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Operator
Good day, everyone and welcome to the CBRL Group first quarter 2009 conference call.
Today's call is being recorded and will be available for replay today, from 2:00 p.m.
Eastern through December 8, at 11:59 p.m.
Eastern by dialing 719-457-0820 and entering pass code 4425923.
And now at this time for opening remarks and introductions, I would like to turn the conference over to the Senior Vice President of Corporate Affairs, Ms.
Diana Wynne.
Please go ahead.
- SVP, Corp. Affairs
Thank you.
Welcome to our first quarter 2009 conference call and webcast this morning.
Our press release announcing our fiscal 2009 first quarter results and our updated outlook for fiscal 2009 was released before the market opened this morning.
In our press release and during this call statements may be made by management of their beliefs and expectations as to the Company's future operating results.
These are what are known as forward-looking statements which involve risk and uncertainties that in many cases are beyond the control of the Company and may cause actual results to differ materially from management's expectations.
We urge caution to our listeners and readers in considering forward-looking statements or information.
Many of the factors that can affect results are summarized in the cautionary description of risk and uncertainties found at the end of this morning's press release and are described in detail in our annual and quarterly reports that we file with the SEC.
And we urge you to read this information carefully.
We also 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 as required by law and in broadly disseminated disclosures such as this morning's press release and this call.
The Company disclaims any obligation to update disclosed information on trends or guidance and should we provide any updates after today, they will be made only by broad dissemination such as press releases or in our filings with the SEC.
We plan to release fiscal 2009 second quarter earnings and same store restaurant and retail sales for fiscal November, December and January on Tuesday, February 24, 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 then Mike will return to close.
We'll then respond to your questions.
With that, I will turn the call over to Mike Woodhouse.
Mike?
- Chairman, President, CEO
Thanks, Diana.
Good morning, everyone and thanks for joining us this morning.
Nobody would have predicted that in the first quarter of our 40th year of operation we would be facing this exceptionally challenging economic and industry environment.
Under normal circumstances we would be happy to see gas prices fall to below $2 a gallon.
Instead we face growing unemployment and tight credit leaving consumers understandably concerned about spending.
This is affecting everyone as even high end retailers are seeing significant declines in sales.
Given that backdrop we feel that Cracker Barrel Country Store fared reasonably well in the first quarter of fiscal 2009.
However, the prospect of continued uncertainty in the environment has led to fundamental changes in our sales expectations for fiscal 2009.
Working with a range of sales outcomes, we've developed action plans to help mitigate the impact of slower sales, and at the same time strengthen our business model for the longer term.
Our focus continues to be on providing our guests with a pleasing experience that they expect from Cracker Barrel, high quality food with ample portions at a fair price, which means that we've not reduced quality or portion sizes in response to cost pressures.
The restrooms are clean, the retail shop is full of gift items for everyone, toys for kids and food for the road.
Our guest loyalty scores are improving, in overall guest satisfaction, speed of service, and taste of food.
We know that loyalty can't be taken for granted, however and it takes great people to make that happen every day.
I can tell you that our people are focused on making Cracker Barrel a more valuable brand, that isn't just a war cry to combat the economic environments that are consistently getting better, we expect to hold our own in this difficult time but we also expect to be a much stronger operator in the years ahead.
In the restaurant business you can't make much real progress as long as you have high turnover.
That's why we place so much emphasis on this key area and why we continue to make good progress in reducing turnover in fiscal 2009.
The rising star on boarding program for hourly employees continues to work well and our hourly employee turnover is now below 90%, which is remarkable in the restaurant industry.
Our management turnover is the lowest in the history of Cracker Barrel.
These are encouraging trends for us because it's our people who will bring us out stronger on the other side of this recession.
Our guest complaint scores are lower than a year ago and a great indicator that our ongoing efforts to improve the guest experience continue to pay off.
All of this is part of delivering on the brand promise which is one component of our strategic plan for the next five years.
It's a plan we call the next five and it's all about ensuring that we grow restaurant traffic and retail sales and of course creating greater value for our shareholders.
At Cracker Barrel we're developing hyper forming teams, executing what we call one best way, consistently in every store.
In order to evaluate each store's execution of our operating systems, our RVPs and DMs are focusing on weekend execution using the one best way approach.
Supported by the service to create sales program in the retail shops.
We used one best way to roll out the fireside country skillets when they launched on November 3.
We continue with our commitment to maintain the high quality of food and service that sets Cracker Barrel apart.
But that's not enough in these difficult times.
We've also sharpened our focus on cost controls, both at the store level and in G&A spending.
The tools we developed last year including the outlier program and system wide exception reporting are working well in identifying, correcting store by store operating cost issues.
