Cracker Barrel Old Country Store Inc (CBRL) 2009 Q3 法說會逐字稿

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  • Operator

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

  • Today's call is being recorded and will with available for replay today from 2 pm Eastern through June 10th, 2009 at 11:59 pm Eastern by dialing 719-457-0820 and entering the pass code 3143057.

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

  • Barbara Gould.

  • Please go ahead.

  • - IR

  • Thank you, Crystal.

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

  • Our press release announcing our fiscal 2009 third 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 and 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 when considering forward-looking statements or information.

  • Many of the factors that can affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning's press release and are described in detail in our 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 fourth quarter earnings and comparable store restaurant and retail sales for fiscal May, June and July on Tuesday, September 15th before the market opens.

  • On the call with me this morning are Cracker Barrel's Chairman, President and CEO, Mike Woodhouse, and our Executive Vice President and CFO, Sandy Cochran.

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

  • We will then respond to your questions.

  • Mike?

  • - Chairman, President and CEO

  • Thanks, Barb, and good morning everyone, thanks for joining us this morning.

  • We have a lot of good news to share with you.

  • Most importantly, that we continue to outperform the casual dining industry in traffic, and at the same time, have year on year margin improvements based on sustainable cost measures that will support the strength of the brand.

  • This has been accomplished through a combination of factors that all relate to guest satisfaction, whether it's in how quickly people are served, creating something new on the menu or getting the latest music from your favorite country artist.

  • We continue to receive confirmation that our brand is relevant to the lifestyles people want to live.

  • Most recently for example, Cracker Barrel's won for the eighth consecutive year the Welcome Mat award for sit down restaurants, an award given by the Good Sam Club, the world's largest RV owner organization.

  • The core idea behind our plans is to tightly manage the costs of the stores and at the home office, while at the same time training and recertifying execution standards at our stores with what we call t he One Best Way, so that we can deliver the great experience that our guests have come to expect each and every time they visit any one of our stores.

  • Speaking of country music, we were pleased to work with Dolly Parton this quarter to release her Backwoods Barbie collector's edition CD exclusively at Cracker Barrel.

  • The CD is ranked in the top 20 on Billboard magazine's country albums chart since we released it on May 23rd, an indication of our growing position as a music retailer in a fast-changing industry.

  • We also offered 1,350 limited edition Dolly Parton rocking chairs at $199 each, and we've sold all but 13 of those rockers.

  • Dolly's book, the official collector's edition Dolly Parton photo album, set a Cracker Barrel book sales record.

  • Our latest CD, offered exclusively at Cracker Barrel, is Montgomery Gentry's For Our Heroes.

  • It was released on Memorial Day, just two days ago, and the 12-song CD features hits like "Something to be Proud of," and "My Town." It also includes an exclusive new song, "One of Those Days," as well as four songs that have received only limited release previously.

  • We're very pleased that Montgomery Gentry's CD set a first day sales record of over 4,400 units.

  • Portions of the proceeds from the sale of this CD will benefit the Wounded Warrior Project which provides programs and services that aid severely injured servicemen and women in their recovery both physically and mentally.

  • We'll begin to roll out our new billboard creative in June.

  • The roll-out will be completed by the end of November.

  • You'll see a return to some of the recognizable brand colors from previous billboards in a more distinctively Cracker Barrel design.

  • The messaging will remind people who are familiar with Cracker Barrel to come and visit us.

  • In markets where we're less known the messaging will explain the concept.

  • For instance, some of these billboards will use our tag line, "Half restaurant, half store, all country."

  • So let's look at what's happening today.

  • I don't pretend to be an economist but it feels like the consumer is beginning to be more optimistic.

  • We've seen improved consumer sentiment numbers in April and now as of today, the May numbers.

  • Initial jobless claims appear to have peaked in late March and early April and weekly hours for manufacturing rose to 39.6 hours in April from 39.4 hours in March which is the first increase in nine months.

  • A recent AAA study predicted that 32 million people would take some kind of road trip over Memorial Day, an increase of 1.5% over last year when gas prices were over $4 a gallon.

  • With all that said, I think it will be well into 2010 before we see any real turn in consumer spending.

  • We're not building our plans or our guidance on the expectation of near term improvement.

  • Cracker Barrel we focus on delivering consistent value and quality, not on discounts.

  • As a result, the guest experience is always top of mind.

  • I'm happy to report that our overall satisfaction scores continue to improve.

  • Our operational focus on speed of service has resulted in significantly higher speed ratings from our guests this year compared to last year.

  • We also scored higher on attentiveness, friendliness, cleanliness and retail store service than a year ago.

  • We've not cut portion sizes or served lower quality food and we have no plans to do so.

  • Our average ticket is about $8.93, up 2.8% in the third quarter and 3.1% for the year.

  • Programs that we've put in place are aimed at improving the guest experience without increasing costs and often at a lower cost.

  • We continue to outperform the Knapp-Track casual dining index in traffic as we have for the past 12 quarters.

