average check was 3.7%, on a menu price increase of approximately 3.6%.

As it did throughout the year, our average menu pricing in the fourth quarter was sufficient to more than offset the impact of food and labor inflation.

We continue to believe it is important to maintain the guest experience, which includes providing good food at a great value, and not reducing portions or the quality of our food, as a way to offset inflationary pressures.

Cracker Barrel comparable store retail sales were up 0.8% in the fourth quarter of fiscal 2008.

About 32% of our guests make a retail purchase, and the average retail ticket is up 10% over last year.

We were encouraged by these positive results, as they were achieved in face of guest traffic declines, and the overall lower level of consumer confidence.

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

Home products also performed well with a broad offering of quilts, gifts and lighting, as well as the celebration and Family Forever themed products, tied to the summer Greatest Family Road Trip promotion.

Food, especially everyday candies, and items tied to the summer road trip theme, also had sales gains in the quarter.

Sales of our apparel continued to be weak and declined in the quarter, similar to reports by other apparel retailers.

Operating income from continuing operations of $41.6 million, was 6.9% of revenues in the fourth quarter of fiscal 2008, compared with $57.6 million, and 9.1% of revenues in the fourth quarter of fiscal 2007.

The additional week in the fourth quarter of fiscal 2007 contributed an estimated $7.8 million of operating income for the quarter, or 60 basis points of operating income margin on a revenue adjusted basis.

This year's fourth quarter operating income margin was negatively affected by higher food and retail costs, increased operating expenses, including utilities, advertising and supplies, and higher general and administrative expense.

The rising cost of fuel and energy prices have taken a toll on margins.

With estimate that there were at least 50 basis points of unfavorable margin related to diesel fuel surcharges and higher utilities.

Cost of goods sold was higher than last year's fourth quarter by 80 basis points, and reduced our gross profit accordingly.

There was no effect on cost of good sold comparisons, due to the extra week last year.

Food related commodity inflation was up 6.6% in the quarter, with the largest inflation percentage increases coming from oils and eggs, which account for about 9% of our food purchases.

Beef and pork costs were below last year's levels.

Retail cost of goods were higher this quarter because of increased retail shrinkage, freight and markdowns, offset by higher initial margin.

Diesel fuel increased in the quarter to the highest levels during our fiscal year, and increased our freight costs and cost of goods sold for both restaurant and retail.

Labor and related expenses were approximately 40 basis points lower in the fourth quarter of last year, or 50 basis points lower excluding the extra week last year.

These favorable labor results were primarily due to lower restaurant hourly labor costs, and lower Workers' Compensation expense.

Hourly wage inflation was 2% this year, compared to 4.6% in the prior year.

Additionally the benefits of lower hourly turnover, which is down 17 percentage points from last year is increasing our ability to deliver our guests the best experience possible, and reducing trend related costs at the store level.

Other store operating expenses increased to 17.9% of sales, up 120 basis points from last year, or up 80 basis points excluding the extra week last year.

This year utilities and advertising expenses were higher in the quarter, partially offset by lower maintenance and general insurance expenses.

We experienced utility inflation of about 10% this past quarter, with electricity contributing the most from a dollar perspective, and natural gas the highest percentage of inflation at approximately 26%.

We incurred higher advertising expense in the fourth quarter because of our first national promotion, the Greatest Family Road Trip, and the completion of our television testing.

We believe our first national promotion was a success, and we were pleased to award the $250,000 Grand Prize to one of our regular guests in West Virginia.

As Mike mentioned our TV testing yielded better than breakeven test results.

During fiscal 2008, we developed an outlier program to focus on and control costs in stores, that had higher costs than the system as a whole.

In the first year of this program, we made progress by controlling maintenance and supply costs this year.

In fiscal 2009, utilities will be added to the outlier program.

General and administrative expense were 60 basis points higher than the fourth quarter of 2007.

Without the extra week, G&A was 50 basis points higher.

The increase is due to higher bonus and incentive compensation expense than last year, offset by lower legal fees.

The prior year also included the favorable effect of the gain on the sale of the Logan's property.

Interest expense in the fourth quarter of fiscal 2008 of $13.9 million, was $2 million less than last year's fourth quarter.

