Cracker Barrel Old Country Store Inc (CBRL) 2011 Q2 法說會逐字稿

Good day and welcome to the Cracker Barrel Country Store's second-quarter 2011 conference call.

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

Eastern time through March 9, 2011, at 11.59 p.m.

Eastern by dialing 719-457-0820 and entering pass code 1049858.

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

Please go ahead.

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

Our press release announcing our fiscal 2011 second-quarter results and updating our 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 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's expectations.

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

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

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

In addition, any guidance or outlook that we give or statements 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 outlook 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 third-quarter earnings and comparable-store restaurant and retail sales on Tuesday, May 24, 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 and Chief Financial Officer Larry Hyatt.

Mike will begin with some opening remarks, Sandy will review our operating performance, and Larry will review the financials and outlook, and then we will respond to your questions.

Mike?

Thanks, Barb.

Good morning, everyone.

Thanks for joining us today.

Given the bad weather that swept the country during the quarter, a still cautious consumer, and commodity costs that were up 2.1% for us in the quarter, we are very pleased to record earnings per share of $1.20 in the second quarter which were up 10% from the same quarter in fiscal 2010.

There is a lot of noise in our sales numbers this quarter because of our holiday shift and I would remind everyone that our accounting periods and weeks end on a Friday, and the severe weather, which together make it difficult to clearly determine the underlying trend.

However, I will tell you that sales levels in both restaurant and retail were below our expectations for the quarter.

The good news is the comparable store restaurant and retail sales were both positive for the fourth consecutive quarter and we outpaced the KNAPP-TRACK Index for the 18th consecutive quarter.

On a two-year basis our traffic within the quarter outperformed the KNAPP-TRACK Index by a margin of 2.8 percentage points.

Going forward, we believe that our focus needs to be on execution to drive traffic and retail sales and to improve our profitability further.

Long-term trends that support our outperformance are still intact.

People want good value for their dining dollar.

We believe that consumers are still facing uncertainty related to key factors such as job growth.

On the plus side, companies are beginning to slowly add new employees and several recent marketing surveys have reported that people intend to eat out more this year than last year.

At the same time food prices at the grocery store are rising faster than at restaurants, which should be an added incentive to eat out more often.

With the intent to eat out rising then becomes a matter of which restaurants customers will choose and we believe that Cracker Barrel's great value, consistent quality, and friendly service will continue to be the reasons why people choose Cracker Barrel over other alternatives.

Our value proposition was underscored by the pricing power that we have demonstrated during the downturn and we believe this will give us the ability to offset the cost pressures from commodities that are threatening our entire industry and allowing us to reaffirm the earnings guidance that we first gave on our year-end credit call in September.

A visit to Cracker Barrel is about more than just food, it's also about total experience.

Our own market research shows that Cracker Barrel makes a lasting impression; specifically some of our guests have fond memories of eating at our restaurants with their families when they were growing up and, importantly, they want to relive the experience with their own children or grandchildren.

In fact, our research shows that we have more parties with children under age 11 than other casual or family dining chains.

Good country cooking also goes hand-in-hand with country music.

Although it's not a significant portion of our retail sales, our exclusive music program remains a key component of the Cracker Barrel brand and the CDs in this program continue to be a big hit with our guests.

We also received hundreds of thousands, if not millions, of dollars worth of public relations value as the artists who are on our CDs appear on numerous TV and radio shows promoting their CDs which are available only at Cracker Barrel.

We had a number of successful launches of exclusive music in this past year.

Our current CD, The Grascals & Friends -- Country Classics with a Bluegrass Spin, debuted at number one in Billboard's top bluegrass albums chart and remained there for four weeks, and has also been in the top 40 in the country chart since its release.

And it reached number 23 in its second week, which is an unusual achievement for a bluegrass album.

This is the first time that we have had a video for one of our CDs.

Dolly Parton is on the CD and in the video with The Grascals for the single, I am Strong.

This generated attention through social media and traditional media like Great American Country and Country Music Television.

