Cracker Barrel Old Country Store's (CBRL) CEO Sandy Cochran on Q3 2016 Results - Earnings Call Transcript

| About: Cracker Barrel (CBRL)

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

Q3 2016 Earnings Conference Call

June 01, 2016 11:00 am ET

Executives

Jessica Hazel - Manager, Investor Relations

Sandy Cochran - President and Chief Executive Officer

Larry Hyatt - SVP and Chief Financial Officer

Jill Golder - SVP and Incoming Chief Financial Officer

Chris Ciavarra - SVP of Marketing

Analysts

Robert Derrington - Telsey Group

Michael Gallow - CL King

John Michael - Bank of America

Jake Bartlett - Suntrust

Alton Stump - Longbow Research

Imran Ali - Wells Fargo

Steve Anderson - Maxim Group

Operator

Good day and welcome to the Cracker Barrel's Fiscal 2016 Third Quarter Earnings Conference Call. Today's conference is being recorded and we will be available for replay today from 2:00 p.m. Eastern through June 15, enter by dialing 719-457-0820 and entering pass code 6647023.

At this time, for opening remarks and introductions, I would like to turn the call over to Jessica Hazel. Please go ahead, ma'am.

Jessica Hazel

Thank you, Jim. Good morning and welcome to Cracker Barrel's third quarter fiscal 2016 conference call and webcast. This morning, we issued a press release announcing our third quarter results and our updated guidance for the 2016 fiscal year.

In this press release and on this call, we will refer to non-GAAP financial measures for the current quarter adjusted to exclude the reduction in provision and tax positions. We also refer to non-GAAP financial measures in the prior fiscal year third quarter adjusted to exclude an accrued liability and tax effect related to litigation matter.

The company believes that excluding these charges and tax effects from its financial results provides information that may be more indicative of the company's ongoing operating performance, while improving comparability to prior periods. This information is not intended to be considered in isolation or as a substitute for financial information prepared in accordance with GAAP.

The last page of the press release includes a reconciliation from the non-GAAP information to the GAAP financials. The press release can be found in the investor section of our website crackerbarrel.com. In that press release and during this call statements may be made by management of their beliefs and expectations of the company's future operating results or expected future events.

These are what are known as forward-looking statements, which involve risks and uncertainties, and in many cases are beyond management's control and may cause actual results to differ materially from expectations. We urge caution to our listeners and readers in considering forward-looking statements and information.

Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning's press release, and are described in detail in our reports that we filed with or furnished to the SEC. We urge you to read this information carefully.

We also remind you that we do not comment on earnings estimates made by other parties. In addition, any guidance or outlook we provide or statements we make regarding trends speak only as of the date they're given and we do not update or express continuing comfort with our guidance, outlook, or trends, except in broadly disseminated disclosures such as this morning's press release, filings with SEC or as otherwise required by law.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Larry Hyatt; Senior Vice President and Incoming CFO Jill Golder; and Senior Vice President of Marketing, Chris Ciavarra. Sandy will begin with a review of the business and Larry will review the financials and outlook.

We will then open up the call for questions for Sandy, Larry, and Chris. We ask that you please limit your questions to matters relating to the company's performance, outlook, and plans.

With that, I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran. Sandy?

Sandy Cochran

Thank you, Jessica. Good morning, everyone. Thanks for joining us today. As you can see from today’s press release, we significantly increased our operating margin in the third quarter, which resulted in a 22% increase in earnings per share from last year on an adjusted basis. Additionally, we delivered greater than 2% restaurant and retail sales growth in an environment where the casual dining industry reported negative sales as measured by the major restaurant performance indices. This morning we announced an increase in our regular quarterly dividend to $1.15 per share.

Over the past five years, we've increased our dividend seven times a total of 423% growth. In addition to the increase in our regular quarterly dividend, this morning we declared a one-time special dividend of $3.25 per share. The increase in our regular dividend and declaration of a special dividend reflects the Board's continued commitment to a balanced approach to capital allocation and to returning capital that's not needed for reinvestment in our business to our shareholders.

Larry will provide you details of our financial results for the third quarter and discuss our fiscal year end expectations, but before he does I'd like to update you on highlights from our quarter.

