Cracker Barrel Old Country Store, Inc. F3Q09 (Qtr End 05/01/09) Earnings Call Transcript

| About: Cracker Barrel (CBRL)

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

F3Q09 Earnings Call

May 27, 2009 11:00 am ET

Executives

Barbara Gould – Investor Relations

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

Sandra Brophy Cochran – Executive Vice President, Chief Financial Officer

Analysts

Brad Ludington - KeyBanc Capital Markets

Robert Derrington – Morgan, Keegan & Co.

Stephen Anderson - MKM Partners LLC

Brian Elliott – Raymond James

Analyst for Joe Buckley – Bank of America/Merrill Lynch

Chris O'Cull - SunTrust Robinson Humphrey

Larry Miller - RBC Capital Markets

Paul [Porst] – [Danzell Capital Partners]

Operator

Welcome to the Cracker Barrel Old Country Store third quarter 2009 conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Ms. Barbara Gould. Please go ahead.

Barbara Gould

Thank you. Welcome to our third quarter 2009 conference call and web cast this morning. Our press release announcing our fiscal 2009 third 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 risks 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 fourth quarter earnings and comparable store restaurant and retail sales for fiscal May, June and July on Tuesday, September 15 before the market opens.

On the call with me this morning our Cracker Barrel's Chairman, President and CEO, Mike Woodhouse and our Executive Vice President and CFO, Sandy Cochran. Mike will begin with the review of the business. Sandy will review the financials and outlook and then Mike will return to close. We will then respond to your questions.

Mike?

Michael Woodhouse

Thanks Barb. Good morning everyone and thanks for joining us this morning. We have a lot of good news to share with you, most importantly that we continue to outperform the casual dining industry in traffic and at the same time have year-over-year margin improvement based on sustainable cost measures that will support the strength of the brand. This has been accomplished through a combination of factors that all relate to guest satisfaction whether it is in how quickly people are served, creating something new on the menu or getting the newest music from your favorite country artist.

We continue to receive confirmation that our brand is relevant to the lifestyles people want to live. Most recently, for example, Cracker Barrel has won for the eight consecutive year the Welcome Mat Award for sit-down restaurants, an award given by the Good Sam Club, the world’s largest RV owner’s organization.

The core idea behind our plans is to tightly manage the cost of the stores and of the home office while at the same time training and re-certifying execution standards at our stores with what we call the One Best Way so that we can deliver the great experience that our guests have come to expect each and every time they visit one of our stores.

Speaking of country music, we were pleased to work with Dolly Parton this quarter to release her Backwoods Barbie Collector’s Edition CD exclusively at Cracker Barrel. The CD is ranked in the top 20 on Billboard Magazine’s Top Country Album’s Chart since we released it on May 23, an indication of our growing position as a music retailer in a fast changing industry. We also offered 1,350 limited edition Dolly Parton rocking chairs at $199 each and we have sold all but 13 of those rockers.

Dolly’s book, The Official Collector’s Edition Dolly Parton Photo Album, set a Cracker Barrel book sales record. Our latest CD offered exclusively at Cracker Barrel is Montgomery Gentry’s For our Heroes. It was released on Memorial Day, just two days ago, and the 12 song CD features hits like Something to be Proud Of and My Town. It also includes an exclusive new song, One of Those Days, as well as four songs that have received only limited release previously. We are very pleased the Montgomery Gentry CD set a first day sales record of over 4,400 units. A portion of the proceeds from the sale of this CD will benefit the Wounded Warrior Project which provides programs and services that aid severely injured service men and women in their recovery both physically and mentally.

We will begin to roll out our new billboard creative in June. The roll out will be completed by the end of November. You will see a return to some of the recognizable brand colors from previous billboards and a more distinctively Cracker Barrel design. The messaging will remind people who are familiar with Cracker Barrel to come visit us and in markets where we are less known the messaging will explain the concept.

For instance, some of these billboards will use our tag line, Half Restaurant, Half Store, All Country. So let’s look at what is happening today. I don’t pretend to be an economist but it feels like the consumer is beginning to feel more optimistic. We have seen improved consumer sentiment numbers in April and now as of today the May numbers.

Initial jobless claims appear to have peaked in late March and early April and weekly hours for manufacturing rose to 39.6 hours in April from 39.4 hours in March which is the first increase in 9 months. A recent AAA study predicted that 32 million people would take some type of road trip over Memorial Day, an increase of 1.5% over last year when gas prices were above $4 a gallon.

