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Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)

F2Q09 (Qtr End 1/30/09) Earnings Call

February 24, 2009 11:00 AM ET

Executives

Diana S. Wynne - Senior Vice President, Corporate Affairs

Michael A. Woodhouse - Chairman, President and Chief Executive Officer

P. Doug Couvillion - Senior Vice President of Finance

Analysts

Brad Ludington - KeyBanc Capital Markets

Larry Miller - RBC Capital Markets

Chris O'Cull - SunTrust Robinson Humphrey

Stephen Anderson - MKM Partners LLC

John Curti - Principal Global Investors

Jake Crandlemire - Ramsey Asset Management

Cris Blackman - Imperial Capital

Operator

Good day and welcome to the Cracker Barrel Old Country Store Second Quarter 2009 Conference Call. Today's call is being recorded and will be available for replay today from 2 p.m. Eastern Time through March 10th at mid-night Eastern, by dialing 719- 457-0820 and entering passcode 3754557.

And now at this time for opening remarks and introductions I would like to turn the conference over to the Senior Vice President of Corporate Affairs, Ms. Diana Wynne. Please go ahead.

Diana S. Wynne

Thank you Dustin. Welcome to our second quarter 2009 conference call and webcast this morning. Our press release announcing our fiscal 2009 second quarter results and our updated outlook for fiscal 2009 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 expectation as to the company's future operating results. These are what are known as forward-looking statements which involve risk and uncertainties that in many cases are beyond the control of the company 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 these factors that can 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 annual and quarterly reports that we file with the SEC, and we urge you to read this information carefully.

We also remind you that we don't review or comment on earnings estimates made by other parties. In addition, any guidance that we give speaks only as of the date it is given. And we do not update our own guidance or express continuing comfort with it except as required by law and in broadly disseminated disclosures such as this morning's press release and this call.

The Company disclaims any obligation to update both information on trends or guidance and should we provide any updates after today, they will be made only by broad dissemination such as press releases or in our filings with the SEC. We plan to release fiscal 2009 third quarter earnings and same store restaurant and retail sales for fiscal February, March, and April on Wednesday, May 27th before the market opens.

On the call with me this morning our Cracker Barrel's Chairman, President and CEO, Mike Woodhouse; Interim CFO and General Counsel, Forrest Shoaf; and Senior Vice President of Finance, Doug Couvillion. Mike will begin with the review of the business, Doug will review the financials and outlook, and then Mike will return to close. We will then respond to your questions.

Michael A. Woodhouse

Thanks Diana. Good morning everyone and thanks for joining us this morning.

A lot of things have changed since our last call on November 24th. For example once -- we're once again Cracker Barrel County Store, Inc. Our shareholders approved the name change at the Annual Meeting on November 25th and our new old name reinforces our commitment to focus on a single concept and seems especially appropriate as we continue through our 40th year of operation.

In these turbulent times, we feel very good about putting our resources behind a single strong brand. In fact, the more time we spend on improving the Cracker Barrel experience the more we learn about what makes us unique and what keeps us -- what keeps our loyal customers coming back time and again. Some of these lessons we learnt the hard way. What seems good in theory doesn't always produce the desired results. For example, in our efforts to increase efficiency with the new menu, we discovered that many of our regular customers were disappointed to see their favorite food items no longer available.

In hindsight this makes perfect sense. At Cracker Barrel comfort food is a hallmark. We're where comfort meets food. Comfort describes something familiar, something that helps people deal with stress and something that stirs a positive emotion. Cracker Barrel is a one of kind experience and the last thing we want to do is to upset the wining formula behind our continuing popularity. That's why at the end of the second quarter we decided not to roll out the best of the Barrel test menu across the entire system. Instead we're enhancing our current menu to reflect the benefits from our menu testing.

For example, we've been able to speed up the order entry with a simplified point-of-sale system, and the new call menu will highlight certain margin food -- high margin food items in the way they brought us very good success as part of the best of the Barrel test. As a result our core products will remain on the menu and ideally we can increase the number of items that our customers crave. Most recent examples are lunch and dinner skillets.

Following strong test results we'll rolling them out across the system for the spring promotion beginning in mid March. This will be supported by a TV advertising in a number of markets. The new skillets will include a toss salad and bread service and they will be in the price range 7.99 to 8.99.

Our focus continues to be on providing our guests with a pleasant people experience that they expect from Cracker Barrel and that means ample portions of high quality food at a fair price. We have not reduced and we will not reduce quality or portion sizes in response to cost pressures. And this strategy is supported by our guest loyalty scores which continued to improve in all categories in order.

In an October study of more than 1100 consumer brands by YouGov/Polimetrix Brand Index, which is a daily brand intelligent service, Cracker Barrel was one of two chains that earned high marks from consumers in terms of favorable perceptions (ph) of value. Both had scores over 30 while the average for the group of 29 casual dining chains was 10.8.

Another study by the NPD group found that there was a direct negative correlation these days between rising prices and consumer satisfaction rates. As the average cost of the dinner and casual dining rises above the $13 mark, satisfaction rates as it relates to good value for the money and affordable to eat there often begin to fall off. And as a reminder, our average dinner check is above $9.35.

As you saw in the press release this morning, our restaurant traffic continued to outperform the Knapp-Track index in the quarter. However, we're not satisfied with just being less negative in the competition and we remain focused on returning to positive guest traffic trends.