  • Over the past two years we've outperformed Knapp-Track by approximately 1.5 percentage points and our performance in the past two quarters has been stronger than that.

  • One of the things we're doing to drive traffic is to provide more variety and choice for our customers.

  • Recent examples are the lunch and dinner skillets that we ran for seven weeks in the third quarter.

  • The skillets performed very well, significantly outperforming last year's spring promotion.

  • The skillets were supported by TV advertising in about a quarter of our markets.

  • We continue with breakfast skillets after the lunch/dinner promotion ended, adding a fourth, the Santa Fe skillet, to the lineup, and the breakfast skillets continue to do better than last year's breakfast promotion.

  • On May 11th we introduced our Campfire Grill summer promotion which has three offerings -- campfire chicken, campfire beef and grilled chicken pineapple salad.

  • We introduced campfire chicken several years ago.

  • It was a guest favorite as well as winning a Menu Masters award from Nation's Restaurant News.

  • And this season we're also offering a version for beef lovers.

  • Campfire Grill will run through July 5th and is being supported by TV and radio advertising similar to the skillets promotion.

  • I also want to bring you up-to-date on what's happening behind the scenes at Cracker Barrel.

  • While our people on the front lines are delivering the same high quality guest experience, our Company's been hard at work making significant changes on how we do that.

  • This includes building a new development kitchen at the home office which allows us to replicate the operating environment at the store to ensure that new menu items can be executed in store to our high standards.

  • The new kitchen allows us to test actual in store operations.

  • Procedures developed in the old kitchen would often have to be modified when they were tested in store, adding time and cost to the development process.

  • For the new facility we can be confident that the new products, processes and equipment we develop and test here can be executed exactly the same way in our stores.

  • The new facility includes all the new equipment and the new pass-through window format being tested by our innovations team.

  • 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're narrowing the whole year operating margin to be in the range 5.8% to 6.1%, and we're able to tighten our EPS guidance for fiscal '09 to a range of $2.70 to $2.90 per share.

  • We continue to make progress on pleasing our guests with more experienced employees.

  • Our turnover remains below 80% for hourly employees and 20% for management which are really impressive numbers for this industry.

  • Meanwhile, we're testing a new system to improve our ability to schedule and deploy labor as effectively as possible.

  • We're also focused on managing other store operating costs.

  • We would be managing certain controllable cost lines against sharply lower targets throughout the year.

  • We've also been sing our new exception reporting and outlier programs and as a result we have a combined almost $8 million of savings year-to-date and we expect that number to exceed $10 million by year end.

  • Our Seat to Eat initiative is another integrated tool to drive store traffic and increase productivity.

  • In the third quarter we ran a training trial in a district to determine the best way to roll out the Seat to Eat initiative.

  • The results are positive.

  • We are achieving faster service and better customer satisfaction scores throughout the test stores, and we continue to target improvements in labor productivity and food waste.

  • This is an example of where the single statistic store traffic may not be the best measure of success with our program.

  • The real result is better service at lower cost which is a win for our guests and a win for us.

  • In June we'll be finalizing plans to roll out the Seat to Eat initiative across the Company during fiscal '10.

  • Another example of progress behind the scenes is the retail distribution centers where better communication and coordination have already resulted in efficiency gains, while the reduction in transportation costs is significant.

  • Cracker Barrel has a culture that encourages our DC employees to make decisions to serve their customers, the retail stores, in the best way to create sales.

  • To quote Bob Maury, the Distribution Center Director, we want to get our merchandise into the DC and back out to the stores as quickly, cost effectively and as efficiently as possible.

  • The key to the improvement has been a concerted effort to improve communications between the distribution center, and the merchandising, planning and allocation departments.

  • Today, morale is high and productivity is consistently improving, and turnover has dropped to a very low 17%.

  • We've asked our employees to ask themselves how we can do better, and they came up with the answers.

  • Let me give you some examples.

  • The logistics department, by changing the port of entry for imported retail goods from the West Coast to Savannah, Georgia has save the Company $1.5 million annually.

  • During the holiday season, by reducing add modifying routes, we reduced emergency deliveries to the stores by 76%.

  • Shifting the responsibility of store mail from UPS to our DC delivery system has now resulted in an annual savings of $450,000.

  • Other benefits include a reduction in the number of routes by we with send merchandise to the stores by 20%.

  • Let's stay with retail.

  • In an extremely difficult retail environment, our comparable store sales were down 7.4% in the third quarter.

  • Sales of our retail food products including everyday candy and Cracker Barrel branded mints and gum were strong and accounted for about 20% of sales in the quarter.

  • Easter product sales were up in the quarter.

  • The softest areas in retail were toys and apparel.

  • Toys declined in the quarter largely due to fewer new offerings for Webkinz and Ty Plush toys this spring to drive sales.

  • Women's apparel, both knit tops and accessories, continues to be soft.

