Cracker Barrel Old Country Store Inc (CBRL) 2014 Q3 法說會逐字稿

Good day, and welcome to the Cracker Barrel FY14 third-quarter earnings conference call.

Today's conference is being recorded, and will be available for replay today from 2:00 PM Eastern through June 12 at 11:59 PM Eastern, by dialing 888-203-1112, and entering passcode 6983800.

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

Please go ahead, sir.

Thanks, Eli.

Good morning, and welcome to Cracker Barrel's third-quarter FY14 conference call and webcast.

This morning, we issued a press release announcing our third quarter and outlook for the FY14.

In this press release and on this call we will refer to non-GAAP financial measures for the current quarter, adjusted to exclude proxy contest expenses and their related tax effects.

We will also refer to non-GAAP financial measures for the prior year, adjusted to exclude charges and tax effects related to severance and prior year proxy contest, as well as adjustments related to the retroactive reinstatement of the Work Opportunities Tax Credit.

The Company believes that excluding these charges and tax effects from its financial results provides information that may be more indicative of the Company's ongoing operating performance, while improving comparability to prior periods.

This information is not intended to be considered in isolation, or as a substitute for, financial information prepared in accordance with GAAP.

The last page of the press release includes a reconciliation from the non-GAAP information to the GAAP financials.

The press release can be found on the investor section of our website, CrackerBarrel.com.

In the press release and during this call statements may be made by management of their beliefs and expectations of the Company's future operating results or expected future events.

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

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

We urge you to read this information carefully.

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

In addition, any guidance or outlook we provide, 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, filings with the SEC, or as otherwise required by law.

On this call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO Larry Hyatt; and Senior Vice President of Marketing Chris Ciavarra.

Sandy will begin with a review of the Business, and Larry will review the financials and outlook.

We will then open the call up for questions for Sandy, Larry and Chris.

We ask that you please limit your questions to matters related to the Company's performance, outlook and plans.

With that, I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran.

Sandy?

Thank you, Josh, and good morning, everyone.

This morning, we announced our sales and earnings for the third quarter.

During the quarter, we improved our operating margins and outperformed the restaurant industry, as measured by the Knapp-Track casual dining index, for the 10th consecutive quarter, despite our comparable-store traffic and retail sales being down on a year-over-year basis.

This performance was achieved against the backdrop of a challenging consumer environment, increasing promotional behavior by our competitors, and severe Winter weather, all of which we believe negatively impacted our store traffic and sales.

I'm pleased with the performance of our field teams, and their ability to preserve margins during this challenging quarter.

Looking at our retail business during the quarter, we increased comparable-store retail sales by 0.9%, while improving our retail gross margin by 140 basis points.

As a result of the Board and management's confidence in the Company's strategy, and in keeping with our focus on delivering shareholder value, during the quarter we declared a $1 per share quarterly dividend, reflecting an increase of 33% over the previous quarter's dividend.

This morning, I will update you on the progress we've made around our 2014 business priorities, and then Larry will provide more detail on the financial results for the quarter.

To reiterate, our 2014 business priorities include the following.

First, a focus on better-for-you menu additions and reinforcing everyday value on our menu.

Second, continue messaging in support of the brand, menu and merchandise.

Third, drive retail sales with improved quality and breadth of our merchandise assortment.

Fourth, improve operations and margins by applying technology and process improvements.

And fifth, to maximize long-term total shareholder returns.

Starting with the menu: During the third quarter, we built upon the Wholesome Fixin's platform by offering five new better-for-you promotional items.

These included a citrus spiced rubbed chicken breast, an oatmeal topped with apples and cinnamon, a smoky southern trout, a steak and egg breakfast for under 450 calories, and a delicious southern Caesar chicken salad.

In addition, we continue to reinforce the affordability of our menu by offering value offerings within our menu promotions.

Spring promotion, which is in stores now, includes a stapled insert in the menu highlighting our full line of country dinner plates priced at $7.69.

We rounded out our third-quarter menu promotions with a few of our traditional guest favorites.

With our second priority focused on messaging, we have continued our advertising strategy, focusing our national cable television spend, mostly in our busiest quarters, the second and fourth quarter.

So, while the third quarter was fairly quiet in terms of traditional advertising, we continue to focus on strengthening our relationships with our guests, through the use of alternative channels such as digital media and our music program.

We use our website and social media outlets to support our menu promotions, and to introduce new retail themes.

