Cracker Barrel Old Country Store Inc (CBRL) 2010 Q3 法說會逐字稿

Good day, and welcome to the Cracker Barrel third quarter 2010 conference call.

Today's call is being recorded and will be available for replay today from 2 PM Eastern through June 8, at 11:59 PM Eastern by dialing 719-457-0820 and entering the passcode 973-9448.

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

Barb Gould.

Thank you, Mindy.

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

Our press release announcing our fiscal 2010 third quarter results and our updated outlook for fiscal 2010 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 or expected future events.

These are what are known as forward-looking statements which involve risks and uncertainties that in many cases are beyond our control and may cause actual results to differ materially from management expectations.

We urge caution to our listeners and readers in considering forward-looking statements or information.

Many of the factors that can affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning's press release and are described in detail in our reports that we file with the SEC, and we urge you to read this information carefully.

We also remind you that we do not comment on earnings estimates made by other parties.

In addition, any guidance or outlook that we give speaks only as of the date it is given, and we do not update or express continuing comfort with our guidance except as required by law, and then only in broadly disseminated disclosures such as this morning's 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 fourth quarter earnings and comparable store restaurant and retail sales on Tuesday, September 14, 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?

Thanks, Barb.

Good morning, everyone.

Thanks for joining us today.

This was another strong quarter for Cracker Barrel.

It was driven mainly by improving sales trends and better store operating margins which together produced very strong earnings.

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

The initiatives that we focused on over the past year are improving the guest experience, and at the same time, strengthening our profitability.

Our new promotional menu items continue to be popular with guests, and we're having good success with a number of new retail products.

These positive results are being further leveraged with continued cost management as we sustain the gains that we made in 2009.

I'll provide an update on our specific Company-wide improvement initiatives including the Seat to Eat and labor management initiatives in a few moments, but I think the real story of Cracker Barrel today is the progress we're making well in advance of these major programs being rolled out across all of our regions.

If I had to specify one reason for our success it would be that we're better focused on the guest experience, specifically as it relates to improving the time to serve food.

For example, our customer satisfaction numbers are up 1.5 points compared with last year.

The speed of order is up 2 points and remember the Seat to Eat is in place in only two regions.

Our scores also show that servers are rated as more attentive.

In the end, it doesn't matter what we think of ourselves, but rather, what our guests tell us.

Being seen as more attentive combined with improved ticket times is a winning combination.

This is especially important as we work to convert our new and infrequent visitors to come back more often.

Now a few words about the economy.

There's still a lot of uncertainty about the pace of the economic turnaround.

Consumer confidence was 57.9% in April, the highest score since September 2008.

Within casual dining, we are hearing more positive comments on sales trends from a number of the chains.

However, retail in restaurant industry sales did not match March's strong performance.

And while we believe that's in part related to the timing of Easter and its effects on the Easter holiday shopping season, we're in the wait and see camp when it comes to consistent economic recovery at this point in time.

Even though it does appear that consumers are more confident than they've been in a long time and want to resume spending, the job market is very tight.

It isn't clear how much consumers can afford to devote to discretionary spending and specifically to dining out.

We continue to get questions on gasoline prices and how they impact our future results.

Although gas prices have increased over the past few months, we haven't seen the rapid increase that we saw in 2008.

As long as the economy continues to improve, we expect that road travel will increase this summer, largely due to pent-up demand to go on vacation or to visit family.

We do know based on experience over a long period of time that our sales don't correlate exactly with gasoline prices, and we can't therefore make accurate forecasts with any consistency.

There have been exceptions when prices spike rapidly over a short period of time, but at the end of the day, we think we're more influenced by the economy as a whole and its impact on consumer spending than we are by gasoline prices.

What is very encouraging is that Cracker Barrel has continued to gain share among casual and family dining during periods of weak travel growth.

This fits well with our goal of becoming the local destination of choice to build on our dominant position on the interstate.

Given the continued challenges of the external environment, we're pleased to have comparable store restaurant sales that were up 0.6% for the quarter, including the negative effects from severe winter weather in February.

We outperformed KNAPP-TRACK comparable store traffic by 1.5 points in the quarter with a strengthening trend in both March and April.

In fact, Cracker Barrel has now performed the KNAPP-TRACK index in guest traffic for 15 consecutive quarters, and we continue to do that with a positive average check relative to the KNAPP-TRACK index.

Six of our regions had positive comp store sales, and the seventh region, Tennessee, had flat comp store sales in the quarter.

Only the states along the eastern seaboard, north of South Carolina, and the corridor from western Kentucky up to Wisconsin, which were the most heavily affected by the weather showed negative restaurant comparisons in the quarter.

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

All of our regions were positive for retail comp sales in the quarter.

As I said before, our success depends on our employees and their consistent delivery of the best possible guest experience.

We take pride in our ability to attract and retain great people.

Our turnover for the third quarter was 68% for hourly and 19% for management.

We have approximately 22,000 or about one third of the total employees who are at the PAR Four level -- our best trained employees, and the turnover rate for this group was 19%.