  • We're working to manage our inventories in line with our current levels by year end by reducing our buys where we can and delaying purchases.

  • So far, we've reduced our retail inventory to $98 million, just $3 million higher than last year.

  • Until we see that our guests are willing to commit to higher discretionary purchases, we're going to be careful in balancing our new product themes and looking for ways to tie the restaurant and country store together and continue to manage inventory levels in line with sales trends.

  • Now I'd like to talk about our capital structure.

  • 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.

  • With our profitability focus and plans to reduce 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 fourth quarter.

  • At the end of the third quarter, our revolver was undrawn and the long-term debt stood at $770 million with $8.8 million in current maturity.

  • As you saw in the press release, we have a contract on the sale leaseback of the distribution center.

  • We're going to use the cash from this transaction along with the cash we'll generate from the sale leaseback of approximately 15 of our stores and excess cash from operations to pay down debt by the end of the fiscal year.

  • With that, I'll turn the call over to Sandy Cochran for her detailed financial review.

  • Sandy?

  • - EVP and CFO

  • Thanks, Mike.

  • Let's review in more detail the financials.

  • For the third quarter of 2009, we reported a 13% increase in diluted earnings per share of $0.52, compared with $0.46 per diluted share in the third quarter of last year.

  • Income from continuing operations of $11.9 million was $1.5 million higher than last year, reflecting higher operating income and lower interest expense this year, partially offset by higher effective tax rates.

  • Revenue from continuing operations during the fiscal third quarter increased slightly to $568 million, reflecting top line growth in restaurant revenues which was driven by store growth, offset by a year-over-year decline in retail.

  • Although we have outpaced the Knapp-Track index by approximately 1.5% over the past two years, our restaurant performance was even stronger comparatively in the second and third quarters of this year.

  • Despite this, our comparable store restaurant sales declined 0.9% and guest traffic was down 3.6% for the quarter.

  • Our average check increased 2.8%, including a menu price increase of approximately 3.4%, which was partially offset by negative mix.

  • The mix was affected primarily by fewer guests ordering beverages and deserts.

  • Our focus continues to be on maintaining the guest experience, which includes ample portions of high quality food at a fair price and not reducing portions or food quality as a means to offset inflationary pressures.

  • Cracker Barrel comparable store retail sales were down 7.4% in the third quarter of 2009.

  • We continue to see softness in apparel and toys, offset by strengths in food and media.

  • Looking at sales on a monthly basis, the quarter was impacted by the shift in Easter, which moved sales from March to April.

  • Overall, however, we believe comparable store restaurant and retail sales in the quarter benefited by approximately 1%, because of the later Easter.

  • Operating income of $29 million was 5.1% of revenues in the third quarter, compared with $27.7 million or 4.9% of revenues in the same quarter of 2008.

  • Operating income was positively affected by lower cost of goods in both restaurant and retail, as well as lower G&A expenses, partially offset by higher labor and related expenses and operating expenses.

  • Cost of goods sold as a percentage of sales was lower than last year.

  • Higher menu pricing more than offset food related commodity inflation of 1.8% in the quarter.

  • Specifically, costs of eggs, dairy and seafood were below last year.

  • We've been seeing food cost inflation abate and we are forecasting food cost inflation at flat to up 0.5% for the fourth quarter.

  • At this point, we have more than 90% of our commodities locked in for the remainder of fiscal 2009.

  • Dairy and produce are the major categories that are not fully locked at this time.

  • Higher retail gross margins in the third quarter were primarily related to a shift in the timing of a Porch Sale to the fourth quarter.

  • As a percentage of sales, our labor expenses were 50 basis points higher than last year.

  • These expenses include healthcare costs, which were significantly higher than last year.

  • On January 1st, 2009, we modified our healthcare plan for our hourly employees.

  • Higher than expected enrollment and usage, in addition to higher plan expenses, created an 80 basis point unfavorable variance in the third quarter.

  • Although the cost per person has declined as we anticipated, the total expenses to our healthcare plan have exceeded our expectations.

  • For the fourth quarter, we anticipate that healthcare costs will continue to be unfavorable by approximately 25 to 50 basis points.

  • We continue to manage our labor costs.

  • Our hourly inflation was 1% in the quarter and as Mike mentioned hourly turnover was below 80%.

  • This reduces our hiring and training costs and we believe contributed to higher guest satisfaction scores and positive guest experience.

  • The lower number of store openings and the completion of our developmental plan for the year reduced preopening labor costs in the quarter.

  • We also saw sustainable productivity gains in hourly restaurant labor versus last year.

  • Operating expenses were slight tally higher in the quarter, because of expanded advertising support of our new product introduction.

  • Lower pre-opening expense and a continued focus on controlling operating expenses offset most of the increase in advertising.

  • Also, we continue to make improvement in supplies and expenses related to our lower turnover.

  • In general and administrative expense, our focus to control discretionary spending is paying off as G&A as a percentage of sales was 4.9%, down 20 basis points from the third quarter of 2008, and down in absolute terms by $0.8 million.