With all that said, I think it will be well into 2010 before we see any real turn in consumer spending and we are not building our plans or our guidance on the expectation of near-term improvement. The Cracker Barrel will be focused on delivering consistent value and quality, not on discounting. As a result, the guest experience is always top of mind. I am happy to report that our overall satisfaction scores continue to improve. Our operational focus on speed of service has resulted in a significantly higher speed rating from our guests this year compared to last year.

We also scored higher on attentiveness, friendliness, cleanliness and retail store service than a year ago. We have not cut portion sizes or served lower quality food and we have no plans to do so. Our average ticket is about $8.93, up 2.8% in the third quarter and 3.1% for the year.

The programs that we have put in place are aimed at improving the guest experience without increasing costs and often at a lower cost. We continue to out perform the Knapp-Track Casual Dining Index in traffic as we have for the past 12 quarters. Over the past two years we have out performed Knapp-Track by approximately 1.5 percentage points and our performance in the past two quarters has been stronger than that.

One of the things we are doing to drive traffic is to provide more variety and choice for our customers. Recent examples are the lunch and dinner skillets that we ran for 7 weeks in our third quarter. The skillets performed very well, significantly outperforming last year’s spring promotion. The skillets are supported by TV advertising in about ¼ of our markets. We continue with breakfast skillets after the lunch/dinner promotion ended, adding a fourth, the Santa Fe Skillet, to the line up and the breakfast skillets continue to do better than last year’s breakfast promotion.

On May 11 we introduced our Camp Fire Grill summer promotion which has three offerings; Camp Fire Chicken, Camp Fire Beef and Grilled Chicken Pineapple Salad. We introduced Camp Fire chicken several years ago and it was a guest favorite as well as winning a Menu Masters Award from Nation’s Restaurant News. This season we are also offering a version for beef lovers. Camp Fire Grill will run through July 5th and is being supported by TV and radio advertising similar to the skillet’s promotion.

We also want to bring you up to date on what is happening behind the scenes at Cracker Barrel. While our people on the front lines are delivering the same high quality guest experience our company has been hard at work making significant changes in how we do that. This includes building a new development kitchen at the home office that allows us to replicate the operating environment of the store to ensure that new menu items can be executed in-store to our highest standards.

The new kitchen allows us to test actual in-store operations. Procedures developed in the old kitchen would often have to be modified when they were tested in-store, adding time and cost to the development. With the new facility we can be confident that the new products, processes and equipment we develop and test here can be executed exactly the same way in our stores. The new facility includes all the new equipment and the new pass-through window format being tested by our innovations team.

Now let’s talk about the cost side of the business. We are ahead of expectations in our plans to mitigate the impact of slower sales and at the same time strengthen our business model for the longer term. We are pleased to be able to provide the earnings guidance that we have today where despite continuing top line pressures we are narrowing the whole-year operating margins to be in the range of 5.8% to 6.1% and we are able to tighten our EPS guidance for fiscal 2009 to a range of $2.70 to $2.90 per share.

We continue to make progress in pleasing our guests with more experienced employees. Our turnover remains below 80% for hourly employees and 20% for management which are really impressive numbers for this industry. Meanwhile we are testing a new system to improve our ability to schedule and deploy labor as effectively as possible.

We are also focused on managing other store operating costs. We have been managing certain controllable cost lines against sharply lower targets throughout the year. We have also been using our new exception reporting and outlier programs and as a result we have a combined almost $8 million of savings year-to-date and we expect that number to exceed $10 million by year-end.

The Seat to Eat initiative is another integrated tool to drive store traffic and increase productivity. In the third quarter we ran a training trial in a district to determine the best way to roll out the Seat to Eat initiative. The results are positive. We are achieving faster service and better customer satisfaction scores throughout the test stores. We continue to target improvements on labor productivity and food waste.

This is an example of where the single statistic store traffic may not be the best measure of success for our program. The real result is better service at lower cost which is a win for our guests and a win for us. In June we will be finalizing plans to roll out the Seat to Eat initiative across the company during fiscal 2010.

Another example of progress behind the scenes is the retail distribution center where better communication and coordination have already resulted in efficiency gains while the reduction in transportation costs is significant. Cracker Barrel has a culture that encourages our DC employees to make decisions to serve their customers and retail stores in the best way to create sales. To quote Bob Moyer, the Distribution Center Director, “We want to get our merchandise into the DC and back out to the stores as quickly, cost effectively and as efficiently as possible.”