This is one way that we're able to tightly manage labor and food waste while at the same time improving guest satisfaction scores.
These efforts contributed significantly to our ability to minimize the compression in store margins in the first quarter when compared to many others in the industry.
Going forward we've rolled out a new group health plan for hourly employees that provides access to coverage for more of our employees at more affordable prices.
This addresses the two issues our employees told us concerned them, access and affordability and it reduces both employee contributions and our benefits costs and we've also taken actions to keep projected G&A spending for the year flat with last year in dollar terms.
With these and numerous other belt tightening actions we're beginning to be able -- we're pleased to be able to provide the earnings guidance that we have today.
Where despite top line pressures we expect to hold year on year operating margin contraction for the full year between 10 and 50 basis points.
Meanwhile, we're maintaining our focus on structural improvements to the business model.
The labor deployment test is on track and the seat to eat initiative is showing some positive results although more slowly in this environment than we would like.
In October we added lunch dinner skillets to the Best of the Barrel in menu tests following the success of the breakfast skillets.
The breakfast skillets, in fact, were so successful in the test that they've now been rolled out system wide for the current holiday promotion.
Let's move on to the retail business.
In an extremely difficult retail environment our comparable store sales were down 2.3% in the first quarter.
This is good performance for Cracker Barrel because it means that retail sales performed better than restaurant traffic and of course retail purchases at Cracker Barrel are largely impulse and certainly discretionary.
In the first quarter we introduced new candy bins and jewelry stands in the store as well as Cracker Barrel branded mints and gum at the cashier stand.
The candy bins fit under the existing candy table display and place candy at the childs level.
The jewelry is a broader and more appealing offering than we've had in the past.
We continue to seek opportunities for more everyday products at affordable prices.
We also know that when the restaurant expanse is closer it becomes easier for our retail employees to engage our customers.
This is the concept behind service that creates sales.
Late in the summer we introduced new packaging of our retail food products, coffee, pancake mix, fried apples and apple butter and the packaging was honored in the 2008 QSR FPI food service packaging award competition in the category of brand delivery.
The new packaging is designed to increase the perceived value of our products by providing a stronger emotional connection with the guest, creating an opportunity for improved and coordinated store displays, and building synergy between the retail and restaurant offerings.
Looking at specific trends in retail, home products saw substantial improvement driven by decor items such as lighting and new themed products such as cherished beginnings and apple.
Food also showed solid growth in the quarter driven by the new assortment of everyday candy, which included sundae seed drops, giant Sugar Daddy suckers, and chocolate covered nuts.
Webkinz toys continued to be strong sellers and we've added a line of Webkinz own ornaments for the holiday season to capitalize on our success with this product line.
The soft areas in retail were our Christmas and harvest seasonal products and general apparel especially women's tops.
However, Christmas apparel is selling well as is outerwear which is a new offering for us.
Cracker Barrel has a great opportunity to build local guest traffic.
We're currently using radio advertising to support our new breakfast skillet holiday promotion and plan to use both radio and TV to support further new product launches later in the year.
Our gift card sales continue to show good growth, increasing 7.6% over last year in the first quarter.
And we now have gift cards in more than 25,000 third party retail outlets as well as in our stores and on or website.
We also plan to add another 2500 outlets in time for holidays.
Another draw for the retail business of Cracker Barrel and an important component of our brand communication is our selection of exclusive music offerings.
Kenny Rogers 50 years was a strong seller in the first quarter.
Our latest offering, Bill Gaither's Homecoming Hymns CD is exceeding projections.
With that I'll turn the call over to Doug Couvillion for his detailed financial review.
Doug?
- SVP-Finance
Thank you, Mike and thanks to our listeners on the conference call and webcast for your interest around participation in today's call.
Let's review in more detail the results for the first quarter of fiscal 2009.
For the first quarter of 2009 we reported diluted earnings per share from continuing operations of $0.57 compared with $0.57 a year ago.
We believe this is good news, considering the difficult environment we're operating in.
After tax income from continuing operations of $12.8 million in the first quarter of fiscal 2009 compared with $14 million in the first quarter of last year, reflected lower operating income in the first quarter of fiscal 2009, partially offset by lower interest expense, a lower effective tax rate, and the benefit of the 7% reduction in share count.
Revenue from continuing operations in our fiscal first quarter declined 1.2% to $574 million.
We opened four new Cracker Barrel units in the quarter.
And although we continue to outpace the KNAPP-TRACK index and our own comparable store restaurant sales, -- I'm sorry.
As we continue to outpace the KNAPP-TRACK index, our own comparable store restaurant sales and guest traffic declined 3.2% and 6.5% respectively.
