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CBRL Group, Inc. (NASDAQ:CBRL)

F3Q08 Earnings Call

May 28, 2008 11:00 am ET

Executives

Diana S. Wynne – Senior Vice President, Corporate Affairs

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

P. Doug Couvillion – Senior Vice President, Finance

Analysts

Sean Dodge - Suntrust Robinson Humphrey

Steven Rees – JP Morgan

Robert Derrington - Morgan Keegan & Company, Inc.

Lawrence Miller – RBC Capital Markets

Bryan Elliott – Raymond James

Brad Lindstrom - Citibank

Amy Greene – Avondale Partners LLC

Jack Heidelmeyer - Ramsey Asset Management

Chris Blackman - Imperial Capital

Operator

Good day everyone and welcome to the CBRL Group’s Third Quarter Conference Call. Today’s call is being recorded and will be available for replay today from 2:00 pm ET through June 11, 2008, at 11:59 pm ET, by dialing (719) 457-0820 and entering passcode 8422317.

At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Diana Wynne, Senior Vice President of Corporate Affairs.

Diana S. Wynne

Welcome to our third quarter 2008 conference call and webcast this morning. Our press release announcing our fiscal 2008 third quarter results and updating our outlook for fiscal 2008 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. 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 will be made only by broad dissemination, such as press releases or in our filings with the SEC.

On the call this morning with me are CBRL’s Chairman, President, and CEO, Mike Woodhouse, and Cracker Barrel’s Senior Vice President of Finance, Doug Couvillion.

Mike will begin with a review of the business, Doug will review the financials, and then Mike will return to discuss the outlook. With that I will turn the call over to Mike Woodhouse.

Michael A. Woodhouse

Thank you, Diana. Good morning everyone. Thanks for joining us this morning.

As I talk to you today about the progress we’re making, as well as the challenges we face, there are a few key things I would like you to remember. First, we expect to see a lot of people on the road this summer. Second, we’ve just begun our first national promotion geared to capture a greater share of those summer travelers. Third, Cracker Barrel remains a top-rated brand and a great dining value. And fourth, we’re getting better at restaurant operations but we still have more work to do to build traffic.

With that, let me begin by acknowledging that we’re in a very challenging consumer environment. We are often asked how higher gas prices will affect summer travel. First, about 60% of our customers are local and our focus is to drive traffic from the local market as well as the traveler. But to answer the question directly, the AAA study, released a couple of weeks ago, said that 1% fewer people were expected to travel by car over the holiday weekend. Our studies show that 70% of Cracker Barrel guests are planning to travel as much or more than usual.

Our Greatest Family Roadtrip game, which rolled out on Memorial Day, rewards the frequent local guest as well as the traveler. We believe that our Strong Value Propositions continue to generate the best [inaudible] traffic which has outperformed the casual dining industry for eight straight quarters.

We want to make it clear that we are not reducing portion sizes and we’re not altering the quality of our ingredients. With an average check of $8.70 we continue to offer a great value in an environment that caters to the entire family.

Our cost management and steps to control labor and operating expenses are showing positive results and helping to mitigate higher costs of food and prices on retail gross margins. Specifically, food waste, hourly labor, supplies, and maintenance expense, all areas of concentration, are each down as a percent of sales for a total of 40 basis points in the quarter.

G&A expenses were also lower because of lower incentive compensation accruals. We are confident that we’re on the right track and Doug Couvillion will be providing you with more detail on the numbers in a few minutes.

As always, I am proud to speak about the strength of the Cracker Barrel brand. Since the last earnings call we have once again been voted as the Most RV-Friendly Sit-Down Restaurant in America by the Good Sam Club. This was the seventh year in a row. The Good Sam Club is the world’s largest membership organization of RV owners.

We were also ranked as the top-rated full-service restaurant in Fortune’s Most Admired Companies listing of food service companies. Overall, we were behind only three very large companies, Star Bucks, McDonald’s, and Yum Brands, none of which is full service. We were especially pleased that the quality of our products and services were ranked second overall, behind only Star Bucks, as they were last year.

Another way to measure the strength of the Cracker Barrel brand is through the guest experience. We look at our guest satisfaction scores at every store every month. And our overall satisfaction score has improved in eight of the past ten months and in the other two it was maintained. Speed of service, as reported by our guests, has improved in five of the six past months and in the one month that it didn’t improve, it was maintained at the same level.