Our CD, Dailey & Vincent Sing The Statler Brothers, which spent 19 weeks overall in one of the three top positions on Billboard's bluegrass albums chart has received numerous awards, including Album of the Year from the International Bluegrass Music Association, and one of its songs was nominated for a Grammy.

Our Now and Then CD by Smokey Robinson has been nominated for an NAACP Image Award for outstanding album.

The Image Awards will be broadcast nationally on March 4.

And while I am talking about awards, I would like to mention one that we have just learned about.

We are going to be receiving this year's [OVE] Hall of Fame Award from the Outdoor Advertising Association of America recognizing Cracker Barrel for its outstanding creative work over many years and highly effective use of the outdoor media.

Cracker Barrel billboards are now receiving the same honor as the billboards for brands such as Disney, Nike, and Apple Computer, and those brands received the award in the past.

We think that is pretty good company to be in and we expect the official announcement about this to go out later today.

I am also pleased to tell you that Cracker Barrel is participating in green initiatives.

A new project that we announced during the second quarter is electric vehicle pilot project in cooperation with ECOtality Inc.

We are going to be installing electric vehicle chargers at 24 Cracker Barrel locations around the Tennessee Triangle, which is a 425 mile stretch of interstate highway connecting Nashville, Knoxville, and Chattanooga.

We will start the installation of the chargers in late March or early April and the installations will continue throughout the summer.

The chargers themselves are being provided by ECOtality through a federal grant and our investment will involve such things as upgrading electrical transformers and installing the chargers in prime spots in our parking lots.

The announcement of this initiative received a great deal of attention in the national and local media adding to the relevancy of the Cracker Barrel brand for our guests and, importantly, for our potential guests.

The success we have achieved over the past few years has been based on preserving the integrity of our brand, which means that every one of our 68,000 employees lives up to our mission of pleasing people each and every day.

It's one thing for me to state our mission but what really counts is when our people demonstrate it through their commitment over a long period of time.

In that regard we consider ourselves an industry leader in the recruiting, training, and retention of hourly employees, and we are in the process of developing plans to build on and extend our leadership position.

Our hourly turnover rate in the second quarter was 72% and our management turnover continues at the low rate of 22%.

Although it has moved up some from a year ago, we are still far below the 100% level for hourly turnover that we had several years ago.

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.

Now before I hand the call over to Sandy Cochran, our President and COO, I would like to take a moment to introduce our new CFO, Larry Hyatt.

Larry joined Cracker Barrel on January 3 from O'Charleys where he had been CFO and Treasurer since 2004.

He also served as Interim CEO of O'Charleys from February through June 2009.

Larry has also served as CFO at Cole National Corporation, a specialty retailer, PSINet, Inc., an Internet service provider, HMS Host Corporation, and Sodexho Marriott Services Inc.

When he joined us Larry jump right in and attended a conference with me during his second week and he has certainly hit the ground running in all areas.

We are very pleased to welcome him to our management team.

Now I would like to turn the call over to Sandy to give you an update on our operations.

Thank you, Mike.

Part of our success in outperforming our peers for the past 18 quarters has been to offer five limited time offers, or seasonal events as we call them, throughout the year to build frequency and attract new customers through menu variety and innovation.

These seasonal events are designed to appeal to both light and heavy users by offering new products that are perceived to be fresh, lighter, and healthier for our lighter users and nonusers, a new twist on traditional Cracker Barrel ideas for our heavier users.

Our market research also indicates that more people are now aware of these fresher, lighter, and healthier options in the restaurant and our more appealing merchandise in the retail store.

We believe our holiday seasonal promotion captured these strategies well.

For the heavy users we had offerings such as the cider-braised pork roast and cinnamon streusel French toast, and to appeal to our lighter and non-users we offered items like the yogurt parfait as part of the Wholesome Morning Sampler and the lunch/dinner offering of chicken salad on top of fresh greens tossed with apple strips, dried cranberries, and pecans.

A notable success in our winter seasonal promotion which began in mid-January has been our new pineapple upside-down cake for dessert.

In the second quarter our seasonal menu offerings accounted for approximately 9% of sales.

Sales growth for all dayparts was positive in the quarter.

