Cracker Barrel Old Country Store Inc (CBRL) 2015 Q3 法說會逐字稿

Good day, and welcome to the Cracker Barrel FY15 third-quarter earnings conference call.

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

Eastern through June 17 at 2 p.m.

Eastern by dialing 888-203-1112 and entering passcode 875-2723.

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

Please go ahead, ma'am.

Thank you, Christie.

Good morning, and welcome to Cracker Barrel's third-quarter FY15 conference call and webcast.

This morning we issued a press release announcing our third-quarter results and our updated guidance for the FY15.

In this press these and on this call we will refer to non-GAAP financial measures for the current quarter adjusted to exclude the impact of accrued liability and tax effects related to the settlement of the Fair Labor Standards Act litigation.

We will also refer to non-GAAP financial measures for the prior fiscal year adjusted to exclude charges and tax effects associated with the special meaning of Cracker Barrel shareholders.

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 in the investor section of our website, crackerbarrel.com.

In that press release and during this call, statements made 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 behind 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 risk and uncertainties found at the end of this morning's press release and are described in detail in our report that we filed with or furnished 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 to 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 the call with me this morning our 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 up the call for questions for Sandy, Larry and Chris.

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

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

Sandy?

Thanks, Jessica.

Good morning, everyone.

I'm pleased to report positive results for the third quarter.

Our store traffic and our restaurant and retail sales were strong.

We once again outpaced the Knapp-Track Casual Dining Index, making this the 14th consecutive quarter of outperformance.

We also posted improvements in our operating income and profit margins, which resulted in a 21% increase in earnings per share from last year on an adjusted basis.

Our performance exceeded both our previously stated expectations and consensus estimates for the third quarter.

We believe our strong sales performance in the quarter was the result of general increases in consumer spending, our strong value positioning, and the continuing success of our marketing initiatives.

Our margin improvement in the quarter reflects the ongoing implementation of our cost savings initiatives and the leverage of higher sales.

This morning we announced a 10% increase in our regular quarterly dividend to $1.10 per share.

Over the past four years we have increased our dividend six times for 400%.

Also this morning, for the first time in our Company's history we announced a special dividend of $3 per share.

The increase in our regular dividend and declaration of a special dividend reflects our commitment to a balanced approach to capital allocation and to returning capital to our shareholders after we have appropriately reinvested in our business.

These decisions reflect our Board's ongoing evaluation of our financial performance and capital investment and liquidity needs, and our ability to deliver total shareholder return.

Over the course of the year we have remain focused on the execution of our business priorities to drive traffic and sales, optimize average guest check, improve margins and further grow our store base.

Larry is going to provide you details of the financial results in the quarter and discuss our up-dated fiscal year guidance, but before he does I want to highlight you -- I want to give you an update on some of the highlights from the quarter.

Our seasonal menu promotions continue to be well received by our guess.

During the third quarter we featured three lighter, fresher Wholesome Fixin's offerings, as well as an extended line of limited time only weekday lunch specials to support our value proposition.

The Spring promotion helped drive positive sales mix in our average check for the third quarter.

We continue to build on our core menu Wholesome Fixin's categories through the addition of our better-for-you southern grilled chicken caesar salad and our smoky southern trout as everyday offerings.

Our Summer menu promotion began yesterday and will run through the remainder of the fourth quarter.

The promotion features limited time offerings like strawberries and cream French toast, made with our own sourdough bread and served with two eggs and a side of bacon or sausage, as well as a delicious summertime favorite, our slow roasted St.

Louis-style rib platter.

We believe this new ribs offering will be very popular with our guests, and at a $10.99 price point is a compelling value.

Additionally, our summer promotion, we're going to highlight several core menu favorites including our guest favorite, Sunrise Sampler Breakfast.

We were very pleased with our retail performance during the quarter.

We increased comparable store retail sales by 4.5% while improving our retail gross margin by 30 basis points.

Our retail sales results for the third quarter were driven by strong performances in the core categories of women's apparel, candles and accessories.

Our merchandising team remains focused on themes that work across multiple generations and resonate with a range of guests.

For example, our summer nautical theme includes a variety of offerings like a trendy fedora hat, embroidered T-shirts and fashionable home decor.