This is a key factor in our ability to produce higher levels of service which in turn brings our guests back more often, and it's largely why we continue to outpace the competition as measured by the KNAPP-TRACK index.

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

The goal is to deliver consistent execution during both peak and off-peak hours.

Seat to Eat also provides measurable results so employees know if they're meeting their performance targets and specifically where they can improve.

Seat to Eat has been rolled out in all 136 stores in the first two regions of the rollout, and we kicked it off in the third region during the third week of April.

As we've said before, the effort to date has had a positive impact on traffic.

Labor efficiencies and other key components to support higher operating margins in the future.

The test results for the new labor deployment system are improving, and as we proceed with the development work, we're focusing now on streamlining the system to ensure that we have a product that can be rolled out successfully to our entire store group.

We know that we're learning how to serve guests better, however, we still have to drive more traffic to the stores.

One of our best opportunities to do this is to build frequency among our lighter users, especially the travel users who love the brand but don't always think of Cracker Barrel when they are at home.

Our advertising and new menu promotions are focused on improving awareness among these light users.

To that end, we've been having good success among light users with our promotions, and the promotional items aimed at maintaining frequency among our heavy users are doing equally well.

In those markets where we are running TV and radio advertising in support of the promotions, we're continuing to see a second year lift on top of the first year lift that we experienced last year.

The new product pipeline continues to deliver.

We're adding a number of new offerings that complement our tried and true favorites.

In the third quarter, we offered a traditional corned beef and cabbage dinner leading up to St.

Patrick's Day, and it exceeded last years performance.

Earlier in the quarter, we completed the winter promotion.

And in March, we rolled out our spring seafood promotion which was up against the skillet promotion last year.

The seafood promotion was aimed primarily at lighter users, and we're pleased with the results we've achieved.

Now a few words about retail sales.

According to our customer satisfaction scores, the appeal of our merchandise improved by 2 points last quarter compared with a year ago.

As the higher score would indicate, our guests are saying that we have better quality products, and they still represent good value.

Our game plan continues to be to offer more products that are unique to Cracker Barrel.

If you walk through the retail store today, you will see a growing number of items that carry the Cracker Barrel logo along with a distinct look and feel of Cracker Barrel.

In particular, we've been very pleased with the results of the new packaging for our Cracker Barrel branded foods.

One of the goals for these products is to offer the customer a way to take the Cracker Barrel dining experience home, and it seems to be working very well.

One of the defining features of Cracker Barrel is our family-friendly environment.

As such, we're always looking for fun new items the whole family can enjoy.

One of our recent new products, in line with the strategy -- Bee-Tees.

Bee-Tees are T-shirts that carry a smiling bumblebee with an encouraging message on the front such as Bee Kind, Bee Friendly, Bee Happy.

Our new line of regional products is targeted at the traveler who is looking for a specific souvenir, such as Virginia Peanuts, the stuffed black barrel T-shirt from the Smoky Mountains, or a book about Elvis for folks visiting near Memphis.

In the fourth quarter, we're continuing with our American Heritage and travel themes that have traditionally sold well over the Memorial Day and July 4, holidays and during the travel season.

Discussion of retail wouldn't be complete without a mention of music sales.

Cracker Barrel has become a major non-traditional music retailer.

Our Daily & Vincent CD has successfully maintained the top position - a position in the top three spots on the Billboard Magazine bluegrass chart since we released it on February the 1st.

During the last quarter of the -- last week of the third quarter, we announced that our next CD will be with Wynonna Judd, who has long been a major name in country music.

Although the CD wasn't available in the stores until yesterday, we were very pleased with the pre-order level.

A portion of the proceeds will go to Wounded Warrior Project as they did last year with the Montgomery Gentry CD.

You can see Wynonna's interaction with Wounded Warriors in a short video on our website.

Although music is still a relatively small part of our overall retail business, it provides a meaningful way to connect with all generations of guests.

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

Yesterday's satellite media tour with Wynonna included interviews in 20 media markets as well as a couple of national interviews.

So as I said at the outset, our strong financial results in the third quarter were mainly driven by higher store operating margins.

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

As you know, we don't use discounting.

And most importantly, we've improved the bottom line without compromising the guest experience.

In fact, our survey scores point to higher levels of customer satisfaction.

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

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

Sandy?

Thanks, Mike.

I'd like to review the financials now in more detail.

For the third quarter of 2010, we reported a 17% increase in diluted earnings per share to $0.61, compared with $0.52 per diluted share in the third quarter of last year.

Revenues during the second quarter increased 1.9% to $578 million, reflecting a 1.4% top line growth in restaurant revenues and a 3.9% growth in retail revenues which were driven by store growth and year-over-year increases in comparable store restaurant and retail sales.

Comparable store restaurant sales increased 0.6%.

Our average check increased 2.2% including a menu price increase of approximately 2.1%.

Severe weather had about a 1 percentage negative impact on the quarter, but the weather effect was concentrated in February, and excluding the severe weather impact, February sales would have been positive.

Guest traffic was down 1.6% for the quarter.

We continue to outpace the industry, however, as this marks the 15th consecutive quarter dating back to our '06 fourth quarter in which we've outperformed the KNAPP-TRACK index.

