CBRL Group Inc. F1Q08 Earnings Call Transcript

Nov.29.07 | About: Cracker Barrel (CBRL)

CBRLGroup Inc. (NASDAQ:CBRL)

F1Q08Earnings Call

November 29, 2007 11:00 am ET

Executives

Mr. Michael A. Woodhouse - Chairman

Mr. Lawrence E. White - ChiefFinancial Officer

Analysts

Matt DiFrisco - Thomas Weisel Partners

Joe Buckley - Bear Stearns

Steven Rees - JPMorgan

Chris O’Cull –SunTrust Bank

RobertDerrington - Morgan Keegan

BryanElliot - Raymond James

ConradLyon - FTN Midwest

MikeSmith - Oppenheimer

Operator

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

MichaelWoodhouse

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

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

LarryWhite

thanksMike and thank you to our listeners on the conference call on webcast for your interestand participation this morning. Our press release announcing our fiscal2008 first quarter results and updating our outlook for fiscal 2008 in totalwas released before the market opened this morning. We urge caution toour listeners and readers in considering the information on our expectationstrends and earnings guidance. We remind you that we don’t review orcomment on earnings estimates made by other parties. In addition, any guidancethat we give speaks only as of the date it is given. And we do not updateour own guidance or express continuing comfort with it except in broadly disseminateddisclosures such as this morning’s press release and this call. Butthe restaurant industry is highly competitive and trends and guidance aresubject to numerous factors and influences that can cause future actual resultsto differ materially from such trends and guidance.

Manyof these factors are summarized in the cautionary description of risks anduncertainties found at the end of this morning’s press release, and aredescribed in detail in our filings that we make with the SEC, and we urge youto read this information carefully. The company disclaims any obligationto update disclosed information on trends or guidance and should we provide anyupdates after today they’ll be made only by broad dissemination such as pressreleases or in our filings with the SEC.

Let’s review thefirst quarter fiscal 2008 information released this morning. Werecorded diluted income per share from continuing operations of 57 cents versus45 cents a year ago an, increase of 27%. Income per diluted share benefitedfrom a 32% reduction in diluted share count resulting from our successful recapitalizationefforts conducted over the past two years.

After-taxincome from continuing operations of $14 million was lower than the prior yearquarter, primarily reflecting higher labor and other operating costs as well ascharges related to closing of two stores in the fiscal 2008 quarter and thosewere partly offset by lower incentive compensation accruals and lower incometax rate. Revenue from continuing operations inour first fiscal quarter which ended November 2nd 2007, increased to $581 million up4.1% from last year’s first quarter.

Duringthis year’s first quarter, we opened six new Cracker Barrel Old Country Store unitsand closed two stores. In addition to these, we also opened astore to replace a location that we closed in a nearby community. Twoclosed stores that were not replaced were closed based on business trends futureexpected capital expenditure needs and in one case a lease renewal decision. Ona comparable week basis Cracker Barrel comparable store restaurant sales, forthe 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 ahalf percent higher than a year ago which included a 1.9% price increase thatwe took in mid August and guest traffic declined by 1.1% for the quarter. Thoughwe’re never satisfied with negative traffic, we’re nonetheless pleased in a very,very tough consumer environment our guest traffic trends have continued tocompare favorably with overall industry performance as measured by NapTrak. Ourtelevision-advertising test had a minimal effect on comparable store sales inthe quarter because it’s in a small portion of the system and began late in thequarter. Mike will comment further on the test in a moment.

Whilethe advertising test markets are running stronger guest traffic relative to acontrol group, we believe it’s too early to gauge the potential for broaderapplication at this time.Cracker Barrel comparable store retail sales were down2.1% in the first quarter of fiscal 2008 on a comparable week basis. Excludingthe impact from our reduced porch sale clearance events however in the, in thisyear’s first quarter comparable store retail sales would have been flat withthe prior year. The reduced porch sale activity also benefitedour retail margins because of lower markdowns.

Ourretail sales trends are not as strong as we had expected however. Retailpurchases are the most discretionary for our guests and we believe we continueto experience the effects of pressure on consumer discretionary income. Softnesshas been most notable in apparel and seasonal products. We had expected seasonalsales to be softer due to assortment availability timing but we expected anoffset in other merchandise increases that didn’t occur to the degree expected.

