Cracker Barrel Old Country Store Inc (CBRL) 2011 Q3 法說會逐字稿

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

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

Eastern through May 24, 2011 at 11.59 p.m.

Eastern by dialing 719-457-0820 and entering pass code 1335825.

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

Please go ahead.

Thank you, Ruth.

Welcome to our third-quarter fiscal 2011 conference call and webcast this afternoon.

A press release announcing our fiscal 2011 third-quarter results and providing guidance for our fourth-quarter and updating the 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 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 or 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 outlook 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, outlook or trends except in broadly disseminated disclosures such as this morning's press release or filings with the SEC on this call.

On the call with me this morning are Cracker Barrel's Chairman and CEO, Mike Woodhouse; President and Chief Operating Officer, Sandy Cochran; and Senior Vice President and CFO, 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'll respond to your questions.

Mike?

Thanks, Barb.

Good afternoon, everyone; thanks for joining us today.

We moved our call today from our usual morning timeframe to the afternoon so that Sandy Cochran could be with us; she was out of the office this morning for her son's graduation.

As we talk about today's earnings release, let me state right up front that we were disappointed with our third-quarter results.

When we offered guidance at the end of the second quarter we did not expect the third quarter to turn out to be this challenging.

While we were anticipating commodity cost increases, short-term pressures from produce and sharply higher pork prices pushed commodity inflation above our expectations.

And we had also expected higher levels of guest traffic and sales.

We're also very conscious of the fact that we did not outperform the Navtrak Casual Dining Index for this quarter.

All of you who follow us know how unusual that is.

So I view the quarter as a wakeup call.

And to navigate through this we have to redouble our efforts to deliver what the guest wants; Cracker Barrel is still all about pleasing people.

In today's world people want value for their dining dollar and we know that we can provide honest value and high-quality without discounting.

However, we also know that there are times when our guests face increases in the cost of living for certain items, like having to pay more for food and for gas as they have to today, and that affects what they have to spend with us.

As we mentioned on our last call, our market research shows that we have more parties with children under age 11 than other casual dining or family dining chains.

And we believe that the dining budgets of this group, as well as for our older guests who are more likely to be on fixed incomes, are being squeezed by the inflationary environment today.

Regardless of the fact that this appears to be one of those times when some consumers have to cut back on their dollars for dining out, we aren't placing the blame for missing the mark on anyone but ourselves.

We clearly did not achieve our business objectives over the past three months and we're addressing that.

The third quarter was the final quarter of the rollout of our Seat to Eat initiative and it was the most intensive quarter with 35% of our stores in some stage of the rollout during the quarter.

While we anticipated a certain level of disruption to the guest experience during the rollout period, we believe that implementing Seat to Eat in such a large part of our system in such a relatively short period of time created greater operational challenges than we had expected.

While our guest satisfaction scores for speed of service are significantly higher than before the program was initiated, we're also finding that guest satisfaction rankings on other attributes of service such as accuracy of order and friendliness of the server have declined.

We believe that this is due at least in part to the shakeout period that occurs after implementation of Seat to Eat in a restaurant.

As we have discussed before, in the process of implementing Seat to Eat we changed 29 processes within the restaurant that relate to such things as order taking, food preparation, how the food is delivered at the table and how the tables are bussed.

Because of the comprehensive nature of these changes the process involved over the past 18 months retraining most of our 70,000 employees.

Given these changes in operations and to our guest satisfaction scores we recently fielded primary research to better understand how the guest is currently experiencing Cracker Barrel.

We also looked at the industry trend data again to help further frame our understanding of why our traffic is softer than we expected.

At the industry level we believe pressures from slow job recovery, inflation of food at home costs and the run-up in gasoline prices are all contributing to a sluggish performance for the full-service industry.

For example, an AMEX market briefing that came out last month indicated that fewer people are intending to eat out more than once a month now than in the same period in 2009.

Internally we've identified several things that we believe are negatively affecting the guest experience and we're in the process of designing solutions that we'll be testing and then rolling out in the near future.

Sandy will address this in more detail in her remarks, but I do want to take this opportunity to say that Seat to Eat has achieved its primary objective of faster and more consistent ticket times and Seat to Eat is now established throughout the Cracker Barrel system as our new operating platform.

The success that we've achieved over the past few years has been based on preserving the integrity of our brand which means every one of our 70,000 employees lives up to our mission of Pleasing People each and every day.

But 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 longer period of time.

This allows us to continue to deliver a great guest experience, grow our revenues and improve our profits.

