Cracker Barrel Old Country Store CEO Discusses F4Q12 Results - Earnings Call Transcript

| About: Cracker Barrel (CBRL)

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

F4Q12 Earnings Call

September 19, 2012 11:00 am ET


Coco Kyriopoulos - Manager of Investor Relations

Sandra Cochran - President, Chief Executive Officer, Director

Lawrence Hyatt - Chief Financial Officer, Senior Vice President


Jeff Farmer - Wells Fargo

Joe Buckley - Bank of America-Merrill Lynch

Bob Derrington - Northcoast Research

David Carlson - KeyBanc Capital Markets

Brian Ward - Davenport & Company


Good day and welcome to the Cracker Barrel Fourth Quarter 2012 Conference Call. Today's call is being recorded and will be available from today at 1 pm Eastern Time through October 4, 2012, at 11.59 pm Eastern by dialing 719-457-0820 and entering the pass code.

At this time, for opening remarks and introductions, I would like to turn the call over to Coco Kyriopoulos. Please go ahead.

Coco Kyriopoulos

Thanks, Nicole. Good morning, and welcome to Cracker Barrel's fourth quarter fiscal 2012 conference call and webcast. This morning we issued a press release announcing our fourth quarter and full fiscal year results and outlook for the 2013 fiscal year.

In this press release and on this call we will refer to non-GAAP financial measures for the fourth quarter and the 2012 fiscal year, adjusted to exclude charges and tax effects related to severance and to the proxy contest concluded at the company's annual meeting of shareholders last December. We will also refer to non-GAAP financial measures for the previous fiscal year and fourth quarter adjusted to exclude charges and tax effects related to an impairment net of a gain on the sale of a property, severance and the proxy contest.

The company believes that excluding these charges, gains, 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 the reconciliation from the non-GAAP information to the GAAP financials. The press release can be found in the Investors section of our website, 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 are 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 the SEC or as otherwise required by law.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; and Senior Vice President and CFO, Larry Hyatt. 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 and Sandy will return to close.

We ask that you please limit your questions to matters relating to the company's performance, outlook and plans and we do not intend to discuss matters relating to a potential proxy contest today. Thanks in advance for your cooperation.

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

Sandy Cochran

Thanks, Coco. Good morning, everyone. Today is the 43rd anniversary of the founding of Cracker Barrel and we are very pleased to celebrate by reporting positive news. As you can see from today's press release, our fourth quarter and fiscal year were a success on many fronts. We exceeded our previously stated expectations for sales and earnings in the fourth quarter which concluded a strong year for Cracker Barrel and our shareholders.

Over the course of the last year, we remained focused and executed remarkably well on our six business priorities that we laid out in the first quarter. broad based enhancements to our core business contributed to top line and EPS performance specifically in the fourth quarter, we believe our national advertising, menu development, and strong execution from the operations team worked together to drive our third consecutive quarter positive traffic.

There were many accomplishments during the fourth quarter in fiscal 2012 and here are a few highlights. Traffic to our stores during the fourth quarter was up 1.4% over last year. This marks three consecutive quarters of positive year-over-year sales and traffic and three consecutive quarters of beating the Knapp-Track casual dining index.

We improved our operating profit and margins despite continued food commodity pressures. This lead to an 18.8% increase in adjusted earnings per share for the fourth quarter and 13.9% increase in adjusted earnings per share for fiscal '12 compared to fiscal '11.

During 2012, we generated $220 million in cash from operations, which allowed us to pay down debt, repurchase shares, increase our dividend to shareholders and continue investing in our future. We were voted number one in the 2012 Consumer Picks survey conducted by Nation's Restaurant News. This is the second year the magazine has performed the survey and the second time that Cracker Barrel has ranked first place in family dining. We led in eight of the ten attribute categories including service, menu variety and likely to return.

Finally, total shareholder return. As measured by an increase in our stock price and dividends paid in fiscal 2012 was 41%. On this call, I will define our priorities for fiscal 2013 but first I would like to briefly review the successful execution of our six business priorities during the fourth quarter.

The first business priority centered on our new marketing message, Handcrafted by Cracker Barrel, which we launched before the holidays. During the fourth quarter, we promoted the Cracker Barrel brands on national cable and we used spot radio in a portion of our markets to communicate menu updates.