Operatingincome from continuing operations for the first quarter was $36 million. Thatwas down 5.8% from the first quarter of fiscal 2007. Operating margin of6.2% from revenues was below last year’s operating margin of 6.9% primarilyreflecting higher hourly and management wages including effective minimum wage increasesfor tipped employees in several states and higher group health expenses inaddition to higher advertising supplies and maintenance expenses and expenses relatedto the two stores that we closed. Partly offsetting these pressures werelower incentive compensation accruals that resulted in lower G&A expense thanlast year.

Goingdown the P&L gross profit margin was flat with last year, reflecting higherfood costs offset in part by lower retail markdowns. Food cost was higheryear over year with about 4.2% commodity inflation, which was inline with theguidance given in our fiscal year end call back in September. Foodcost inflation was partly offset by higher menu pricing on a margin basis. Theincrease in commodity inflation from a year ago was primarily due to increasesin dairy eggs oil and grain products. at this time we've contracted for over70% of our estimated product needs for the remaining three quarters of fiscal2008 with overall commodity inflation expected to continue between four and fourand a half percent for the remainder of the year. Labor and relatedexpenses as a percentage of revenues were about 80 basis points higher thanlast year reflecting higher hourly and management labor costs as well as highergroup health insurance.

Weexperienced significant wage inflation approximately 4.6% on hourly wage ratesas a number of state mandated minimum wage increases affected the ways that wepay to our tipped employees in those states. And we’re also, seeing prevailing wagerates for non-tipped employees increasing at a higher rate as well. Althoughthese wage rate trends are not surprising they are just a little higher than wehad anticipated. We also have been experiencing highergroup health claim payments than last year for which we’re self-insured. Basedon group health cost trends last year we expect that the degree of year overyear pressure for group health to be reduced over the remaining quarters of thefiscal year relative to our performance in the first quarter. Otherstore operating expenses were unfavorable by about 60 basis points comparedwith last year’s first quarter. Other store operating expenses werepressured by higher advertising expenses of about $1.8 million due to the TVadvertising test including production costs of just over $1 million. Maintenanceand supplies expenses also were higher than a year ago. Supplies were pressuredby large increases in flatware costs reflecting among other things global metaldemand.

Andas indicted earlier we also incurred charges related to the closing of two storesin the quarter where a where which are in a line item on the income statement brokenout separately. And we had lower G&A expenses primarilyas a result of lower incentive compensation accruals. Our first quarterincome tax rate for continuing operations was just under 34%, which was lowerthan last year’s first quarter rate of just under 36%. The company adopted FIN48at the beginning of fiscal 2008 which resulted in a number of balance sheetadjustments that will be discussed in more detail on our first quarter Form10-Q.

Theadoption and implementation of FIN48 in the first quarter did not have amaterial effect on the company’s first quarter tax rate. We’re projecting thatour second quarter tax rate will be similar to the first quarter tax rate and thenthe third and fourth quarters the rates are expected to be lower. Theeffective tax rate for the full fiscal year of 2008 is presently expected to bebetween 31.5% and 32%. Cash flow from operating activities wasa use of approximately $3 million. The net use was more than accountedfor by a greater decrease in accounts payable than last year as a result of thetiming of normal trade payments.

Capitalexpenditures were $24 million only slightly higher than we spent in 2007. Anddividends while being paid at a quarterly per share rate of four cents greater thana year ago we’re slightly lower in aggregate than last year because of theseven 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 atthe end of today’s press release as well as those discussed in our 2007 and Form10-K.

I understand theinherent risks associated with trends targets guidance and estimates in a competitiveindustry such as ours. Based on current trends we presentlyexpect fiscal 2008 total revenue to increase approximately three to 4% over the$2.35 billion of total revenue from continuing operations in fiscal 2007. Fiscal2007 included the effect of a 53rd week, which provided anadditional $46 million in revenue. The projection for fiscal 2008includes the opening of 17 projected new Cracker Barrel units, which is areduction from our initial projected openings. We decided to defer three openings intofiscal ’09 rather than force too many into the fourth quarter where theyprovide little benefit to this year’s operating results.