The decrease is due to the extra week in the prior year, lower non-use fees this year, and fees associated with the redemption of [lines] in last year's fourth quarter, and lower outstanding debts this year, offset by slightly higher borrowing rates.

Our fourth quarter income tax rate from continuing operations was 25.7%, compared with 34.2% in the fourth quarter of fiscal 2007.

The lower tax rate was primarily due to expiring statutes of limitations, and lower effective state tax rates recorded in accordance with FIN 48, which the Company adopted this fiscal year.

For fiscal 2008, cash flow from operating activities was $125 million, compared to $97 million in fiscal '07.

The increase reflects the lower net income from continuing operations in fiscal 2008, and the non-recurrence of taxes and expenses related to disposing of Logan's Roadhouse operations, and redeeming our previously outstanding senior notes in fiscal 2007.

Cash provided by operating activities exceeded the Company's capital expenditure plans.

Cash provided by operating activities exceeded the Company's capital expenditure needs, which for 2008 were $88 million.

Capital expenditures ran slightly ahead of guidance, because of timing on some of the units we will open in the future.

We paid dividends of $0.68 per share in fiscal 2008, which was $0.12 more than we paid in fiscal 2007.

However the total cash outlay was only slightly higher because of the lower share count.

The fourth quarter was a challenging quarter for us, and the restaurant industry as a whole.

We saw guest traffic decline, and profit margin pressures continue.

However, as we complete the fiscal 2008 year, we were encouraged with the progress we have made in a number of areas.

Excluding the 53rd week in fiscal 2007, revenues in fiscal 2008 were up 3.4%, on positive comparable store sales increases of 0.5%, and the opening of 17 new Cracker Barrel Old Country Store units.

Our guest traffic has outpaced the industry, as measured by KNAPP-TRACK for the entire fiscal year, and retail sales while slightly negative for the year finished positive for the quarter.

We have made progress in controlling food waste, gave reduced hourly and management turnover, to some of the lowest levels in many years, and in the second half of the year, began to deliver on margin improvement initiatives.

In our year-to-date results we also saw the benefit of our recapitalization efforts, and leveraged the 9% decline in income from continuing operations, into a 17% increase in diluted income per share.

We also increased total dividends per share 21% over fiscal 2007.

This completes my financial review for fiscal 2008.

Before I review the guidance for fiscal 2009, I would like to provide you some information about the various weather events that have affected our system.

As of Monday, September 15th, sales of approximately 50 Cracker Barrel stores have been affected by tropical storms, hurricanes, and flooding in the quarter to date.

This equated to approximately 80 sales days.

The stores impacted by Hurricane Gustav have reopened for business.

We currently have 12 stores closed, and we presently expect these stores to reopen soon.

Approximately five of our stores incurred minor property damage.

We will provide more detail on the lost sales impact of these stores, when we report our first quarter on November 24th.

Now I would like to review with you the guidance for fiscal 2009 included in today's press release.

We presently do not expect immediate relief from the external cost pressures.

We will continue to focus on growing restaurant traffic and retail sales, and controlling our costs to improve shareholder returns.

Based on current trends we presently expect fiscal 2009 total revenue to increase approximately 4.5 to 5.5%, over the $2.385 billion of total revenue from continuing operations in fiscal 2008.

This increase includes the opening of 12 new Cracker Barrel units during fiscal 2009.

The comparable store sales increases of 2 to 3% per restaurant, including approximately 3.5% of menu pricing, and increases of 2.5 to 3% for retail.

Additionally during the first quarter of fiscal 2009, we took a price increase of 1.8%, in the last similar price increase.

We presently expect operating margins to be in the 6 to 6.3% range, which compares with an operating margin of 6.3% in fiscal 2008.

Commodity cost inflation for fiscal 2009 is presently projected to be in the 4 to 5% range, although commodity prices have come off the peaks of fiscal 2008, costs are still above average pricing in 2008.

Net interest expense is presently projected to be approximately 57 to $58 million, and depreciation for the year is estimated at approximately $62 million in fiscal 2009.

We presently project that the tax rate for fiscal 2008 will be in the range of 30 to 31%, with the third and fourth quarters being lower than the full year rate.