During the quarter, we successfully launched an exclusive music project with Michael W. Smith.

The exclusive CD titled, Hymns, reached number one on Billboard's Christian albums music chart, and has remained in the top 10 for the first seven weeks of the release.

In our retail business, our third priority, we continue to see strength in our apparel and accessories category, largely driven by women's cardigans, fashion scarves, and our new footwear category.

Our merchandising team was able to optimize on sustained guest interest in the category by expanding the overall assortment of offerings during the quarter.

Additionally, our wall decor theme, specialty items containing sentiment, was positively received by our guests during the third quarter, and supported year-over-year growth within our home decor category.

We continued to make progress on our fourth initiative, to improve margins.

Our improvements in technology and process enhancements have resulted in our field management team's ability to maintain operating margins in a very tough operating environment.

The investments that we've made in our labor management system and training platforms have allowed our operations team to continue to deliver a great guest experience.

And our guest survey scores continue to remain high, and showed year-over-year improvement in both overall satisfaction and overall value.

Our fifth business priority is the continued focus on maximizing shareholder return by increasing the quarterly dividend, expanding the footprint through new unit growth, and extending the brand outside of the four walls.

As I mentioned earlier, we announced a quarterly dividend of $1 per share.

This increase represents an increase of 33% over the previous quarter's dividend, and an increase of more than 350% over the last dividend prior to the announcement of the Company's strategic priorities in September of 2011.

While immaterial to our P&L, we continue to be pleased with the progress of our licensed food products sold in grocery stores.

Our bacon products continue to gain distribution and rank high in sales among other nationally recognized brands.

During the third quarter, we introduced an applewood sliced bacon, and five types of sliced-to-order deli meat.

In addition, we believe our guests positively responded to our second seasonal offering of our CB Old Country Store spiral ham during the Easter holiday.

Earlier this month, we introduced two types of jerky exclusively in our Cracker Barrel retail stores, and will continue to build on our licensing platform throughout the calendar year.

As we look to the fourth quarter, we have several plans to support our business priorities that we'd like to share.

During the fourth quarter, we'll focus on expanding the footprint through the opening of four new stores.

We're also reintroducing one of our most popular menu promotions: campfire chicken and campfire beef.

These foil-wrapped camp style products will headline as limited-time-only offerings within our Summer menu promotion.

Additionally, we'll continue to promote the Cracker Barrel brand through national cable TV, and expand value messaging through our billboards.

New billboard creative will communicate value positions at both lunch and dinner, with $5.99 and $7.69 price points.

On May 21, we launched a nationwide charity auction to benefit the National Military Family Association, the NMFA.

Proceeds from the Four Star Salute, Cracker Barrel's military family online charity auction, will support the NMFA's Operation Purple family retreat program.

This is an opportunity to help our returning service men, women, and their families, while at the same time raising the awareness of the Cracker Barrel brand in a way that is consistent with our brand values.

We look forward to continuing our support of military families.

The auction will be running through July 7, with five rounds of compelling price packages, including generously donated experiences such as Dollar General NASCAR racing experience, whitetail hunting with Austin Manelick in the Alleghenies, a Tom Joyner Family Reunion, and concert experiences with a range of artists from Dailey & Vincent to Romeo Santos.

We encourage everyone to join us in support of this worthy cause.

I also want to mention that we were recently named to the list of America's 100 Most Trustworthy Companies, published in Forbes Magazine.

This list was developed by GMI ratings, which evaluated the accounting and governance behaviors of more than 8,000 publicly traded companies in North America.

We're proud to be on the list, and we believe further demonstrates that Cracker Barrel is a brand not only that our customers can trust, but a solid long-term investment our shareholders can trust.

Finally, I'd like to share a few highlights from our May 1 analyst and institutional investor day.

At the meeting, we presented an update to our long-term strategy to enhance the core, expand the footprint, and extend the brand.

We shared our plans to increase relevance to drive traffic and sales in both restaurant and retail business, implement geographic pricing tiers to optimize average check, and re-engineer store processes to drive margins.

We'll introduce our new fusion prototype kitchen and selectively enter new markets.

And we'll build on the initial success of the licensing business, leverage brand strengths into a new fast-casual prototype, and grow retail into an omnichannel business.

For more information on the meeting, please see the Investor Relations section of our website.

In closing, the Cracker Barrel Board and management team is focused and excited about the future, and I remain confident that we have the right strategy and leadership in place to move the brand forward, and drive long-term shareholder value.