Ourprojected comparable store sales increase of two to 3% for restaurant sales includesapproximately 3½% of menu pricing. Comparable store retail salesexpectations are being lowered to flat to up 2%. Again given thepressures on the discretionary income of our customers that appears to bereflected in recent trends.

Excludingthe effect of the 53rd week in fiscal 2007, the projected 2008 revenueincrease 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 wellas non-recurrence in 2008 of the 53rd week that benefited fiscal 2007 partly offsetby expected G&A savings we expect operating margins to be down in fiscal 2008.

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

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

Capitalexpenditure plans for fiscal 2008 include the 17 new stores and expenditures ofapproximately $95 million. That $95 million includes spending onplanned fiscal ’09 openings, which are not reflected in the store count ofcourse, as well as various other, in store and corporate office initiatives. Weexpect cash flow from operations to exceed our capital expenditure and dividendpayment outlays once again in fiscal 2008.

Soin summary, we are reporting results that while below our expectations are inan exceptionally difficult consumer and cost environment for our industry. Theseissues are going to be with us for the remainder of this fiscal year and ourteam is focused on overcoming them whenever and wherever possible.

despitethese challenges, I’ll point out that last year’s recapitalization is substantiallybenefiting diluted income per share from continuing operations and we expect tocontinue to have solid cash flow from when the headwinds abate and they willabate we believe we’ll be well positioned to take advantage of an improvedoperating environment and delivering even better results. With that thank youfor your attention, I’m going to turn the call back over to Mike Woodhouse. Mike.

MikeWoodhouse

thanksLarry good morning again everyone it was just reported this week consumer confidenceis at the lowest level since September 2005. And we also know from industry datathat people are eating out less. But although the unemployment rateremains below 5%, a number of factors are weighing heavily on the minds ofconsumers relating to the economy and the discretionary incomes. Thelist includes declining home sales and home values rising energy prices wheregasoline prices are now averaging 85 cents higher than a year ago and the subprime credit crunch. On top of all that, the recent declinesin the stock market only add to the negative wealth effect. Whilewe’re not happy with our in store sales numbers in the first quarter we areahead of industry guess counts as Larry mentioned as reported by NapTrak. Andif we exclude the impact of having shorter and fewer porch sale events, whichhelp us in terms of markdowns and margin our retail same store sales, were flat.

Andas we discussed in the release earlier today November restaurant sales and wehave just three daily days to go in the month our accounting period ends onFriday of this week restaurant sales in November are ahead of October and aheadof Q1 as a whole and our retail sales are slightly ahead of restaurant sales. Howeverif we look back at the first quarter our ability to protect market share and growrevenues didn’t translate into improved bottom line results as we would havewished. Cost pressures resulting from minimum wage increases implementedto into 2007 by a number of states especially those that raised the cash wage fortipped employees higher group health expense and higher commodity costs ingeneral were felt throughout the quarter. We took about a 2% price increase inmid August resulting in an average price increase for the quarter of approximately3½% over last year. The price increase is intended to offsetthe higher food and labor hourly labor costs that we expect in fiscal 2008 as awhole and in fact pricing more than offset those cost increases in dollar termsin the first quarter. We also benefited from improved markdownsin retail so that our gross profit margin in the quarter was flat with lastyear at 69%.

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

Next,I’d like to update you on the status of our strategic initiatives designed toincrease restaurant traffic retail sales and operating margins. Asyou 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 directedat building brand awareness rather than being product driven, we expect trafficto build over time. Results from the first flights havebeen positive but not as strong so, far as we’d hoped. We’ve tweaked thecreative for the second flight to include current seasonal promotional items,which are our roast beef dinner and holiday breakfast sampler.

Let’slook at the restaurant initiatives. In keeping with our theme of simply focusand execute restaurant execution requires improving speed of service while maintaininga quality guest experience. The speed up service the startingpoint was a simplified menu one that was easy to read that would also drive amore profitable mix of orders in the kitchen. Our new Best of the Barrel menu isbeing expanded to a 30-store beta test and we expect to roll it out companywide in April. Our goal for the Best of the Barrelmenu is to improve ticket times and to improve dollar margins for guests by highlightinghigh margin products that are fast out of the kitchen.

