Cracker Barrel Old Country Store Inc (CBRL) 2010 Q2 法說會逐字稿

Good day and welcome to the Cracker Barrel's second quarter 2010 conference call.

Today's call is being recorded and will be available for replay today from 2 pm eastern through March 9, 2010 at 11:59 pm eastern by dialing (719) 457-0820 and entering passcode 362-4273.

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

Please go ahead.

Thank you, Megan.

Welcome to our second quarter 2010 conference call and webcast this morning.

Our press release announcing our fiscal 2010 second quarter results and our updated outlook for fiscal 2010 was released before the market opened this morning.

On 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 or expected future events.

These are what are known as forward-looking statements which involve risks and uncertainties, and in many cases, are beyond our control 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 are described in detail on our reports that we file with the SEC, and we urge you to read this information carefully.

We also remind you that we don't comment on earnings estimates made by other parties.

In addition, any guidance or outlook that we give speaks only to the date as such is given.

We do not update our expressed continuing comfort with our guidance except as required by law and then only in broadly disseminated disclosures such as this mornings press release, our filings with the SEC and this call.

We also disclaim any obligation except as required by law to update disclosed information on trends or guidance and note that any such updates should they occur, again will be made only in broadly disseminated disclosures.

We plan to release fiscal 2010 third quarter earnings and comparable store restaurant retail sales on Tuesday, May 25 before the market opens.

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

Mike will begin with a review of the business.

Sandy will review the financials and outlook and then Michael will return to close.

We will then respond to your questions.

Mike.

Thanks, Barb.

Good morning, everyone.

Thank you for joining us today.

This was an excellent quarter for Cracker Barrel driven mainly by better operating margins that produced strong earnings.

We will continue to make improvements across the Company and I anticipate that further progress as our execution becomes more consistent through the daily efforts of our 66,000 employees.

We have been working a number of programs to provide a better guest experience and at the same time improve our profitability and the results are encouraging.

For example we've used our focus on weekend execution which is to provide great service when our stores are at their busiest to raise our gain throughout the rest of the week.

Our new promotional menu items are a big hit with guests, and we've got a number of new successful retail products.

We continue to deliver strong profits through disciplined cost management.

We are especially pleased with these positive results considering the economy in general and the financial results reported by many others in the restaurant industry.

One factor I can point to in explaining this is that we have a greater level of intensity at Cracker Barrel compared with a year ago and compared with two years ago.

We've made efforts to simplify the business which has allowed us to focus on fewer areas that actually can have a significant impact.

For example, much of our progress to date has been achieved by removing obstacles that have slowed down service.

So it's no surprise that we've been able to execute better across all fronts; food preparation, table service and retail.

Remember, this is still a work in progress.

The initiatives we're still working on means that there are more improvements to come.

I'm very pleased that our positive momentum continues despite the challenging economy.

As you know, there is still a lot of uncertainty about the pace of the economic turnaround that we are in the middle of.

Consumer confidence was 55.9 in January, the highest score in more than a year.

However, the news on employment and job accretion is still largely negative.

It seems for every company that announces the hiring of new workers, there are others with news of layoffs.

With new jobs scarce and money generally tight, it's no wonder the consumers are focused on paying down debt and getting more value for their money they do spend.

Given this environment, we are pleased to have comparable store restaurant sales that are down only 0.2% for the quarter, including the slightly negative effects from more severe winter weather this year than last year.

It seemed better though when you compared the results with the rest of our industry.

In fact Cracker Barrel has now outperformed the Knapp-Track index for 14 consecutive quarters.

And we had a positive average check in every quarter.

For the second quarter our comparable store traffic was more than two points better than the Knapp-Track index.

Four of our regions had positive comp store sales and Florida and the upper Midwest are two of the areas showing the greatest positive comparisons.

In addition, our weekday business improved in the second quarter as did lunch and breakfast on the weekends.

We can point to our improving customer satisfaction scores to explain why we are staying ahead of the pack.

However, this doesn't fully explain our ability to more than hold our own for such a long period of time.

We think the answer to that question lies in the strength of the brand and in our unique offerings.

Keep in mind that we have been voted Best Family Dining for 19 years in a row in the annual "Choice in Chains" survey conducted by "Restaurants & Institutions" magazine.

For over 40 years we've put together a winning combination that creates a nostalgic atmosphere featuring food made from scratch and an old-fashioned country store.

There's something about that down-home feeling that stirs up strong emotions.

That's one reason why people continue to rate us very highly.

Even though we have been around for decades we think the trusted Cracker Barrel brand is more relevant today than ever before because of the value that is associated with both our restaurant and retail offerings.

The recession has definitely changed consumer spending habits, some would say perhaps forever.

We aren't smart enough to make predictions, so we are not about to make predictions about when the recession will end or how much people will commit to dining out when it does.