The key to the improvement has been a concerted effort to improve communications between the distribution center and the merchandising, planning and allocation department. Today morale is high and productivity is consistently improving and turnover has dropped to a very low 17%. We have asked our employees to ask themselves how we can do better and they came up with the answers.

Let me give you some examples. In the logistics department, by changing the port of entry for imported retail goods from the West Coast to Savannah, Georgia has saved the company $1.5 million annually. During the holiday season by reducing and modifying routes we reduced emergency deliveries to the stores by 76%. Shifting the responsibility of store mail from UPS to our DC delivery system has now resulted an annual savings of $450,000. Other benefits include a reduction in the number of routes by which we send merchandise to the stores by 20%.

Let’s stay with retail. In an extremely difficult retail environment our comparable store sales were down 7.4% in the third quarter. Sales for our retail food products including every day candy and Cracker Barrel branded mints or gum were strong and accounted for about 20% of sales in the quarter. Easter product sales were up in the quarter. The softest area in retail were toys and apparel. Toys declined in the quarter largely due to fewer new offerings for Webkinz and Ty plush toys this spring to drive sales. Women’s apparel, both knit tops and accessories continue to be soft.

We are working to manage our inventories in line with our current sales levels by year-end by reducing our buys where we can and delaying purchases. So far we have reduced our retail inventory to $98 million, just $3 million higher than last year. Until we see that our guests are willing to make the higher discretionary purchases we are going to be careful in balancing our new product themes and looking for ways to tie the restaurant and Country Store together and continue to manage inventory levels in line with sales trends.

Now I would like to talk about our capital structure. One of the many strengths 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. With our profitability focus and plans to reduce our capital expenditures, we expect to generate a significant amount of free cash flow which we will use to pay down our long-term debt in the fourth quarter.

At the end of the third quarter our revolver was undrawn and our long-term debt still at $770 million with $8.8 million in current maturity. As you saw in the press release we have a contract on the sale/leaseback of the distribution center. We are going to be using the cash from this transaction along with the cash we will generate from the sale/leaseback for approximately 15 of our stores and excess cash from operations to pay down debt by the end of the fiscal year.

With that I will turn the call over to Sandy Cochran for her detailed financial review. Sandy?

Sandra Brophy Cochran

Thanks Mike. Let’s review in more detail the financials. For the third quarter of 2009 we reported a 13% increase in diluted earnings per share of $0.52 compared with $0.46 per diluted share in the third quarter of last year. Income from continuing operations of $11.9 million was $1.5 million higher than last year reflecting higher operating income and lower interest expense this year partially offset by a higher effective tax rate.

Revenue from continuing operations during the fiscal third quarter increased slightly to $568 million reflecting top line growth in restaurant revenue which was driven by store growth offset by a year-over-year decline in retail. Although we have outpaced the Knapp-Track Index by approximately 1.5% over the past two years, our restaurant performance is even stronger comparatively in the second and third quarters of this year.

Despite this, our comparable store restaurant sales declined 0.9% and guest traffic was down 3.6% for the quarter. Our average check increased 2.8% including a menu price increase of approximately 3.4% which was partially offset by negative mix. The mix was affected primarily by fewer guests ordering beverages and desserts.

Our focus remains mainly on maintaining the guest experience which includes ample portions of high quality food at a fair price and not reducing portions or food quality as a means to offsetting inflationary pressure. Cracker Barrel’s comparable store retail sales were down 7.4% in the third quarter of 2009. We continue to see softness in apparel and toys offset by strength in food and media.

Looking at sales on a monthly basis, the quarter was impacted by the shift in Easter which moved sales from March to April. Overall, however, we believe comparable store restaurant and retail sales in the quarter benefited by approximately 1% because of a later Easter.

Operating income of $29 million was 5.1% of revenues in the third quarter compared with $27.7 million or 4.9% of revenues in the same quarter of 2008. Operating income was positively affected by lower cost of goods in both restaurant and retail as well as lower G&A expenses partially offset by higher labor and related expenses and operating expenses.

Cost of goods sold as a percentage of sales was lower than last year. Higher menu pricing more than offset food related commodity inflation of 1.8% in the quarter. Specifically, cost of eggs, dairy and seafood were below last year. We have been seeing food cost inflation abate and we are forecasting food cost inflation of flat to up 0.5% for the fourth quarter.

At this point we have more than 90% of our commodities locked in for the remainder of fiscal 2009. Dairy and produce are the major categories that are not fully locked at this time.