Forexample, the menu features a new lunch section with high valued high marginproducts. It also eliminates a number of lowvolume sellers to reduce waste and reduces the number of slow to make items suchas sandwiches. And along with the new menu, wegreatly simplified the point of sales screens to increase the speed and ease oforder entry. In addition, we've trained our serverson how to communicate the changes in our menu positively to our guests and our guestsresponses have been generally positive resulting in higher tips for our servers. Thecomprehensive seat to eat initiative is progressing and includes kitchen processespass through window management labor deployment and front of the house servicemethods.

Inrelated initiatives, we’re taking a fresh look at how we can improve our throughputby simplifying recipe processes and improving labor deployment. We’recurrently testing elements and combinations of all of these initiatives in a numberof stores. We expect to be able to report measurableresults over the next several months. They’re all about measuring results atCracker Barrel. Over the years, we found that onething that has the highest correlation to growing our sales and profitability. Andthat one thing is low employee turnover. Our new Rising Star Program focused onour new hires.

Newhourly hires continues to show marked progress in reducing turnover and reducedturnover leads to improved skill levels and an enhanced guest experience. Turnoverfor 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 ofthe success of this program and our overall focus on the guest experience is ourcontinuing 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. Therewere mixed signals coming into the holiday season with predictions of lower holidaysales for retailers in general. Reports from this past weekend followingand including Black Friday indicated that more people were shopping althoughtheir purchases were smaller. And this hopefully bodes well for astronger holiday season for us. And we did see a strong pickup inretail sales starting on Black Friday.

Aswe look back at the first quarter, warmer fall weather resulted in lower demandfor women’s and children’s outerwear and fall apparel. Our HarvestCollection sold well in the quarter but our seasonal sales were down as wholewere down year over year. Our decision to delay the full set of Christmasproducts and store decoration until October resulted in the decline of about20% in sales of seasonal merchandise season to date. Last year webenefited from a few very popular Christmas products, which sold out in thefirst quarter of fiscal 2007, and those products were not offered for saleagain this year.

Thegood news is that we’ve had some growth areas. Toys including the Perfect Pet Webkinz and games and puzzles continue to sell well. Andgifts for the home and our candle products were also strong sellers. Mediasales were up double digits in the quarter due to the popularity of ourexclusive CD’s by Josh Turner and Merle Haggard as well as 35 new DVD titles. Othermusic initiatives include two more exclusive CD offerings introduced inNovember.Lonestar’s My Christmas Listand a live collection of classic Alabamahits recorded during their American farewell tour.

Foodproducts, largely candy, were up approximately 6% in the quarter. andour updated point of sales system has provided new opportunities for betterpricing and bundling of the products than was available last year for example ourpricing change on thin sticks candy to increase the price from ten cents to 15cents each or offer ten for a dollar increased sales and units almost 40%. andwe’re using the new capabilities to drive volume through BOGO’s ahead of traditionalmarkdowns for example with Christmas ornaments where this year we’re able tooffer buy four get one free. Looking forward we have a number of excitingnew things going on in retail. First, as the Christmas merchandisebegins to settle down in the middle of December we’re bringing in new products inthe garden inspirational and rooster rangers in time for gift giving. Secondin the spring retail, presentations will include more cross-departmental themesto lead customers to explore the store throughout all product presentations. Anexample 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 ValentinesDay and Easter without being specific to either occasion. In line with ourfocus on uniqueness, much of the product for this theme will be designedexclusively for Cracker Barrel.

Thirdwe’re reviewing the fit and cut of our apparel to ensure that we haven't leftthe traditional Cracker Barrel apparel customer behind as we’ve looked to broadenthe appeal. We’re also adjusting the mix of sizeswe’re buying. And we now have for the first time theability to replenish by size. We expect these changes to lead toimproved sales and reduced markdowns in our apparel business. Andthen as we look forward to the spring we’ll have new presentations every month. Andwe have some new product categories. An example of that would be noveltylamps.

