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CBRL Group, Inc. (NASDAQ:CBRL)

F4Q08 Earnings Call

September 16, 2008 11:00 am ET

Executives

Diana Wynne – Senior VP, Corporate Affairs

Michael Woodhouse – Chairman, President, and CEO

N.B. Forrest Shoaf – Senior VP, General Counsel, Secretary, Interim CFO

P. Doug Couvillion – Senior VP, Finance of Cracker Barrel

Analysts

Larry Miller – RBC Capital Markets

Analyst for Joe Buckley – Banc of America Securities

Brad Ludington – KeyBanc Capital Markets

Steven Rees – JPMorgan

Chris O’Cull – SunTrust Robinson Humphrey

Bob Derrington – Morgan Keegan

Analyst for Brian Elliott – Raymond James Investments

Stephen Anderson – MKM Partners LLC

Chris Blackman – Imperial Capital

[David Schmuckler] – Kingsland

Howard Penny – Research Edge

Operator

Welcome to the CBRL Group fourth quarter conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over to Diana Wynne, Senior Vice President of Corporate Affairs.

Diana Wynne

Our press release announcing our fiscal 2008 fourth quarter and full year results and our outlook for fiscal 2009 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 influenced 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 risk 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.

We plan to release fiscal 2009 first quarter earnings and same restaurant sales for fiscal August, September, and October on Monday, November 24, 2008, before the market opens.

On the call with me this morning are CBRL's Chairman, President, and CEO Mike Woodhouse; CBRL’s Interim CFO and General Counsel Forrest Shoaf; 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 outlook, and then Mike will return to close. We will then respond to your questions.

With that, I will turn the call over to Mike.

Michael Woodhouse

Our 39th year of operation was one of the toughest every faced by the restaurant industry. Consumer confidence fell to 16-year lows as a result of high gasoline prices, rising food costs at the grocery, falling home values, and a shrinking job market. To no one’s surprise, people responded by cutting back the number of times they dined out. Good news is the Cracker Barrel Old Country Store remains the preferred choice of many. It’s a place where multigenerational families can gather; it’s also one of the few places where travelers and locals alike can find consistently great tasting country cooking.

By providing honest value, which we define as high quality food with ample portions at a fair price, which incidentally means that we have not reduced quality or portion sizes in response to current price pressures, we outperformed many in the casual dining industry, as measured by comparable store sales published by Knapp-Track. With an average check of $8.59, we continue to offer great value without discounting or coupons.

The impact of commodity market changes on our cost of goods, especially the effects of heightened global demand for corn and other grains, was a 6.6% increase in food product prices in the fourth quarter and 6% increase for the year as a whole. While we were more efficient in the use of labor hours, the cost of utilities and supplies continue to increase. It’s always been our goal to offset margin pressures from higher costs with selective price increases. Our goal in 2008 was to use pricing to offset the dollar impact of commodity and labor cost increases, and we achieved that goal for both the fourth quarter and for the full year.

In the retail business, we carried more load margin domestically source products, and we use more markdowns, which along with surcharges on freight also increased our costs.

Despite the pressure on profits, we continue to generate strong cash flows. Net cash from operating activities was $124.5 million, which funded an $87.8 million of capital expenditures. We also returned capital to shareholders by paying a dividend of $0.68 a share and repurchasing $52 million of stock outstanding, retiring approximately 7% of the total stock outstanding at the beginning of the fiscal year.

Our brand is as relevant today as it was in 1969 when we opened our first store. It’s all about the experience in a creating a strong emotional attachment to the Cracker Barrel brand and winning the best family dining chain award from Restaurants and Institutions Magazine for the 18th consecutive year help to prove the point about the power of our brand.

We also know that loyalty can’t be taken for granted. We want our guests to receive a great Cracker Barrel experience each and every time, and it takes great people to make that happen every day, and we believe have a unique advantage and retaining top caliber employees with our wages, benefits, and training programs. We continue to make good progress in reducing turnover in fiscal 2008 and will have gained [inaudible] better focus in fiscal 2009.

The Rising Star Program, which we introduced in 2007, has helped reduce hourly employee turnover to below 100%, which is a remarkable number in the full service restaurant industry. Our management turnover is below 20%, another measure of our focus on refining job responsibilities in order to provide our guests with the absolutely best dinning experience. Lower employee turnover begins a positive train reaction to results in higher guest satisfaction, increased productivity throughout the store, and lower costs for training and hiring.

Our restaurant initiatives continued focus on improving the speed of service and improving margins. We found that when guests wait less than 15 minutes for their food, they’re much more likely to return and recommend our restaurant to others. Our Seat-to-Eat initiative includes process simplification and new types of equipment and new kitchen and service configurations. We’re currently testing this package in three districts. Assuming success in this expanded test, we’ll start the rollout across the system in the second half of fiscal 2009.

Another way to increase speed of service is to simplify the menu. We’re testing another version of Best of the Barrel Menu currently. This menu has several new products added to attract back the guest, the guest who had their favorite removed in the original Best of the Barrel test. We’ve added three fireside country breakfast skillets, ham and cheese, smoked sausage, and veggie. We’ve also brought back the popular lemon pepper trout as both a country dinner plate and a fancy fixings dinner. We’re testing this version of the Best of the Barrel Menu in an expanded group of stores right now during the first quarter and we’ll evaluate the results before the end of the second quarter with a planned rollout in the third quarter. Separately in fiscal 2008, we successfully completed the elimination of artificial trans fats from our food without in any way affecting the quality of the test.