Before I turn the call over to Sandy to discuss operations in more detail, I'd like just to take a moment to acknowledge the devastation during the last week of April in parts of the Southeast from multiple tornadoes and storm systems and now the tragedy that's unfolding as we speak in Joplin, Missouri, from Sunday's massive tornado.

In April Alabama was hit particularly hard and nine of our stores were closed for varying amounts of time ranging from one to 10 days.

Coming at the end of the third quarter the storms did not materially affect our results for the quarter and we don't expect a material impact on our results for the fourth quarter.

But we were very lucky to have suffered only minor damage to our stores in Alabama and we're very thankful that all of our employees are safe, even though several did lose their homes and tragically some family members.

And in Joplin we're again thankful that our employees are safe and that the damage to our store is minor, although some of our employees have suffered major damage to their homes.

Our thoughts and prayers are with our employees and all of those people who were affected by these terrible storms.

And now I'd like to turn the call over to Sandy for an update on operations.

Thank you, Mike, and good afternoon, everyone.

As Mike said, we're disappointed in our third-quarter results, and so we have plans in place to drive traffic and improve profitability in the fourth quarter and into fiscal 2012.

I'm going to start by talking about our restaurant operations.

As Mike mentioned, our Seat to Eat program is now live in all stores.

As we anticipated, the program has achieved its main purpose, improving the speed of service, and our guests have noticed this improvement.

But we've also seen some of our guest satisfaction measures slip, which may have contributed to our disappointing sales results in the third quarter.

While we anticipated some disruption during the Seat to Eat implementation, one of the things some of our guests have told us through the primary research we fielded is that our service does not seem as attentive or as friendly as they're used to.

We're proud of our reputation for Pleasing People, so we're zeroing in on those key elements of our service model that need to be addressed.

I've been visiting our stores and connecting with our field teams from regional vice presidents to hourly personnel, working in our stores to get a first-hand perspective.

We're confident that the problems are fixable through refinements to our platform and our chief focus will be to improve the guest experience and drive traffic.

I'm pleased to report that our promotional strategy continues to deliver positive results.

We look to our seasonal offerings to play a big role in building frequency among both our heavy and lighter users.

Last spring we offered a seafood line-up that we believe demonstrated that Cracker Barrel can provide superior value in this menu category.

This year's spring offering once again focused on seafood, two different shrimp dishes for lunch and dinner and the return of the haddock that was successful last year.

We also offered a grilled chicken and strawberry salad for the Cracker Barrel guest looking for lighter fare.

We added a Reuben sandwich which had previously been a regional offering to our national lunch/dinner menu.

And to extend our reach to our lighter users we added two new limited time griddle offerings -- multi-grain pancakes and six grain and granola pancakes served with banana and honey.

The promotions accounted for 10% to 11% of mix which was at the high end of our expectations and accounted for much of the favorable mix affect on April sales.

In the first week of June we start our summer promotion which will feature a barbeque lineup including Kansas City barbeque chicken, Texas beef brisket and a grilled chicken and summertime salad for lunch and dinner.

These products scored well with guests during our testing and we believe this program has broad appeal.

We'll continue our current breakfast seasonal lineup into summer as well.

Next I'll move into our retail store operations.

Although our retail business was affected by the drop in restaurant traffic, several categories, including media, seasonal and apparel, had positive comparable store sales.

These include garden and Easter products, our reusable totes, women's accessories, children's apparel and the Kenny Rogers gospel CD.

The Kenny Rogers gospel CD was number two for four weeks on Billboard magazine's Christian music chart and in the top 10 on their country album chart for three weeks.

Areas that did not do as well included toys which were up against strong sales of silly bands last year and sales of collectible candles and quilts were also below expectations.

We expect retail sales momentum to improve with the assortments that we've planned for the summer travel season.

We've updated the American Heritage great gifts offering and the food and games offered in the road trip theme.

We're also adding a new twist in the exclusive music category.

Teddy Gentry, the bass player from the band Alabama, has brought together up-and-coming artists for a special CD that features 12 new songs selected specifically for these artists.

Cracker Barrel guests in nine states, Alabama, Florida, Georgia, Indiana, Kentucky, Mississippi, Missouri, Ohio and Tennessee, are getting the chance to meet the best new Nashville artists when they play, sing and sign autographs on the front porches of selected Cracker Barrel locations through June 7.

In addition to our operational initiatives we're also looking at our marketing plans.

We complete the refreshing of our billboards by the end of the month in time for the summer travel season.

When you see the new boards you'll notice that the theme is consistent with prior billboards which refine messaging to better activate both the local and the travel occasion.

As you may recall, last month we won the OBIE Hall of Fame award for consistent use of outdoor media and for our current campaign.

