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CBRL Group Inc. (NASDAQ:CBRL)

F1Q08 Earnings Call

November 29, 2007 11:00 am ET

Executives

Mr. Michael A. Woodhouse - Chairman

Mr. Lawrence E. White - Chief Financial Officer

Analysts

Matt DiFrisco - Thomas Weisel Partners

Joe Buckley - Bear Stearns

Steven Rees - JP Morgan

Chris O’Cull – SunTrust Bank

Robert Derrington - Morgan Keegan

Bryan Elliot - Raymond James

Conrad Lyon - FTN Midwest

Mike Smith - Oppenheimer

Operator

At this time for opening remarks and introductions I would like to turn the call over to Mr. Michael Woodhouse Chairman President and Chief Executive Officer. Please go ahead Mr. Woodhouse.

Michael Woodhouse

thank you good morning everyone thanks for joining us this morning as usual I have Larry White our CFO with me. We’re here to talk about our first quarter. As far as the headliners go, we’re obviously in an environment where it’s getting tougher and tougher for this industry. We’re very and we can see it in the industry numbers is at a, we, and others report we’re very pleased to be maintaining a healthy positive margin in traffic versus the industry. We had a little bit of a late start to the season in retail. But, both restaurant and retail have improved in November, which we’ll be reporting next week. Our hourly labor and food costs in the quarter were in line with our expectations. We have some other cost prices especially from group health and maintenance and we’ll be discussing those in more detail.

But we’re confident we’re on the right track we’re going to talk in more detail about all of this, over the next 30 minutes or so, so with that I’d like to turn the call over to Larry White for his financial review.

Larry White

thanks Mike and thank you to our listeners on the conference call on webcast for your interest and participation this morning. Our press release announcing our fiscal 2008 first quarter results and updating our outlook for fiscal 2008 in total was released before the market opened this morning. We urge caution to our listeners and readers in considering the information on our expectations trends and earnings guidance. We 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 in broadly disseminated disclosures such as this morning’s press release and this call. But the restaurant industry is highly competitive and trends and guidance are subject to numerous factors and influences that can cause future actual results to differ materially from such trends and guidance.

Many of these factors 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 filings that we make with the SEC, and we urge you to read this information carefully. The company disclaims any obligation to update disclosed information on trends or guidance and should we provide any updates after today they’ll be made only by broad dissemination such as press releases or in our filings with the SEC.

Let’s review the first quarter fiscal 2008 information released this morning. We recorded diluted income per share from continuing operations of 57 cents versus 45 cents a year ago an, increase of 27%. Income per diluted share benefited from a 32% reduction in diluted share count resulting from our successful recapitalization efforts conducted over the past two years.

After-tax income from continuing operations of $14 million was lower than the prior year quarter, primarily reflecting higher labor and other operating costs as well as charges related to closing of two stores in the fiscal 2008 quarter and those were partly offset by lower incentive compensation accruals and lower income tax rate. Revenue from continuing operations in our first fiscal quarter which ended November 2nd 2007, increased to $581 million up 4.1% from last year’s first quarter.

During this year’s first quarter, we opened six new Cracker Barrel Old Country Store units and closed two stores. In addition to these, we also opened a store to replace a location that we closed in a nearby community. Two closed stores that were not replaced were closed based on business trends future expected capital expenditure needs and in one case a lease renewal decision. On a comparable week basis Cracker Barrel comparable store restaurant sales, for the first quarter were up 1.8% compared to a year ago which included a 2.9% higher average check. Average menu prices were three and a half percent higher than a year ago which included a 1.9% price increase that we took in mid August and guest traffic declined by 1.1% for the quarter. Though we’re never satisfied with negative traffic, we’re nonetheless pleased in a very, very tough consumer environment our guest traffic trends have continued to compare favorably with overall industry performance as measured by NapTrak. Our television-advertising test had a minimal effect on comparable store sales in the quarter because it’s in a small portion of the system and began late in the quarter. Mike will comment further on the test in a moment.

While the advertising test markets are running stronger guest traffic relative to a control group, we believe it’s too early to gauge the potential for broader application at this time.Cracker Barrel comparable store retail sales were down 2.1% in the first quarter of fiscal 2008 on a comparable week basis. Excluding the impact from our reduced porch sale clearance events however in the, in this year’s first quarter comparable store retail sales would have been flat with the prior year. The reduced porch sale activity also benefited our retail margins because of lower markdowns.

Our retail sales trends are not as strong as we had expected however. Retail purchases are the most discretionary for our guests and we believe we continue to experience the effects of pressure on consumer discretionary income. Softness has been most notable in apparel and seasonal products. We had expected seasonal sales to be softer due to assortment availability timing but we expected an offset in other merchandise increases that didn’t occur to the degree expected.

Operating income from continuing operations for the first quarter was $36 million. That was down 5.8% from the first quarter of fiscal 2007. Operating margin of 6.2% from revenues was below last year’s operating margin of 6.9% primarily reflecting higher hourly and management wages including effective minimum wage increases for tipped employees in several states and higher group health expenses in addition to higher advertising supplies and maintenance expenses and expenses related to the two stores that we closed. Partly offsetting these pressures were lower incentive compensation accruals that resulted in lower G&A expense than last year.