To build our profitability, we continue to have focus on our outlier stores, the stores with the greatest opportunities for financial improvement. We developed tools and management process to improve margins by focusing on food waste, labor and productivity, and supply and maintenance costs. By focusing efforts on these stores, we added $4 million of profit to fiscal 2008. In 2009, we’re making these analytical tools available to all of our stores, and we’re adding utilities to the focus.

Next, I want to talk about the progress we’re making in our retrial business in an extremely difficult retail environment. Our comp store sales are up eight-tenths of a percent in the fourth quarter. This is an especially positive performance because Cracker Barrel retail shops are not typically destination shopping places and restaurant traffic slowed as consumers purchasing power declined in the fourth quarter. We’re seeing these positive results as the implementation of our new retail strategy, which we developed over the past year is kicking in.

In fiscal 2008, we introduced floor set location optimization into our retail business, which integrates all part of the merchandising cycle. In simpler terms, this is part of our effort to generate higher sale dollars and profits from every square foot of retail space. Also, we’re always looking for new themes to link the retail offerings with our authentic restaurant experience. For example, this year’s “Road trip theme” tied seasonal restaurant and retail items to a national summer promotion. Each retail theme includes related impulse items such as nostalgic candies or toys. The goal is to create a fun shopping experience. Our customers call it "The thrill of the hunt,” discovering what’s new the retail store throughout the year. We’ve also introduced iconic packaging to many of our retail products that reinforce Cracker Barrel Old Country Store roots.

There’s a lot more involved in retail than merely selling products. We now measure the contribution of these products to our access by evaluating product selection and customer feedback, as well as sourcing and supply chain costs. One example is women’s apparel where we now have much a better understanding of customer preferences, how to best source that product across the various locations, and when to reorder. We’ve adopted a similar process to improve our pricing. Other actions that are enabling us to drive improvements in the sales and profitability of the retail business include enhanced point of sale capabilities, additional training of our retail staff, and more detailed market research.

Looking at specific trends, toys, especially the Webkinz line, continue to perform well in the quarter. Home products also saw a substantial improvement driven by the quilts and the celebrations in Family Forever themes that tied in with the Greatest Family Road Trip promotion this summer. Apparel continued to be weak during the summer.

To drive traffic into our restaurant retail stores, we need to be awareness outside the four walls. Billboards to continue to be our primary form of advertising as they quickly show the brand promise and provide directions to the next location. We’re testing new billboard designs around middle Tennessee right now, and we’re looking to refresh the system later in fiscal 2009. The new designs communicate our core brand messages like Breakfast All Day; Eat, Shop, Relax; and Half Restaurant, Half Store, All Country.

The end of fiscal 2008 we completed a TV advertising test which was designed to stimulate awareness of Cracker Barrel as a local place to eat as well as a much relaxing place for travelers. While we saw meaningful increases in traffic and retail sales, enough to more than breakeven in the test markets, our overall geographic footprint limits the number of markets in which we can profitably run TV. So we’re in the final stages of developing a plan to run a combination of TV and radio advertising in fiscal 2009; and in some markets, we’ll be featuring the new product offerings that I discussed earlier in the advertising.

We introduced our first national promotion in late 2008, the Greatest Family Road Trip. We gave away over 30 million game pieces to our guests for the chance to win free meals, GPS navigational systems, and the grand prize. Betty Brown, who eats breakfast every Sunday morning at our Princeton, West Virginia, chose the $250,000 cash alternative as the grand prize winner. In addition, guests won 38,000 Cracker Barrel Gift Cards and 52 navigational systems during the promotion. It’s all difficult to determine the full benefit of a promotion, especially when it’s system-wide, but we believe it was creative; it was certainly new, and it was fun for our employees and guests. In fact, in the months of June and July despite some predictions that our guest traffic would be disproportionately affected by lower summer travel, we continue to outperform our industry in guest traffic.

Another program helping to bring more people to our doors is the Cracker Barrel Gift Card. By doubling the number of major retailers who carry our gift cards in fiscal 2008, we saw gift card sales increase 16% over the previous year.

Country Music goes hand-in-hand with down home country cooking and we’ve continued to expand this important tie to the Cracker Barrel brand with the sales of CDs available exclusively to our stores. Offerings in the fourth quarter included music by Aaron Tippin and Ricky Skaggs. The latest release by Kenny Rogers is now available exclusively through our Cracker Barrel and Country stores.

With that, I’ll turn the call over to Doug Couvillion for his detailed financial review of the quarter.

P. Doug Couvillion

Let’s review in more detail the results of the fourth quarter of fiscal 2008. First, I would like to remind you that the prior year’s quarter included an additional week, which contributed $46.3 million of revenue, $7.8 million of operating income or 60 basis points of favorable margin effect, and $4.4 million of after tax income from continuing operations or $0.17 of income per diluted share.

