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

F4Q09 Earnings Call

September 15, 2009 11:00 am ET

Executives

Barbara Gould – Investor Relations

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

Sandra Cochran – Executive Vice President and Chief Financial Officer

Analysts

Stephen Anderson - MKM Partners LLC

Joseph Buckley - BAS-ML

Robert Derrington - Morgan, Keegan & Company, Inc.

Michael [Woolbed] – Sidoti and Company

Brad Ludington - Keybanc Capital Markets

Bryan Elliott - Raymond James

Operator

Thank you for standing by and welcome to the Cracker Barrel fourth quarter 2009 conference call. Today’s conference is being recorded and will be available for replay beginning at 2:00 PM Eastern Time through September 29 by dialing 719-457-0820 and entering a pass code of 8525545.

Now at this time I’d like to turn the conference over to Barb Gould.

Barbara Gould

Thank you, [Dwayne]. Welcome to our fourth quarter 2009 conference call and webcast this morning. Our press release announcing our fiscal 2009 fourth quarter results and outlook for fiscal 2010 was released before the market opened this morning.

In our press release and during this call statements may be made by management of their beliefs and expectations as to the company’s future operating results. 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 for information. Many of the factors that can affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning’s press release and are described in detail in our 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 call. The company disclaims any obligation to update disclosed 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.

On the call with me this morning are Cracker Barrel’s Chairman, President and CEO, Mike Woodhouse and our Executive Vice President and CFO, Sandy Cochran. Mike will begin with a 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 A. Woodhouse

Thanks, Barb. Good morning everyone. Thanks for joining us today. We have a lot of good news to share with you. On Saturday, Cracker Barrel Country Store will be 40 years old. And while I’m certain that there were some challenging times in the early days, I’m also certain that this last fiscal year presented more challenges than most of us have ever seen and so I look at our year-end results as a major win for everyone working here in Lebanon and everyone working at our 590 Cracker Barrel restaurants.

A year ago we established an initial guidance range of $2.80 to $3.00 in EPS for fiscal 2009. Today, despite the headwinds that we encountered all year long, we’re reporting EPS of $2.89. And along the way, we were able to beat expectations in each of the four quarters. Of course the sudden and unexpected slowdown in industry traffic in late September and early October caused our initial sales outlook to turn out to be optimistic, but we kept our focus on driving sales, controlling store operating costs and controlling G&A expenses and also tightly managing cash to insure that we would have no risk of violating our debt covenants.

The sales efforts were three-fold. First, insuring the best possible guest experience with our weekend execution initiative to make certain that we’re executing at the highest possible standard at the busiest times of the week; second, developing and rolling out a series of strong new product offerings and supporting these first with radio and then with targeted radio and TV advertising in key markets. The positive impact from these efforts can clearly be seen in our performance compared with the Knapp-Track index. In the 42 weeks from the third week of October, 2008 to the end of the fiscal year we exceeded the index in guest traffic by an average of 3%. And since the casual dining industry has been a net discounter since May we’re even further ahead [based] on sales terms.

We’ve tightly controlled store offering costs with a focus on execution at the store level, supported by new tools and systems and we supplemented the tight management of cash including aggressively reducing retail inventories in line with lower sales levels, with the sale of lease-back in 15 stores and our retail DC. As a result, we were able to pay down $143 million of our long-term debt and there were no issues with our covenants.

And most importantly we achieved all of these things without compromising the guest experience. No changes in product specs or portions, no reduction in service levels and no discounting our offerings in order to boost traffic. So we believe we’re in a very strong position to deal with the future.

As I’ve said many times, it’s all about the brand. I believe that the reason Cracker Barrel has done so well over the years is because we’ve stayed true to the brand and true to the principles that have been there since the beginning. Cracker Barrel started in the south and southern cooking and hospitality are our mainstays, but the attributes beyond the brand, friendliness, quality and value translate well wherever we go.