Now let's talk about the cost side of the business. We're ahead of expectations with our plans to mitigate the impact of slower sales and at the same time strengthening our business model for the longer term. We're pleased to be able to provide the earnings guidance that we have today where despite continuing top-line pressures we're reaffirming a whole year operating margin to be in the range of 5.8% to 6.2% compared with 6.3% of fiscal 2008. And our EPS guidance remains $2.65 to $3 per share.

A key component of our plan is to spend only what we have to and to execute according to our standards but without in any way compromising the experience of our guests each and every time they visit any one of our stores. Productivity is central to these efforts in controlling costs.

In the restaurants, the rising star on boarding program for hourly employees continues to work well. The hourly employee turnover is now below 80% which is remarkable in the restaurant industry. Meanwhile, we're making structural improvements such as how we deploy labor. We've been testing better ways to utilize hours worked. The goal is to maximize stamping for the expected sales mix at any store on any specific day.

To seek to even this gives another integrated tool to drive store traffic and increase productivity. In addition to the primary cost benefits in these new programs, we know that lower employee turnover produces more experienced severs and the more experienced servers supported by more experienced kitchen staff generally equals a more satisfied customer. If we can approve and sustain these process improvements at the store level during these difficult -- in this difficult sales environment, we'll be at a very good position to create some positive operating leverage in a more robust economy.

And finally on turnover, I want to mention that our management turnover at 16% for the quarter is almost 4 percentage points lower than it was last -- this time last year. More of the many strength of our brand is the ability to generate strong cash flow. Over the long-term, we are working to improve the cash generated from every dollar of sales revenue. In the meantime, however, we want to ensure a comfortable cushion regarding our debt obligations.

With our profitability focus and plans to reduce our capital expenditures we expect to generate a significant amount of free cash flow, which we'll use to pay down our long-term debt in the second half of the year.

At the end of this quarter, our revolver was un-drawn and our long-term debt stood at $772 million with $8.8 million in current maturities. With our extensive real estate holdings, we have on very few occasions in the past undertaken sale-leaseback transactions for increased financial flexibility. We decided that it's appropriate to do so once again, with a proposed sale-leaseback of 15 or so of our stores. This represents less than 3% of our store base. I also want to state that this does not represent a departure from our long-term strategy of owning our buildings in fact after completion of the sale leaseback we'll still own approximately 400 stores.

As we said in the last quarter conference call, we were comfortable that we would remain in compliance with our debt covenants with a guidance that we provided at that time when the convents tighten in May. As of the end of this quarter our interest coverage ratio is 5.34 well above the minimum of 3.5 and the consolidated total leverage ratio is 3.72 below the maximum level of 4.0.

The cash received from the proposed two sale-leaseback transactions of the 15 stores and our regional distribution center combined with cash generated from operations will be used to pay down debt and provide us with some insurance in the form of more cushion on our debt covenants in this uncertain economic environment. We've also announced today that our quarterly dividend was maintained at $0.20 per share which results in a better than 4% yield at current share prices.

Before I turn the call over to Doug for the financial discussion, I have a few words on the retail business. There are no real surprises here. In an extremely difficult retail environment our comparable store sales were down 7% in the second quarter. Sales for our retail food products including everyday candy and Cracker Barrel branded mints and gum improved in the quarter.

Brass products showed solid growth and collegiate gifts, accessory and decor were up in the quarter. We had more offerings this year and we've recently introduced the special line of lady balls offerings to tie in with the University of Tennessee Women's Basketball Coach Pat Summitt's 1000th win a couple of weeks ago. And finally the Bill Gaither and Kenny Rogers CDs as well as valentines cards sold very well in the quarter helping media in total show positive growth.

We continue to attract new artists to our exclusive music offerings list. We're very excited to announce that we've just signed an agreement with Dolly Parton. Starting on March 23rd we'd be selling an exclusive collectors addition of her Backwoods Barbie CD which includes three never before released tracks. We are also going to be selling an exclusive Dolly Parton Rocker.

Webkinz toys continue to be a strong seller although other toys didn't sell as well this year which was in line with overall industry trends. The softness there is in retail with our seasonal products and general apparel, especially men's and woman's knit tops. Higher markdowns helped reduce inventory at the seasonal items but of course at a lower -- overall lower sales dollars.

In retail, it's always a balancing act between keeping fresh unique items on the floor and managing inventories and markdowns. We've reduced our buyers where we can and delayed purchases in order to manage our inventories to our current sales levels. Speaking of inventory, one action step that we took this quarter which is saving us about $350,000 annually is eliminating the trailers that we were using to store inventory at our stores. Removing the trailers turned up some pictures that could be used at other stores and it also requires tighter control of inventory at every store.

Until we see evidence that our customers are willing to commit to higher discretionary purchases, we're going to be carefully balancing our new product themes and look for ways to tie the restaurant and country store together and ways to continue to manage the levels in line with sales trends.

One last item to talk about here, our gift cards sales were up slightly over last year in the second quarter. The increase through third party outlets offset the decline in units sold at Cracker Barrel. We like the value we get from the third party program, both from the increased visibility across the country and the incremental sales that result.

And with that I'll turn the call over to Doug Couvillion for his detailed financial review. Doug?

P. Doug Couvillion

Thanks Mike and thanks to out listeners on the conference call and webcast for your interest and participation in today's call. Let's review in more detail the results of the second quarter of fiscal 2009.

For the second quarter of 2009, we reported diluted earnings per share of $0.81 compared with $0.85 per diluted share in the second quarter of last year. Income from continuing operations of 18.4 million was 1.9 million lower than last year reflecting lower operating income this year, partially offset by lower interest expense and a lower effective tax rate.