At a time when consumers want good value, we reminded them that our food is made from scratch and served fresh for a reasonable price. We continue to believe this media approach is working and contributed to our positive traffic performance.

Also, as a result of continued marketing efforts and a successful engagement campaign during the fourth quarter, we saw our digital activity including our Facebook, Pinterest, Email and text followers increase by double digit percentages across all platforms.

The second priority was refining our menu and pricing strategies with a focus on value affordability and variety. Our $5.99 daily lunch specials were a highlight of the year, providing our guests with a dependable affordable lunchtime option and have continued to drive weekday lunchtime traffic since their introduction last September.

Another highlight was the enhanced and new salads introduced in the fourth quarter which provided our guests with a wider variety of choices and flavors. These salads were supported by new radio spots and exceeded our expectations for sales mix and customer satisfaction.

Our grilled chicken and fresh vegetable salad was featured on NBC's Today Show with the Cracker Barrel nutritive preparing the salad and highlighting that it has less than 600 calories including the dressing and crackers. The salads were the centerpiece of our summer promotion, which also included other favorites like our (inaudible) fresh blackberry pancakes and a lunch dinner special of barbeque pork with corn bread.

The third priority was to enhance the restaurant operating platform to sustainably improve the guest experience. I am especially proud of our operations team and what they have accomplished this year. During the fourth quarter, we continued to execute on our operational initiatives and deliver a great guest experience.

The success of these initiatives is reflected in our guest surveys where we experience year-over-year increases in our overall guest satisfaction and over the course of the year we received all time high scores in many categories including overall value, taste and temperature of the food, friendliness and attentiveness of the server, speed of receiving your order, timeliness of checkout, cleanliness of the dining area and service in the retail store. Also the 2012 Consumer Picks survey that voted us number one reinforces that consumers really enjoy the Cracker Barrel experience.

Our fourth priority centered on driving retail sales and we are pleased to report the third consecutive quarter of comparable store retail sales growth. Specifically during the fourth quarter, we saw large increases in sales of home décor products. A standout in this category was our Garage theme which included products appropriate for Father's Day gifts.

Other popular items included nostalgic antique looking signs and humorous red solo cup stemware. These products are examples of the broader multi-generational approach that we are taking towards our merchandising and our focus on nostalgic authentic and unique items.

Apparel and accessories also continued to grow this quarter as they have all year, and as you recall, Laura Daily, our new Senior Vice President of Retail joined us during the quarter and we look forward to her influence on our retail business.

Our fifth priority was taking cost out of the business. Since July 2011, we have eliminated annual general and administrative expenses and district management cost with restructurings at the home office and in the field leadership. Also in the fourth quarter, we continued to see savings from the initial implementation of our labor management system. Additionally, we completed the rollout of our transportation management system which we believe will improve efficiency in the distribution of our retail merchandise during future busy season.

Our sixth priority was maintaining a balanced approach to capital allocations. During the fourth quarter, we maintained our disciplined approach to growth and opened three new stores ending the fiscal year with 616 stores. Over the course of the year, we repaid $25 million in long-term debt and repurchased approximately $15 million worth of shares while increasing our cash balance by $100 million. Additionally, we just announced another increase in our dividend to $0.50 a quarter representing 100% increase over the quarterly dividend declared in the first quarter of fiscal 2012.

Our 2012 successes as well as our longer term strategy of continuing to enhance the core business with a focus on increasing sales and profitability within the stores to expand the footprint with new store openings and to extend the Cracker Barrel brand beyond the physical stores with new revenue streams will guide our priorities for fiscal 2013.

They are the following. The first is to refresh select menu categories that will reinforce our value and provide healthier options to our guest. Second priority is to grow retail sales with unique merchandise. The third, to build on the successful Handcrafted by Cracker Barrel advertising campaign. The fourth, to invest in and leverage technology and equipment to support operations and reduce costs. The fifth is the continued focus on shareholder return. The final one is to expand the brand through e-commerce and licensing.

I will now describe each one in more detail. Regarding the first priority, we continue to improve our menu offerings to better meet our guest needs. Given the current mark in place, our guest feedback and our brand positioning, we have focused on satisfying the need for affordable options, healthier items with customizable choices.