  • Lower travel, professional fees and management training costs were partially offset by higher incentive compensation accruals.

  • Interest expense of $12.7 million was $1.5 million less than last year's third quarter due to lower borrowing rate.

  • Our third quarter income tax rate was 26.6% compared with 22.5% in the third quarter last year.

  • The lower tax rate in the third quarter of 2008 was due to the rolling off of the FIN 48 reserves relating to expiring statutes of limitations and lower effective state tax rates.

  • The effective rate for the full fiscal year of 2009 is expected to be in the range of 26% to 27%.

  • Now let's move to our cash flow, balance sheet and debt covenants.

  • For the first nine months of fiscal 2009, cash flow provided by operating activities was $90.1 million, compared with $83.8 million in 2008.

  • The increase reflects the reduction in retail inventories in the first nine months of fiscal 2009, timing differences and interest accounts payable and income tax payments.

  • Year-to-date capital expenditures were $50 million compared with $61 million last year, reflecting fewer new units in fiscal 2009.

  • With the opening of three units in the third quarter, we've completed our planned unit expansion of 11 stores for the current year.

  • Through the first three quarters, we've paid cash dividends of $13.1 million, or $0.20 a share quarterly, which at current stock prices represents a yield of approximately 2.5%.

  • We're pleased to report that following a competitive bidding process we have a contract on the sale leaseback of our retail distribution center and a letter of intent for the sale leaseback of the 15 stores.

  • We're expecting gross proceeds from the two transactions to be approximately $57 million, which breaks down to $12 million to $12.5 million for the distribution center and almost $3 million for each store.

  • Net proceeds of $53 million to $54 million, all of which we intend to use to pay down debt.

  • The gain of the sale will be amortized over the life of the leases.

  • And due to the timing of the closing, the effect on the fourth quarter will not be material.

  • We'll disclose more details on the sale leaseback after the closing of the transaction.

  • On the balance sheet, we've reduced our retail inventory to $98 million at the end of third quarter compared to $125 million at year end fiscal 2008.

  • We've reduced our retail purchases for the remainder of the year and we anticipate that our retail inventory levels at the end of fiscal 2009 will be approximately $10 million below last year.

  • Total inventory was $133 million at the end of the quarter, flat with last year's third quarter end, and down $22.6 million from the end of fiscal 2008.

  • On May 1st, we had cash balances of $36 million.

  • Quarter end we were evaluating a possible repurchase of our debt, at a discount.

  • But with our debt trading now at near par, we intend to apply the excess cash to our outstanding debt balances at par.

  • Our total borrowings including current maturities at quarter end was $778 million with no outstanding borrowing under our revolver.

  • Using excess cash and the anticipated proceeds from the sale leaseback, we would expect our total long-term debt to be down to approximately $670 million at year end.

  • We remain in compliance with our debt covenants at the end of the quarter.

  • Our total leverage ratio was 3.66.

  • And our interest coverage ratio was 6.05.

  • As of May 2nd, 2009, each of the maximum leverage ratio and the minimum interest coverage ratio is 3.75.

  • Let's now look at our outlook.

  • Entering our fourth quarter, we are still anticipating a difficult consumer environment and are focused on growing restaurant traffic and retail sales, controlling our costs, and managing our inventory levels.

  • Based on current trends, we presently expect fiscal 2009 total revenues to range from flat to down 0.5%, from last year's $2.4 billion of total revenue.

  • Comparable store restaurant sales are projected to decrease 1.5% to 2%, including approximately 3.3% of menu pricing.

  • We have lowered our expectations as to comparable store retail sales to down 6% to 7%.

  • Given our performance through the first nine months and the lower expectations for retail sales through the fourth quarter we've narrowed our range of guidance on operating margins to 5.8% to 6.1% range which compares with an operating margin of 6.3% for fiscal 2008.

  • Net interest expense has been lowered to a range of $52 million to $52.5 million, which is between $4 million to $4.5 million lower than 2008 interest expense based on lower interest rates.

  • Depreciation for the year is expected to be approximately $60 million.

  • The diluted share count is expected to be between 22.5 million to 23 million shares.

  • We are also narrowing our projected diluted earnings per share projection for 2009 to a range of $2.70 to $2.90.

  • We're pleased that our sales performance and productivity improvements provided positive earnings growth which, when combined with slower unit growth and aggressive balance sheet management, generated strong cash flow.

  • We believe we're one of the strongest and most highly differentiated brands in the industry.

  • We're well positioned to take advantage of an improved operating environment and to deliver premium returns to our shareholders when the economy returns.

  • Thank you for your time this morning and I'll turn the call back over to Mike for his closing remarks.

  • - Chairman, President and CEO

  • Thanks, Sandy.

  • Just to summarize, our focus is on getting the word out about Cracker Barrel because we think we have something to talk about, and our new billboards and TV advertising are doing that.