Breakfast sales had the greatest increase in the quarter and sales growth on weekdays was stronger than on weekends, which we believe is attributable to more of the severe weather hitting on weekends than during the week.

On the retail side the severe weather, the weak buying power of the consumer, and aggressive pricing and discounting by other retailers made the retail environment challenging.

However, we did have improved product mix in core categories such as apparel, toys, and rockers, and these changes helped drive positive sales for the quarter.

In apparel, a new line of women's wraps, dressy tops, and accessories were strong sellers.

In toys, novelty items, such as the laughing dog and monkey along with our dollhouse collection in the pretend play category, were hits with the kids.

One of our big stories during the holiday seasons was Great Gifts.

This collection doubled in sales this year and some of our key contributors were the plush bear for $9.99 and tabletop games.

In January the chocolate, coffee, and tea theme performed strongly with new additions this year such as flavored single-pot coffees along with new branded food offerings.

We were glad to see that a really strong seller throughout the last quarter was our seasonally decorated tote bags.

The larger size and great price point made them a very popular item.

Areas that experienced sales challenges were mechanical toys within our Christmas assortment, along with candles and quilts within our home decor department.

Each of these areas missed our sales expectations which resulted in higher markdowns than planned.

In our retail business, although we did experience additional weather impact in February, we are encouraged by the recent results and we are pleased with the assortments that we have planned in the second half of the year.

We believe we have a solid lineup for spring and expect to drive sales through expanded assortments leading up to Mother's Day and the summer travel season.

We are pleased with the start of our garden theme and we have added apparel to the assortment for our popular American Heritage theme, and we have expanded our line for our road trip theme planned for the summer.

We expect retail sales momentum to build as the second half of the fiscal year progresses.

Now I would like to update you on some of the initiatives that we are implementing in the current fiscal year.

The Seat to Eat initiative is now fully implemented in approximately 70% of our stores.

We have the final two regions in training right now and will be essentially complete with the implementation of Seat to Eat for all 10 regions by May.

We are not releasing specific impacts of Seat to Eat, such as traffic gains.

This initiative is geared towards increasing the accuracy of orders and the quality and consistency of the food, and to giving our guests the confidence that they will consistently receive their meals within 14 minutes.

And we are pleased with the results.

I would like to say a few words now about unit growth.

We believe there are opportunities to improve our unit economics and we will keep you updated as they evolve.

Our new store in Hartselle, Alabama, is part of that evolution and features a smaller footprint.

We have reduced the size of the unit by about 10%.

It's also more energy efficient, for instance, skylights and more windows in the back to make use of natural daylight and more energy efficient lighting in the front of the store.

We are testing a redesigned dish room as we look at improving labor productivity, reduce the amount of supplies needed, and be more energy efficient.

The remaining six units scheduled for opening this year will all be this smaller footprint.

And of note, another important milestone in our growth is that we will open our 600th store on March 28 in Frankfort, Kentucky.

Now I will turn the call over to Larry.

Good morning, everyone, and thank you, Sandy.

First of all, let me say what a pleasure it is for me to join you on my first conference call for Cracker Barrel.

While I am still learning the Company and its organization, so far I am very impressed with everything I have seen and excited about the Company's future.

I would like to begin by discussing our financial performance for the second quarter of fiscal 2011, some items that impacted our performance, and our outlook for the fiscal year.

For the second quarter of 2011 we reported net income of $28.8 million or a 13.3% increase over the $25.4 million reported in last year's second quarter, and diluted earnings per share of $1.20, a 10% increase over the $1.09 per diluted share that we reported last year.

We estimate that the inclement weather reduced our net income by between $1.4 million and $1.9 million, and reduced our diluted earnings per share by between $0.06 and $0.08 in the quarter.

For the second quarter of fiscal 2011 revenue increased 1.2% to $640.3 million from $632.6 million in last year's second quarter.

Restaurant revenues increased 1.0% to $479 million and retail revenues increased 1.9% to $162 million.

Comparable store restaurant sales increased 0.3% as a 1.8% increase in average check reflecting menu price increases of approximately 1.8% was partially offset by a 1.5% decline in traffic.