For the fourth quarter of 2008, we reported diluted income per share from continuing operations of $0.91 compared with a $1.15 a year ago. Excluding the effect of last year’s additional week, diluted earnings per share is down 7%. After tax income from continuing operations of $20.6 million in the fourth quarter of fiscal 2008 compared with $28.2 million in the fourth quarter of last year and reflected lower operating income in the fourth quarter of fiscal 2008 and the non-recurrence of $4.4 million from the additional week in fiscal 2007, partially offset by a lower effective tax rate in fiscal 2008.

Revenue from continuing operations in our fiscal fourth quarter declined 4.8% to $601.8 million. Excluding the extra week in the 2007 quarter, revenues increased 2.7%. We opened one new Cracker Barrel unit in the quarter, bringing our total for the year to 17. Although we continue to outpace Knapp-Track comparable store sales in the quarter, comparable store restaurant sales declined 0.8%.

Our average check was 3.7% [inaudible} a menu price increase of approximately 3.6%. As it did throughout the year, our average menu pricing in the fourth quarter was efficient to more than offset the impact of food and labor inflation. We continue to believe it is important to maintain the guest experience, which includes providing good food at a great value and not reducing portions or the quality of our food as a way to offset inflationary pressures.

Cracker Barrel comparable store retail sales were up 0.8% in the fourth quarter of fiscal 2008. About 32% of our guests make a retail purchase and the average retail ticket is up 10% over last year. We were encouraged by these positive results as they were achieved in the face of guest traffic declines and the overall lower level of consumer confidence.

Our [inaudible] category continues to be a strong performer for us, primarily because of the popular Webkinz plush animals. Home products also performed well with a broad offering of quilts, gifts and lighting, as well as the celebration and Family Forever themed products tied to the summer Greatest Family Road Trip promotion. Food, especially every day candies, and items tied to the summer Road Trip theme also had sales gains in the quarter. Sales of our apparel continued to be weak and declined in the quarter similar to reports by other apparel retailers.

Operating income from continuing operations of $41.6 million was 6.9% of revenues in the fourth quarter of fiscal 2008 compared with $57.6 million and 9.1% of revenues in the fourth quarter of fiscal 2007. The additional week in the fourth quarter of fiscal 2007 contributed an estimated $7.8 million of operating income to the quarter or 60 basis points of operating income margin on a revenue adjusted basis. This year’s fourth quarter, operating income margin was negatively effected by higher food and retail costs; increased operating expenses, including utilities, advertising, and supplies; and higher general and administrative expense. The rise in cost of fuel and energy prices have taken a toll on margins. We estimate that we’re at least 50 basis points of unfavorable margin effect related to incremental diesel fuel surcharges and higher utilities.

Cost of goods sold was higher than last year’s fourth quarter by 80 basis points and reduced our gross profit accordingly. There was no affect on cost of goods sold comparisons due to the extra week last year. Food related commodity inflation was up 6.6% in the quarter, with the largest inflation percentage increases coming from oils and eggs, which account for about 9% of our food purchases. Beef and pork costs were below last year’s levels.

Retail costs of goods were higher this quarter because of increased retail shrinkage, freight, and markdowns offset by higher initial margin. Diesel fuel increased in the quarter to the highest levels during our fiscal year and increased our freight costs and costs of good sold for both restaurant and retail.

Labor and related expenses were approximately 40 basis points lower than the fourth quarter of last year, or 50 basis points lower excluding the extra week last year. These favorable labor results were primarily due to restaurant hourly labor costs and lower worker’s compensation expense. Hourly wage inflation was 2% this year compared to 4.6% in the prior year. Additionally, the benefits of lower hourly turnover, which is down 17 percentage points from last year, is increasing our ability to deliver our guests the best experience possible and reducing train-related costs at the store level.

Other store operating expenses increased to 17.9% of sales, up 120 basis points from last year, or up 80 basis points excluding the extra week last year. This year utilities and advertising expenses were higher in the quarter, partially offset by lower maintenance and general insurance expenses. We experienced utility inflation of about 10% this past quarter, with electricity contributing the most from a dollar perspective; and natural gas, the highest percentage inflation, at approximately 26%.

We incurred higher advertising expense in the fourth quarter because of our first national promotion, the Greatest Family Road Trip, and the completion of our television testing. We believe our first national promotion was a expense, and we’re pleased to award the $250,000 grand prize to on our regular guests in West Virginia, and, as Mike mentioned, our TV testing yielded better than breakeven test results.

During fiscal 2008, we developed an Outlier Program to focus on and control costs in stores that had higher costs than the system as a whole. In the first year of this program, we made progress by controlling maintenance and supply costs this year. In fiscal 2009, utilities will be added to the Outlier Program.

General and administrative expense was 60 basis points higher than the fourth quarter of 2008 and without the extra week, G&A was 50 basis points higher. The increase is due to higher bonus and incentive compensation expense than last year, offset by lower legal fees. The prior year also included the favorable effect of the gain on the sale of a Logan’s property.

Interest expense in the fourth quarter of fiscal 2008 of $13.9 million is $2 million less than last year’s fourth quarter. The decrease is due to the extra week in the prior year, lower non-use fees this year, and fees associated with the redemptions of lines in last year’s fourth quarter, and lower outstanding debt this year offset by slightly higher borrowing rates.

Our fourth quarter income tax rate from continuing operations was 25.7% compared with 34.2% in the fourth quarter of fiscal 2007. The lower tax rate was primarily due to expiring statutes of limitations and lower affected state tax rates recorded in accordance with FIN 48, which the Company adopted this fiscal year.

