Cracker Barrel Old Country Store Inc (CBRL) 2009 Q2 法說會逐字稿

Good day, and welcome to the Cracker Barrel Old Country Store second quarter 2009 conference call.

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

eastern time through March 10th at midnight eastern, by dialing 719-457-0820 and entering pass code 3754557.

And now at this time for opening remarks introductions, I would like to turn the conference over to the Senior Vice President of Corporate Affairs, Ms.

Diana Wynne.

Please go ahead.

Thank you, Dustin.

Welcome to our second quarter 2009 conference call and webcast this morning.

Our press release announcing our fiscal 2009 second 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 risks 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 effect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning's press release, and our 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 (inaudible) 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 third quarter earnings and same-store restaurant and retail sales for fiscal February, March and April on Wednesday, May 27th before the market opens.

On the the call with me this morning are Cracker Barrel's Chairman, President and CEO, Mike Woodhouse; Interim CFO and General Counsel, Forrest Shoaf, and 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 will then respond to your questions.

Thanks, Diana.

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

A lot of things have changed since our last call on November 24th.

For example, we are once again Cracker Barrel Old Country Store, Inc., Our shareholders approved the name change at the annual meeting on November 25th and our new "old" name reinforces our commitment to focus on a single concept; and it seems especially appropriate as we continue to our 40th year of operation.

In these turbulent times, we feel very feel good about putting our resources behind a single strong brand.

In fact, the more time we spend on improving the Cracker Barrel experience, the more we learn about what makes us unique and what keeps our loyal customers coming back time and again.

Some of these lessons we learned the hard way.

What seems good in theory doesn't always produce the desired results.

For example, in our efforts to increase efficiency with a new menu, we discovered that many of our regular customers were disappointed to see their favorite food items no longer available.

In hindsight, this makes perfect sense.

If Cracker Barrel comfort food is a hallmark, we are where comfort meets food.

Comfort describes something familiar -- something that helps people deal with stress and something that stirs a positive emotion.

Cracker Barrel is a one-of-a-kind experience.

The last thing we want to do is upset winning formula behind our continuing popularity.

That's why at the end of the second quarter we decided not to roll out the Best of the Barrel test menu across the entire system.

Instead, we're enhancing our current menu to reflect the benefits from our menu testing.

For example, we've been able to speed up the order entry with a simplified point of sale system, and the new core menu will highlight certain high margin food items in the way that brought us very good success as part of the Best of the Barrel test.

As a result, our core products will remain on the menu.

And ideally, we can increase the number of items that our customers crave.

A most recent example is our lunch and dinner skillets.

Following strong test results, we'll be rolling them out across the system for the spring promotion beginning in mid-March.

This will be supported by TV advertising in a number of markets.

The new skillets will include a tossed salad and bread service and it will be in the price range of $7.99 to $8.99.

Our focus continues to be on providing our guest with the pleasing people experience that they expect from Cracker Barrel, and that means ample portions of high-quality food at a fair price.

We have not reduced and we will not reduce quality or portion sizes in response to cost pressures; and this strategy is supported by our guest loyalty scores, which continued to improve in all categories in the quarter.

In an October study of more than 1,100 consumer brands by (Inaudible) metrics brand index, which is a daily brand intelligence service, Cracker Barrel was one of two chains that earned high marks from consumers in terms of favorable perceptions of value.

Both had scores over 30, while the average for the group of 29 casual dining chains was 10.8.

Another study by the NPD group found that there was a direct negative correlation these days between rising prices and consumer satisfaction rates.

As the average cost of a dinner and casual dining rises above the $13 mark, satisfaction rates as they relate to good value for the money and affordable to eat there often began to fall off.

And as a reminder, our average dinner check is about $9.35.

As you saw in the press release this morning, our restaurant traffic continued to outperform the Knapp-Track index in the quarter.

However, we're not satisfied with just being less negative than the competition, and we remain focused on returning to positive guest traffic trends.

Now, let's talk about the cost side of the business.

We're ahead of expectations with our plans to mitigate the impact of slower sales, and at the same time strengthen our business model for the longer term.

We're pleased to be able to provide the earnings guidance that we have today where, despite continuing top line pressures, we are reaffirming the whole year operating margin to be in the range of 5.8% to 6.2% compared with 6.3% in fiscal 2008.

And our EPS guidance remains $2.65 to $3.00 per share.

A key component of our plan is to spend only what we have to, and to execute according to our standards but without in any way compromising the experience of our guests each and every time they visit any one of our stores.

Productivity is central to these efforts in controlling costs.

In the restaurants, the Rising Star onboarding program for hourly employees continues to work well; and our hourly employee turnover is now below 80%, which is remarkable in the restaurant industry.

Meanwhile, we're making structural improvements such as how we deploy labor.

We've been testing better ways to utilize hours worked.

The goal is to maximize staffing for the expected sales mix at any store on any specific day.