As I outlined on our last call, our management team remains focused on several sales and traffic initiatives to meet the challenges of today, while strengthening the business for the future. The third quarter included a complete re-messaging of our more than 1600 billboards, many of which highlight our strong value proposition, an incremental full-week national cable advertising flight that reinforced our unique freshly prepared menu items, every day value and welcoming guest experience, a significant social media marketing campaign in support of the American Country Music Awards, and we highlighted three limited time only menu offerings that promoted our every day value.

In an ever competitive promotional environment we chose to focus upon our affordability programs during the quarter and guests responded well. Our spring menu offerings like salmon patties, the mushroom onion Swiss chops steak, and crispy buttermilk fried chicken plate drove positive guest response as part of our core menu $7.99 country dinner plate category.

We believe these strategic initiatives working in conjunction with our commitment to a unique and authentic Cracker Barrel experience supported our outperformance of the casual dining industry in the third quarter.

One way we deliver unique guest experience is through our retail store, which focuses on offerings that set us apart from the competition. Through our distinctive theme assortments we offer the guests something new and exciting at every visit. During the third quarter, our merchants assembled a terrific assortment of product like our Summer Fun theme which is filled with Flamingo laden merchandise that really resonated with our guests.

Additionally during the quarter, we experienced a significant sales increase in our media category driven by demand for the popular Joey and Rory CD. We continue to believe our music program drives significant brand impressions and builds awareness among our current and future generation of guests.

We remain focused on broadening the appeal of our music program genres and continue to engage guests through their favorite musicians like Pentatonix, Anthony Hamilton and Cole Swindell.

One of the innovative ways we believe we reached new audiences like Millennials during the third quarter was our proprietary academy of country music Content Creator Studio that we built and hosted at the fourth annual ACM Party for a Cause Festival in April. The three day studio event was a way to share coverage from back stage where several of today’s most popular social media influencers conducted exclusive interviews with some of country music's top and emerging artists. We're pleased with the results of this program as we've reached more than 180 million people to date through a variety of social media channels.

This past September, we introduced and trained our field leadership on a new targeted food management program that includes back of the house process improvements, additional focus on food reporting and analytics and a new food auditing process and we began to see traction during the third quarter from this initiative and realized additional savings in our restaurant cost of goods line.

We were pleased with our first Holler and Dash biscuit house opening, the team did a phenomenal job bringing this exciting new concept to market and the guest response has been very positive. We expect to open our second Holler and Dash during the fourth quarter in Tuscaloosa, Alabama. While we're excited about this brand, I want to emphasize that we do not expect it to have a meaningful impact on our financial results for the next one to two years.

Our fourth quarter is off to an exciting start with the highly anticipated return of our foil wrapped campfire beef and campfire chicken meals, both slow roasted with a medley of summer vegetables. These guest favorites, camp style inspired products will headline as limited time only offerings within our summer menu promotion, which began in May this year versus June and prior years to capture dining occasions around Mother's Day and the busy Memorial Day travel weekend.

We're supporting these unique menu offerings through a fully integrated marketing campaign featuring dedicated campfire billboards, product specific national cable advertising, in-store marketing, and social media content. We're pleased with the early progress from these advertising platforms like our campfire social media campaign which has driven the highest ever level of user engagement based on likes, shares and comments.

The Fourth Quarter will include a total of nine weeks of national cable advertising compared to six weeks in the prior year fourth quarter. Introduced two weeks earlier than in the prior year and with increased weekly GRP weight levels and expanded media channels the concentrated marketing program will highlight the uniqueness and limited nature of our campfire entrees.

To keep the offering new and fresh, we plan to introduce a new campfire mixed grill entree mid-summer and this entree will include the same delicious slow roasted vegetables, but will feature a combination of USDA choice beef chuck roast and a hearty serving of smoked sausage prepared with our own special seasoning.

On the retail front, our fourth quarter includes an expanded assortment of popular themes. For example, both our equestrian inspired and nautical influenced themes have returned supported by the introduction of new merchandise. Our retail merchandising team is focused on assortments that resonate across all generations and we’re excited about new offerings from stationary to accessories and home decor to music. We believe through the uniqueness and breadth of our merchandise we will continue to drive positive retail sales.