Our trends in the quarter were similar to those of the industry according to the KNAPP-TRACK index.
However, we are encouraged by our October performance relative to the index.
Perhaps a sign that lower retail gasoline prices provided some of our guests a little needed relief.
Our average check increased 3.3%, reflecting a menu price increase of approximately 3.2%.
Our average menu pricing in the first quarter offset the impact of food inflation in dollar terms and labor inflation in percentage terms.
Our focus continues to be on maintaining the guest experience which includes providing good country cooking at a great value and not reducing portions or food quality as a means to offset inflationary pressures.
Cracker Barrel comparable store retail sales were down 2.3% in the first quarter of fiscal 2009.
The average dollar sold per retail ticket continues to increase over last year, although slightly fewer guests are purchasing retail items.
Given the performance of many retailers and the types of products we sell, we feel that our retail business performed reasonably well in the quarter.
Operating income of $32.6 million was 5.7% of revenues in the first quarter of fiscal 2009.
Compared with $36 million or 6.2% of revenues in the first quarter of fiscal 2008, a margin decline of 50 basis points.
In this year's first quarter, operating income margin was negatively affected by lower revenue, higher food and retail costs, and higher utilities.
Fuel and energy prices continued to put pressure on margins.
Additionally, earlier in this quarter our revenues and operating margins were reduced by the tropical storms and hurricanes.
As a reminder, we lost approximately $1 million in revenues and incurred various costs related to minor property damage, security and post store cleanup efforts.
I would like to thank and compliment our operations and home office teams who have come together to make improvements in our operating controls.
Our decline in margins would have been more were it not for the efforts and dedication of our operators who have set, and are delivering against some aggressive targets.
For the past several quarters we have seen improved performance in food waste, labor management, and controllable operating expenses like supplies and maintenance through our various outlier programs.
Now, I will review in a little more detail the changes in our operating margins.
Cost of goods sold was higher than last year's first quarter by 60 basis points.
Food related commodity inflation was up 4.7% in the quarter with the largest inflation percentage increases coming from oils, produce, eggs and grain.
Pork and dairy cost was below last year's levels.
Retail cost of goods was higher this quarter because of increased product costs and to a lesser degree markdowns.
Freight costs continued to increase both restaurant and retail costs of goods sold.
During the quarter, diesel fuel surcharges were approximately $900,000 more than the first quarter of last year.
The good news is that fuel prices have come down and we have locked a portion of our diesel fuel costs.
This, and lower food related commodity inflation are presently expected to benefit us for the remainder of the current fiscal year.
Labor and related expenses are down 10 basis points as a percentage of sales compared with the first quarter of last year, favorable restaurant hourly labor, Workers' Compensation and lower group health costs contributed to this improved performance.
Hourly wage inflation was 1.4% in the quarter and like Mike mentioned, hourly turnover is now below 90% which increases our ability to deliver to our guests the best experience possible and reduce training related costs.
Other store operating expenses increased to 18.5% of sales.
Up 40 basis points from last year.
Higher utilities were partly offset by lower advertising.
Natural gas and electricity costs continue to experience significant inflation.
And utilities have been added to the outlier cost management program as an area of opportunity and focus.
The outlier program is one of the ways we are achieving the cost savings I mentioned earlier in my discussion of operating margins.
Advertising expenses were lower in the first quarter of fiscal 2009.
And last year's first quarter we began our TV advertising test and expensed all of the production costs.
We did not run broadcast advertising in the first quarter.
We however do plan to move forward with broadcast advertising in this year and this quarter we began supporting our breakfast skillets promotion with radio advertising and later in the year we will use a combination of TV and radio to support other traffic-driving promotions.
General and administrative expense was 20 basis points lower than the first quarter of 2008.
The reduction in G&A is primarily due to a decision to defer the general manager's conference offset by higher incentive compensation expense.
The next general manager conference is planned for the first quarter of fiscal 2010 and from that point will be held once every 24 months.
Interest expense of $14 million was about $1 million less than last year's first quarter.
The decrease is due to lower borrowing rates on our unswapped debt.
Our first quarter income tax rate was 30.7%, compared with 33.9% in the first quarter of fiscal 2008.
In the first quarter, we used cash to build inventory for the holiday selling season.
Cash flow used for operating activities was $6.7 million, compared to a use of $3 million the first quarter of fiscal 2008.
The increase reflects the inventory build.
Capital expenditures were $22 million, compared with $24 million last year, reflecting fewer new units under construction and other planned efforts to reduce capital spending and increase free cash flow.
This quarter we paid cash dividends of $4.1 million, and we announced an 11% increase in our dividend to $0.20 a share quarterly.