Going down the P&L gross profit margin was flat with last year, reflecting higher food costs offset in part by lower retail markdowns. Food cost was higher year over year with about 4.2% commodity inflation, which was inline with the guidance given in our fiscal year end call back in September. Food cost inflation was partly offset by higher menu pricing on a margin basis. The increase in commodity inflation from a year ago was primarily due to increases in dairy eggs oil and grain products. at this time we've contracted for over 70% of our estimated product needs for the remaining three quarters of fiscal 2008 with overall commodity inflation expected to continue between four and four and a half percent for the remainder of the year. Labor and related expenses as a percentage of revenues were about 80 basis points higher than last year reflecting higher hourly and management labor costs as well as higher group health insurance.

We experienced significant wage inflation approximately 4.6% on hourly wage rates as a number of state mandated minimum wage increases affected the ways that we pay to our tipped employees in those states. And we’re also, seeing prevailing wage rates for non-tipped employees increasing at a higher rate as well. Although these wage rate trends are not surprising they are just a little higher than we had anticipated. We also have been experiencing higher group health claim payments than last year for which we’re self-insured. Based on group health cost trends last year we expect that the degree of year over year pressure for group health to be reduced over the remaining quarters of the fiscal year relative to our performance in the first quarter. Other store operating expenses were unfavorable by about 60 basis points compared with last year’s first quarter. Other store operating expenses were pressured by higher advertising expenses of about $1.8 million due to the TV advertising test including production costs of just over $1 million. Maintenance and supplies expenses also were higher than a year ago. Supplies were pressured by large increases in flatware costs reflecting among other things global metal demand.

And as indicted earlier we also incurred charges related to the closing of two stores in the quarter where a where which are in a line item on the income statement broken out separately. And we had lower G&A expenses primarily as a result of lower incentive compensation accruals. Our first quarter income tax rate for continuing operations was just under 34%, which was lower than last year’s first quarter rate of just under 36%. The company adopted FIN48 at the beginning of fiscal 2008 which resulted in a number of balance sheet adjustments that will be discussed in more detail on our first quarter Form 10-Q.

The adoption and implementation of FIN48 in the first quarter did not have a material effect on the company’s first quarter tax rate. We’re projecting that our second quarter tax rate will be similar to the first quarter tax rate and then the third and fourth quarters the rates are expected to be lower. The effective tax rate for the full fiscal year of 2008 is presently expected to be between 31.5% and 32%. Cash flow from operating activities was a use of approximately $3 million. The net use was more than accounted for by a greater decrease in accounts payable than last year as a result of the timing of normal trade payments.

Capital expenditures were $24 million only slightly higher than we spent in 2007. And dividends while being paid at a quarterly per share rate of four cents greater than a year ago we’re slightly lower in aggregate than last year because of the seven million fewer shares outstanding resulting from our recapitalization efforts. Finally, in this morning’s press release we updated our outlook for fiscal year 2008. Again, I urge you to consider the cautionary discussion of risks and uncertainties at the end of today’s press release as well as those discussed in our 2007 and Form 10-K.

I understand the inherent risks associated with trends targets guidance and estimates in a competitive industry such as ours. Based on current trends we presently expect fiscal 2008 total revenue to increase approximately three to 4% over the $2.35 billion of total revenue from continuing operations in fiscal 2007. Fiscal 2007 included the effect of a 53rd week, which provided an additional $46 million in revenue. The projection for fiscal 2008 includes the opening of 17 projected new Cracker Barrel units, which is a reduction from our initial projected openings. We decided to defer three openings into fiscal ’09 rather than force too many into the fourth quarter where they provide little benefit to this year’s operating results.

Our projected comparable store sales increase of two to 3% for restaurant sales includes approximately 3½% of menu pricing. Comparable store retail sales expectations are being lowered to flat to up 2%. Again given the pressures on the discretionary income of our customers that appears to be reflected in recent trends.

Excluding the effect of the 53rd week in fiscal 2007, the projected 2008 revenue increase would be about five to 6%. That’s excluding that $46 million in fiscal ’07. With continuing inflation and food costs and hourly labor as well as non-recurrence in 2008 of the 53rd week that benefited fiscal 2007 partly offset by expected G&A savings we expect operating margins to be down in fiscal 2008.

our present projection is for operating margins in the 6.7 to 6.9% of revenues range which compares with fiscal 2007’s operating margin of 7% on a basis excluding the favorable effect of the 53rd week. That 53rd week had about a 20 basis point favorable impact on fiscal ’07. Both net interest expense and depreciation are projected to be approximately $60 million in fiscal 2008.

The diluted weighted average share count is expected to be between 23½ and 24 million shares. I discussed the impact of the adoption of FIN48 earlier. And overall, we expect the effective tax rate for the fiscal year 2008 is going to be between 31½ and 32%. We presently expect income per diluted share from continuing operations to be in the range of $3 to $3.15 for fiscal 2008 compared with $2.52 per share in fiscal 2007 a significant increase.