  • When our guests come to the stores, our focus is on providing new and interesting and attractive offerings and I think our new menu offerings and some that we have planned for the future and our summer retail items will do that.

  • And then we want to provide them with an overall great experience and our training and retraining and certifying with One Best Way is aimed at doing that.

  • One of the things that we focus on is to think about our guest experience as an investment and not a cost center, and I think that guides us in terms of how we view how we treat our guests, and I think our guests are rewarding us with the traffic that we're seeing in today's difficult times.

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

  • Operator

  • The question-and-answer session will be conducted electronically.

  • (Operator Instructions).

  • Our first question comes from Brad Ludington from Keybanc Capital Markets.

  • - Analyst

  • Good morning.

  • Thank you.

  • I wanted to ask just a house cleaning question.

  • On the interest rate swap liability, as your nominal amount's going down here in May, is there anything that will flow through on the interest line related to an adjustment for that?

  • - EVP and CFO

  • No, no.

  • - Analyst

  • Okay.

  • And then when you look at the labor line, good to see in the fourth quarter, I think you said you're expecting less pressure from the health plan, but can you comment on what you think that minimum wage increase could do going beyond that, beyond July into August?

  • - Chairman, President and CEO

  • We'll be talking about next year at our next conference call and providing guidance.

  • I think we would prefer to keep our remarks right now to what's going on in the third and fourth quarters, and as we said, wage inflation is running about 1% which we think is pretty good.

  • We've got some focus on hiring wages so that in this difficult environment, we are, if you will, taking advantage of that situation by making certain that we're not over-paying on the front end as we hire people which then helps manage our overall labor costs as we go forward.

  • - Analyst

  • Okay.

  • And then given that the development is done for the year, should we expect the lower absolute dollars on the G&A line to continue in the fourth quarter?

  • - Chairman, President and CEO

  • We're guiding to I think flat G&A I think for the year?

  • - EVP and CFO

  • Yes, flat for the year.

  • But we should see some, directionally we should see some improvement in the fourth quarter.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from Robert Derrington from Morgan Keegan.

  • - Analyst

  • Sandy, welcome to the show.

  • - EVP and CFO

  • Thank you.

  • - Analyst

  • Glad to have you.

  • Couple of, again, laundry list questions.

  • I'm not sure whether Sandy or Mike you're the one to ask.

  • If you could help me clarify on the sale leaseback, you talked about net proceeds of $53 million to $54 million.

  • I thought last conference call we were talking about net proceeds of $55 million to $60 million?

  • - Chairman, President and CEO

  • Since I was on the last conference call, let me start this.

  • That's true.

  • And I think it's also fair to say that the commercial real estate market has been heading down for some period of time and we are I think, I believe we have a very good couple of good deals here.

  • Not done yet, but very close.

  • And given the market environment, we're very, very pleased with the outcome.

  • - Analyst

  • What I was curious about in that number, Mike, was the variance versus the prior expectation, was it due to the store level value per store or was it the value per the distribution center?

  • - Chairman, President and CEO

  • The high end of the range last time had a higher number of stores.

  • We hadn't settled on a number of stores so I think the focus has to be on the low end of the range which was the number that related to the actual number of stores we expected to do.

  • - Analyst

  • How should we think about the rent impact on the P&L from that transaction, I know it's a small base of restaurants.

  • - Chairman, President and CEO

  • Very, very limited in the fourth quarter because we're not expecting to close the deal until sometime in July and we'll talk about that with our guidance for next year in September.

  • - Analyst

  • Okay.

  • And then one more question, I'll jump back in the queue.

  • Mike, when you look at the media spend, I know that you've been pretty cautious about spending on media because you wanted to make sure you get a good return on your dollars.

  • Do you feel like you're getting that on the dollars you're spending for both the TV and the radio you've been using recently?

  • - Chairman, President and CEO

  • Yes.

  • We're spending again, it's about a quarter of the system.

  • Some of the markets that we're advertising in were markets that we also advertised with our TV test last year.

  • So it would be unrealistic to expect a big lift.

  • I think in today's market, protecting the lift we gained last year is pretty good.

  • As I look around me and look at the restaurant industry and look at the effects of advertising and non-advertising on various competitors, I think what we're achieving is pretty good.

  • We're also getting, in the you newly advertised TV markets, we're getting a good lift.

  • And we're going to continue to.

  • We've got the second round to go against campfire and then we're going to look at how we did and then build our plans for next year.

  • But I expect at this point to continue to be advertising on radio and TV next fiscal year.

  • - Analyst

  • Got you.

  • Very good.

  • I'll jump back in the queue.

  • Thank you.

  • Operator

  • Our next question comes from Steve Anderson from MKM Partners.

  • - Analyst

  • Good morning.

  • Very quick question.

  • Campfire Grill, have you engineered that to make that part of the Best of the Barrel initiative, seeing it had a similar menu about 10 years ago with the Campfire Grill?

