Cracker Barrel Old Country Store Inc (CBRL) 2011 Q1 法說會逐字稿

Good day and welcome to the Cracker Barrel first quarter 2011 conference call.

Today's call is being record and will be available for replay today from 2.00 PM Eastern Time through December 8th, 2010, at 11.59 PM Eastern Time by dialing 719-457-0820 and entering pass code.

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

Barb Gould.

Thank you, Jennifer.

Welcome to our first quarter fiscal 2011 conference call and webcast this morning.

Our press release announcing our fiscal 2011 first quarter results reaffirming our previously announced outlook for fiscal 2011 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 is 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's expectations.

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

Many of the factors that can affect results or summarize in the cautionary description of the risks and uncertainties found at the end of the morning's news release and are described in detail in our reports that we file with or are furnish to 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 outlooks that we give or statement that we make regarding trends speak only as of the date they are given and we do not update or express continuing comfort with our guidance outlooks or trends except in broadly disseminated disclosures such as this morning's press release, our filings with the SEC, and this call.

We plan to release fiscal 2011 second quarter earnings and comparable store, restaurant, and retail sales on Tuesday, February 22, 2011 before the market opens.

On the call with me this morning are Cracker Barrel's Chairman and CEO, Mike Woodhouse, President and Chief Operating Officer, Sandy Cochran, Senior Vice President, Chief Legal Officer and Interim CFO, Forrest Shoaf, and Senior VP of Finance, Doug Couvillion.

Mike will begin with a review of the business, a review of the financials and outlook, and then we'll respond to your questions.

Mike.

Thanks, Barb.

Good morning, everyone.

Thanks for joining us today.

We hope to cover a lot of ground with you in this call.

But I first want to offer the following points as a back drop to the detail.

First, the new fiscal year is off to a very strong start.

Second, Cracker Barrel's brand continues to perform extremely well.

Third, we're maintaining our profit momentum even as we continue to make investments in productivity.

And fourth, we are in a strong position to accelerate our unit growth rate and still increase our dividend.

As I look back at last year's first quarter, I notice that some things are the same, while others have changed.

As we reported a year ago, we can again report positive comparable store restaurant sales, a positive check average, improving operating margins, and strong earnings growth.

A year ago, we also talked about continuing uncertainty related to job growth, and consumer spending.

And, yes, we are still wondering about the potential for new job growth and how much consumers will spend on dining out.

But what's different for us this year is that results for the first quarter include positive comparable store retail sales for the third consecutive quarter and another quarter of positive restaurant traffic.

This positive top line growth, combined with the structural improvements that we made to our business model over the past two years, are reflected in the strong financial results.

We reported earnings per share of $1.01 in the first quarter which was up 29% from the same quarter in fiscal 2010.

We also raised the dividend 10% to an annual rate of $0.88 per share.

Over the past five years we've increased our dividend at an annual average rate of 11%.

And there is another tangible measure of our progress, Moody's and Standard and Poor's, both raised our credit outlook to positive from stable during the quarter.

Our guests count on Cracker Barrel brand for consistent quality, friendly service and great value.

We discovered a while back that the surest way to improve our profitability was to continue to improve the guest experience.

Our guest satisfaction scores continue to improve.

Our largest increase versus the prior year are in the speed of order, temperature of food and the appeal of merchandise categories.

This is a big reason our profitabilities improved and why we'll continue to pick up market share as we out perform the Knapp-Track Traffic Index for the 17th consecutive quarter.

And on a two-year basis, our traffic in the quarter out performed the Knapp-Track Index by a margin of 5 percentage points.

While people are focused on value, we also know that they want to see fresh new items on the menu and offering lighter healthier options in the restaurant and more appealing merchandise in the retail store has driven the positive top line growth.

For the holiday promotion, which began last week, we're featuring the host morning sampler with fresh pineapple and lowfat yogurt and a fresh baked cranberry orange muffin or cinnamon french toast.

At lunch or dinner, you can still try our chicken salad or the new side of braised pork roast with slices of gala apples, dried cranberries, and pecans.

We're making a concerted effort this year to show faster growth in retail.

We'll accomplish this only if we can continue to improve the guest experience at the front of the store.