Our media program continues to generate positive returns in the markets where we're running it.

We continue to refine the program to improve results on a market-by-market basis and we are rotating the messaging to strengthen our appeal.

We're also pleased to announce that we'll relaunch our website in June which will move us more fully into the social marketing space.

Our new site will have a fresh look, expanded functionality, new content and more robust eCommerce architecture.

We expect this initiative to provide an enhanced platform for us to connect with our guests and drive sales growth over time.

Our green initiative, the Electrical (sic) Vehicle Pilot Project is still in the planning stages as the Company doing the installations resolves production issues with the chargers.

We've been told that the installation of the 24 electric vehicle chargers will start in August in the Tennessee triangle, which is the 425 mile stretch of interstate highway that connects Nashville, Knoxville and Chattanooga.

We've been very happy with the positive press this has generated and the new association we think it's building for the brand.

Last I'd like to update you on our new unit growth.

We opened four stores in the third quarter; we have three more units scheduled to open in the fourth quarter, one of which opened yesterday, which will bring the total number of new units to 11 for this fiscal year.

We're pleased with the performance of our new stores this year.

As we move into the summer travel season, we remain committed to delivering the guest experience that we're known for.

We're responding to the feedback we've received from our guests and we're confident in our ability to make the refinements to our operating systems which are necessary to build and sustain traffic growth.

Now I'll turn the call over to our CFO, Larry Hyatt, to discuss the financial details and the outlook for 2011.

Good afternoon, everyone, and thank you, Sandy.

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

For the third quarter of fiscal 2011 we reported net income of $15.2 million, a 5% increase over the $14.4 million reported in last year's third quarter, and adjusted earnings per share of $0.64, a 4.9% increase over the $0.61 per diluted share that we reported last year.

Net income for the current quarter includes a benefit of $1.5 million or $0.06 per diluted share for gains on the sale of property net of an impairment charge.

For the third quarter of fiscal 2011 revenue increased 0.7% to $582.5 million from $578.2 million in last year's third quarter.

Restaurant revenues increased 0.6% to $476.4 million and retail revenues increased 1.2% to $106.2 million.

Comparable store restaurant sales decreased 0.3% as a 2.3% increase in average check was offset by a 2.6% decline in traffic.

The increase in average check reflects menu price increases of approximately 1.9% and a favorable mix impact of 0.4% due primarily to the higher priced items in this year's spring promotion.

At the end of March we raised our menu prices by approximately 1.5%.

When we combine this increase with menu price increases taken earlier in the year we carried menu price increases of approximately 2.2% into April.

Comparable store retail sales were up 0.1%.

Cost of goods sold in the quarter was 30.9% of revenue, a 100 basis point increase over the prior-year quarter.

Including inflation and specification changes, food commodity costs were up approximately 5% in the quarter compared to the prior year, which is more than 2.5 times the percentage increase in menu prices.

We experienced double-digit increases in pork, butter, coffee and lettuce prices which were partially offset by declines in the price of oils and poultry.

We also experienced higher food waste in the quarter.

Our retail cost of goods was slightly favorable in the quarter.

Our store payroll and related expenses were $227.4 million or 39% of sales compared to $226 million or 39.1% of sales in the prior-year quarter.

A 60 basis point reduction in store and field management bonus accruals and a 10 basis point reduction in hourly labor expenses were partially offset by a 20 basis point increase in store management costs and increases totaling 40 basis points in employee benefits, payroll taxes and preopening labor expenses.

Our hourly wage rates increased by 1.1% compared to the prior-year quarter.

Store operating expenses in the quarter were $112.1 million or 19.3% of revenue compared with $109.3 million or 18.9% of revenue in the prior-year quarter.

Lower maintenance expenses were more than offset by increases in supplies, advertising and other expenses.

Store operating income was $63.2 million or 10.8% of revenues compared with $69.8 million or 12.1% of revenues in the prior-year quarter.

Our general and administrative expenses in the quarter were $34 million or 5.8% of revenue compared with $38 million or 6.6% of revenue in the prior-year quarter.

This 80 basis point decrease resulted from lower incentive compensation accruals which reflect lower relative performance against financial objectives in 2011 as compared to last year.

During the third quarter the Company completed the sale of three properties including two vacant stores and one store that was recently closed to make way for a road.

The total cash proceeds from these three sales was $7.6 million and the pre-tax gain on these sales was $4.1 million.

During the quarter the Company also recognized an impairment charge of $2.2 million for a store that will remain open.

The pre-tax benefit of these gains net of the impairment charge was approximately $2 million in the third quarter.