Comparable store retail sales were up 1.3%.

We estimate that inclement weather in the quarter reduced comparable-store traffic and sales by 0.9%.

As noted in this morning's release, the pattern of our monthly sales in the quarter was impacted by the shift of the Christmas holiday to fiscal January this year from fiscal December last year.

We estimate that this shift had a positive impact on December sales of 4.9% and a negative impact on January sales of 4.3%.

Cost of goods sold in the quarter was 34.3% of revenue, an 80 basis point increase over the prior-year quarter.

The increase in restaurant cost of goods sold resulted primarily from increases in food and other product costs and weather-related increases in food waste.

Food commodity costs were up 2.1% in the quarter compared to the prior year as expected double-digit increases in pork and butter prices were partially offset by declines in the price of oils and poultry.

Retail accounted for 20 basis points of the 80 basis point increase in cost of goods, reflecting primarily higher markdowns during the holiday season.

Our store, payroll, and related expenses declined to $223.2 million or 34.8% of sales from $228.6 million or 36.1% of sales in the prior-year quarter.

This 130 basis point reduction was due to a 70 basis point reduction in store management bonus accruals, a 30 basis point reduction in restaurant wage expenses, and a 30 basis point reduction in employee benefit costs.

During the quarter our hourly wage rates increased by only 0.5% compared to the prior-year quarter.

Restaurant operating expenses in the quarter were $112.2 million or 17.5% of revenues compared with $105.5 million or 16.7% of revenues in the prior-year quarter.

General insurance expense was 40 basis points higher in the quarter due to favorable actuarial reserve adjustments made in the prior-year quarter.

Maintenance expense was 20 basis points higher in the quarter due to sign maintenance and other programs.

Supplies expense was also 20 basis points higher due primarily to operational changes intended to improve the retail guest experience, such as offering gift wrapping and higher battery usage to demonstrate toys.

Store operating income was $85.5 million or 13.4% of revenue compared with $84.4 million or 13.3% of revenue in the prior-year quarter.

Our general and administrative expenses in the quarter were 5.2% of revenue compared with 5.5% of revenue in the prior-year quarter.

The decrease resulted from lower incentive compensation accruals which reflect lower relative performance against financial objectives in 2011 as compared with last year.

Operating income in the quarter was $52.5 million, a 6% increase over the $49.4 million reported in the prior-year quarter, while our operating margins improved 40 basis points to 8.2% from 7.8%.

Our interest expense in the quarter was $11.8 million, a reduction of 11% versus the prior-year quarter reflecting lower debt outstanding.

Our income tax rate of 29.2% for the second quarter and 29.4% for the year-to-date period are lower than last year due to higher employer tax credits.

Our balance sheet continues to be strong.

At the end of the quarter we had approximately $63 million of cash on hand.

Our retail inventory of $98 million was $9 million higher than at the end of the second quarter of fiscal 2010.

Like many retailers, we are ordering and receiving merchandise earlier than usual this year in order to avoid potential delays from overseas suppliers.

At the end of the quarter our debt, which includes current maturities, was $577 million and there were no borrowings outstanding under our revolving line of credit.

We repurchased 200,000 shares of stock for a total of $11 million in the quarter.

Capital expenditures in the quarter were $40 million compared with $27 million in last year's second quarter.

The increase is largely due to new locations acquired and under construction this year and operational innovation initiatives, like the Seat to Eat.

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

As we have said before, the speed of the recovery of the US economy continues to be a concern as to issues relating to the global price and supply of oil and food.

We are projecting that total revenues for the 2011 fiscal year will increase by between 2.5% and 3.5%.

Comparable-store restaurant sales for the full year are expected to increase between 1.5% and 2.5%, including approximately 2% from menu pricing.

We expect comparable-store retail sales to increase between 2% and 3% in fiscal 2011.

We plan to open 11 new Cracker Barrel units in fiscal 2011, five of which are already open.

We expect to open three later in the third quarter and the final three in the fourth quarter.

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

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

We project that commodity costs for fiscal 2011 will increase between 2% and 2.5%.