I’ve already said that our success and our performing in the casual dining industry and traffic did not come at the expense of the brand. Nor did our success come at the expense of margin. In the fourth quarter we achieved year-on-year margin improvement despite higher costs of labor and some impairment charges. There’s something about genuine Cracker Barrel hospitality that inspires a strong sense of loyalty to the brand, and its’ one reason why people continue to rate us the best. For 19 years in a row now we’ve won Restaurants and Institutions Choice in Chains Award for the best in family dining.

There’s more evidence to show that our efforts are producing positive results. Our top box guest satisfaction scores increased 2% this year. 2% may not sound like much but it amounts to millions of our guests being more satisfied with their experience in 2009 than in fiscal 2008. All of this was accomplished with a combination of factors that contributed to guest satisfaction whether it’s how quickly people were served, finding something new on the menu or buying the latest music from your favorite country artist.

Speaking of country music, the CD “Our Heroes” by Montgomery Gentry, released exclusively at Cracker Barrel over the Memorial Day weekend, set an all-time sales record of almost 80,000 copies to date. A portion of the proceeds from the sale of the CD benefited the Wounded Warrior Project, which supports the recovery of our returning severely injured servicemen and women. The CD stayed in the top 35 on Billboard Magazine’s top current country album chart for 11 weeks. At the end of August, we released our latest exclusive CD, “The Collection of My Best Recollection” by country music legend George Jones. This looks like another success in the making. The CD entered the Billboard top country album chart at number 24 in its first week.

Let me now give you some examples of how we provide more menu variety for our guests. In the fourth quarter we offered Campfire Grill Chicken and Beef and a Grilled Chicken and Pineapple salad, which we supported with TV advertising in about 25% of our markets. These items accounted for more than double the mix compared with last year’s promotion. For breakfast we continued through July 5 with our Breakfast Skillets which also performed better than last year’s promotion.

Our pipeline of new products is growing. We want our regular guests to have a reason to visit us more frequently and we also want to expand the range of offerings at a range of portable price points to stimulate trial for non-users. For example in our latest promotion which we began on August 31, we introduced what we’re calling Then and Now offerings to celebrate our 40th anniversary. New this fall for breakfast is a Fresh Fruit and Yogurt breakfast and an Apple Streusel French Toast breakfast and these are going to be promoted alongside the traditional Country Meat and Biscuits with Fried Chicken Tenderloin, Country Ham or Sausage Patties. For lunch and dinner, we’re bringing back a guest favorite, Autumn Applefest Grilled Chicken and Dressing and at the same time introducing the Autumn Applefest Grilled Chicken Salad, which broadens our salad range and builds on the success of the Pineapple Salad that we offered during the summer. For dessert, to celebrate our anniversary, we’ll be offering our very popular and exclusive Double Chocolate Fudge Coca-Cola Cake all year long.

So let’s go from what’s on the menu to what’s happening behind the scenes at Cracker Barrel. While our people on the front lines are developing a high quality guest experience, the remainder of our company has been hard at work developing better ways to support them. The Seat to Eat initiative is an integrative tool to drive store traffic and increase productivity. When tested in the stores in four of our districts, we were able to consistently deliver food to guests in less than 14 minutes in all day parts. Beginning next month, the initiative will be deployed over the next 18 months on a region-by-region basis.

This is a people business and that’s why employees with more experience make all the difference. Our turnover for the year was 76% for hourly employees and 18% for management. And while we’re very pleased with the results that come from a more stable workforce, we continue to look for more effective ways to schedule and deploy labor. Our goal is to always have the right people in the right places at the right time in order to provide the service our guests expect. We’re especially focused on achieving this goal of peak demand times and the weekend execution initiative that we rolled out in the second quarter has been very effective in doing this. To further improve our ability to achieve this goal, we have a new labor deployment system in test with a roll-out expected to begin late in the fiscal year.

Moving on to retail, in an extremely difficult retail environment our comparable store sales were down 7% in the fourth quarter. On the bright side, sales for our media products, CD’s, books and stationery and the gifts which are new this year were up double digits and now account for about 10% of sales. The softest areas in retail were toys and apparel. Demand for women’s apparel continues to be soft and toys were down in the quarter largely owing to fewer new offerings for Webkinz and Ty plush toys. We hope to see a boost in toys in this new quarter with our new, exclusive offering of the Webkinz Opossum starting out fiscal 2010.