A few comments about our debt covenants.
At the end of the first quarter of fiscal 2009, we are in compliance with our debt covenants.
The two financial covenants I am referring to are total leverage rare ratio and our interest coverage ratio.
In addition, we are comfortable that with our updated guidance both of these ratios will remain in compliance for the remainder of the fiscal year.
I will discuss our outlook in more detail but I think this is the perfect time to let you know that we have put action plans into place to manage cost in our units, we are reducing discretionary spending throughout the Company and have reduced our capital spending for fiscal 2009.
In addition, we have suspended our share repurchase plans for fiscal 2009 and with the additional cash flow, we will consider paying down debt more than the minimum payment required.
Now I'd like to update you on the guidance for fiscal 2009 that is included in today's press release.
We currently do not expect relief from the difficult consumer environment or external cost pressures in fiscal 2009.
We will continue to focus on growing restaurant traffic, retail sales and controlling our costs to improve shareholder returns.
Based on current trends, we presently expect fiscal 2009 total revenue to range between a decrease of 0.5% to an increase of 1.5% over the $2.3 billion of total revenue from continuing operations in fiscal 2008.
We have reduced our new store openings by one to 11 during fiscal '09.
We have already opened six units this fiscal year and have two units preparing for opening in the second quarter and three under construction.
Comparable store restaurant sales are projected to decrease 1 to 3% including approximately 3.5% of menu pricing.
Comparable store retail sales are projected to be flat to down 2%.
We presently expect operating margins to be in the 5.8 to 6.2% range, which compares with an operating margin of 6.3% in fiscal 2008.
We have lowered commodity cost inflation expectations for fiscal 2009, to a range of 3.5 to 4.5%.
And we have about 75% of our commodities under contract through the remainder of fiscal 2009.
Net interest expense has been lowered to a range of 53 million to $54 million, which is 3 million to $4 million lower than fiscal 2008, based on lower interest rate expectations on our unswapped debt.
Depreciation for the year is expected to be approximately 59 million to $60 million in fiscal 2009.
Our lower capital expenditures of 73 million to $75 million are responsible for the decline in depreciation.
This level of capital spending is approximately $14 million lower than fiscal 2008 and supports our efforts to improve free cash flow.
We presently project the tax rate for fiscal 2009 will be in the range of 27.5 to 28.5% with the third and fourth quarters being lower than the full year rate.
The diluted weighted average share count is presently expected to be approximately 23 million shares.
Since we have now suspended our repurchase plan.
And our strong cash flow will allow us to consider paying down debt beyond the minimum scheduled payments.
With the new assumptions I have just outlined we have broadened the range of projected net income per share for fiscal 2009 to a range of $2.65 to $3 a share.
In summary, we reported results that while below our expectations were at least equal to last year.
The current outlook is based on the scenario that the economy is not going to improve in fiscal 2009.
There is still a lot of uncertainty about sales in the entire retail industry and many recent reports suggest that we have a difficult holiday selling season.
As Mike has mentioned, we have action plans in place and a leadership team focused on achieving the current guidance.
We expect to continue to have solid cash flow performance, supported by a proactive management of our cash flow, and we expect cash flow from operations to exceed our capital expenditure and dividend payment outlays once again in fiscal 2009.
We believe that we have one of the strongest and most highly differentiated brands in the industry and when the economy turns we believe that we will be well positioned to take advantage of an improved operating environment and deliver premium returns to our shareholders.
Thanks for your time and attention and enjoy the holidays later this week.
I'll now turn the call back over to Mike for his closing remarks.
- Chairman, President, CEO
Thanks, Doug.
I'd like to just comment on a couple of items in our guidance for fiscal 2009.
We've reduced the number of stores that will open to 11 and that's because new unit performance continues to be an area of focus for us.
We're working on identifying the management skills that can provide a positive guest experience from day one and move them more quickly to their projected profitability level.
Our lower unit growth rate this year will give us some time to improve that execution.
On the sales guidance, we're looking for slightly stronger sales in the remainder of the year as our new skillets and future promotions have a positive impact on sales.
As I said earlier, we have action plans in place to minimize the deleveraging impact of lower sales on operating margin.
And to reinforce what Doug said about our debt covenants we're currently in compliance and will remain in compliance based on the range of operating performance that supports our updated guidance.
However, just as we're tightening our belts on operating costs, we're reducing our cash outflows in the form of share repurchases and certain capital expenditures to give us added cushion over the covenants.
In closing, as we look forward to our 40th anniversary we recognize we face significant challenges.
Our strategy is to keep the brand fresh and relevant 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 our costs.
Our store managers are focused on daily operations.