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

Cracker Barrel's comparable store retail sales were up 3.2% in the third quarter of 2010.

The increase came from strength in our home and decor categories and a successful launch during the quarter of the new regional selection that Mike commented.

Toys were also a strength for us, and our customers have responded well to our garden assortment this year.

Our comparable store resale sales tracked the retail industry sales performance in March and April as a shift in the timing of Easter benefited March, but unfavorably affected April.

Gross margin for the quarter improved 120 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, lower commodity costs, and lower food waste.

Commodity costs declined 2.8% compared with last year, primarily because of price declines in seafood, eggs, oils, and poultry.

Retail gross margin improved as a result of lower markdowns and improved shrink.

Labor expenses as a percentage of sales were 140 basis points lower than the third quarter last year.

Employee healthcare benefit costs and management and restaurant hourly labor costs were lower but were partially offset by higher store bonus expense.

Employee healthcare costs benefited from our new plan that went into effect in January.

Our hourly wage rates increased in the quarter by 0.2%.

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 50 basis points higher than last year, primarily due to maintenance and rent expenses.

Maintenance expenses were higher in the quarter relating to the timing of signed maintenance and other programs, and the higher rent expense was the result of the sale lease back transactions that we completed at the end of fiscal 2009.

As a result of the higher gross margin and favorable labor expenses, our store operating income of $70 million was 23% higher than in the same quarter last year, and store operating income margin of 12.1% was 210 basis points higher than last year.

General and administrative expenses were higher by 170 basis points.

This is primarily in two areas.

Higher manager training expenses as we rebuild our inventory of store managers and begin to prepare for the FY '11 store openings and higher incentive compensation accruals resulting from our improved performance.

Interest expense of $12.2 million was lower than last year's third quarter, reflecting lower debt outstanding, partially offset by the higher interest rates resulting from the amendments to our revolver and term loans that extended the maturities of portions of those facilities.

Our income tax rate was 26.6% in both years.

Net income of $14 million in the third quarter was $2 million, or 21% higher than last year.

Our balance sheet and cash flow statements continue to improve.

Our retail inventory of $90 million was down 8% from the third quarter of fiscal 2009 as a result of better inventory management.

At the end of the quarter, our debt, which includes current maturities, was $600 million, and there were no borrowings outstanding under our revolver.

The higher level of cash on our balance sheet is the result of our decision not to pay down additional debt because of the level of our interest rate swap.

And although we did repurchase -- although we did not repurchase shares during our third quarter, we have repurchased 172,800 shares for $8.4 million, or $48.79 per share, since the quarter ended.

Now let's move to our cash flow.

In the first nine months of fiscal 2010, cash provided by operating activities was $137 million compared with $90 million in 2009.

The increase reflects our higher net income and continued improvements in working capital and an increase in bonus accruals as a result of our improved performance against financial objectives.

Capital expenditures for the quarter were $13 million for a nine-month total of $40 million, compared with $50 million last year, reflecting the fewer new units in fiscal 2010.

We paid our current $0.20 per share cash dividend in the quarter bringing the total amount paid in the first nine months of fiscal 2010 to $14 million.

Regarding our outlook, everyone should be mindful of the risks and uncertainties associated with that outlook as described in today's earnings release and in our reports we file with the SEC.

Based on our performance for the first nine months of fiscal 2010, we are updating our guidance for the year.

Total revenues are projected to be up 1% to 2%.

Comparable store restaurant sales for the full-year are projected to increase 0.5% to 1%, including approximately 2.4% of menu pricing.

We expect comparable store sales for retail to decrease 0.5% to 1% for the year, and we've opened all six new Cracker Barrel units that we had planned for fiscal 2010.

We continue to forecast commodity costs for fiscal 2010 to be down 2% to 2.5%, and we currently have approximately 83% of our commodity requirements for fiscal 2010 under contract.

We believe that our updated 2010 guidance balances uncertainties about consumer spending and our costs of rolling out important initiatives in the fourth quarter against the benefits of our ongoing cost management efforts.

As you saw in this quarter, our year-over-year rate of improvements in operating margins have slowed.

We're lapping our cost management efforts begun last year, and we have a greater level of investment in rolling out key initiatives.

We expect our operating margin for fiscal 2010 to be between 6.8% and 6.9% compared with 6% in fiscal 2009, and we expect our full-year tax rate to be between 26% and 27%.

Our strong performance in the first nine months has allowed us to increase our fiscal 2010 EPS guidance to be in the range of $3.50 to $3.60 with approximately $23.5 million to $23.7 million diluted shares expected to be outstanding.

We've lowered our estimated capital expenditures to a range of $65 million to $70 million, which allows for approximately $32 million in maintenance capital, investment in innovation initiatives such as Seat to Eat, and then our general corporate needs plus our fiscal '11 new stores.

In conclusion, we're very pleased that our earnings per share growth exceeded our sales growth in a challenging economic environment.

With 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 continue to deliver solid returns to our shareholders.

Now I'll turn the call back over to Mike.

Thank you.