So to that end, we believe we have a better product mix today in the core categories of apparel, seasonal items, and toys than we had last year.

For example, we're selling more musical toys, plus we offer a wider range of colors and styles in our ramps and quilts.

And, of course, our great gifts program is front and center when you enter the store.

And there are two additional great gift collections as part of our Christmas themes also selling at prices under $20.

And in the toys area, we also have a great gift selection.

These are items that are under $10.

Highlights during the first quarter were our Halloween sales.

We've been putting greater emphasis on Halloween each year in the last two, three years and this year our sales increased.

Halloween sales increased by 33% over the previous year.

Next, I want to bring you up to date on the some of the initiatives that we're implementing in the current fiscal year.

Seat-to-Eat initiative is in the roll out process in the fifth region.

It's now alive, as of yesterday, in a total of 271 stores.

We have three more regions in training right now and we'll start training the final two regions after the holidays.

We're still on track to complete the implementation of Seat-to-Eat for all 10 regions by the end of the third quarter of this fiscal year.

And we're pleased with the results in the regions that have already implemented Seat-to-Eat guest (inaudible) scores for the key measures, speed of service, are averaging four to six percentage points higher than a year ago.

And in some locations, we've seen improvements as much as 20 percentage points.

We are sometimes asked why it takes so long to roll out Seat-to-Eat.

So I thought I'd, you might like to know that we've looked at the detail and Seat-to-Eat involves 29 different operational changes of varying degrees to increase our speed of service to provide a superior guest experience.

And one of the good out comes from this is that our servers can spend 15% more of their time with a guest to improve our overall guest service.

And the food, of course, is hot and fresh and it gets out quickly.

So it's easy to see why there's such a positive impact on customer service and guest satisfaction.

It's always good to come up with a win-win solution to a problem and in this case the problem is energy consumption and costs of energy.

And this year we're undertaking a complete overhaul of our lighting in both the dining room and the retail store.

The goal is to use new technology to reduce costs and at the same time improve the lighting for our guests, while also maintaining the all important Old Country Store ambience.

We've decided to use a combination of more energy efficient incandescent bulbs and LED lighting to achieve this.

And combining the two, because we find that using just LED lighting in our lanterns, especially in the restaurant, created an effect of eating under a spotlight, which is not exactly the most comfortable atmosphere and definitely not the atmosphere we like in an Old Country store.

And that is not the only thing we're doing to make our stores more comfortable.

We figured that it's about time we updated our restrooms so they are more in line with what our guests today would like to see.

We're starting with surveying our guests to find out what's expected in our restrooms.

We believe it's likely that they are going to come back and tell us they want things such as hands free fixtures.

But while we do not have that information yet and we'll be back with more news on that later on this year.

Now I'd like to say a few words about the unit growth.

As we announced In September, we intended to open 11 new Cracker Barrel locations in fiscal 2011.

We've already opened four of those.

One was our first store in Maine, which became the 42nd state where you can find the Cracker Barrel.

This store has exceeded our sales expectations by 25% in its first three weeks, proving again the broad geographic appeal of our brand.

Plus, our first smaller scale prototype will open in Hartselle, Alabama, in January of 2011.

This is unit is approximately 8,900 square feet, combined with our current prototype which averages 10,000 square feet.

The continued success that we achieved over the past few years has been based on preserving the integrity of our brand, which means that every one of our 67,000 employees lives up to our mission of pleasing people each and every day.

Our hourly turnover rate in the first quarter was 79% and management turnover continues at the low rate of 20%.

We believe that with the right talent at every level we can continue to deliver a great guest experience, grow our revenues, and improve our profits.

A you heard Barb say in her opening remarks, Sandy is here today but in her new roll.

She was promoted to President and Chief Operating Officer the first week of this month.

And in her new position, she's going to be totally focused on maintaining the quality of the Cracker Barrel experience.

Her previous experience in executive leadership, finance and retailing, makes her the perfect fit to direct our future growth.

And reporting to Sandy are Nick Flanagan, who was promoted to Senior Vice President of Restaurant Operations, Terry Maxwell, Senior Vice President for Retail, Doug Barber, who is taking on the new position of Chief People Officer, and Jim Torcivia, Vice President of Real Estate.