And with that, I'll hand the call over to Larry for more details on the quarter.

Good morning, everyone, and thank you, Sandy.

I would like to begin by discussing our financial performance for the third quarter of FY14, and then our outlook for the FY14.

For the third quarter of FY14, we reported net income of $28.7 million, or $1.20 per diluted share.

When adjusted for charges related to the April special meeting of shareholders, our adjusted net income was $1.23 per diluted share, a 20.6% increase over earnings per diluted share of $1.02 in the prior-year quarter.

Our revenue in the quarter was $643.3 million, a 0.5% increase over the $640.4 million in the prior-year third quarter.

Our restaurant revenues were $523.6 million, and retail revenues were $119.7 million.

Our comparable-store restaurant sales decreased 0.6%, as average check increased 2.3%, and traffic declined 2.9%.

The increase in average check reflects menu price increases of approximately 1.8%, and a favorable mix impact of 0.5%.

Our comparable-store retail sales increased 0.9% for the quarter.

Our total cost of goods sold in the quarter was 31.3% of revenue, a reduction of 20 basis points from the prior-year quarter.

Our restaurant cost of goods was 27.1% of restaurant sales, which is flat to the prior-year quarter.

On a constant-mix basis, our commodity cost declined 0.6% in the quarter compared to the prior-year quarter, as increases in beef and seafood were offset by reductions in most other areas.

This reduction in commodity costs, and the impact of higher menu prices, were offset by the mix shift to higher-cost menu items, and increases in food waste.

We believe that the increase in food waste was caused by the unpredictable weather and traffic patterns in the quarter, which made it difficult for our stores to accurately forecast production.

Our retail cost of goods was 49.9% of retail sales, an improvement of 140 basis points compared to 51.3% in the prior-year quarter.

This year-over-year improvement was the result of higher initial mark-ups, reductions in freight expense, and reduced shrinkage, partially offset by higher markdowns.

Our retail inventories at the end of the quarter were $110.5 million, an increase of $12.4 million over the prior-year quarter.

This increase was primarily the result of higher in-stock positions in women's apparel, accessories, and toys.

Our labor and related expenses were $243 million or 37.8% of sales, which was flat as a percentage of sales to the prior-year quarter, as lower store bonus expenses were offset by higher employee benefits expenses and store management labor.

Our other store operating expenses in the quarter were $121.1 million or 18.8% of revenue, compared with $116.4 million or 18.2% of revenue in the prior-year quarter.

This year-over-year increase of 60 basis points is due primarily to an increase in utilities, supplies, maintenance, and depreciation expenses.

Our store operating income was $77.8 million or 12.1% of revenue, compared with $80.2 million or 12.5% of revenue in the prior-year quarter.

On a GAAP basis, our general and administrative expenses in the quarter were $32.5 million or 5.1% of revenue.

Adjusted to exclude special meeting expenses, our G&A expenses were $31.4 million or 4.9% of revenue, compared with G&A expenses of $36 million or 5.6% of revenue in the prior-year quarter.

This 70-basis-point reduction was primarily a result of lower incentive compensation.

On a GAAP basis, our operating income was $45.2 million, or 7% of revenue.

Adjusted for special meeting expenses, our adjusted operating income was $46.3 million or 7.2% of revenue, a 30-basis-point improvement, compared with operating income of $44.2 million or 6.9% of revenue in the prior-year quarter.

Our interest expense in the quarter was $4.3 million, compared to $10.2 million in the prior-year quarter.

This reduction in year-over-year interest expense was due primarily to lower interest rates following the expiration of our swaps at the end of last year's third quarter, reduced levels of borrowing, and a lower credit spread on our bank facility.

Our effective income tax rate was 29.7% for the quarter, compared to 27.6% in the prior-year quarter.

The tax rate for the current quarter, and the anticipated tax rate for the full fiscal year, reflect the expiration of the Work Opportunity Tax Credit on December 31, 2013.

Our capital expenditures for the quarter were $23.9 million, compared to $16.4 million in the prior-year quarter, reflecting higher spending on new stores and store maintenance capital.

Our balance sheet continues to be strong.

We ended the quarter with $88.2 million of cash and equivalents, and our total debt is approximately $400 million.

With respect to 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.

So, bearing that in mind, we now expect to report adjusted earnings per diluted share for the fiscal year of between $5.50 and $5.60, which implies adjusted EPS for the fourth quarter of between $1.50 and $1.60.