Operating income in the quarter was $31.2 million or 5.4% of revenue compared to $31.8 million or 5.5% of revenue in the prior-year quarter.

Our interest expense in the quarter was $11.6 million, a reduction of 4.7% versus the prior-year quarter, reflecting lower debt outstanding.

Our effective income tax rate of 22.6% for the third quarter and 28% for the year-to-date period are lower than the prior year as a result of higher employer tax credits.

Our balance sheet continues to be strong.

At the end of the quarter we had approximately $62 million of cash on hand.

Our retail inventory of $98.6 million was $8.9 million higher than at the end of the third quarter of the 2010 fiscal year.

Approximately half of this increase is due to earlier deliveries in order to avoid potential delays from overseas suppliers.

At the end of the quarter our debt, which includes our current maturities, was $575 million and there were no borrowings outstanding under the revolving line of credit.

Year to date we have purchased a total of 500,000 shares including 300,000 in the third quarter for a total of $25.6 million including $14.6 million for share repurchases in the third quarter.

Our capital expenditures on a year-to-date basis were $59 million compared to $40 million last year.

The increase is largely due to new locations acquired and under construction this year and operational innovations like 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 previously, the speed of the recovery of the US economy continues to be a concern as do issues relating to the global price and supply of oil and food.

We are projecting that fourth-quarter total revenues will increase by between 1% and 2.5%.

We expect comparable store restaurant sales for the fourth quarter to be approximately flat while we expect comparable store retail sales to increase between 1% and 3% in the fourth quarter.

We plan to open three new Cracker Barrel stores in the fourth quarter for a total of 11 in this year.

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

Seven of the 11 are located on interstate highways.

We project that commodity costs for the 2011 fiscal year will increase by approximately 3%, including a fourth-quarter increase of between 5% and 6%.

For the fourth quarter we expect double-digit increases in the price of pork, dairy and coffee, moderate increases in the price of beef and poultry and reduction in the price of eggs.

We have locked in our pricing on more than 80% of our estimated commodity requirement for the balance of the fiscal year.

We expect our operating margin for the fourth quarter to be between 6.9% and 7.3% compared with 7.4% for the fourth quarter of 2010 and our full-year tax rate to be in the range of 27.5% to 28%.

We are lowering our full-year earnings guidance to be in the range of $3.80 to $3.90 per diluted share 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 plan.

Our capital expenditures are forecast to be in the range of $85 million to $90 million.

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.

In conclusion, we believe that with one of the strongest and most highly differentiated brands in the industry we will be able to improve our profitability and continue to deliver solid returns to our shareholders.

And now I'm going to turn the call back over to Mike.

Thank you very much.

Thanks, Larry.

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

(Operator Instructions).

Chris O'Cull, SunTrust Bank.

Good afternoon, guys.

Sandy, my first question -- I have two related to sales.

I'm a little surprised the Company would see a dramatic change in their GSI scores, especially when related to service.

Has there been a trend in terms of GSI scores declining?

You mean with -- about my comments about the Seat to Eat?

Well, the attentiveness of service, the friendliness of service -- I'm assuming that's based on a customer survey.

Yes, yes.

Well, what we started to see in this quarter was more negative feedback than we had been getting prior to that.

And I think what we believe is that we had significantly more stores in the rollout, the level of disruption was greater and we were much more focused on measuring the impact to our guest.

So we actually fielded some additional research to better understand what our guests were telling us.

And what the indications were, that there were some customers who viewed that the service changes that we were making were on balance negative.

Although we also believe there are other customers who valued the increase in the speed of service.

So clearly what we were doing when we put 35% of the change through the Seat to Eat was more disruptive than we had intended and we're evaluating the service model in order to determine what refinements we need to make.

Chris, if I can just jump in on that.

I'm not certain we used the word "dramatic", but we are seeing declines in some of the service scores on our ongoing tracking, which we do every month every store.

But in the research that we fielded to try and understand this better I think it's important to point out that, for instance, when we asked the question was your most recent experience at Cracker Barrel better or worse than before?

More people said it was better than said were worse.

So we're focusing on -- because it's really important to focus on the people who are not as satisfied.

But I don't want to suggest that the entire -- everybody who comes to Cracker Barrel is suddenly dissatisfied with us.

It's some group of people who, for whatever reason, are currently less satisfied than they used to be.

Okay, fair enough.

That's helpful.

One other question related to sales.

Sandy, the Company has raised its check the past several quarters while many in the bar and grill segment have actually lowered their check, especially recently with lunch promotions.