However, the latest research to support the notion that today's customers are even more demanding about the value they expect, and Cracker Barrel continues to be all about offering high-quality food and great retail products at a great value.

And we now continue with an update on the things we can control.

Our focus on execution called One Best Way has helped our overall guest satisfaction scores improve again in the second quarter.

In particular, we saw significant gains in the areas of "speed of the order in the restaurant", "server attentiveness" and "appropriate food temperature".

We also scored higher marks for "retail service".

An important part of One Best Way is Recipe Right, which we started in fiscal 2008, to ensure that high-volume food items are prepared throughout the system according to our specs.

Recipe Right, coupled with efforts to improve the management of waste through promotional execution, enabled us to save over $2 million compared with last year and reduced waste during the second quarter.

Let me next tell you how we're progressing with our Seat to Eat initiative.

Seat to Eat is focused on delivering consistent execution during both peak and off peak hours.

Seat to Eat also provides measurable results to allow employees to know when they are meeting their targets and when they need to improve.

It has been rolled out now in all 72 stores in the first region to implement the program, including one of our new stores that opened during the second quarter.

And we kicked off the Seat to Eat rollout in our second region during the last week of January.

The third region will begin its rollout in April.

We're pleased that the implementation costs have been lower than expected and our initial traffic results have been positive.

We will continue to monitor these stores to ensure that the results meet our expectations.

Clearly once we have guests in the store, we will only have to serve them better.

However, we still have to drive more traffic to the stores.

Our best opportunity to do this is to build frequency among our like-users who make up about one-half of our guest's.

We know that they love the Cracker Barrel brand but that were not always top of mind.

At the same time local customers are among our heaviest users, but in some cases they aren't coming in as often as they have in the past.

To that end, we've been having good success with our promotional menu item's.

We are adding a number of new offerings that compliment our tried and true favorites.

In the second quarter for the holiday promotion, we continued some of the popular fall offerings in addition to traditional holiday favorites.

During the last week of the second quarter we rolled out the winter promotion.

For breakfast it includes a Baked Country Casserole and a favorite from last winter, the Smoked Sausage Skillet.

For lunch and dinner we extended the range of Cracker Barrel comfort foods with two new offerings, which both include a new brand of steamed green beans, waxed beans, red onions and fresh red peppers.

The first is a Chicken and Vegetable Biscuit Pot Pie, retailing at $7.99.

And the second is a Mushroom-Braised Pot Roast at $8.99.

To round out the meal we've introduced Grandma's Cheesecake for dessert.

Next a few word on retail sales.

Our efforts to place the right products in the right place, at the right time and at the right price are starting to pay off.

For example, we were able to reduce our second quarter mark-downs significantly by right sizing the amount of seasonal items and by the introduction of the Great Gifts program.

This colorful display had a prominent place when you first entered our stores during the Christmas season.

We offered a wide variety of items both fun and practical at each for less than $20.

Several of the items sold out in just a few weeks and we reordered them in time for Christmas.

These included the Laughing Dog, the Magic Fiddle and the Tabletop Air Hockey games.

As a result of our successful holiday strategy we exceeded our expectations for retail sales and gross profits and we significantly improved our retail profitability during the quarter compared with the holiday season last year.

While we've trimmed the number of our apparel SKUs, the key item that produced strong sales in the quarter was the one-size-fits-all fleece wrap for $24.99.

Collegiate products continue to be a growing category for us.

And our T-shirts and hats honoring America's military personnel have sold through very quickly, leading us to expand this assortment in the months ahead.

As spring giftable selection is now in the stores, this includes chocolate, tea and coffee selections that sold well last year leading into Valentine's Day, as well as Easter-themed items.

In addition to generating better sales, our retail operations are consuming less cash than before.

Our retail inventory level was $90 million at the end of the quarter, $14 million below last year.

Discussion in retail wouldn't be complete without mention of our media sales.

We see our exclusive CDs as an important factor in the growth of Cracker Barrel's role as nontraditional music retailers.

We did something new with the Allen Jackson collection.

This exciting theme includes Men's Wear, Womens Wear, food items and collectibles, and Allen Jackson's signature rocker and of course, an exclusive CD with two previously unreleased songs.

The CD was one of our ten best selling products during the quarter.

On the first of February we introduced a new CD by Dailey and Vincent, an award-winning bluegrass duo, which ended the Billboards Magazine Bluegrass album chart at number one, and remained at the top in the second week of sales.

It was also in the top 20 on the Country Album chart and was at number 120 on the overall Billboard 200.

Our exclusive music collection features today's younger artists as well as legends of yesterday and gives all of our guests one more reason to visit Cracker Barrel.

We also benefit from the wide publicity surrounding our participating artists as they tour the country and promote these new CDs.

We've also placed more emphasis on sales of Cracker Barrel's branded foods.