Before turning the call over to Larry to discuss the financials I want to take a moment and acknowledge the phenomenal contributions Larry's made to our company. This serves as his last earnings call before leaving Cracker Barrel to enjoy his previously announced retirement. He has had an accomplished and lengthy career.

In his nearly six years as our Chief Financial Officer, Larry's financial and business leadership has been instrumental to our success. In that time he's been at the forefront of putting the company in a path of profitable and sustainable growth. His contributions have been significant to our organization and I especially appreciate the support he's provided to me. Those of you know Larry understand the rare mixture of intellect, leadership, and humor that he has.

I will miss working with Larry and I wish him and his family the best in retirement. While it's sad to say goodbye to Larry I'm excite to have Jill Golder join our team. Jill has been actively working alongside Larry, the team, and me since her arrival and is bringing new perspectives and energy to the company. And I'm confident that she will build on the phenomenal progress that Larry has helped create for Cracker Barrel.

And with that, I will turn the call over one last time to Larry. Larry?

Larry Hyatt

Good morning, everyone. And thank you, Sandy for your kind words. I would like to begin by discussing our financial performance for the third quarter of fiscal 2016 and then our outlook for the 2016 Fiscal Year. As I discuss our results, I will refer to adjusted financial information for the current and prior year third quarters. This financial information reflects the following adjustments to GAAP net income.

First, during the prior year third quarter, we accrued $0.8 million for a litigation matter. Second, for the past few months, and with the assistance of outside tax experts, we have evaluated our provisions for uncertain tax positions. Based on this review, we have reduced that provision by $5.3 million or $0.22 per diluted share. Our adjusted earnings per share for the current year third quarter excludes the impact of this amount.

For the third quarter of fiscal 2016, we reported GAAP net income of $49.2 million or $2.04 per diluted share and adjusted net income of $43.9 million or $1.82 per diluted share. This represents a 22% increase in adjusted earnings per diluted share when compared with adjusted net income of $35.8 million or $1.49 per diluted share in the prior year quarter. Our revenue in the quarter was $700.1 million, an increase of 2.4% compared to revenue of $683.7 million in the prior year quarter. Our restaurant revenue increased 2.4% to $570.5 million and our retail revenue increased 2.4% to $129.7 million. Our comparable store restaurant sales in the quarter increased 2.3%, as an increase in average check of 2.9% was partially offset by a 0.6% decline in traffic. The increase in average check reflected menu price increases of approximately 2.8% and a favorable mix impact of 0.1%.

Our comparable store retail sales increased 2.2%. Our total cost of goods sold in the quarter was 30.3% of revenue, a 130 basis point improvement over the prior year quarter. Our restaurant cost of goods sold was 26.2% of restaurant sales compared to 27.5% in the prior year quarter. On a constant mix basis, our food commodity costs were approximately 1.6% lower in the quarter than in the prior year quarter driven primarily by decreases in beef costs. Our retail cost of goods sold was 48.5% of retail sales compared to 49.6% in the prior year quarter. This 110 basis point improvement was due in part to timing and we anticipate that our retail cost of goods sold will be higher in this year’s fourth quarter than in last year’s fourth quarter.

Our retail inventories at the end of the quarter were $107.6 million, an 8.6% increase compared to the unusually low inventory levels at the end of the prior year third quarter. Our labor and related expenses were $249.3 million or 35.6% of revenue, a reduction of 50 basis points compared to 36.1% of revenue in the prior year quarter. This year-over-year improvement was due to a number of factors including lower store bonus expense and State unemployment tax favorability.

Our other store operating expenses in the quarter were $135 million or 19.3% of revenue compared with other store operating expenses of $126.7 million or 18.5% of revenue in the prior year quarter. This 80 basis point increase was due to a number of factors, including a 60 basis point increase in advertising expense as we ran national cable advertising for the first time in the third quarter, and had a change in the timing of our billboard remessaging and a 20 basis point increase in store maintenance expense associated with continued preventive maintenance and related repair spend. Consistent with our strategic plan, we anticipate advertising expense for the full fiscal year to be 30 basis points higher than in the prior year.

