Coco Kyriopoulos Sandra Brophy Cochran - Chief Executive Officer, President, Director and Member of Executive Committee Lawrence E. Hyatt - Chief Financial Officer and Senior Vice President Christopher A. Ciavarra - Senior Vice President of Marketing.

Joseph T. Buckley - BofA Merrill Lynch, Research Division Michael W. Gallo - CL King & Associates, Inc., Research Division Bryan C. Elliott - Raymond James & Associates, Inc., Research Division Robert M. Derrington - Wunderlich Securities Inc., Research Division Stephen Anderson - Miller Tabak + Co., LLC, Research Division Christopher T.

O'Cull - KeyBanc Capital Markets Inc., Research Division.

Good day, and welcome to the Cracker Barrel Fiscal 2014 First Quarter Earnings Conference Call. Today's conference is being recorded and will be available for replay today, from 2 p.m. Eastern through December 10 at 11:59 p.m. Eastern, by dialing (719) 457-0820 and entering passcode 6807655.

You will also be able to access the replay on the Cracker Barrel Investor Relations page. At this time, for opening remarks and introductions, I would like to turn the call over to Coco Kyriopoulos. Please go ahead..

Thanks, Danielle. Good morning, and welcome to Cracker Barrel's first quarter fiscal 2014 conference call and webcast. This morning, we issued a press release announcing our first quarter and outlook for the 2014 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 proxy contest expenses and the related tax effects.

We will also refer to non-GAAP financial measures for the prior year quarter, adjusted to exclude charges and tax effects related to severance and the prior year proxy contests.

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 Investors section of our website, www.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 file 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 outlooks 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; Senior Vice President and CFO, Larry Hyatt; 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?.

Our Stores, Our Story, and focused on the importance of the employee experience and the guest experience to driving the long-term financial success of our company. The conference is a key tool to sustain our brand and reinforce the significance of our caring and friendly culture as a key differentiator to our success.

In addition, the conference provides an important opportunity to train our store leadership. We trained all of our general managers on Phase 2 of our labor management initiative, which is now rolled out to all of our stores. We trained our retail managers on improved selling techniques to highlight our fun, unique and nostalgic merchandise.

And we introduced a new mobile technology program to our district managers. A new element introduced to our conference this year was the inclusion of our key strategic suppliers who had an opportunity to share time with our leadership team and participate in portions of the conference to further their understanding of the brand.

I'm also pleased to report that in October, we shipped our first licensed product with John Morrell Food Group under our new mark, CB Old Country Store. An assortment of hams, bacon and lunch meats will be in nearly 12,000 retail outlets across the U.S. this winter. This is an important step in our longer-term licensing strategy to extend our brand.

Regarding our Expand the Footprint strategy, we opened one store in the quarter and remained on track with the goal of opening 7 to 8 stores total this fiscal year. Looking ahead, we view the second quarter and the holiday season with caution, as uncertainty about consumer spending and economic trends continue.

And the holiday season is shorter this year. Not only does Thanksgiving fall a week later in the calendar, but it appears that Thanksgiving travel will be impacted by winter storms.

Our holiday promotion is in stores now, featuring items from our Wholesome Fixin's category like our Grilled Chicken n' Vegetable Salad, items from our Weekday Lunch Specials category, like our Special Grilled Three Cheese Sandwich and Soup and limited time offers appropriate for this more indulgent season like our Pecan Sticky Bun French Toast and Holiday Grilled Ham and Pineapple Dinner.

Our retail floor is ready for the season with unique festive decor, great gifts for under $20 and wrapping services to assist the busy holiday shopper.

In summary, despite continued economic concerns, our consistent focus on our long-term strategy and our initial execution of our business priorities led us through a solid quarter of steady revenue growth and strong operating performance. We remain focused on these priorities through the busy holiday season in second quarter.

With that, I'll hand the call over to Larry for more details on the quarter..

advertising expense in the quarter was 50 basis points higher than in the prior year quarter, as we adjusted the timing of our advertising spend to support the rollout of the new Wholesome Fixin's menu; expenses for our previously discussed general managers' conference were 40 basis points; store maintenance expense was higher by 20 basis points.

These increases were partially offset by a reduction in general insurance expense of 20 basis points. Our store operating income was $81.1 million or 12.5% of revenue, compared with $81 million or 12.9% of revenue in the prior year quarter. On a GAAP basis, our general and administrative expenses in the quarter were $36.9 million or 5.7% of revenue.

Adjusted to exclude proxy contest expenses, our G&A expenses were $34.1 million or 5.2% of revenue, compared with adjusted G&A expenses of $31.8 million or 5.1% of revenue in the prior year quarter. On a GAAP basis, operating income was $44.2 million or 6.8% of revenue.

Adjusted for proxy contest expenses, adjusted operating income was $47.1 million or 7.2% of revenue, compared with adjusted operating income of $49.2 million or 7.8% of revenue in the prior year quarter. Our interest expense in the quarter was $4.4 million, compared to $10.7 million in the prior year quarter.

This reduction in year-over-year interest expense was due primarily to lower interest rates following the expiration of our swaps at the end of last year's third quarter, reduced levels of borrowing and a lower credit spread on our bank facility. Our effective income tax rate was 31.8% for the quarter, compared to 33% in the prior year quarter.

The tax rate in the prior year quarter did not reflect the extension of the work opportunity tax credit, which was not reenacted until January of 2013.