We now have targeted items on specific products.

For example our brand of mints and gums which have been selling very well.

But more than just building retail sales, we see this key program as another way to leverage the power of the brand, helping to keep Cracker Barrel on top of mind.

Of course our retail products sell better when there is service behind the sale, and this is another example where I think we have a greater level of intensity.

We've had a program called Service to Create Sales for sometime now and this, too, is an area where we are getting even better at execution.

Another way to drive traffic is with gift card sales, and we are very pleased with the results we saw this year.

In the second quarter overall gift card sales increased 14% from last year.

This was driven by a broader distribution of third party outlets which has now increased to 50,000 total outlets over the past holiday season.

Specifically, outside our strong financial results in the same quarter were mainly driven by higher operating margins.

Our ability to take advantage of favorable commodity costs in the quarter combined with better retail gross margins, and better labor and operating expenses, produced significantly better imagines at the store operating level compared with a year ago.

As you know, many in our industry have been resorting to discounts and other giveaways to driving traffic and sales.

This is left what some refer to as a discount hangover.

The challenge of restoring normal prices without negatively affecting travel.

We don't use other means of discounting, and most importantly, we have improved the bottom line without compromising guest experience.

No changes in product specs, no change in portions and no reductions in service levels.

This doesn't mean that we can let up, we have to be even more disciplined than in the past regarding how we set prices and we manage our costs.

Between high productivity and a better overall sales mix we expect our operating margin to improve further in fiscal 2010 to between 6.7% and 6.9% for the full year, up from 6% last year.

A big part of what sustains our brand appeal is delivering the best experience - - best guest experience every time.

At Cracker Barrel we take pride in our ability to attract and retain great people.

Our turnover for the second quarter was 68% for hourly employees and 16% for management.

These low turnover levels mean even more experienced employees which in turn means a better level of guest service, which brings our guests back more often and allows us to continue to outpace the Knapp-Track index.

And with that I will turn the call over to Sandy to discuss the financial results in detail.

Sandy?

Thanks, Mike.

I would like to review the financials in more detail.

Overall for the second quarter of 2010, we reported a 35% increase in diluted earnings per share of $1.09, compared with $0.81 per diluted share in the second quarter of last year.

Revenues during the second quarter increased 0.4% to $633 million, reflecting a 1.1% top line growth in restaurant revenues which was driven by store growth and partially offset by year-over-year declines in comparable store restaurant and retail sales.

Comparable store restaurant sales decreased 0.2%.

Our average check increased 2.1% including a menu price increase of approximately 2.4%.

Our average check was negatively affected by lower incidence of beverages and size, partly offset by a favorable promotional mix effect.

Excluding the severe weather effects in December and January, comparable store restaurant sales would have been positive.

Guest traffic was down 2.3% for the quarter.

We've outperformed the Knapp-Track index for traffic 14 consecutive quarters since the last quarter in fiscal 2006, and the gap in traffic was over 2 percentage points in the quarter.

Our strong brand in solid every day value has enabled us to sustain pricing power and a positive check average.

Cracker Barrel's comparable store retail stores were down 3% in the second quarter of 2010.

Comparable store sales by month were impacted by a shift in the timing of our Employee Appreciation Day.

In fiscal 2010, we concentrated these days into December versus having days in both November and December last year.

This change negatively affected comp sales in November but improved our retail gross margin for the quarter.

And as Mike mentioned, we were pleased with the performance of our merchandise assortment.

Gross margin for the quarter improved 180 basis points compared with last year.

On the restaurant side, cost of sales as a percentage of sales was lower than last year because of favorable menu pricing and lower food costs which declined 2.4%, compared with yet last year primarily because of price declines in seafood, pork, dairy and eggs.

We also benefited from lower food waste during the quarter.

Holiday sales performed as planned resulting in significantly reduced markdowns and improved retail gross margin.

In addition, both restaurant and retail cost of sales benefited from lower freight costs.

Labor expenses as a percentage of sales were 100 basis points lower than the second quarter last year.

Restaurant hourly and management labor costs, employee healthcare benefits and workers compensation insurance costs were lower, but were partially offset by higher store bonus expense.

Employee healthcare cost benefited from the new plan that went into effect in January as well as lower usage under the old plan at the end of calendar 2009, compared with usage during the earlier portions of the year.

Our holiday wage rates declined in the quarter by 0.1%.

Continued low, hourly turnover which is now at 68% has reduced our hiring and training costs and helped contribute to higher guest satisfaction scores and a positive guest experience.

Other store operating expenses were 10 basis points better than last year.

Lower operating expenses this quarter in dollar terms resulted from lower utility costs and favorable general insurance costs partially offset by higher rent expense resulting from the sale lease-back transactions that we completed at the end of fiscal 2009.