Higher retail gross margins in the third quarter were primarily related to the shift in the timing of a porch sale to the fourth quarter. As a percentage of sales our labor expenses were 50 basis points higher than last year. These expenses include healthcare costs which were significantly higher than last year. On January 1, 2009 we modified our healthcare plan for our hourly employees. Higher than expected enrollment and usage in addition to higher plan expenses created an 80 basis point unfavorable variance in the quarter.

Although the cost per person has declined as we anticipated, the total expenses to our healthcare plan have exceeded our expectations. For the fourth quarter we anticipate that healthcare costs will continue to be unfavorable by approximately 25-50 basis points.

We continue to manage our labor costs. Our hourly inflation was 1% in the quarter and as Mike mentioned hourly turnover was below 80%. This reduces our hiring and training costs and we believe contributed to higher guest satisfaction scores and positive guest experiences. The lower number of store openings and the completion of our development plan for the year reduced pre-opening labor costs in the quarter. We also saw sustainable productivity gains in hourly restaurant labor versus last year.

Operating expenses were slightly higher in the quarter because of expanded advertising support of our new product introductions. Lower pre-opening expense and a continued focus on controlling operating expenses offset most of the increase in advertising. Also we continue to make improvements in supplies and expenses related to our lower turnover.

In general and administrative expense, our focus to control discretionary spending is paying off as G&A as a percentage of sales was 4.9%, down 20 basis points from the third quarter of 2008 and down in absolute terms by $0.8 million. Lower travel, professional fees and management training costs partially offset by higher incentive compensation accruals.

Interest expense of $12.7 million was 1.5 less than last year’s third quarter due to lower borrowing rates. Our third quarter income tax rate was 26.6% compared with 22.5% in the third quarter last year. The lower tax rate in the third quarter of 2008 was due to the rolling off of the FIN 48 reserves related to expiring statutes of limitations and lower effective state tax rates. The effective rate for the full fiscal year of 2009 is expected to be in the range of 26-27%.

Now let’s move to our cash flow, balance sheet and debt covenants. For the first nine months of fiscal 2009 cash flow provided by operating activities was $90.1 million compared with $83.8 million in 2008. The increase reflects the reduction in retail inventory in the first nine months of fiscal 2009, timing differences in interest accounts payable and income tax payments.

Year-to-date capital expenditures were $50 million compared to $61 million last year reflecting fewer new units in fiscal 2009. With the opening of three units in the third quarter we have completed our planned unit expansion of 11 stores for the current year. Through the first three quarters we paid cash dividends of $13.1 million or $0.20 per share quarterly which at current stock prices represents a yield of approximately 2.5%.

We are pleased to report that following a competitive bidding process that we have a contract on the sale/leaseback of our retail distribution center and a letter of intent for the sale/leaseback of the 15 stores. We are expecting gross proceeds from the two transactions to be approximately $57 million which breaks down to $12.5 million for the distribution center and almost $3 million for each store. Net proceeds of $53-54 million all of which we intend to use to pay down debt.

The gain of the sale will be amortization over the life of the leases and due to the timing of the closings the effect on the fourth quarter will not be material. We will disclose more details on the sale/leaseback after the closing of the transaction.

On the balance sheet we have reduced our retail inventory to $98 million at the end of third quarter compared to $125 million at year-end fiscal 2008. We have reduced our retail purchases for the remainder of the year and we anticipate that our retail inventory levels at the end of fiscal 2009 will be approximately $10 million below last year.

Total inventory was $133 million at the end of the quarter, flat with last year’s third quarter end and down $22.6 million from the end of fiscal 2008. On May 1 we had cash balances of $36 million. At quarter end we were evaluating a possible repurchase of our debt at a discount but with our debt trading now at near par we intend to apply the excess cash to our outstanding debt balances at par.

Our total borrowings including current maturities at quarter end were $778 million with no outstanding borrowing under our revolver. Using excess cash and the anticipated proceeds from the sale/leaseback we would expect our total long-term debt to be down to approximately $670 million at year-end. We remain in compliance with our debt covenants at the end of the quarter with total leverage ratio of 3.66 and our interest coverage ratio was 6.05. As of May 2, 2009 each of the maximum leverage ratio and the minimum interest coverage ratios is 3.75.

Let’s now look at our outlook. Entering our fourth quarter we are still anticipating a difficult consumer environment and are focused on growing restaurant traffic and retail sales, controlling our costs and managing our inventory levels. Based on current trends we presently expect fiscal 2009 total revenues to range from flat to down 0.5% from last year’s $2.4 billion of total revenues.