For fiscal 2008, cash flow from operating activities was $125 million compared to $97 million in fiscal ’07. The increase reflects the lower net income from continuing operations in fiscal 2008 and the non-recurrence of taxes and expenses related to disposing of Logan’s Roadhouse operations and redeeming our previously outstanding senior notes in fiscal 2007.

Cash provided by operating activities exceeded the Company’s capital expenditure plans. Cash flow by operating activities exceeded the Company’s capital expenditure needs, which for 2008 were $88 million. Capital expenditures ran slightly ahead of guidance because of timing on some of the units that we’ll open in the future. We paid dividends of $0.68 per share in fiscal 2008, which was $0.12 more than we paid in fiscal 2007. However, the total cash outlay was only slightly higher because of the lower share count.

The fourth quarter was a challenging quarter for us and the restaurant industry as a whole. We saw guest traffic decline and profit margin pressures continue. However, as we complete the fiscal 2008 year, we were encouraged with the progress we have made in a number of areas. Excluding the 53rd week in fiscal 2007, revenues in fiscal 2008 were up 3.4% on positive comparable store sales increases of 0.5% and the opening of 17 new Cracker Barrel Old County Store units.

Our guest traffic has outpaced the industry as measured by Knapp-Track for the entire fiscal year and retail sales, while slightly negative for the year, finished positive for the quarter. We have made progress in controlling food waste, have reduced hourly and management turnover to some of the lowest levels of many years, and in the second half of the year began delivering on margin improvement initiatives.

In our year-to-date results, we also saw the benefit of our recapitalization efforts and leveraged a 9% decline in income from continuing operations and to 17% increase in diluted income per share. We also increased total dividends per share 21% over fiscal 2007. This completes my financial review for fiscal 2008.

Before I review with you for the guidance of fiscal 2009, I would like to provide you some information about the various weather events that have affected our system. As of Monday, September 15th, sales of approximately 50 Cracker Barrel stores have been affected by tropical storms, hurricanes, and flooding in the quarter-to-date. This equates to approximately 80 sales days. The stores impacted by Hurricane Gustav have reopened for business, and we currently have 12 stores closed, and we presently expect these stores to reopen soon. Approximately five or our stores incurred minor property damage. We will provide more detail on the loss sales impact to these stores when we report our first quarter on November 24th.

Now I would like to review with you with the guidance for fiscal 2009 included in today’s press release. We presently do not expect immediate relief from the external cost pressures. We will continue to focus on growing restaurant traffic and retail sales and controlling our costs to improve shareholder returns. Based on current trends, we presently expect fiscal 2009 total revenue to increase approximately 4.5% to 5.5% over the $2.385 billion of total revenue from continuing operations in fiscal 2008. This increase includes the opening of 12 new Cracker Barrel units during fiscal 2009, and comparable store sales increases of 2% to 3% for restaurant, including approximately 3.5% of menu pricing and increases of 2.5% to 3% for retail. Additionally during the first quarter of fiscal 2009, we took a price increase of 1.8% and [inaudible] similar price increase.

We presently expect operating margins to be in the 6% to 6.3% range, which compares with an operating margin of 6.3% in fiscal 2008. Commodity cost inflation for fiscal 2009 is presently projected to be in the 4% to 5% range. Although commodity prices have come off the peaks of fiscal 2008, costs are still above average pricing in 2008.

Net interest expense is presently projected to be approximately $57 to $58 million, and appreciation for the year is estimated at approximately $62 million in fiscal 2009. We presently project that the tax rate for fiscal 2008 will be in the range of 30% to 31% with the third and fourth quarters being lower than the full year rate. The diluted weighted average share count is presently expected to be 22.5 to 23 million shares, reflecting the authority repurchase up to $65 million of outstanding shares, which was announced on August the 1st.

Income from continuing operations per diluted share is presently projected to be in the range of $2.80 to $3.00 for fiscal 2009. Our capital expenditure plans for fiscal 2009 presently include 12 new stores and expenditures of approximately $95 to $98 million. This estimate includes spending on fiscal ’09 units and various other in store and corporate office initiatives. We presently expect cash flow from operations to exceed our capital expenditure and dividend payment outlays once again in fiscal 2009.

With that review on our guidance and our view of fiscal 2008, I would like to turn the call back over to Mike for his closing remarks.

Michael Woodhouse

I’d just like to comment on a couple of items in our guidance for fiscal 2009. It’s been disclosed today we’re planning to open 12 new stores this year. [Inaudible] has been an area of focus for us in the last couple of years. We will continue to see stores opening at record breaking sales level and we’ve made progress in managing our post opening costs, especially labor. But we can do better in limiting the fall off from those honeymoon sales levels and in reaching an ongoing level of profitability faster. These are operational issues so we’ve made some adjustments to the new opening process and at the same time we reduced the unit growth rate this year to give us time to improve our execution.

On the sales guidance, we’re looking for stronger sales in the second half of the year because our innovation initiatives will begin to rollout in the second half and they’ll have a positive impact on sales.