Their report cards is guest satisfaction and financial performance.
At the same time we put together a plan for the next five years.
We have the opportunity to take advantage of our strong brand, our strategic locations, and our multi-generational family appeal and we're in this for the long haul.
With that, I'd like to open up the call for questions.
Operator
Thank you, sir.
The question-and-answer session will be conducted electronically.
(OPERATOR INSTRUCTIONS) We'll go first the Brad Ludington with KeyBanc Capital Markets.
- Analyst
Good morning.
- Chairman, President, CEO
Good morning.
- Analyst
I just had a -- to start off a question on where the CapEx exactly is coming out.
You have over $20 million coming out.
Is that just by cutting development and expected development in fiscal '10?
- Chairman, President, CEO
It's coming out from -- we're opening one fewer store, one less store this year.
There's some CapEx coming out as we tighten up our plans to roll out some of our operating initiatives, turns out that the timing of the actual capital spending is going to be a little later than we had anticipated.
Those are the primary changes.
- Analyst
Okay.
Can you comment on which specific operating initiative really got pushed back?
- Chairman, President, CEO
The biggest CapEx is the seat to eat.
- Analyst
Okay.
Looking at the debt repayment, you'll think about repaying debt as time goes on.
My model's showing that in the second and fourth quarter, you could repay probably up to $80 million or so.
Is that a reasonable assumption or do you think you'll be a little more conservative with that cash?
- Chairman, President, CEO
There's several questions intertwined there.
We're going to consider paying down debt.
One of the things we want to stress is not in terms of our -- how we feel about our business but in terms of how we feel about the economy.
There's clearly some uncertainty around where sales are going to go.
We try to reflect that in our guidance.
There's a range of outcomes reflected in our guidance.
The range of operating income and cash flow is going to reflect that range.
I don't know -- I can't comment on the specific number since we can't -- we don't look at your model.
I think that's probably a high number, is that correct?
- SVP-Finance
I think so, yes.
- Analyst
Okay and then finally, one more and I'll jump off for someone else.
When you're talking about issues or working on sales volumes and profitability for new stores, has there been an issue with off interstate locations ramping up a little slower than on interstate?
- Chairman, President, CEO
No, we just opened up an off interstate location in Maryland last week.
Which, although it didn't break any records, came very very close to breaking records.
We're not concerned about our off interstate stores.
- Analyst
Thank you very much.
- Chairman, President, CEO
Thank you.
Operator
Go next to Joe Buckley with Banc of America.
- Analyst
Thank you.
Can you comment on the lower G&A in the first quarter and I think you said full year you're expecting G&A to be kind of flat in absolute dollars?
- Chairman, President, CEO
Right.
Like us to comment on that?
- Analyst
Yes, just what pushed it down in the first quarter.
I think you indicated bonus accruals were actually up?
- Chairman, President, CEO
Yes.
Well, we've been -- I hate to use this phrase but we've been tightening our belts and looking at different ways to run this business.
A couple of things are going on in G&A in the first quarter.
The first one is that as Doug mentioned, the general manager's conference, we're pushing that out to a 24 month interval.
That was a decision made before this quarter and it's to do with the scale of the conference and the amount of resources required to put it together.
We think that a longer interval is a better deal.
We've also changed our incentive bonus philosophy in terms of how we set our targets and we've taken our top bonus targets down.
If you've looked at any of our disclosures you would have seen that which results in non-cash comp coming down in the first quarter.
You would have seen that on the cash flow.
And then generally going forward, we have a number of things going on.
We're looking really hard at travel.
We're looking at seminars.
We decided not to hire some people that we had in the plan to hire.
We're going to look real hard at any hires going forward and generally just really tightening this thing up.
As ever, not doing that in a way that's going to do any damage to the ability to support the operating business.
- Analyst
Okay.
And then question on the retail business.
How are you going into the quarter with inventories and then sort of separate from that, the dollar strengthening, how does that factor into the retail business, I guess not so much right now, perhaps, but going forward?
- Chairman, President, CEO
We're going into the quarter as Doug said with inventories a little higher than we had planned because our sales obviously aren't where we had planned and with the long lead times especially on our imports, especially with the large volume of Christmas purchases, we have higher inventories than we had planned.
We are -- we have a game plan to get our inventories back to where we want them to be at the end of the second quarter.
We're obviously like most other retailers, I imagine, we're certainly looking hard every day, every week really hard at where we are on our markdown schedule.
We expect to spend a little more on markdowns than we otherwise would but at this point we think we have the plans in place.
And then on the long-term, yes, I think there is an -- I think there's a broader opportunity than just the dollar.