We expect double-digit increases in the price of pork and coffee and moderate increases in the price of beef to be partially offset by reductions in the price of poultry and eggs.

We have locked in the pricing on approximately 65% of our commodity requirements for the balance of the current fiscal year, including approximately 80% of our beef requirements, about one-third of our pork needs, over 90% of our poultry requirements, and approximately two-thirds of our expected egg demand.

We expect operating margin for fiscal 2011 to be between 7.1% and 7.3% compared with 6.8% in fiscal 2010 and our full-year tax rate to be in the range of 27% to 28%.

We are reaffirming our previously issued earnings guidance and protecting diluted earnings per share for fiscal 2011 in the range of $3.95 to $4.10 with approximately 23.5 million to 24 million diluted shares outstanding.

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

As the Company indicated on our fiscal 2010 year-end call and again on our first-quarter 2011 call, we do not expect our earnings growth to be even through the course of this fiscal year.

We expect the rate of commodity inflation to increase in the second half and we have lapped the significant healthcare savings that we experienced in our calendar 2010 plan.

And in addition, the impact of severe winter weather continued into the third quarter.

Capital expenditures are forecast to be in the range of $90 million to $100 million for the year.

This includes approximately $35 million to $40 million in maintenance capital, investments in new stores for 2011 and 2012, and new equipment as part of the Seat to Eat rollout.

We expect to complete the design work and testing for the lighting and restroom renovation projects this year and begin the rollout of these initiatives in the fiscal 2012 year.

In conclusion, we are very pleased that our earnings per share growth exceeded our sales growth in this challenging economic environment.

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

Now I am going to turn the call back over to Mike.

Thank you very much.

Thanks, Larry.

We would now like to open up the call for questions.

(Operator Instructions) Jeff Omohundro, Wells Fargo Securities.

My question relates to the smaller prototype that was mentioned.

Could you talk a little further about where the size savings have occurred, any thoughts about projected return profile on the unit?

And does that impact the addressable site universe for you?

Does it expand it, particularly in off-interstate areas?

Thanks.

Jeff, the prototype is a -- we are thinking of it as somewhat of an interim prototype.

We have taken a design that we had in the past with 177 seats versus 207 in our current prototype.

So it's two dining rooms instead of three dining rooms upfront which will make it more efficient from a service point of view and we have taken space out of the back of the house.

We are also using it as a test bed for some new ideas we have, and I think Sandy mentioned, especially the dish room, and some other things around energy saving in the dish room and through lighting.

So we are looking for a reduction in the investment, we are looking for some operating savings, and we expect this to evolve into a new prototype somewhere down the road.

The intent is to reset unit economics so that we will have a prototype that will allow us to confidently expand to the level that we believe we can get to.

And as a follow-up, one quick question on that restaurant operating expense increase in the quarter.

I appreciate the breakdown of the components there -- insurance, maintenance, and supplies.

How much of that is sustaining in the quarter and going forward that elevated level?

Thanks.

Jeff, as noted in my prepared remarks, of the approximately 100 basis points increase in restaurant operating expenses 40 basis points of that really is based upon the comparability to what happened the last year in general insurance.

The balance 20 basis points maintenance and 20 basis points is supplies.

A portion of supplies was seasonal and was based upon retail around the holiday season, such as gift wrapping.

Maintenance we are taking a very close look at because since the judgment that we have is probably a part of that is ongoing, but a part of that is not.

But it's kind of difficult at this point to be more specific with an answer.

Thank you.

Brad Ludington, KeyBanc Capital Markets.

First, just wanted to hit on the -- follow-up briefly on the smaller prototype.

With fewer seats I assume a lower AUV.

Do you have a target for how much lower the average volume might be on one of these units?

No, I don't think there is necessarily a direct correlation.

First of all, we will have the full Seat to Eat platform in the new prototype design into the kitchen.

I think that in many cases, most cases, except on very high-volume stores, we can hit volumes well above our system average of 177 seats.

So we don't think we are going to restrict ourselves substantially on volume.

I think the important thing is that as we improve the unit economics that we can build out the system, not having -- we will have less pressure to have every new store be better than the system average.