Our first priority is to refresh select menu categories that reinforce the value proposition of Cracker Barrel and provide better for you alternatives. For example, last year, we launched our lunch specials which highlighted an affordable option during the lunch day part. This year, we will focus on highlighting our affordability during dinner with reformulated country dinner plates which are currently in test and anticipated to be on the menu later this year.

Last year, we met the needs of customers looking for healthier items with our new and enhanced salads in the fourth quarter. This year, we will build on our fresh and lighter options and increase customization for our guests with the introduction of six new sides, three for breakfast and three for lunch or dinner. The sides will come into our core menus this fall with the launch of our fall promotion.

Additionally, in an effort to signal to our guests that better for you selections are available at Cracker Barrel, we will be working on a dedicated category on both our breakfast menu and our lunch dinner menu. This category, called Wholesome Fixins will make it easier for the guest to find a delicious meal of 450 calories of breakfast and 600 calories of lunch and inner. We look to test this in the second quarter and roll it out towards the end of the fiscal year.

Our second priority echoes one from fiscal 2012 to grow retail sales. From a merchandise perspective, we will build on the successes of the past year focusing on authentic nostalgic and unique items and will continue to grow strong selling categories such as apparel and accessories.

We plan to maximize the growth of proprietary product lines. For example, we plan to expand the butterfly stall collection by introducing new doll accessories and furniture. We are also encouraged by the success of several of our items that sell across generations and we will offer more themes with products that appeal both to our established baby boomer guest and our growing millennial guest.

For example, in stores now is a western or country collection with products that vary from a traditional all over print tapestry bag to a more modern mesh cardigan. Another focus is to refine our strategy for seasonal offerings to optimize the lifecycle of products and we will look to improve productivity with better merchandising and base planning within the store.

Our next priority will be to build on our successful Handcrafted by Cracker Barrel advertising campaign. We will maintain the advertising approach we adopted in fiscal '12 using national cable to drive brand awareness and spot radio to deliver product news during our busy seasons in the second and fourth quarters.

Our billboards which are critical marketing tools for us to build brand awareness and deliver product and directional information will adopt the Handcrafted by Cracker Barrel creative with slogans highlighting value and freshness such as home made, doesn’t cost extra and fresh meals, friendly prices.

We will also build on our efforts from fiscal '12 to further engage our guests with digital media. We plan to increase the frequency and scope of our digital campaigns and use additional guest supply data to create a more customized experience.

Finally, one of the more unique components of our marketing mix is our music programs. This year, we will continue to offer exclusive products for Cracker Barrel guests from their favorite musicians with a shift towards artists who have better reach with younger consumers.

Our fourth priority is to invest in and leverage technology and equipment to support operations and reduce cost. Under the guidance of the new Chief Information Officer, we have several technology initiatives underway to sustain and grow our menu variety, our retail margins and our restaurant operations. We will complete the second phase of our production planning tool which focuses on food preparation.

We have recently implemented a merchandise planning system to create greater efficiencies for our retail operations and we also have several virtual training and e-learning and employee engagement initiatives which we believe will improve food and service quality and reduce training costs.

This quarter, we expect to complete the process of installing electronic ordering and invoicing capabilities at the individual store level which we believe will provide more accurate costing and greater visibility. We will also continue to evaluate new equipment solutions to offer our refresh menu item, improve labor productivity and minimize waste. For example, we plan to begin updating our source with more efficient dish rooms and invest further in our food inventory management system.

Our next priority is a continued focus on maximizing shareholder return. With careful analysis, we will continue to expand our footprint to meet our targeted 2% to 3% growth in new units, adding 12 stores in fiscal '13. Other capital expenditures will be for store maintenance, equipment and technology enhancements and with our strong cash flow we further anticipate opportunities to directly impact shareholder returns with quarterly dividends and share repurchases like the dividend increase we announced this morning to $0.50 per quarter.

Our final priority, as part of our extend the Cracker Barrel brand strategy includes two fronts. The first is to grow our e-commerce awareness and revenues and the second is to lay the groundwork to sell Cracker Barrel branded products in grocery stores. We will have more information on that in upcoming calls.