We continue to source a merchandise assortment that has broad multi-generational appeal with a focus on nostalgic and authentic items that are uniquely Cracker Barrel.

As a result of our strong retail sales in the third quarter and disciplined merchandise buying, we entered our typically busy fourth quarter with very clean inventories.

To support our summer sales volume, however, we are supplementing our existing inventory with additional buys in certain categories.

However, given the long lead time such supplemental buying opportunities may be limited.

Let me now talk specifically about marketing.

The third quarter was fairly quiet in terms of traditional marketing efforts, specifically TV advertising.

We continue to focus on strengthening our relationship with our guests through alternative channels, such as our always-on billboard advertising, digital and social media and our music program.

Much of our third-quarter marketing effort was centered on our Country Checkers Challenge, which connected the Academy of Country Music's 50th awards celebration show with an iconic element of the Cracker Barrel brand, checkers.

The Country Checkers Challenge leverage a digital checkers game with the opportunity to win a trip to the ACM awards celebration to compete in a live checkers match against popular country artists.

We were pleased with the increased level of social brand engagement, and believe this type of marketing continues to support our long-term goals to drive reach through more focused content and through opening up new channels to reach certain market segments.

Our fourth-quarter national TV advertising will once again use a pulsing scheduled to stay engaged with our target guests over a longer period of time, and therefore extend our brand awareness.

And we continue to build on our successful Handcrafted by Cracker Barrel marketing campaign with a new TV commercial reinforcing the value and variety of offerings available on our breakfast menu.

Next, let me share our progress on optimizing average guest check.

We implemented our second market level pricing increase in March.

As we build on the pricing levels we established in September, and we continue to read the elasticity in each market and use the learnings to further expanded the pricing variance between levels.

We anticipate total annual price increases over the next three years between 2% and 3% per year.

During our first-quarter call, we outlined our fiscal year plan to reduce store operating costs by approximately $20 million through the implementation of cost saving operations processes and technology.

We remain on track for fulfilling that commitment, and continue to benefit from the changes we have implemented so far.

We believe we have generated sustainable improvements in our cost structure and driven higher operating margins.

We expect rollout of our dining room management system to be substantially complete by the end of the fiscal year.

This technology allows us to optimize our wait list and maximize throughput by converting capacity without negatively impacting our guest experience.

I'm pleased with the positive results from our employees and guests.

While immaterial to our P&L, we continue to be optimistic about our licensing program under our CB Old Country Store mark.

I'm pleased to announce that Continental Mills has joined us as the second licensee to support our entry into additional grocery categories.

During the quarter we introduced four new licensed products, including buttermilk baking and pancake mix and three flavors of dry gravy mix.

The products have just entered distribution and we are excited about this opportunity.

Before I turn the call over to Larry, I want to reiterate how pleased I am with our year-to-date performance, which we believe reflects the success of our continued focus on our FY15 business priorities.

Entering the fourth quarter, we remain focused on these key priorities and on delivering solid returns for our shareholders.

With that, I will turn the call over to Larry to discuss our financials.

Larry?

Good morning everyone, and thank you Sandy.

I would like to begin by discussing our financial performance for the third quarter of FY15 and then our outlook for the FY15.

For the third quarter of FY15 we reported GAAP net income of $35.3 million, or $1.47 per diluted share.

And adjusted net income of $35.8 million or $1.49 per diluted share, a 21% increase over adjusted earnings per diluted share of $1.23 in the prior year quarter.

In the prior-year quarter, GAAP net income was adjusted for the expenses and tax effects related to the special meeting of shareholders.

In the current-year quarter, GAAP net income is adjusted to reflect an accrual of $0.8 million for the settlement of the previously disclosed Fair Labor Standards Act legation.

Our revenue in the quarter was $683.7 million, a 6.3% increase over the $643.3 million in the prior-year third quarter.

Our restaurant revenues were $557.1 million and retail revenues were $126.6 million.

Our comparable store restaurant sales increased 5.2%, as average check increased 3.4% and traffic increased 1.8%.

The increase in average check reflects approximately 2.5% higher menu prices for the quarter and a 90 basis point favorable mix impact.

Our comparable-store retail sales increased 4.5% for the quarter.