Movingnow to our other marketing initiatives we’ve already updated you on our TV testand music programs. We’ve added Kroger Rite Aid and WinnDixie as well as approximately 800 Walmart locations to our third party giftprogram. Compared to last year first quarter gift card sales were up 42%. Andalong with these additional sales, the gift cards give us a way to communicateour brand in many other new locations. We’re also exploring summer trafficdriving promotion ideas with Cracker Barrel’s unique combination of restaurantand retail. And the brand’s powerful associationwith travel we believe there’s an opportunity to design promotions that leveragethese brand strengths and build on the summer travel potentially come fourthquarter.

Lookingat new store openings in fiscal 2007, we had three of interstate stores, whichbroke opening week sales records Huntsville Alabama Sherman Texas and Lubbock Texas. OnNovember the 12th we opened another off interstate store this one inMidland Texasand it set a five-day retail sales record. This performance the Huntsville Shermanand Lubbock stores continue to perform better than projected.

Thisperformance supports our conviction about the strength of the brand and the viabilityof our ongoing development plans but I want to be clear however that we stillneed to work on sustaining the opening sales that we’re achieving. Andachieving profitability faster in our new stores. Let’s look at theupdate to the outlook for fiscal 2008 where we lowered the project in samestore sales based on first quarter results as well as the current uncertaintyin the industry and the overall economy. We would expect sales and operating marginto improve in the second half of the year as we gain some benefits from theinitiatives we’re testing.

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

Andwith that, I’d like to open up thecall for questions.

Question-and-AnswerSession

Operator

(OperatorInstructions) And we’ll go firstto Matt DiFrisco with Thomas Weisel Partners.

MattDiFrisco - Thomas Weisel Partners

Imight have missed this did you guys, mention how much how many shares wererepurchased in the quarter.

LarryWhite

therewere no repurchases in the quarter Matt.

MattDiFrisco - Thomas Weisel Partners

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

LarryWhite

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

MattDiFrisco - Thomas Weisel Partners

okayand then G&A as far as being down it looks like on absolute terms what’sthe outlook given your outlook for accruals on a year over year basis for the remainderof the year.

LarryWhite

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

MattDiFrisco - Thomas Weisel Partners

sofavorable meaning relative G&A leverage.

LarryWhite

yes.

MattDiFrisco - Thomas Weisel Partners

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

LarryWhite

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

MattDiFrisco - Thomas Weisel Partners

oranything any concerns going on with shipping costs or fuel costs in gettingthings to you during the Christmas time.

LarryWhite

wellour Christmas product is all delivered at this point so that’s really not anissue.

MattDiFrisco - Thomas Weisel Partners

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

MikeWoodhouse

wellwe we’ve done that in the test menu with the lunch items so we’re trying tofocus people on value items that also benefit the value in and of itself a lowprice. I guess in and of itself is not something that we want to focuson because our challenge is how do we, [inaudible] through at busy times we’realways on a wait. so we don’t want to give up margin beit just to have a lower price point we think our menu is a pretty good value comparedwith most others that we compete with and compete with in the customer’s mindso. I don't think we want to go chasing that we do want to do thingsfrom a promotional point of view that reinforce the fact that we overallrepresent very good value if you take into account the food and the experience andeverything else.

MattDiFrisco - Thomas Weisel Partners

okayand then I guess is there one linchpin that you can point to that you think wouldbe something over the next 12 months that could accelerate the table turn orthe line flow or increase capacity of sales capacity during those high peaktimes that we should look for.

MikeWoodhouse

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

MattDiFrisco - Thomas Weisel Partners

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

MikeWoodhouse

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

MattDiFrisco - Thomas Weisel Partners

okaythank you.

MikeWoodhouse

thankyou.

Operator

andwe’ll go next to JoeBuckley with Bear Stearns.

JoeBuckley - Bear Stearns

thankyou a couple of questions on the cost side you gave us the hourly wage rate inflationdoes that diminish as you lap election day or diminish as you lap maybe Januaryfirst because of some of the state initiatives from a year ago.