And, of course, also today with us as Interim CFO is Forrest Shoaf, who is, of-course, retaining his role as Chief Legal Officer.

Before I turn the call over to Forrest to discuss our financials in more detail, I would like to point out that though we are enjoying higher sales and improving profitability today, we recognize that challenges remain in both in terms of the strength of the economic recovery, and more recently, the prospect of higher food and utility costs.

We believe that the best defense against this is to continue to aggressively manage our costs and to monitor the pay back on our productivity initiatives and we'll be focusing on that during the remainder of the year.

Despite all of this, we're very, very pleased for the first quarter and very pleased that we are anticipating achieving full year margin improvements and maintaining our guidance for the year.

And now I'll turn the call over to Forrest for a review of the financials.

Forrest?

Thanks, Mike.

Excuse me.

I'll review the financials now with more detail.

For the first quarter of 2011, we reported diluted earnings per share of $1.01 compared with $0.78 per diluted share in the first quarter of last year.

A 29.5% increase.

Our earnings growth was generated by a combination of revenue growth and improved margins.

Revenues during the first quarter increased 3% to $599 million, reflecting 3.2% top line growth in restaurant revenues, and 2.2% growth in retail revenues, which were driven by year-over-year increases in comparable store restaurant and retail sales and contributions from new stores.

Operating income grew 20%, as operating margins improved by 110 basis points to 7.6% for the quarter.

Again, as a result of strong store level performance.

Comparable store restaurant sales increased 2.4%.

Our average check increased 1.9%, including a menu price increase of approximately 2%.

Guest traffic was positive for the second consecutive quarter.

And all day parts, on week days and weekends, had positive comparable store sales per quarter.

And we out paced the Knapp-Track Traffic Index by approximately two points in the quarter, the 17th consecutive quarter in which we've done so.

We believe that we've benefited from a strong travel season early in the first quarter.

But as the quarter progressed, however, our GAAP above the Knapp-Track index narrowed, which we believe is due to some of the other chains included in the index beginning to make higher percentage traffic gains as they compare themselves against lower bases.

We believe that our strong brand and solid everyday value has enabled us to sustain pricing power and maintain a positive check average.

Cracker Barrel's comparable store retail sales were up 1.5% in the first quarter.

Sales were driven primarily by gains in apparel, especially Halloween assortments and accessories.

Toys were a contributor also.

Gross margins for the quarter improved 50 basis points compared with last year.

On the restaurant side, cost of sales as a percentage of revenues was flat with last year.

Commodity costs were also flat compared with last year.

Prices declines in oils and poultry were offset by higher pork prices.

Retail gross margin improved primarily as a result of improved sell-through of retail inventory and reduced markdowns.

Our retail inventories are more current than they were last year because of active inventory management and successful clearance for sales.

Labor expenses, as a percentage of revenues, were 110 basis points lower than in the first quarter last year, primarily as a result of lower employee healthcare costs which we believe are a result of the design and implementation of a new healthcare plan that went into effect last January.

We expect healthcare costs as a percent of sales in calendar 2011 to remain similar to 2010 levels.

Management and restaurant hourly labor costs were also lower as a percent of sales.

Our hourly wage rates increased in the quarter by just 0.4% and our hourly turnover was 79%.

Other store operating expenses as a percentage of sales increased 50 basis points over last year, primarily because of higher maintenance and supplies expense.

The higher maintenance expenses were attributable to the timing of assigned maintenance and other programs.

The higher supply expenses were primarily due to operational changes intended to improve the guest experience such as lighting oil lamps all year.

As a result of the higher gross margins and favorable labor expenses, store operating income of $82 million was 12% higher than in the same quarter last year.

And store operating income margin of 13.7% was 110 basis points higher than last year.

General and administrative expenses were flat compared to last year on a percent of revenues basis.

The dollar increase was primarily from normal merit increases in fiscal 2011.

Interest expense of $11.7 million was slightly lower than last year's first quarter, reflecting lower debt, partially offset by higher interest rates resulting from the amendments to our credit agreements that extended the maturities of our revolver and portions of our term loans.

Our income tax rate of 29.6% is lower than last year as a result of higher employer tax credits.