In the quarter, we recorded $2.3 million in asset impairment costs for one leased location.

General and administrative expenses were higher by 90 basis points because of higher incentive compensation expense.

As a result of a higher gross margin and favorable labor and operating expenses, partially offset by higher general and administrative expenses, our operating income of $49 million was 26% higher than in the same quarter last year and operating income margin of 7.8%, 160 basis points higher than last year.

Interest expense of $13.3 million was flat with last year's second quarter reflecting lower debt outstanding offset by the higher interest rates resulting from the amendments to our revolver and term loan at the beginning of the second quarter, but extended the maturities of portions of those facilities.

In the second quarter, our income tax rate was 29.6%, compared with 29.4% in the second quarter last year.

Primarily as a result of our higher operating margin, our net income of $25 million in the second quarter was $7 million, or 38% higher than last year.

Our balance sheet and cash flow statement show the benefit of initiatives that we have underway to improve our cash flow and reduce debt.

For example on our balance sheet our retail inventory of $90 million is down $14 million from the second quarter of fiscal 2009 and as a result of better inventory management and product selection.

During the quarter we paid down $41.4 million on our debt.

At the end of the quarter, total borrowing including current maturities was $602 million and there were no borrowings outstanding under our revolver.

We remain comfortably in compliance with our debt covenant.

At the end of the quarter our total leverage ratio was 2.56 which is substantially below the maximum of 3.75 allowed by the credit agreement.

Now let's move to our cash flow.

In the first six months of fiscal 2010, cash provided by operating activities was $86 million compared with $50 million in 2009.

The increase reflects the higher net income and continued improvements in working capital.

Capital expenditures for the quarter were $28 million compared with $37 million last year reflecting pure new units in fiscal 2010, and we paid cash dividends of $9.3 million in the first six months reflecting our current quarterly dividend of $0.20 per share.

In the quarter we did repurchase 205,000 shares for $7.8 million, for $38.04 per share to offset delusion.

Now let's take a look at our outlook.

Everyone should be mindful of the risks and uncertainties associated with our outlook as described in today's earnings release and in our reports we filed with the SEC.

Given the most recent trends we do not believe that a strong case exists to say that the consumer environment is improving.

And we believe that consumer spending will remain challenged throughout our fiscal 2010.

We are reiterating the sales guidance that we gave at the end of the first quarter.

Total revenues are projected to be flat to up approximately 2%.

Comparable store restaurant sales for the full year are projected to range between a decrease of 0.5% to an increase of 1%, including approximately 2.5% of menu pricing.

We expect comparable store sales for retail to be negative to flat for the year.

We are focusing on controlling our costs, managing our inventory level and improving our sales trends.

We are opening six new Cracker Barrel units in fiscal 2010, all of which are now open.

The remaining one that we plan to open late in fiscal 2010 will now open early in fiscal 2011.

We're now forecasting commodity costs for fiscal 2010 to be down 2.0% to 2.5%.

And we currently have approximately 76% of our remainder - - of our commodity requirements for fiscal 2010 under contract.

We believe that our 2010 guidance balances uncertainties about consumer spending and our cost to rolling out important initiatives during the year against the benefits of our ongoing cost management efforts and the expectation of easing inflationary pressures on key cost lines.

We expect our year-over-year rate of improvement in operating margins to slow in the second half of the year.

There is several contributing factors.

We begin to lapping management efforts begun last year and we have a greater level of investment in rolling out key initiatives.

Retail gross margins and store management training costs will normalize in the second half.

And in the second half of fiscal 2009 we had significantly lower store management training costs as we move towards a lower new management staffing structure.

We are raising our operating margin guidance for fiscal 2010 to be between 6.7% and 6.9% compared with 6% in fiscal 2009.

Strong performance in the first half has allowed us to increase EPS guidance to be in the range of $3.35 to $3.50 with approximately 23 million to 23.5 million diluted shares expected to be outstanding.

We plan to repurchase shares during the year only to offset delusion in the year associated with stock option exercises and other share-based compensation.

Our guidance for depreciation, net interest expense, tax rate and capital expenditures have not changed from the last update.

Capital expenditures in the range of $70 million to $75 million allows for approximately $32 million in maintenance capital, the six new stores for 2010, anticipated spending for the fiscal 2011 new stores, plus investment and innovation initiatives such as Seat to Eat.

In conclusion, we are very pleased that we are able to achieve substantial earnings per share growth in an environment that continues to be challenging and that we generated significant cash flow in our first six months.

As one of the strongest and most highly differentiated brands in the industry, we believe that we're well positioned to take advantage of an improved operating environment and to deliver solid returns to our shareholders.

Now I will turn the call back over to Mike.

Thank you.

Thanks, Sandy.

Now I would like to turn the - - open the call up for questions.

(Operator Instructions).