Thanks, Sandy, and now we're ready for questions.

Thank you.

(Operator Instructions) We'll take our first question from Robert Derrington of Morgan Keegan.

Thank you.

It's actually Dustin Tompkins in for Robert -- for Bob.

My first question is on the G&A.

The G&A and operating expense both seemed higher than we had modeled, and as I look sequentially, we're higher both year-over-year and sequentially.

Was there some Seat to Eat impact to either one of those line items?

And can you provide some additional color on why those seem to be a little bit higher than they had been?

Well, yes, and I think what we've been indicating is that as we have our initiatives rolling in the second half of this year that we would begin to see additional expense in both -- and particularly in the G & A line.

And so part of the additional increase in G&A has been the rollout of Seat to Eat.

There's probably some additional expenses in our stores and our maintenance category as we prepare the stores for the modifications we made in the kitchens to accommodate the equipment.

And Dustin, the other thing we've talked about is as we get into the second half of this year -- in the third and fourth quarters, we are running against a period last year where we were not hiring many managers at all because we had slowed down our growth and turnover had dropped substantially.

So we were working through our excess inventory of managers.

So now we're back up to a normal run rate.

So that's running through G&A.

And of course with the year as it is, we have much higher bonus accruals in G&A than we had last year.

Can you quantify the impact from Seat to Eat?

And should we think about that in terms of more of a one-time expense?

As you roll that out over the next 12 to 18 months, how much of that goes away?

Well, you're right.

It is one-time in the sense that as we roll through the regions, which will take us into the end of next fiscal year, we will be incurring expense at a relatively constant rate.

It will actually increase a little bit next year because we'll be rolling more than one region at a time.

This year, we've been rolling just one region at a time.

Right now, I think I'm right in saying that the manager effect and the bonus effect is greater than the Seat to Eat effect.

Yes.

And is that the same for the ramped up maintenance expense?

I'm sorry, Dustin, is what the same?

Well should we expect that the maintenance expense will remain at an accelerated rate through the remainder of this year and next year?

It will certainly go through this year.

It should ease off somewhat next year.

We happen to have -- with long-term assets you get different cycles of maintenance happening.

So we happen to have two groups of assets where we've got the system-wide maintenance program going on this year and into next year that happen to come together.

So they push it up, but next year that should roll off somewhat.

And then lastly, you mentioned the G&A -- you have had some higher manager training expenses as you ramp up your manager bench.

Can you give us some color about what the pipeline for unit growth looks like in 2011?

Do you expect to open more restaurants than what you opened this year?

And if so, can you give us some ballpark idea?

We will be providing -- .

The answer is yes and no.

Yes.

We know, and I think we do believe it will be more.

But we will be providing that specific guidance at year-end when we update just for the whole year -- for fiscal '11.

Thank you.

Thanks, Dustin.

We'll take our next question from Jeff Farmer of Jefferies & Company.

Great, thanks.

You did touch on this, but how much of the 140 basis points of labor cost favorability in the quarter was driven by that new healthcare plan?

I think to kick it in January versus plus really meaningful turnover benefits year-over-year?

I don't want to be specific, Jeff, but it was a significant part of it.

My question is really getting at the fact that that fired up in January.

You've seen some pretty material labor benefits both this quarter and last, and just -- my expectation is that that would continue probably for another two quarters?

Is that fair?

Well, a healthcare plan runs on a calendar year basis.

Correct.

Yes.

So yes.

All right.

And then as it relates to your swap, I think you have about three years remaining on that.

As you get deeper into the contract status of that, do you have any opportunity to potentially rework that swap?

Or are you going to be with that for the next three years?

Well, depending on the overall interest rate environment, we could always choose to prepay it and pay the penalty.

So we continue to evaluate that alternative versus others as we look at the maturities.

So based on the current interest rate, you're still pretty far away from being in economic breakeven standpoint from -- so choosing to prematurely exit that swap?

Is that correct?

Yes.

And finally on the tax rate, it looks like based on your guidance you're probably implying about a 20% or so tax rate after the fiscal fourth quarter.

First of all, is that correct?

And if it is correct, what's going on there?

Well, we just guided for the year, and you can back into the quarter.

And generally what affects the fourth quarter is the rollout of the FIN 48 reserves.

So if you look back to last year, you'll see a similar effect.

Okay, perfect.

Thank you.

Thank you.

Your next question comes from Joe Buckley of Banc of America Merrill Lynch.

Thank you.

First, a question on the labor deployment program.

Could you elaborate a little bit what you're doing with that?

And is that part of the G&A pick up, and if so, could you explain?

No, it has nothing to do with G&A.

We've been developing our labor deployment program for a while as we've talked about on these calls over a period of time.

We have a system that is giving us results on an individual store basis in the test environment.

We think that as we look at the components of the system, the biggest benefit is on the scheduling side.

On the front end, our ability to schedule accurately and then measure how we're doing against the scheduling.

We need a system that is robust enough in the sense that it can be usefully employed by all of our management teams, and we're looking at, as I said in my remarks, streamlining it, simplifying it somewhat so that we are not creating something where the amount of effort to run it is substantially -- is more than we would like it to be.