Our retail people did an excellent job in reducing inventories. By limiting our buys where we could, delaying purchases and managing markdowns, we reduced our year-end inventory to $108 million, $16 million below last year’s level. Until we see that our guests are willing to commit to more discretionary purchases, we’re going to be careful in balancing our new product themes, looking for ways to tie the restaurant and country store together and continue to manage inventory levels in line with sales trends.

We’ve also taken steps to reduce the risk around seasonal merchandise. In fiscal 2010, we’re offering fewer seasonal items in favor of a new program we’ve called Great Gifts. These are products designed to be used as gifts and priced at $20 or below. The idea is to make Cracker Barrel a top-of-mind place to go for a convenient gift year-round. And of course we’ll provide free gift-wrapping while you enjoy a meal with us. There will be new offerings throughout the year, but these products won’t be subjected to the same seasonal markdowns as we go through the year as our normal seasonal products are.

We’re also placing more products on the floor. And by removing the stories trailers which we’ve used for a number of years at the stores and saving over $1 million annually in the process, we’ve had to become more disciplined about what gets displayed and for how long.

In fiscal 2010 we’ll be looking at options to refinance portions of our debt. Our guidance for the year has no assumptions for the effects of any such refinancing such as timing, the amount of refinancing or the associated fees. And Sandy will cover more about this and about our guidance in her financial review. Sandy?

Sandra Cochran

Thanks Mike. I’d like to review the financials in more detail. Overall for the fourth quarter of 2009 we reported a 9% increase in diluted earnings per share of $0.99 compared with $0.91 per diluted share in the fourth quarter of last year.

Revenues during the fourth quarter decreased slightly to $596 million, reflecting top-line growth in restaurant revenues which was driven by store growth, offset by a year-over-year decline in retail. Comparable store restaurant sales declined 1.4%. Our average check increased 2.4% including a menu price increase of approximately 2.9%, which was partially offset by negative mix. Our average check was negatively affected by lower incidents of beverages and add-ons. Guest traffic was down 8% for the quarter. We have outperformed the Knapp Track index since the last quarter of fiscal ’06 and the gap has widened to more than 3 percentage points in the fourth quarter.

Cracker Barrel comparable store retail sales were down 7% in the fourth quarter of 2009. Growth in our media category could not offset the softness in toys and apparel. Media includes the exclusive CD’s by Montgomery Gentry and Dolly Parton that Mike mentioned as well as books, gifts and stationery items which were not available last year.

Gross margin for the quarter improved 40 basis points compared to last year. On the restaurant side, cost of sales as a percentage of sales was lower than last year because of higher menu pricing and favorable menu mix. This year’s summer promotion featuring Campfire Chicken and Beef and the Grilled Chicken Pineapple Salad contributed to the higher gross margin.

Food cost inflation in the quarter was only 0.1%. Increases in produce and poultry were offset by lower dairy and egg costs. Higher retail cost of sales partially offset the favorable restaurant cost of sales. Retail gross margin in the fourth quarter was lower due to lower initial margins and higher markdowns that were related to the planned shift in timing of our clearance activity into the fourth quarter. Both restaurant and retail cost of sales benefited from lower freight costs.

Labor expenses as a percentage of sales were 70 basis points higher than during the comparable quarter last year. Although we improved restaurant and retail labor costs by 10 basis points, they were more than offset by 40 basis points of higher healthcare costs which was in line with the guidance that we gave in the third quarter call, and in addition workers comp and store bonus expenses were higher. Despite the minimum wage increase, our hourly wage inflation in the quarter was only 0.6%. Hourly turnover below 80% reduces our hiring and training costs and helped contribute to the higher guest satisfaction scores and a positive guest experience.