  • - Chairman, President and CEO

  • The Best of the Barrel Menu we replaced with a new core menu across the whole system in March.

  • Campfire Grill is built on, as you point out, a very successful product, I think it was nine to ten years ago, and we re-ran it again since then.

  • We've tweaked it a little bit this time, added the beef, and getting very good guest feedback.

  • - Analyst

  • Yes.

  • And maybe a little early to ask this question but do you have any insight into fiscal 2010 food costs and if you have locked in any costs for that yet?

  • - Chairman, President and CEO

  • That's something we will be talking about in September.

  • - Analyst

  • Okay.

  • Thank you.

  • I'll get back in queue.

  • Operator

  • Our next question comes from Bryan Elliott from Raymond James.

  • - Analyst

  • Good morning.

  • Couple follow-up questions.

  • First, on the Easter shift, just curious why you think there was as much as a point benefit to the later Easter, although both years within the quarter?

  • - Chairman, President and CEO

  • I think the later Easter always benefits retail.

  • Retailers in general benefit from a later Easter, it's a longer selling season.

  • So on the retail side I think that's what's going on.

  • On the restaurant side, later Easter allows a very clear distinction between spring break and Easter, so we get two travel opportunities within the quarter, which helps build restaurant traffic.

  • - Analyst

  • Okay.

  • All right.

  • On the taxes, what are we seeing, pretty meaningful reduction in tax guidance, what's driving that?

  • - EVP and CFO

  • It's largely due to some additional roll-offs of FIN 48 reserves which we're anticipating in the fourth quarter.

  • - Analyst

  • Okay.

  • And will that clean them up or might that be a benefit as we move into next year as well, possibly?

  • - Chairman, President and CEO

  • We'll talk about guidance for next year in September.

  • - Analyst

  • But will we still have some further reserves that we may or may not be able to realize?

  • - Chairman, President and CEO

  • It's a dynamic process because we're rolling in and rolling out over time.

  • - Analyst

  • Right, okay.

  • - Chairman, President and CEO

  • We're really up and running on FIN 48.

  • - Analyst

  • I probably need a refresher on that.

  • - Chairman, President and CEO

  • I've got a book with about 600 pages that you can have.

  • - Analyst

  • My staff is all on vacation this week so we'll get it next week.

  • All right.

  • Could you help a little bit, disaggregate the impact of the Porch Sale which was a factor in the cost of goods improvement?

  • How much do you think was from that timing shift?

  • - Chairman, President and CEO

  • Two things happened with moving a Porch Sale as we did.

  • One is we had lower sales in the third quarter than we would have and we have higher or better margins because we don't have the heavy markdowns, so you've really got to look at both of those.

  • I don't think that the net of those is totally meaningful or material.

  • - Analyst

  • All things being equal, then, we would expect higher sales and lower margins relative to what we would have been, had the Porch Sale obviously stayed in the third quarter, right?

  • So it makes the improvement in COGS higher than it otherwise would have been here in Q3.

  • - Chairman, President and CEO

  • Correct.

  • And both of those effects, as you correctly point out, are in our guidance.

  • - Analyst

  • Yes, Okay.

  • All right.

  • And last question from me.

  • How many lease commitments have been made for 2010, and more generally, how do think about development in the new fiscal year?

  • - Chairman, President and CEO

  • Well, we've announced that we're going to open seven and it's going to be front end loaded.

  • And leases, we have three leases.

  • - Analyst

  • Okay.

  • And I guess commitments, purchases and leases I guess is the question.

  • - Chairman, President and CEO

  • Oh, commitments?

  • - Analyst

  • Yes.

  • - Chairman, President and CEO

  • We're committed on six I think.

  • - Analyst

  • Okay, very good.

  • All right.

  • Thanks a lot.

  • - Chairman, President and CEO

  • Thank you.

  • Operator

  • Our next question comes from Joe Buckley from Banc of America.

  • - Analyst

  • Hi, it's actually Steven Barlow for Joe.

  • I was wondering if you could just talk generally about discounting across casual dining and if that is having any impact on you.

  • And how do you see yourself positioned and maybe room there to be more promotional?

  • - Chairman, President and CEO

  • Okay.

  • Let me try the short version and then maybe we'll expand the longer version.

  • We're very cognizant of the fact there's a lot of discounting going on out there, a lot of special prices, a lot of BOGOs, a lot of everything.

  • I would just, first of all, repeat what I said in my prepared remarks that we've been running 1.5% ahead of Knapp-Track traffic the last two years, and in the most recent two quarters we've improved on that run rate.

  • Those two quarters are when the discounting really started happening.

  • I don't want to sound complacent because we're actually anything but complacent around here, but I think the focus on the value as it relates to the guest experience, the quality of the product, and the fact that we're not taking anything off the plate and we're not disappointing in any way, is actually working in our favor in this environment.

  • I think what -- and I don't want to comment on specific competitors but as I observe the industry, as well as discounting, there's a lot of product offering changes going on in the form of portion sizes and quality specs and so on and so forth.