Our net income of $24 million in the first quarter was $5.7 million or 32% higher than last year.

Our balance sheet continues to be strong.

At the end of the quarter, we had approximately $25 million of cash on hand.

Our retail inventory of $133 million was $12 million higher than the end of the first quarter of fiscal 2010 as we have planned for a stronger Christmas holiday shopping season than we had last year.

Also, to avoid potential ocean freight problems, we received goods earlier than we did last year and ordered to have them on hand in time for the holiday season.

At the end of the quarter, our debt, which includes current maturities was $579 million, and there were no borrowings outstanding under our revolver.

The lower level of cash on our balance sheet is the result of using cash to fund our retail inventory build and to pay annual bonus payments.

We did not repurchase any shares of stock during the quarter, however, we do have the authority to repurchase shares to offset dilution resulting from issuances under our equity expense plan.

And we anticipate making such purchases when market and other conditions make it appropriate for us to do so.

Now let's move to our cash flow.

In fiscal 2011, cash used in operating activities was $10 million compared with $23 million provided by operating activities in 2010.

The decrease reflected the payment of the fiscal 2010 bonuses, which were significantly higher than in 2009, and payment for the increase in retail inventories that I mentioned earlier.

Capital expenditures in the quarter were $18 million compared with $15 million last year.

The increase is due to the on going implementation of the Seat-to-Eat initiative and higher maintenance capital expenditures.

Regarding our outlook, even though we just finish a good quarter, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and in our reports that we filed with the SEC.

More over, the speed and depth of the recovery of the US economy continued to be a concern.

Nonetheless, we are maintaining our guidance for fiscal 2011.

We are projecting total revenues for 2011 to be up 3% to 4.5%.

Comparable store restaurant sales for the full year are expected to increase 1.5% to 3%, and including approximately 1.7% of menu pricing.

We expect comparable store retail sales to remain positive and to increase 2% to 4% in fiscal year 2011.

We plan to open 11 new Cracker Barrel units in fiscal year 2011, four of which are open today.

Three will open in the third quarter and the final four in the fourth quarter.

The land for five stores will be owned and six will be leased.

Seven of the 11 will be on the interstate and four off interstate.

Although commodity costs were essentially flat in the first quarter, which contributed in part to the strength of our performance.

We believe that commodity costs for fiscal year 2011 will increase 1.5% to 2.5%.

Year-over-year increases in commodity costs will increase significantly in the second quarter with further increase anticipated by the fourth quarter.

Pork and butter costs are expected to be up double digits over the low prices in 2010.

We have approximately 69% of our commodity requirements for the balance of fiscal year 2011 locked.

We expect our operating margin for fiscal year 2011 to be between 7.1% and 7.3% compared with 6.8% in fiscal 2010.

And our full year tax rate to be approximately 27% to 28%.

We're projecting diluted earnings per share for fiscal year 2011 to be in the range of $3.95 to $4.10 with approximately 23.5 million to 24 million diluted shares outstanding.

As I indicated earlier, we intend to repurchase shares during the year solely to offset dilution associated with issuance of shares under our equity compensation plans.

As we indicated in our call when we reviewed fiscal 2010 results and initially provided our fiscal year 2011 guidance, we do not expect our earnings growth to be even throughout the year.

Beginning in the second quarter, we expect to begin to see higher commodity costs and a continuation of the higher operating expenses as we continue to roll out Seat-to-Eat.

Capital expenditures are forecasted to be in the range of $110 million to $120 million, which allows for approximately $35 million to $40 million in maintenance capital, plus investments in new stores in 2011 and 2012.

Continuing innovation initiatives, like Seat-to-Eat and special projects, like updating our in store lighting.

In conclusion, we're very pleased that our earnings per share growth exceeded our sales growth in the 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 Forrest.

Now we'd like to open the call up for questions.

Thank you.

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

(Operator Instructions) We'll now take our first question from Chris O'Cull with Sun Trust.

Hi, it's actually Dave today, in for Chris.

How is everyone doing?

Good.

I have a question regarding -- Thanks for the detail around the commodity prices.

I was wondering if you guys could tell us what items are not hedged?

And, also, what your expectation might be for those items?

You did say, I believe pork and butter, or is it all of dairy up double digits?