Revenue from continuing operations, during our fiscal second quarter declined 0.7% to 630 million reflecting top line growth in restaurant revenues driven by store growth offset by a year-over-year decline in retail.

Our decline in retail sales was generally inline with results posted by many other retailers. By the end of the second quarter, we had opened eight new Cracker Barrel units this year including four in the second quarter. These new units contributed to our revenue growth and although we continue to outpace the Knapp-Track Index, our comparable store restaurant sales and guest traffic declined 1.5 and 4.6% respectively.

Comparable store restaurant sales benefited by approximately 0.5 to 1% during the quarter from shifts and the timing of holidays and the travel associated with these holidays. The shift affected sales unfavorably in December and favorably in November and January. The net effect of weather was minimal for the quarter.

Our average check increased 3.1% reflecting a menu price increase of approximately 3.6%. Our average menu price in the second quarter more than offset the impact of food inflation and labor inflation. Our focus continues to be on maintaining the guest experience which includes providing good country cooking at a great value and not reducing portions of food quality as a means to offset inflationary pressures.

Cracker Barrel comparable store retail sales were down 7% in the second quarter of 2009. We continue to see softness in apparel and our seasonal business was not quite as strong as we expected. Christmas seasonal merchandize is an important part of our second quarter retail assortment and in a competitive environment represented a percentage of sales consistent with that of the past two years.

The average retail ticket (ph) continues to increase over last year although fewer guests are repurchasing retail items. Our operating income of $39.3 million was 6.2% of revenues in the second quarter compared to $45.4 million or 7.2% of revenues in the second quarter of 2008. Operating income margin was negatively affected by lower revenue and higher labor and related expenses. Health insurance benefits, workers compensation expense and store management labor contributed to higher labor expenses as a percentage of sales in the quarter compared with last year.

Lower operating expenses this quarter, in dollar terms, resulted from favorable general insurance costs and tighter spending controls on miscellaneous expenses, partially offset by higher utility costs and property taxes.

During the second quarter, actuarial reviews of the company's self insured workers compensation and general insurance reserves resulted in a smaller reduction to workers compensation expense this year compared to the prior year, and a larger reduction to general insurance than in the prior year.

Now, let's take a look at our operating margins. Cost of goods sold on a percentage of sales basis was flat with last year's second quarter, food related commodity inflation was lower than last year at 2.7% in the quarter with the largest percentage increases coming from oils, produce and grain based products. Dairy and pork costs were below last year's levels.

Retail cost of goods was higher this quarter due to approximately 10% higher mark-downs than last year and increased product cost. Helping to offset higher retail cost were fuel surcharges which were lower than last year by approximately $800,000 the first decline in about five quarters. We've lowered our forecast for food cost inflation to 2.5 to 3% for the year. Year-to-date our food cost inflation has been 3.7%. So we're looking for lower food cost particularly for dairy and eggs in the second half of the year.

Labor and related expenses were up 100 basis points as a percentage of sales compared with the second quarter of last year. But the key drivers of this increase were higher health benefits, the unfavorable effect of the lower workers compensation actuarial adjustment than last year, and the deleveraging effect of lower sales on store management expenses.

Medical cost inflation continues to outpace revenue for us and many other companies. Effective January the 1st 2009, we implemented several changes to our health insurance benefits which we expect to reduce our cost in the future. In the current quarter, higher medical claimed expenses and some transition costs related to the health plans put pressure on our labor margins. Partially offsetting these increases were lower restaurant hourly labor costs and lower operating bonuses.

Hourly wage inflation was 1.4% in the quarter and as Mike mentioned our hourly turnover was below 80%. This reduces our hiring and training costs and should result in a better guest experience. Other store operating expenses were flat last year's second quarter at 16.8% of sales.

Our utilities and property taxes were offset by a reduction in general insurance costs and tighter controls on miscellaneous store operating expenses. In general and administrative expense, our focus on curbing discretionary spending is paying off as G&A as a percentage of sales was flat with the second quarter of 2008 and down in absolute terms by 1.1 million.

Controllable administrative cost like travel and professional fees were down and base G&A payroll was flat to last year. The prior year reflects the non recurrence of a gain on the sale of the Las Logon's (ph) property we had retained.

Interest expense of 13.3 million is 1 million less than last year's second quarter due to lower borrowing rates on our un-swap debt. Our second quarter income tax rate was 29.4% compared with 34.9% in the second quarter of fiscal 2008. The difference in the effective tax rate in the second quarter of 2009 compared with the same quarter of 2008 reflected higher employer tax credits on an absolute dollar basis as well as higher employer tax credits as a percentage of pretax income due to lower income from operations. The effective tax rate for the full fiscal year 2009 is expected to be between 27.5 and 28.5%.

Now let's move from the income statement to our cash flow, balance sheet and debt covenants. For the first six months of 2009, cash flow provided by operating activities was $49.8 million, compared with $63.6 million in 2008. The decrease reflects lower net income and timing differences in interest, accounts payable and income tax payments. Year-to-date, capital expenditures were 37 million compared with 45 million last year reflecting few newer units in fiscal 2009. And as I mentioned earlier, we had opened eight units by the end of the second quarter and since that time, we have open three more units which completes our plan new unit expansion for the current year.

We reduced our outlook for capital expenditure for the year to 65 million, with our announcement that we'll opening only seven new stores next year. So far this year, we have paid cash dividends of 8.6 million or $0.20 a share quarterly rate, which at current stock prices represents a yield of more than 4%.