Our total cost of goods sold in the quarter was 31.6% of revenue, a 30 basis point increase over the prior-year quarter.

Our restaurant cost of goods was 27.5% of restaurant sales compared to 27.1% in the prior-year quarter.

This 40 basis point increase was primarily a result of increases in food commodity costs partially offset by increases in menu prices.

On a constant mix basis, our commodity costs were up approximately 4% in the quarter compared to the prior-year quarter, due primarily to increases in beef costs.

Our retail cost of goods sold was 49.6% of retail sales, an improvement of 30 basis points compared to 49.9% in the prior-year quarter.

This year-over-year improvement was primarily the result of lower mark-downs and improvement in shrinkage and damages, partially offset by lower initial mark-ups.

Our retail inventories at the end of the quarter were $98.9 million compared to $110.3 million in the prior-year quarter.

Our labor and related expenses were $246.8 million, or 36.1% of sales, a reduction of 170 basis points compared to 37.8% in the prior-year quarter.

This year-over-year improvement is due to a number of factors, including a reduction in employee benefits expense due to favorable claims experience in the current and prior fiscal years; improvement in store labor productivity, driven by the ongoing successful implementation of our cost savings initiatives, and the leverage of sales increases.

These items were partially offset by increased store manager incentive compensation due to our strong performance.

Our other store operating expenses in the quarter were $126.7 million, or 18.5% of revenue, compared with $121.1 million, or 18.8% of revenue in the prior-year quarter.

This year-over-year reduction of 30 basis points is due primarily to decreases in utility expenses, partially offset by increased advertising spending.

Our store operating income was $94 million, or 13.8% of revenue, compared with $77.8 million, or 12.1% of revenue in the prior-year quarter, a 170 basis point increase.

On a GAAP basis, our general and administrative expenses in the quarter were $38.6 million, or 5.7% of revenue.

Adjusted to exclude the impact of the SLSA settlement, our G&A expenses were $37.8 million, or 5.6% of revenue, compared with adjusted G&A expenses of $31.4 million, or 4.9% of revenue in the prior-year quarter.

This 70 basis point increase was primarily driven by increases in incentive compensation.

On a GAAP basis, our operating income was $55.5 million, or 8.1% of revenue.

Adjusted operating income was $56.2 million, or 8.2% of revenue, compared with adjusted operating income of $46.3 million, or 7.2% of revenue in the prior-year quarter.

Our interest expense in the quarter was $4 million compared to $4.3 million in the prior-year quarter.

Our effective income tax rate was 31.4% for the quarter compared to 29.7% in the prior-year quarter due primarily to the increase in pretax income.

Our capital expenditures for the quarter were $22.4 million compared to $23.9 million in the prior-year quarter.

Our balance sheet continues to be strong.

We ended the quarter with $202.1 million of cash and equivalents, an increase of approximately $114 million compared to the prior-year quarter, and our total debt remains at $400 million.

In this morning's release we announced a 10% increase in our regular quarterly dividend to $1.10 per share, or $4.40 per year.

We also announce the payment of a special dividends of $3 per share.

The regular and special dividends will both be paid on August 5, 2015 to shareholders of record on July 17, 2015.

These dividend payments will use less than half of our quarter-end cash balance, and will not require any additional borrowing under our revolver.

The remaining cash balance and the unused balance on our revolver will continue to provide substantial liquidity after these dividends are paid.

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.

Bearing that in mind, we now expects to report adjusted earnings per diluted share for the fiscal year of between $6.60 and $6.70, which implies EPS for the fourth quarter of between $1.75 and $1.85.

We expect total revenue for FY15 of between $2.8 billion and $2.85 billion, reflecting anticipated increases in comparable store restaurant sales of between 4.5% and 5%, comparable store retail sales of between 3.5% and 4% and the expected opening of six new Cracker Barrel stores over the course of the fiscal year.

We expect increases in food commodity costs on a constant mix basis of approximately 3% for the fiscal year, and we expect our commodity costs in the fourth quarter to be approximately flat.

We have locked in our pricing on approximately 75% of our expected commodity requirements for the remaining quarter of FY15, which is relatively flat to this time last year.

We have received several questions related to the avian flu outbreak and its impact on egg prices.