Capital expenditure plans for fiscal 2008 include the 17 new stores and expenditures of approximately $95 million. That $95 million includes spending on planned fiscal ’09 openings, which are not reflected in the store count of course, as well as various other, in store and corporate office initiatives. We expect cash flow from operations to exceed our capital expenditure and dividend payment outlays once again in fiscal 2008.

So in summary, we are reporting results that while below our expectations are in an exceptionally difficult consumer and cost environment for our industry. These issues are going to be with us for the remainder of this fiscal year and our team is focused on overcoming them whenever and wherever possible.

despite these challenges, I’ll point out that last year’s recapitalization is substantially benefiting diluted income per share from continuing operations and we expect to continue to have solid cash flow from when the headwinds abate and they will abate we believe we’ll be well positioned to take advantage of an improved operating environment and delivering even better results. With that thank you for your attention, I’m going to turn the call back over to Mike Woodhouse. Mike.

Mike Woodhouse

thanks Larry good morning again everyone it was just reported this week consumer confidence is at the lowest level since September 2005. And we also know from industry data that people are eating out less. But although the unemployment rate remains below 5%, a number of factors are weighing heavily on the minds of consumers relating to the economy and the discretionary incomes. The list includes declining home sales and home values rising energy prices where gasoline prices are now averaging 85 cents higher than a year ago and the sub prime credit crunch. On top of all that, the recent declines in the stock market only add to the negative wealth effect. While we’re not happy with our in store sales numbers in the first quarter we are ahead of industry guess counts as Larry mentioned as reported by NapTrak. And if we exclude the impact of having shorter and fewer porch sale events, which help us in terms of markdowns and margin our retail same store sales, were flat.

And as we discussed in the release earlier today November restaurant sales and we have just three daily days to go in the month our accounting period ends on Friday of this week restaurant sales in November are ahead of October and ahead of Q1 as a whole and our retail sales are slightly ahead of restaurant sales. However if we look back at the first quarter our ability to protect market share and grow revenues didn’t translate into improved bottom line results as we would have wished. Cost pressures resulting from minimum wage increases implemented to into 2007 by a number of states especially those that raised the cash wage for tipped employees higher group health expense and higher commodity costs in general were felt throughout the quarter. We took about a 2% price increase in mid August resulting in an average price increase for the quarter of approximately 3½% over last year. The price increase is intended to offset the higher food and labor hourly labor costs that we expect in fiscal 2008 as a whole and in fact pricing more than offset those cost increases in dollar terms in the first quarter. We also benefited from improved markdowns in retail so that our gross profit margin in the quarter was flat with last year at 69%.

On the labor line over 50 basis points of the 80 basis points increase was the result of the group health expense situation that Larry’s already explained. below the labor line the higher store operating expenses included TV advertising where the main factors that made the impacted well where the main factors of making the impact of store operating margins. While we don’t anticipate recurring production, costs for our commercials the combination of continued TV tests and higher costs for certain supplies will keep pressure on margins until we get some leverage from added sales growth.

Next, I’d like to update you on the status of our strategic initiatives designed to increase restaurant traffic retail sales and operating margins. As you know, we rolled out our TV advertising test in October in six markets, which represented about 15% of our stores. Given that the TV campaign is directed at building brand awareness rather than being product driven, we expect traffic to build over time. Results from the first flights have been positive but not as strong so, far as we’d hoped. We’ve tweaked the creative for the second flight to include current seasonal promotional items, which are our roast beef dinner and holiday breakfast sampler.

Let’s look at the restaurant initiatives. In keeping with our theme of simply focus and execute restaurant execution requires improving speed of service while maintaining a quality guest experience. The speed up service the starting point was a simplified menu one that was easy to read that would also drive a more profitable mix of orders in the kitchen. Our new Best of the Barrel menu is being expanded to a 30-store beta test and we expect to roll it out company wide in April. Our goal for the Best of the Barrel menu is to improve ticket times and to improve dollar margins for guests by highlighting high margin products that are fast out of the kitchen.

For example, the menu features a new lunch section with high valued high margin products. It also eliminates a number of low volume sellers to reduce waste and reduces the number of slow to make items such as sandwiches. And along with the new menu, we greatly simplified the point of sales screens to increase the speed and ease of order entry. In addition, we've trained our servers on how to communicate the changes in our menu positively to our guests and our guests responses have been generally positive resulting in higher tips for our servers. The comprehensive seat to eat initiative is progressing and includes kitchen processes pass through window management labor deployment and front of the house service methods.

In related initiatives, we’re taking a fresh look at how we can improve our throughput by simplifying recipe processes and improving labor deployment. We’re currently testing elements and combinations of all of these initiatives in a number of stores. We expect to be able to report measurable results over the next several months. They’re all about measuring results at Cracker Barrel. Over the years, we found that one thing that has the highest correlation to growing our sales and profitability. And that one thing is low employee turnover. Our new Rising Star Program focused on our new hires.

New hourly hires continues to show marked progress in reducing turnover and reduced turnover leads to improved skill levels and an enhanced guest experience. Turnover for our hourly employees as a whole is at 102% this year to date versus 121% last year, year to date at the end of the first quarter. Another measure of the success of this program and our overall focus on the guest experience is our continuing trend of fewer guest complaints. So now, let’s look at the retail business. Clearly, our retail sales have been soft along with many other retailers. There were mixed signals coming into the holiday season with predictions of lower holiday sales for retailers in general. Reports from this past weekend following and including Black Friday indicated that more people were shopping although their purchases were smaller. And this hopefully bodes well for a stronger holiday season for us. And we did see a strong pickup in retail sales starting on Black Friday.