And we're pleased to announce earlier today the declaration of another $0.20 quarterly dividend to be paid later in the third quarter. Our total borrowings including current maturities at the end of the quarter was 781 million with no outstanding borrowing under our revolver. We remain in compliance with our debt covenants, our total leverage ratio was 3.72 and our interest coverage ratio was 5.34. Since the end of the first quarter, our leverage ratio improved from 3.81 and our interest coverage ratio comfortably exceeds the minimum of 3.5. We adjusted how we calculate our interest coverage ratio to exclude the interest associated with the interest rate swap reflecting a more accurate interpretation of our credit agreement.

We'd also like to remind you that after May 1st, 2009 the maximum leverage ratio will be decreased to 3.75 and the minimum interest coverage ratio will be increased to 3.75. We believe as our guidance indicates, we'll remain in compliance for the reminder of the fiscal year. However, we also think that it's prudent in this uncertain economy to provide some additional cushion. Therefore we're undertaking the sales leaseback of approximately 15 stores in our retail distributions center. We will use the estimated proceeds of approximately 55 million as well as excess cash flow to further reduce our debt level.

Let's look next at our outlook in more detail. We currently do not expect relief from the difficult consumer environment in fiscal 2009. We will, however, continue to focus on growing restaurant traffic, retail sales, controlling our cost to improve shareholder returns.

Based on current trends we presently expect fiscal 2009 total revenue to range between a decrease of 0.5% to an increase above 0.5% relative to last year's $2.4 billion of total revenue. Comparable store restaurant sales are projected to decrease 1% to 2% including approximately 3.3% of menu pricing and comparable store retail sales are projected to be down 4.5% to 6%. Favorable developments on commodity cost and our cost management initiatives allow us to reaffirm our guidance on operating margins which we expect to be in the 5.8 to 6.2% range, which compares with an operating margin of 6.3% in fiscal 2008.

Commodity cost moderating, we have lowered our expected commodity cost inflation for 2009 to a range of 2.5 to 3% and we currently have about 87% of comp -- commodities under contract for remainder of fiscal 2009. Net interest expense has been lowered to a range of $52 to $53 million with just $4 to $5 million lower than 2008 based on lower interest rate expectations on our un-swapped debt.

We have completed our new store development for fiscal 2009 and our guidance today includes opening seven stores during fiscal 2010. By opening only seven stores in 2010 we are able to reduce our capital expenditure needs this year to $65 million. And consistent with our focus on maintaining the guest experience, we will not be reducing our spending on maintenance capital expenditures which we expect to be approximately $28 million.

Depreciation for the year remains the same at 59 to 60 million in fiscal 2009 and we did not change our projected tax rate for fiscal 2009 and expected to be in the 27, 28.5% range with the third and fourth quarters being lower than full fiscal rate -- year rate. The diluted earnings per share count is presently expect to be approximately 23 million shares, reflecting the suspension of our share repurchase plan. We are also reaffirming our projected net income per diluted share for fiscal 2009 to a range of 2.65 to $3 a share.

In summary we are focused on managing our cost to a disciplined approach of business, we are committed to improving the guest experience so that Cracker Barrel's always top of mind when the consumer decides to dine out.

Our focus is on continuing to be the best family dinning restaurant, based on restaurant and institutions choice of chain survey for the past 18 years. The current outlook is based on the scenario that the economy is not going to improve in fiscal 2009.

There is still lot of uncertainty about sales in the entire retail industry, and there are few, if any, sign that the consumer has plans to start spending. We do have action plans in place, and our entire Cracker Barrel team is focused on achieving the current guidance. We believe that we're one of the strongest and most highly differentiated brands in the industry. And when the economy turns, we believe, we will be well positioned to take advantage of an improved operating environment, and deliver premium returns to our shareholders.

Thank you for your time this morning. I'll now turn the call back over to Mike for his closing remarks.

Michael A. Woodhouse

Thanks Doug. I just like to comment on a couple of items in our guidance for fiscal 2009 and the new store opening target in fiscal 2010. We've opened the 11 new units that we committed to for fiscal 2009, the last unit of that group opened just this week. In fiscal 2010 we are planning to open only 7 stores and we are doing that although the performance of the 2009 stores is exceeding our expectation, want to be able to -- we need work on identifying the management skills that are going to make certain that we provide a guest experience -- a positive guest experience from day one and then we can move stores quickly to their projected profitability level. Our lower unit growth rate will give us some more time to continue to focus on that execution.

As an example of the strong sales we're seeing when our new stores do open these days, our Stevensville, Maryland store set a record for combined sales in its first full week of operation in November. This tells us that dinners are still looking for good food and great value in a friendly family atmosphere.

On the sales guidance, we're looking for slightly stronger sales in the remainder of the year as our new skillets and future promotions have a positive impact on sales. And we've reduced our comparable store sales for retail to down 4.5 to down 6% which is in line with our performance for the first half of the year.

As I said earlier we're ahead in our action plans that are in place to minimize the deleveraging impact of lower sales on operating margin. Our outlook reflects the continued uncertainty in the economy and it's potential impact on casual dining. By limiting new store openings we can focus on executing the basics in order to maximize cash flows. At the same time we're committed to driving greater traffic to our restaurants and retail stores and improving profitability for the long-term. With demographic trends supporting the continued growth in our target customer base, we've every intention of maintaining our position as the customer -- consumer's choice when eating out.