The Seat-to-Eat initiative is another integrated tool to drive store traffic and increase productivity.

In addition to the primary cost benefits of these new programs, we know that lower employee turnover produces more experienced service, and a more experience service supported by more experienced kitchen staff generally equals a more satisfied customer.

If we can improve and sustain these process improvements at the store level in this difficult sales environment, we'll be in a very good position to create some positive operating leverage in a more robust economy.

And finally on turnover, I want to mention that our management turnover at 16% for the quarter is almost four percentage points lower than it was this time last year.

One of the many strengths of our brand is the ability to generate strong cash flow.

Over the long-term, we're working to improve the cash generated from every dollar of sales revenue.

In the meantime, however, we want to ensure a comfortable cushion regarding our debt obligations.

With our profitability focus and plans to reduce our capital expenditures, we expect to generate a significant amount of free cash flow, which we'll use to pay down our long-term debt in the second half of the year.

At the end of this quarter, our revolver was undrawn, and our long-term debt stood at $772 million, with $8.8 million in current maturities.

With our extensive real estate holdings, we have on very few occasions in the past undertaken sale leaseback transactions for increased financial flexibility.

We've decided that it's appropriate to do so once again, with a proposed sale leaseback of 15 or so of our stores.

This represents less than 3% of our store base; and also I want to state that this does not represent a departure from our long-term strategy of owning our buildings.

In fact, after completion of the sale leaseback, we'll still own approximately 400 stores.

As we said in the last quarter conference call, we were comfortable that we would remain in compliance with our debt covenant with the guidance that we provided at that time when the covenants tighten in May.

As of the end of this quarter, our interest coverage ratio is 5.34, well above the minimum of 3.5, and the consolidated total leverage ratio is 3.72, below the maximum level of 4.0.

The cash received from the proposed sale leaseback transactions of the 15 stores in our retail distribution center, combined with cash generated from operations, will be used to pay down debt and provide us with some insurance in the form of more cushion on our debt covenants in this uncertain economic environment.

We've also announced today that our quarterly dividend was maintained at $0.20 per share, which results in a better than 4% yield at current share prices.

Before I turn the call over to Doug for the financial discussion, I have a few words the retail business.

There were no real surprises here.

In an extremely difficult retail environment, our comparable store sales were down 7% in the second quarter.

Sales of our retail food products, including everyday candy and Cracker Barrel branded mints and gum, improved in the quarter.

Bath products showed solid growth, and collegiate gifts, accessory and decor were up in the quarter.

We had more offerings this year, and we've recently introduced a special line of Lady Vols offerings to tie in with the University of Tennessee Women's Basketball coach Pat Summitt's 1,000th win a couple of weeks ago.

And finally, the Bill Gaither and Kenny Rogers CDs, as well as Valentine's cards, sold very well in the quarter, helping media in total show a positive growth.

We continue to attract new artists to our exclusive music offerings list, and we're very excited to announce that we've just signed an agreement with Dolly Parton.

Starting on March 23rd, we'll be selling an exclusive collector's edition of her Backwoods Barbie CD, which includes three never-before released tracks; and we're also going to be selling an exclusive Dolly Parton rocker.

Webkinz toys continue to be a strong seller; although other toys didn't sell as well this year, which was in line with overall industry trends.

The softest areas in retail were our seasonal products and general apparel, especially men's and women's knit tops.

Higher markdowns helped reduce inventory to seasonal items, but of course at a lower -- overall lower sales dollar.

In retail, it's always a balancing act between keeping fresh, unique items the floor and managing inventories and markdowns.

We've reduced our buys where we can and delayed purchases in order to manage our inventories to our current sales levels.

Speaking of inventory, one action step that we took this quarter which is saving us about $350,000 annually is eliminating the trailers that we were using to store inventory at our stores.

Removing the trailers turned up some fixtures that could be used at other stores, and it also requires tighter control of inventory at every store.

Until we see evidence that our customers are willing to commit to higher discretionary purchases, we're going to be carefully balancing our new product themes and look for ways to tie the restaurant and Country Store together in ways to continue to manage inventory levels in line with sales trends.

One last item to talk about here, our gift card sales were up slightly over last year in the second quarter.

The increase through third party outlets offset the decline in units sold at Cracker Barrel.

We like the value we get from the third party program, both from the increased visibility across the country and the incremental sales that result.

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

Doug?

Thanks, Mike and thank you to our listener on the conference call and webcast to your interest and participation in today's call.

Let's review in more detail the results of the second quarter of fiscal 2009.

For the second quarter of 2009, we reported diluted earnings per share of $0.81 compared with $0.85 per diluted share in the second quarter of last year.

Income from continuing operations of $18.4 million was $1.9 million lower than last year, reflecting lower operating income this year partially offset by lower interest expense and the lower effective tax rate.