The diluted weighted average share count is presently expected to be 22.5 to 23 million shares, reflecting the authority to repurchase up to $65 million of outstanding shares, which was announced on August 1st.

Income from continuing operations per diluted share is presently projected to be in a range of $2.80 to $3.00 for fiscal 2009.

Our capital expenditure plans for fiscal 2009 presently include 12 new stores, and expenditures of approximately 95 to $98 million.

This estimate includes spending on fiscal '09 units, as well as various other in-store and corporate office initiatives.

We presently expect cash flow from operations to exceed our capital expenditure and dividend payment outlays once again in fiscal 2009.

With that review on our guidance, and our review of fiscal 2008, I would like to turn the call back over to Mike for his closing remarks.

Thanks, Doug.

I would just like to comment on a couple of items in our guidance for fiscal 2009.

As we disclosed today, we are planning to open 12 new stores this year.

New unit performance has been an area of focus for us in the last couple of years.

On the positive side, we continue to see stores opening at record breaking sales levels, and we have made progress in managing our post-opening costs, especially labor.

We can do better in limiting the fall-off from those honeymoon sales levels, and in reaching an ongoing level of profitability faster.

These are operational issues, so we have made some adjustments to the new unit opening process, and at the same time, we reduced the unit growth rate this year, to give us time to improve our execution.

On the sales guidance, we are looking for stronger sales in the second half of the year, because our invasion initiatives will begin to roll out in the second half, and then have a positive impact on sales.

In closing, as we look forward to our 40th Anniversary, we recognize that we face significant challenges this year.

Our game plan is to continue to build on the brand strength, and execute our operational initiatives, to generate higher restaurant and retail sales, achieving higher profit margins on each sales dollar, will largely depend on our ability to manage costs, and we are confident that we can do that.

Most important, we cannot lose the energy and the excitement of our 65,000 dedicated employees who serve our guests everyday.

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

(OPERATOR INSTRUCTIONS).

We will go first to Larry Miller of RBC.

Yes.

Thanks very much.

I have a question on 2 to 3 comp store sales outlook.

It implies flat traffic, and it has actually been a while since really I look back it has been since 2005, that you guys have had 2% comps and flat traffic.

I know you have had a lot of initiatives over the last couple of years, but I have got to think that investors coming off of this call are going to say, really what is different that you have in '09, than you have had over the last several years?

I know Mike you went through a lot of initiatives and really focused on that innovation for the second half of the year.

Can you help us get more comfortable that that is a realistic objective, and I do have one more question as well.

Okay.

Well, several pieces to that.

I think first of all in terms of the numbers we are guiding to 2 to 3%.

We are running about 3.5% in price.

We don't talk about our future price increases, but I think it is reasonable to assume that we have been doing that for a couple of years, we will continue.

We are not really looking at positive traffic.

We are look at negative, unfortunately traffic to continue to be negative.

We have some things going on this year that are different.

We have the Best of the Barrel menu.

We have been talking, and I know some folks have said we may have been talking too much and too long, but we have been talking about our initiatives for a while.

This is the year, as I said in my remarks, we are going to be rolling out two important initiatives, the Best of the Barrel menu in the second half, and also starting to roll out Seat To Eat.

Both of those are aimed at improving speed and therefore improving sales and traffic.

We are very excited about our skillets that we have out there right now.

These I think the beginning of our refocusing on new products to drive sales and traffic.

We have been doing a lot of things in product development in the last 18 months around first of all the trans fats, which was just a necessary thing to do, and also around working on the process simplification that we have talked about, which is actually going to help us in the future to speed up the kitchen.

We now have our whole product development resources focused on new product development, creating excitement.

Skillets are doing really well in tests.

We are now in market tests, and we are seeing in the market tests, we are seeing the same kind of strong numbers that we saw in our ops tests with the skillets, and again without rebuilding our plans, I expect other new products coming during the year, which will also help drive sales.

And then on the advertising front as I said in my remarks, we saw good results from the TV.

Unfortunately just because of our spread geographically, it is tough for us to be efficient, and actually be profitable using TV in a whole bunch of markets, where we think a combination of radio which was good for us back in the 2000 to 2003 and '04 year, a combination of those are also going to support driving sales.