We want something a little simpler, but we believe that -- we know what we can do.

And we know what results we're achieving, and this will just take a little longer than we had originally expected to develop.

We're into next year now in terms of thinking about a rollout.

Okay, and then a question about the Seat to Eat.

So I guess the original region, obviously, was in effect for the full quarter, and region two was in effect it sounds like for a good chunk of the quarter.

You did say traffic impact was positive.

Could you put a little bit more parameters around that?

Was the traffic positive in those two Seat to Eat regions, and could you quantify it at all?

Yes, we really don't want to quantify it, Joe.

One of the things we're finding is yes we're getting positive results.

We're finding that there's a building effect that occurs so that the earlier region is beginning to build on the foundation.

We think we can potentially build faster in some of the future regions, but we have yet to see that -- when we get to the future regions.

So I don't want to get ahead of ourselves in terms of anticipating the benefit.

There is a benefit, and we expect a real benefit to the total system.

But it's going to be well into next year before we start seeing the real system impact on the top line.

Okay, and then a question on sales, and I know you don't comment on the quarter to date results.

But two event-type questions.

I know the Nashville region got a ton of rain.

As this quarter ended and the new quarter began, curious if there was much impact on stores or sales from that?

And then, I know you don't have too many stores really in the Louisiana, Alabama, Mississippi states, but any thoughts on this Gulf spill and potential impact on traffic that we should be thinking about?

I'm going to leave the big picture on the Gulf spill to my fellow Brits who seem to have their hands full down there.

In terms of Nashville, yes, we have substantial -- significant flooding.

We -- any effect there was on our sales is built into our guidance because it's behind us.

We didn't have any store closings.

So we were fortunate from that point of view.

No impact on the stores.

I think the same thought is true on both Nashville and the Gulf, and that is we expect there to be summer travel based on vacations and family trips and so on and so forth to the extent that there were any locations that become less favorable, we expect to see the benefit somewhere else.

That typically is what we see in other situations like this.

So we're not overly concerned at this point in time about the effect on our total system.

Okay, thank you.

Thank you.

We'll take our next question from Jeff Omohundro of Wells Fargo Securities.

Thanks, I just had a question on marketing.

You mentioned the TV radio second year lift.

I wondered if you could maybe update us on your thinking around media in general?

Also, including digital media?

Thanks.

Specifically on the broadcast media that we've been running, we've been running actually in some markets three years, but broadly on about 25% of the system we're in our second year of this.

And we saw a lift last year.

We're seeing a lift this year.

We like the consecutive lift because we see this as something that is certainly at the point of paying for itself and sustaining our traffic improvements in those markets.

So I see us continuing -- tweaking potentially the creative strategy as we go along but continuing to build on that.

We are in the process of thinking about where we might want to go with digital media.

Obviously there's a lot of stuff going on.

Obviously, there is a lot of talk about how the whole world is rushed into that space.

We're going to take our time and make certain that we're doing it right.

That we're not diverting our efforts from the things that are the most important and basic for us which is obviously billboards and broadcast media.

We are in the process of understanding how our particular customer base uses the digital media, and I expect us to be doing some work on that over the next year or so.

Thanks.

Thank you.

We'll take our next question from Brad Ludington of KeyBanc Capital.

Thank you.

Starting off with the share repurchases.

I believe you said last quarter on the call that share repurchases would only be to offset dilution in future quarters.

It looks like in the third quarter you had over a million options exercised.

So should we expect that share repurchases really continue throughout the fourth quarter beyond what you have said?

Yes.

Our intent over a period of time is -- our current intent is to offset dilution from options exercised.

We had a lot of options that were exercised at the end of the quarter, and we will look for opportunities to buy back stock over the next few quarters.

Today might be a good day.

And then also on the Recipe Right savings.

Last quarter, you said it saved about $2 million in waste.

Was it a similar level this quarter, and when did that first rollout?

Well that initiative we've had in the store since last year, and we've been pleased with the results of it.

I don't want to quantify the specifics in this quarter, other than to say we did make progress -- we made additional progress on controlling food waste in the quarter.

And that contributed to our positive gross margin.

Okay, thank you very much.

Thank you.

We'll take our next question from Bryan Elliott of Raymond James.

Thank you.

Good morning.

Just a couple forward-looking questions.

I know you won't quantify them, but give us some help and sense of direction.

Given -- first on just thinking about store growth for next year and timing of that given the CapEx guidance.

Here in Q4, it would appear that we'll see maybe even front-weighting to the fiscal '11 store openings?

We might see multiple stores in each of the first two quarters?

Well, Bryan, as you've rightly pointed out, we're in the situation that we're always in which is we give our guidance on store count on the September conference call.

We suggested earlier that there will be an increase in the number of stores.

So that would lead to the conclusion that there will be some increase in capital spending.

But in terms of exactly how they are spread over the year, I think that's something we'll have to wait until September to talk about.

Would you be willing to share how many stores are under construction at the moment?

No.

Okay, all right.

But Bryan, there's also in the fourth quarter additional -- just the way the timing of the initiatives and the Seat to Eat and the CapEx associated with that.