Revenue from continuing operations during our fiscal second quarter declined 0.7% to $630 million, reflecting top line growth in restaurant revenues driven by store growth, offset by a year-over-year decline in retail.

Our decline in retail sales was generally in line with results posted by many other retailers.

By the end of the second quarter, we had opened eight new Cracker Barrel units this year, including four in the second quarter.

These new units contributed to our revenue growth; and although we continued to outpace the Knapp-Track index, our comparable store restaurant sales and guest traffic declined 1.5 and 4.6%, respectively.

Comparable store restaurant sales benefited by approximately 0.5 to 1% during the quarter from shifts in the timing of holidays and the travel associated with these holidays.

The shifts effected sales unfavorably in December and favorably in November and January.

The net effect of weather was minimal for the quarter.

Our average check increased 3.1%, reflecting a menu price increase of approximately 3.6%.

Our average menu pricing in the second quarter more than offset the impact of food inflation and labor inflation.

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 7% in the second quarter of 2009.

We continue to see softness in apparel, and our seasonal business was not quite as strong as we expected.

Christmas seasonal merchandise is an important part of our second quarter retail assortment; and in a composite environment, represented a percentage of sales consistent with that of the past two years.

The average retail ticket continues to increase over last year, although fewer guests are purchasing retail items.

Our operating income of $39.3 million was 6.2% of revenues in the second quarter compared with $45.4 million or 7.2% of revenues in the second quarter of 2008.

Operating income margin was negatively affected by lower revenue and higher labor and related expenses.

Health insurance benefits, Worker's Compensation expense and store management labor contributed to higher labor expenses as a percentage of sales in the quarter compared with last year.

Lower operating expenses this quarter in dollar terms resulted from favorable general insurance costs and tighter spending controls on miscellaneous expenses, partially offset by higher utility costs and property taxes.

During the second quarter, actuarial reviews of the Company's self-insured, Worker's Compensation and general insurance reserves resulted in a smaller reduction to Worker's Compensation expense this year compared to the prior year and a larger reduction to general insurance than in the prior year.

Now let's take a look at our operating margins.

Cost of goods sold on a percentage of sales basis was flat with last year's second quarter.

Food-related commodity inflation was lower than last year at 2.7% in the quarter, with the largest percentage increases coming from oils, produce and grain-based products.

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

Retail costs of goods was higher this quarter due to approximately 10% higher markdowns than last year and increased product costs.

Helping to offset higher retail costs were fuel surcharges, which were lower than last year by approximately $800,000 -- the first decline in about five quarters.

We have lowered our forecast for food cost inflation to 2.5 to 3% for the year.

Year-to-date, our food cost inflation has been 3.7%; so we're looking for lower food costs, particularly for dairy and eggs in the second half of the year.

Labor and related expenses were up 100 basis points as a percentage of sales compared with the second quarter of last year.

The key drivers of the increase were higher health benefits, the unfavorable effect of the lower Worker's Compensation actuarial adjustment than last year and the deleveraging effect of lower sales on store management expenses.

Medical cost inflation continues to outpace revenue for us and many other companies.

Effective January the 1st, 2009, we implemented several changes to our health insurance benefits, which we expect to reduce our costs in the future.

In the current quarter, higher medical claims expenses and some transition costs related to the health plans put pressure on our labor margins.

Partially offsetting these increases were lower restaurant hourly labor costs and lower operating bonuses.

Hourly wage inflation was 1.4% in the quarter; and as Mike mentioned, our hourly turnover was below 80%.

This reduces our hiring and training costs and should result in a better guest experience.

Other store operating expenses were flat with last year's second quarter at 16.8% of sales.

Higher utilities and property taxes were offset by a reduction in general insurance costs and tighter controls on miscellaneous store operating expenses.

In general and administrative expense, our focus on curbing discretionary spending is paying off, as G&A as a percentage of sales was flat with the second quarter of 2008 and down in absolute terms by $1.1 million.

Controllable administrative costs like travel and professional fees were down, and base G&A payroll was flat to last year.

The prior year reflects the non-recurrence of a gain on the sale of the last Logan's property we had retained.

Interest expense of $13.3 million is one point million less than last year's second quarter due to lower borrowing rates on our unswapped debt.

Our second quarter income tax rate was 29.4% compared with 34.9% in the second quarter of fiscal 2008.

The difference in the effective tax rate in the second quarter of 2009 compared with the same quarter of 2008 reflected higher employer tax credits on absolute dollar basis, as well as higher employer tax credits as a percentage of pretax income due to lower income from operations.

The effective tax rate for the full fiscal year 2009 is expected to be between 27.5 and 28.5%.

Now let's move from the income statement to our cash flow, balance sheet and debt covenants.

For the first six months of 2009, cash flow provided by our operating activities was $49.8 million compared with $63.6 million in 2008.

The decrease reflects lower net income and timing differences in interest, accounts payable and income tax payments.