Other store operating expenses were 20 basis points favorable in the quarter. Deflation in utilities and improvements in supplies and expenses related to our lower turnover were partially offset by losses on the sale of three sale lease-back stores. The loss of $1 million was expensed when the transaction closed, but gains on the remaining sale lease-back properties are deferred over the life of the leases.

During the fourth quarter the company incurred impairment charges of approximately $2.1 million. This charge includes the impairment on one Cracker Barrel location and the impairment on various corporate properties due to changes in their intended use.

In general and administrative expenses, lower incentive comp expense, lower expenses for training new store managers and our focus to control discretionary spending paid off as G&A at 5.3% of sales was down 60 basis points from the fourth quarter of 2008, and down in absolute terms by $3.6 million.

As a result of higher gross margin as well as lower G&A expenses, partially offset by higher labor and other related expenses and impairment charges, operating income was $41.4 million or 7% of revenues in the fourth quarter compared to $41.6 million or 6.9% of revenues in the same quarter of 2008.

Interest expense of $12.1 million was $1.7 million less than last year’s fourth quarter due to lower borrowing rates. And the fourth quarter income tax rate was 22.1% compared with 25.7% in the fourth quarter last year. The lower tax rate in the fourth quarter of 2009 was due to the rolling off of more FIN 48 reserves relating to expiring statues of limitations this year than last year that is not expected to repeat in fiscal ’10.

Income from continuing operations of $22.8 million in the fourth quarter was $2.2 million higher than last year. Our balance sheet and cash flow statements show the benefit from the execution of the action plans that we undertook during the year to improve our cash flow and reduce debt. On the balance sheet we reduced our retail inventory to $108.4 million at year-end, which is down $16.2 million from year-end fiscal 2008 and our total inventory was $137.4 million at year-end.

Our total borrowings including current maturities at year-end were $645 million, $25 million lower than we had projected at the end of the third quarter. There were no outstanding borrowings under our revolver.

We used excess cash and the proceeds from our sale lease-back to reduce our long-term debt by $133 million in the quarter and $143 million for the year. We remain in compliance with our debt covenants. At the end of the year our total leverage ratio was 3.02 and our interest coverage ratio was 7. The maximum leverage ratio and minimum interest coverage ratio are 3.75.

Now let’s move to our cash flow. For fiscal 2009, our cash flow provided by operating activities was $164.2 million compared with $124.5 million in 2008. The increase reflects the reduction in retail inventories in fiscal 2009 and timing differences in interest and income tax payments.

Capital expenditures for the year were $67.8 million compared with $87.8 million last year, reflecting fewer new units in fiscal 2009. We paid cash dividends of $17.6 million or $0.20 a share quarterly, which at current stock prices represents a yield of approximately 2.5%.

Now let’s look at the outlook. We’re still anticipating a difficult consumer environment in fiscal 2010 as do most of our peers. We expect traffic in retail sales to be negative at least for the first half of the fiscal year. We’re focused on controlling our costs, managing our inventory levels and improving sales trends as the year progresses. We currently expect fiscal 2010 total revenues to increase between 0.5% and 2.5% from total revenue of $2.4 billion in fiscal 2009.

We intend to open seven new Cracker Barrel units in fiscal 2010, two of which opened on Labor Day, one in Pearland, Texas and one in Sanford, North Carolina, which set an off-interstate opening day record.

Comparable store restaurant sales are projected to range between a decrease of 0.5% to an increase of 1.5%, including approximately 2.5% of menu pricing. In September we took a menu price increase of 1.2% and lapped a 1.8% price increase. We expect comparable store retail sales for the year to range between a decline of 1.5% and an increase of 0.5%.

Commodity cost inflation for fiscal 2010 is projected to be approximately flat. We currently have approximately 62% of our fiscal 2010 commodity requirements under contract.

Operating expenses in fiscal ’10 will include approximately $4.9 million related to the sale lease-back transactions compared to $1.4 million in fiscal ’09. Operating margin in fiscal ’10 is projected to be between 5.7% and 6.0% compared to 6.0% in fiscal 2009. We expect the impact of the sale lease-back transaction to be 20 basis points of margin in fiscal ’10.