Despite the challenging outlook form employment, consumer sentiment, commodity and gasoline prices and the uncertainties created by the upcoming elections, I am confident that our focus on these six priorities will enhance our performance in the current fiscal year.

Before I hand the call to Larry, I want to highlight the changes to our board since our last conference call. Three new members have joined the board, Glenn Davenport, the former Chairman and CEO the Morrison Group, Tom Barr, VP of Global Coffee at Starbucks and Norman Johnson, Executive Chairman and former CEO of Clarcor. They bring food service expertise and marketing insight to our director base.

With these additions, came some retirement announcements. I want to thank Eddy Jones, Jack Lowery, Bobby Dale and Mike Woodhouse for their years of service. I am grateful for all four of these gentlemen and offer special thank you to Mike Woodhouse, my predecessor as Chief Executive Officer for his commitment to and guidance of this great Cracker Barrel brand. With the addition of the latest board members, 70% of our board is new within the past 18 months and this brings new energy around our strategy of sustainable profitable growth and a commitment to increase shareholder value.

In summary, I am incredibly proud of our leadership, home office team and most importantly our employees in the field for successfully executing on our business initiatives in fiscal 2012. I look forward to building on this success in fiscal 2013 and with that I will hand the call over to Larry Hyatt, our CFO for more details on the quarter. Larry?

Lawrence Hyatt

Good morning, everyone and thank you, Sandy. I would like to begin by discussing our financial performance for the fourth quarter of fiscal 2012 and the full fiscal year and then our outlook for the 2013 fiscal year.

In this morning's release, we reported that our fourth quarter net earnings on a GAAP basis was $34.7 million or $1.47 per diluted share compared to $17.5 million or $0.75 per diluted share in the prior year quarter. When adjusted for the impact of the 53rd week in the current year, and certain charges in the prior year, our adjusted net earnings were $1.20 per diluted share, and 18.8% increase over our adjusted net earnings of $1.01 per diluted share in the prior year quarter.

For the full fiscal year, we reported GAAP net income of $103.1 million or $4.40 per dilute share. On a comparable 52 week basis, and adjusted for certain charges and gains in the current and prior year, our adjusted net earnings for the full fiscal year were $4.34, 13.9% increase over the prior year's adjusted earnings per diluted share of $3.81.

Our revenue in the quarter was $700 million. Adjusting for $51 million impact of the additional week, our adjusted revenue for the fourth quarter was $649 million an increase of 5.9% compared to $612.9 million in the prior year quarter.

On an adjusted basis, restaurant revenues increased 6.0% to $526.9 million and retail revenues increased 5.5% to $122 million. Our comparable store restaurant sales increased 3.8% as traffic increased 1.4% and average check increased 2.4%. The increase in average check reflected menu price increases of approximately 2.2% and a favorable mix impact of 0.2%, due primarily to the higher priced items in this year's summer promotion. Our comparable store retail sales increased 3.1%.

Our total cost of goods sold in the quarter was 30.9% of revenue, a 70 basis point decrease over the prior year quarter. Our restaurant cost of goods was 26.7% of restaurant sales compared to 27% in the prior year quarter.

Our food commodity costs were approximately 2.5% higher in this quarter than in the prior year quarter as cost for eggs, oils and domestic catfish were up sharply from last year. These commodity cost increases were more than offset by reductions in food waste as a result of the continued success of our food production initiatives.

Our retail cost of goods was 49% of retail sales compared to 51.3% in the prior year quarter. This 230 basis point decrease was due primarily to a reduction in mark downs. Our retail inventories at year-end were $108.8 million which is flat to the prior year quarter.

Our store payroll and related expenses were $260.3 million or 37.2% of revenue compared to $229 million or 37.4% of revenues in the prior year quarter. Our hourly wage expense was 50 basis points lower than the prior year quarter as we continued to see productivity improvements due to our enhanced labor management system.

This was partially offset by higher store management bonuses. We estimate that the additional week in the quarter increased the year-over-year improvements in payroll and related expenses by 10 basis points.