Okay.

And then just briefly, Sandy, you said that the LTOs were 9% of sales, I think, this quarter.

What were they in more recently or year-over-year?

What kind of increase does that represent?

It was in line with our expectation.

What we target is generally like a 9% to 12% mix from our promotion.

This one just we had anticipated at the lower end of that, but we were pleased with the results from this promotion.

Okay.

Thank you very much.

Joe Buckley, Bank of America Merrill Lynch.

Two questions, and you gave some of this on the gross margin breakdown saying that retail was responsible I think for 20 of the 80 basis points higher cost of goods sold.

But just trying to break out restaurants to think about the rest of the year, what kind of an increase would you expect on the cost of goods sold line?

And just remind us of the timing of past price increases and maybe what your current thoughts are on pricing.

Joe, we have said that we expect to see an increase in commodity costs in the 2.5% range for the year.

For the first quarter we said our commodity costs were approximately flat, for the second quarter we said that they were up 2.1%.

Math of that works out that for the third and fourth quarters or the second half of the year we are looking for increases in commodity costs somewhere in the 3% to 4% range.

And we think with the pricing actions that we have anticipated that we will be able to maintain our dollar margin, but that doesn't necessarily translate into maintaining our percentage margin.

Okay.

Then a question on CTE.

I kind of understand your reluctance to break down the traffic numbers in the Seat to Eat stores.

But with 70% of the system done presumably you are getting some pickup in traffic from Seat to Eat, and yet even on a weather-adjusted basis the restaurant comp of 1.3 looks kind of light.

I guess I am curious if there is other aspects programs or initiatives that drove sales in the past that seem like they are wearing off or could you talk a little bit about the same-store sales breakdown if you can?

I am sorry; I was looking through the 1.3%, Joe.

The adjusted pro forma we have for the quarter I think is 1.2%.

1.2%, I am sorry.

That is the number you are referring to right?

Yes.

As I said in my prepared remarks, we weren't happy with the outcome.

We are happy that we have now got four consecutive quarter's positive sales and gross restaurant retail and we, on a two-year basis -- increasingly we are looking at two years to see what is going on with the industry and with KNAPP-TRACK.

That gap to KNAPP is holding up pretty well.

I think that the overall industry on a two-year basis I don't believe is picking up at this point.

I think it's kind of stalled in terms of where it's going.

So I don't know that we are far off with where the world in general is going and I think that relates back to the consumers' inability to spend.

But I think the desire to spend is there; I think the intent to eat out is there.

I don't know that it has really been activated simply because of spending capability.

Now in terms of what we are doing, our promotions have been an important part, for the last two years now, of, we think, sustaining sales, building frequency.

The 9% that we talked about was at the low end of our expectation on our promotions.

I think that the upcoming spring promotion, which starts on March 21, had some really exciting new offerings that will continue us down the path of building on Cracker Barrel in terms of what we are, but also pushing the boundaries a little bit and broadening the appeal.

So we think the promotions will continue to help us and that we may have had one of our weaker promotions in the most recent quarter.

We will also continue with advertizing but we have some new TV creative being shot right now, or shot last week, so we will be using it as we go forward.

We have got a billboard refresh that is being rolled out.

It's 18 months since we started the last refreshed so just by themselves, by refreshing the billboards it adds to the impact of the billboards.

And then on execution I think the Seat to Eat is performing.

It's a big change and I think that it takes a while to settle down.

And I think as it moves through the system and we settle down we can come back with now we have a new platform, now we have a new set of expectations, and let's keep pushing on that.

And that is what I meant when I talked about the focus on execution at the beginning of my remarks.

So it's a combination like it has been for the last 2.5 years or so, but execution, product promotions, advertising to support all of that.

And then on the retail side, Sandy said we had some things that are performing well and expect to perform well as we go into the spring.

So we are looking forward rather than back.

The weather is so difficult.

We quote numbers -- everybody quotes numbers on weather.