  • So that's what the industry's doing.

  • What we're doing is offering what we've always offered at the same price.

  • And I would just stand behind the traffic numbers and say so far the consumer is voting in our favor.

  • - Analyst

  • Great.

  • And then are you seeing any kind of sequential noise by day part for the comp, specifically breakfast and then maybe weekend versus weekday?

  • - Chairman, President and CEO

  • I think the one noticeable trend which I guess is probably true across the industry is weekday dinner because that's probably the most discretionary of the offerings, in the sense that even though there's no compulsion to go out and eat on the weekends, I think people like to have that as a treat and want that as part of their lifestyle.

  • But during the week, weekday dinners, a little softer than the other day parts.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • We have a follow-up question from Brad Ludington from Keybanc Capital Markets.

  • - Analyst

  • Thank you.

  • I wanted to follow up on a comment about how AAA is forecasting that travel will be up year-over-year.

  • Is their expectation that with travel up that people probably watching their dollars a little bit more, I would assume there's expectations that your retail will still be hurt but do you think they'll still be saving the dollars on stopping in for breakfast, lunch or dinner while they're on the road as well, or is that something you've looked at?

  • - Chairman, President and CEO

  • I think when we looked back at last year's, our fourth quarter, the summer time period, our traffic relative to Knapp-Track did soften a little bit.

  • We were still running at or slightly above for a period of a couple months there.

  • I think that's almost certainly in part a result of $4 gas last year.

  • So I think we're going to see more miles driven and when people drive they're going to stop and eat and I think we benefit from that.

  • - Analyst

  • Okay.

  • And then with the retail same store sales guidance it seems to imply that you expect fourth quarter same store sales to sequentially deteriorate a little bit, at least, from the third quarter.

  • Is there potential for the Porch Sale shift to turn that around and maybe show upside to that guidance?

  • - Chairman, President and CEO

  • No, the Porch Sale is in the guidance.

  • - Analyst

  • All right.

  • Thank you very much.

  • Operator

  • Our next question comes from Chris O'Cull from SunTrust Bank.

  • - Analyst

  • Mike, given the commodity inflation has moderated, do you expect to take less pricing in coming quarters?

  • - Chairman, President and CEO

  • They're partially related, obviously, because what we've always said in this commodity crunch for the last couple of years is we at least need to cover our dollar increases in food costs.

  • I think pricing is going to be -- let me say it this way.

  • I think to the extent commodities are easing it puts less pressure on having to take price.

  • I think pricing in this market is a very sensitive thing, as we've always said.

  • We are taking prices.

  • We do test them.

  • We are not seeing any measurable impact on traffic from the price increases we're taking but we're very sensitive to the price that consumers are willing to pay for a meal and that is where, as we see continued discounting, I think that that sort of sticker effect will get in people's minds.

  • But again, there's absolutely no sign of negative reaction to any pricing we're taking.

  • We're going to keep our options open.

  • We're going to, when we talk about providing value, price is part of that equation and we'll price as we think appropriate to sustain the relative benefit we're getting in traffic.

  • - Analyst

  • Okay.

  • And one other question.

  • I know you guys have done a really good job of using these exception reports to manage or improve your costs.

  • When you look forward, where do you think some of the best opportunities to reduce costs or control costs in some of these outlier stores?

  • Does it still lie within the labor line or do you find more of it in controllable expenses going forward or is there some sort of food gap, waste gap that you've got?

  • Where do you see most of the opportunity going forward?

  • - Chairman, President and CEO

  • Well, the outliers, an outlier store can be an outlier by virtue of any one of the cost lines that you mentioned.

  • We're not just looking at a single line.

  • We're looking at stores that are outliers on the various lines and giving them tools to correct that.

  • So the outlying group is a dynamic group.

  • Stores correct and then others fall into the outlier group.

  • If you think about it in terms of we have standards, obviously, in all of those areas of getting the whole system to get tighter along that progression line against standards, that's really what we're trying to do.

  • And so there's a continuing opportunity that runs across everything.

  • - Analyst

  • This new labor system that you're talking about, testing soon, is that going to be the tool that these guys need to maybe manage labor better or have they had some ad hoc reporting systems today that have helped them reduce that labor cost?

  • - Chairman, President and CEO

  • We have a system today which we've had for some time.

  • So today when we're managing labor, we're managing using that system.

  • The new system will give us a more precise tool to manage labor by hour or day and by day of week.

  • - Analyst

  • So we should expect maybe some further savings on the labor line after using this new tool?

  • - Chairman, President and CEO

  • Yes, that is the purpose of the tool.

  • My hesitation is simply in terms of don't expect it next week because we haven't announced the roll-out yet.

  • - Analyst

  • Okay.

  • Great.

  • Thanks, guys.

  • Operator

  • Our next question comes from Gary Miller from RBC.

  • - Analyst

  • Yes, hi.