As we look back at the first quarter, warmer fall weather resulted in lower demand for women’s and children’s outerwear and fall apparel. Our Harvest Collection sold well in the quarter but our seasonal sales were down as whole were down year over year. Our decision to delay the full set of Christmas products and store decoration until October resulted in the decline of about 20% in sales of seasonal merchandise season to date. Last year we benefited from a few very popular Christmas products, which sold out in the first quarter of fiscal 2007, and those products were not offered for sale again this year.

The good news is that we’ve had some growth areas. Toys including the Perfect Pet Webkinz and games and puzzles continue to sell well. And gifts for the home and our candle products were also strong sellers. Media sales were up double digits in the quarter due to the popularity of our exclusive CD’s by Josh Turner and Merle Haggard as well as 35 new DVD titles. Other music initiatives include two more exclusive CD offerings introduced in November.Lonestar’s My Christmas List and a live collection of classic Alabama hits recorded during their American farewell tour.

Food products, largely candy, were up approximately 6% in the quarter. and our updated point of sales system has provided new opportunities for better pricing and bundling of the products than was available last year for example our pricing change on thin sticks candy to increase the price from ten cents to 15 cents each or offer ten for a dollar increased sales and units almost 40%. and we’re using the new capabilities to drive volume through BOGO’s ahead of traditional markdowns for example with Christmas ornaments where this year we’re able to offer buy four get one free. Looking forward we have a number of exciting new things going on in retail. First, as the Christmas merchandise begins to settle down in the middle of December we’re bringing in new products in the garden inspirational and rooster rangers in time for gift giving. Second in the spring retail, presentations will include more cross-departmental themes to lead customers to explore the store throughout all product presentations. An example is the chocolate theme that will include not only candy and treats but, novelty serve ware whimsical gifts and apparel. This theme is timed to run through Valentines Day and Easter without being specific to either occasion. In line with our focus on uniqueness, much of the product for this theme will be designed exclusively for Cracker Barrel.

Third we’re reviewing the fit and cut of our apparel to ensure that we haven't left the traditional Cracker Barrel apparel customer behind as we’ve looked to broaden the appeal. We’re also adjusting the mix of sizes we’re buying. And we now have for the first time the ability to replenish by size. We expect these changes to lead to improved sales and reduced markdowns in our apparel business. And then as we look forward to the spring we’ll have new presentations every month. And we have some new product categories. An example of that would be novelty lamps.

Moving now to our other marketing initiatives we’ve already updated you on our TV test and music programs. We’ve added Kroger Rite Aid and Winn Dixie as well as approximately 800 Walmart locations to our third party gift program. Compared to last year first quarter gift card sales were up 42%. And along with these additional sales, the gift cards give us a way to communicate our brand in many other new locations. We’re also exploring summer traffic driving promotion ideas with Cracker Barrel’s unique combination of restaurant and retail. And the brand’s powerful association with travel we believe there’s an opportunity to design promotions that leverage these brand strengths and build on the summer travel potentially come fourth quarter.

Looking at new store openings in fiscal 2007, we had three of interstate stores, which broke opening week sales records Huntsville Alabama Sherman Texas and Lubbock Texas. On November the 12th we opened another off interstate store this one in Midland Texas and it set a five-day retail sales record. This performance the Huntsville Sherman and Lubbock stores continue to perform better than projected.

This performance supports our conviction about the strength of the brand and the viability of our ongoing development plans but I want to be clear however that we still need to work on sustaining the opening sales that we’re achieving. And achieving profitability faster in our new stores. Let’s look at the update to the outlook for fiscal 2008 where we lowered the project in same store sales based on first quarter results as well as the current uncertainty in the industry and the overall economy. We would expect sales and operating margin to improve in the second half of the year as we gain some benefits from the initiatives we’re testing.

However, given the negative external pressures we’re taking added steps to reduce discretionary spending and focusing on ways to increase sales and reduce costs. We expect cash flow from Cracker Barrel to remain strong and more than sufficient to service our debt to finance our restaurant and retail initiatives as well as our unit growth and to continue our share repurchases and to fund our dividend payouts. As you know in September, we increased the dividend 29% to 18 cents per share for the quarter. It’s the 5th year in a row that we’ve increased the dividend. Simplify focus and execute is our call to action to drive increases in both traffic and retail sales for 2008. We’re keenly aware of the potential volatility of earnings per share because of new crack capital structure and we’re determined to leverage the capital structure to significantly grow, earnings per share. We’ve put together additional resources to successfully implement the Best of the Barrel menu and to build brand awareness to drive restaurant retail sales. And to improve conversion of higher sales to bottom line profits. Our goal is to deliver a premium brand to our customers and a premium return to our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll go first to Matt DiFrisco with Thomas Weisel Partners.