LarryWhite

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

JoeBuckley - Bear Stearns

okayas high as the first quarter Larry you think.

LarryWhite

Imean we’re hoping that it’s going to be a little bit less than that Joe butit’s but we’re trying to manage it as well but I think that the exposure isstill there and that’s going to reflect in our risks and opportunities on thisprojection.

JoeBuckley - Bear Stearns

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

LarryWhite

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

JoeBuckley - Bear Stearns

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

MikeWoodhouse

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

JoeBuckley - Bear Stearns

okayhas the expanded test been in place for any length of time or is that just startingnow.

MikeWoodhouse

itstarted at the beginning of the month beginning of November.

JoeBuckley - Bear Stearns

okaybut if all goes as planned you would think you'll, roll this out in April didyou say.

MikeWoodhouse

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

JoeBuckley - Bear Stearns

allright, that sounds good thank you.

MikeWoodhouse

thanksJoe.

Operator

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

StevenRees - JP Morgan

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

LarryWhite

wellretail is markedly better beginning with Black Friday as Mike indicated andthere’s a lot of noise throughout the month other than that.

StevenRees - JP Morgan

okayand then just on the retail margin you had talked for several quarters aboutimproving margins of retail are they still up year over year and what furtheropportunities do you see to improve the margins there from less markdowns.

MikeWoodhouse

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

forexample, we’re up and out where if you buy one you get a 40% you buy two youget 50% you buy three pieces you get 60%, which is better than obviouslyputting everything out there at 75% and that escalating percentage is a realsales driver. So we’re doing a lot of, things tomanage 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 tokeep the porch sales to a minimum going forward.

LarryWhite

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

StevenRees - JP Morgan

okaythanks and then just quickly on the table optimization program perhaps you can talkabout an update there how many stores have tables for two whether or not you’veseen expected traffic improvement there.

MikeWoodhouse

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

StevenRees - JP Morgan

okaygreat thank you very much.

MikeWoodhouse

thankyou.

Operator

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

ChrisO’Cull – SunTrust Bank

goodmorning.

MikeWoodhouse

goodmorning.

ChrisO’Cull – SunTrust Bank

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

MikeWoodhouse

no.

ChrisO’Cull – SunTrust Bank

okaygreat.

MikeWoodhouse

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

LarryWhite

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

ChrisO’Cull – SunTrust Bank

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

MikeWoodhouse

no.

ChrisO’Cull – SunTrust Bank

okay.

MikeWoodhouse

Ithink that the intent the presentation and the results are that the variety wesee no reduction in the perceived variety. Expect for those small number ofindividuals whose favorite product disappeared we certainly hear from them.

ChrisO’Cull – SunTrust Bank

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

MikeWoodhouse

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

ChrisO’Cull – SunTrust Bank

okaygreat.

MikeWoodhouse

Andso there’s a, refilling the queue. And that’s one of the ways that thetable optimization plays into this, because at the beginning of the rush at anypoint 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 thosepeople who’ve already seated so it’s kind of a whole bunch of things have tohappen at the same time here.

ChrisO’Cull – SunTrust Bank

soyou won't have as many turnaways people leaving.

MikeWoodhouse

you'recorrect.

ChrisO’Cull – SunTrust Bank

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

MikeWoodhouse

correct.

ChrisO’Cull – SunTrust Bank

okayand then Larry I believe last year in the second quarter retail sales benefitedfrom the pre Christmas markdowns which negatively impacted the cost of salescan you give us some year over year modeling advice in the second quarter basedon this year’s [inaudible]

LarryWhite

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

ChrisO’Cull – SunTrust Bank

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

LarryWhite

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

ChrisO’Cull – SunTrust Bank

greatand my last question is the stock compensation expense during the quarter canyou tell us how much was in G&A.

LarryWhite

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

ChrisO’Cull – SunTrust Bank

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

LarryWhite

yeahthere’s stock expense and stock option expense I think year over year we hadabout a $5 million and also bonus expense we had about a $5 million benefit inG&A.

ChrisO’Cull – SunTrust Bank

greatthanks.

LarryWhite

thankyou.