What gives you confidence that the traffic degradation isn't also related to maybe a narrowing in that value gap between Cracker Barrel and some of these competitors?

Well, we're actually looking at that as well and we're being very cautious about how much and where we choose to take price.

And I think we're confident now that where we have -- the guests are accepting but we are looking at that very closely.

Yes, I think that's a very important thing to continuously monitor because it's not just relative to the competition, it's also relative to the customer's ability to spend money as well.

So we're going to keep looking very, very carefully at that.

One of the things that we think we can do is to remind our customers that we do have a lot of affordable items on the menu, but we don't plan to start discounting to match the casual diners.

Have you seen any kind of change in your lunch performance data -- traffic performance?

That was one of our weaker areas.

Weekday lunch/dinner.

Okay, great.

Thanks.

I'll get back in the queue.

Steve West, Stifel Nicolaus.

Yes, Matt Van Vliet on for Steve today.

I was just wondering if you could give us any color or if you saw any real impact in terms of customer traffic at your interstate stores versus those off interstates?

And does that give you some semblance that it was more gasoline related or what kind of trends you're seeing there?

Well, the answer to the specific question is, no, we don't see any differential in performance between on and off interstate.

We do think gas prices are a factor, but I think they're a factor in terms of, A, disposable income; and B, we saw back in 2008 when there was the run-up in gas prices up to the $4 level, we did see some pressure on our performance then.

I think it's during the run-up period, that's what I believe, that as everyone is adjusting to the fact that gas costs more and they have less disposable income.

As gas prices stabilize and in fact the most recent outlook we've seen is for gas prices to start coming down through the remainder of 2011 we would expect that effect to lessen.

Okay.

And I just wonder if you could give us any -- a little bit more detail on the customer service scores that you were talking about and the previous questioner asked about.

Were you able to track those to stores that were more recent in the rollout of Seat to Eat versus maybe the ones that have had it longer aren't seeing as many declines or at least an uptick in terms of the worst and last time entry that you just commented on?

Well, we do track them by store so we are able to, and we had anticipated some period of shakeout as you go through the Seat to Eat and had seen that in our prior regions.

So we were not -- we were not surprised by seeing some issues early on in the process.

What we were focused on is as we continued to move through in more stores than we would have liked more input from our guests that they weren't seeing the recovery that we had expected in terms of our service standards.

And it's specifically the accuracy of the orders and the attentiveness and friendliness of the service.

Is there anything in the program then that you're aiming to change now as there are stores that maybe aren't fully experienced with it that would be easier to change now?

Or do you still have confidence in the program as a whole; you just need to kind of work through it?

Yes, let me reiterate what I said in my remarks earlier.

Absolutely Seat to Eat is the right platform for Cracker Barrel; it provides us with the ability to deliver quick ticket times, it provides us with the ability to provide consistently better food in terms of temperature and accuracy of order.

So it's not the platform, it's the -- in some cases it's the pressure of the implementation, I think.

The things we're looking at to solve are things that -- we haven't finished the process but absolutely things that we think are fixable.

We don't have to turn the world upside down.

Okay and then one final question.

In terms of some of the decline we've seen in commodities the last couple weeks or month or so, has that given you any opportunity to lock in maybe some longer-term contracts to at least have some clarity going out, whether it be through the end of the calendar year or into next fiscal year, and maybe lock in some savings here or is it still too early for that?

Yes, Matt, we are constantly monitoring all of the commodities markets, literally on a daily basis.

And when we do see an opportunity because of a short-term debt or a longer-term trend in the commodity prices we will take advantage of that opportunity and lock in.

As we said a little earlier, we're locked in on our estimated commodity needs for the fourth quarter about 80% which is about as much as it's possible to.

Because since there are certain commodity items, produce is an example where it is very difficult to lock in.

We're looking closely at those markets.

We lock in pricing based on the logical cycles of a given commodity market, not based upon a fiscal year calendar.

And so we've done some looking forward to 2012 and we'll be prepared to talk about that in more detail on our fourth-quarter conference call.

All right, thank you very much.

Brad Ludington, KeyBanc Capital Markets.

Thank you.

I wanted to start off with just -- kind of looking into the summer and gas prices coming down.

Before that started really we've seen some surveys where consumers are indicating that even with high gas prices they plan on taking vacations still.

Do you guys have any internal surveys or something you pay attention to that's been giving you that read or the opposite?

The answer is no, we don't have internal surveys that give us that insight.

Robert Derrington, Morgan Keegan.

Thank you.

Sandy, could you give us a little bit more color on the promotion you've got on the restaurant side of the business coming into the summer?