Comparable store restaurant sales are projected to decrease 1.5-2% including approximately 3.3% of menu pricing. We have lowered our expectations as to comparable store retail sales to down 6-7%. Given our performance through the first nine months and the lower expectations for retail sales through the fourth quarter we have narrowed our range of guidance on operating margin to 5.8-6.1% range which compares with an operating margin of 6.3% for fiscal 2008.

Net interest expense has been lowered to a range of $52-52.5 million which is between $4-4.5 million lower than 2008 interest expense based on lower interest rates. Depreciation for the year is expected to be approximately $60 million. The diluted share count is expected to be between 22.5-23 million shares. We are also narrowing our projected diluted earnings per share projection for 2009 to a range of $2.70 to $2.90.

We are pleased that our sales performance and productivity improvements provided positive earnings growth which when combined with slower unit growth and aggressive balance sheet management generated strong cash flow. We believe we are one of the strongest and most highly differentiated brands in the industry. We are well positioned to take advantage of an improved operating environment and to deliver premium returns to our shareholders when the economy returns.

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

Michael Woodhouse

Thanks Sandy. Just to summarize, our focus is on getting the word out about Cracker Barrel because we think we have a lot to talk about and our new billboards and TV advertising are doing that. When our guests come to the stores our focus is on providing new and interesting and attractive offerings. I think our new menu offerings and some that we have planned in the future and our summer retail items will do that and we want to provide an overall great experience. Our training and re-training and certifying with One Best Way is aimed at doing that.

One of the things that we focused on is to think about our guest experience as an investment and not a cost center. I think that guides us in terms of how we see our guests and I think our guests are rewarding us with the traffic we are seeing in today’s difficult times.

With that I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Brad Ludington - KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets

I wanted to ask just kind of a house cleaning question. On the interest rate swap liability is your nominal amount going down here in May, is there anything that will flow through on the interest line related to an adjustment for that?

Sandra Brophy Cochran

No.

Brad Ludington - KeyBanc Capital Markets

When you look at the labor line, it is good to see in the fourth quarter I think you said you are expecting less pressure from the health plan but can you comment on what you think the minimum wage increase could do going beyond that? I guess beyond July and August?

Michael Woodhouse

We’ll be talking about next year in our next conference call and providing guidance. I think we would prefer to keep our remarks right now to what is going on in the third and fourth quarters. As we said, wage inflation is running about 1% which we think is pretty good. We have some focus on hiring wages so that in this difficult environment we are, if you will, taking advantage of that situation by making certain that we are not over paying on the front end as we hire people which then helps manage our overall labor costs as we go forward.

Brad Ludington - KeyBanc Capital Markets

Given that the development is done for the year should we expect the lower absolute dollars on the G&A line to continue in the fourth quarter?

Michael Woodhouse

We are guiding to I think flat G&A for the year.

Sandra Brophy Cochran

Yes, flat for the year but directionally we should see some improvement in the fourth quarter.

Operator

The next question comes from Robert Derrington – Morgan, Keegan & Co.

Robert Derrington – Morgan, Keegan & Co.

A couple of again laundry list questions. I am not sure whether Sandy or Mike is the one to ask, if you could help me clarify on the sale/leaseback you talk about net proceeds of $53-54 million. I thought last conference call we were talking about net proceeds of $55-60 million.

Michael Woodhouse

Since I was on the last conference call let me start this. That is true. I think it is also fair to say that the commercial real estate market has been heading down for some period of time and we are, I think and I believe we have a very good couple of good deals here. They are not done yet but very close. Given the market environment we are very, very pleased with the outcome.

Robert Derrington – Morgan, Keegan & Co.

What I was curious about in that number was the variance versus the prior expectation due to the store level value per store or was it the value for the distribution center?

Michael Woodhouse

Well the high end of the range last time had a higher number of stores. We hadn’t settled on a number of stores. I think the focus has to be on the low end of the range which was the number that related to the actual number of stores we expected.

Robert Derrington – Morgan, Keegan & Co.

How should we think about the rent impact on the P&L from that transaction both the small base and restaurants?

Michael Woodhouse

Very, very limited in the fourth quarter because we are not expecting to close the deal until some time in July. We will talk about that with our guidance for next year in September.

Robert Derrington – Morgan, Keegan & Co.

When you look at the media spend I know that you have been pretty cautious on spending on media because you wanted to make sure you get a good return on your dollars. Do you feel like you are getting that on the dollars you are spending for both TV and radio you have been using recently?