Store operating expenses in the quarter were $126 million or 18% of revenues compared with $115.7 million or 18.9% of revenues in the prior year quarter. A 30 basis points decrease in utility expenses, a 20 basis points reduction in depreciation expense and the estimated 40 basis points point impact of the additional week accounted for this 90 basis points improvement year-over-year.

On a GAAP basis, store operating income was $97.6 million in the fourth quarter on an adjusted basis, store operating income was $86.5 million or 13.3% of revenue compared to adjusted store operating income of $74.7 million or a 12.2% of revenue in the prior-year quarter.

On a GAAP basis, our general and administrative expenses in the quarter were $37.7 million. On an adjusted basis, our G&A expenses were $36.3 million or 5.6% of revenue compared to adjusted G&A of $33.2 million or 5.4% of revenue in the prior year quarter. Lower salaries and wages as a result of our previously store organization changes were offset by higher incentive compensation expense due to our strong and financial and stock price performance.

On a GAAP basis, our operating income in the quarter was $59.9 million. On an adjusted basis, our operating income was $50.2 million or 7.7% of revenue, 100 basis points improvement over the adjusted operating margin in the prior year quarter.

Our interest expense in the quarter was $11.4 million. When adjusted for the impact of the extra week in the current year and the refinancing cost in the prior year, our interest expense in the quarter was lower by $0.7 million.

Our effective tax rate for the quarter was 28.5% compared to an effective tax rate of 19.4% in the prior year quarter. For the full year, our effective tax rate was 29.5% compared to 26.3% in the fiscal 2011. The increase in the full year rate is a result of our higher taxable income, a favorable prior year adjustment for deferred taxes, the expiration of the work opportunity tax credit and higher reserves for uncertain state tax positions which were partially offset by the state income tax benefit from the corporate entity merger. Our capital expenditures for the full year were $80.2 million compared to $77.7 million in the 2011 fiscal year.

Our balance sheet continues to be strong. At the end of the quarter, our long-term debt was $525 million, and we had unused capacity on the revolver in excess of $150 million. During the year, we reduced our debt outstanding by a total of $25.1 million and repurchased a total of 265,500 shares for $14.9 million. We ended the year with $152 million of cash and cash equivalents, an increase of almost $100 million from the prior year-end.

With respect to the our outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in this morning's earnings release and in our reports filed with the SEC. Conditions in the U.S. economy and the prices and supply of food and oil continue to be of concern.

So, bearing that in mind, we expect our total revenue for the fiscal 2013 to be between $2.6 billion and $2.65 billion reflecting anticipated increases in comparable store restaurant and retail sales in the range of 2% and 3%, and the expected opening of 12 new Cracker Barrel stores. We expect to report earnings per diluted share for the fiscal year of between $4.50 and $4.70.

With the anticipated impact of the drought, we now expect increases in food commodity cost on a constant mix basis of between 5% and 6% for the fiscal year with the most significant increases in the latter half of the year in beef and chicken, eggs, fruits and oils. We have currently locked in our pricing on approximately 45% of our commodity requirements for fiscal 2013.

We expect our operating margin for the year to be in the range of 7.3% to 7.5% of revenues. We expect deprecation expense of between $66 million and $68 million for the year and net interest expense of between $36 million and $38 million. Our interest expense is expected to decrease in the fourth quarter of fiscal 2013 when the existing interest rate swaps expire.

We expect an effective tax rate for the year of between 32% and 33%. The year-over-year increase in estimated tax rate is due largely to the anticipated non-renewal of the work opportunities tax credit. We anticipate the capital expenditures for the year will be in the range of $90 million to $100 million including new store investments of approximately $40 million and maintenance CapEx of approximately $40 million.

In this morning's release, we announced that our board has increased our quarterly dividend to $0.50 a share which is a 25% increase over our currently quarterly dividend and a doubling of the quarterly dividend over the past year. Our board has also approved a one year share repurchase authorization for up to $100 million of the company's outstanding common stock. This authorization is a replacement for a recently expired authorization.

For the first quarter of fiscal 2013, we expect to report earnings per diluted share of between $1 and $1.05. As we disclosed previously, our results for the first quarter of the 2012 fiscal year included the benefit of a litigation settlement and an actuarial adjustment to worker's compensation reserves.

Our guidance for the year and the first quarter does not reflect any expenses to a potential proxy contest at our annual shareholder's meeting on November 15 nor any severance or other charges related to potential organization changes.