And with that, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We'll go first to Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets

Good morning. I have a question first and see if we can get any more clarification on the sales leaseback. On that is -- since the net proceeds are 55 to 60 million, is that the expected sale price or would that be selling a little bit of a loss in using a little bit of a tax benefit along with that?

P. Doug Couvillion

That's just net proceeds, that does not include the tax effect or any gain with the transaction.

Brad Ludington - KeyBanc Capital Markets

Okay. And do you expect to be able to sell it for cost or better or will there be impairment charge that goes along with that?

P. Doug Couvillion

We expect to sell at a gain.

Brad Ludington - KeyBanc Capital Markets

Okay. Good to hear, especially in this environment. What about -- do you know what kind of cap rate you expect out of that?

P. Doug Couvillion

We're in the middle of negotiating, so we're not prepared to put a cap rate out just yet.

Brad Ludington - KeyBanc Capital Markets

Okay. And looking after the financing is already in place or is that still being worked on as well?

P. Doug Couvillion

That's being worked on, but we're quite confident we're going to be able to put this deal up, close this deal.

Brad Ludington - KeyBanc Capital Markets

Okay. And last think; I know I'm hitting you for a lot of detail on this, is it third the party transaction or will it be an LLC that Cracker Barrel's involved with?

Michael Woodhouse

It's a third party transaction.

Brad Ludington - KeyBanc Capital Markets

All right, thank you very much.

Michael Woodhouse

Welcome.

Operator

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

Unidentified Analyst

Hi, it's actually Steven Barlow (ph) for Joe. On the sales leaseback again, how are the -- how were the proceeds spilt between the 15 stores and the distribution center?

P. Doug Couvillion

Distribution center is about 12 million of the total.

Unidentified Analyst

Okay. And then on the covenants, what are the -- I guess with the timing in May, what are the ramifications if you break through them?

Michael Woodhouse

Well I don't think that's something that's relevant. We have no intention of breaking through. Our projection shows to be very comfortable relative to the covenants. The reason that we're doing the sale leaseback is to provide as more cushion, not to provide us the only cushion. We said at our last conference call, what we expected to be fine with our covenants based on our guidance. At that point our guidance, you will note, on earnings, has not changed. So we have -- we don't see any issues. We obviously have thought about what the implications might be but we don't think that's the topic that's worthy of discussion at this point.

Unidentified Analyst

Great, thank you.

Operator: Our next question comes from Larry Miller with RBC Capital Markets.

Larry Miller - RBC Capital Markets

Yeah, thank you very much. I also have a couple of sale leaseback questions and there's something else I'd like to ask. But on the sale leaseback, are you considering any other units other than the 15 currently and can you talk about some of the restrictions that you have in a dead agreement that would prohibit you from selling real estate or any buildings and whatever your proceeds might have to be directed to? And then just on that as a closure loop, I know you didn't talk about the cap rates that you are seeing but what generally are the cap rates in the marketplace for transactions like this and how would you characterize just the overall appetite on the investment side?

Michael Woodhouse

Well the appetite for the specific transaction that we're interested in, and I don't really want to represent myself as an expert in say leaseback market generally, but we're pretty confident on our side. In terms of do we intend to do any more, no, we have no intentions, but we do have the ability. Our credit agreement has two baskets one allows us to do up to $100 million on a one-time basis, sale leaseback without -- with no restrictions on these proceeds and then we have a $150 million basket which can be used in three $50 -- $50 million trenches one year at a time and the proceeds must be used to pay down debt. So we have lots of flexibility if we wouldn't need to go back to that market. But we don't see that, we think that we are going to be in pretty good shape.

Larry Miller - RBC Capital Markets

Right. And I just want to circle back. Kind of you've been testing a lot of same-store sales driving initiatives in the last 12 or 18 months. And I'm just curious if you were to prioritize based on all those results that you are getting, what's working, what's now working and what you've learned. I mean it sounds like the menu organization wasn't as important maybe as you thought it was. How about speed, value, table turns, all that -- and guest service, all that stuff that you are -- I mean, can you give us a relative rating on those things?

Michael Woodhouse

Well I think number one is our value and we would stress that we were not doing anything to our products -- all the experience -- the service experience, but we're not doing anything to our products to diminish the value of the products from a portion size or quality point of view and I will not comment on what we see elsewhere in the industry but we think that makes us somewhat distinctive in this environment. So, I think that is -- would be the reliability of the Cracker Barrel brand; you know what you're going to get when you come to Cracker Barrel, it's absolutely first and foremost. The speed is important to our guest and important to us from a throughput point of view.

One of the things that we've been focusing on in was last quarters, I think what weekend execution. And that's not about new ways of doing things, that's about focusing on our current standards of how we sit, how we place tables, how we get food out of the kitchen, and it's called we have reason obviously Friday, Saturday, Sunday represent 60% of our week. So if we can improve speed in that, we're having a very big impact after seeing some good results, I personally being our stores at the weekends and seen how that execution can really help us.

And then the new products also as escalate showing then, some innovative ideas give us under bread both boughs we have out there have shown that this is an appetite, serve this for new products. And we've seen some benefit, because we really haven't been in the new product business as much for quite a while. So I think that all of those things together all of that some newness, but mostly it's about the fact that our guest can term about and depend on us not to change the rules on in this difficult time.

Larry Miller - RBC Capital Markets

Okay, thanks. Did you want to share any data with respect to skills given its importance in the second half sales guidance?