Matt DiFrisco - Thomas Weisel Partners

I might have missed this did you guys, mention how much how many shares were repurchased in the quarter.

Larry White

there were no repurchases in the quarter Matt.

Matt DiFrisco - Thomas Weisel Partners

was there any restriction to that was there any reason why or.

Larry White

no, I guess the key reason is the first quarter is a fiscal quarter is typically a low cash flow quarter and we decided not to make any repurchases during the quarter and borrow on our revolver to make those repurchases.

Matt DiFrisco - Thomas Weisel Partners

okay and then G&A as far as being down it looks like on absolute terms what’s the outlook given your outlook for accruals on a year over year basis for the remainder of the year.

Larry White

we expect favorable performance for the balance of the year in G&A as well.

Matt DiFrisco - Thomas Weisel Partners

so favorable meaning relative G&A leverage.

Larry White

yes.

Matt DiFrisco - Thomas Weisel Partners

okay and then just looking at the cogs line it looked like it was a little bit higher than what I had expected and I'm trying to figure out that was that is there any effect happening with a lower U.S. Dollar. I know that a lot, of your toys are imported but I would just presume that most of those toys are coming from countries that are pegged to the dollar is there any adverse effect you're seeing as far as product margins at the retail store.

Larry White

well I don't think there’s anything material there related to the dollar that’s something we do kind of have an eye on but nothing really material there.

Matt DiFrisco - Thomas Weisel Partners

or anything any concerns going on with shipping costs or fuel costs in getting things to you during the Christmas time.

Larry White

well our Christmas product is all delivered at this point so that’s really not an issue.

Matt DiFrisco - Thomas Weisel Partners

okay and then lastly just on the value menu approach do you think there’s have you tested anything about that or maybe tried to look at your menu and if you look at the success of the fast feeders which seem to be outpacing casual dining in the last two years I guess the tiered menu strategy? Is there a way that maybe you could cross into that line and also sort of bring an attention to your customer of more of your value oriented items on a price point to them.

Mike Woodhouse

well we we’ve done that in the test menu with the lunch items so we’re trying to focus people on value items that also benefit the value in and of itself a low price. I guess in and of itself is not something that we want to focus on because our challenge is how do we, [inaudible] through at busy times we’re always on a wait. so we don’t want to give up margin be it just to have a lower price point we think our menu is a pretty good value compared with most others that we compete with and compete with in the customer’s mind so. I don't think we want to go chasing that we do want to do things from a promotional point of view that reinforce the fact that we overall represent very good value if you take into account the food and the experience and everything else.

Matt DiFrisco - Thomas Weisel Partners

okay and then I guess is there one linchpin that you can point to that you think would be something over the next 12 months that could accelerate the table turn or the line flow or increase capacity of sales capacity during those high peak times that we should look for.

Mike Woodhouse

well. I think the main goal of the Best of the Barrel menu is to improve speed of service that is something that we think we can once we get it right we can roll out through the whole system. The other initiatives are having some benefit they’re a little more complex. And I don't want to go into the details of what’s happening but we’re seeing some positive results in terms of speed in the kitchen, which will help as well. But I think the menu is the number one priority right now.

Matt DiFrisco - Thomas Weisel Partners

okay and then last question I remember what is the timeframe for Larry and are you in the process of seeing any candidates, internal external.

Mike Woodhouse

we have a national search underway Larry’s departure will be the end of January and we hope to be on track to have somebody aboard on or before that date.

Matt DiFrisco - Thomas Weisel Partners

okay thank you.

Mike Woodhouse

thank you.

Operator

and we’ll go next to Joe Buckley with Bear Stearns.

Joe Buckley - Bear Stearns

thank you a couple of questions on the cost side you gave us the hourly wage rate inflation does that diminish as you lap election day or diminish as you lap maybe January first because of some of the state initiatives from a year ago.

Larry White

consumer price indexes and that sort of thing. So I think that for the remainder of the year we’re still going to see some high wage inflation.

Joe Buckley - Bear Stearns

okay as high as the first quarter Larry you think.

Larry White

I mean we’re hoping that it’s going to be a little bit less than that Joe but it’s but we’re trying to manage it as well but I think that the exposure is still there and that’s going to reflect in our risks and opportunities on this projection.

Joe Buckley - Bear Stearns

okay and a question on food costs I get the impression at the Analyst Meeting that things might be coming in a little bit better than you had expected at that point. and now it seems like you're back to your original expectations of four to 4½% food cost inflation was my impression right and did something change to kind of kick it back up again a little bit.

Larry White

well I think the probably the biggest single item has been in produce. And I think specifically in lemons if I recall I think things are volatile out there in change. I we’re essentially in line with what we projected before and our expectation for the whole year is probably going to be slightly favorable to what we expected before but we’re still talking about a high food cost inflation in the four to 4½% range.

Joe Buckley - Bear Stearns

okay then a question on the Best of the Barrel menu. I guess at the [inaudible] meeting you were testing it in four units and now it sounds like it’s been expanded to 30 give us a sense of what how streamlined the menu is and what have you seen in those stores in terms of service times.