In closing, as we look forward to our 40th Anniversary, we recognize that we face significant challenges this year. Our game plan is to continue to build on the brand strength and execute our operational initiatives to generate higher restaurant and retail sales. Achieving higher profit margins on these sales dollar will largely depend on our ability to manage costs, and we’re confident that we can do that. Most important, we cannot lose the energy and the excitement of our 65,000 dedicated employees who serve our guests every day.

With that, I’d like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Larry Miller - RBC.

Larry Miller – RBC Capital Markets

I have a question on the 2% to 3% comp store sales outlook. It implies flat traffic and it’s actually been awhile since, really I look back it’s been since 2005 since you guys have had 2% comps in flat traffic, and I know you guys had a lot of initiatives over the last couple years, but I got to think that investors coming off this call are going to say, “Really, what’s different that you have in ’09 than you’ve had over the last several years?” I know, Mike, you went through a lot of initiatives and you really focused on that innovation for the second half of the year, can you help us get more comfortable that that’s a realistic objective, and I do have one more question as well.

Michael Woodhouse

Well several pieces to that. I think first of all in terms of the numbers, we’re guiding to 2% to 3%. We’re running about 3.5% in price. We don’t talk about our future price increases, but I think it’s reasonable to assume that we’ve been dong that for a couple of years; we’ll continue. So we’re not really looking at positive traffic. We’re looking unfortunately traffic continue to be negative. We have some things going on this year that are different. We have the Best of the Barrel Menu, and we’ve been talking, and I know some folks that said we may have been talking too much and too long, but we’ve been talking about our initiatives for a while and this is the year where, as I said in my remarks, we’re going to be rolling out two and four initiatives, the Best of the Barrel Menu in the second half and also starting to rollout Seat-to-Eat.

Both of those are aimed at improving speed and therefore improving sales and traffic. We’re very excited about the skillets that we have out there right now. These I think are the beginning of our refocusing on new products that drive sales and traffic. We’ve been doing a lot of things in product development over the last 18 months around first of all the trans fats, which is a necessary thing to do, and also around working on the process of simplification that we’ve talked about, which is actually going to help us in the future to speed up the kitchen, but we now have our whole product development resources focused on new product development including the skillets, doing really well in tests. In the market tests, we’re seeing the same kind of strong numbers that we saw in our ops tests with the skillets. Again, without revealing our plans, I expect there will be other new products coming during the year which will help drive sales.

Then on the advertising front, as I said in my remarks, we saw good results from the TV. Unfortunately just because of our spread geographically, it’s tough for us to be efficient and actually be profitable using TV in a whole bunch of markets, but we think a combination of radio which was good for us back in the 2000 to 2003 or ‘4 years, a combination of those two is also going to support driving sales.

So I think with a combination of those things, there’s a lot more going on in 2009 than we’ve had going in the last several years.

Larry Miller – RBC Capital Markets

Just a follow-up on that TV that’s local spot, it was inefficient for you to do any national cable is that what you’re saying?

Michael Woodhouse

My point of view on TV is you get what you pay for. You’re basically buying impressions and you’re buying recent frequency, so national cable can get you very targeted but a dollar is a dollar and TV is essentially a commodity. If we took the same dollars and went over in national cable, I think our weight levels would be too low to have any real impact.

Larry Miller – RBC Capital Markets

Then just on the commodities, you mention 60% contracted, 4% to 5% inflation I believe. Can you give us some color on what’s contracted at what rate in that 60%?

Michael Woodhouse

I can give you a sense, last year we were at 65%, so we’re a little bit lower than we were last year. One open item is chicken. We’re rolling off a contract at the end of December. Right now we’re comfortable that’s not likely to be a negative. Certainly if feed prices of corn stay where they are relative to recent history, we think that we should be in good shape with the new chicken contract.

On the negative, and this applies to the industry, and it’s an interesting phenomenon because I haven’t heard anybody talk about it, but potato prices are up very substantially or forecasted to be up in the new crop year which is starting right about now. Potato contracts typically are negotiated right in this time period every year, and we’re seeing some substantial increases in the prices we’ve been quoted. I assume that’s going to apply to everyone else.

But generally, we’d like to see lower commodity inflation; but, as with last year, we feel good about where we are and we good feel good about our project on commodities.

Larry Miller – RBC Capital Markets

Is there room in 4% to 5% for some upward inflation in either a chicken contract or potatoes, and what kind of rate of inflation are you guys seeing in potato contracts?

Michael Woodhouse

We don’t have a contract, so I can tell you the numbers of Harry’s, and I would guess it’s the best way to describe it, but I don’t want to go over it until we have the contract in place. As I said, we’re not the only… Everybody has a contract for potatoes. But everything we know, including the potato prices and our best guess at chicken are in our guidance number.

Operator

Your next question comes from Analyst for Joe Buckley - Banc of America Securities.

Analyst for Joe Buckley – Banc of America Securities

Of the 12 new openings, how are those divided among new and mature markets and I guess on interstate/off interstate?

Michael Woodhouse

There are 8 off/12 on and then 8 are core markets and four are developmental markets.

Operator

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

Brad Ludington – KeyBanc Capital Markets

The first question I just wanted to ask you about the debt balance. You said you’ll pay, you should pay for the share repurchases and dividends through cash flow from operations, so should we assume that debt balance stays kind of level or is there plan to pay that down?

Michael Woodhouse

There’s a mandatory repayment of $8.7 million. We’ll obviously pay that. That’s all we plan to pay down.