We currently expect our full year and quarterly adjusted EPS to be close to the midpoints of these ranges.

We now expect total revenue for FY14 of approximately $2.7 billion, reflecting anticipated increases in comparable-store restaurant sales of approximately 0.5%, approximately flat comparable-store retail sales, and the expected opening of seven new Cracker Barrel stores.

We continue to expect increases in food commodity costs on a constant-mix basis of approximately 2% for the fiscal year, and we expect commodity cost increases of approximately 2.5% for the fourth quarter.

We have locked in our pricing on more than 90% of our expected commodity requirements for the remaining quarter of FY14, which is similar to our locked percentage at this time last year.

We expect our adjusted operating margin for the year to be between 7.7% and 7.9% of revenues, depreciation expense of between $68 million and $70 million, and net interest expense of between $17 million and $18 million.

We expect an effective tax rate for the year of between 31% and 32%, and capital expenditures for the year in the range of $90 million to $100 million.

The reduction in our full-year earnings guidance reflects a more cautious outlook for fourth-quarter comparable-store sales, and higher expected commodity cost increases, particularly in pork, beef, eggs and dairy.

The unexpected increases in pork prices are due to the PED virus, while the unexpected increases in beef prices are due to the loss of favorable fixed-price contracts as a result of the bankruptcy of a major supplier.

Our guidance for adjusted earnings per diluted share does not include any expenses related to the November proxy contest or the special shareholders meeting in April, nor any severance or other charges related to any organization changes.

Proxy contest expenses related to the November annual shareholders meeting were $0.09 per diluted share, while the expenses associated with the special meeting of shareholders on April 23 were $0.03 per diluted share.

And with that, I will now turn the call over to the operator for your questions.

Thank you very much.

(Operator Instructions)

And we will be limiting questions to one question and one follow-up on today's call.

We'll be going to our first question today from Alton Stump with Longbow Research.

Please go ahead.

Thanks, Sandy for all the color on the new products front in your opening remarks.

Obviously, you are going to be lapping Wholesome Fixin's launch later on this summer.

Just want to get an idea of as you look at your new product endeavor over next 6 to 12 months, how much of that do you think will be adding lines to the Wholesome Fixin's portfolio, versus possibly some new categories?

Well, I'm going to let Chris add the detail, but in general, we've got a number of initiatives focused on our menu that address generally what we continue to see, which is a need to reinforce our value position, and to offer value to our guests, and then secondly, to broaden our reach through a variety of programs.

Let me let Chris expand on that.

Thanks, Sandy.

Good morning.

So on a value front, we as Sandy said, believe we need to continue to reinforce the marketplace, us being a destination for everyday value.

So we have two main programs for that, our weekday lunch special program and our country dinner plates program.

As Sandy indicated, we're pushing a good portion of our billboards back to message on that.

We have plans to kind of revitalize our weekday lunch special program with within this fiscal year, add new products that will add reach on an everyday basis, so think of things like our LTO this past winter, where we had a sandwich and soup offer, and adding in reach.

Our country dinner plates are in market right now.

We'll continue to message against that.

The second leg for us, we continue to think about is better for you and as you noted, we did launch our Wholesome Fixin's category last fall.

It's done a good job at improving perceptions around offering fresh, healthy options, if you will, fresh ingredients, restaurant I can trust, things like that.

We've seen positive movements in those perceptual measures.

We plan on continuing to add to that category.

We've got a variety of new products coming that will add reach and margin.

So for example, in this spring promotion we had our smoked Southern trout, which we were very pleased with.

You'll see take come back on the menu later in the year.

It gave the operators a chance to get familiar with the product, so look for more of that.

And then as Sandy said, certainly continuing to drive news in the marketplace with flavor, and so looking to do that in two ways.

One is through our limited time offers, which give our guests some additional choice, and drives a little more frequency.

So this summer we're excited to bring back our campfire beef and chicken products as wells as or our multigrain products.

And then a little further out in the future, we talked about in our Analyst Day a mid-line dinner for lack of a different description at the moment, a category that would fit between our country dinner plates and our Fancy Fixin's that would pull from some existing products, some new products, and feature bolder flavors.

That's what's on the horizon for us.

Thank you for the question.

That's helpful.

Thanks, Chris and Sandy.

I guess one quick follow-up.

Any idea on the weather front, how much of an impact that was in 3Q to comps?

Hi, Alton.

Weather clearly had an impact on us in the second quarter.