I think the worldwide slowdown especially with our import business we're seeing contraction in manufacturing in China.
We're seeing obviously less usage of ocean freight so there's all kinds of opportunities for us to be looking hard at taking advantage of this situation in terms of managing our costs.
- Analyst
Okay.
And then lastly on the lower CapEx being related to CTE, what kind of changes were you planning to make within the stores for CTE?
Is it just a default, Mike, or is it something that sort of you're rethinking again?
- Chairman, President, CEO
No, we're not rethinking.
We know what we want to do.
The changes are changing the grill, changing -- installing some hot hold capabilities so that we can hold better and longer.
We're considering putting in a screen, a monitor, to look at speeds through the window.
So no change in the program, simply that as we looked at our test, looked at our ability and how we want to roll this thing system-wide as we laid out the plans in detail, the result was that the roll-out is going to be later than we had originally estimated when we put the plan together for this year.
- Analyst
Okay.
Thank you.
- Chairman, President, CEO
Thank you.
Operator
We'll go next to Bob Derrington with Morgan Keegan.
- Analyst
Mike, if I could stick to that CT response for a second, now, I thought there was not only an opportunity to serve customers quicker, turn tables faster, improve productivity, how does that play out through the dynamics on the P&L?
- Chairman, President, CEO
In terms of when it happens?
- Analyst
Obviously, with it being deferred a little bit, it will affect some of the numbers potentially the table turns, the same store sales, the throughput.
Is that the reason for the lower same store sales or is that a function strictly of the environment we're in or how should we think about that?
- Chairman, President, CEO
We had planned originally to start rolling this thing out later this fiscal year.
So there's no effect going on right now relative to not having seat to eat rolled.
When we roll it we expect to get the same type of benefits that we originally expected.
What happens in this environment, obviously, and it's the environment that's causing our current sales level is when you're running down traffic in the way that we are and let me stress again, we're running better than Knapp-Track in the quarter, when you get that amount of traffic decrease, the benefit from seat to eat comes from peak periods, primarily of moving when we're on a wait, moving more people through.
So when you have fewer people on a wait it's more difficult to capture the benefits.
But again, that's not the reason, the timing is all around.
We've designed the training programs.
We designed the roll-out plan and I talked about one best way in my remarks and that's a whole new way of thinking about how we train and roll out stuff when we just laid out what it's going to take from a timing point of view to do that well across the system, and you've heard me talk before about so many initiatives in this industry are talked about and then rolled and you never hear about them again.
Our intent is that when we roll it it's going to stick and it's going to work and that's all that's going on here.
- Analyst
Got you.
Okay.
And then as we listen to the change in the CapEx spend, the fact that some of the changes to the grill, the hot hold capability equipment, some of those changes, does that mean the product mix that we see that you'll be selling this year will be slightly different than what was maybe originally planned?
- Chairman, President, CEO
No.
The seat to eat is built around our existing menu.
- Analyst
Right.
Yes.
I understand that piece.
But the change in CapEx, okay, relates only to the seat to eat.
I thought you mentioned that--?
- Chairman, President, CEO
The largest part in the change of CapEx was seat to eat.
- Analyst
I'm trying to understand how the change in the equipment, kitchen equipment, the grill, the hot hold capability, that doesn't affect the products that you'll be promoting this year?
- Chairman, President, CEO
No.
- Analyst
Okay.
All right.
And then when we think about the advertising last year you used TV at this point in time.
- Chairman, President, CEO
Right.
- Analyst
It doesn't sound as though we're going to see it right now.
How should we think about your use of that?
Is it just not in this environment cost effective but it is later on?
- Chairman, President, CEO
It's not a cost effective issue in the terms of just the absolute cost but in terms of our ability to optimize the benefit of advertising across the largest group of stores, this is function of how much -- obviously how much you spend and how much total sales increase you get.
Radio gives us the ability to go much broader across the number of stores, increased sales as TV does but the resulting overall outcome is what we deem to be optimal, especially with new products because we want to get coverage as broadly across the system as we can and we're supporting the skillets right now and as I said in my remarks the advertising going forward in the year is going to be against some other new products.
The brand in the TV I think works as part of an ongoing brand building and we want to get back to that because it has worked for us in the past but in this immediate time frame we're looking for a little more promotional support of the product, get the news of the new product out and from a cost of TV point of view that's just not all that effective for us.
- Analyst
Got you.
Fair enough.
Thanks, Mike.
- Chairman, President, CEO
Thank you.
Operator
We'll go next to Steve Anderson with MKM Partners.
- Analyst
Good morning.
Just have a quick question about another initiative, Best of the Barrel.
Wanted to ask about the progress on that?