With that, I am now going to turn the call back to the operator, so we can answer questions. Thank you very much.

Question-and-Answer Session


(Operator Instructions). Due to time, we would appreciate if you would limit your questions to one and one follow-up question and then get back in the queue. (Operator Instructions).

We will take our first question from Jeff Framer from Wells Fargo.

Jeff Farmer - Wells Fargo

You talked on this but what would you point as the two or three most significant drivers of your same store sales momentum? Especially rolling in there to July, you expect that to continue in coming quarters?

Sandy Cochran

Well, we had a lot of things going in the fourth quarter, Jeff. Our strategy of enhancing our core business was focused on driving traffic from our current guests. They know it and they love it and we wanted to increase the frequency and we really did that through a combination of a very successful LTO and in this case an additional enhancement to our core menu which was our salad promotion and I was very pleased with the success that we had with that.

Additionally, we had increased the reach of our advertising as we previously announced. We focused our advertising spend this year in the second and the fourth quarter. So we the national TV and spot radio to support the brand and the salad promotion. I think both of those were very effective.

Our operators did a phenomenal job of delivering the experience. We have spent a lot of time focused on service enhancements over the year so that we can ensure that we are providing a consistent quality experience and I think our operators absolutely did that.

We got some help from gas prices that came down. So I think it was a strong travel season and the miles driven was good. I think the fourth of the July being in the middle of the week helps a little. It gives us two strong weekends on either end. So just across the board, I think we had a number of things that contributed to the performance in the fourth quarter.

Jeff Farmer - Wells Fargo

Okay, and then just as a quick follow-up, just going back and recapping what happened last year, you began FY12 pointing to, I believe, $4.05 to $4.20, that would be excluding the proxy expenses. It looks like you raised the guidance in every quarter before finally delivering the $4.61 for the year, this year. So looking at what happened last year, any reason for us to believe that you haven’t been equally as conservative with the FY13 guidance?

Lawrence Hyatt

Jeff, the guidance of the $4.50 to $4.70, yes, we exceeded our guidance and much of Wall Street's expectations for the fourth quarter but the other thing that happened in the fourth quarter, United States experienced a historic drought. Many restaurant companies have adjusted our food cost outlook for the next four quarters and what is particular in our 2013 fiscal year for the back half of the year, in terms of what the commodity cost outlook is, we are now looking at an acceleration of our commodity cost through the course of the year, so that we are probably looking in the first quarter at something in the 2% to 3% range which can potentially by the fourth quarter be in the 7% to 9% range.

At the time that we initially offered our $4.50 to $4.70 guidance at the end of the third quarter, we were probably being a little more modest than we are now in terms of the same store sales except didn’t know about the food cost impact that we saw as a result of the drought over the summer. We, at that time, were actually anticipating a bumper corn crop and now it seems that this will one of the smallest crops in the United States in many years.


Our next question comes from Joe Buckley from Bank of America-Merrill Lynch.

Joe Buckley - Bank of America-Merrill Lynch

Can I just focus, maybe, on the first quarter guidance for a minute? You did have some unusual items. You had them going both ways and you have look like net net maybe was a plus $0.09 to earnings. So looking at the guidance, going up against the only quarter of negative comps and what you just described as fairly modest food cost inflation for the first quarter, just kind of walk us through your thinking on the first quarter guidance.

Lawrence Hyatt

Sure, Joe. Let me walk you through some numbers from first quarter last year, all right. Last year, we reported earnings per share on a GAAP basis of $1.03 and we said at that time that we had about $0.06 worth of expenses related to the proxy contest that would result in an adjusted number of $1.09.

We further spoke about a litigation settlement of $3 million or about $0.10 a share which was a non-recurring benefit in the first quarter last year and additionally a positive adjustment to our worker's compensation reserves which was a non-recurring benefit that we said was at the time would be a on-recurring benefit of $2.6 million or of $0.09 a share.

Factoring those items out of last year's first quarter, we are still anticipating substantial year-over-year earnings per share growth on a comparable basis or on an adjusted basis in this year's first quarter versus last year's fist quarter.