Eggs constitute between 3% and 4% of our commodity spend, of which approximately 75% are shell eggs, approximately 20% are liquid eggs, and the remaining are hard-boiled eggs.

We have locked in our pricing on eggs through the end of the current fiscal year.

We expect significant increases in egg prices in the next fiscal year, and we expect to provide additional guidance on our anticipated FY16 commodity costs on our fourth-quarter conference call.

We expect our adjusted operating margin for the year to be between 8.5% and 9% of revenues, depreciation expense of between $71 million and $73 million and net interest expense of approximately $17 million.

We expect an effective tax rate for the year of between 31% and 32% and capital expenditures for the year of approximately $95 million.

If we achieve our earnings guidance for FY15, our year-over-year percentage increase in adjusted operating income and adjusted EPS will be in the high teens.

These growth rates are more than double the growth rate set forth in the three-year strategic plan which we presented last May during our Analyst and Investor Meeting.

While we continue to be excited as we look forward to the future, we do not anticipate that we will necessarily be able to maintain this year's growth rate over the remaining two years of our three-year plan.

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

Thank you very much.

( Operator Instructions )

Jeff Farmer, Wells Fargo.

Larry, you did touch on it, but how do you normally contract for eggs, and what can you do to help offset some of the expected pressure as you get into FY16 in terms of the promotional shifts or some pretty targeted menu pricing?

Yes.

Jeff, we target for -- I'm sorry.

We contract for shell eggs, liquid eggs and for hard-boiled eggs under multi-year requirements contracts which require our suppliers to meet all of the requirement that we have.

Those contracts tend to feature rolling quarterly pricing locks that are based on the prior year's quarter's marketing -- market prices.

So our prices on shell and liquid eggs are currently locked through fiscal year end.

So that as we go into FY16 as compared to what some restaurant companies have publicly said about supply availability, we are very confident in our ability to obtain supply.

Pricing will, of course, be significantly higher than the pricing we have paid in FY15.

And as to whether that drives changes in menu or changes in specific item menu pricing, I think it's a little premature at this point to say.

All right.

Thank you for that.

And one unrelated question.

One of your larger casual [dining] peers recently had some decent success in pursuing sale lease-backs, looked like with some cap rates that were sub-6%.

What is your latest thinking on the pros and cons of monetizing your own real estate?

Jeff, as we have repeatedly said, sale lease-backs are just a form of secure financing.

They are a form of secured financing that historically has had a cosmetic accounting advantage in that both the liability and the corresponding collateral just mysteriously vanishes off of a company's balance sheet, but the financial obligation is identical to a secured borrowing.

We currently have $325 million unused capacity under our revolver that we can borrow it [on] 125 basis points over LIBOR.

We have been very successful in the interest rate swap market, fixing LIBOR for 10 years in some instances.

And we can still borrow right now [10-year money] at a rate that is about 250 basis points lower than the sale lease-back cap rate of that particular casual dining peer.

Got it, got it.

So no sale lease-backs in the future, it sounds like.

All right.

Thank you very much.

No.

Let me be clear.

These things work in cycles.

And I'm not saying -- we are not saying never.

We are saying in the current conditions of the capital market, a sale lease-back as a form of borrowing would do a disservice to our shareholder, but capital markets change as they go through cycles.

Understood.

Thank you, Larry.

Michael Gallo, CL King.

Hi.

Good morning.

Good morning, Michael.

Just a couple of questions.

First just to follow up.

Larry, I know you mentioned there was some reduction in employee benefits due to claims.

Can you tease out how much that was?

It sounds like that would be the variety that was unexpected and you wouldn't expect to recur?

Michael, I don't think I would characterize that as not being expected because that was reflected at the time that we offered our guidance at the end of the first quarter and the end of the second quarter.

Specifically, our employee benefits cost as compared to the same quarter of 2015 was down in the range of about 80 basis points.

Okay.

Thank you.

In terms of -- and then just want to -- if you could give us an update on the tiered pricing test, how that's going, whether you've seen resistance to adjustments in prices in various markets, or whether you think that something we will see rolled out full system next year?

Thanks.

Michael, we, to a very large extent, have it rolled out full system now.

We have a relatively small group of what we refer to as the hold-back stores, which basically are serving as a control group for the first pricing tier.