I think ribs and chicken, can you kind of -- and brisket, what are the price points?

It's -- they're consistent -- what we're rolling out, for the breakfast we're continuing with our spring promotion with the multi-grain pancakes and the six-grain and granola, which have both been extremely popular.

And those are at the $7.79, $7.49 kind of price points.

For lunch and dinner we'll be bringing in a salad which will be in that $8.49 range as well as the barbeque chicken and the brisket which is in the $8 to $9 range.

We are very excited about our summer promotion.

Jeff Omohundro, Wells Fargo Securities.

Hi, this is Katie Willett for Jeff.

I was wondering, were there any calendar shifts impacting the monthly sales results this quarter?

Yes.

Katie, looking at the monthly sales as we reported them in this morning's release, you can see what the result we believe of the shift in the Easter holiday was, that although both this year and last year it occurred in our fiscal April, it occurred at the beginning of fiscal April last year, the end of fiscal April this year which we think shifted sales in between the March fiscal month and the April fiscal month.

Joe Buckley, Bank of America-Merrill Lynch.

Just a question on some of the earlier markets that have converted to Seat to Eat.

In those markets where you had more time to sort of iron out the wrinkles and get the full benefit of Seat to Eat, are you seeing better sales and traffic performance?

And -- let me stop there for starters.

The answer is yes.

What we saw in the earlier markets, Joe, was a little bit of a drop in traffic as we went through the initial bidding in and then we saw traffic come back and improve.

So what we've got here I think is just a bigger version of that whole thing because we were -- we pushed ourselves to get all the stores done that we've done in the last quarter.

So part of it's going to be time, but part of it is looking to address the specific guest concerns we're hearing through our research.

Could you break down the same-store sales by the 30% or 35% of the markets that got Seat to Eat more recently versus the other 65% to 70% of the market?

No, we really don't want to do that for a variety of reasons.

One is that this quarter did have -- it had weather and all kinds of things going on.

And there wasn't 35% of the system on any given day at exactly the same place in the rollout.

I mean it was a wave of stuff going through.

I'm not certain that drilling down into the numbers would be particularly helpful except to say that the earlier stores which went through Seat to Eat have recovered and doing better than the latest group.

Just last one on sales.

Any regional differences that are noteworthy?

Florida and Texas were the two weakest regions, which would account for what, about 100 -- 110 stores, something like that, for the system?

And the Northeast and Mid-Atlantic were the strongest.

Okay.

Okay, thank you.

(Operator Instructions).

Steve Anderson, Miller Tabak.

Yes, and good afternoon.

Just taking a look at some of your performance along with that of your peers.

It appears like during the downturn you kept some of the traffic from some of the higher priced competition.

Now as some of your arrivals start to generate positive comp growth, do you think there's a trade up going on vis-a-vis some of your rivals?

Well, we don't track the specific transfer of business to the extent there is some.

I think one of the obvious things that went on over this period is that some concepts fell much further than others in terms of traffic, so that coming to some of the ones that are doing the best now as we understand it within Navtrak, are some of the ones who fell quite considerably during the downturn.

So my guess is it's not so much transfer from us, it's people reentering the set for those concepts who had dropped out for whatever reason during the recession.

Thank you.

Michael Wolleben, Sidoti & Company.

Thanks.

I wanted to touch on the comp guidance for the restaurant here coming into the fourth quarter.

You saw an improvement in April numbers; the flat number that you guys are looking for here, is that based on numbers that you guys are already seeing, or is that based on some of the changes that you guys are going to be making, products rolling out and then seeing marked improvement from where we're at here today?

Yes, Mike, in response to a question that was asked a little while ago, some of the relative positives you saw in the month of April were a result of the holiday shift.

And so it isn't necessarily that that's the beginning of a trend or that's kind of our view.

The fourth quarter for Cracker Barrel is very dependent on the travel season, which really starts the Memorial Day weekend.

And so we don't yet have a good read on that.

Some positives we think such as the moderation in the gasoline prices that the federal government is forecasting.

But on -- as a basis of our performance in the second quarter and the third quarter, we're comfortable with the flat restaurant guidance in the fourth quarter.

Okay, thank you.

Brad Ludington, KeyBanc Capital Markets.

Thank you.

The operator is being pretty efficient today, so I'm going to go ahead and get one question and a follow-up in right now.

Looking at the rollout of the Seat to Eat first off, do you expect to see some of those inefficiencies running into the fourth quarter the way we saw them in the third quarter?

And then to follow up, when you're talking about communicating value, is there any plan -- I mean how do you plan to communicate value in the coming quarters to try to turn some of this traffic issue around?