We believe the range for our operating margin in our 2010 guidance balances uncertainties about consumer spending and the costs from rolling out important initiatives during the year against the benefits of our ongoing cost management efforts and expectations of easing inflationary pressures on key cost lines. Our net interest expense is projected in the range of $46 to $48 million and as Mike mentioned today, we do intend to explore opportunities to refinance or extend the maturities of a portion of our long-term debt during fiscal 2010. There are no assumptions included in our guidance to the terms, timing, fees or amount of the refinancing and our guidance is of course subject to the effects of those transactions that we might undertake.

We’re projecting diluted earnings per share for fiscal 2010 to be in the range of $2.85 to $3.10. Diluted shares outstanding are forecast to average 23 million. We plan to repurchase shares to offset dilution in the year associated with stock option exercises and other share-based compensation.

Capital expenditures are forecast to be in the range of $70 to $75 million, which allows for approximately $30 million of maintenance capital, seven new stores plus investment in innovation initiatives such as Seat to Eat.

In conclusion, we’re pleased that we were able to provide positive earnings growth in a very tough environment in fiscal 2009 which combined with slower unit growth and aggressive balance sheet management generated strong cash flow. As 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 turns.

Thank you for your time this morning. I’ll turn the call back over to Mike.

Michael A. Woodhouse

Thanks, Sandy. And at this point I’d like to open up the call for questions.

Question-and-Answer Session

Operator

Very good. (Operator Instructions) Your first question comes from Stephen Anderson - MKM Partners LLC.

Stephen Anderson - MKM Partners LLC

A very quick question on the labor cost line that’s been coming up the last couple of quarters, primarily on the health cost side, but as the costs related to the increased enrollment in the new healthcare program start to roll off in January, can you give any guidance in terms of where you see labor costs head for the fiscal year?

Sandra Cochran

We don’t want to, Steve, give any more guidance beyond what we’ve given although we do anticipate making some changes to our health plan and those are built into our guidance for next year.

Operator

Your next question comes from Joseph Buckley - BAS-ML.

Joseph Buckley - BAS-ML

Given that it’s your fourth quarter you’re obviously reporting pretty far into your quarter, the Street is anticipating that casual dining sales or you know got better or less bad I guess you know since the end of your fiscal year. I was wondering if you’d be willing to comment on the quarter to date, what kind of sales progression you’re seeing.

Michael A. Woodhouse

Joe, we would love to do that but our protocol is obviously quarterly reporting and on the fourth quarter as you correctly say we’re further into the year than we normally are. So I really can’t comment. I will point back to how pleased we were with our fourth quarter sales and also that in our guidance we’re not anticipating any major turnaround in the economy to drive sales. I think that you know there are a number of factors going on that are pretty obvious. Again I think this is consumer sentiment may have improved a little bit but on the other side unemployment and therefore ability to spend is getting worse so we want to be cautious with our numbers.

Joseph Buckley - BAS-ML

And then just a question on the CapEx numbers, you made reference to some portion of it being related to Seat to Eat. And could you walk through that in a little bit more detail?

Michael A. Woodhouse

There are several things going on in CapEx and the Seat to Eat piece as I said in my remarks we are satisfied with our test. We are going to start rolling out in October but it’s going to be an extended roll out continuing into 2011. But from a CapEx point of view we will be spending more than half the capital for that whole project during 2010, but relatively late in the year. So that’s driving our capital up. I think that the total expenditures for this year, Sandy, for Seat to Eat are?

Sandra Cochran

In the CapEx?

Michael A. Woodhouse

In the CapEx, yes.

Sandra Cochran

Oh about $13.

Michael A. Woodhouse

For the whole program. Right. But we won’t be spending all of that in 2010 but we will be spending more than half of it.

Joseph Buckley - BAS-ML

And is that to reconfigure the kitchen layouts primarily?

Michael A. Woodhouse

The kitchen and the pass through window.

Operator

Your next question comes from Robert Derrington - Morgan, Keegan & Company, Inc.

Robert Derrington - Morgan, Keegan & Company, Inc.