Store operating income was $103.4 million in the third quarter or 14.8% of revenue compared with store operating income of $94 million or 13.8% of revenue in the prior year quarter. Our general and administrative expenses in the quarter were $36.4 million or 5.2% of revenue compared to adjusted G&A of $37.8 million or 5.6% of revenue in the prior year quarter. This 40 basis point decrease was primarily driven by lower incentive compensation. Our operating income was $67 million or 9.6% of revenue compared to adjusted operating income of $56.2 million or 8.2% of revenue in the prior year quarter, a 140 basis point improvement.

Our interest expense for the quarter was $3.4 million compared to an interest expense of $4 million in the prior year quarter. As this reduction was the result of a reduced credit spread and the expiration of certain higher price swaps and their replacement with lower price swaps. Our effective tax rate on a GAAP basis was 22.7% for the third quarter. On an adjusted basis, our effective tax rate was 31% compared to an adjusted tax rate of 31.3% in the prior year quarter.

Our balance sheet continues to be strong. We ended the quarter with $176.7 million of cash and equivalents compared to $202 million at the end of the prior year quarter. Our total debt is $400 million. In this morning’s release, we announced a 4.5% increase in our regular quarterly dividend to $1.15 per share or $4.60 per year. We also announced the payment of a special dividend of $3.25 per share. This is our second special dividend payment and represents our commitment to returning excess cash to our shareholders. These dividend payments will use approximately $105 million of our quarter end cash balance and will not require any additional borrowing under our revolver. The remaining cash balance and the unused balance on our revolver will continue to provide substantial liquidity after these dividends are paid.

With respect to our outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today’s earnings release and in our reports filed with the SEC. So, bearing that in mind, for the 2016 fiscal year, we now expect to report earnings per diluted share on a GAAP basis of between $7.75 and $7.85, and on an adjusted basis of between $7.45 and $7.55. We expect total revenue for fiscal 2016 of between $2.90 billion and $2.95 billion reflecting anticipated increases in comparable store restaurant and retail sales for the full fiscal year in the range of 2% to 2.5% and the opening of five new Cracker Barrel stores.

We now expect food commodity cost on a constant mix basis for the fiscal year to be approximately flat to the prior fiscal year. We have locked in our pricing on approximately 90% of our commodity requirements for the balance of fiscal 2016 which is relatively flat to this time last year. We expect our operating income margin for the full fiscal year to be approximately 9.5% of revenue, depreciation expense of between $77 million and $78 million, and net interest expense of approximately $14 million.

We now expect an effective tax rate for the year of approximately 29% on a GAAP basis or approximately 31% on an adjusted basis. We anticipate that capital expenditures for the year will be in the range of $100 million to $110 million. This represents an increase of approximately $10 million from our previous capital expenditure guidance. We have identified an opportunity to pull a cost saving initiative forward that was originally planned for early fiscal 2017. For the fourth quarter of fiscal 2016, we expect to report earnings per diluted share of between $2.05 and $2.15. In our May fiscal month, our comparable store traffic and sales were positive.

As many of you know, this is my last earnings call as CFO before my retirement in the summer. With a strong and highly differentiated brand and outstanding CEO, Management team and Board and a long record of industry beating performance, I know that I am retiring from the best CFO job in the restaurant industry. I also know that with Jill Golder, I am being replaced by an outstanding CFO. I would like to take this opportunity to express my thanks to the shareholders who own our company, to the analysts who follow us, and to the bankers who finance us for your support and encouragement these past six years. It has been an honor to know and to serve you. During my first conference call as CFO of Cracker Barrel, in February of 2011 I said that I was excited about this company's future. I still am.

And with that and for my very last time, I will now turn the call over to the Operator so that we can take your questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Robert Derrington from Telsey Group.