Our first question will come from the site of Joe Buckley from Banc of America.

Your line is now open.

Thank you.

Could you fill out a few more details on your experience so far of Seat to Eat?

Maybe talk about whether you are achieving the targeted service times that you had and talk a little bit about the cost, the training costs, associated with it.

And did you indicate that initial region did end up with positive traffic and presumably positive same-store sales for the quarter?

I'd be happy to talk about it.

We are at the beginning of what we believe will be a successful program.

We are very happy with the way the rollout went.

As I've said earlier, we - - our training costs, rollout costs, were below budget and we think we can - - hope we can maintain that.

The traffic results were positive.

We haven't made a big deal in this quarterly close about the weather, but of course there's been a lot of noise around everything with weather.

So it's very difficult to read anything over the last probably month or so because of the bumps of weather.

But we are very pleased with it.

As I've said, we are going to be monitoring very closely for - - to make certain that we hit our expected results.

One of the things I've said repeatedly over time is that the biggest danger with any rollout in any restaurant company is that it gets rolled out successfully and then it becomes yesterday's program.

We're not going do that.

So a lot of emphasis on follow-up.

For example, we have done a refresh already in the first region that we fully rolled out with our district managers to make certain that they continue to be totally current.

So that's the emphasis we're putting on.

Roll it out successfully on the front, and come along behind and make certain that we are sustaining that success.

Okay.

And then just one question on the retail business.

The guidance, full year guidance, implies positive retail comps in the back half of the year.

Could you talk a little bit about your confidence in that guidance?

And also just a question on Great Gifts, whether that will be a continuing program through the year away from the Christmas season?

Yes, we have confidence in our guidance.

We've been working very hard on retail.

Over the last year we are much better at buying the right stuff and maintaining the right level of inventories for the environment.

Making certain that we are allowing room for some sales improvement.

Not buying down so much that we are depressing sales.

So we're pretty confident with the solvent of merchandise we have going into the spring and summer, that we've got good stuff and we've got the right stuff.

And we are very focused on price points, making certain that we aren't getting ahead of where the consumer wants to be on price points.

Great Gifts is an important part of what we did over the holidays and is going to be an important part in the future.

We had nice success, we learned some things.

For example, let's not run out on the really popular products as soon as we get them out there, which we learned pretty quickly.

And what we're going to see with Great Gifts is a - - it's going to be a sustaining program, but as we hit holiday or special occasion kinds of times, we will bring this assortment back together and emphasize it more.

For instance, ahead of Mother's Day, we're going to put some real energy behind Great Gifts and other typical kinds of occasions like that.

So we're feeling much better about retail than we did a year ago.

We're trying to be cautious generally about when is the consumer coming back.

We don't want to predict as I said in my remarks, a major turnaround in the economy here.

So we're kind of keeping it steady.

But retail should be good.

Okay.

Thank you.

Thanks, Joe.

Our next question will come from the site of Jeff Omohundro, of Wells Fargo.

Your line is now open.

It's Jason Belcher for Jeff.

Again, still on the retail.

I was wondering if you could give us a little more color on the retail margin performance in the quarter?

Maybe help us understand how much that retail margin contributed to overall profitability in the period?

And then also if you could talk a little bit more about your initiatives on the Service Behind the Sale or Service to Create Sales in retail, that you mentioned?

That would be great.

Thank you.

Jason, I will take the first part of the margin because we don't say much and I will give the service one to Mike.

We don't disclose the specifics break down in our cost of good.

But we were very pleased with the progress that we made in retail.

And we expected to based on the performance from last year and the level of markdowns that we needed to take last Christmas when the environment changed so dramatically and so quickly.

Okay.

Although on the service question, the Service to Create Sales is a program that we've had in place for several years but we continually look at it, update it.

We specifically right now focusing on the fact that a portion of retail purchases are made after the guest has eaten in the dining room comes back into the retail store.

So we want to make certain that we're paying attention to the needs of those guests who are coming back into the store.

We very focused with the program on product knowledge, on target items.

We are not a hard sale kind of environment, and we don't want to become that.

But we want to make certain that we maximize the opportunity when our customers are in a frame of mind to buy something.

We want to make certain we are paying attention and giving them what they need.

Okay.

Thank you.

Thank you.

And we will move next to the site of Brad Ludington from Keybanc Capital.

Your line is now open.

Thank you.

First off congratulations on a great quarter.

Thank you.

Thank you, Brad.

You're welcome.

I want to start off with, Sandy, depreciation, it was a little higher than we expected.

Is that just due to the openings, the three openings?

Or is there some accelerated depreciation involved with the rollout of Seat to Eat?

It's just about the timing of some of the assets that are related to specific items into the store and some of the initiatives, spending does have shorter lives and so on.

Okay.

So should we expect this trend to continue in the next couple of quarters?