Thank you.

Let me take the communications piece.

A couple of things that we're doing specifically.

We talked -- Sandy talked about rolling out a new website, we've got a lot of plans to use that as a basis for communicating with our customers.

Something we didn't mention in our remarks was that we are doing some heavier outdoor advertising.

We planned some heavy [up] last summer and saw some measurable benefits from that.

So we're taking that and tweaking it a little bit and doing a little bit more of heavy up outdoor advertising so we think that will help improve traffic.

We're looking at the rotation of the advertising spots and putting in a bigger proportion of breakfast into the spots.

We don't have a lunch menu per se, so we don't have a lunch/dinner pricing differential.

But by advertising breakfast we're getting in front of the consumer in our advertising lower price points which I think is what they will respond to.

So that's some of the pieces of the puzzle.

Sandy, do you want to talk to --?

(multiple speakers) the Seat to Eat, Brad, yes, there will be some more because we -- although we did -- the majority of the stores are finished with the implementation, there were some residual or two residual regions that were at the beginning stages at the end of the quarter.

So it's implemented but not fully fleshed out.

And the one in Alabama we even had to delay given the weather there for a week or so.

Thank you.

Chris O'Cull, SunTrust Bank.

Thanks.

I just had a couple of follow-ups.

And I apologize if this was answered already.

But, Sandy, if my memory serves me right, last year I think in the fourth quarter you guys had increased your media spend.

Should we expect a comparable level of spend though this year in the fourth?

Yes.

Yes.

I'm sorry -- I [shouldn't have].

That was aimed at Sandy.

Okay, great.

And then Larry, would you bring break down the CapEx between new store growth and special projects like Seat to Eat this year?

And then maybe provide some color on spending plans for special projects next year?

Yes.

We'll talk about next year as we normally do on our conference call for the fourth quarter.

As I noted in my remarks, our maintenance CapEx spending for existing stores is expected to be in the range of $35 million to $40 million.

Our spend for new stores will similarly be in the range of about $35 million to $40 million and the balance will be in initiatives and some funds, a relatively modest amount, into information systems.

Okay, great.

Thanks.

Robert Derrington, Morgan Keegan.

Thanks.

Sandy, I didn't get all my question out before when -- I was curious.

Typically the Company is pretty good at looking at its promotional plan, testing that in advance, and then ultimately rolling it out and having some success with those.

As you look at the summer promotion with some of the barbeque items, can you give us some kind of color on how it tested and then what you expect to happen with check in the fourth quarter?

I assume because you're expecting flat nominal comps you expect traffic to be down; is it in line with price or in line with price plus mix?

Well, we did market test the summer promotion and we were pleased with the results.

We did make some refinements based on the results of the market test, so we're very optimistic about the impact that will have.

In terms of our expectation, we do believe it will -- I'm not sure if I completely understood your question in terms of the impact it will have on check.

We do think -- our expectation is the mix will be flat.

You think the check will be flat, is that it?

The check will be up.

Okay, you've got about 2.2% of menu pricing, correct?

Correct.

Okay, all right.

Well I would assume that if nominal comps are flat traffic is down 2.2% or so?

Bob, to clarify, we went into the last month of the third quarter with pricing going forward in the 2.2% range; that will carry forward through the fourth quarter.

We expect that the promotions will basically result in a flat mix, meaning that our anticipation of approximately flat same-store restaurant sales would imply that we're expecting traffic down by about as much as we expect pricing up.

Very good.

I'll follow up.

Thank you.

Bob, just if I could just comment on the products themselves.

As Sandy said earlier, we are continuing the two new pancake breakfasts that we were running in the springtime promotion, the six-grain and granola pancake and the multi-grain pancake exceeded our expectations in the springtime so they're continuing into the summer.

One of the barbeque products, the chicken, we've actually run before and had positive results from it.

And then we have an absolute knockout dessert, which is a multi-berry cobbler with a new ice cream that we're launching.

So in terms of the confidence in the products themselves, we feel good about their ability to deliver.

Great, thank you.

Michael Wolleben, Sidoti & Company.

Hi, I just wanted to follow up again on the Seat to Eat initiatives.

These guest satisfaction issues that you've seen in the latest rollout, were these satisfaction issues that you saw in the rollout of the other 65%?

And is the resolution really just a retraining here for the servers to be more attentive?

Is that what we're looking at?

We didn't see the attributes where we've seen a negative trend in the most recent regions; we did not see that kind of negative number in the early going.

I wouldn't like to leave the thought that it's just a matter of retraining.