It all goes back directly to our mission of pleasing people. Our number one focus is on employees trained to deliver a pleasing experience to our guests each and every time. Turnover of our new hires, our rising stars, is almost one-third lower than in the middle of last year before we started the initiative, which means that we are recruiting and training 16,000 fewer new employees annually. Our overall hourly turnover is at 95% year-to-date, down from 113% at the same time last year, which is outstanding for the restaurant industry.

We know that as you improve the retention of your people their ability to provide a better guest experience also improves. And this in turn will lead to higher sales and should go on to lead to higher profit margins.

Now let me update you on two of our initiatives, The Best of The Barrel Menu and The Seat To Eat Project. As you know, The Best of The Barrel Menu is in a 30-store beta test. This menu is designed to improve speed of service, and therefore traffic, and improved margins per guests by highlighting high margin products on the menu and by eliminating certain low-volume products to reduce waste and simplify operations. The menu has been an operational success and we have achieved some improvement of margins. However, we’re still short of our goals for generating growth and traffic and we know that we can do better with this menu.

For example, The Best of The Barrel is a pared down menu, meaning that certain items are no longer available. Even though it might be only a very small percentage of customers who were disappointed to see their favorite product disappear, we need to be able to bring a greater focus to what’s new on the menu. That’s why we’re accelerating the development of some exciting new offerings, including a new breakfast category, some additional seafood items, and some interesting new side dishes.

While the execution focus is to simplify operations and improve speed of service, we cannot let up in our efforts to attract new people to Crack Barrel and to encourage them to come back again and again.

The Seat To Eat Project also continues to move forward. Our project team is focused on expedited cook-and-hold platforms and window management solutions. Increased food cooked capacity during peak periods, as well as sales increases during the week day lunch in order to meet guest lunch hour time constraints, are key outcomes for the Seat To Eat initiative.

The results of the cook-and-hold platforms and the window management improvements have shortened the time from sitting down to the table to receiving food at the appropriate temperature. New hothold units, bread cabinets, personal window management applications and food line set up will be rolled out across two districts by the end of this fiscal year. During the first quarter of fiscal 2009 we will monitor traffic and speed of service improvements to determine the success of our tests.

Now let’s look at the retail business. Our comp store retail sales were down 2.1% in the quarter. And early Easter and fewer people coming in to eat hurt our sales. However, we planned for lower sales due to the timing of Easter and although sales of Easter items were down 32% from last year, we ended the quarter with lower Easter inventory than we did last year.

Certain items did sell well in the quarter, including toys, especially the Webkins, and décor items for the home, such as quilts and lighting also sold well in the quarter. We are also benefiting from offering a broader spring collegiate product line that includes women’s and children apparel and accessories. And we continue to be encouraged to see increases in the average selling price and the dollar spend per check in our retail business.

Our retail strategy includes cross-departmental themes to encourage customers to explore all product presentations throughout the retail store and tie in with the restaurant promotion. The chocolate theme that ran during the quarter was very successful, nearly doubling the sales of the same footprint last year. The theme included not only candy and sweets, but also novelty serve ware and products designed exclusively for Cracker Barrel, such as apparel and ceramic ware.

This quarter we are offering an Americana theme, which features our new packaging designed exclusively for Cracker Barrel as well as items for The Greatest Family Road Trip. Travelers will discover just what they need for trip with snack favorites, guide books, car accessories and travel-themed apparel.

Spending time traveling in the car can be fun with more new toys, games, activities, books, and art supplies for the kids. Outdoor picnics, lawn games, reminiscing about favorite family memories are reflected in our ceramics, our photo keepsakes, and picnic accessories.

As I mentioned earlier, we recently kicked off our first ever national summer travel promotion to drive traffic to our locations. During The Greatest Family Road Trip promotion guests receive a game card when they visit our stores. Each guest will also receive a game piece bearing a word or phrase associated with summer travel or Cracker Barrel on every visit. The object is to collect the winning game piece or collection of game pieces.

We are giving away over 90,000 instant winner gift cards worth $7.50 each. 400 guests who collect both “Next” and “Exit” stickers will win a Tom-Tom navigation system, and the guest who collects the “Good Country Cooking” stickers will win the $250,000 grand prize, which is either a Marco RV and spending money for a four-week road trip or $250,000 in cash.

We will also continue the television appetizing test in the three markets during the fourth quarter. Since the last update we have continued to see positive trends in the test markets relative to the control group and we are in the process of reviewing the test results of this product developing the marketing plan for fiscal 2009.