Joe Buckley - Bank of America-Merrill Lynch

Larry, wasn’t the manager's conference expense though, which I think was about $2.6 million in last year's first quarter?

Lawrence Hyatt

There was a manager's conference expense which I failed to mention and was a perfectly offsetting adjustment to our employee health care reserves. So those cancel, Joe.

Joe Buckley - Bank of America-Merrill Lynch

Let me just ask one more question on the first quarter. Does the guidance reflect any greater concern on sales in the first quarter than you might have had previously?

Lawrence Hyatt

We have roughly the same sales outlook for the first quarter now that we had when we shared our initial guidance in May. We think there is potentially some more risking of those sales as a result of some of the environmental concerns Sandy mentioned earlier.


Our next question comes from Bob Derrington from Northcoast Research.

Bob Derrington - Northcoast Research

If I could follow-up on that question about the guidance, one thing that I am scratching my head over is, your same store sales guidance of 2% to 3% basically implies is in fact you are able to report that the strongest two year same store sales in seven years. Given the concerns that you expressed early about the economy et cetera, I am just trying to understand as the comp compares to dramatically tougher beginning in the second quarter, what gives you the confidence that you can report the 2% to 3% same store sales growth? Is it higher traffic? Is it higher menu pricing? Is it mix? What is it that we need to understand here about that?

Sandy Cochran

Well, Bob, I think it's the initiatives really that I have outlined, already the work that we are doing to continue to enhance the menu. We do have a price increase embedded in our numbers but we have got a number of initiatives to further enhance and build on the effectiveness of our advertising program to build retail sales, to menu news on both the LTO side and the core menu side, continued enhancements on the service side. So it's all the things that I highlighted as the initiatives for 2013.

Bob Derrington - Northcoast Research

As a follow-up, if same store sales, if we just assume that the first quarter, 2% to 3% in line with your guidance comes through, that implies a substantial deceleration on a two year basis for the first quarter. Is there some reason that we should expect or again, is your guidance just conservative? How do we think about that? Particularly given that we are halfway through the quarter.

Sandy Cochran

I think in the first quarter we have got, as we mentioned, we continue to have a fairly conservative outlook about the consumers. It is a little bit unclear to us the impact of the election and the noise that that’s going to cause in our market where we continue to see very aggressive advertising and discounting from our competitors and I think that we are being cautious about our outlook on the consumer for the first quarter.

We also, as you recall, we have focused our advertising in Q2 and Q4. So while we do intend to run radio again in the fall which we did last year to support our fall promotion. We won't be running TV this quarter.


We have a question from David Carlson from KeyBanc.

David Carlson - KeyBanc Capital Markets

Real quick on the cost to goods sold. It came in well below what we were expecting for the fourth quarter, a portion of which, I believe, you mentioned was on the retail side. On the restaurant side, what was the gross inflation during the fourth quarter?

Lawrence Hyatt

Yes, commodity inflation in the fourth quarter was 2.5% so that it was slightly ahead of the increase in average check and was more than fully offset by the initiatives we have had in place on the food production side that has successfully reduced food waste.

David Carlson - KeyBanc Capital Markets

Also on the advertising front, should we expect higher percentage of revenues dedicated to marketing spend in fiscal year '13? Any commentary you can provide around the level of spend would be greatly appreciated.

Lawrence Hyatt

We expect our advertising spend for the full fiscal year as a percentage of total revenue to be roughly the same as in fiscal '12.

David Carlson - KeyBanc Capital Markets

Which was about 2%?

Lawrence Hyatt

2.2%, to be exact, yes.


(Operator Instructions) We will take a question from Jeff Omohundro from Davenport & Company.

Brian Ward - Davenport & Company

This is Brian Ward calling in for Jeff Omohundro. Hope everybody is doing well and congratulations on the quarter.

Sandy Cochran

Thank you, Brian.

Lawrence Hyatt

Thank you, Brian.

Brian Ward - Davenport & Company

My question is, have you had the opportunity to evaluate patient protection and affordable care act as it relates to the potential cost increases the company might see in the coming years?

Sandy Cochran

Brian, we are in the process of evaluating what, as we currently understand it, what the implications of that act will be on our business and what our choices will be and how we intend to address it. So I am not prepared to discuss it at this time but we are spending a lot of time on that internally.