That is also concentrated in G&A stuff.

So sort of ended up more concentrated in the fourth quarter.

It's not just the FY '11 new stores.

That's helpful.

Thank you.

And thinking about commodities, could you give us a sense how far, if very, you might be as far as locking in into fiscal '11?

We're obviously seeing a lot of pressure on spot meat prices here and just trying to get a sense of what your exposure to that might be?

Again, that's one of those September questions, but I would just point out as we've talked about before, we don't think of our commodity purchasing on a fiscal year basis.

We're looking at purchasing based on our view of each individual commodity market, and how far we want to go ahead and we want to be locked in or not.

So it would be reasonable to assume that we're looking at the markets and recognizing that there's going to be some pressure out in the future.

And we're doing what we can to deal with that.

All right.

Fair enough.

And last question I have is the payroll in the macro economy have finally started to turn up a little bit.

Are you seeing any bounce -- any rebound maybe in hourly turnover rates that might be correlated with that?

No, as we have said, we're at 68% on hourly.

We're down at 19% on our PAR Four which is one third of the whole system.

So we're pretty consistent right now, don't see a lot of pressure.

It will be interesting to see as we go forward because I don't think the jobless forecast -- .

Yes.

Showing much improvement.

Great.

All right.

Thank you very much.

Thanks, Bryan.

We'll take our next question from Steve Anderson of MKM Partners.

Good morning, and congratulations on the quarter.

Thank you.

You answered most of my questions, but I think given some of the volatility in the markets -- and particularly on the [interstate] market, do you anticipate any kind of upward pressure on your interest expense line as a result of what's been going on in some of the LIBOR Markets?

Well, no.

One of the advantages of being fully swapped is that our interest rates is really fixed, and we have very little usage right now of our revolver.

So, no.

I don't anticipate that being an issue.

All right, thank you.

Thank you, Stephen.

Our next question comes from Steve West of Stifel Nicolaus.

Yes, hello.

Matt Van Vliet on for Steve this morning.

I just had a question on the improving retail sales, and maybe what you expect somewhat going forward?

But also just what kind of leverage you get maybe on a sensitivity basis of each 1% in retail sales comp number?

Or something that can add a little detail to maybe how much of the store level margin improvement was helped by the 3% comp boost here in the quarter?

Well, if you look at it on a flow-through basis, our flow-through is -- to the bottom line is essentially the same from either restaurant or retail.

And it's in the mid-30% range for a marginal dollar of sales.

So retail helps us just as restaurant would at that level.

It's different by line because retail cost of goods is higher than food cost, and labor is less.

So it appears in different places, but the flow-through is about the same.

In terms of where the retail -- we're pleased about the quality of our retail sales improvement because we're getting it the right way.

We're getting more conversion.

We're getting more retail sales per guest and more guest purchasing as well.

So everything is moving in the right direction on retail.

So we're pretty happy with that.

Okay, and then a separate question on the commodities.

You kind of hit on this.

But the portion that's not contracted at this point, is that the typical amount that just doesn't work through contracts?

Or is there some either strategic or some other fundamental reason why you don't have it mostly contracted for the quarter?

Well, our purchasing strategies always involve an assessment of the outlook and the relative benefit to fixing or not.

So from time to time, we will choose not to fix in a category that we could fix.

I think that our portion locked right now is slightly lower than this time last year, but the team has done a good job -- particularly, of taking advantage of the opportunity-based buys that they have been able to do.

The deflation impact was primarily in the protein categories, and it was offset with some increases in fruits and vegetables which is not an area that you can lock.

Okay, thank you.

Thanks.

Your next question comes from Michael Wolleben of Sidoti & Company.

Good morning.

Thanks.

Can you just speak a little more to this advertising with the TV and radio?

I know you said 25% of the system here is in the second year.

How much of the whole system is in those advertising regions?

And then, can you quantify the returns you think you're seeing here maybe compared to your traditional billboard strategy?

Well, I use 25%.

It's approximately 25% of the units, and it's about 25% of the sales that we're covering in the markets that we're in.

And that's been consistent for the last two years.

In terms of the return we're looking for, we look for -- to advertising markets that are efficient so that the level we spend -- the lift that we get will be self-funding for the advertising expense.

So getting another lift in the second year is helpful.

We're now moving into -- I think we are moving into positive profit territory.

And the way we think about -- the way I think about it is it becomes a sustaining -- at some point, it becomes more sustaining in those markets because we will have achieved some cumulative lift.

And by spending the advertising dollars, we retained that lift over time.

So we're pleased that we're in that position because that is an ongoing improvement from -- versus not advertising.

Billboards are really difficult to quantify in terms of the direct effect on sales.

It's an awareness builder.

We have the highest awareness of any full service restaurant for travelers on the interstate, and that's the direct result of the billboards and the high rises and the buildings which are very distinctive.

Taking down or putting up any single billboard is almost impossible to measure.

It's a function of what's going on around it, and so on and so forth.

But I think that -- we believe we're at about the right level totally on billboards.

As I've said on previous calls, we started seeing our awareness slipping a couple years ago.