Mike Woodhouse

the menu is streamlined Joe in the sense of we’ve taken some a number of slow moving items off total item count we took off was a relatively large number. But in terms of product mix, it was a well a pretty small number what we've seen in the stores are higher some record dollar sales per hour. And that is really the goal now we have to translate those dollar sales per hour into higher traffic and if you think about the opportunity we have which is that we have waits. And we have the people divided into two groups those who are willing to wait with any point in time for the quoted time and those that are not. It’ll take a while as we increase the throughput, which we are as mentioned by those higher dollar sales per hour for those that weren’t willing to wait to realize that the wait is shorter. So it’ll be a building process but I think that the it’s very encouraging that we’re seeing the hourly throughput at the levels we are.

Joe Buckley - Bear Stearns

okay has the expanded test been in place for any length of time or is that just starting now.

Mike Woodhouse

it started at the beginning of the month beginning of November.

Joe Buckley - Bear Stearns

okay but if all goes as planned you would think you'll, roll this out in April did you say.

Mike Woodhouse

yeah but I reserve the right to change that date we’re going to do it right so April is the target but to the extent that we want to tweak something or check something we’ll do it we’re not just going to blindly roll out a system wide menu.

Joe Buckley - Bear Stearns

all right, that sounds good thank you.

Mike Woodhouse

thanks Joe.

Operator

we’ll go next to Steven Rees with JP Morgan.

Steven Rees - JP Morgan

Just on the sequential acceleration that you saw in your same-store sales through November, was that consistent throughout the month, or did it accelerate towards the end of the month? Was there any particular day part or geographies where you saw more improvement?

Larry White

well retail is markedly better beginning with Black Friday as Mike indicated and there’s a lot of noise throughout the month other than that.

Steven Rees - JP Morgan

okay and then just on the retail margin you had talked for several quarters about improving margins of retail are they still up year over year and what further opportunities do you see to improve the margins there from less markdowns.

Mike Woodhouse

continue to see fewer markdowns in the first half of the year, which is the remainder of this current quarter. And then when we get to the point where we’re lacking the reduced port sales the opportunity will be apples to apples kind of basis so that we’ll continue to see it for a while. And then we’ll be at the new higher level and we’re doing a number of things that are fairly detail level I talked about the BOGO so that we’re selling things through at less than the full markdown on our clearance apparel.

for example, we’re up and out where if you buy one you get a 40% you buy two you get 50% you buy three pieces you get 60%, which is better than obviously putting everything out there at 75% and that escalating percentage is a real sales driver. So we’re doing a lot of, things to manage markdowns where we do take markdowns to be less of an impact in [inaudible] we’re just getting better at all of this stuff and the goal is to keep the porch sales to a minimum going forward.

Larry White

yeah I would say last year in the second half of the year, we had some pretty good retail gross margin numbers and I think we’ll probably see a little net pressure in those in the second half of the year.

Steven Rees - JP Morgan

okay thanks and then just quickly on the table optimization program perhaps you can talk about an update there how many stores have tables for two whether or not you’ve seen expected traffic improvement there.

Mike Woodhouse

well the store is pretty much where it has been for a little while now on that but we went through that process and that’s really getting the stakes set for all of these other initiatives that’ll actually help us improve throughput. So we have been optimized the opportunity wasn’t as big as we first had thought at first because a number of our operators had already got ahead of the program because they figured out the opportunity there. But I think right now we you'll see on a opportunistic store-by-store basis there may be some possibility but we’re really looking to the menu and then these other initiatives to use that platform that we built with the table optimization.

Steven Rees - JP Morgan

okay great thank you very much.

Mike Woodhouse

thank you.

Operator

and we’ll go next to Chris O’Cull with SunTrust Bank.

Chris O’Cull – SunTrust Bank

good morning.

Mike Woodhouse

good morning.

Chris O’Cull – SunTrust Bank

Mike I believe you guys, monitor your price increases by comparing trends to a control group would you elaborate on the guest count trends of the control group versus the rest of the system. Are you seeing any differences there?

Mike Woodhouse

no.

Chris O’Cull – SunTrust Bank

okay great.

Mike Woodhouse

and we do it both ways we test ahead of time and then we do a holdback so we get a measure on both ends and we have not seen any meaningful traffic difference. So we’re pretty comfortable with the increase in August has stuck and we’re comfortable with running at 3½% total price I mean our traffic would suggest that we’re not damaging ourselves by price.

Larry White

we also have as I think you probably know Chris an outside consultant that advises us on product sensitivity to price and their evaluation of our most recent price increase in August is that there’s no effect on traffic or adverse effect on mix either.

Chris O’Cull – SunTrust Bank

okay great and then Mike I understand the Best of the Barrel menu is a streamlined menu but does fewer items equate to a narrower range of prices.

Mike Woodhouse

no.

Chris O’Cull – SunTrust Bank

okay.

Mike Woodhouse

I think that the intent the presentation and the results are that the variety we see no reduction in the perceived variety. Expect for those small number of individuals whose favorite product disappeared we certainly hear from them.

Chris O’Cull – SunTrust Bank

I’m sure now and then just to make sure I understand the throughput benefits if you are able to decrease the meal duration period and increase your throughput during peak periods unless the wait time stays consistent with what it was you wouldn’t see an increase in the sales is that fair. Well you, need the wait time to stay at least where it was.