I'm sorry, in the second quarter and the third quarter.

And in particular, of course, in the months of February and March, and we also had the impact of the three-week shift of the Easter holiday, from what was in the March month last year to the April month this year.

As far as the specific quantification of the impact, we've not disclosed that.

Okay.

Thanks, guys.

Appreciate it.

We'll go to our next question from Joe Buckley with Bank of America-Merrill Lynch.

Please go ahead.

I wanted to ask a question on sales, as well.

Just with respect to fourth-quarter guidance, you're a few weeks into the fourth quarter obviously, and based on the guidance, it seems like you're not seeing any real change in sales or any pick-up in sales.

I guess I'm curious, is there any residual effects from school holidays being shortened or things like that, either what you've seen so far in the fourth quarter or what you may be anticipating for the fourth quarter at large?

Joe, I'll make some general comments, and we don't really give a whole lot of detail on forward-looking.

But we continue to be cautious about the consumer for a variety of reasons, including, we think, many of our guests are still working through the impact of the weather, and that could be absorbing the additional costs that they had in terms of heating bills and so on, and in some cases we do believe that school holidays were disrupted by the amount of winter weather.

Now, the bulk of that we thought was focused on the spring breaks, which for many school districts were either abbreviated somewhat, and to some degree, we think people just didn't travel because they were so abbreviated, or the consumer was absorbing these additional costs.

We're also cautious about the level of promotional activity that's currently going on in the market.

So I think both of those factors are impacting our outlook on the fourth quarter.

Just a question on the commodity outlook.

You gave very detailed numbers and the abrupt swing from I think you said modest deflation in the third quarter to 2.5% inflation in the fourth.

Is it just that the sudden changes in the pork market and you mentioned a supplier going bankrupt as well, is it mostly around that?

And I know this isn't the forum for guidance for next year, but at the Analyst Day, you talked about food inflation for FY15 possibly being a little bit above what I think you laid out as a 2% to 3% annualized outlook for that three-year time frame.

Joe, we had said actually, I believe, as far back as the first quarter, that we expected our commodity costs to hit their cyclical low in the third quarter, and to gradually increase in the fourth quarter.

It turned out that they increased more than we anticipated, and as I noted, a lot of that, in fact well over half of the unanticipated increase in commodity cost is a result of the pork price increases, which as we understand it, is directly related to the PED virus.

Additionally, the bankruptcy of a major supplier, which was actually continuing to operate under Chapter 11 for a couple of months, and converted that to a complete liquidation within just the past few weeks, which resulted in a shutdown of their operations and of course our fixed price contracts aren't very valuable.

So it's been possible, thanks to the great work of our Strategic Sourcing team to find additional sources of supply, but those, of course, have been at higher prices.

Additionally, there have been some unexpected movements in the liquid dairy market and the egg market, which appears to be due largely to increases in export demand.

Okay.

And is it too early to talk about FY15 and just how it may be shaping up on the commodity front?

It is.

We are continuing to contract as our strategic sourcing team sees opportunity to lock in pricing for 2015, but our guidance for the 2015 fiscal year, including our commodities guidance, will be offered on our fourth-quarter call in September.

Okay.

Thank you.

And we'll go to our next question from Michael Gallo from CL King.

Please go ahead.

I was wondering, the four stores still opened in Q4, will those have the prototype kitchen, or will the first stores in the prototype be 2015?

2015.

And then a question, follow-up question for Larry.

How much was the change in bonus accrual year-over-year?

If you'll hold on for one second, just so I can give you an appropriate answer to that question.

Our change in incentive compensation between third quarter last year and third quarter this year was about 20 basis -- no, I'm sorry, was between 70 and 80 basis points.

Okay.

Thanks very much.

And we'll go to our next question from Imran Ali with Wells Fargo.

Please go ahead.

Just recapping, at your Analyst Day, you talked about your plans to increase your advertising expenditures, with some changes coming over the next three years.

Can you just remind us about what some of these changes might be?

Good morning, Imran.

We did talk about that and I'll ask Chris, actually, to expand on how -- what he plans to do.

Good morning, Imran.

In the Analyst Day, we did talk about the success we've seen over the past few years, and our shift into national advertising, and the various looks we've done, and the fact that we believe it's had a positive impact on a financial basis, and certainly in terms of being able to drive a different portion of our guest base.

Our plan over the next three years calls for us to lay in, in each year, stair step our way into this, and so it's not going to all go in year one.