Or just kind of a one-time pop?

I think it's part of a one-time thing.

Okay.

And then on the impairment charge that was related you said to a leased locations.

Is that one of the ones that went to the sale leased-back, or just one?

No, they wouldn't let us do that.

No.

It's not one of the four leased-back stores, and it is a leased location.

Okay.

Good.

And beyond that, on debt repayments and share repurchases, should we - - what kind of assumptions should we make for the back half of fiscal 010 on those?

I think modest additional - - we've got some required payments of debt that are scheduled in there that are fairly modest.

And then we will repay what we can but we're very careful about the level of our interest rate swap.

And so that does provide us with something of a floor.

Okay.

You are a little below that notional amount right now, aren't you?

No, we are not.

Oh, okay.

We are not.

Because the swap does amortize.

So we are very careful to keep it at that and we are mindful of that as we pay down.

And in terms of the share repurchases, it really is just after we have some delusion from stock option exercises, then we look for an opportunity to go into the market and repurchase.

I think that will be ongoing as we go through the year.

But it will be dependent on the share exercise activity.

All right.

Congratulations again and thank you.

Thank you.

Thanks, Brad.

We will now move to the site of Larry Miller from RBC.

Your line is now open.

Yes, thanks.

Sandy, I might have missed it.

I thought you said something about February, maybe you were just talking about weather, but I don't know if you were talking about comps?

And then - - my question was, I think you cited some factors that might limit your earnings growth in the second half of the year.

Things like - - improvement in retail gross margins and lapping some cost efforts.

Can you couch that another way and talk about what level of comp you wouldn't necessarily need to see to see some margin expansion in the back half of the year?

And if you just look at the guidance range there is some margin expansion at the high end, but the low end has a contraction.

Thanks.

Let me try to address some of those first - - I don't remember saying anything about February, specifically.

But we did have weather in February.

And the weather that we specifically discussed today was in the second quarter which we said we would have otherwise been positive.

The weather in February has been more severe, but it's factored into the guidance.

In terms of just the balance of the year and expectations about earnings, the point was just that as we go into the second half of the year we have a number of factors that we will be addressing.

We've got the - - we are lapping our cost management efforts that we began last year, so the comparison gets more difficult.

We - - the timing of our initiatives is such that it's heavily weighted to the back end of the year.

And so we will see some additional maintenance and then initiative spending as well as we expect our turnover to normalize.

And as we begin to build our staffs for our new stores for 2011, we will see more expense there.

Our bonus expense will continue to be higher and then our gross margin improvement in retail was, our expectation for the full year, was heavily weighted into the second quarter because of last year's performance that was where we had the most pressure.

Let me just jump in on the turnover comment.

What happened last year was that we decided during the year that we were going to reduce the standard levels of management in our lower volume stores by year end, which meant that we reduced our hiring, essentially to zero for quite an extended period of time because we had more managers in the system than we needed, so we let turnover take care of the attrition to get us to the new level.

This year we are in a pretty steady state of turnover.

We were at the new staffing levels for managers in our lower volume stores.

So we have lower management expense at those stores.

But we were back to a more normalized rate of recruiting and training trainees in the second half of the year.

That's going to be, year-to-year, that's going to be an increase in cost.

That is helpful.

Thanks.

And then - - just thinking out on a longer term basis, Mike, you simplified the business a lot and then presumably as a result of that, you are operating more efficiently today than you have in the past.

I think that's probably true.

Several years ago you were close to an 8% operating margin.

How do you think about that as long term goal as you sit here today?

Well, I think that a lot of things have changed since we were at 8%.

We have been - - we are obviously very pleased with what we did in the most recent quarter, and we think the second half of the year is going to be heard the way we've guided.

The things that have changed for the industry are overall pricing ability, we feel that we are in good shape.

We have been holding our pricing power so we think we can use that.

But we're going to be cautious because as I said in my remarks the industry has been discounting and there's some kind of correction is going to have to happen.

We just want to make certain we don't overpromise ourselves on our ability to price our way to better margins.

As we get full traction on our Seat to Eat initiatives which, as we said previously, we are expecting to take 18 months from last October to get throughout the system.

And as we later this year start rolling out our labor deployment program, we have an opportunity to improve our structural cost.

So our goal is to continue to build operating margin.

That's the big leverage for us, we understand that.

And we think we were making progress.

I don't want to predict at this point a precise number on how long it will take.

I think it would be reasonable to assume that we are going to continue to see improvement year-to-year as we go forward.

Okay.

Thanks a lot.

Thank you.

And we will move next to the site of Bryan Elliott from Raymond James.

Your line is now open.

Thank you.

Good morning.

Couple of items.

First, just wanted to touch base, clarify a bit the comments on the labor cost.

I think there were some - - sounded like a reversal maybe in healthcare accruals or something that might have been a catch-up that artificially benefited that number a bit.