Mike Woodhouse

well what we do know is that at any given [inaudible] so presumably if the wait time goes down those people will fill up and get back to where we were.

Chris O’Cull – SunTrust Bank

okay great.

Mike Woodhouse

And so there’s a, refilling the queue. And that’s one of the ways that the table optimization plays into this, because at the beginning of the rush at any point in time we can seat more people to begin with. so that so but the [inaudible] of wait only goes down if we’re fast with putting out throughput on those people who’ve already seated so it’s kind of a whole bunch of things have to happen at the same time here.

Chris O’Cull – SunTrust Bank

so you won't have as many turnaways people leaving.

Mike Woodhouse

you're correct.

Chris O’Cull – SunTrust Bank

and potentially if the advertising starts to create awareness in trial that should help, build the wait as well.

Mike Woodhouse

correct.

Chris O’Cull – SunTrust Bank

okay and then Larry I believe last year in the second quarter retail sales benefited from the pre Christmas markdowns which negatively impacted the cost of sales can you give us some year over year modeling advice in the second quarter based on this year’s [inaudible]

Larry White

[Inaudible] margins for the second quarter to be flat to very slightly improved, not as much improved as in the first, quarter.

Chris O’Cull – SunTrust Bank

okay and then what was the impact of higher group health plan payments during the quarter you said you expected it to get better through the year.

Larry White

well it was in the first quarter year over year it was about 50 basis points. and so it was a big number and as we look at the trend of where our group health ran last year and the to the relative comparisons we’re going to have we’re going to see that pressure mitigate quite a bit over the course of the remaining course of the year.

Chris O’Cull – SunTrust Bank

great and my last question is the stock compensation expense during the quarter can you tell us how much was in G&A.

Larry White

well all of the I don't, have the dollar amount. And but I will say that it fully accounted for the change year over year. I think we had let me think.

Chris O’Cull – SunTrust Bank

is what’s on the cash flow statement what’s in G&A.?

Larry White

yeah there’s stock expense and stock option expense I think year over year we had about a $5 million and also bonus expense we had about a $5 million benefit in G&A.

Chris O’Cull – SunTrust Bank

great thanks.

Larry White

thank you.

Operator

and we’ll go next to Robert Derrington with Morgan Keegan.

Robert Derrington - Morgan Keegan

yeah thank you. mike could you give us a little bit of color on the TV advertising for a minute what did you learn as you tested have you found that consumers found the shots or the production interesting but the message didn’t necessarily drive traffic and so now you're moving to food is it, based on…

Mike Woodhouse

yeah it is driving traffic. It didn’t on day one. I mean it was a build which we expected because it’s a brand awareness campaign and just interestingly on Thanksgiving day which is always a very special day for us because we’re one of the few restaurants open and we have the Thanksgiving dinner offering the TV markets were up by the same amount as the most recent overall week. So clearly, there’s some traffic building going on. we decided to put some product information in to see if we can stimulate building on the brand awareness piece to stimulate further traffic because we’d like the traffic to be higher if you’ve I don't know if you’ve seen them with their new form but it’s really it’s using the existing creative and blending in the product shots.

Robert Derrington - Morgan Keegan

how should we think about the impact on the operating expense line as you go forward with the your advertising spend through the balance of this year.

Mike Woodhouse

well it’s built into our guidance first of all.

Robert Derrington - Morgan Keegan

okay.

Mike Woodhouse

so I think that’s the best way to think about it.

Robert Derrington - Morgan Keegan

okay all right.

Larry White

the unusual thing of the first quarter was that we had the production expense, which was a little over a million dollars. But then we’ll also have some level of advertising in the future so [inaudible] a little lighter than the initial flight but we’ll have it throughout more of the quarter.

Robert Derrington - Morgan Keegan

you showed us a lot of different food creativity at your analyst meeting earlier this year are some of those newer items yet to be folded into the plan as we go through the course of this year.

Mike Woodhouse

one way of saying this is not all of those things that you saw have been folded in yet. There’s some real opportunities there. And but we are focusing back onto new food. We’ve been focusing on restructuring the menu to generate all the benefits we talked about in terms of speed and margin. we’ve also had the product development folks working on some of the back of the house kitchen processes improvements that we've been talking about now we’re back fully focused on our new products so our goal is to have more new product excitement going on than we’ve had in the past.

Robert Derrington - Morgan Keegan

okay very good thank you.

Mike Woodhouse

thank you.

Operator

and we’ll go next to Bryan Elliot with Raymond James.

Bryan Elliot - Raymond James

good afternoon just or good morning wanted to check on help me think, about Larry sort of countervailing cost of goods line things that are happening. You’ve got retail margin improving. but to a lesser rate we got 4½% or so food inflation and the price increase that you quantified for us first of all was sort of first quarter reflective fully of the price increase. Remind me when that went in and are you on a fiscal year contract or at I think you might be more on a calendar year contract with some things. and is with the receding of the benefit from the porch sales etcetera are we going to see essentially a widening of the cost of goods pressure as we move through the year that’s essentially my question.