Michael Woodhouse

What I can say is this breakfast is freedom together than the four from the Santa Fe that we brought in recently outperformed any other breakfast proportion will be down and the stimulus (ph) test performed very strongly as a promoted item. So we're looking forward to seeing that happen when we put them in a national promotion. and since it's new news, the fact that we're using some TV to support, we're going to have TV and about 25% of the system.

The ability to get new news outside of the box outside of the four walls should help us leverage the newness of that, because otherwise would depending on those who come to Crackle Barrel to discover from sale. So that combination of more broadcast support and new products that we think is going to be positive.

Larry Miller - RBC Capital Markets

Thanks very much.

Operator

We'll go next to Chris O'Cull with SunTrust Bank.

Chris O'Cull - SunTrust Robinson Humphrey

Thanks guys. My question relates to the cost. Doug, last year, I know in the fourth quarter G&A was up quite a bit on a percentage of revenues, and I think also on absolute dollars. Was there any unusual expense last year in the fourth quarter in that line, or should we expect G&A to be lower in the fourth this year?

P. Doug Couvillion

Well, for the whole fiscal year, we're projecting that G&A is going to be flat on a year-over-year basis. And we should be down when you compared our -- and depend the fourth quarter.

Chris O'Cull - SunTrust Robinson Humphrey

Okay. And that flat year-over-year that includes the one times that I think you had in the last year's number?

P. Doug Couvillion

Includes what, Chris?

Chris O'Cull - SunTrust Robinson Humphrey

Were there are some onetime charges in 2008 in G&A last year?

P. Doug Couvillion

Yes, and I think we also had some incentive comp kind of true ups as we rapped up the year.

Chris O'Cull - SunTrust Robinson Humphrey

Okay, great. And then the last question that relates to just, I guess the biggest surprise tells us some of the labor cost that you experienced during the quarter. Can you quantify the impact of the higher health insurance and worker's comp expense had on the quarter?

P. Doug Couvillion

Give me just a second. We from a dollar perspective in the 3 to 4 million range. But you've got to understand that the worker's comp thing is really -- it was really great results last year --

Michael Woodhouse

And great result for this year, but --

P. Doug Couvillion

-- great results for this year, but not to the some magnitude.

Michael Woodhouse

Right.

P. Doug Couvillion

So we're still experiencing very favorable trends that are underlying loss rates per dollar a payroll, and so it's kind of misleading to call that bad news, I believe.

Chris O'Cull - SunTrust Robinson Humphrey

Okay. And was the health insurance -- was that increase related to just renewals?

P. Doug Couvillion

No. Their health insurance is running inflation somewhere in the 7 to 10% range on a compounded basis and then we made some plan design changes effective to the first of the year. So we've got a small amount of transition costs that we incurred this quarter. We expect this plan design changes to really benefit us in the future.

Chris O'Cull - SunTrust Robinson Humphrey

Okay, great. Thanks.

Michael Woodhouse

Chris, just a follow-up on that the labor, not separate from the help from the workers comp. Labors and areas of significant focus for us and the underlying numbers we think were pretty good. Our hourly labor on an absolute basis, dollars was flat year-on-year at despite some wage inflation and some minimal wage increases has happened in January from various states. So, we're going to continue to really focus on all areas of labor. So, we feel pretty good. But that's not going to be an area of exposure to us for the remainder of the year relative to our guidance.

Chris O'Cull - SunTrust Robinson Humphrey

And the benefits you've seen in your hourly labor, that's really reflecting your focus on optimizing the labor hours by the peak sales period.

Michael Woodhouse

That's right.

Chris O'Cull - SunTrust Robinson Humphrey

Okay, thanks.

Michael Woodhouse

Thank you.

Operator

We'll go next to Stephen Anderson with MKM Partners.

Stephen Anderson - MKM Partners LLC

Yes, good morning and congratulation on the quarter.

Michael Woodhouse

Thank you.

Stephen Anderson - MKM Partners LLC

And just a follow up on the labor cost side. You anticipate additional transaction cost in the next couple of quarters going forward?

Michael Woodhouse

I think that we're going to be through most of those costs by the end of the third quarter. There is probably a slight risk that something occurs in Q3. But I think we're pretty comfortable with what we have in on outlook delay in the labor margins.

Stephen Anderson - MKM Partners LLC

Okay, great. Thank you.

Michael Woodhouse

Thank you.

Operator

We'll go next to John Curti with Principal Global Investment (sic) [Investors].

John Curti - Principal Global Investors

Good morning. Question with respect to your annual guidance of 2.65 to $3, does that include or any gain from the sale and lease back?

Michael Woodhouse

It does not included any gain.

John Curti - Principal Global Investors

Okay. On the store openings of fiscal '10, the seven, what's kinds of the timing of those stores first half of the year?

Michael Woodhouse

Yeah. They were front end loaded, and they all will all occur in the first half.

John Curti - Principal Global Investors

Okay. So out of the 65 million in CapEx that's -- I realize that represents a reduction because of the reduction of source of 10, how much of the CapEx for those seven stores that will open in the first half of 2010 will be occurring in this back half of 2009, fiscal '09?

P. Doug Couvillion

About $8 million.

John Curti - Principal Global Investors

Leaving roughly how much for the balance then in fiscal '10.

Michael Woodhouse

Probably 14 million to $17 million, I am not quite sure of the mix of land and all that, but --

John Curti - Principal Global Investors

Okay.

Michael Woodhouse

I don't really have that in front of me.