Then the first pricing tier serves as the control group for the second pricing tier, and basically et cetera.

But the thing to understand is that the menu pricing gap between the various tiers will grow gradually over time, not be a one-time jump.

So for example, we do our menu price increases once in the Spring, once in the Fall.

So we intend to continue to do our menu price increases once in the Spring, once in the Fall.

And certain of the menu price tiers will get slightly higher menu price increases so that the gap will grow over time, not as a discrete jump.

Very helpful context.

Thank you.

Joe Buckley, Bank of America Merrill Lynch.

Thank you.

Couple of questions, as well.

So first, I just your description of the way your eggs are priced under your contract.

I think you mentioned it's on the prior-year pricing so -- but --

It's on the prior quarter, Joe.

Prior quarter, okay.

That's why it's kind of rolling 90-day blocks.

Is that how it works?

It does.

Yes.

Okay.

And then a couple other questions on things that were touched on already, as well.

Just on the regional pricing, the 2% to 3% target is that -- it doesn't sound materially different than what you'd be realizing most recently, of course, but maybe even over the past couple of years.

Is that correct, or should the pricing skew up a little bit stronger on a year-over-year basis as this is implemented?

Joe, Cracker Barrel is going to always want to be positioned in the market as a compelling value for our guests.

And the thought is that as we continue with tiered pricing and become more confident in the ability to tier prices, that there may be an opportunity to go from the 2%, which has been the historical average over the past few years, to something which is closer to the higher end of the range.

But we don't intend to use tiered pricing, which is a multi-year program, as a way to take us away from our value position.

Okay.

And then on the food inflation, I realize you want to hold off on FY16 until the fourth-quarter call, but is it encouraging as a potential offset or partial offset to the egg issue, that the fourth-quarter food inflation is expected to be flat year over year?

Do you see other things leveling off that may continue to be flatter favorable into the new fiscal year?

Again, without getting into the specific details about FY16, we expect to see some moderation in year-over-year increases in beef, but the risk going into 2016, in addition to the avian flu and the eggs, is that pork belly, which are the commodity for bacon, which is a very important item for us, are now at a historical and likely a non-sustainable low.

And so there is some likelihood that there will be some recovery in pork belly prices as we go into FY16.

Again, though, I prefer not to talk about our commodity outlook in any detail for FY16 until our fourth-quarter call.

Okay.

I'm going to add one point to that, Joe.

Although Larry outlined for you what eggs are as a percentage of our buy, of course you realize that eggs are an ingredient in quite a few of the other items on our menu.

So it's in meatloaf, it's in, of course, all of our biscuit mix and cornbread, so it's going to affect us.

We just don't know how broadly in other ways.

Okay.

Okay, and then just one more if I can.

Sandy, I didn't understand the mention of supplemental retail inventories.

And then the retail inventory number was actually down quite a bit year over year.

So I wasn't sure where you are going with the comments on the supplemental buys.

The retail team has done an excellent job of providing the shops with an assortment that I think is compelling to the guests.

I think the styling, the value, the price points and the way they are broadening the reaches, and they're good.

The good news is that we have sold a lot more a lot quicker than we thought of our inventory, and quite a bit of our inventory is unique to Cracker Barrel and we source overseas.

The downside of that is you find yourself having to find additional inventory to fill back in when you sell through faster than you thought.

As we go into our busy travel season, our inventories are very clean and they are lower than last year, probably a little lower than I would have actually liked and that Laura would have liked.

So the buying team has been working on adding more volume in some areas where we can, and supplementing inventory in some categories that we are seeing a lot of enthusiasm with.

So that's difficult to do, given our lead time, and it's just pointing out as a potential issue for us in the fourth quarter.

Okay.

Thank you.

Matthew DiFrisco, Guggenheim.

Thank you.

I wonder if you could talk a little bit about the long-term growth projection, or at least the third year of your three-year plan where you were a little presumably cautious or conservative in not expecting the similar type of growth going forward?

I was just curious, is there any factoring in of some of the kitchen initiatives you've discussed in the past and some of the opportunities there that you have early-stage identified as some kitchen savings?

And where do we stand in that rollout or timetable of testing that?