We are on track to open 17 new locations in fiscal 2008. So far in the year we’ve opened 16 stores. We have two more to open in the fourth quarter, one of which is a replacement of a store closed in Georgia earlier this year. While we have not slowed down new store locations, our goal is to sustain the opening sales that we achieve in many of these new locations and a [inaudible] of profitability in a shorter period of time. And we are making progress in that area.

We recently announced the promotion of Doug Barber to Chief Operating Officer. Doug brings strong leadership skills and high standards of execution to this expanded role and we are looking forward to making continued progress on both the day-to-day operations of the business and the operation of excellence that will take Cracker Barrel to the next level.

I am pleased to announce that Nick Flannigan, one of our regional restaurant vice presidents, has been promoted to Vice President of Restaurant Operations and will continue Doug’s high-energy leadership of the restaurant side of the business.

And with that I will turn the call over to Doug Couvillion for his detailed financial review of the quarter.

P. Doug Couvillion

Thank you, Mike. Now let’s review in more detail the third quarter of fiscal 2008.

We reported diluted income per share from continuing operations of $0.46 versus $0.44 a year ago, an increase of 4.5%. Income per diluted share benefited from a 24% reduction in diluted share count resulting from the strategic initiatives that we completed in fiscal 2007 and the additional share purchases earlier this fiscal year.

Third quarter fiscal 2008 after tax income from operations of $10.5 million, compared to $12.1 million in the third quarter of last year, reflected lower operating income and lower interest income. Interest income in the prior year was generated from the short-term investment of the proceeds of the sale of Logan’s Roadhouse. On a recurring basis our interest income is generally not significant.

Revenue from continuing operations in our fiscal third quarter increased $567 million, up 3.3% from last year’s third quarter. Contributing to this increase was the opening of six new Cracker Barrel units and positive comp store restaurant sales. Year to date we have opened 16 locations and our 17th and final unit scheduled for the fiscal year will open in June. Development for fiscal 2009 is underway and our first six units for fiscal 2009 are under construction.

Cracker Barrel comparable store restaurant sales for the third quarter were up 0.2% from a year ago, our fourth consecutive quarter of positive comparable store restaurant sales increases.

Our average check was 3.5% higher, reflecting menu price increases of approximately 3.7%. We took a modest price increase this year at the beginning of April and like the similar prior-year increase at the end of the quarter. For the third quarter our menu price increase in dollar terms more than offset the impact of food and labor inflation. Our thinking on pricing continues to be geared toward providing a great value to our guests while covering the dollar cost of inflation pressures. We believe this strategy is working for us and although guest traffic declined 3.3% in the quarter, our traffic continues to run ahead of the industry as measured by the Knapp-Track index.

Cracker Barrel comparable store retail sales were down 2.1% in the third quarter of fiscal 2008. Easter sales were approximately 1/3 lower than last year, primarily because of an early Easter. Our retail theme planned accordingly and Easter product inventory ended below 2007 levels. Our toy category continues to be a strong performer, primarily because of the popular Webkins plush animals. Some products that also performed well was a broad offering of quilts, lighting, and gift items. We offered a wider spring collegiate collection this year, including women and children’s collegiate apparel and accessories. Our general apparel continues to be weak and is consistent with the soft apparel trends noted by other retailers. We are encouraged by May month-to-date comparable store retail sales and expect to finish the month up 2%-3%. We will report the full month sales next Tuesday, June 3, 2008.

Operating income from continuing operations of $27.7 million for the third quarter of fiscal 2008 as a percentage of revenues was down 60 basis points to 4.9% of revenues. This compares to $30.1 million and 5.5% of revenues in the third quarter of fiscal 2007. Operating income margin was favorably affected by higher sales and lower general and administrative costs, but were offset by higher retail product costs and food costs.

Cost of goods sold was higher than last year’s third quarter by 120 basis points and reduced our gross profits accordingly. About half of the 120 basis point increase can be attributed to retail cost of goods sold, another 40% relates to food costs, commodity inflation net of any pricing. The balance is due to increases in fuel and freight costs in both restaurant and retail.

Retail cost of goods was higher this quarter due to increase of apparel and port sales mark downs and lower initial margins, and to a lesser degree increases in retail shrinkage and other inventory reserves. Lower initial margins are due to a higher mix of domestically-sourced products, which have lower margins that most imported products and the loss of higher-margin Easter sales due to the shortened selling season.