No, just pork and butter that we expect up double digits.

And we do not have shell eggs hedged, or fresh produce.

Okay.

And then also in terms of the average check that fell during the quarter, was that a function of a price increase rolling off or was it actually a menu mix shift of sorts?

And what is the average price increase that we should assume for the remaining quarters of the year, if you can provide that?

It was both price increase rolling off and some mix shift going on.

And I do not have the remainder of the, our guidance for the whole year on prices.

It was 1.7 Q3 piv 1.6, Q4 1.5.

And, than also, one quick modeling question.

The stock compensation has been volatile over the past few quarters.

Assuming current stock price, should we expect possibly a quarterly amount to be around $1.6 million for the remainder of the year?

I don't know the specific number.

But I don't know of anything going on that would change our current run rate for the remainder of the year.

Assuming stock prices remain the same.

Okay.

Thank you very much.

Thank you.

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

Thank you.

I wanted to start and make sure, Forrest, I heard this right.

You said that when you were talking about the 50 basis point improvement in cost of sales, restaurants were flat so that was really mostly if not all attributable to improvements in retail?

That's correct, yes.

Okay.

Good.

And then I just wanted to talk about the retail, ask if you could kind of give an idea of when the rest of the pork sales are scheduled this year and does that match up with last year's timing?

Yes.

They will match up.

We don't have any missed matched this year.

Okay.

Thank you, Mike.

And then just looking at your guidance, I know it's an uncertain environment, but given the level of the beat in the first quarter, I would guess as long as the consumer comes through, maybe there could be some upside.

I understand your cautious with the consumer in commodities but if the consumer continues to improve in the coming months and quarters, would upside be possible to the guidance you have out?

Well I think that's.

Let's talk our sales trends for a moment and let me just amplify what Forrest said about the first quarter.

The trend in the first quarter, we were running against a very, very strong September and October a year ago.

If you want to go back to the monthly numbers a year ago our absolute same store sales numbers and our gap to Knapp-Track was stronger than before and after those two months.

So our performance this year in September and October was, we believe, largely a result of those very strong comparisons.

So as we look forward to the rest of the year, we're pretty comfortable with our guidance.

And we're performing at levels that are consistent with our guidance in November.

The question then becomes what do we think the consumer is going to do, and that's a, as we all know, a very difficult thing to kind-of see in advance.

When the obvious answer is that the consumer comes back substantially stronger than we anticipate then we'll have more sales and more profits.

But we'll come through with our level of anticipation right now into something we think is likely to the extent there is some upside, we would be happy to have it.

Okay.

Thank you and congratulations on the quarter.

Thanks.

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

Thank you.

A couple of questions on Seat-to-Eat.

You do add a couple of statistics with it that I think were guest satisfaction ratings.

I just wanted to verify that.

Like four to six points higher.

Right.

So are those ratings around the speed of service and over all guest experience?

Or what exactly do they refer to?

Those were specifically on the speed of service.

Okay.

The four to six percentage points was speed of service.

Okay.

And, Joe, if I could just take a second of your time, we were pleased with our overall improvement in guest satisfaction across the system.

Part of which is obviously Seat-to-Eat.

And one of the things I'd like to point out is that we're getting better guest satisfaction scores with a background of positive guest traffic.

So this isn't the so-called survivor effect where when you have negative guest traffic your scores go up because the people that keep coming like you more.

So we feel pretty good about our improvement of some legitimate improvement in guest satisfaction.

That's a good point.

Could you talk a little bit about the relative performance of the regions with Seat-to-Eat were the traffic increases stronger in those regions than across the system?

Overall, we're getting positive traffic.

Yes, relative for the system.

We measure them up on a weekly basis and we're seeing positive traffic relative to the system in the regions where we have it.

There is a little bit of bumpiness in the early learning.

But the further out we get the more sustained those numbers are.

So we're pleased with what we're seeing.

Okay.

And so far still achieving the targeted goals, in terms of service time, and other things that you're measuring in Seat-to-Eat?

Yes, absolutely.

Okay.

And then one last question.

I know you talked about year-over-year comparisons.

But even on a two-year basis, sales slowed month to month in the quarter.