Robert Derrington

Thank you. Larry, we're going to miss you a lot, especially your kind of somewhat sarcastic humor. We really appreciate everything. Quick question on if I could get a little bit of color on the implied same-store sales guidance for both the restaurants and the retail for the fourth quarter. I'm just trying to understand a couple of things. One, on the implied restaurant same-store sales based on your annual guidance, implies a pretty broad range of roughly 2.5 to 4.5. One, I'm curious why the range is so broad at this point particularly given that you've only have essentially two months left in the year? And then secondarily on the retail piece, your retail same-store sales guidance is implied in the fourth quarter to be up 0.8 to 2.8. If in fact that proves to be the case, that's a pretty substantial deceleration in the two year trend versus what the third quarter was. Any kind of color you can help us with?

Larry Hyatt

Bob, you are correct of course about the implied relatively wide range which is just what would typically happen and has happened in the prior years also. As we've gotten into the fourth quarter, we typically will guide our same-store sales to about a 50 basis point range which of course means that just how that math works as far and I'm speaking specifically now to restaurant sales, I will speak to the retail sales in a moment. And some of that is a reflection of the uncertainty and the caution that we feel going into the fourth quarter. Sales for most restaurant companies for most retail companies over much of the last year has shown a choppiness on a month-to-month basis. We have had positive months, we've had negative months and looking at the consumers’ environment, we see as many negatives as we see positives and it candidly seems as if those negatives win some months, positives win some months, and it's very hard to have visibility even into the near term.

As far as retail sales are concerned, as you may recall, we went into last year’s fourth quarter with very light retail inventories which basically allowed us to largely avoid retail markdowns. As we are going into this year’s fourth quarter, we expect a more normal markdown phase.

Robert Derrington

Terrific, thanks for the color, Larry. I'll get back in the queue.

Operator

Moving on, we'll take our next question from Michael Gallow from CL King.

Michael Gallow

Hi, good morning. Congratulations on the results and again congratulations Larry on your retirement.

Larry Hyatt

Thank you, Michael.

Michael Gallow

My question is just on operating margins. I think you'd call it 9.5% now. I think when you started a few years ago, you had a lot of low hanging fruit. I was wondering when you think about the next kind of frontier where you think you can take operating margins, where you think some of the biggest areas of opportunity are, obviously you've done a great job on the retail margins which seem like it will be a little bit more of a headwind at least in the near term, commodities have been favorable for you and you've done a great job on labor. So I was wondering if you could just touch on the key categories how we should think about where you can take margins over the next couple of years, thanks.

Sandy Cochran

Michael, I'll start this and then let Larry finish it up. We haven't provided of course any specific guidance about beyond what we just did and we will be doing that and giving you some more color next fall. But in general, we have a number of initiatives that we have been working on for a few years, largely focused on improving the productivity in the back of the house. These initiatives are new equipment in our cooking platform. They are as Larry alluded to in his comments we pulled forward an energy savings lighting initiative in the back of the house that we were able to accelerate as well as a number of labor initiatives that come through either changes in our menu platform or in some new technology that we've been able to add. So for example, our dining room management system which we installed a year ago, we've got a series of benefits that we think will get to those some of them labor and some of them just guest facing and informational. So I think we do have a number of areas that we're working on to improve the productivity and the profitability of our core business, and we'll be updating you in more detail on that in September.

Michael Gallow

Thank you.

Operator

Moving on we'll take our next question from Joseph Buckley from Bank of America.

John Michael

Thanks. This is John Michael on for Joe. Just wondering if you're seeing any impact on your breakfast sales given the increased breakfast focus by the QSR players?

Sandy Cochran

I'm going to actually let Chris Ciavarra speak to it whose is here and before I turn it over to him I'll make a note he is the proud father of a new three day old baby boy, so I'm just happy that he here in the room and awake, but Chris, you want to speak to breakfast?

Chris Ciavarra

Thank you Sandy very much. So I think in terms of McDonald's putting their increased focus on it, we've continued to see favorability out of breakfast sales over the past, really past six months, that day part has continued to perform for us. We certainly have monitored our breakfast sales very closely when they did launch that and we don't believe we did see any impact from that rollout by them and part of that simply is at the end of the day that we think the occasion for Cracker Barrel visit is quite different than a QSR visit.

John Michael

Got it. Thank you, Chris and congratulations.

Chris Ciavarra

Thank you.