Brad Ludington – KeyBanc Capital Markets

Talking about the closed days from the storms, you said 80 days. Is that just 80 days thus far or 80 days expected in total?

P. Doug Couvillion

That’s just through yesterday’s business. We’ve got about 10 stores, 10 to 12 stores that have not opened yet and it’ll be a few more days from those over the next week or so depending on utilities and things of that nature.

Brad Ludington – KeyBanc Capital Markets

Does all that 80 days fall into the first quarter?

P. Doug Couvillion

Yes.

Brad Ludington – KeyBanc Capital Markets

On timing of the 12 openings, should it be pretty evenly spread out through the year?

Michael Woodhouse

They’re more front end loaded. Can I just make a point on the store closing? We did some mental math this morning. I think in the quarter, we expect about two-tenths of 1% of same store sales, so it’s not a big number, but it is important.

Operator

Your next question comes from Steven Rees - JPMorgan.

Steven Rees – JPMorgan

My question was just on the CapEx guidance, the $95 to $98 this year, up from $88 last year despite doing your units, I guess just comment on that and if it’s just a case of units in ’09 getting pushed back or sort of how you think about longer-term unit growth?

Michael Woodhouse

About $16 million of it is related to the rollout of the initiative. The seat-to-eat requires some amount of capital per store, so that’s the big piece of the new capital that’s going in.

Steven Rees – JPMorgan

Then maintenance is still that $25 million level?

Michael Woodhouse

Yes.

P. Doug Couvillion

That’s about right.

Steven Rees – JPMorgan

Then just on the slowdown, it sounds like it’s front end loaded so it sounds like you cut what you could. I mean would you’ve cut further if you could have?

Michael Woodhouse

No, we think this is a good number because there is some momentum that has to be slowed down and then when we rebuild, we have to rebuild the momentum. Our focus is absolutely, we do not have disastrous new store openings, we just think we can do better and we put a lot of focus on: What is it going to take to just go to that next level on new store openings and we figured that just cutting back somewhat would be just give us a little breathing room to do really well. That’s all that’s going on there.

Steven Rees – JPMorgan

Then you had mentioned some analytical tools which allowed $4 million of savings I think in 2008 and you mentioned that you’re going to roll this out to the entire stores in 2009, so can you just talk about what those tools were and how many stores they were in this year?

Michael Woodhouse

They were in a little over 100 stores in ’08, but of course those were the worst performers. These are basically looking at outliers where on any given area that we’re looking at the costs are substantially different from where we’d expect an average store to be. So this is not rocket science, but it’s something we haven’t really done this way before. It’ll be dangerous to extrapolate the $4 million to the whole system. I mean we’re going to get savings, but it’s not going to be in direct proportion because those were the worst stores that we applied it to last year.

Steven Rees – JPMorgan

Finally just on the retail business, it sounds like a lot of that business is being driven by average check gains; I think you said it was up 10%. But if I remember correctly, you’re talking about formally doing lower price points to drive transactions, so how do you think about transactions versus average check growth and retail and what are the plans for ’09?

Michael Woodhouse

We’ve become smarter. Several years ago we were looking at lower price points and we ended up with low prices and high prices but nothing in the middle. So we’re really looking pretty hard at a range of price points. We’re always going to have the low price for candies, but even there we’re finding that we have been selling some of our candies at prices that have not been changed for 10 or 15 years, or even as far as back anybody could remember, which didn’t make a lot of sense. So being realistic about pricing and still staying with value is important and having a good range of prices is really important. We’re actually converting, our conversion rate is going up with negative traffic and higher retail sales, so we’re pretty comfortable with where we’re going with retail.

The other thing that I don’t think we’ve talked about a lot is just our new amount of sale capabilities, we can do logos and other kinds of transactions that involve multiple purchases in a way that we never could before, so we stimulate the volume by driving up the volume on a given purchase.

Operator

Your next question comes from Chris O’Cull - SunTrust.

Chris O’Cull – SunTrust Robinson Humphrey

Mike, labor costs were better than we were expecting for the quarter, especially in light of the trends we’ve seen in the past couple quarters. Could you guys elaborate on the improvement in labor costs for the quarter and maybe whether it’s sustainable?

Michael Woodhouse

It’s primarily around managing labor hours and it’s also around as we mentioned with getting our turnover down, especially on the front end, our recruiting and training costs are coming down. Yes, that’s sustainable because what we’ve done the last 18 months to improve turnover is something we can continue doing.

Chris O’Cull – SunTrust Robinson Humphrey

Then could you give us an update on the timing of the recruiting for the permanent CFO and marketing officer?

Michael Woodhouse

On the CFO, we have some kind of list. We’re still not at the final point. As soon as we’re there, we’ll make an announcement. Since the last quarter end, we’ve hired a VP of brand and many a strategy who’s taking over those particular responsibilities, so we have two strong VPs of marketing now covering between the whole range of marketing. While the CMO is a great idea, we’re not waiting for that to happen. We’re forging ahead with the things we’re going to do this year, and I think we’re going to make some pretty good progress on the marketing front, especially on the menu strategy front.

Chris O’Cull – SunTrust Robinson Humphrey

Then one last question: Doug, did the change in the Moody’s rating affect your spread that you pay on the borrowings?