Food related commodity inflation was about 5.8% in the third quarter, which was slightly higher than our expectations. Eggs, oils, dairy, and grain-based products all posted double-digit inflation in the quarter compared to last year. Combined, these categories made up about 25% of our purchases for the quarter.

On a positive note, the beef and pork prices were down compared to the third quarter of last year and our operators have made improvements in controlling food waste. Improvements in controlling food waste through the upcoming high-volume months is important to maintaining or improving our operating margins.

We expect fourth quarter commodity inflation to be in line with our full year expectations, which we have increased 50 basis points to 5.5%-6% for fiscal 2008. We have contracted about 80% of our estimated needs for the fourth quarter. We will provide you our outlook for fiscal 2009 commodity inflation when we release fourth quarter earnings on September 16.

Labor and related expenses were approximately 10 basis points higher than the third quarter of last year. As a percentage of sales favorable restaurant and retail hourly labor costs, including 2.4% wage inflation, were more than offset by higher management and group health insurance costs. We believe the benefits of lower hourly turnover, which is down 15% from last year, is increasing our ability to deliver our guests the best experience possible and is contributing to improve productivity.

Other store operating expenses improved 10 basis points to 18.2% of sales. General insurance and advertising expenses were lower in the quarter, offset by higher utilities. Although we continued to run TV advertising on a test basis in the third quarter of fiscal 2008, advertising was higher in the third quarter of fiscal 2007 because of a broad use of radio and completing the roll out of the new billboards last year.

Our focus on controlling expenses have gained momentum, resulting in holding maintenance expense for the quarter of flattened dollars and lower as a percentage of sales.

General and administrative expense was 60 basis points lower than the third quarter of last year due to lower incentive compensation accruals, which are based on year-to-date performance.

Our third quarter income tax rate for continuing operations was 22.5% compared to 34.4% in the third quarter of fiscal 2008 [sic]. The lower tax rate was due to a higher level of non-deductible items in fiscal 2007, the rolling off of thin 48 reserves related to expiring statutes of limitations, and lower effective state tax rates. We are projecting that our fourth quarter rate should be lower than the nine-month rate for the year and our effective tax rate for the full year of fiscal 2008 is expected to be between 30%-30.5%.

Year-to-date cash flow from operating activities was $84 million compared to $100 million in fiscal 2007. The decrease reflects the tie-in of accounts payable payments at quarter end.

Capital expenditures were $61 million year to date compared to $67 million in the same period last year. We have lowered our capital expenditure guidance $5 million for the year, to $85 million, reflecting lower maintenance CapEx run rates and the timing of capital spending into fiscal 2009.

While quarterly dividends of $0.18 are $0.04 more per share, total cash dividends paid were slightly lower compared to last year because of the lower share count.

In summary, we reported growth in top line revenues and earnings per share and because of the focus that puts on our operations teams and home office teams, we are seeing positive results in many areas of our business. Positive comparable store restaurant sales, improving comparable store retail sales, lower food waste, effective labor management, and consistent improvements in other controllable expenses, have served to offset the external pressures on margins.

Although we do not expect relief from the external cost pressures in the fourth quarter, we believe the positive indications I just mentioned and the Greatest Family Road Trip promotion will help us to drive traffic and retail sales in the fourth quarter and offset some of the margin pressures we are experiencing.

That completes my financial review so I will turn the call back over to Mike for a review of our fiscal 2008 outlook.

Michael A. Woodhouse

Thanks, Doug. Let’s look now at the update to the outlook for fiscal 2008. In light of continued industry trends and our year-to-date results, we have updated our projections for same store sales and overall revenue growth. And with the benefit from our cost control initatives we have narrowed our EPS guidance for the year to a range of $3.02-$3.12. As you remember, earnings per share in fiscal 2007 were $2.52, which includes $0.14 per share from the 53rd week in the year.

We are now projecting approximately 2% revenue growth over the $2.35 billion of total revenue from continuing operations in fiscal 2007. The additional week last year added $46 million of revenue, so on a 52-week basis we are projecting revenue to grow approximately 4%.

We are projecting full year comparable store restaurant sales up 1%-1.5%, which includes about 3.6% of menu pricing and is consistent with what we’ve seen in the first nine months of fiscal 2008.

Based on the results here today from fiscal 2008, we have further narrowed the range on full year comparable store retail sales to 0.0%-0.5%. With the May month-to-date results and the summer travel promotion for June and July, we believe that we can bring comparable store retail sales back to positive territory.