Operator

Moving on we'll take our next question from Jake Bartlett from Suntrust.

Jake Bartlett

Hi, thanks for taking the questions and again Larry congratulations. It’s been a long time I remember first meeting you back with the O'Charley's days, so congrats.

Larry Hyatt

Thanks a lot.

Jake Bartlett

I have a number of questions and one is just kind of starting with the $10 million investment in CapEx. You said you're kind of moving that forward. I assume that's part of the cost related to the cost savings you would have expected in 2017 and it looks just from what you reported in this quarter of CapEx that's probably where it landed. Do you expect this investment to help in the fourth quarter or to help 2016 and more broadly, are we still looking at kind of a $10 million savings in 2016 and $20 million savings in 2017 for cost savings initiatives?

Larry Hyatt

Yeah, with respect to the guidance increase in our capital investment, that is related as Sandy indicated to a back of the house lighting initiative not likely to have a material impact on our operating performance in the fourth quarter of 2016 likely to allow us to realize those savings earlier in fiscal 2017 than we would have otherwise realized them. And in terms of the $10 million in cost savings initiatives for 2016 and the implied $20 million for 2017, I'll remind you of something I said in response to a question at the second quarter conference call where we said then that as a result of the choppiness of the consumer spending and the fact that our number one focus has to remain on making sure we meet consumers needs without the potential of the disruption which sometimes occurs from the implementation of various of these cost savings initiatives that it was possible in fact likely that some of the $50 million in cost savings that were targeted for fiscal 2015, 2016, and 2017 may carry over into subsequent years.

Jake Bartlett

Got it, okay. Thank you. And then in an effort to understand the underlying trends of the business and the impact from the promotions, I'm hoping you can give us an indication of how much the Easter shift affected the March and April results? And taking an impact out of March and putting it into April, I would have expected March to may be a little stronger given the four weeks of advertising and the more value oriented promotion that you had, maybe if you can explain that, the cadence or what the impact of the promotions were? And then April maybe remind us what you were running in April that drove the solid results after factoring in the Easter shift?

Larry Hyatt

Yeah, let me start answering that. I'll answer like the first half of that and then I will turn it over to Chris to talk specifically about the impact of the promotions and the advertising. We have estimated that the impact of the Easter shift on our March comp store traffic and comp store sales and our April comp store traffic and comp store sales was in the range of approximately 150 basis points, meaning that the impact of the shift was about 150 bips positive to our March comp store traffic and sales, and a similar amount negative to our April comp store traffic and sales. I'll point out as far as the advertising is concerned in our fiscal March month, which is when our advertising flight started in the third quarter that we actually only had two weeks of the advertising in the March fiscal month and the balance in the April fiscal month and the experience we have had with our advertising flights in the past is that the impact has the tendency to build over time so that we didn't expect to see much of a sales impact for that advertising in the last two weeks of the March month and I'm now going to turn it over to Chris.

Chris Ciavarra

Thank you, Larry. Yeah, I think I'll just remind people that we were really working to reaffirm our value position at dinner and we did feature at three limited time offers at $7.99. We supported those with new creative on some of our billboards as Sandy outlined during her prepared remarks and then through a rather expensive digital program. From a messaging standpoint on TV, we actually did not focus on these and instead we focused more on our experience and wide range of wide variety of menu options that are available at Cracker Barrel. We were certainly prepared for slight negative mix impact although as Larry did outlined, we certainly had prepared that to a degree with some offsetting menu items. Ultimately, those menu items did perform better than we anticipated and while we're prepared and pleased with the mix it’s turned out to be beneficial.

Jake Bartlett

Great. And then in terms of the current trends and I appreciate that the campfire promotion is working very well right now. Looking beyond the campfire promotion into 2017 I'm not asking for specific guidance but just maybe the components of what you think are going to drive your same-store sales including that whether we're going to see another increase in marketing spend like we did this year, whether the incremental impact of tiered pricing is going to be as great, any other flavor you can give us to perhaps how you think you can offset the challenging environment that we're seeing out there.