Mike, if you could help me understand for a second you know the company’s view on restaurant sales, you know the guidance you provided, you know we’ve watched you know obviously this past fiscal year was a difficult year and I guess it’s now five quarters in a row in which restaurant same-store sales have been negative, yet your guidance is for down 0.5 to up 1.5. And in addition you’ve also lost I guess 0.6% of menu pricing with the menu price lap on the new pricing. So I guess I’m just trying to understand what are the components that you see giving you comfort that comps will be kind of a better trend than what we’ve seen for a while now?

Michael A. Woodhouse

Well I think you know obviously we are in this fiscal year going to be lapping some very negative numbers for last year. In my answer to a previous question I was trying to point out that we’re not looking for a lot of pick up from the economy but we’re not looking for obviously much further down in terms of traffic. So if the same people who were coming last year when the industry was down 6 and 8% come this year, adjusted maybe for unemployment, we expect to see the kind of numbers that we’re going to see.

The other thing that is really important is the reason that I in my remarks chose the middle of October was that was when we really started separating from Knapp Track and that was when the three things I mentioned kicked in, the weekend execution, we started seeing improved traffic on the weekends as a result; it was when the pipeline of our new promotional products really kicked in and as I said we’re seeing very difficult to measure traffic lift from those because we’re running them in the whole system, but we are seeing a bit of sales mix from those promotions than we’ve seen in the past. And then we have the TV and radio advertising in about a quarter of the system against us. So those three things together kicked in just at the time when we saw our gap improve. And I believe that’s no coincidence. I think that those things had a direct affect. So as we go forward I would expect us to continue to be able to perform at that kind of level.

Robert Derrington - Morgan, Keegan & Company, Inc.

Well, if I could follow up real quickly, you know inside your stores right now you have a very different free standing insert than what you typically use. I’m just curious, is that one of the things that’s benefiting that mix that you just mentioned?

Michael A. Woodhouse

I’m glad you pointed that out. We changed earlier in the year, in fact when we introduced Skillets we had a different kind of free standing insert instead of one that was stapled into the menu. And then in the most recent promotion we’ve developed that to a wrap that goes around the menu when it’s presented. So there’s a lot more attention given to the promotional products. We’ve got more photography, we’ve got more descriptives and the other piece we haven’t talked about is we think our price points are pretty attractive. We’re offering a range of price points. For instance the new Yogurt and Fruit and Granola Breakfast is at $5.99 for the platter and for $1 you can add two eggs and bacon or sausage or whatever. So all of that is, and you know I can’t say too much about execution. The focus on execution around these promotions is really the thing that’s delivering the results.

Robert Derrington - Morgan, Keegan & Company, Inc.

You know likely you tested that before you rolled it out. Any kind of color on what that test showed? Obviously you know something positive, otherwise you wouldn’t roll it out.

Michael A. Woodhouse

You’re right in your conclusion.

Operator

Your next question comes from Michael [Woolbed] – Sidoti and Company.

Michael [Woolbed] – Sidoti and Company

I was wondering if you could just comment here on the uses of cash. I know you said you’re going to likely purchase some stock back to offset dilution. Is there any interest here in retiring any more of that debt that you guys have?

Sandra Cochran

We will use our cash for our capital expenditures. As I mentioned the stock repurchases to offset dilution, we’ll pay our dividend and then the balance we’ll intend to continue to reduce our debt as we go through the year.

Michael [Woolbed] – Sidoti and Company

I know you said two stores have already opened. Do you have kind of a guideline on when those other five will be coming online?

Michael A. Woodhouse

They are front end loaded. Sandy’s going to give us the detail.

Sandra Cochran

Yes, with the next ones coming on will be in the next couple of months. We’ve got two more here in November and then the balance of them will be next summer.

Operator

Your next question comes from Brad Ludington - Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

You know I wanted to ask you a question building on the debt question. The last couple of years in the first quarter we’ve seen that you needed to draw some on the revolver just because the first quarter’s seasonally slower. Should we expect that we see debt added on to the revolver here in the first quarter of fiscal ’10?