Year-to-date, capital expenditures were $37 million compared with $45 million last year, reflecting few newer units in fiscal 2009.

And as I mentioned earlier, we had opened eight units by the end of the second quarter; and since that time, we've opened three more units, which completes our planned new unit expansion for the current year.

We reduced our outlook for capital expenditures for the year to $65 million with our announcement that we will be opening only seven new stores this year.

So far this year, we have paid cash dividends of $8.6 million or $0.20 a share quarterly rate, which at current stock prices represents a yield of more than 4%.

We were pleased to announce earlier today the declaration of another $0.20 quarterly dividend to be paid later in the third quarter.

Our total borrowings, including current maturities, at the end of the quarter was $781 million, with no outstanding borrowing under our revolver.

We remain in compliance our debt covenants.

Our total leverage ratio was 3.72, and our interest coverage ratio was 5.34.

Since the end of the first quarter, our leverage ratio improved from 3.81, and our interest coverage ratio comfortably exceeds the minimum of 3.5.

We adjusted how we calculate our interest coverage ratio to exclude the interest associated with the interest rate swap, reflecting a more accurate interpretation of our credit agreement.

We would also like to remind that you after May 1st, 2009, the maximum leverage ratio will be decreased to 3.75 and the minimum interest coverage ratio will be increased to 3.75.

We believe, as our guidance indicates, we will remain in compliance for the remainder of the fiscal year; however, we also think that it is prudent in this uncertain economy to provide some additional cushion.

Therefore, we are undertaking the sale leaseback of approximately 15 stores in our retail distribution center.

We will use the estimated proceeds of approximately $55 million as well as excess cash flow to further reduce our debt level.

Let's look next at our outlook in more detail.

We currently do not expect relief from the difficult consumer environment in fiscal 2009.

We will, however, 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 up 0.5% relative to last year's $2.4 billion of total revenue.

Comparable store restaurant sales are projected to decrease 1 to 2%, including approximately 3.3% of menu pricing; and comparable store retail sales are projected to be down 4.5 to 6%.

Favorable developments on commodity costs and our cost management initiatives allow us to reaffirm our guidance on operating margins, which we expect to be in the 5.8 to 6.2% range, which compares with an operating margin of 6.3% in fiscal 2008.

In commodity cost moderating, we have lowered our expected commodity cost inflation for 2009 to a range of 2.5 to 3%, and we currently have about 87% of our commodities under contracts for the remainder of fiscal 2009.

Net interest expense has been lowered to a range of 52 to $53 million, which is 4 to $5 million lower than 2008 based on lower interest rate expectations on our unswapped debt.

We have completed our new store development for fiscal 2009, and our guidance today includes opening seven stores during fiscal 2010.

By opening only seven stores in 2010, we are able to reduce our capital expenditures needs this year to $65 million.

And consistent with our focus on maintaining the guest experience, we will not be reducing our spending on maintenance capital expenditures, which we expect to be approximately $28 million.

Depreciation for the year remains the same at 59 to $60 million of fiscal 2009, and we did not change our projected tax rate for fiscal 2009 and expect it to be in the 27 to 28.5% range, with the third and fourth quarters being lower than the full fiscal year rate.

The diluted earnings per share count is presently expected to be approximately 23 million shares, reflecting the suspension of our share repurchase plan.

We're also reaffirming our projected net income per diluted share for fiscal 2009 to a range of $2.65 to $3.00 a share.

In summary, we're focused on managing our costs through a disciplined approach to business.

We're committed to improving the guest experience so that Cracker Barrel is always top of mind when the consumer decides to dine out.

Our focus is on continuing to be the best family dining restaurant, based on Restaurant and Institutions Choice of Chain Survey for the past 18 years.

The current outlook is based on the scenario that economy is not going to improve in fiscal 2009.

There's still a lot of uncertainty about sales in the entire retail industry, and there are few if any signs that the consumer has plans to start spending.

We do have action plans in place, and our entire Cracker Barrel team is focused on achieving the current guidance.

We believe that we're one of the strongest and most highly-differentiated brands in the industry; and when the economy turns, we believe we will be well-positioned to take advantage of an improved operating environment and deliver premium returns to our shareholders.

Thank you for your time this morning.

I'll now turn the call back over to Mike for his closing remarks.

Thanks, Doug.

I just would like to comment on a couple items in our guidance for fiscal 2009 and the new store opening target in fiscal 2010.

We have opened the 11 new units that we committed to for fiscal 2009, and the last unit of that group opened just this week.

In fiscal 2010, we're planning to open only seven stores; and we're doing that although the performance of the 2009 stores is exceeding our expectations.

We want to be able to continue to work on identifying the management skills that are going to make certain that we provide a guest experience -- positive guest experience from day one, and then we can move stores quickly to their projected profitability level.

Our lower unit growth rate will give us some more time to continue to focus on their execution.

