Cracker Barrel Old Country Store, Inc.

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CBRL

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Q2 2010 Earnings Call

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Feb. 23, 2010

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MANAGEMENT DISCUSSION SECTION

Operator: Good day, and welcome to the Cracker Barrel Second Quarter 2010 Conference Call. Today’s call is being recorded and will be available for replay today from 2 PM Eastern through March 9, 2010 at 11:59 PM Eastern by dialing 719-457-0820 and entering passcode 3624273.

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

Barbara A. Gould, Investor Relations

Thank you, Megan. Welcome to our second quarter 2010 conference call and webcast this morning. Our press release announcing our fiscal 2010 second quarter results and our updated outlook for fiscal 2010 was released before the market opened this morning.

In our press release and during this call, statements may be made by management of their beliefs and expectations as to the company’s future operating results or expected future events. These are what are known as forward-looking statements, which involve risks and uncertainties that in many cases are beyond our control and may cause actual results to differ materially from management’s expectations. We urge caution to our listeners and readers in considering forward-looking statements or information.

Many of the factors that can 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 file with the SEC and we urge you to read this information carefully.

We also remind you that we don’t comment on earnings estimates made by other parties. In addition, any guidance or outlook that we give speaks only as to date on which it was given, and we do not update or express continuing comfort with our guidance and/or except as required by law and then only in broadly disseminated disclosures, such as this morning’s press release, our filings with the SEC and this call.

We also disclaim any obligation except as required by law to update disclosed information on trends or guidance, and note that any such update, should or if they occur, again will be made only in broadly disseminated disclosures. We plan to release fiscal 2010 third quarter earnings and comparable store restaurant and retail sales on Tuesday, May 25 before the market opens.

On the call with me this morning are Cracker Barrel Old Country Store’s Chairman, President and CEO, Mike Woodhouse; and our Executive Vice President and CFO, Sandy Cochran. Mike will begin with a review of the business; Sandy will review the financials and outlook, and then Mike will return to close. We will then respond to your questions. Mike?

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

Thanks, Barb. Good morning, everyone and thank you for joining us today. This was an excellent quarter for Cracker Barrel, driven mainly by better operating margins that produced very strong earnings. We’ll continue to make improvements across the company and I anticipate further progress as our execution becomes more consistent through the daily efforts of our 66,000 employees. We’ve been working on a number of programs to provide a better guest experience, and at the same time improve our profitability, and the results are encouraging. For example we used our focus on weekend execution, which is to provide great service when our stores are at their busiest, to raise our game throughout the rest of the week. Our new promotional menu items are a big hit with guests, and we’ve got a number of new successful retail products and we continue to deliver strong profits through disciplined cost management.

We’re especially pleased with these positive results considering the economy in general and the financial results reported by many others in the restaurant industry. One factor I can point to in explaining this is that we’ve got a greater level of intensity at Cracker Barrel compared with a year ago, and compared with two years ago. We’ve made efforts to simply the business, which has allowed us to focus on the fewer areas that actually can have a significant impact. For example much of our progress to-date has been achieved by removing obstacles that slowed down service, so it’s no surprise that we’ve been able to execute better across all fronts: food preparation, table service and retail.

And remember this is still a work in progress. The initiatives we’re still working on I means there are more improvements to come. I’m very pleased that our positive momentum continues despite the challenging economy. As you know there is still a lot of uncertainty about the pace of the economic turnaround that we’re in the middle of. Consumer confidence was 55.9 in January, the highest score in more in a year, however the news on employment and job creation is still largely negative. It seems that for every company that announces the hiring of new workers, there are others with news of lay-offs. With new jobs scarce and money generally tight, there is no wonder that consumers are focused on paying down debt and getting more value for the money they do spend.

Given this environment we’re pleased to have comparable store restaurant sales that are down only two-tenths of 1% for the quarter, including the slightly negative effects from more severe winter weather this year than last year. It’s even better, though, when you compare the results with the rest of our industry. In fact Cracker Barrel has now outperformed Knapp-Track index for 14 consecutive quarters. And we’ve had a positive average check in every quarter.