With the combination of those things there is a lot more going on in 2009 than we have had going on in the last several years.

Okay.

That is very fair.

And just a follow-up on that TV that is local spot, it wasn't efficient for you to do any national cable?

Well, my point of view on TV is you get what you pay for.

Basically, you are buying impressions, and you are buying reach and frequency.

National cable can get you very targeted, but a dollar is a dollar and TV is essentially a commodity.

So if we took the same dollars and went over national cable, I think our weight levels would be too low to have any real impact.

That is very fair.

Just on the commodities you mentioned 60% contracted, Florida 5% inflation I believe.

What can you give us some color on what is contracted at what rate in that 60%?

Thank you.

Well, I can give you a sense.

Last year we were 65%.

So we are a little bit lower than we were last year.

One open item is chicken, we are rolling off a contract at the end of December.

Right now we are comfortable that is not likely to be a negative, certainly if prices of corn stay where they are relative to recent history, we think we should be in good shape with the new chicken contract.

On the negative, and this applies to the industry, and it is an interesting phenomenon, because I haven't heard anybody talk about it, but potato prices are up very substantially, or forecast to be up in the new crop year which starting right about now, potato contracts typically are negotiated right in this time period every year.

We are seeing some substantial increases in the prices we have been quoted.

I assume that is going to be apply to everyone else.

But generally, we would like to see lower commodity inflation, but as with last year we feel good about where we are, and we feel good about our projection on commodities.

Just a quick follow up, is there room in the 4 to 5% for some upward inflation, in either a chicken contract or potatoes, and what kind of rate of inflation are you guys seeing on the potato contract?

We don't have a contract, so I can tell you the numbers are hair-raising, I guess would be the best way to describe it, but I won't know until we have the contract in place.

As I said we are not the only, everybody has to have a contract for potatoes, but everything we know, including the potato prices, and our best guess of chicken are in our guidance numbers.

Okay.

Thank you very much.

Thank you.

All right.

Our next question comes from Joe Buckley, Banc of America Securities.

It is actually [Steven Borello] for Joe.

Of the 12 new openings, how were those divided among new and mature markets, and I guess on Interstate, off Interstate?

Well, it might take a second to get that.

I have that information, but I don't have it off the top of my head.

So let me pull it up here.

Eight off, 12 on.

In terms of.

Eight off, four on.

And then eight are in core markets, and four are in developmental markets.

Thanks.

Thank you.

All right.

We will go next to Brad Ludington of Keybanc Capital Markets.

Good morning.

Thank you.

The first question I wanted to ask you about the debt balance.

You said you should pay for all of the share repurchases and dividends through cash flow from operations.

Should we assume that debt balance stays kind of level, or is there a plan to pay that down?

There is a mandatory repayment of, Doug, what is -- ?

8.7 million.

8.7 million.

We will obvious pay that.

That is all we plan to pay down.

Okay.

And then talking about the closed days from the storms you said 80 days.

Is that 80 days thus far, or 80 days expected in total?

That is just through yesterday's business.

We have got about ten to 12 store that have not opened yet, and it will be a few more days for those in the next week or so, depending on utilities and things of that nature.

Okay.

And is that all, does all of that 80 days fall into the first quarter?

Yes.

Yes.

Okay.

And just, last quick question on timing of the 12 openings should it be spread out pretty evenly throughout the year?

More front end loaded.

Okay.

All right.

Thank you very much.

Can I just make a point on the store closings?

We did some mental math this morning.

I think in the quarter there was, we expect about 0.2 of 1% of same store sales.

So it is not a big number, but it is an important number.

All right.

We will take our next question from Steven Rees of JPMorgan.

Hi.

Thank you.

My question was on the CapEx guidance, the 95 to 98 this year, up from 88 last year despite doing fewer units.

So I guess just comment on that, and if it is just a case of units in '09 getting pushed back, or sort of how you think about longer term unit growth?

About $16 million of it is related to the roll-out of the initiatives, the Seat to Eat requires some amount of capital per store.

So that is the big piece of the new capital that's going in.

Okay.

And then maintenance is still in that 25 million level?

Yes, that is about right.

Yes.

Then just on the slow down, it sounds like it is front end loaded, so it sounds like you have cut what you can.