I'm going to turn it over, Matt, to Larry to sort of maybe add additional color on the numbers, but when we laid out our three-year plan last May 2014, we identified at that time a number of initiatives that we thought would drive improvement in our productivity and sustainable improvements in our labor model and energy savings.

There are a variety of things.

So I am really pleased with what we have been able to deliver this year.

The key initiatives, the plateware reduction, which we rolled out in Q1.

We had improvements in our retail labor.

We had a big energy savings, lighting initiative that I'm pleased with.

As I mentioned, we're in the process of rolling out our dining room management.

That is another big initiative which I think drives a variety of things, including labor savings.

So we have initiatives, both planned in 2016 continuation and then also in 2017 that we are excited about.

So it's not that we aren't continuing to factor them in or now don't believe that they will drive.

It's just some of them this year works, I think a lot came together for this year and some of the improvements came faster than we had anticipated.

Let me -- Larry, why don't you add the numbers color to that.

To refresh everyone's memories on the numbers that the Company shared at its Analyst and Investor Meeting last May 1, and if there's anyone who's interested in looking at that presentation, it still is available on the investor relations portion of our webpage.

We anticipated that over a three-year period from year-end 2014 to our FY17 that we would have annual sales growth in the 4% range, that we would have 100 basis points of margin improvement coming from annual cost reductions to be achieved by 2017 of $50 million which will be partially offset by additional advertising as a percent of sales, and what we anticipated as additional wage and benefit pressure, it would be partially offset.

And that the net of all that would be approximately 100 basis points of margin improvement over three years.

And as a result our operating income we expected over that three years, a compound annual growth rate in the 7% to 8% range, and an EPS growth rate in the 7% to 8% range.

FY15 is the first year of that three-year plan.

We anticipate that we will probably have an Analyst and Investor Meeting sometime in FY16.

We will probably update and expand and extend our strategic plan, but we've achieved significantly above that 7% to 8% operating income growth, that 7% to 8% earnings per share growth in 2015.

And that's from a number of things.

One is we anticipate that we will have achieved 40% of the three-year $50 million annualized savings in FY15, but we also had very strong sales as a result of many of our marketing and operating initiatives, but as a result also of a somewhat more benign consumer environment than we had anticipated at the time that we presented last May.

Excellent.

Thank you.

Alton Stump, Longbow Research.

Thank you and good morning.

Good morning.

Yes, it's a great job on the quarter.

I guess I just had a question on the balance sheet, as just looking at special dividend, and as you mentioned, doesn't require you to take out any debts or use your revolver at all.

You have a very lean balance sheet.

Obviously you've already given back a lot of cash to shareholders over the last couple of years here, in particular.

What is your appetite to potentially use debt to either, if it is raise your dividend even further and/or start to buy back shares, which you haven't done a whole lot of over the last couple of years?

How are you thinking now after the special dividend as to where you see cash returns going from here?

Yes.

We have said that we anticipate going forward that our regular quarterly dividend, which currently has a payout ratio in the low 60% range, would be growing roughly in line with the long-term growth of our earnings per share.

Concern about raising our regular dividend much further is that there tends to come a point where your dividend payout ratio gets that it's difficult to convince the market that it's sustainable, and we are mindful of not getting it to that point.

As far as the opportunity to repurchase shares, as long as we have a 19.9% shareholder and we have a shareholder rights plan with a 20% threshold, and I'll remind everyone that our shareholders overwhelmingly approved a shareholder rights plan with a 20% threshold, the view that we have is that we need to find alternatives to share repurchases to return capital to shareholders, which is the reason for our first special dividend that we announced this morning.

That makes sense.

Thanks so much, Larry.

I appreciate it.

Steve Anderson, Miller Tabak.

A couple of quick questions.

I think I may have missed the first one.

With regard to the 170 basis point drop in labor cost, can you break it down in terms of the percentage for claims, how many basis points was tied to claims?

I'm trying to -- you said you modeled this lease stuff the last few quarters, and as I'm thinking about our 2016 model, is this something you would consider going forward?

Yes.

Stephen, it's difficult to comment at this stage about what our actuarial experience may be as we move forward.