Sandra Cochran

We will use the revolver in the first quarter but we’re anticipating maybe lower usage. We’ve done a good job of managing our inventories and our payables, but I don’t think it will be significantly different than prior years.

Brad Ludington - Keybanc Capital Markets

And then related to that we saw here in the fourth quarter a working capital gain of I think about $42 million. I know a lot of that was related to the better inventory levels and rolling off some of that that’s held for sale. But should we expect to see some of that reverse itself in the first quarter as well?

Sandra Cochran

Yes. A little bit will. We won’t have as big an improvement in the inventory levels as we did last year.

Brad Ludington - Keybanc Capital Markets

And then just finally on your interest line and your interest guidance, are you assuming that there are any charges related to the swap built in beyond just the higher interest rate that we factor into those levels?

Sandra Cochran

No. There’s nothing additional built into the guidance.

Operator

Your next question comes from Bryan Elliott - Raymond James.

Bryan Elliott - Raymond James

I wanted to get a little more color on sort of the advertising marketing efforts. I know you mentioned, Mike that was one of the things that seemed to kick in last fall. But maybe more broadly just discuss sort of the findings and what seems to be working and any plans for 2010 on maybe altering the mix a bit or just a discussion on that would be helpful. Thanks.

Michael A. Woodhouse

Okay. Well, as a reminder our business model is to sustain about 2% of that on advertising and about half of that goes on our outdoor. So starting with the outdoor which is our biggest spend, we’re in the middle of rolling out some new creative. We ultimately felt that the previous campaign where we went with more pictorial representation of products didn’t work as well as we would have liked because one of the strengths of our billboard strategy has always been that we have so many billboards out there, we have about 1,500, that the reputation and the awareness building is an important component. So having billboards that are immediately from a distance recognizable as Cracker Barrel is an important factor. So our new campaign is going back to that goal and we have about two-thirds of them rolled out right now. We’ll be finished by the end of October. So that’s one piece of kind of the update and the focus.

On the broadcast media because of our geographic distribution, we’re not able to be efficient in a lot of our markets and especially in some of the larger markets. We are efficient at the kind of spending levels that tie into our 2% overall spend in about 25% of our markets with a combination of radio and TV that seems to work best. And they’re both brand campaigns but with a stronger promotional product focus in ’09 and we’re going to continue that in ’10. So that combination seems to be working well and one of the factors in this brand that is really critical is that our conversion of awareness is very high, awareness to trial. So building our awareness and doing it within the constraints of our 2% spending level is critical. And I think the changes we’ve made on billboards and the new radio and TV campaign should be helping us build our awareness which had frankly slipped for a couple or three years before last year.

Operator

And with that there are no further questions. I’d like to turn the call then to Michael Woodhouse for any additional or closing comments.

Michael A. Woodhouse

Thanks, Dwayne. Well we’ve covered a lot of ground this morning reviewing last year, talking about what’s new at Cracker Barrel for the new year. We’re very pleased with how we’ve done in these very difficult times and we’re very proud of what we have to offer our guests. So as I just discussed in the last question, we’re going to be focusing on getting our message out with the new billboard creative and with the continued TV and radio advertising. And internally we’re going to be focused on doing things that will improve our business model while at the same time improve the experience from the guests point of view. And we’ve talked about some of those things so we think we had a pretty good quarter. We’re looking forward to reporting on the first quarter when we get to the end of that.

And just finally a commercial for our Investor Day which is on October the 13th. We’re starting at 11:00 AM with lunch and we’re going to be showcasing a number of our products and touring our new test kitchen that we’ve talked about before. And we’ll have presentations from our management team on the plans for 2010 and then we have a new retail facility with training and a new mock shop here on campus. We’re going to do a tour of that. So if you would like to attend and you haven’t signed up at this point please call or email Barb Gould.

And with that, thank you for joining us and we’ll talk to you next time. Thanks.

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Source: Cracker Barrel Old Country Store, Inc. F4Q09 (Qtr End 07/31/09) Earnings Call Transcript
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