In the second quarter our comparable store traffic was more than two points better than the Knapp-Track index. Four of our regions had positive comp store sales --Florida and the upper Midwest were two of the areas showing the greatest positive comparisons. In addition, our weekday business improved in the second quarter as did lunch and breakfast on the weekends.

We can point to our improving customer satisfaction scores to explain why we’re staying ahead of the pack. However this doesn’t fully explain our ability to more than hold our own for such a long period of time. We think the answer to that question lies in the strength of the brand and in our unique offerings. Keep in mind that we’ve been voted Best in Family Dining for 19 years in a row, in the Annual Choice In Chains survey conducted by Restaurants & Institutions magazine.

For over 40 years, we put together a winning combination that creates an atmosphere, featuring food made from scratch at an old fashioned country store. There’s something about that down home feeling that stirs up strong emotions and it’s one reason why people continue to rate us very highly. Even though we’ve been around for decades, we think that trusted Cracker Barrel brand is more relevant today than ever before because of the value that’s associated with both our restaurant and retail offerings.

The recession has definitely changed consumer spending habits, some would say perhaps forever. We’re not smart enough to make predictions and we’re not about to make predictions about when the recession will end or how much people will commit to dining out when it does. However there is research to support the notion that today’s customers are even more demanding about the value they expect. And Cracker Barrel continues to be all about offering high quality food and great retail products at a great value.

Let me now continue with an update on the things we can control. Our focus on execution, called One Best Way, has helped our overall guest satisfaction scores improve again in the second quarter. In particular, we saw significant gains in the areas of speed of the order in the restaurant, server attentiveness, and appropriate food temperature. We also scored higher marks for retail service. An important part of One Best Way is Recipe Right, which we started in fiscal 2008, to ensure that high volume food items are prepared throughout the system according to our specs. Recipe Right, coupled with efforts to improve the management of waste through promotional execution, enabled us to save over $2 million compared with last year and reduced waste during the second quarter.

Let me next tell you how we’re progressing with our Seat to Eat initiative. Seat to Eat is focused on delivering consistent execution during both peak and off peak hours. Seat to Eat also provides measurable results to allow our employees to know when they’re are meeting their targets and when they need to improve. It’s been rolled out now in all 72 stores in the first region to implement the program, including one of our new stores that opened during the second quarter, and we kicked off the Seat to Eat rollout in our second region during the last week of January. The third region will begin its rollout at April. We’re pleased that the implementation costs have been lower than expected and our initial traffic results have been positive. We’ll continue to monitor these stores to ensure that the results meet our expectations.

Clearly once we have guests in the store, we’re learning how to serve them better. However, we still have to drive more traffic to the stores. Our best opportunity to do this is to build frequency among our light users who make up about one half of our guests. We know that they love the Cracker Barrel brand but that we’re not always top of mind. At the same time, local customers are among our heaviest users, but in some cases they aren’t coming in as often as they have in the past. To that end we’ve been having good success with our promotional menu items.

We’re adding a number of new offerings that complement our tried and true favorites. In the second quarter for the holiday promotion, we continued some of the popular fall offerings in addition to traditional holiday favorites. During the last week of the second quarter, we rolled out the winter promotion. For breakfast, it includes a baked country casserole and a favorite from last winter, the Smoked Sausage Skillet. For lunch and dinner, we extended the range of Cracker Barrel comfort foods with two new offerings, which both include a new blend of steamed green beans, wax beans, red onions and fresh red peppers. The first is the Chicken n’ Vegetable Biscuit Pot Pie retailing at $7.99, and the second is a Mushroom-Braised Pot Roast at $8.99. And to round out the meal we’ve introduced Grandma’s Cheesecake for dessert.

Next a few words on retail sales. Our efforts to place the right products in the right place at the right time and at the right price are starting to pay off. For example, we were able to reduce our second-quarter markdown significantly by right-sizing the amount of seasonal items, and by the introduction of the Great Gifts program. This colorful display had a prominent place when you first entered our stores during the Christmas season. We offered a wide variety of items, both fun and practical, and each for less than $20. Several of the items sold out in just a few weeks and we reordered them in time for Christmas. These included the Laughing Dog, the Magic Fiddle and the Tabletop Air Hockey games.