P. Doug Couvillion

No, it did not.

Operator

Your next question comes from Bob Derrington - Morgan Keegan.

Bob Derrington – Morgan Keegan

Couple questions if I may: Mike, when we look at CapEx, I think you mentioned that $16 million was set aside for the Seat-To-Eat Program. Is some of that back of the house equipment and some dining room? Can you kind of give us some color there?

Michael Woodhouse

It’s back of the house. We’re putting in new holding station, so we can hold a product for a period of time. For instance, one of the things we can now do is to grill bacon ahead of time and hold it for a period of time which at heavy breakfast periods, there’s no question that we’re going to keep selling bacon for the next two or three hours so we can improve the order speed by doing that. We’ve changed the way we hold biscuits so we think it’s going to improve the quality substantially. We had made some adjustments on the grill. So it’s all around kitchen equipment.

Bob Derrington – Morgan Keegan

If you can kind of give us a little bit of color and your philosophy around some of the new menu additions that you’re looking at. Obviously we’ve seen the skillets out in the marketplace, but how do you look at when you try and position those as far as the retail price, the potential cost of sales, et cetera?

Michael Woodhouse

That’s really important in terms of we talk about our value and that is really critical to our success now and going forward. Historically, we had a tendency to design a product and then figure out what we have to charge for it and now we’re going in a different direction which is to look at price points where we want to sell a product and designing the product to get to the price. Breakfast skillets are $6.99, which for the offering we think is a very, very great value. But it’s also something that improves our margin within the breakfast mix, so we’ll be taking that point of view as we look at our menu additions going forward, really attractive price point, great value at that price point and at the same protecting our margin because one of the issues we have is we’re not really at our peak times. We’re usually pretty full so it doesn’t make any sense for us to offer products with lower margin to fill seats that are empty. We’re trying to improve the margin per hour per seat, and that’s what this is all about.

Bob Derrington – Morgan Keegan

It sounds as though from your remarks, most of these programs are really kind of geared toward the second half of the fiscal year? Are we going to see much in the way of new product news any time in the first half?

Michael Woodhouse

Well, we have the skillets out there. I’m sure there will be more, and I’m sure you’ll find that, as you usually do, Bob, by checking out all of our stores. I really don’t want to talk about specifics because we’d rather do what we did with skillets, which is to test and have a success and then start talking about, so a little bit more to come.

Bob Derrington – Morgan Keegan

Typically, Mike, the brand has performed pretty well relative to the casual dining index. Is that a reasonable expectation that trend continue recent times in this new quarter and going forward?

Michael Woodhouse

Well going forward, you’ll have to ask the casual diners that question. We know what we’re going to do, but I’m not certain what they’re going to do. But I think that, again, the value of the price point is something that I think we really offer something that not necessarily everybody else can do and we’re certainly not going to go chasing [inaudible] to solve our problems.

Operator

Your next question comes from Brian Elliott - Raymond James Investments.

Analyst for Brian Elliott – Raymond James Investments

I was just calling to see if you could provide some sort of an update as we’ve seen in August and obviously your comp store out perform the industry versus Knapp-Track in July. I just wanted to see if that outperformance may have continued in August or what you’re seeing in the latest numbers.

Michael Woodhouse

We’d love to talk about that, but our policy now is that we’re going to report on a quarterly basis with our sales, and then we’ll report the individual months when we get there. So sorry I can’t comment right now.

Operator

Your next question comes from Steve Anderson - MKM Partners.

Stephen Anderson – MKM Partners LLC

I just wanted to ask about dairy prices, what kind of guidance you have for that. Second of all, I wanted to ask if you had any exposure at all loans from Lehman Brother.

Michael Woodhouse

Second of all, no, we have no exposure to anything to do with Lehman Brothers. On dairy, we’re looking for dairy to be relatively flat to maybe down a little bit.

Operator

Your next question comes from Chris Blackman - Imperial Capital.

Chris Blackman – Imperial Capital

Can you tell me how many stores you all closed in ’08 and what you might expect in ’09?

Michael Woodhouse

We didn’t close in ’08 and we have no plans to close anything in ’09.

Chris Blackman – Imperial Capital

The 12 stores that you’re opening, four of those I think you heard say are in existing or, no, eight of those are in existing markets and four development markets.

Michael Woodhouse

Correct.

Chris Blackman – Imperial Capital

None of those are relocations, I assume.

Michael Woodhouse

No.

Chris Blackman – Imperial Capital

How many stores do you all currently have under construction?

P. Doug Couvillion

We have got about eight under construction currently.

Chris Blackman – Imperial Capital

So 8 of your 12 are under construction. Have you opened any so far in the new year?

P. Doug Couvillion

Not yet.

Chris Blackman – Imperial Capital

I don’t know if I missed it or not, but can you tell me what percent of your commodities you contracted for over the next say two quarters or first half of the year or maybe through the third quarter?

Michael Woodhouse

We have 60% for the year at this point.

Chris Blackman – Imperial Capital

Which is a little bit below what you would…

Michael Woodhouse

65% last year, but we’re not uncomfortable with the difference. There are reasons for that.

Chris Blackman – Imperial Capital

Your Christmas inventory, could you expand maybe a little bit on the retail side, how you feel about your Christmas inventory compared to last year?