As I mentioned, we’re maintaining our plans to open 17 new Cracker Barrel, of which 16 are open. As Doug mentioned, we’ve lowered our CapEx guidance by $5 million, reflecting lower maintenance CapEx and the shift of the timing of spending into fiscal 2009.

We expect cash flow from Cracker Barrel to remain strong and more than sufficient to service our debt and to finance our restaurant/retail initiatives, as well as our growth and to fund our dividend payouts.

We will not be making any additional share repurchases this fiscal year because we’ve already purchased the maximum allowed under our credit agreements.

In the press release this morning we announced that beginning in fiscal 2009 we will not be issuing monthly sales releases. Most of the casual and family dining industry has moved to reporting quarterly sales results when they release their quarterly earnings and we’re going to follow that trend. We will, however, provide monthly sales details with the quarterly releases.

While our restaurant traffic and retail sales were not as strong as we expected in the quarter, we are pleased with the way the fourth quarter has started. We believe that our first ever national promotion, The Greatest Family Road Trip Game, will generate new excitement for Cracker Barrel during the summer travel season. We continue to represent a great dining value and now we’re providing more reasons to stop and see what’s new.

We continue to expect earnings per share to be substantially better than fiscal 2007, which included the 53rd week, as a result of both our strong operating focus this year and the benefit of the re-capitalization that began back in fiscal 2006.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sean Dodge with Suntrust Robinson Humphrey.

Sean Dodge - Suntrust Robinson Humphrey

I just wanted to know, given what you know now on the advertising test results, do you still anticipate rolling out to a larger store base in fiscal 2009?

Michael A. Woodhouse

Well, as I said in my remarks, we are planning our advertising our advertising for next year. We don’t see a measurable traffic lift when we run this advertising so it becomes a question of which markets can we do that from a cost-effectiveness point of view. And we haven’t laid that whole map out yet but we will be doing that over the next month or so.

Sean Dodge - Suntrust Robinson Humphrey

Okay. Could you just give us some type of indication of what your Memorial Day sales, or what Memorial Day looked like this year relative to the last?

Michael A. Woodhouse

Well, we don’t want to get down to a day-by-day sales disclosure here. We did talk about what we expect the month to be. We would always like sales to be higher. The travel season is just beginning and there was a lot of these, you probably saw a lot of media publicity around good reasons to stay home this past Memorial Day. So, as I said, I don’t want to give individual daily updates. We are confident and comfortable with the outlook for the month and we are confident and comfortable with our guidance for the fourth quarter.

Operator

Your next question comes from Steven Rees with JP Morgan.

Steven Rees – JP Morgan

Mike, controlling expenses, particularly on the labor and operating lines this year, and as it allows you to meet your earnings targets despite a slowing revenue environment, I guess as you look out in the next year or two, I mean, how much more do you see in the way of expense control in what could be a softer . . .?

Michael A. Woodhouse

First of all, let me make it clear. When we talk about controlling expenses, we’re not talking about cutting costs below the levels they need to be at. We’re talking about running this business at its standards and the areas we’ve been focusing on, food waste and labor are areas that we know how to do, we haven’t necessarily been as focused in the past as we could have been.

The future is all about how we transition with some of these initiatives to get better at the cost control side, as well as building traffic. For instance, on the labor front, we have a new labor deployment system that’s test which will allow us to schedule labor more accurately against sales on an hour-by-hour, shift-by-shift basis, which should help us to continue to improve our labor management. And on the food cost side, we will continue with the, when we successfully test the Best of The Barrel Menu and roll it out, we expect to be some benefits on the food cost side.

So this is not a one-time shot and really what I want to emphasize, it’s not a cutting back wherever we can just to survive a difficult period. We really, really are focused on the need to deliver the quality and the portions. You know, we hear about portion cutting going on as well as price increasing in the industry. We’re not going to do that. Because we think there’s a strong trust relationship with our guests, it’s all about delivering what they expect.

Steven Rees – JP Morgan

And the labor management tool you mentioned that’s in testing. Could that be a 2009 initiative or do you think more testing is required?

Michael A. Woodhouse

I can see up beginning to roll it out in 2009.

Steven Rees – JP Morgan

And my other question was on commodities. I know you’re pretty much locked in, I think 80% for this fiscal year, but am I safe to assume that a lot of your commodities are locked in on a calendar year and what sort of visibility do you have as you roll into the second half of this calendar year and are you comfortable with the pricing you just took to offset that going forward?