And I believe -- and that's turned around.

And two things we've done in the last two years are to regenerate the billboard strategy with better creative that's more distinctly Cracker Barrel, and we've had this consistent radio and TV strategy.

So I think those two together are the reasons that our awareness is beginning to go in the right direction.

And how much of your system do you think could be efficient at this point for TV and radio?

About where we are today, I think, with the results we're seeing in the second year, I think we could possibly see some addition to that.

The challenge for us is that in the big markets, it's very difficult for us to be efficient because of our penetration levels in the Dallases and Atlantas of the world.

And even more so in Chicago and places in the Northeast.

So the markets we can be efficient in tend to be the smaller, more traditional Cracker Barrel markets.

I'm not suggesting we are going to do this, but I think we'll continue to look at where we can add markets with the results we've seen so far could be efficient.

And when we can do that, we'll continue to do so.

Okay, great.

That's helpful, and lastly with that retail inventory down 8% -- but you are seeing these steady comps -- a nice comp increase here in this quarter.

Any thoughts on when you will have to start rebuilding that inventory up?

Well I think we've done -- the retail folks have done a great job of recovering from the mess that we were in a year ago as were all of the other retailers.

We're getting down to the level where we are probably pretty efficient on our inventory levels and will start building them in line with anticipated sales.

I don't see us as being below an efficient level.

I don't think we've stripped them down to a point where we can't be effective.

So it's more of a question of now building them in line with sales growth.

Okay, thank you.

We'll take our next question from Chris O'Cull of SunTrust Robinson.

Good morning.

Good morning.

My question is on the new stores.

Would you give us an update on just recent new store -- new store economics?

Chris, we don't actually provide a lot of information about our store model.

So we're pleased overall with the stores overall that we opened during this year, and other than the general information that we provide -- $4 million per store and where they are.

We don't really provide much in addition to that.

No, we have not.

Whether we should provide a little more is a matter of discussion here right now because it's certainly a question we get a lot, and I think we need to figure out a way to get better information out there.

I would say that one of the things that we're really focusing on hard right now because we've come down to the lowest level of development this year with six stores is it's going to take some time to rebuild.

We're looking very hard at our prototype and looking at ways to make it more efficient from an economics point of view.

And we have some ideas that we think are going to work, but that will take a little while to play out in terms of design and then testing and then rolling it.

But I do think there's a real opportunity as we look forward for the longer term that we could see sustainable improvement in our unit economics primarily because it's something we haven't addressed as a whole.

We look at parts of the economics like the Seat to Eat changes, the kitchen operating platform, but we really haven't looked overall.

So I'm optimistic that we're going to see some good things coming out going forward.

Is one of those opportunities -- given how productive the dine in area is -- and your capacity issues during peak periods.

Is an opportunity maybe to increase the size of the dine in area?

Or at least utilize space that's being used in the back of the house or the retail -- where your inventory retail product.

Is that maybe -- could you use that space more efficiently you think going forward?

Well, I think it's a combination of all of those things.

I think that one of the things we talk about is we have very large -- physically large kitchens relative to just about any other restaurant operation I'm aware of.

We also have a very complex menu so we have to balance that.

But I think there's some opportunity to rebalance the space we're using.

I think with retail for a number of years we have actually created this virtual space by having trailers outside which originally were just for the Christmas season and became year around.

We have worked our way out of that in the last 12 months or so which provided us nice cost savings.

So we're really operating pretty efficiently on the retail space, and I don't want us to reduce the retail selling space because that serves a purpose greater than just displaying retail stuff.

It is a place.

It's a waiting space, and it's an entertainment space, if you will.

We'll look at the dining room in terms of what size we need it to be as we go through this whole process.

One of the things I believe, and it's really important to balance here is that customers enjoy eating in not overly crowded but in busy restaurants.

Sitting in a half empty restaurant because you've got the capacity for Saturday night, but you're sitting there on Wednesday morning, and it's empty.

That's not a positive.

So balancing that is really critical so that we can get the throughput which we're working on with Seat to Eat in terms of the speed and be very efficient with the dining room without having to add too much space.

But it's one of the question of the box and what goes in it, and how it's all balanced is part of this process we're going through.

And then one last question.

Sandy, I may have missed this, but what are the plans for debt repayment?

I know the swap precludes you from paying a lot, but is there a scheduled payment?

The swap amortizes -- it's about $25 million a year.

But otherwise, no.

There's a tranche due in '13, and some modest repayments, and then in '16.

Okay, great, thanks.

Like $7 million or so -- a modest amount that is due other than that.

We'll take our next question from Kyle Kavanaugh of Palisade Capital.

Hello.

Good morning.

Good morning.

I was wondering -- could you explain to me a little bit more about the manager training costs?

They went up year-over-year because last year you just weren't hiring more managers because of the economic times.

So this year, you're replenishing it?

Or is it planning for future growth?

The dynamics -- or the metrics really are the turnover rate -- the replacement rate for turnover and building for future growth.

So what happened last year was that when the recession kicked in, we had a target -- obviously, we have to be looking out ahead in terms of our recruiting plans.