Larry Hyatt

Yeah, Jake, this has nothing to do with my pending retirement and kind of has everything to do with the cadence that the company uses when it comes to offering the guidance for the following year. We will be in a much better position to talk about our anticipated performance for 2017 and the sales drivers and the menu drivers and the cost savings initiatives and that’s the time we offer our guidance for 2017 on the fourth quarter call.

Jake Bartlett

Got it and thank you. And just last question really quickly, sorry for so many but the dividend increase of 5% was less than last year. Is this, are you targeting a payout ratio or anything you can tell us about what the decision was going into the 5% increase versus the 10% increase?

Larry Hyatt

Yeah, we have said that we are over the long term and of course are subject to constant review and consideration by the Board, who is the one that of course ultimately is responsible for a dividend decisions, are targeting a long term dividend increases, which are roughly in-line with our long term increases in earnings per share. We can although there's not necessarily a hard and fast rule here, but we tend to do our raises in even nickels. And so our Board felt that in particular along with a special dividend of $3.25 that the $0.05 increase in the regular quarterly dividend is consistent with that long term objective.

Jake Bartlett

Great, thank you very much and congratulations again, Larry.

Larry Hyatt

Thanks a lot, Jake.

Operator

Moving on, we'll take our next question from Alton Stump from Longbow Research.

Alton Stump

Hi, thanks. Good morning and my congratulation as well Larry and good luck in next stage of your life. Just a real quick question I realize you don't want to talk about your full-year 2017 guidance in the fourth quarter conference call, but just on the input cost trend obviously things improved over the course of the last couple quarters, potential outlook for the current fiscal year. But as you look ahead to full year 2017, what's going on with beef, also dairy as well including costs falling way off? I mean is there any way that we don't see commodity deflation for you guys heading into full year 2017, if you can answer that?

Larry Hyatt

On the basis of what we are seeing now and I'm going to emphasize and to underline now because this may change by the time the company is sharing it’s guidance for the fourth quarter it is reasonable to assume looking forward that there will be some deflation in commodities based on what we know right now. But it's important to point out that there is likely to be higher wage cost pressure in 2017 as the labor market continues to tighten. So that will be at least a partial offset to the potential tailwind from commodities.

Alton Stump

That's very helpful thanks, Larry and then just quick if I could have a follow-up and hop back in queue. But I mean obviously April was a tough month for not just you guys but a lot of your peers even after stripping out the Easter timing shift. Is there anything you saw either internally or externally that will explain why April was so weak and sort - up to that point if it appears have things have gotten better certainly based on your comments you’ve made?

Sandy Cochran

Well, I think that as Larry said earlier in the call the consumer continues to be a bit of a mystery and what might be reflected in April is a continuation of the choppiness that he described that we see and are to some degree assuming we may continue to see.

Alton Stump

Got it. Thanks, Sandy and Larry.

Operator

Moving on, we'll take our next question from Imran Ali from Wells Fargo.

Imran Ali

Hi, good morning thanks for taking my question.

Sandy Cochran

Good morning.

Imran Ali

Moving back to the special dividend, I think the last time you paid the special dividend you had exited Q4 with around $265 million in cash in your balance sheet and currently you have around $175 million in cash. I guess how should we think about special dividends going forward in terms of your minimum cash requirements, the frequency and so on?

Larry Hyatt

Yeah. A couple of things to point out. Last year, we paid the special dividend, two weeks after the end of the fourth quarter. So that $265 million of cash on the balance sheet at the fiscal year and was very soon reduced by about $75 million for the special dividend payment and by about another $27 million for the regular dividend payment. In order to avoid some potential confusion about that, the Board decided to make the special dividend payment at the end of this year’s fiscal year. So the comparison of the cash balances of this year, fiscal year and last year’s fiscal year will be somewhat misleading except if you take that $75 million special dividend payment last year into consideration. As far as the answer to the larger question in terms of the company’s attitude towards special dividends going forward, special dividends are by their name special, not regular. On the other hand, as long as we don't have the same opportunity to repurchase shares that many other companies have. The company and the board are going to continue to look at ways to return cash to shareholders that the company does not need to reinvest.