John Curti - Principal Global Investors

And then the interest expense and the depreciation expense guidance for this year reflects the sale and lease back of the properties either adjustments in there they would lower the depreciation because of the sale at least back?

Michael Woodhouse

Not significantly, they would only one quarters impact probably less than the quarters impact, which comes to two of the end of the year that we closes things, just not material.

John Curti - Principal Global Investors

Okay. And then with respect to your retail operation, you talked about a cost pressures on the product side as well as increased markdowns, what's kind of your outlook for the back half of the year even though you have kind of increased the amount of negatives same store sales guidance for the back half. What are you --

Michael Woodhouse

Well, as I said in my prepared remarks, one of the things we've been doing on retail is as we solved the slow down early in the year. And we do have pretty long lead time in retail is that we've been pulling back on our orders so that we should have our inbound retail product more on line with our expected sales. So we won't be doing what we had to do in the first half of the year, which was to unwind longer inventory positions than we would have liked in the sales. So we are in better shape from that point of view.

Our goal and our plan is to have our retail inventories be inline with run rate or sales by the year-end. So, net of all that is we don't expect the mark downs to be such a significant tool in major inventories in the second half as during the first.

John Curti - Principal Global Investors

Has there much seasonality in the retail business? I mean is the second quarter using one of the high points of quarters?

Michael Woodhouse

Yes, it is. On the retail side, we would like every other retailer that the holiday seasons to be part of the year.

John Curti - Principal Global Investors

Okay. Thank you very much.

Michael Woodhouse

Thank you. Just to quickly clarify the capital spending, the balance of the capital spending on the 10 stores probably about $15 million.

Operator

And we'll go next to Jake Crandlemire with Ramsey Asset Management.

Jake Crandlemire - Ramsey Asset Management

Hi guys, thanks for taking my question. Can you just give us a sense maybe on per-store basis regarding the sale-leaseback, the impact to the P&L from the higher rent expense, but also the offsetting depreciation and other expenses that you may incur? Thanks.

Michael Woodhouse

We really don't do that until the terms are finalized.

Jake Crandlemire - Ramsey Asset Management

Got it, okay. And then could you also give us sense maybe going forward? Have you seen the sales trends that you saw in January continue over in the February?

Michael Woodhouse

We would love to talk as ever with that current month for that our policy is that we only give quarterly guidance. So, sorry we can't tell you about that.

Jake Crandlemire - Ramsey Asset Management

Okay. Thanks guys.

Michael Woodhouse

Thank you.

Operator

(Operator Instructions). And we'll go next to Cris Blackman with Imperial Capital.

Cris Blackman - Imperial Capital

Yeah, I appreciate it. Can you hear me?

Michael Woodhouse

Yes, we can hear you.

Cris Blackman - Imperial Capital

Okay. I hate keep coming back to the sale-leaseback, but under that transaction, I assume the land, the building and building improvements are included in that.

Michael Woodhouse

Yes.

Cris Blackman - Imperial Capital

And the equipment is not included; would that be right?

Michael Woodhouse

That's right.

Cris Blackman - Imperial Capital

If I take the low end of what you are suggesting you are going to back from the sale-leaseback of, and subtract the distribution center that would suggest that those 15 stores are going to generate about 43 million in sale-leaseback, which is roughly about 35% higher than the sale-leasebacks you did back in 2000 on the 65 units you did then. I think you are bringing in an average of about 2.8 million, 2.86 million per store. I guess you answer the gain and the amortization and depreciation, but I was curious the age of those units, those 15 units. Can you give us an average eight of those units?

Michael Woodhouse

It would be a mix, but they will be newer stores probably in the 2004 to 2008 timeframe.

Cris Blackman - Imperial Capital

Okay, somewhere will be 2000 toward 2008. And --

Michael Woodhouse

That's the pool that we are looking at, yeah.

Cris Blackman - Imperial Capital

Okay. And is the lease term is going to be -- do you expect initial term to be 21 years or do you have a timetable on --

Michael Woodhouse

That's part of the negotiations right now.

Cris Blackman - Imperial Capital

Okay.

Michael Woodhouse

We don't want to publicly negotiate against ourselves.

Cris Blackman - Imperial Capital

Okay. Any thoughts on the increase in value from 2000 to 2008 average per store; any -- is that just general inflation or --

Michael Woodhouse

A part of it is sales for store, higher than what back then.

Cris Blackman - Imperial Capital

Okay, that's helping drive it.

Michael Woodhouse

Yeah.

Cris Blackman - Imperial Capital

Are you seeing any leverage on advertising with this comparative environment out there, the economy the way it is, do you see any opportunities to rain in advertising or to get more out of your advertising or possibly to renegotiate better contract on some of your good would cost and such?

Michael Woodhouse

Well, we're seeing on the billboards, we aren't seeing some opportunities as we're always on the process of renewing with 1,500 billboards out there. And the same leases come up that are lower than the previous rent on that particular billboard by a little bit. So that's certainly an opportunity. We've got the agency, who works on that directed to -- we're not going to give out on the quality of the boards, where we've certainly opportunities to reduce at least cost on global, so we're focused on that. And then as we buy or have radio and TV, we certainly are looking at the fact that there is an opportunity. We generally approach everything in the business today that the marketplace in the world has changed out there, and we're looking for opportunities to benefit from that. We are seeing a reason why we shouldn't take benefits economic side of the economy while we are taking the negative side on the sales line.