As an example of the strong sales we're seeing when our new stores do open these days, our Stevensville, Maryland store set a record for combined sales in its first full week of operation in November.

This tells us that diners are still looking for good food and great value in a friendly family atmosphere.

On the sales guidance, we're looking for slightly stronger sales in the remainder of the year, as our new skillets and feature promotions have a positive impact on sales; and we've reduce our comparable store sales for retail to down 4.5 to down 6%, which is in line with our performance for the first half of the year.

As I said earlier, we're ahead in our action plans that are in place to minimize the deleveraging impact of lower sales and operating margins.

Our outlook reflects the continued uncertainty in the economy and its potential impact on casual dining.

By limiting new store openings, we can focus on executing the basics in order to maximize cash flows.

At the same time, we're committed to driving greater traffic to our restaurants and retail stores and improving profitability for the long-term.

With demographic trends supporting the continued growth in our target customer base, we have every intention of maintaining our position as the consumer's choice when eating out.

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

(Operator Instructions).

We'll go first to Brad Ludington with Keybanc Capital Markets.

Good morning.

I have a question first, and see if we can get any more clarification sale leaseback.

On that, is -- since the net proceeds of 55 to $60 million, is that the expected sale price, or would that be selling at a little bit a loss and could -- using little bit of a a tax benefit along with that?

That's just net proceeds.

That does not include the tax effect or any gain with the transaction.

Okay, do you expect to be able to sell it for cost or better, or will there be an impairment charge that goes along with that?

We expect to sell at a gain.

Okay.

Good to hear, especially in this experiment.

What about -- do you know what kind of cap rate you expect out of that?

We're in the middle of negotiating, so we're not prepared to put a cap rate out just yet.

Okay.

Well, can we ask if the financing is already in place, or is that still being worked on as well?

That's being worked on, but we're quite confident we're going to be able to put this deal up -- close this deal.

Okay.

And last thing -- I know I'm hitting you for a lot of detail on this -- is it a third-party transaction, or will it be an LLC that Cracker Barrel's involved with?

It's a third-party transaction.

All right, thank you very much.

You're welcome.

We'll go next to Joe Buckley with Bank of America.

Hi.

It's actually Steven Barlow for Joe.

On the sales leaseback again, how are the proceeds split between the 15 stores and the distribution center?

The distribution center about $12 million of the total.

Okay, and then on the covenants, what are -- I guess with the tightening in -- what are the ramifications if you break through them?

Well, I don't think that's something that's relevant.

We have no intention of breaking through.

Our projections show us to be very comfortable relative to the covenants.

The reason that we're doing the sale leaseback is to provide us more cushion, not to provide us the only cushion.

We said at our last conference call that we expected to be fine with our covenants based on our guidance at that point.

Our guidance, you will note, on earnings has not changed.

So we don't see any issues.

We obviously have thought about what the implications might be, but we don't think that's a top that's worthy of discussion at this point.

Great, thank you.

Our next question comes from Larry Miller with RBC Capital Markets.

Yes, thank you very much.

I also have a couple of sale leaseback questions, and then something else I'd like to ask.

But on the sale leaseback, are you considering any other units other than the 15 currently; and can you talk about some of the restrictions that you have in the debt agreement that would prohibit you from selling real estate or any buildings?

And what the reuse of proceeds might have to be directed to?

And just on that, to close the loop, I know you didn't talk about the cap rates that you're seeing, but what generally are the cap rates in the marketplace for transactions like this, and how would you characterize just the overall appetite on the investment side?

Well, there's appetite for the specific transaction that we're interested in.

I don't really want to represent myself as an expert in sale leaseback market generally, but we're pretty confident on our side.

In terms of do we intend to do anymore; no, we have no intentions, but we do have the ability.

The credit agreement has two baskets.

One allows us to do up to $100 million on a one-time basis of sale leaseback without -- with no restrictions the use of proceeds; and then we have a $150 million basket which can be used in three $50 million trenches one year at a time, and the proceeds must be used for paying down debt.

So we have lots of flexibility if we were to need to go back to that market, but we don't see that.

We think that we're going to be in pretty good shape.

Great, and then I just wanted to circle back.

You've been testing lot of same-store sales driving initiatives in the last 12 or 18 months.

And I'm just curious, if you were to prioritize based on all of those results that you're getting, what's working, what's not working and what you've learned?

I mean, it sounds like the menu optimization wasn't as important as maybe you thought it was.

How about speed, value, table turns and guest service and all of that stuff that you're -- I mean, can you give us a relative rating on those things?

Well, I think number one is our value; and we would stress that we're not doing anything to our products or the service experience -- but we're not doing anything to our products to diminish the value of the products from a portion size or a quality point of view.

And I will not comment on what we see elsewhere in the industry, but we think that makes us somewhat distinctive in this environment.

So I think that is -- would be the reliability of the Cracker Barrel brand.