I guess I'm curious if there is anything you can point to underlying that?

Well, I think as I just mentioned in a previous response, the September-October of last year, for example, if I used GAAPs and Knapp-Track as a way of talking about that, our GAAP, Knapp-Track and traffic for the whole of last fiscal year was 2.6%.

But in the months of September and October last year it was 4.7% to 4.0%.

So they were the strongest except for June, the strongest in the year.

So we really did have success in September and October relative to competition, relative to ourselves.

We think that was the 40th anniversary promotion was the first time we had run that big wrap promotional.

It's not inserted because it's around the menu.

And the first time we've used that very strong photography and so on and so forth.

Plus we were talking about the anniversary.

So that was an unusually strong period.

So I think it's more reasonable to look at the quarter as a whole.

This year and even look at the trends before and say, does that look reasonable compared with our guidance and we obviously think it does.

Okay.

Thank you.

Thanks, Joe.

We'll go next to Jeff Omohundro with Wells Fargo Securities.

Thank you.

I just wanted to touch base around the holiday retail line up.

Particularly, what seems to be a little increased focus around the apparel products and also around the great gifts program.

I wonder if you could maybe talk about how you feel they are positioned?

Has there been adjustments in the buying practices there?

And then, finally, in terms of restocking and inventory depth, assuming you get pretty good sales fall through in those categories?

I'm going to ask Sandy to use her three weeks of experience to answer that question?

Well, Jeff, we are pleased with the progress, the sales so far in our great gifts assortment.

We have a number of items there that are selling quite well.

I think we focused on value and price point.

That's the message in that assortment.

And I think it's resonating with our guests.

It includes some apparel.

So we made a bigger commitment in our inventory to women's apparel and accessories.

So, for example, our wraps and in the great gift assortment, we have collegiate wraps and some items like that are working extremely well.

We have a, our value message is being communicated through a $9.99, very large Teddy bear.

And we have, one of our strongest selling items and our great gift assortment is an animated butterfly, which is working quite well.

So we did make commitments to those areas.

We do think that it is a season that's going to be about value.

And continue to be about price point with our guests.

It does look like from a competitor standpoint it's shaping up to be potentially a promotional Christmas.

So we're happy with where we're positioned.

In terms of our inventory levels, we, as mentioned in the script, we did bring our inventory in a little bit earlier this year.

We wanted to avoid any disruption, potential disruption in the transportation on our imports.

So we did bring our product in.

So we feel we're well positioned to replenish as needed.

And now we just have to see what the customer does in the next few weeks.

So things like the butterfly in the jar, you feel you can maintain inventory levels on some of the hotter items through the season?

Well those aren't the kind of thing we're going to get more of.

But I think we feel good about where we have it allocated currently in the field and about our plans to back-fill that seam when we sell through.

Thanks.

Thank you.

We'll go next to Steve Anderson with Miller Topics.

Good morning.

Congratulations on the quarter.

I just wanted to talk about commodities for a second.

Now you mentioned a higher pork, butter cost.

I've noticed chicken prices have started to come in a little bit.

And I just wanted to ask how long your contract is for chicken and do you see yourself having an opportunity to procure any additional supply at a lower price?

Well, yes, as we always talk about, we're not buying on the spot market with our commodities.

We're looking at longer term contracts where appropriate.

So we do have a chicken contracted for an extended period.

But we're comfortable with the prices we're at.

Obviously, well not obviously, but we didn't buy.

We didn't lock in, at the peak of the market.

But if we took the opposite point of view and basically went for the cash markets, we would have very little control over our commodity prices.

So we do see, as we said in the earlier remarks, we do see in general commodities ramping up, especially the proteins, next calendar year.

All right.

Thank you.

Thank you.

We'll go next to Michael Wolleben with Sidoti & Company.

Good morning.

Thank you.

Good morning.

I wanted to go back and touch on retail again here.

Just looking at your guidance for the full year, the upper end being at 4%, during the quarter though you only hit it at 1.5%.

Were you, I mean, it was an easy comparison this quarter.

And it seems to be getting increasingly difficult throughout the year.

Can you speak to what gives you the confidence you can hit into that range as you move through the rest of this year?

Well I'm going to let Sandy jump in just a second.