- Chairman, President, CEO
Well, we have it in 75 stores right now.
We're in a test where we've added as I mentioned the lunch dinner skillets.
The breakfast skillets worked so well when we added them to Best of the Barrel.
We listed them and we're running them as our holiday promotion right now and we've now layered in the lunch dinner skillets which are also doing very well in the test.
So one of the things that's coming out of all of the product develop menu work is seem to get some benefit when we have news and excitement around our products which is sort of a no-brainer but we haven't done a lot of that or as much of that in the past as we plan to going forward.
The test is running in parallel to the promotion of the breakfast skillets and we have some decision points early next calendar year in terms of how we want to move this thing forward.
There are components that work really well but overall as I said in the past we're not getting total results we expected but I think this new product thing is probably going to offset that so we're going to get more news from our overall new product activity.
- Analyst
Okay.
And talk about another initiative that we spoke about in the past is the KMS.
Has that been delayed as well by your decisions as far as some of the CapEx spending?
- SVP-Finance
Did you say KDS.
- Analyst
Kitchen display system.
- Chairman, President, CEO
I mentioned in a previous question we're looking at a modified form of that as this monitor that we're looking at to measure the speed through the window.
It's morphed into a slightly different application that we think is going to have a pretty big effect pretty quickly.
Operator
We'll go next to Jake Crandlemire with Ramsey Asset Management.
- Analyst
Can you disclose the ratios on the debt to trailing 12 month EBITDA and the interest expense?
- Chairman, President, CEO
No, we haven't done that.
We've said that we're comfortable.
Our banks obviously know the numbers and they're comfortable.
And that's where we are.
- Analyst
So you're not going to disclose it in the Q either?
- SVP-Finance
We don't plan to.
- Chairman, President, CEO
No, we don't plan to.
- Analyst
I see.
Is there something about it that would make it different than just doing simple math?
- SVP-Finance
There are a few little nuances in our calculations that are in the covenant agreements but I think directionally you could probably get there from the stuff that's in public information.
- Analyst
Okay.
And I mean, obviously for the equity holders this is maybe more important than the 5% of the call that you devoted to it.
Have you entered discussions with the banks at all just in terms of at the end of the fiscal year, the ratios get harder.
So is that something that's negotiable?
Are you able to disclose any -- anything on that, A?
B, how does paying the dividend -- I mean, obviously that's a Board level decision but is there anything you can talk about in terms of cutting back the dividend to have a little bit more flexibility with respect to the ratios?
- Chairman, President, CEO
Well, first of all, we're not attempting hide something here that's bad nor are we trying to under discuss it.
We see no need.
We've spent a lot of time in this environment updating our projections for the year and looking at the specific things we're going to do.
You've seen today with our guidance and hopefully with our discussion the outcome of all that.
With those actions and those outcomes we're absolutely comfortable with where we are in our debt covenants so there's no need to be looking at contingency plans at this point.
Obviously, it's something we will continue to monitor because as I said a few minutes ago, the biggest variable for the industry and we obviously are going to move with the industry is going to be sales and I don't see a lot of -- personally a lot of catalyst for industry wide sales improvements out there so what we're doing is focus on what we can do to control our own destiny.
Hope that's helpful.
I think the dividend is part of our overall assessment of where we're going and guidance and our comfort level with the covenants.
- Analyst
Okay.
Thank you.
- Chairman, President, CEO
Thank you.
Operator
We'll go next to Bryan Elliott with Raymond James.
- Analyst
Good morning.
Just a quick question on the non-stock comp expense which has fallen a bit here.
What level would be embedded in the guidance that was updated today?
- Chairman, President, CEO
Don't want to sound like I'm dodging the question, Bryan, but the level that's in there is based on the operating income numbers that are part of the guidance.
In other words, it is all consistent.
- Analyst
Well, I guess my question is is was the drop, the $1.7 million we saw in the first quarter, is it fair to annualize that number which would bring it down substantially year-over-year or will there be an increase sequentially in the amount of non-stock comp expense as we look through the rest of the year?
- SVP-Finance
I think the $1.7 million you're referring to is the total drop in G&A.
- Analyst
No, no, I'm referring to the stock comp expense in the cash flow statement as million $1.721 in the first quarter.
- Chairman, President, CEO
While everybody's looking at that, I would say overall go back to the general statement, and I know you want to get to a little more detail but the general statement that we have G&A, expect G&A to be flat with last year in dollar terms includes--.
- Analyst
The benefit of this.
Right.
I'm just trying to get a feel for how much that benefit actually is?
And if you don't have it, I can get it offline.
- Chairman, President, CEO
The drop is -- unless I'm reading this wrong, but the drop is 500, right?