Imran Ali

Understood and just shifting back to the cost savings initiative that you touched on earlier and you talked about there might be some moving parts here in terms of $10 million this year and $20 million next year there might be some movement there. But that being said, would you see the net impact of these savings amounts to and what would be the margin impact of these savings in aggregate?

Larry Hyatt

Are you talking about at the full $50 million?

Imran Ali

Yes of the full 50, correct.

Larry Hyatt

Full $50 on $3 billion of sales is about I guess 130 basis points.

Imran Ali

Okay.

Larry Hyatt

But it is important to point out as we said at the time that we first set out this $50 million savings target back in our Analyst and Investor Day meeting in May of 2014 that we expected that $50 million in savings to be at least partially offset by both our increase in our advertising spend, which we said over the three years from 2014 to 2017 would be going up by somewhere in the range of 50 basis points to 60 basis points and additionally that we anticipated and in fact have seen some accelerated wage pressure.

Imran Ali

All right. Great thanks very much.

Operator

Moving now, we'll take our next question from Steve Anderson from Maxim Group.

Steve Anderson

Good morning, just wanted to ask about the [indiscernible] any discussion on the fusion prototype and then the restaurants that you've opened so far, if you've learned anything incrementally since those openings and if you're still potentially looking to accelerate unit growth, being if these units tended to have a lower construction and operating cost?

Sandy Cochran

Yeah, Steve. We're pleased with the cost savings that we're achieving in the fusion store and we currently really only have the one store operating in North Carolina. The second fusion store, and just by nature of how the construction schedule was working when we built that there were most of the stores that have opened since then were already in the works, but it's going to be opening in next week or two more weeks out in Idaho and then each of the subsequent stores will have the fusion prototype or the second iteration of it. But we continue to be pleased with it. We do continue to work on optimizing both the new store version of the fusion kitchen, as well as opportunities that we see from the learning that we're getting from the fusion prototype to retrofit in our existing store base to achieve some savings. So, we really have two projects working on that.

Steve Anderson

Okay. And then, with regards to any 17 opening I know you haven't announced your schedule yet, but will all of the 17 units be fusion units?

Sandy Cochran

Yes, they will be.

Steve Anderson

Okay thank you.

Larry Hyatt

And Steve, one thing to just point out, you had mentioned both lower construction and operating costs. It is actually we anticipate that the operating costs will be lower and the construction cost in the range of about what they were for the old prototype. We said in 2014 that we thought construction costs would be about $50,000 or less, which on $2.8 million to $3 million investment isn't that meaningful a number. And finally, I'll just point out that one of the reasons why our new store targets now five, which is lower than we started the year since we had one store fall-off just because of zoning in and landlord issues and have had two stores move from basically the end of the current fiscal year to early in the 2017 fiscal year.

Steve Anderson

All right. Thank you.

Operator

Moving now, we'll take our next question from Robert Derrington from Telsey Group.

Robert Derrington

Yeah. Just a follow-up, Larry if you could and I don't want to get too detail about next year, but there's been a lot of discussion in kicking around the part of the higher federal mandated over time rules. I'm just trying to - can you give us any color does this the new labor rules as it relates to over time for exempt employees, is it a deal breaker? Is it something that you think you can manage in the company’s business, any kind of color would be helpful there?

Larry Hyatt

Sure, Bob. We have in very round numbers approximately 3,500 salaried store managers. We anticipate on the basis of the final rules that the DOL just recently announced that fewer than 3% of those salaried store managers will be below the DOLs new salary threshold. That said, we are evaluating our management structure to see if there are additional changes that we should be making, but we think that this will be very manageable for us.

Robert Derrington

That's terrific Larry, again good luck to you in the future. Thank you.

Larry Hyatt

Thanks a lot, Bob.

Operator

At this time, I'd like to turn the conference back over to Sandy for any additional or closing remarks.

Sandy Cochran

Well. Thank you all for joining us today. As we head into the final quarter of the year, we're encouraged by our May sales results and the customer enthusiasm around our summer menu offerings. We look forward to hopefully a busy summer travel season. I remain confident that we have the right strategy and right leadership in place to move the brand forward and drive shareholder value. We appreciate your interest and support.

Operator

And that will conclude today’s conference. We thank everyone for their participation.

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