So it will come in, each year, we'll be looking at it each year, to understand its impact, make certain that it's delivering what we want, and if it is, continue to move forward.

Okay.

Great.

And a slightly different tack, in terms of expanding, you talked about as well at your Analyst Day, but in terms of expanding into new markets, such as the B2B market and catering, and other off-premise opportunities.

Do you have a time line established for those opportunities too, or an updated time line?

We do internally, Imran, in terms of our B2B.

That's a business that we currently do, and what we plan to do over the next three years is to introduce technology offerings, packaging and so on, marketing, all to do a better job of delivering the business that we currently have, and to hopefully grow that business.

So I think what we announced at Analyst Day as one of the first steps is an online ordering platform, which should be this fall.

And then we'll be adding different elements as we go.

We'll be more on that in our September guidance for 2015.

Okay.

Thanks very much.

Appreciate it.

We'll go to our next question from Chris O'Cull with KeyBanc.

Larry, restaurant margins fell in the past four quarters, and looks like you expect it may fall in the fourth.

My question is what comp increase do you think you need to keep the margin flat year-over-year?

Chris, difficult question to answer, because of course, there's a lot of factors that go into those store margins.

As we've said, there are going to be quarterly fluctuations in our retail cost of goods sold.

We have seen that there can be some unanticipated changes in our restaurant cost of goods sold.

Typically, if our pricing increases pull through, even with traffic flat, you should see store margins constant to slightly increasing.

Okay.

Great.

And then can you remind us where you are in terms of reducing the plateware, and maybe help us ballpark what's the impact of that change?

Chris, we will be sorting that initiative rolling out in the beginning of the next fiscal year.

We haven't yet -- we've quantified, we haven't yet laid out the specific numbers.

That will be part of our guidance in September.

But that's actually a project that will take -- I think we anticipate some benefit in FY15 and in FY16.

Chris, just to remind those on the call who may not have had an opportunity to go through our analyst and Investor Day information, we anticipate that between now and 2017 that we will identify and we'll implement about $50 million of annual cost savings.

$20 million of that is expected to come out of labor cost, $20 million of that out of store management, about $5 million out of utilities, and $5 million out of various other things.

The plateware initiative will be a meaningful part of that $20 million of labor cost savings, and will also be a part of the utility cost savings, although most of the utility cost savings is expected to come from the installation of energy management systems in our stores.

Just as a follow-up, is it reasonable to assume the plateware changes will be the most meaningful cost cutting improvement or opportunity in the next 12 months?

We certainly expect it to be a meaningful opportunity in the 2015 fiscal year.

I don't know if I would necessarily say the most meaningful.

Thanks.

And we'll go to our next question from Steve Anderson with Miller Tabak Research Firm.

Please go ahead.

Yes, good morning.

And actually we spoke earlier.

But I wanted to touch now on the retail side of the business, and wanted to see where your mark-downs were, relative to the year-ago basis.

I have a follow-up on inventories.

Good morning, Steve.

I'll let Larry summarize what part of that he discloses.

Yes.

Hi, Stephen.

As noted, our retail cost of goods margin improved 140 basis points in the third quarter, versus the prior year's third quarter.

And that improvement was the result of us having higher initial markups.

We're continuing to see reductions in our expense, as a result of our transportation management system.

We are controlling shrinkage, and we saw some meaningful benefit there, and as you know, that was partially offset by higher mark-downs.

In terms of the specific mark-downs, weren't that much more significant in the aggregate in the third quarter of this year than they were in the prior year, and you really have to offset those against the fact that our initial markups were higher.

Understand.

And with regard to the year-over-year increase in inventories, I notice they're in the categories where we've seen stronger sales.

Is that reflective of anything else, of any other inventory overhang?

No.

Since we've been -- our sales of women's apparel and accessories in particular have been very strong, and that is a place that a lot of the retail inventory increase has come.

If there's one area that we perhaps are a little heavier in inventory than we might like, it would be in toys.

All right.

Thank you.

It appears there are no further questions at this time.

I would like to turn the conference back over to Sandy Cochran for any additional remarks or closing.

Thanks, you all, for joining us today.

I continue to be pleased with our ability to manage through a challenging period.

We look forward to the summer travel period, and continued progress on our business priorities during the last half of the year.

We appreciate your interest and support, and look forward to talking to you next quarter.

Thank you.

And that concludes today's conference.

We appreciate your participation.