Would you have cut further if you could have?

No, we think this is a good number.

Because there is some momentum that has to be slowed down, and then when we rebuild, we have to rebuild the momentum, but our focus is absolutely, we do not have disastrous new store openings, we just think we can do better and we put a lot of focus on what is it going to take to just go to the next level on these new store openings, and we figured that just cutting back somewhat would just give us a little breathing room to do really well.

That is all that is going on there.

Okay.

And then you had mentioned some analytical tools which allowed $4 million of savings in 2008, and you mentioned that you are going to roll this out to the entire store base in 2009.

Can you just talk about what those tools were, and how many stores they were in, and--?

They were in a little over 100 stores in '08, but of course those were the worst performers.

These are basically looking at outliers, where on any given area that we are looking at the costs are substantially different from where we would expect an average store to be.

It is not rocket science, but something we haven't really done this way before.

It would be dangerous to extrapolate the $4 million to the whole system.

We are going get savings, but it is not going to be in direct proportion.

Because those were the worst stores that we applied this to last year.

That is helpful.

Finally just on the retail business, it sounds like a lot of that business is being driven by average check gains.

You said it was up 10%.

You were talking about formerly doing lower price points to drive transactions, how do you think about transactions versus average check growth in retail, and what are the plans for '09?

We have become smarter, several years ago we were looking at low price points and we ended up with low prices and high prices, but nothing in the middle.

So we are really looking pretty hard at a range of price points, we are always going to have the low price for candies, but even there we are finding that we have been selling some of our candies at prices that have not been changed for 10 or 15 years, or even as far back as anybody could remember, which didn't make a lot of sense.

Being realistic about pricing and still staying with values in core, having a good range of prices is really important.

We are actually converting, our conversion rate is going up negative traffic and higher retail sales.

So we are pretty comfortable with where we are going with retail.

The other thing that I don't think we have talked about a lot, is just our new point of sale capabilities, we can do BOGOs and other kinds of transactions that involve multiple purchases, in a way that we never could before, so we stimulate the volume by driving up the volume on a different purchase.

Okay.

Great.

Thank you very much.

Thank you.

Our next question comes from Chris O'Cull of Suntrust.

Good morning everyone.

Good morning.

Mike, labor costs were better than we were expecting for the quarter, especially in light of the trends we have seen in the past couple of quarters.

Could you guys elaborate on the improvement in labor costs for the quarter, and maybe whether it is sustainable?

It is primarily around managing labor hours, and it is also around as we mentioned, with getting our turnover down, especially on the front end, our recruiting and training costs are coming down.

So should we--?

Yes, that is sustainable, because what we have done the last 18 months to improve turnover is something we can continue doing.

Okay.

Great.

Could you give us an update on the timing of the recruiting for the permanent CFO and Marketing Officer?

On the CFO we have some candidates which are still not at the final point, and as soon as we are there, we will make an announcement.

We have hired since we last quarter and we have hired a VP of brand and menu strategy, taking over those particular responsibilities, so we have two strong VPs of Marketing now, covering the range of marketing, and while a CMO is a great idea, we are not waiting for that to happen.

We are forging ahead with the things we are going to do this year, and I think we are going to make some pretty good progress on the marketing front, especially on the menu strategy front.

Okay.

Great.

One last question, Doug did the change in the Moody's rating effect your spread that you pay on the borrowing?

No, it did not.

Okay.

Great.

Thanks, guys.

Thanks.

We will go next to Bob Derrington of Morgan Keegan.

When we look at CapEx, I think you mentioned 16 million was set aside for the Seat to Eat program, is some of that back of the house equipment and some dining room?

Can you give us some color there?

It is back of the house.

We are putting in new holder stations, hot holds, so that we can hold product, for instance, one of the things we can now do is to grill bacon ahead of time, and hold it for a period of time, which at heavy breakfast periods, there is no question that we are going to keep selling bacon for the next 2 or 3 hours, so we can improve the order speed by doing that.

We have changed the way we hold biscuits.

We think it will improve the quality substantially.

We have made some adjustments on the grill.

It is all around kitchen equipment.