We have a follow-up question from Bob Derrington from Northcoast Research.

Bob Derrington - Northcoast Research

Yes, Sandy, you mentioned, I think it was in the fall menu that you expect to include a new section on the menu with some more controlled calorie information. Is that, I assume, a precursor to ultimately adding calorie information to the menu and when would you anticipate doing that?

Sandy Cochran

Well, it's not in the fall menu. We are going to be testing it in the second quarter and hope to roll it by the end of the year. I mentioned it was internally its Wholesome Fixins and it will offer the guest a variety of breakfast options that has calories less than 450 and then some lunch dinner options at less than 600.

We think it will absolutely address the need for lighter fresher and dedicated categories for those guests who are looking to ensure they can get a healthy option. It does help us as we move towards providing the nutritional information. But most of all, we think, this is as clearly as what guests are looking for and that it is currently a barrier to usage right now with guest that love us but say they sometimes restrict usage because they are not sure they can find something that’s within the calories they are looking for. So we are going to try to point all of that out, form it and organize it in a way to make it easy for them to find.

Bob Derrington - Northcoast Research

Got you, and a follow-up, Larry. If you could help me for a second, within the press release, you talked about the total revenue for the company on both the restaurants and retail on a comparable 13 and 52 week period basis. Do you have the actual results for the restaurant and retail which was a 14 week period?

Lawrence Hyatt

Yes, and let me walk you through what the sales impact and the cost of good sold impact were of the 53rd week, Bob. Sales, as we said, the sales impact of the 53rd week was $51 million which broke about approximately $42 million restaurant, $9 million in retail. Our cost of good sold for the 53rd week for restaurant was about $11.2 million and for retail about $4.1 million, meaning our 53 week COGS for restaurant was the same, 26.7%, as it is on an adjusted basis and for retail it is 49.0% as compared to the adjusted number of 49.2%.


We have a follow-up from David Carlson from KeyBanc.

David Carlson - KeyBanc Capital Markets

Just one final question. Can you comment at all on the impact of the shift in July 4 or July 4 taking place on a different day may have had on a similar strong sales during the quarter?

Sandy Cochran

Yes, I comment related the holiday being in the middle of the week does allow us to get two good weekends of travel versus concentrating at one which tends to happen more when the holiday falls obviously at one end or the other of the weekend. So I would say, overall, I was pleased that it fell this week on a Wednesday.


We have our final question from Joe Buckley.

Joe Buckley - Bank of America-Merrill Lynch

Just a couple of quick ones. You mentioned in the first quarter you would do radio advertising but not TV? Is that the same year-over-year or was there some TV in the first quarter a year ago?

Sandy Cochran

No, we did radio last year. So it’s the same.

Joe Buckley - Bank of America-Merrill Lynch

Then, just a question on the CapEx numbers. Larry, it looks like, I think they are coming in a little lower than what you described at the analyst meeting in April. So I am just trying to verify that and maybe ask you why that’s the case and then with respect to the new restaurants, where are you in terms of somewhat less costly prototype that I believe you have been working one?

Lawrence Hyatt

First of all, in terms of the answer to your question about our CapEx numbers for the 2012, they are lower than the numbers that we had anticipated at the investor analyst meeting. Some of that is just we had some remodeling programs that we just found we were doing fewer of than we had anticipated in April.

So as I mentioned that we are anticipating for 2013, $90 million to $100 million of CapEx, of which about $40 million will be new stores, about $40 million will be maintenance CapEx and the balance will basically be our sales driving and cost reduction initiatives. Then, as far as our cost reduction efforts with respect to the new restaurant prototype, the best way to characterize it is it’s a work in progress.


And at this time, I would like to turn the call back over to Sandy Cochran for any closing remarks.

Sandy Cochran

Thank you. Thank you all for joining us today. As we head into the first quarter, the fiscal year, I am pleased with the progress we have made on our strategic priorities in 2012 and with the momentum that’s carrying us into fiscal 2013. I look forward to building on the success and executing our new priorities and I remain confident that we have the right strategy and the right leadership in place to move this brand forward and to drive shareholder value. We appreciate your interest and support. Thank you.


Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.

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