You know what you're going to get when you come to Cracker Barrel is absolutely first and foremost.

The speed is important -- important to our guests and important to us from a throughput point of view.

One of the things that we've been focusing on in this last quarter is a thing called Weekend Execution; and that's not about new ways of doing things.

That's about focusing on our current standards of how we seat and how we bus tables -- how we get food out of the kitchen and it's called weekend (inaudible) -- obviously Friday, Saturday, Sunday represent 60% of our week.

So if we can improve speed in tha,t we're having a pretty big impact.

And we're seeing some good results.

I've personally been in a lot of stores over the weekends and seen how that execution can really help us really quick.

And then the new products also -- I think that skillets have shown that some innovative ideas --skillets and the bread bowls that we have out there have shown that there's an appetite, so to speak, for new products and we're seeing some benefit -- because we really haven't been in the new product business as much for quite a while.

So I think that all of those things together are all about some newness; but mostly it's about the fact that our guests can come to Cracker Barrel and depend on us not to change the rules on them in this difficult time.

Great, thanks.

Did you want to share any data with respect to the skillets, given its importance in the second half sales guidance?

Well, the -- what I can say is that the breakfast skillets -- there's three of them together, and then fourth one, Santa Fe, that we brought in recently -- outperformed any other breakfast promotion that we've done, and that the lunch/dinner skillets in test performed very strongly as a promotive item.

So we -- we're looking forward to seeing that happen when we put them in a national promotion.

And since it's new news, the fact that we're using some TV to support -- we're going to have TV in about 25% of the system -- the ability to get the new news outside of the box, outside of the four walls, should help us leverage the newness of that; because otherwise we're depending on those who come to Cracker Barrel to discover it for themselves.

So that combination of more broadcast support and new products, we think, is going to be a positive.

Thanks very much.

Thank you.

We'll go next to Chris O'Cull with Suntrust Bank.

Thanks, guys.

My question relates to the cost.

Doug, last year I know in the fourth quarter, G&A was up quite a bit on a percentage of revenues and I think also in absolute dollars.

Was there any unusual expenses last year in the fourth quarter in that line, or should we expect G&A to be lower in the fourth this year?

Well, for the whole fiscal year, we're projecting that G&A is going to be flat on a year-over-year basis, and we should be down when you compare in the fourth quarter.

Okay.

And that flat year-over-year, that includes the one-times that I think you had in last year's number?

Includes the what, Chris?

Where there's some one-time charges in 2008 in G&A last year?

Yes, and I think we also had some incentive comp kind of true-ups as we wrapped up the year.

Okay.

Okay, great.

And then the last question relates to just -- I guess the biggest surprise to us was some of the labor costs that you experienced during the quarter.

Can you quantify the impact that higher health insurance and Worker's Comp expense had on the quarter?

Give me just a second.

We -- from a dollar perspective, in the 3 to $4 million range.

But you've got understand that the Worker's Comp thing is -- really, it was really great results last year and great results this year, but not to the same magnitude.

So we're still experiencing very favorable trends in our underlying loss rates per dollar of payroll, and so it's kind of misleading to call that bad news, I believe.

Okay.

And what the health insurance -- was that increase related to just renewals?

No, you know, they're -- health insurance is running inflation somewhere in the 7 to 10% range on a compounded basis, and then we made some plan design changes effective the first of the year and so we've got a small amount of transition costs that we incurred this quarter.

But we expect these plan design changes to really benefit us in the future.

Okay.

Great, thanks.

Just Chris -- just to follow up that.

The labor, not -- separate from the health and the Worker's Comp, labor is an area of significant focus for us; and the underlying numbers, we think, were pretty good.

Our hourly labor -- on an absolute basis, dollars was flat year on year, despite some wage inflation and some minimum wage increases that happened in January from various states.

So we're going to continue to really focus on all areas of labor.

So we feel pretty good; but that's not going to be an area of exposure us to for the remainder of the year relative to our guidance.

In the benefits you've seen in your hourly labor, that's really representing your focus on optimizing the labor hours for the peak sales periods?

That's right.

Okay, thanks.

Thank you.

We'll go next to Steve Anderson with MKM Partners.

Yes, good morning, and congratulations on the quarter.

Thank you.

And just a follow-up on the labor costs side.

Do you anticipate additional transition costs in the next couple of quarters going forward?

I think that we're going to be through most of those costs by the end of the third quarter.

There's probably a slight risk that something occurs in Q3, but I think we're pretty comfortable with what we have in our outlook relating to labor margins.

Okay, great, thank you.

Thank you.

We'll go next to John [Curty] with Principal Global Investment.

Good morning.

A question with respect to your annual guidance of $2.65 to $3.00.

Does that include any gain from the sale and leaseback.

Does not include any gain.

Okay.

On the store openings for fiscal 2010 -- the seven -- what is kind of the timing of those stores?

First half the year?