Operator

andwe’ll go next to Robert Derrington with Morgan Keegan.

RobertDerrington - Morgan Keegan

yeahthank you. mike could you give us a little bit ofcolor on the TV advertising for a minute what did you learn as you tested haveyou found that consumers found the shots or the production interesting but themessage didn’t necessarily drive traffic and so now you're moving to food isit, based on…

MikeWoodhouse

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

RobertDerrington - Morgan Keegan

howshould we think about the impact on the operating expense line as you goforward with the your advertising spend through the balance of this year.

MikeWoodhouse

wellit’s built into our guidance first of all.

RobertDerrington - Morgan Keegan

okay.

MikeWoodhouse

soI think that’s the best way to think about it.

RobertDerrington - Morgan Keegan

okayall right.

LarryWhite

theunusual 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 ofadvertising in the future so [inaudible] a little lighter than the initial flightbut we’ll have it throughout more of the quarter.

RobertDerrington - Morgan Keegan

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

MikeWoodhouse

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

RobertDerrington - Morgan Keegan

okayvery good thank you.

MikeWoodhouse

thankyou.

Operator

andwe’ll go next to Bryan Elliot with Raymond James.

BryanElliot - Raymond James

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

LarryWhite

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

BryanElliot - Raymond James

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

LarryWhite

yearon year, year on year.

BryanElliot - Raymond James

Okayso in other words the slight increase here in Q1 based on what you know today. Andthese countervailing trends you’ve talked about that’s a reasonably should bereasonably consistent through the year as you see it right now is that what youmean.

LarryWhite

I'mnot exactly sure what you're saying Bryanbut let me take a crack at it here.

BryanElliot - Raymond James

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

LarryWhite

forour menu-pricing yes.

BryanElliot - Raymond James

givenmenu pricing retail etcetera.

LarryWhite

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

BryanElliot - Raymond James

allright thank you.

LarryWhite

thankyou.

Operator

andwe’ll go next to Conrad Lyon with FTN Midwest.

ConradLyon - FTN Midwest

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

MikeWoodhouse

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

ConradLyon - FTN Midwest

okayand in terms of when you may go into new markets when might that be again or expandyour advertising.

MikeWoodhouse

thatwill be next fiscal year.

ConradLyon - FTN Midwest

okay. Soeven if you see say some better than expected results you wouldn’t grow yourexposure this year.

LarryWhite

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

ConradLyon - FTN Midwest

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

MikeWoodhouse

truckersas in 18-wheelers.

ConradLyon - FTN Midwest

yeah.

MikeWoodhouse

theycertainly don’t show up with their 18-wheelers.

ConradLyon - FTN Midwest

okayfair enough that’s all thanks.

MikeWoodhouse

thanks.

Operator

andwe’ll go next to Mike Smith with Oppenheimer.

MikeSmith - Oppenheimer

goodmorning.

MikeWoodhouse

goodmorning.

MikeSmith - Oppenheimer

acouple 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 comein considerably lower than in the second half of the year why would that be.

LarryWhite

underFIN48 as you have discreet events happening you, record the effect of thosediscreet events on your tax rate under prior accounting for income taxes youalways used your expected full year tax rate now you look at the changes incircumstances related to discreet events and we expect to see some pickup laterin the year.

MikeSmith - Oppenheimer

whatare those discreet events?

LarryWhite

theyrelate to some of the assumptions that we have about uncertainty and becomingmore certain as the year proceeds.

MikeSmith - Oppenheimer

okayin the advertising, you spent 1.8 million in the first quarter of which amillion was production.

LarryWhite

alittle over a million.

MikeSmith - Oppenheimer

andwould you anticipate that your ad spending going forward then would be about amillion dollars quarterly.

LarryWhite

that’sI think getting a little finer than we than we really want to get in ourguidance. But as we said, we will have continuedmedia relative to what we had last year.

Operator

thankyou with no further questions in the queue I’d like to turn the conference backover to Mr. Woodhouse for any additionalor closing remarks.

MikeWoodhouse

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

LarryWhite

thankseveryone.

Operator

thankyou, we appreciate your participation that does conclude today’s conferencecall you may disconnect at this time.

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