We had until the end of the 2014 calendar year, and it is important to emphasize here that it's a calendar year which is relevant for our benefits plans not our fiscal year, through the 2014 year we had an employee healthcare plan that was insured by a major insurance company, but that had a retroactive adjustment feature.

We have gotten the benefit of the positive claims experience in the 2014 calendar year in the form of those retroactive adjustments, some of which occurred in FY14, most of which are occurring in FY15.

As we go forward, we have now in compliance with the Affordable Care Act, have a self-insured plan that tends to have higher deductibles than the 2014 plan did.

So it is still relatively early to assess what the likely claims experience is going to be and the implication that that might have on next year's plan.

Okay.

That is fair to ask.

I will reenter the queue for a follow-up.

Thank you.

Robert Derrington, Wunderlich Securities.

Yes.

Thank you.

Sandy or Larry, I'm not sure who to direct this to.

As we look at the 170 basis point improvement in labor cost, can you give us any kind of color on what the dining room management program is contributing to that?

The dining room management is not contributing at all to that yet.

So we are in the process of rolling it out.

I think there is about half the chain maybe in the process of installing it.

We should be largely done by the end of the fiscal year, and then there'll be -- they'll have to understand how to use it.

I do anticipate a future labor savings tied to that initiative.

Okay.

All right.

I just wasn't sure whether we should assume that there is any contribution from that yet or not.

On the inflation guidance, Larry, that you typically talk to us about, you mentioned that's relative on a constant mix basis, I think.

But typically I thought some of the LTOs that the company traditionally uses, you try and find a promotional mix of product that could also provide you some benefit.

So the flat inflation you are expecting in Q4, year over year you won't necessarily have a constant mix sales basis, is that correct?

Bob, a couple of things there.

We have historically used our five menu promotions a year for the purpose of providing something new for our core customers and something different for our occasional customers.

From a financial standpoint, we have always targeted our promotions to be gross margin neutral on a dollar basis, not a percentage basis.

Now since the promotional items tend to have a higher menu price, at a constant dollar margin it means that they tend to have a lower percentage margin, which is the reason why we have reported for at least each of the quarters of 2015 a relatively high mix benefit in our comp store sales.

But you've not necessarily seen that in our restaurant food margin.

Got you.

As a percentage.

Last year the fourth quarter, I think you ran Campfire Meals.

And if I remember correctly, I think it added roughly 70 basis points, or it pushed COGS up for the restaurants on the food side up versus prior year.

I'm just trying to think about this year's promotion, which is ribs, which you haven't done, at least I believe in a while, right?

Yes.

And the ribs at a $11.99 -- I'm sorry, at a $10.99 price point are a compelling value as compared to what some full-service restaurant companies are offering ribs for.

Again, we expect it to be gross margin dollar neutral, which means it may from a percentage standpoint -- from a margin standpoint be slightly negative.

Just out of curiosity, is that actually a half of slab?

Go ahead, Chris.

It's Chris Ciavarra, yes.

It is half of slab.

St.

Louis style.

Yes.

Terrific.

Sounds like a great lunch.

Thanks, guys.

Congratulations.

Thank you, Bob.

Steve Anderson, Miller Tabak.

Just as a follow-up.

I wanted to discuss the fusion prototype and wanted to ask if you have [begun] any progress on -- I think if I remember correctly, at least one of the units were in the fusion prototype for FY15, and if you have thought about any kind of re-acceleration of unit growth?

Thank you.

The store is nearing completion of construction.

It is in Morganton, North Carolina and we expect to open on June 22.

I'm pleased with the way the construction progress is going.

And we're really excited about the learnings that are going to come from the new design.

That will give us an opportunity to improve new stores going forward, but it will also allow us to begin to understand better potential retrofit opportunities.

Okay.

Thank you.

That conclude today's question-and-answer session.

At this time, I will turn the conference back over to Ms. Sandy Cochran for any additional or closing remarks.

Well, thank you all for joining us today.

As we head into the final quarter of the year, I'm pleased with the sustained progress we're making on our strategic priorities and with the momentum we are carrying.

We remain well-positioned with a strong brand, talented management team and more than 70,000 engaged employees committed to providing a great guest experience.

We appreciate your interest and support.

Thank you.

That's conclude today's conference.

Thank you for your participation.