So we have to have an assumed turnover rate, and once the recession hit the turnover rate came down fairly substantially quite quickly.

So we had a pipeline in excess of our needs for turnover.

And at the same time, we reduced our new store development for all of the reasons we talked about then.

So that meant that we had more managers than we needed.

So we had an opportunity to -- we had to live off our inventory.

We didn't have to be hiring.

And then the other thing we did last year was to reduce the standard number of managers we have in some of our lower volume stores.

And we implemented that right at the end of last fiscal year.

So we actually had a lower level that we needed.

So all of those three effects caused us to not have to be hiring very many at all for the second half of last year.

Now we're back at just a steady state.

We're replacing at the current turnover is 19%.

We're replacing at that rate.

We've got the right number of managers in all of our stores, and we've got our growth plans.

So that's really the differential.

So going forward, the effects should be much much less unless there is some dramatic change in any of those variables.

Okay, and is all of the Seat to Eat expenses included in G&A?

Or is it somewhere else, too?

Well, the initial -- the rollout of it is in G&A.

Okay.

So right now, all of Seat to Eat expenses on the rollout are in the G&A?

Well, the rollout.

If the store is preparing in terms of additional maintenance and things like that.

That will hit in maintenance, and then obviously, there's the capital.

Okay.

And then also with this Gulf oil spill, do you have any like shrimp costs or anything coming from the Gulf?

Well, we do buy shrimp, and one of the things -- as soon as the thing happened, our purchasing folks went out and made certain we were locked in on shrimp costs.

So we're in good shape for an extended period.

Okay.

And then, do you have any -- my guess is you'll probably -- I don't know if you'll comment on pricing for 2011?

Menu pricing or anything?

No, we don't forecast pricing.

Our philosophy is to be conservative, be careful -- always test and measure what we're doing and the effect of that.

We are pleased as we've said that we are able to maintain positive pricing in a discounting world and still have better traffic than the industry as a whole.

We expect and hope to be able to continue in that position going forward.

Exactly how much that means in terms of pricing, we'll have to see when we get to next year.

Thank you very much.

Thank you.

We'll take our next question from Jonathan [Wait] of Presidio Research.

Yes, hello.

I was wondering on the -- would you -- media-efficient if you are seeing some differences in your customer makeups, locals versus travelers?

If that is changing as you're doing this media?

Don't know the direct answer to that, Jonathan, because we haven't measured at that level of detail.

We do know that we're getting better -- somewhat better retail sales, a bigger lift in retail than the restaurant.

We're getting a lift in both which would suggest that we're getting lighter on newer users because those folks tend to purchase more retail.

Okay, and then on the tax rate.

Let me just follow-up on that one.

If we're at about 20% for fourth quarter, that would be about -- I don't know -- $0.10, $0.15 help to the year from what we were thinking before.

How come we aren't bumping the estimates up more than what you did?

Given that tax rate improvement, and that the comps have turned into positive territory, here?

Well that's only one component of what goes into the guidance.

We've got the other various issues going through the P&L that we've factored in when we provided the guidance.

So this is more just G&A -- more incentive spend building up the manager bench?

Is that the gist of it?

Correct.

Okay, thanks.

Thanks.

(Operator Instructions) We'll take our next question from Joe Buckley of Banc of America Merrill Lynch.

Thank you.

I just want to go back to the G&A again.

Part of it you mentioned were bonuses, and you put together a good year.

But was there some inflection point this quarter that maybe kicked that bonus accrual rate up higher than it had been in the first couple of quarters?

As the full year visibility became clearer -- just from being in the end of the third quarter as opposed to the end of the first or second?

Well one component, Joe, that probably hit us more in this quarter -- some piece of the bonus is tied to the stock price.

So it is stock-based compensation.

So when the stock price gets higher, that disproportionately hits.

And so that's in it.

And in the G&A, over half of the increase is about the bonus.

It's a significant amount of the increase.

About half of the year-over-year increase?

More than half.

More than half, okay.

And then would you expect that $38 million to be roughly the run rate again in the fourth quarter, maybe going forward on a quarterly basis?

Or do you think it will bounce around a little bit because the timing of some of these things?

I think a lot of the issues that affected it in the third will be continuing in the fourth.

Okay, thank you.

Thank you.

At this time, there are no other questions in the queue.

Okay.

Well thanks everybody for joining us this morning.

I'd just like to say that, in closing, we're very encouraged by what we've accomplished so far this fiscal year, but also about the future.

We haven't come to any kind of stop here.

We really believe that we can continue to build on the success of the last two years.

We're especially confident because of the demographics projections.

NPD is projecting the number of people age 62 and older which tend to be in our target audience is going to grow by 35% in the next ten years.

This is the group -- these are the boomers who built casual dining, love dining out, and they do have the spending power to continue to dine out.

So we think we're well positioned to capture a growing share of the segment as we have in the last two years because of our strong proposition of high quality of food and great value.

So that's where we are.

Look forward to sharing our continued progress with you in future quarters.

Thanks again for joining us.

This does conclude today's conference.

Thank you for your participation.