Michael A. Woodhouse

Lots of questions there. We don’t lock in on a calendar-year basis automatically, or a fiscal-year basis automatically. We used to do some of that because it made planning a budget easier when you knew what the costs were. Our focus now is to evaluate each of our major commodities on it’s own basis. What is that commodity doing? What are the entrance and what is the outlook and take either a long or short position on the commodity based on that evaluation.

We’ve seen commodities, as I’m sure you’ve seen, ease a little bit. But ease doesn’t mean they’re going down in most cases, it means they’re coming off some very strong highs. So we have some partial locked in for the first half, well, going out beyond the first half of next year, and we’re staying deliberately open on some other areas where we expect to see some easing in costs.

Overall, we expect commodity inflation, as a percent, to be lower in the second half of the calendar year.

Operator

Your next question comes from Robert Derrington with Morgan Keegan.

Robert Derrington - Morgan Keegan & Company, Inc.

Mike, could you give us some guidance on how to consider the cost associated with this fourth quarter promotion? How will that flow through the P&L?

Michael A. Woodhouse

The cost of the promotion is a straight charge to the marketing line. Store operating expenses.

Robert Derrington - Morgan Keegan & Company, Inc.

And then you mentioned you continue to test a number of items that can be rolled into the restaurants, side dishes, entrees and things. We’ve seen a lot of restaurant chains use kind of a bar-bell menu strategy, a number of items priced higher, a number of items priced lower. Do you have any kind of thought on how new items will be added to the menu or as a featured promotional item? Higher price, lower price? Any kind of color there?

Michael A. Woodhouse

Well, first of all, as we talked about before, one of the reasons we haven’t had as much new product activity over the last 18 months as we expect to see in the future is we’ve been focused on transition of trans fats and also we’ve been working very hard on the process improvements which are going to help us in the kitchens in terms of speed going forward.

We’ve turned our focus very much on the new product development and we have a number of ideas, which are more than ideas, which we’re accelerating to get into the Best of The Barrell test. We expect to be rolling that out at the end of July, or thereabouts.

In terms of pricing, I personally believe that there’s a risk in going to the higher price, that you get a halo effect over the whole menu that is a negative, especially in a value proposition like ours. I really want to be hitting the sweet spot, which is very appealing probably at or a little below our check average. But with a really good margin.

Robert Derrington - Morgan Keegan & Company, Inc.

In times past you’ve had seasonal menu promotions or seasonal offerings and you’ve tested a number of things over time. One of the inserts typically would have two or three or maybe four items on it, and I think that was more cumbersome inside the restaurant. And then in more recent times you’ve had some that have only featured one item.

Michael A. Woodhouse

Right. And traditionally, as you will recall, we used to feature just one item or maybe one item plus a salad and then two or three years ago we got into these multiple products and what we found was that the product mix effect was the same whether we had one or four products. And by putting four products on we just got ourselves into very inefficient food costs and labor costs in the kitchen.

But I do think as we look at these new items going forward, one of things we’re looking at is to have a new category or two, rather than a single product, which we think will bring some big excitement to our menu.

Robert Derrington - Morgan Keegan & Company, Inc.

And then a couple of guidance points. Within the release there are a couple of items that were tightened up. I think depreciation was tightened up last quarter, the guidance was $60 million, now it’s $57 million-$58 million. And also I think interest expense was tightened from $60 million to a similar number, $57 million-$58 million. Any kind of color there you can share?

Michael A. Woodhouse

I think that’s just as you go through the year you know more. I mean, interest expense is obviously a function of how much you are borrowing, what your cash position is, and the rate of which we do cash, as well as our operating cash flow, the rate of which we do share repurchases has some bearing on that. So we’re just further into the year and have just a tighter handle on that.

Same with depreciation. We start the year with planned capital spending, it doesn’t always go at the rate we want it to. In this case it went up, we’re going to end up the year spending at our planned level and therefore we’re coming in with lower depreciation. There were no major business issues going on there.

Robert Derrington - Morgan Keegan & Company, Inc.

Is it reasonable to expect the development likely won’t change from what the trend is then? On an annual basis, going forward. Fiscal 2009.

Michael A. Woodhouse

I think we’re going to have to wait until September for that, Bob, because the initiatives we’ve been talking about, some of them have some capital spending associated with them that we haven’t got final timing plans around so by September we’ll be ready to talk about that, which will give a better handle on cash flow and on depreciation for 2009 and subsequent years.

Operator

Your next question comes from Larry Miler with RBC Capital Markets.