Yes, they'll be front-end loaded and they'll all occur in the first half.

Okay, so out of the $65 million in CapEx, that's -- I realize that represents a reduction because of the reduction of stores in 2010 -- how much of the CapEx for those seven stores that will open in the first half of 2010 will be occurring in this back half of 2009?

Fiscal '09?

About $8 million.

Leaving roughly how much for the balance, then, in fiscal 2010?

Probably 14 to $17 million.

I'm not quite sure of the mix of land and all of that but -- and I don't really have that in front of me.

Sorry.

Okay.

And then the interest expense and the depreciation expense guidance for this year reflects the sale and leaseback of the properties?

Are there adjustments in there that would lower the depreciation because of the sale and leaseback?

Not significantly.

There would -- only one quarter's impact.

Probably less than a quarter's impack.

It's going to be towards the end of the year that we close this thing, so it's not material.

Okay.

And then with respect to your retail operations, you talked about cost pressures on the product side, as well as increased markdowns; what's kind of your outlook for the back of half of the year, even though you've increased the amount of negative same-store sales guidance for the back half?

What are you --

Well, as I said in my prepared remarks, one of the things we've been doing on retailer as we saw the slowdown earlier in the year -- and we do have pretty long lead times on retail -- is that we've been pulling back on our orders.

So we should have our inbound retail product more in line with our expected sales, so we won't be doing was we had to do in the first first half the year, which was to unwind longer inventory positions than we would have liked given the sales.

So we're in better shape from that point view.

Our goal and our plan is to have our retail inventories be in line with run rate of sales by the year-end.

So net all of that is, we don't expect markdowns to be such a significant tool in managing our inventories in the second half as we will in the first.

Is there much seasonality in the retail business?

I mean ,is the second quarter usually one of the high points of the quarters?

Yes, it it is.

On the retail side, we were like every other retailer, that the holiday season is the busiest time of the year.

Thank you very much.

Thank you.

Just to quickly clarify the capital spending -- the balance of the capital spending on the ten stores, probably about $15 million.

And we'll go next to Jake [Krandelmeyer] with Ramsey Asset Management.

Hey, guys, thanks for taking my question.

Can you just give us a sense, maybe on a per-store basis, regarding the sale leaseback -- the impact from the P&L to the higher rent expense, but also the offsetting depreciation and other expenses that you may incur?

Thanks.

We really don't do that until the terms are finalized.

Got it.

Okay, and then could you also give us a sense maybe going forward, have you seen the sales trends that you saw in January continue over into February?

We would love to talk as ever with the current month, but our policy is that we only give quarterly guidance.

So sorry that we can't tell you about that.

Okay.

Thanks, guys.

Thank you.

(Operator Instructions).

And we'll go next to Chris Blackman with Imperial Capital.

Yes, I appreciate it.

Can you hear me?

Yes, we can.

Okay.

I hate to keep coming back to the sale leaseback, but under that transaction, I assume the land, the building and building improvements are included in that?

Yes.

And the equipment is not included, would that be right?

That's right.

If I take the low end of what you're suggesting you're going to get back from the sale leaseback of -- and subtract the distribution center, that would suggest that those 15 stores are going to generate about $43 million in sale leaseback, which is roughly about 35% higher than the sale leasebacks you did back in 2000 on the 65 units you did then.

I think you're bringing in an average of about 2.8 million -- 2.86 million per store.

I guess you've answered the gain and the amortization and depreciation; but was curious, the age of those units -- those 15 units.

Can you give us an average age of those units?

It will be a mix; but they will be newer stores, probably in the 2004/2008 timeframe.

Okay.

Some of them will be 2004/2008?

That's the pool that we're looking at, yes.

Okay, and the -- is the lease term going to be -- do you expect the initial term to be 21 years, or do you have a time table on --

Again, that's part of the negotiations right now.

We don't want to publicly negotiate against ourselves.

Okay.

Any thoughts on the increase in value from 2000 to 2008 average per store?

Any -- is that just general inflation or --

Part of it is sales per store are higher than they were back then.

Okay, that's helping drive it?

Yes.

Are you seeing any leverage on advertising?

With this competitive environment out there, the economy the way it is, do you see any opportunities to reign in advertising or to get more out of your advertising or possibly to renegotiate better contracts some of your billboard costs and such?

Well, we're seeing on the billboards, we are seeing opportunities -- as we're always in the process of renewing with 1,500 billboards out there -- and we're seeing leases come up that are lower than the previous rent on that particular billboard by a little bit.

So that's certainly an opportunity.

We've got the agency who works on that directed to -- we're not going to give up the quality of the boards, but we certainly see an opportunity to reduce our lease costs on billboards, so we're focused on that.

And then as we buy or have bought radio and TV, we certainly are looking at the fact that there is an opportunity.

We generally approach everything in the business today that the marketplace and the world has changed out there, and we're looking for opportunities to benefit from that.