Michael Woodhouse

Yes. We are spending against about ¼ of the system. Some of the markets we are advertising in are markets that we also advertised with our TV test last year so it would be unrealistic to expect a big lift. I think in today’s market protecting the lift we gained last year is pretty good. As I look around me and look at the restaurant industry and look at the effect of advertising on it and advertising of various competitors I think that what we are achieving is pretty good. We are also getting in the newly advertised TV markets a good lift. We are going to continue to…we have the second round to go against Camp Fire and then we are going to look at how we did and build our plans for next year. I expect at this point to continue to be advertising on radio and TV next fiscal year.

Operator

The next question comes from Stephen Anderson - MKM Partners LLC.

Stephen Anderson - MKM Partners LLC

Camp Fire Grill have you engineered that to make that part of the Best of the Barrel initiative being as you had announced a similar menu about 10 years ago with the Camp Fire Grill?

Michael Woodhouse

I’m sorry, the Best of the Barrel menu we replaced with a new core menu across the whole system in March. Camp Fire Grill is built on, as you point out, a very successful product I think 9-10 years ago. We re-ran it again since then. We have tweaked it a bit this time, added the beef and are getting very good guest feedback.

Stephen Anderson - MKM Partners LLC

It may be a little early to ask this question but do you have any insight into fiscal 2010 food costs and have you locked in any costs on that yet?

Michael Woodhouse

That is something we will talk about in September.

Operator

The next question comes from Brian Elliott – Raymond James.

Brian Elliott – Raymond James

A couple of follow-up questions. First, on the Easter shift just curious why you think there was as much as a point benefit to the later Easter although both years within the quarter?

Michael Woodhouse

I think the later Easter always benefits retail. Retailers in general benefit from a later Easter with a longer selling season. So on the retail side I think that is what is going on. On the restaurant side a later Easter allows a very clear distinction between spring break and Easter so we get two travel opportunities within the quarter which helps build restaurant traffic.

Brian Elliott – Raymond James

On the taxes, what are we seeing pretty meaningful reduction in tax guidance. What is driving that?

Sandra Brophy Cochran

It is largely due to some additional roll off’s of FIN 48 reserves which we are anticipating in the fourth quarter.

Brian Elliott – Raymond James

Will that clean them up or might that be a benefit as we move into next year as well possibly?

Michael Woodhouse

We’ll talk about our guidance for next year in September.

Brian Elliott – Raymond James

Will we still have some further reserves that we may or may not be able to realize?

Michael Woodhouse

Well it is a dynamic process because we are rolling in and rolling out all the time. We are really up and running on FIN 48.

Brian Elliott – Raymond James

I probably need a refresher on that.

Michael Woodhouse

I have a book with about 600 pages you can have.

Brian Elliott – Raymond James

My staff was all on vacation this week so we will get it next week. Could you help a little bit just aggregate the impact of the porch sale which was a factor in the cost of goods improvement? How much do you think was from that timing shift?

Michael Woodhouse

Well two things happened with moving our porch sale as we did. One is we had lower sales in the third quarter than we would have. We have higher or better margins because we don’t have the heavy mark down’s. So you have really got to look at both of those. I don’t think with the net of those is totally meaningful or material I guess.

Brian Elliott – Raymond James

All things being equal we could expect higher sales and lower margins relative to what we would have been had the porch sale obviously stayed in the third quarter right? So it makes the improvement in COGS higher than it otherwise would have been here in Q3?

Michael Woodhouse

Correct. Both of those effects, as you correctly point out, are in our guidance.

Brian Elliott – Raymond James

How many lease commitments have been made for 2010 and more generally how do you think about development in the new fiscal year?

Michael Woodhouse

Well we have announced we are going to open seven. It is going to be front end loaded. Leases we have three leases.

Brian Elliott – Raymond James

Commitments, purchases and leases I guess is the question.

Michael Woodhouse

Oh, commitments? We are committed on six I think.

Operator

The next question comes from Analyst for Joe Buckley – Bank of America/Merrill Lynch.

Analyst for Joe Buckley – Bank of America/Merrill Lynch

I was wondering if you could just talk generally about discounting across casual dining and if that is having any impact on you. How do you see yourselves positioned and maybe room there to be more promotional?

Michael Woodhouse

Let me try the short version and then maybe we will expand to the longer version. We are very cognizant of the fact there is a lot of discounting going on out there. A lot of special prices. A lot of BOGO’s. A lot of everything. I would just first of all repeat what I said in my prepared remarks that we have been running 1.5% ahead of Knapp-Track traffic for the last two years and in the most recent two quarters we have improved on that run rate. Those two quarters are when the discounting really started happening. I don’t want to sound complacent because we are actually anything but complacent around here but I think that the focus on the value as it relates to the guest experience, the quality of the product and the fact we are not taking anything off the plate and we are not disappointing in any way is actually working in our favor in this environment.