Larry White

okay there were a lot of pieces to that we have about 3½% pricing the first quarter and that’s consistent with what we’re looking at for the year so might be some small fluctuations by quarter. but it’s about what we’re looking at the remainder of the year I do expect to see some net pressure on gross margin over the remainder of the year but I don’t expect it to be flat.

Bryan Elliot - Raymond James

flat with the pressure being flat with the pressure we saw in Q1 or flat year on year.

Larry White

year on year, year on year.

Bryan Elliot - Raymond James

Okay so in other words the slight increase here in Q1 based on what you know today. And these countervailing trends you’ve talked about that’s a reasonably should be reasonably consistent through the year as you see it right now is that what you mean.

Larry White

I'm not exactly sure what you're saying Bryan but let me take a crack at it here.

Bryan Elliot - Raymond James

yeah let me help you, you were up 5% [inaudible] in Q1, and I think I heard you say that’s a good number to use for the rest of the year through the year.

Larry White

for our menu-pricing yes.

Bryan Elliot - Raymond James

given menu pricing retail etcetera.

Larry White

yeah what I said was and I think what you had asked me was what was the situation on pricing in the first quarter, and the remainder of the year as I had pointed out we had 3½% menu pricing the first quarter. That’s about consistent with what we expect for the year there could be some minor fluctuations quarter by quarter but that’s about what we expect. I do expect and we had flat gross margins in the first quarter year over year I don’t expect flat I expect there might be some net pressure on gross margins over the remaining course of the year.

Bryan Elliot - Raymond James

all right thank you.

Larry White

thank you.

Operator

and we’ll go next to Conrad Lyon with FTN Midwest.

Conrad Lyon - FTN Midwest

yeah good morning let me slip back to the advertising for a minute one of the things you had mentioned on your investor data is that you really wanted to try to refocus folks and know your brand more so as a kind of a roadside stop. and try to get them to think of it as more a stop during a typical outing how’s that evolving or is that going to change with your new advertising or are you changing your advertising a little bit here.

Mike Woodhouse

well the overall goal is to improve [inaudible] awareness. We think the opportunity is that we have a lot of people who travel use us when they travel do not use us when they're at home. But if the awareness is stimulated love Cracker Barrel and we think that stimulating that awareness will cause them to use us, more the adding of the product piece is we think that will be an added plus to the reminder of what Cracker Barrel is all about. Plus oh by the way come in and get our kind of promotion will. So the goal has not changed as I said before the we are seeing some traffic growth we don’t have a measure on whether that’s local folks or travel folks that’s a very difficult thing to measure obviously and we’ll see what happens in the second flight.

Conrad Lyon - FTN Midwest

okay and in terms of when you may go into new markets when might that be again or expand your advertising.

Mike Woodhouse

that will be next fiscal year.

Conrad Lyon - FTN Midwest

okay. So even if you see say some better than expected results you wouldn’t grow your exposure this year.

Larry White

our guidance doesn't reflect us going in to additional markets for this fiscal year and we can be nimble if we see something that causes us to do differently.

Conrad Lyon - FTN Midwest

okay great let me shift gears here just for a second we all know about some of the pump prices from regular gasoline and recently diesel’s been going up have you guys really ever tired to gauge how many truckers use your concept.

Mike Woodhouse

truckers as in 18-wheelers.

Conrad Lyon - FTN Midwest

yeah.

Mike Woodhouse

they certainly don’t show up with their 18-wheelers.

Conrad Lyon - FTN Midwest

okay fair enough that’s all thanks.

Mike Woodhouse

thanks.

Operator

and we’ll go next to Mike Smith with Oppenheimer.

Mike Smith - Oppenheimer

good morning.

Mike Woodhouse

good morning.

Mike Smith - Oppenheimer

a couple of things one this tax rate you indicated was going to be for the full year. 31½ 32% I believe that these have got to come in considerably lower than in the second half of the year why would that be.

Larry White

under FIN48 as you have discreet events happening you, record the effect of those discreet events on your tax rate under prior accounting for income taxes you always used your expected full year tax rate now you look at the changes in circumstances related to discreet events and we expect to see some pickup later in the year.

Mike Smith - Oppenheimer

what are those discreet events?

Larry White

they relate to some of the assumptions that we have about uncertainty and becoming more certain as the year proceeds.

Mike Smith - Oppenheimer

okay in the advertising, you spent 1.8 million in the first quarter of which a million was production.

Larry White

a little over a million.

Mike Smith - Oppenheimer

and would you anticipate that your ad spending going forward then would be about a million dollars quarterly.

Larry White

that’s I think getting a little finer than we than we really want to get in our guidance. But as we said, we will have continued media relative to what we had last year.

Operator

thank you with no further questions in the queue I’d like to turn the conference back over to Mr. Woodhouse for any additional or closing remarks.

Mike Woodhouse

thank you well thanks everyone for joining us. I hope we've conveyed the fact that we are as the rest of the industry in some tough times but that we know where we’re going and how we’re going to get there and we look forward to talking to you at the end of next quarter thank you.

Larry White

thanks everyone.

Operator

thank you, we appreciate your participation that does conclude today’s conference call you may disconnect at this time.

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Source: CBRL Group Inc. F1Q08 Earnings Call Transcript
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