We see no reason why we shouldn't take the benefit side of the economy while we're taking the negative side on the sales line.

Great.

With this capital transaction you're doing on the sale leaseback and the reduction in CapEx, can you give us any more guidance on how much debt you expect to pay off by the end of the year?

No, that will get us into giving guidance on cash flow.

We would give the earnings guidance and the other components, so you can probably get there if you work your way through the numbers.

Yes.

Now, you've said in the conference call, I think your range has been stated $2.65 to $3.00.

I was just reading through the preliminary transcripts from one of the services, and it's got you quoted as saying $2.55 to $3.00, and I just want to confirm you said $2.65 --

I said $2.65, just as it is in release.

Okay, perfect.

Thank you very much.

Thank you.

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

Yes, this is Brian [Vicaro] filling in for Bryan Elliott.

I was hoping you could give us a little bit more color on the change to the interest coverage ratio that you mentioned -- the change in the calculation?

And the I just had one quick follow-up.

Yes, if I can speak to that, that's simply adjusting to a correct interpretation of the document.

We had in fact been using a GAAP interpretation, but the document itself has a non-GAAP interpretation; so that has nothing to do with having issues with the covenant the way we're doing it.

We just think we should be interpreting the document correctly, and the banks and the accountants all support that.

So it's just a mechanical correction.

Okay, fair enough.

And what was the -- if you could give us just the inventory balance sheet number at the end of the quarter -- for retail specifically?

Well, hang on just a second.

Just a second.

Okay, no problem.

Approximately $140 million.

We typically don't break out and disclose separately our restaurant inventories from our retail inventories.

About 140?

Okay, thank you.

Thank you.

And we have a follow-up from Jake Krandelmeyer with Ramsey Asset Management.

Hey, guys just one more on the sale leaseback.

I know last year at different points in time when people had talked about the value of your restaurants, you would always kind of use the $3 million per site number as the rule of thumb; and if you do the math at the mid-point of your current guidance "x" the distribution center, it's about 2.9 -- so a little under 3.

I'm just curious with the deterioration of the credit markets and financing, and just commercial real estate in general, I mean, I'm just trying to get a sense of your thought process and whether or not -- how prudent you guys are being with throwing out -- kind of a similar $3 million number per site?

Well, we don't normally throw out numbers.

We normally have some pretty good substance behind numbers.

In this case, we have good substance behind our numbers.

We're just not finalized on the negotiation, so we don't want to -- I guess as a nominal air, I would say we're highly confident that we're going to get the deal done and get to the numbers we have out there.

Got it.

Okay, thanks.

Okay.

We'll return to John Curty with Principal Global.

Yes, a follow-up on the balance sheet.

The assets held for sale of $5.5 million -- what is that, please?

We have a couple of locations that we closed several years ago that are still currently being marketed for sale, and we have one property -- a corporate property -- in the local market that we're trying to dispose of as well.

The corporate property, is that an improved property or is that just a parcel of land?

It's an improved property.

It's just excess capacity.

And do you have any vacant parcels that may be coming up for sale at a later time where -- as a result of reduced store opening plans or anything like that?

No, no, we don't.

Okay.

Thank you.

Thank you.

And we'll go next to Brad Ludington with KeyBanc Capital Markets.

Thank you.

I just wanted to follow-up, just looking into fiscal 2010 -- if I was trying to estimate CapEx, I mean I would assume you use roughly the $28 million maintenance again; and what number should I use per store in development?

Well, we haven't spoken about the 2011 new store count; and we are not in a position to do that just yet, so it's difficult to get a number or to give you a number that would be helpful at this point.

Our normal protocol is to announce our development plans with our year-end earnings release every year for the new year.

We just accelerated that this time to give some visibility into our capital expenditures for the remainder of this year so that there would be greater visibility into our comfort level with our covenant calculations.

So we really can't give you anything that would be helpful at this point, but we will certainly be doing that in September.

Okay, and just last -- and this may fall in that same bucket, not ready to comment -- should we expect that the Seat-to-Eat initiative goes -- hits CapEx in fiscal 2010?

Yes, that's reasonable at this time.

Okay.

Thank you.

Thank you.

And there appear to be no further questions at this time.

I would like to turn the call back over to Mr.

Woodhouse for any additional or closing comments.

Okay, well thanks again, everybody for joining us.

I would like to say in closing that we are pleased with the -- all of the aspects of our performance, as represented in quarter.

We're very pleased that our brand is so strong, that we are able to attract the traffic that we do in these very difficult times; but at the same time we're able to get on top of our costs and to be able to sustain our earnings guidance, and hopefully given more visibility into the covenant questions and we've -- we're going to have a little insurance with the sale leaseback.

So appreciate all of the questions, and we'll be here next quarter.

Thanks.

That does conclude today's conference call.

Again, we thank you for your participation.

You may disconnect at this time.