Cris Blackman - Imperial Capital

Very good. With this capital transaction you are doing on the sales-leaseback in the reduction in CapEx, can you give us anymore guidance on how much debt you expect to pay off by the end of the year?

Michael Woodhouse

No, that would get us into giving guidance on cash flow that we will give the earnings guidance and the other components. So you can probably get there if you walk way through the numbers.

Cris Blackman - Imperial Capital

Yeah, you've said in conference call, I think your range has been stayed at 2.65 to 3. I was just reading through the preliminary transcripts from one of the services, and it gets you quoted as saying in 2.55 to 3. I just want to confirm you said 2.65 --

Michael Woodhouse

I said 2.65 just as it is in the release.

Cris Blackman - Imperial Capital

Okay, perfect. Thank you very much.

Michael Woodhouse

Thank you.

Operator

Moving next to Brian Elliott with Raymond James.

Unidentified Analyst

Hi, this is Brian Mitchell (ph) filling in for Brian Elliott. I was hoping if you can gives us a little bit more color on the change to the interest coverage ratio that you mentioned, the change in the calculation, and then I just have a one quick follow-up.

Michael Woodhouse

Yeah, if I can speak to that, that's simply adjusting to a correct interpretation of the document. We had in fact been using a GAAP interpretation, but the document itself has a non-GAAP interpretation. So that has nothing to do with -- having issues with the covenant, the way we are doing. And we just think we should be interpreting the document correctly and the banks when the council all support that. So I think just a mechanical correction.

Unidentified Analyst

Okay, fair enough. And what was the inventory balance sheet number at the end of the quarter for retail specifically?

Michael Woodhouse

Well, just a second.

Unidentified Analyst

Okay, no problem.

Michael Woodhouse

Approximately $140 million, we typically don't breakout and disclose separately our restaurant inventories from our retail inventories.

Unidentified Analyst

That 140. Okay, thank you.

Michael Woodhouse

Thank you.

Operator

And we have a follow-up from Jake Crandlemire with Ramsey Asset Management.

Jake Crandlemire - Ramsey Asset Management

Hey guys, just one more on the sale-leaseback. I know last year that different points in time when people had talked about the value of your restaurant. You'd always kind of use the 3 million per site number, the rule of thumb. And if you do the math at the midpoint of your current guidance extra distribution center, it's about 2.9, so little under 3. I am just curious with the deterioration of the credit markets and financing and just commercial real estate in general, I mean I am just trying to get a sense of your thought process and whether or not how prudent you guys have been with kind of a similar 3 million number per site?

Michael Woodhouse

We don't normally throw our numbers. We normally have some pretty good substance behind them, but in this case, we have good substance behind our numbers. We just not finalized on the negotiations. So we don't want -- I guess as a normal way, I'd say we're highly confident that we are going to get the deal done and get to the numbers we have out there.

Jake Crandlemire - Ramsey Asset Management

Got it, okay. Thanks.

Michael Woodhouse

Okay.

Operator

And we return to John Curti from Principal Global.

John Curti - Principal Global Investors

Yes, follow up on the balance sheet, the assets held for sale of $5.5 million, what is that please?

Michael Woodhouse

We have couple of locations that we closed several years ago that are still currently being marketed for sale and we have one property -- a corporate property in the local market that we're trying to dispose off as well.

John Curti - Principal Global Investors

The corporate property; is that an improved property or is that just a parcel of land?

Michael Woodhouse

It's an improved property, it's just excess capacity.

John Curti - Principal Global Investors

And do you have any vacant parcels that may be coming up for sale little later time as a result of reduced store opening plans or anything like that?

Michael Woodhouse

No, no. We don't.

John Curti - Principal Global Investors

Okay. Thank you.

Michael Woodhouse

Thank you.

Operator: And we'll go next to Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets

Thank you. I just wanted to follow-up. Just looking into fiscal 2010, if I was trying to estimate CapEx, I mean I would assume you use roughly the 28 million maintenance again, and then what number should I use per store in development?

Michael Woodhouse

Well we haven't spoken about the 2011 new store count and we're not in the position to do that just yet. So it's difficult to get a number or to give you a number that would be helpful at this point. Our normal protocol is to announce on development plans that with our yearend earnings release every year for the New Year. We just accelerated that this time to give some visibility into our capital expenditures for the remainder of this year, so that there would be greater visibility into our comfort level with our covenant calculation. So we really can't give you anything that would help at this point. But we will certainly be doing that in September.

Brad Ludington - KeyBanc Capital Markets

Okay. And just last thing; this may fall in that same bucket, the -- not ready to comment. Should we expect that the seat-to-eat initiative goes -- hits CapEx in fiscal 2010?

Michael Woodhouse

Yes, that's reasonable at this time.

Brad Ludington - KeyBanc Capital Markets

Okay. Thank you.

Michael Woodhouse

Thank you.

Operator: And there appear to be no further question at this time. I'd like to turn the call back over to Mr. Woodhouse for any additional or closing comments.

Michael Woodhouse

Okay, well thanks again everybody for joining us. I'd like to say in closing that we are pleased with the -- all of the aspects of our performance as represented in the quarter. We're very pleased that our brand is so strong that we are able to attract the traffic that we do in these very difficult times, but at the same time, we're able to get on top of our cost and be able to sustain our earnings guidance and hopefully we've given more visibility into the covenant questions and we're going to have a little insurance with the sale leaseback. So appreciate all the questions and we'll be here next quarter. Thanks.

Operator: That does conclude today's conference call. Again, we thank you for your participation. You may disconnect at this time.

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