But when you have a concept like ours that is, A), concentrated in the Southeast where there was a lot of weather this year -- and, as those of us who live in the Southeast know, we don't handle weather as well as it's handled in other parts of the country -- and as a travel concept, I think that we can even read it into some of the product mix things that we see because we have a sense of what the traveler will choose versus the local heavy user.

So I think weather had a broad impact.

So feeling good about all of those things.

Okay, thank you.

Thank you.

Michael Wolleben, Sidoti & Co.

Good morning.

I just wanted to touch on two things quickly here.

The sales results you mention were below your expectations for the quarter.

Was that entirely from the weather or was the -- absent the weather, were things still tracking below what your expectations were?

Yes, the pro forma numbers are below where we would liked to have been.

Okay.

And then just circling back to the Seat to Eat, with the implementation costs and training costs that you guys have in there with about 70% done at this point.

Are you still seeing a meaningful impact in those training costs trickling through, and when should we start expecting some of those to start lapping over and seeing a benefit of those coming back out?

Well, the implementation will be complete by May so the training costs will -- we will be through with that component of it.

And all that we have incurred we had predicted and baked into our guidance.

Okay, thank you.

Steve Anderson, Miller Tabak.

Good morning.

Just a couple of quick questions.

Number one, on the CapEx guidance which was reduced, does that reflect entirely on the reduced footprint prototype?

No, Stephen, it's due primarily to the fact that the previous guidance had the beginning of the rollout of the lighting initiative and of the restroom initiative.

We now expect to be complete with the testing of those initiatives in the current fiscal year, but that we won't start rollout until next fiscal year.

Okay.

And my second question is with regards to another initiative, it's for the -- it's the IT-based labor management initiative.

I know you have spoken about it on past calls.

Can you give us an update on that?

We continue to work on it and have been testing a version of it in the field for the past -- for the first half of the year.

Not ready yet to discuss when we will be rolling it out.

Okay, thank you.

But we feel very optimistic that we will have a new labor system to discuss in 2012.

Okay, thank you.

(Operator Instructions) Steve West, Stifel Nicolaus.

[Matt Enblade] on for Steve today.

My first question, I was just wondering if you could give us any indication if there were regional traffic trends that were more impacted by the weather or less impacted.

Just to kind of get a sense of maybe as we look forward to next year and just kind of keeping an eye on that.

Yes, the weakest was the east coast.

Okay.

And then not so much traffic trends for Seat to Eat, but have you seen a dramatic change as you roll out in maybe your customer service scores or some other measurements that you track that could indicate that you are seeing strong performance from those stores that pick it up and kind of buildup through it?

We look at a number of metrics overall -- guest satisfaction, temperature of food, attentiveness of server, and so on -- and we are encouraged by the metrics and pleased with the results.

Okay.

And then finally, could you give us any kind of sense of where you are in terms of contracting on commodities out past the end of the fiscal year, maybe just through the end of the calendar year?

If you have started to do any of that and maybe what you are seeing.

Well, we have because, as we have talked about before, our whole approach to purchasing food is not tied to the fiscal year in any way.

It's based on the seasonality of the commodity, the outlook as we see it for the commodity.

But our practice is that we don't comment on the next fiscal year until our year-end conference call in September.

Okay, thank you.

(Operator Instructions) It looks like we have no further questions in the queue at this time.

Okay, thank you.

Well, thank you all for joining us.

As we move forward on the second half of this fiscal year, I want to stress that we do continue to face uncertainty in the economy.

And due to a number of factors that we have talked about on this call, our results will fluctuate in terms of the margin on a quarter-by-quarter basis, but we are very comfortable with our guidance for the year as a whole.

Despite all of this, we are looking to achieve our overall margin improvements and again we are pleased to maintain our guidance.

As you know, we have programs in place to help offset rising costs from food and labor.

However, we have the opportunity to create a great deal of future value by generating incremental sales growth through a combination of new menu items, new retail products, new unit growth, and the improved service that comes from Seat to Eat.

We think that our focus on good value has real staying power.

It has served us very well in the last several years, and going forward we expect that to continue.

We appreciate your continuing interest and support, and we will talk to you again at the end of this quarter.

Thank you.

That does conclude today's conference.

We thank you for your participation.