As a result of our successful holiday strategy, we exceeded our expectations for retail sales and gross profits, and we significantly improved our retail profitability during the quarter compared with the holiday season last year. While we trimmed the number of our apparel SKUs, the key item that produced strong sales in the quarter was the one-size-fits-all fleece wrap for $24.99. Collegiate products continue to be a growing category for us, and our t-shirts and hats honoring America’s military personnel have sold through very quickly, leading us to expand this assortment in the months ahead.

Our spring giftable selection is now in the stores. This includes chocolate, tea and coffee selections that sold well last year, leading into Valentine’s Day, as well as our Easter-themed items. In addition to generating better sales, our retail operations are consuming less cash than before. Our retail inventory level was $90 million at the end of the quarter, $14 million below last year.

Discussion of retail wouldn’t be complete without mention of our media sales. We see our exclusive CD’s as an important factor in the growth of Cracker Barrel’s role as a non-traditional music retailer. We did something new, with the Alan Jackson Collection. This exciting theme included menswear, womenswear, food items, collectibles, an Alan Jackson Signature Rocker, and of course an exclusive CD with two previously unreleased songs. The CD was one of our 10 best selling products during the quarter.

On the 1st of February, we introduced a new CD by Dailey & Vincent, an award winning bluegrass duo, which entered Billboard’s Magazine’s Bluegrass Album Chart at number one and remained at the top in the second week of sales. It was also in the top 20 on the Country Album Chart and was at 100 – number 120 on the overall Billboard 200. Our exclusive music collection features today’s younger artists as well as the legends of yesterday, and gives all of our guests one more reason to visit Cracker Barrel. We also benefit from the wide publicity surrounding our participating artists as they tour the country and promote these new CDs.

We also place more emphasis on sales of Cracker Barrel’s branded foods. We now have targeted items on specific products, for example our branded mints and gums, which have been selling very well. But more than just building retail sales, we see this key program as another way to leverage the power of the brand, helping to keep Cracker Barrel top of mind.

Of course, our retail products sell better when there’s service behind the sale, and this is another example where I think we have a greater level of intensity. We’ve had a program called Service that Creates Sales for some time now, and this too is an area where we’re getting even better at execution. Another way to drive traffic is with gift card sales, and we’re very pleased with the results we saw this year. In the second quarter overall gift card sales increased 14% from last year. This was driven by a broader distribution at third-party outlets, which have now increased to 50,000 total outlets over the past holiday season.

As I said at the outset, our strong financial results in the second quarter were mainly driven by higher operating margins. Our ability to take advantage of favorable commodity costs in the quarter, combined with better retail gross margins and better labor and operating expenses, produced significantly better margins at the store operating level compared with a year ago.

As you know, many in our industry have been resorting to discounts and other giveaways to drive traffic and sales. This has left what some refer to as a discount hangover, the challenge of restoring normal prices without negatively affecting travel. But we don’t use coupons or other means of discounting, and most importantly we’ve improved the bottom line without compromising guest experience. No changes in product specs, no changes in portions, and no reductions in service levels. This doesn’t mean that we can let up, we have to be even more disciplined than in the past regarding how we set prices and how we manage our costs. Between higher productivity and a better overall sales mix, we expect our operating margin to improve further in fiscal 2010, to between 6.7 and 6.9% for the full year, up from 6% last year.

A big part of what sustains our brand appeal is delivering the best guest experience every time. Cracker Barrel, we take pride in our ability to attract and retain great people, our turnover for the second quarter was 68% for hourly and 16% for management. These low turnover levels mean even more experienced employees, which in turn means a better level of guest service, which brings our guests back more often and allows us to continue to outpace the Knapp-Track index.

And with that I’ll turn the call over to Sandy to discuss the financial results in detail. Sandy?

Sandra Cochran, Executive Vice President and Chief Financial Officer

Thanks, Mike. I would like to review the financials now in more detail. Overall for the second quarter of 2010, we reported a 35% increase in diluted earnings per share, with $1.09 compared with $0.81 per diluted share in the second quarter of last year. Revenues during the second quarter increased 0.4% to $633 million, reflecting a 1.1% top line growth in restaurant revenues, which was driven by store growth and partially offset by year-over-year declines in comparable store restaurant and retail sales. Comparable store restaurant sales decreased 0.2%.