Lawrence Miller – RBC Capital Markets

One of the things I’m struggling with here is your guidance on improvement in same store sales run rates for the rest of the quarter. It sounds like you’re basing it on the Road Trip promotion, is that right?

Michael A. Woodhouse

Well, the way we develop our projections, we look at a base projection and then we look at what we think we might get from the Road Trip. That’s right, but we’re not talking huge numbers in terms of the same store sales we’re expecting from the Road Trip. But we’re pretty comfortable that we can get the kind of lift that we have built into the numbers.

Lawrence Miller – RBC Capital Markets

I guess I’m just thinking about the delta, you know, from the current trend. Can you help me understand how you think about that? Is it the Road Trip? It sounds like it might not be?

Michael A. Woodhouse

Well, it’s partially the Road Trip and it’s partially looking at a stabilized projection. We’re not expecting to see continued, you know, April was a softer month for us, we’re not expecting to see that continue. You’ve seen our May projection numbers.

Lawrence Miller – RBC Capital Markets

The covenant that prevents you from buying back stock. How will that affect 2009? Will that basically continue based on the levels of outstanding debt and so forth, whether you will be prevented from buying back stock or not?

Michael A. Woodhouse

We won’t be prevented, we’ll be permitted to buy stock. The allowance goes up each year and added to the fixed allowance, or the door in the credit agreement, we can also spend whatever we receive in terms of proceeds from auction exercises.

Lawrence Miller – RBC Capital Markets

And then what’s the authorization that you currently have out right now?

Michael A. Woodhouse

We have completed the authorization. But that’s a simple matter of taking it to the Board.

Lawrence Miller – RBC Capital Markets

You mentioned that you had some contracts into the second half of 2008, some commodities. Can you tell us what percent you might be contracted on for the balance of the year?

Michael A. Woodhouse

We’re in the 40%-50% range for the first half of our next fiscal year.

Operator

Your next question comes from Bryan Elliott with Raymond James.

Bryan Elliott – Raymond James

Appreciate the color on the Best Of The Barrel, but I wonder if you could elaborate a little bit more on the lack of traffic traction. I understand one of the goals is simplified operation in the kitchen for a little faster table turns therefore accommodation of some of the people who are typically waiting for a seat. Are we seeing the number of folks who are waiting diminishing? And that’ preventing the traffic from the faster table turns or help me square that circle a little bit.

Michael A. Woodhouse

Well, the conclusion we’ve drawn is that by doing what we did, which was basically, and I’m sure you’ve seen the menu, is take a number of items off. It was all, for some of our guests it was all take away and no replacement, there is no new news, there is no excitement there. So that’s where our focus is and that’s where we expect to pick up our traffic.

Bryan Elliott – Raymond James

Is there a line issue? Do you measure your line system-wide? How long you’re going to wait, for example? Has there been a material change in that in the last few months or quarters?

Michael A. Woodhouse

No, we don’t measure it system-wide, we measure it from time to time, primarily looking at the turn aways, the folks that will not wait.

Bryan Elliott – Raymond James

Noticed any change there?

Michael A. Woodhouse

I haven’t seen any recent numbers that would indicate a change.

Operator

Your next question comes from Brad with

Brad Lindstrom – Citibank

If you looked at cost of goods in the fourth quarter, excluding higher commodity and retail costs, and you just look at yields, should we assume that around 20 basis points of pressure on that line will continue if gas prices stayed around the same?

P. Doug Couvillion

For just fuel alone, probably in the 15-20 basis point range.

Brad Lindstrom – Citibank

And I know you’re probably not ready to give in guidance for fiscal 2009 CapEx, but considering some of the initiatives coming up possibly rolling out that labor management system and some others, is it safe to assume that CapEx does goes up some from this year’s level?

Michael A. Woodhouse

Yes, it is. I don’t have a number that we’re ready to put out there yet but yes, it will go up.

Operator

Your next question comes from Amy Greene with Avondale Partners.

Amy Greene – Avondale Partners LLC

Any update on the search for the CFO?

Michael A. Woodhouse

We’re looking at some candidates. Hope to get to a conclusion pretty quickly.

Amy Greene – Avondale Partners LLC

I’ve been seeing some articles over the last week or so about a Supreme Court case that you all were involved in. Is there any comment you guys want to make on that or does it mean that we will see any increase in legal expenses or things like that in the fourth quarter?