Michael Woodhouse

We offered Christmas by themes. If you go in the store, you’ll see a tree and then a theme around that. We’re going to have seven themes this year, same as we had last year. We’ve got some new ornaments, which we think are going to be pretty good sellers. We feel good about Christmas at this point.

Chris Blackman – Imperial Capital

Then the change in Moody’s, I know you were below the leverage ratio. What was the… Did you have a discussion with them after that? I know it kind of caught you by surprise, the rating change.

Michael Woodhouse

Well, they use a different methodology to come up with their numbers. It’s proprietary I guess. They don’t explain it. We couldn’t get to their numbers.

P. Doug Couvillion

I did have a conversation with them and they said they have their methodology and they just publish what they publish. I would also point that S&P affirmed their rate.

Chris Blackman – Imperial Capital

What would trigger Moody’s to downgrade again?

P. Doug Couvillion

You’ll have to ask them.

Michael Woodhouse

Yes, I think you have to ask them. I think you’ll find that they have a very specific view of the consumer economy over the near- to medium-term which captures us and a whole bunch of other folks.

Chris Blackman – Imperial Capital

But importantly, as you discussed, I guess the previous question that no change in rates. Then finally, of the 12 new stores you’re opening, will you own real estate on any of those stores; and if so, how many?

P. Doug Couvillion

About four of those we’ll own.

Operator

Your next question comes from Joe Buckley - Banc of America Securities.

Analyst for Joe Buckley – Banc of America Securities

With the gas peaking during the quarter, and I guess coming down the last two months, did you see anything encouraging maybe from traffic or just interesting?

Michael Woodhouse

We don’t have any ability to measure miles traveled on a current basis. We can just use the DOT numbers that come out a month or two behind. Obviously with gas prices coming down, that’s going to help everyone in terms of a little more disposable income. But I don’t know that the consumers are going to change their behavior very much in the short-term. Right now, I’m not certain where you’re based, but around here the gas prices are way up.

Operator

Your next question comes from David Schmuckler - Kingsland.

David Schmuckler – Kingsland

I suppose I could back into it, but can you guys just save me the step and tell me how much is the all in capital costs is to develop a new store?

Michael Woodhouse

It’s about $4.2, $4.1/$4.2 all in including land.

David Schmuckler – Kingsland

Then can you tell me what the EBITDA was for fiscal ’08 as calculated under the coming credit agreement?

Michael Woodhouse

As calculated under the credit agreement?

David Schmuckler – Kingsland

Yeah, the covenant EBITDA.

Michael Woodhouse

We’ll have to get back to you on that.

Operator

Your next question comes from Larry Miller - RBC.

Larry Miller – RBC Capital Markets

With gas prices falling, are you having discussions with your distributors about not taking the fuel surcharges that they’ve been pushing through to you guy?

Michael Woodhouse

Well the fuel surcharges are directly tied to the prices they are paying for their diesel and we can order those numbers, so it’s just an automatic contractual factor. They’ll move down as prices move down.

Larry Miller – RBC Capital Markets

In terms of the development you’re talking, the 12 stores, are there any in new strip centers that you’re, and I don’t know what the percentage is of strip centers and free standers that you’re planning for next year, but where there might be a potential for delayed delivery because of the leasing up of that facility?

Michael Woodhouse

I read the Wall Street Journal as well last week. I’m not aware of any at this point. It’s something we really focus on because we felt for the last two or three years just by looking and traveling around looking at new sites that there was an overbuilt situation building up, so we’ve been very careful about that.

Larry Miller – RBC Capital Markets

So in terms of mix, it sounds like mostly free standers is that right?

Michael Woodhouse

Excuse me back up. When you say free stander, they’re all freestanding buildings. Is your question: Are they part of a development?

Larry Miller – RBC Capital Markets

Exactly.

Michael Woodhouse

They are mix, but we’re pretty careful about what is signed up before we would go into a major development.

Larry Miller – RBC Capital Markets

Then you’ve given us great cost of sales detail, but we don’t have a potato cost of sales. It’s obviously lower than the 7%. That’ll be the lowest number you’ve offered on anything. Do you have a number for that?

Michael Woodhouse

Potatoes, I’ve obviously scared up a potato story here. I don’t have that number off the top of my head. It’s meaningful in terms of increase in potatoes actually has an affect on the total. Let me give you a number. It’s about, which I do have, it’s between 2% and 3% of our total spend on food products.

Operator

Your next question comes from Howard Penny - Research Edge.

Howard Penny – Research Edge

If the paradigm that we’ve seen for the last couple years of lower traffic and lower margins continue for the next couple years, can you just sort of from a 50,000 foot view give me your view of capital allocation?

Michael Woodhouse

That’s a hypothetical. Really our plans are not to expect that and I really don’t want to get into what I’ve gained because we’ll deal with it as we see the trends emerge if they’re not what we expect.

Operator

We have no further questions at this time.

Michael Woodhouse

Well thanks, everybody, for joining us this morning. It is going to be a challenging year, but the good news is that the things that we’ve been talking about are going to be moving beyond the testing phase. We’re going to see some real action this year, and we’ll be back in November to give you an update. Thanks.

P. Doug Couvillion

Thank you.

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Source: CBRL Group, Inc. F4Q08 (Qtr End 08/01/08) Earnings Call Transcript
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