- SVP-Finance
500 in the quarter.
- SVP, Corp. Affairs
In the quarter.
- Analyst
It's actually almost 600 year-over-year and about 150 sequentially from Q4.
130.
- Chairman, President, CEO
All right.
I think I've forgotten how to read a cash flow statement here.
I'm looking at 1721.
- Analyst
Yes.
I was just looking for a range of full year but I can get it offline rather than take time on the call here.
- Chairman, President, CEO
Yes.
Okay.
Let's do that.
Operator
We'll go next to Thomas Haynes with Empirical Capital.
- Analyst
Just a follow-up question on your debt.
Just tell me how much you've drawn on your revolver and how much capacity you have?
- SVP-Finance
At the end of the quarter, we have about $32 million on the revolver.
And our capacity -- we have a $250 million facility which is reduced a little bit by letters of credit that are necessary to guarantee our comp business.
- Chairman, President, CEO
We have a lot of room.
- SVP-Finance
We have plenty of room in our revolver.
- Analyst
Right.
Yes.
And then the $32 million that's drawn out now, is that the only portion of your current obligations or is there additional on top of that?
- SVP-Finance
We have mandatory payments of about $6.7 million left for the year.
It's a $9 million annual requirement so we have three more quarterly payments.
- Analyst
Okay.
And then how many shares were outstanding on your balance sheet at quarter end?
- SVP-Finance
Diluted shares, 22.6 million.
On our balance sheet, 22,375.
- Analyst
I think that's everything.
Thanks.
Operator
Our next question comes from [Jack Wagner] with MJX Asset Management.
- Analyst
Yes.
Good morning.
Did you say that your percentage of costs that are contracted for the year are 75%?
- Chairman, President, CEO
Yes.
That's right.
- Analyst
And the cost that's contracted for, how does that compare to last year?
- Chairman, President, CEO
It's a little bit low.
- Analyst
Little bit lower.
And what would you say is the mix of your variable and fixed costs?
- Chairman, President, CEO
Mix of variable and fixed costs in terms--?
- Analyst
Percentage.
- Chairman, President, CEO
The whole P&L structure?
- Analyst
I'm sorry?
- Chairman, President, CEO
On the whole P&L structure in.
- Analyst
Yes.
- Chairman, President, CEO
Well, I can answer it indirectly.
The flow-through, this will get you I think to the answer, the flow-through from an incremental dollar is 36%.
- Analyst
36% on the?
- Chairman, President, CEO
On a marginal dollar.
- Analyst
So the variable cost would be 36%?
- Chairman, President, CEO
No.
- Analyst
Regarding the cost structure, I'm just trying to get--?
- Chairman, President, CEO
I'm trying to answer the question.
I haven't thought about it that way.
The flow-through is 36 then presumably the cost is 64.
Variable.
- Analyst
Okay.
And regarding the comparison to Knapp-Track, are you talking about same store sales?
- Chairman, President, CEO
Traffic.
We measure our restaurant traffic against Knapp-Track casual dining traffic.
- Analyst
Okay.
And the -- what was Knapp-Tracks average, what was the index on the traffic side?
- Chairman, President, CEO
In the month of -- in the quarter?
I don't have those numbers off the top of my head.
And I'm hesitant to offer those numbers since they're not ours.
- Analyst
Okay.
- Chairman, President, CEO
I'm just--?
- Analyst
Your traffic was down around 7%, let's say?
- SVP-Finance
For the quarter, we were down 6.5 and--.
- Chairman, President, CEO
Yes, down 6.5 for the quarter and--.
- SVP-Finance
Down 7 in October.
- Chairman, President, CEO
As we said we were better than Knapp-Track for the quarter.
- Analyst
Okay.
All right.
Thank you very much.
- Chairman, President, CEO
Thank you.
Operator
(OPERATOR INSTRUCTIONS) We'll pause for just a moment to allow everyone a chance to signal.
And there appear to be no further questions.
At this time I would like to turn the call back to Mr.
Woodhouse for any additional or closing comments.
- Chairman, President, CEO
Thank you everyone for joining us.
These are difficult times in general, certainly difficult for the restaurant industry.
I hope that between our release and our remarks and our Q&A today we've conveyed a sense of making real progress and being on top of the operating side of our business in this really tough environment as it shows up in our margin and also that we're not -- we'll continue to focus on the long-term at the same time.
So we really do believe that we're going to continue to do better than average, better than others during these tough times and we're going to come out better on the other side.
So thanks again.
Enjoy the holidays.
We'll talk to you next time.
Operator
Once again that does conclude today's conference.
Again, we thank you for your participation and you may disconnect at this time.