Michael A. Woodhouse

A couple of things on that. As you are well aware, it was basically a clarification of role that we were seeking and we’ve begun that. The actual process of going to the Supreme Court is not particularly expensive, that’s behind us, and don’t expect any increases in expenses going forward, coming out of this particular situation.

Amy Greene – Avondale Partners LLC

It doesn’t necessarily open the door to any additional cases or anything like that that you see spring up because of it or you don’t see any pending sitting out there?

Michael A. Woodhouse

No. I mean, it just provides a separate or extra avenue for somebody seeking to bring retaliation charges against us, but we don’t have any sign of a backlog or an overhang or anything like that.

Operator

Your next question comes from Jake Heidelmeyer with Ramsey Asset Management.

Jake Heidelmeyer - Ramsey Asset Management

Was there any impact on your Q2 [inaudible], either positive or negative from retail business year-over-year, similar to what you saw here in Q3? I’m just trying to get a sense of if it’s trending up here, if you guys took [inaudible] in retail numbers because you were cutting prices and more promotions, etc.

P. Doug Couvillion

We had some fuel pressure in Q2 similar to what we experienced now but back when we talked about the second quarter, we talked about managing markdowns and a kind of a tough Christmas selling season. The pressure this quarter was really from the change in mix because of Easter and a few more markdowns. But I think that we’ll see some improvement into the fourth quarter.

Jake Heidelmeyer - Ramsey Asset Management

And do you have sense of your advertising budget here in Q4 versus Q4 of last year? And did the billboard rollout from Q3 of 2007 spill over into Q4 at all?

P. Doug Couvillion

We’ll probably be somewhere up in the 30-40 basis points just on the advertising spend in the fourth quarter, but that’s in our guidance. And most of that increase is due to the promotion.

Operator

Your last question comes from Chris Blackman with Imperial Capital.

Chris Blackman - Imperial Capital

Would you comment any on the difference between your trends and store traffic on you interstate stores to your more urban type stores that you’ve been moving to?

Michael A. Woodhouse

No measurable difference.

Chris Blackman - Imperial Capital

So changing gas prices hasn’t really shown any difference in those two concepts or two formats?

Michael A. Woodhouse

No.

Chris Blackman - Imperial Capital

And in the longer range, I know for example, I was visiting one of your stores in Hendersonville, Tennessee, I guess close to your home office, a store you opened up, it’s more of an urban type store, long range, can you talk about your plans for taking your brand and putting it more in those kinds of locations?

Michael A. Woodhouse

Yes. We talk about a potential for about 1,100 Cracker Barrels in total, which is a little less than double what we have right now. As we grow the system, the mix between on-interstate and off-interstate will start switching towards off-interstate and we’re looking at brands to specifically address off-interstate. One of the differences is simply the retail offering, and our total sales per year are about the same, on-interstate and off-interstate, but there’s higher restaurant, lower retail off-interstate because retail is associated with the traveler, which makes quite a lot of sense.

So we’re looking at what retail offerings might be to off-interstate, which would just add to the attraction of doing that. We’re also looking at the possibility of having a more scalable box where we could go into smaller areas, which would further add to the 1,100 opportunities we have out there. And I would expect those to be primarily off-interstate.

Chris Blackman - Imperial Capital

I guess the majority of the stores I have visited recently have been the off-interstate stores and I have been impressed with those. One question, but I seem to notice at the stores is a lot of people drinking water with lemon. There’s obviously a cost associated for you with that.

Michael A. Woodhouse

Let me tell you what our standard is. And I hope all of our operators are listening to this. Our standard is lemon on request with water, we obviously won’t deny a request. But the standard is not to serve lemons with water automatically. And yes, lemons cost money. And as I said in answer to another question earlier, we’re not in the cost cutting to take away from the guests but we’re certainly in the mode of operating our systems to our standard.

Chris Blackman - Imperial Capital

Is there any way possible, in the future to start charging for that? For water with lemons.

Michael A. Woodhouse

No. The next guy that follows me can do that.

Operator

With no additional questions in the queue I would like to turn the conference back over to Mike Woodhouse.

Michael A. Woodhouse

Thank you all for joining us this morning. I will, as my last act this morning, lift the ban on you all participating in our game. Visit as many Cracker Barrels as you can. We’ll be back at the end of the quarter. We are feeling positive about the situation right now and we hope to have great results when we come back in September. Thank you.

Operator

Thank you for participating in today’s conference call. This concludes today’s call. You may now disconnect.

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Source: CBRL Group, Inc. F3Q08 (Qtr End 5/2/08) Earnings Call Transcript
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