But I would point out that our retail is very tied to our restaurant traffic.

So to the extent that we had a weaker September and October restaurant traffic then we're expecting for the remainder of the year.

The retail will have a natural built in upward bias as we see the expected traffic.

Sandy?

And I think it's time to put, spend more time getting our initiatives into place.

During the quarter, as we mentioned in the beginning of the presentation, we were very pleased with the performance of, for example our Halloween product, which was very strong and our apparel.

There were a couple of categories though that we are continuing to tweak.

We have made, we're focus on our food assortment which we had very strong growth last year and are continuing to find ways to grow it.

So we were a little disappointed with, where we came in, in terms of our plan on the food area, and our candle area, is an area that we are not pleased with where the sills have been on that.

So I think we have got some programs and initiatives to address those areas which will be useful to driving sales in the latter half of the year.

Okay.

Just looking at, you guys built your inventory up earlier than last year.

But can you guys give us a sense of where the inventory is on a science basis compared to last year?

I guess what I'm trying to get at here is, are you building up more inventory than last year?

And would that kind of lead to increased discounting post holiday season?

Or are you around the same inventory levels?

I think the inventory increase you're seeing in this particular quarter is more related to timing.

So although it is an increase on a same-store basis, if we anticipate having an improvement for the full year in turn.

So assuming that the consumer comes through as we expect over the holiday season, we shouldn't see additional markdowns necessary.

Okay.

Great.

And then just the last thing I wanted to clarify.

On the Seat-to-Eat initiative, did Mike say that in those early regions that it was rolled out to the performance as studied and the customer satisfaction is maintained?

Yes.

Great.

Thank you.

Thank you.

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

Thanks.

Good morning.

Just a quick question on the forced labor commentary and make sure I heard the message right.

We're lapping the healthcare program from last year, going forward, I believe, if I heard it right, that the cost is flat.

I assume that's a cost per employee and so if that's the case, is there anything else going on in that line?

Or should we think about sort of underlying wage inflation and turnover relative to comps as a way to sort of model that line item?

The healthcare is flat.

Anticipating next calendar will be flat as a percent of sales.

As a percent of sales.

Okay.

And, in general, we saw a slight uptick in wage rate this is quarter and a slight uptick in hourly employee turnover.

I don't know the answer to this, but I think a little bit of that might be associated with Seat-to-Eat.

It's a fairly intensive training program.

So I think on a store by store basis we see a little bit of turnover going on during that.

But nothing alarming.

I don't think the labor market is tightening up very much at all at this point.

All right, thank you.

Thank you.

We'll go next to Chris O'Cull with Sun Trust.

Thanks for taking another question.

Just a follow-up to something you guys just said a second ago.

You said you're trying not to buy on the spot market, in terms of commodities, when you can control it.

So should we go ahead and assume that dairy and pork inflation, the double digit or the butter and pork inflation is based on contracts that are already in place as opposed to your expectations for future spot prices?

No.

Not for butter.

Not for butter?

Okay.

We're partially locked in, in pork, but not on everything.

We're trying to manage very specifically by individual product against our best expectation of where the market is going.

So we'd always be partially short or partially long on any given situation.

And then a question around labor costs per operating week.

Those were down from last year's first quarter.

Where are you guys finding opportunities to reduce labor costs?

And is that something we should continue to expect?

This is in terms of dollars per week?

Well it's going to be healthcare.

The healthcare?

Yes.

Okay.

Thank you.

Thank you.

And at this time there are no further questions.

Okay, well thank you all again for joining us.

As we move further into 2011, I will stress that we obviously sense that there's continuing uncertainty in the economy.

And that our quarters will not be evenly distributed in terms of margin and I think we've indicated that.

We will be in placed on commodity costs.

We are going to be lapping the healthcare plan at the beginning of the year so we'll not have that gain.

But what we do believe about our business is actually focused on the guest.

So the focus on the value is something that we believe we offer.

We're going to continue to offer that.

Over the last two years we've made great strides in the structural side of the business so we are very encouraged by the long term potential.

We appreciate your continuing interest and support and we'll talk to you again at the end of next quarter.

Thank you.

This does conclude today's conference call.

We thank you for your participation.