Did I hear that correctly, Sandy?

No.

We - - no, there was no reversal.

What we have are - - we have two different plans because the quarter, our healthcare plans are calendar based.

Right.

So November and December was under one plan.

And our usage as we got to the end of the calendar year, the usage within our employee base just was lower than we had been seeing and expected to see.

Then we moved into a new plan in January and our usage under that new plan has been better versus last January.

And plus that new plan is at a lower absolute cost, right?

We hope so.

Okay.

All right.

So it did sound like it was an accrual catch-up but it was just sort of marked as the bills come in, so to speak.

Okay.

More substantially, I want to talk a little bit about, get a little better handle on cost of goods.

I understand reluctance to sort of break out retail and food costs for us but the projection of I think it was 2% to 2.5% food deflation over the - - is that the balance or I guess that's the full year, right, now?

That's the full year.

With 70% of that contracted.

Could you just aggregate that a bit and what areas in particular are really driving the food deflation sort of protein versus dairy, and other things to give us a handle on what's moving the most and maybe the least in that?

And are you contracted out through calendar 2010 into fiscal 2011?

Or are we still - - I know you are more quarterly than annual on your contracting so give us a sense of the first half of new fiscal year?

Thanks.

Okay.

Let me answer the last part of that.

Our contracting is based on the specific commodity and where we see the cycle in that commodity and where we think we should be long or short in terms of that commodity.

We don't - - we measure the rest of the fiscal year just in terms of reporting but we don't have any contracts where we focus on the fiscal year as a determining date at all.

We are looking at what works for the business on an ongoing basis.

That's a change from where we were several years ago and it's been a beneficial change because we are not, unofficially - - it's like everything else.

The world doesn't change on the first day of the fiscal year just because it's the first year of the fiscal year.

So we try to manage the business in the right way for its normal cycle.

That's how we are doing - - so we have some one-year, two-year, three-year contracts in place.

So they will continue on to whatever their natural ending is.

On the specifics, I am gong to hand it to Sandy.

Okay.

So first, Ryan, you said 70%.

We actually - - we are 76% at this point for the balance of the year.

And then let me break down the particulars as I can.

The decline compared in the quarter compared to last year was primarily in seafood, pork, dairy and eggs.

The decline in our guidance versus the Q1 guidance.

So if you will, the outlook that we have now versus the outlook that we had in Q1 is primarily a difference in our view about the environment for eggs and dairy, but that's offset with a more negative view if you will on fruits and vegetables.

Okay.

And that's what's leading us to take the overall for the year guidance down from 1% to 2%, to 2% to 2.5%.

All right, very helpful.

And just, since we all have to publish something for the out year, can you give us just a ballpark on what percentage of fiscal 2011 or first half of fiscal 2011 needs might be contracted at this point, just a general number?

Brian, we feel your pain on having to do something.

But we pretty much have been sticking with our rule that we don't do that until we get to September.

Fair enough.

I enjoy opportunities to make myself look silly.

Thanks.

And we will move next to the site of Chris O'Cull from Suntrust.

Your line is now open.

Thanks.

Good morning.

Good morning.

I may have missed this in the prepared remarks.

But Mike, would you talk about the new labor deployment system and maybe what you are hoping to accomplish with it and the timing of the rollout?

Yes.

The system is in test as we've said before and current expectation is that we will start a rollout late this fiscal year.

This is a system that is designed to allow us to schedule more accurately and to manage how we manage on a shift-by-shift basis against that schedule.

Specifically, the goal is to have our labor be more variable related to sales than it has been historically.

That's a real opportunity for us because of our three-day parts, we have always historically run the business on a two-shift basis.

So we have a pretty substantial amount of labor that is fixed from open until two and then from two until close.

And of course, the sales don't fluctuate quite like that.

So the goal is simple.

The execution obviously, with the complexity of our operation, is a little more complex.

But it's - - one of the things we are working on is making certain that the Seat to Eat initiative and the new labor deployment system are compatible because Seat to Eat changes some of the individual rolls within terms of who does what in the kitchen and at the window.

So we have to follow, we have to have the labor deployment follow Seat to Eat so that we don't do this thing twice on two different operating platforms.

So that's the goal.

So the results should be better scheduling which should lead to more labor productivity.

And this is not just a cost cutting initiative.

It's really about building sales because if we staff our stores correctly, what tends to happen in most restaurants, and certainly in this because of the three-day parts is that we have too much labor at the slow times and too little labor at the busy times.

That's what we are trying to match up.

Do that successfully, we should see some ability to drive sales at the peak periods.

Great.

And is this a system you developed in-house?

It's - - no.

It's a third party system that we have worked to customize for our particular needs.

Okay.

Great.

And then one last question.