I don’t want to comment on specific competitors, but as I observe the industry as well as discounting there is a lot of product offering changes going on in the form of portion sizes and quality specs and so on and so forth. That is what the industry is doing. What we are doing is offering what we have always offered at the same price and I would just stand behind the traffic numbers and say so far the consumer is voting in our favor.

Analyst for Joe Buckley – Bank of America/Merrill Lynch

Are you seeing any kind of sequential noise by day part for the comp? I guess specifically for breakfast and then maybe weekend versus week day?

Michael Woodhouse

I think the one noticeable trend is I guess is probably true across the industry is weekday dinner. That is probably the most discretionary of the offerings. I think in a sense that even though there is no compulsion to go out and eat on the weekends, I think people like to have that as a treat and want that as part of their lifestyle. Between the week, the weekday dinners, it is a little softer than the other day parts.

Operator

The next question comes from Brad Ludington - KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets

I wanted to follow-up on the comment about how AAA is forecasting travel will be up year-over-year. Is there expectation that with travel up people will be probably watching their dollars a little bit more, I would assume there is expectations that your retail will still be hurt. Do you think they will still be saving their dollars on stopping in for breakfast, lunch or dinner while they are on the road as well? Or is that something you have looked at?

Michael Woodhouse

I think when we look back at last year’s fourth quarter, the summer time period, our traffic relative to that time frame did soften. We were still running at or slightly above for a period of a couple of months there. I think that is almost certainly in part a result of $4 gas last year. I think we are going to see more miles driven and when people drive they are going to stop and eat. I think we benefit from that.

Brad Ludington - KeyBanc Capital Markets

With the retail same store sales guidance it seems to imply you expect fourth quarter same store sales to sequentially deteriorate a little bit at least from the third quarter. Is there potential for the porch sale shift to turn that around and maybe show up side to that guidance?

Michael Woodhouse

No, the porch sale is in the guidance.

Operator

The next question comes from Chris O'Cull - SunTrust Robinson Humphrey.

Chris O'Cull - SunTrust Robinson Humphrey

Given the commodity inflation has moderated do you expect to take less pricing in coming quarters?

Michael Woodhouse

They are partially related obviously because what we have said in this commodity crunch for the last couple of years is we at least need to cover our dollar increases in food costs. I think pricing, let me say it this way, I think to the extent commodities are reasoning it puts less pressure on having to take price. I think pricing in this market is a very sensitive thing. As we have always said we are taking pricing. We do test them. We are not seeing any measurable impact on traffic from the price increases we have taken but we are very sensitive to the price that consumers are willing to pay for a meal. That is where as we see continued discounting I think that sort of sticker effect will get on people’s minds. Again, there is absolutely no sign of negative reaction to any pricing we have taken. We are going to keep our options open. When we talk about providing value price is part of that equation and we will price where we think appropriate to sustain the relative benefit we are getting in traffic.

Chris O'Cull - SunTrust Robinson Humphrey

I know you have done a really good job of using these exception reports to manage or improve your costs. When you look forward where do you think some of the best opportunities to reduce costs or control costs in some of these outlier stores? Does it still lay within the labor line or do you find more of it in controllable expenses going forward or is there some sort of food waste gap that you have got? Where do you see most of the opportunity going forward?

Michael Woodhouse

An outlier store can be an outlier by virtue of any one of the cost lines that you mentioned. We are not looking at a single line. We are looking as far as outliers on the various lines and giving them tools to correct that. So the outlying group is a dynamic group, stores correct and then others fall into the outlier groups. So if you think about it in terms of we have standards obviously in all of those areas of getting the whole system to get tighter against that regression line against standards. That is really what we are trying to do. So there is a continuing opportunity that runs across everything.

Chris O'Cull - SunTrust Robinson Humphrey

This new labor system that you are talking about testing soon, is that going to be the tool that these guys need to maybe manage labor better or have they had some ad hoc reporting systems today that have helped them reduce that labor cost?

Michael Woodhouse

We have a system today that we have had for some time. Today when we are managing labor we are managing it using that system. The new system will give us a more precise tool to manage labor by hour of day and by day of week.

Chris O'Cull - SunTrust Robinson Humphrey

So we should expect maybe some further savings in the labor line after using this new tool?