If you can give us a little bit of color on your philosophy around some of the new menu additions that we are looking at, obviously we have seen the skillets out in the marketplace, but how do you look at when you try to position those, as far as the retail price, the potential cost of sales, et cetera?

Well, that is a good question.

That is really important in terms of you know we talk about our value, and that is really critical to our success now and going forward.

Historically we had a tendency to design a product, and then figure out what we had to charge for it.

Now we are going in a different direction which is to look at price points where we want to sell a product, and designing the product to get to the price point.

The breakfast skillets are at $6.99 which for the offering we think is a very, very great value, but it is also something that improves our margin within the breakfast mix.

We will be taking that point of view as we look at our menu additions going forward.

Really attractive price point, great value at that price point, and at the same time protecting our margin, because one of the issues we have is we are not really at our peak times, we are usually pretty full.

So it doesn't make any sense for us to offer products with a lower margin for the seats that are empty.

We are trying to improve the margin per hour per seat, that is what this is all about.

It sounds from your remarks, that most of these programs are really kind of geared towards the second half of the fiscal year, are we going to see much in the way of new product news any time in the first half?

We have the skillets out there, and I am sure there will be more, and I am sure you will find that as you usually do, Bob, by checking out all of our stores.

I really don't want to talk about specifics, because we would rather do what we did with skillets, which is test them, have success, and then talk about them.

There will be more to come.

Okay.

Last question, typically Mike, the brand has performed pretty well relative to the casual dining index.

Is that a reasonable expectation that trend to continue, recent times in this new quarter and going forward?

Going forward, you will have to ask the casual diners that question, we know what we are going to do but I am not certain what they are going to do, but I think that again the value of the price point is something that I think we really offer something that is not necessarily everybody else can do, and we are certainly not going to go chasing higher check average to solve our problems.

Okay, great.

Thank you.

Thank you.

We will go next to Bryan Elliott of Raymond James Investment.

This is Brian Vaccaro, actually in for Bryan Elliott.

I was trying to see if you could provide an update as we seen in August, obviously your comps were outperforming the industry with Knapp-Track in July, I wanted to see if that outperformance may have continued in August, or what you are seeing in the latest numbers?

Thank you.

We would love to talk about that, but our policy now is that we are going to report on a quarterly basis with our sales, and then we will report the individual months when we get there, but sorry I can't comment right now.

All right.

Fair enough.

Thank you.

Thank you.

We will go next to Steve Anderson of MKM Partners.

Good morning.

Two quick questions, I just wanted to ask about dairy prices, what kind of guidance you have for that?

And second of all I want to ask if you had any exposure at all to loans from Lehman Brothers?

Thank you.

Second we have nothing to do with Lehman Brothers.

On dairy, we are looking for dairy to be relatively flat to maybe down a little bit.

Okay.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

Now we will go to Chris Blackman of Imperial Capital.

Chris, your line is open.

I am sorry.

Can you hear me?

Yes, sir.

Can you hear me?

Yes, we can.

I apologize, can you tell how many stores you closed in '08, and what you might expect in '09?

We didn't close any in '08, and have no plans to close anything in '09.

In the 12 stores you are opening, eight of those are in existing markets, and four are development markets?

Correct.

None of those are relocations I would assume?

No.

How many stores do you currently have under construction?

Hang on just a second.

At the end of May, it was six for '09?

We are got about eight under construction currently.

So eight of your 12 are under construction.

Have you opened any so far in the new year?

Not yet.

No.

All right.

What, I don't know if I missed it or not, but can you tell me what percent of your commodities you are contracted for the next two quarters, or first half of the year, or maybe through the third quarter?

We have 60% for the year at this point.

60%.

Which is a little below what you would--?

65 last year, but we are not uncomfortable with the difference, there are reasons for that.

Just a couple more if I may.

Your Christmas inventory, could you expand a little bit on the retail side, how you feel about your Christmas inventory compared to last year?

We have a total.

We offer in our Christmas themes, if you go into a store, you will see a tree and a theme around that.

We are going to have seven themes this year, same as last year, we have some new ornaments which we think are going to be pretty good sellers.

And we feel good about Christmas at this point.

Okay.

And then the change in Moody's, I know you were below the leverage ratio.

Did you have a discussion with them after that?