  • Thanks.

  • Larry Miller.

  • I just had a question for you, Mike.

  • As you look back historically, as guest satisfaction scores begin to improve, or actually decline, how long until you typically see the change in sales either way?

  • - Chairman, President and CEO

  • I think it's a tough thing to call.

  • I think improving -- the only way I can measure sales in this environment is on a relative basis.

  • And we specifically are focused on traffic because sales becomes a difficult number when we have discounting and so on and so forth.

  • So again, our traffic is doing better absolutely and better relatively than it has and I would expect continuing guest satisfaction to sustain that direction.

  • - Analyst

  • That makes sense.

  • Let me ask it another way that you might have more data.

  • How much improved are the guest satisfaction scores relative to maybe three, six or 12 months ago?

  • - Chairman, President and CEO

  • I'll say this to all of our operators that are listening.

  • They're great but they're not enough.

  • - Analyst

  • Okay.

  • Thank you.

  • - Chairman, President and CEO

  • Thank you.

  • Operator

  • We have a follow-up question from Robert Derrington.

  • - Analyst

  • Thank you.

  • Mike, could you give us a little bit of perspective on the product development you have at this point in time?

  • It seems like this fiscal year we've seen a little bit more creative offerings than we've seen in a while, coming out of the test kitchen, ultimately into the restaurants.

  • Is there more in the pipeline and if there are, would we, like the campfire meals, would those be a limited time offer or should we expect that some of these things, obviously beyond skillets, get to the menu and stay on the the menu?

  • - Chairman, President and CEO

  • We have a pipeline.

  • Somewhere in all this I think I alluded to the fall promotion.

  • Just so happens that our 40th anniversary is in September so when we get to our fall promotion, we've structured that around a theme that we're calling Back and Forth, which is about looking back to our tradition and heritage and looking forward to where we're trying to go.

  • And we're doing that with food, so we're bringing in some tried and true items but we have some new items that are taking us further down the road of expanding our appeal, expanding our relevance and expanding in the areas of fresh and good for you.

  • So it's going to be -- the products are great.

  • Signed off on all of them and so that's really I think going to be interesting to see, watch our guests respond to this kind of offering.

  • So I'm very, very encouraged with the process we made in the last eight, nine months on product development.

  • We've changed the process.

  • We're managing to move things through faster and we do have this new kitchen which is really helping, as well.

  • But the important thing is we have a very clear strategy around our menu and around our products which is designed, as I said, to move the brand forward as well as reinforce its strength and its roots.

  • And yes, we will see some products moving on to the menu potentially as we broaden the offerings because there's going to be some potentially new categories that we will want to see on the menu after the promotion.

  • - Analyst

  • Okay.

  • You've got my curiosity piqued.

  • When you look at the skillets, obviously those had a very favorable cost profile.

  • Do the campfire meals also have good cost to sales, as well?

  • - Chairman, President and CEO

  • One of the expectations that we have with our promotions is we will see an improvement from a mix point of view, a mix driven improvement in margin, and campfire does that for us.

  • - Analyst

  • Terrific.

  • Didn't want to assume it.

  • Thank you.

  • Operator

  • Our next question is a follow-up question from Steve Anderson.

  • - Analyst

  • One quick question on the retail side.

  • Have you noticed any kind of a -- what has been the change in terms of the average tickets on the retail?

  • - Chairman, President and CEO

  • No, there really hasn't been any significant change.

  • The challenge on retail is in terms of units per guest.

  • - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Our next question comes from Paul Bourke from Stanfield Capital Partners.

  • - Analyst

  • On the 15 units in the sale leaseback, could you remind us again maybe like where they're located or why you chose these 15 and maybe the AUVs relative to the rest of the store count or the stores?

  • How should we look at these relative to the rest of the stores in your -- ?

  • - EVP and CFO

  • It was a fairly diverse geographically portfolio of our stores that were relatively new, and we will give you some more details after we close, but I don't think we'll be disclosing the details of the volumes of those specific stores.

  • - Analyst

  • Okay.

  • Okay.

  • And you'll disclose the cap rate at that time as well?

  • - EVP and CFO

  • At this time, we're not planning to.

  • - Analyst

  • Okay.

  • That's it.

  • Thank you very much.

  • Operator

  • We have no further questions at this time.

  • I would like to turn the call back over to Michael Woodhouse.

  • - Chairman, President and CEO

  • Thank you.

  • Well, thanks everyone for joining us today.

  • Hope you have a sense that in these difficult times, we have a clear sense of where we're going.

  • Everything is focused around the guest experience and improving the guest experience through the things we do, the things we offer, and by staying true to the brand.

  • We're not going to use short-term tactics.

  • We think we're doing very well with our current direction and we are working with our strong cash flow to maintain our dividend, reduce our debt, and we think we're headed for a really positive future.

  • So thanks for joining us and we'll be back in September.

  • Operator

  • This concludes today's conference.

  • Thank you for your participation.