Michael Woodhouse

Well, yes. Those were the terms of the tool. My hesitation is simply in terms of don’t expect it next week because we haven’t announced the roll out yet.

Operator

The next question comes from Larry Miller - RBC Capital Markets.

Larry Miller - RBC Capital Markets

As you look back historically as guest satisfaction scores begin to improve or actually decline how long until you typically see the change in sales either way?

Michael Woodhouse

I think that is a tough thing to call. The only way I can measure sales in this environment is on a relative basis. We specifically are focused on traffic because sales becomes a difficult number when we have discounting and so on and so forth. Again, our traffic is doing better absolutely and better relatively than it has and I would expect continuing guest satisfaction to sustain that direction.

Larry Miller - RBC Capital Markets

Let me ask another way that you might have more data. How much improved are the guest satisfaction scores relative to maybe 3, 6 or 12 months ago?

Michael Woodhouse

I’ll say it as to all of our operators who are listening. They are great but they are not enough.

Operator

The next question comes from Robert Derrington – Morgan, Keegan & Co.

Robert Derrington – Morgan, Keegan & Co.

Could you give us a little bit of perspective on the product development you have at this point in time? It seems like this fiscal year we have seen a little more creative offerings than we have seen in awhile coming out of the test kitchen ultimately into the restaurants. Is there more in the pipeline? If there are, like the Camp Fire meals would those be a limited time offer or should we expect that some of these things obviously beyond skillets get to the menu and stay on the menu?

Michael Woodhouse

We have a pipeline, as somewhere in all this I think I alluded to the fall promotion. It just so happens that our 40th anniversary is in September so when we get to our fall promotion we have constructed that around a theme that we are calling Back and Forth which is about looking back to our tradition and heritage and looking forward to where we are trying to go. We are doing that with food so we are bringing in some tried and true items but we have some new items that are taking us further down the road and sort of expanding our appeal, expanding our relevance and expanding in the areas of fresh and good for you. So it is going to be the products are great. We have signed off on all of them. That is really, I think, going to be interesting to watch our guests respond to this kind of offering. I am very, very encouraged with the progress we made in the last 8-9 months in product development. We have changed the process. We are managing to put things through faster and we have this new kitchen which is really helping as well.

The important thing is we have a very clear strategy around our menu and around our products which is designed, as I said, to move the brand forward as well as reinforce its strength. Yes, we will see some products moving onto the menu potentially as we broaden the offerings because there are going to be some potentially new categories that we would want to see on the menu after the promotion.

Robert Derrington – Morgan, Keegan & Co.

You have my curiosity peaked. When you look at the skillet obviously those had a really favorable cost profile. Do the Camp Fire meals also have good cost of sales view as well?

Michael Woodhouse

One of the expectations we have with our promotions is that we will see an improvement from a mix point of view, or mix driven improvement in margin. Camp Fire does that for us.

Operator

The next question comes from Stephen Anderson - MKM Partners LLC.

Stephen Anderson - MKM Partners LLC

One quick question on the retail side. Have you noticed any kind of change in terms of the average ticket on retail?

Michael Woodhouse

There really hasn’t been any significant change. The challenge on retail is in terms of units per guest.

Operator

The next question comes from Paul [Porst] – [Danzell Capital Partners].

Paul [Porst] – [Danzell Capital Partners]

On the 15 units and the sale/leaseback could you remind us again where they are located and why you chose these 15 and maybe AUV’s relative to the rest of the store count or the stores? How should we look at these relative to the rest of the stores?

Sandra Brophy Cochran

It was a fairly diverse geographically portfolio of our stores that were relatively new and we will give you some more details after we close but I don’t think we will be disclosing the details of the volumes for those specific stores.

Paul [Porst] – [Danzell Capital Partners]

You will disclose the cap rate at that time as well?

Sandra Brophy Cochran

At this time we are not planning to.

Operator

We have no further questions. At this time I would like to turn the call back over to Michael Woodhouse.

Michael Woodhouse

Thanks everyone for joining us today. I hope you have a sense that in these difficult times we have a clear sense of where we are going. Everything is focused around the guest experience and improving the guest experience through the things we do, the things we offer and by staying true to the brand. We are not going to use short-term tactics. We think we are doing very well with our current direction. We are working with our strong cash flow to maintain our dividend, reduce our debt and we think we are headed for a really positive future. Thanks for joining us. We will be back in September.

Operator

This concludes today’s conference. You may now disconnect.

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