I know it caught you by surprise, the rating change.

They use a different methodology to come up with their numbers, it is proprietary I guess.

They don't explain it, and we couldn't get to their numbers.

I did have conversation with them, and they just said they have their methodology, and they just publish what they publish.

I would also point out that S&P affirmed their rate.

Okay.

What would trigger Moody's downgrade again?

I mean.

You would have to ask them.

Yes.

You would have ask them.

They have a very specific view of the consumer economy over the near to medium term, which captures us, and a whole bunch of other folks.

Yes.

Importantly as you discussed I guess the previous question, no change in rates.

And finally of the 12 new stores you are opening, will you own real estate on any of those stores, and if so how many?

Four of those we will own.

Four.

Okay.

Thank you very much.

Thank you.

All right.

We will go next to Joe Buckley of Banc of America Securities.

Just a follow up.

With the gas peaking during the quarter, and I guess coming down the last two months, did you see I guess anything encouraging maybe from traffic, or just interesting?

We don't have any ability to measure miles traveled on a current basis We can just use the DOT numbers that come out behind.

Obviously with gas prices coming down that is going to help everyone in terms of a little more disposable income.

I don't know that the consumer is going to change their behavior very much in the short term.

Right now I am not certain of your base, but around here gas prices are way up.

Great.

Thanks.

Thank you.

All right.

We will go next to [David Schminkler of Hinkland].

Hi there.

I suppose I could back into it, but can you save me the steps, and tell me how much is the all-in capital cost to develop a new store?

Hello.

We are here.

It is about 4, it is about 4.2.

That is about right.

4.1, 4.2 all-in, including land.

Okay.

And then can you tell me what the EBITDA was for fiscal '08, as calculated under the Company's credit agreement?

As calculated under the credit agreement?

Yes, the covenant.

We will have are to get back to you on that.

Fair enough.

Thanks.

All right.

We will go now to Larry Miller of RBC.

Thanks guys, a couple of quick follow-ups.

With gas prices falling, are you having discussions with our distributors about not taking the fuel surcharges that they have been pushing through to you guys?

Well, the fuel surcharges are directly tied to the prices they are paying for their diesel.

And we can alter those numbers, so it is just an automatic contractual fact they will move down as prices move down.

Okay.

Great.

In terms of the development you are talking about the 12 stores, are there any in any new strip centers that you are, and I don't know what the percentages is of strip centers and free standers that you are planning for next year, but where there might be a potential for delayed delivery because of the leasing up of that facility?

I read The Wall Street Journal as well last week.

I am not aware of any at this point, it is something that we really focus on, because we felt for the last two or three years just by looking, and traveling around looking for new sites, there was an overbuild situation building up.

So we have been very careful about that.

Okay.

Great.

Sounds like.

So in terms of mix it sounds like mostly free standers?

Is that right?

When you say free stander.

They are all free standing buildings.

Is your question are they part of a development?

Yes, exactly.

They are a mix, but we are pretty careful about what is signed up, before we would go into a major development.

Okay.

That is helpful.

Thanks.

And then you have given us great cost of sales but we don't have potato cost of sales, it is lower than 7%, because that would be the lowest number you have offered on anything?

Do you have a number for that?

On potatoes, I have obviously scared on the potato story here.

I don't have that number off the top of my head.

It is meaningful in terms of the increase of potatoes actually has no effect on the total.

Let me give you a number I do have, it is between 2 and 3% of our total spend on food products.

That is great.

Thank you very much.

Thank you.

We have time for one more question, Howard Penney of Research.

Thanks very much.

If the new, if the paradigm that we have seen for the last couple of years of lower traffic and lower margins continue for the next couple of years, can you just sort of from a 50,000 give me your view of capital allocation?

That is a hypothetical.

Our plans are not to expect that, and I really don't want to get into it, because we will deal with it as we see the trends emerge if they are not what we expect.

All right.

We have no further questions at this time.

Okay.

Well thanks everybody for joining us this morning.

It is going to be a challenging year, but the good news is that the things we have been talking about, are going to be moving beyond the testing phase.

We are going to see some real action this year, and we will be back in November to give you an update.

Thanks.

Thank you.

Again, ladies and gentlemen this does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.