Sandy, would you break down the CapEx spend for this year between maybe new units, special projects like the CT and then ongoing maintenance?

Okay.

For the year?

Yes.

I would say stores if you combine residual nine expense in the beginning of the year, the ten stores and the 11 stores, is about 17.

That's new stores.

And then existing stores is 35.

And then - - initiatives is going to end up being in this year six to eight, and then the balance of that is G&A, and other.

I hope that adds to about the number that we gave you.

I think it does.

When - - with the initiatives should we - - is that something, the CT program should be fully implemented by the end of this fiscal year?

No, no.

End of next year.

I'm sorry, end of next fiscal year.

We will only have done three regions by the end of this fiscal year.

Actually some of the equipment will be purchased for some of the regions that will be rolling in Q1.

But they will be quite a bit of activity here through fiscal 2011.

Okay, great.

Thanks, guys.

Thanks.

And it looks like our next question will come from the site of Michael Wolleben of Sidoti & Company.

Thank you.

Sandy, can you just remind us what the [notional] amount on that swap level is today?

600.

600?

On those retail comps, can you give some color on that January number there?

It doesn't look like it was a particularly - - it wasn't the worst comparable from last year.

Where is that strength coming from and is that sustainable here, or - -?

It was very strong.

And, no, I mean that's not the kind of number we are baking in to the balance of the year.

We are pleased with it and I think a lot came together for us in retail, our assortments were strong, we had - - we had done a good job of having the right inventory, in the right places.

We weren't marking down.

So we were getting full price or close to full price for more stuff.

So that obviously drove the number up.

We were pleased.

As Sandy said, that we are expecting positive retail in the second half.

We would love to have 8% all the way through, but we are not projecting that.

Lastly here, can you give us any indication here what we should be thinking on unit openings in the outyear for 2011.

I know it was slowed down to six this year.

Is there a possibility that ramps back up closer to historical levels next year?

Or should we be thinking more on the pace of fiscal 2010?

Thanks.

It's really somewhere between those two.

That again is a number that we announce when we do our September year end call.

But I think it's reasonable to say it might be up just a little bit from 2010 levels.

Thank you.

Thank you.

(Operator Instructions).

We will go next to the site of Karen Lamark of Federated Investors.

Good morning.

I've got a few questions.

First with respect to your comp guidance for the year, it's unchanged but you indicated the severity of the weather in February was worse than Q2.

Does that imply that you're more dependent on comps in the fiscal fourth quarter or that there is a divergence in your comp expectations between the two quarters?

No.

The weather was early in February.

So the impact was really to the extent that there's some catch up versus our previous expectation.

That spread throughout the two quarters.

Okay.

Also with respect to gift cards, can you talk a little bit about the cadence of redemption, fiscal Q2 and then maybe for the rest of the year?

And maybe if it's changed versus the prior year given maybe some pent up demand for eating out?

Well we were pleased with the gift card sales that we had, particularly through our third party brokers.

But we are not seeing any meaningful difference in the redemption pattern.

I think we might be a little bit - - this year's reduction might be closer to a typical year.

Last year was a little accelerated, I think we saw that because everybody was short of cash and used their gift cards pretty quickly.

I think right now we were into a more normal pattern.

Okay.

And then with respect to pricing, given the challenging macro environment that you expect and your sensitivity to driving margins just by price.

Can you talk at all about your thoughts in taking price beyond the current fiscal year?

I mean you are still comfort with like a 2% or 3% rate?

We are not ready to guide to a pricing number beyond this year.

I mean our approach is going to be the same which is we are going to look at our price sensitivity in our stores by market versus competition, and we will take price where we can.

I would point out that we have been able to take price in the last 12 to 18 months in a situation where the industry has been discounting.

But we are going to be cautious because the last thing we want to do is to price beyond a level - - we don't want to inhibit the return to positive traffic through pricing.

So we are going to be careful and cautious and - - but we are confident that we can price at least to the industry level or potentially a little bit beyond.

Perfect.

One last question.

With respect to capital allocation, where do dividend increases fall?

Thanks.

Well we are going to sound like the people who never want to talk about the future.

I think and I will say that like the ads say the past performance is no predictor of future performance but I would just encourage you to look at our sequence over time - - over the last two or three years and see no reason to be significantly different from the future.

Great.

Thanks for your time.

Thank you.

It appears we have no further questions at this time.

I would like to turn it back over for any closing remarks.

Okay.

Well thank you, everybody, for joining us this morning.

As I said earlier, we are very pleased, continue to be pleased with what we are doing in these difficult times.

I do think our execution is improving and both on the top line and the past and margin side.

So another half a year behind us.

We were pleased with that and we're looking forward to reporting in May and we will see you then.

Thank you.

And this does conclude today's teleconference.

Thank you for your participation.

You may disconnect at any time and have a wonderful day.