We are looking very hard at our research in terms of the guest customer service model and making certain that all the elements of that model from a customer point of view are solid and if there are tweaks that we need to make to our execution we'll make those tweaks as well.

We're confident that we know what the issues are and we're working on the solutions.

Okay, thanks.

(Operator Instructions).

Howard Penney, Hedgeye Risk Management.

Thanks very much.

I was just wondering if you could maybe clarify your thoughts on pricing, especially as it relates to what is a fairly consistent decline in traffic.

And then your comments about value as well and trying to communicate a value message to customers.

And given what your core customers are, and everybody is, struggling with, the disposable income issues.

I was just -- if you could maybe speak broadly as to your pricing philosophy.

Is it to protect margins, is it to -- I'm just a little confused with how you're trying to communicate that one to the Street but also, too, to your core customers?

Thanks.

Sure, Howard.

As we said in I think it was the second-quarter conference call, we believe that in a period of rising commodity prices that we will price our menu so that we will hold dollar margin per customer constant, not percentage margin.

And we believe that in the brand experience over the past few years seems to be that the customer understands when they see that prices in the supermarket are going up, that they would see some restaurant price increases as well, which of course is countered by the fact that as grocery prices are going up and gasoline is going up that their discretionary income is negatively impacted.

But we believe and we think that the kind of pricing levels we've been talking about, 2% pricing on a 5% to 6% increase in commodity costs is consistent with a strategy of holding dollar gross margin constant.

[Wouldn't you] balance that with your -- the need to promote value as well in -- I guess I'm -- maybe I'm not asking the question right.

I'm just confused.

Value has, obviously, as we're all aware, a number of dimensions to it; it's not just a pure price point equation.

And one of the things that we have held to throughout the slowdown and through to now and expect to in the future is that the quality and quantity of our offerings is unchanged because I think if we were to stop changing those things we would not be able to continue to hold our pricing strategy.

I also think that we will be looking at price points that are in an affordable range both to communicate because we have those already on the menu and as we develop our menu to consider things that we can bring onto the menu which would maintain a strong sense of affordability.

We would be very concerned about a menu that started moving up with a number of items getting up to the $10 price range; we don't think that's the right place for Cracker Barrel to be.

So clearly there's a lot of pressure going to come from commodities.

I would also suggest, and it does not affect us directly except in the consumer's potential reaction, that those who are in a discounting mode and have the same commodity prices as us are going to have a double hurdle to get over, which is to deal with the level of price -- cost increases that are going to be coming and hitting them when they're in a discounted position.

So I think that we may actually get some help from the industry having to take price at a potentially greater level than we have in the recent past.

Mike, I agree with you.

On that notion, I think there were a couple quarters back you were probably benefiting from that discounting.

But do you think that given that you have such a high concentration of your revenues from such a small customer base and such a loyal customer base that you are battling a different animal when you raise prices?

Well, I think that -- we've always said that because we have a concentrated loyal customer base, many of whom always buy the same thing, that our price increases are more noticeable to some people because you don't get a 2% average price increase by taking everything up 2% if you're taking certain items up more than that and some not at all.

So those where we're taking more, that's always been a dynamic of Cracker Barrel.

So we're very, very -- we're very, very cautious about that.

But part of our marketing strategy is to broaden our appeal.

We've talked about and been running promotions that have products that broaden the sense of what Cracker Barrel food can be about -- the salads, the healthier breakfasts and so on that -- and some of the seafood items we've run over the last two years.

So what we're actively working towards and with our advertising looking at activating a larger group and bringing more people into the user group.

The segmentation study that we ran last October gave us great insight into the categories of users that we have and will give us the tools to identify users that we can move into the heavier more concentrated use by understanding what they're looking for from Cracker Barrel.

So that's something that we're really working on.

We would not want to be -- we prefer to be dependent on a larger core group than a smaller core group.

Thanks for your time.

There are no further questions in queue.

Okay.

Well, thank you all for joining us today.

Obviously the world is not great right now in terms of the economic outlook.

I think one potentially bright spot is that gas prices look like they're going to ease a little bit and that will be great for us as we move into the summer travel season.

We've obviously hit some bumps in the road here that we're working very hard on to fix and focused very much on working on our -- on building traffic.

Margin pressure is another area with the commodities and that's something that has caused us to reduce our guidance for this year.

But looking beyond the near term we continue to believe that all of the strategies that we've talked about today and accelerating new unit growth which we'll talk about in September, will allow us to build sales and therefore build profits and stay true to the brand.

So we appreciate your interest and your support and we'll talk with you again at the end of our fiscal year.

Thanks.

This concludes today's conference call.

Thank you for your participation.