Our capital expenditures for the quarter were $17.1 million, compared to $13.2 million in the prior year quarter, reflecting higher spending on store maintenance capital, information systems and our strategic initiatives. Our balance sheet continues to be strong.

We ended the quarter with $57.5 million of cash and equivalents compared with $118.9 million at the end of the prior year quarter. Our total debt is approximately $400 million. During the first quarter, we repurchased 120,000 shares for $12.5 million.

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, we reaffirm our previous guidance and expect total revenue for fiscal 2014 of between $2.7 billion and $2.75 billion, reflecting anticipated increases in comparable store restaurant and retail sales in the range of 2% to 3% and the expected opening of 7 or 8 new Cracker Barrel stores.

We continue to expect increases in food commodity costs on a constant-mix basis of approximately 2% for the fiscal year. We have locked in our pricing on more than 60% of our expected commodity requirements for the remaining 3 quarters of fiscal 2014, compared to approximately 50% at this time last year.

While advertising spending, as a percent of sales, was higher in the first quarter than in the prior year quarter, we expect our advertising spend for the full 2014 fiscal year to be approximately the same percentage of sales as in the prior fiscal year.

We expect our adjusted operating margin for the year to be in the range of 7.8% to 8% of revenues, depreciation expense of between $68 million and $70 million and net interest expense of between $16 million and $18 million.

We expect an effective tax rate for the year of between 31% and 32% and capital expenditures for the year in the range of $90 million to $100 million. For the second quarter of fiscal 2014, we expect to report adjusted earnings per diluted share of between $1.50 and $1.60.

Our earnings guidance for the quarter and for the full year does not reflect any expenses related to the just-completed proxy contest nor any severance or other charges related to any organizational changes.

We currently expect our proxy contest expenses for the year to be in the range of $0.10 to $0.12 per diluted share, of which $0.08 was recognized in the first quarter. And with that, I will now turn the call over to the operator for your questions. Thank you very much..

[Operator Instructions] Our first question will come from Joe Buckley with Bank of America Merrill Lynch..

Could I ask you to fill out the comments around the government shutdown effect a little bit more. Did you see a marked difference between restaurants that are either in the D.C.

area or en route to national parks, as opposed to the rest of the system? And has it bounced back since? Was it, in fact, a short-term phenomenon?.

Yes, Joe, I'll be happy to do that. I'll start by, maybe, reminding everybody that 40% of our business, overall, is related to travel visits. But that has particular areas where there is concentration. So -- and one of those happens to be during fall break.

So the shutdown, for us, not only affected us in the areas where people maybe weren't working, but perhaps, more importantly, it affected the travel occasion. So for example, we have a store in Pigeon Forge, Tennessee, right at the base of the Smoky Mountain National Park.

Well, the park was closed so people didn't want to really visit that whole area. An awful lot of our guests during that time of the year travel up and down the eastern seaboard, looking at the fall foliage, and many trips evidently end in Washington, D.C. to see the monuments. So that kind of travel was disrupted.

So we did see an impact relating to the shutdown. It probably affected us because of our travel emphasis, more than other concepts. And we did see that when it -- the shutdown was over, that there was an improvement..

Okay. And then just a question on food costs. Larry, I think you mentioned 4% inflation for the quarter. You're thinking 2% for the full year.

Will the back half be inflationary, do you think, from a food cost standpoint? Or how do you see it playing out over the quarters?.

Yes. Joe, we see and currently anticipate a significant deceleration in commodity costs in the second half of the fiscal year compared to the first half of the fiscal year.

We still expect that for each of the 4 quarters, that commodity costs, on a constant-mix year-over-year basis, are going to be positive, but they will be only marginally positive by the fourth quarter, based on our current forecast..

And next we'll hear from Michael Gallo with CL King..

Just had a question on the average check in the quarter.

Did you see any impact there from Wholesome Fixin’s? Or was the change in -- or other mix changes or was the change in average check primarily just pricing-driven?.

Michael, let me answer that a couple of ways. First, the change in check was a function both of a 40-basis-point mix change, as well as menu price increases.

As the menu price increases in the first quarter were actually higher than we anticipate they will be in the balance of the 2014 fiscal year, and a part of that is the timing of this year's price increases versus last year's price increases. Last year, our fall price increase was in November.

This year, our fall price increase was in August, so we had a couple of months in the first quarter that we add the benefit of basically lapping both of those price increases. That is a benefit we don't anticipate in the subsequent quarters of 2014..

Okay, great.

And then just a follow up on the labor productivity, how far along are you in that now? And how much more you think you can get out of labor productivity?.

We saw the full benefit and have now largely lapped that benefit from Phase 1 of our labor productivity initiative. As Sandy mentioned, we are playing on Phase 2 of our labor productivity initiative at our general managers' conference in September. So have, literally, in the last 30 to 60 days, have rolled that out..

And the next question will come from Bryan Elliott with Raymond James..

Just a couple things, the advertising shift into Q1 is -- should be just sort of spread that evenly through the balance of the year or will it be disproportionate as you look out over the next 3 quarters in any 1 quarter?.

It -- you can just take it out of Q2 and Q4..

Okay, okay. All right. And then you, I believe, mentioned the new mobile technology that were given to the managers.

Could you elaborate a bit on that?.

Sure. We've been working hard to give our district managers the tools they need to manage the business. So we put some emphasis on having iPads loaded -- secured and loaded with the information and the reporting that they need, very robust reporting.

It also provides our retail managers with planograms and a whole lot of information that previously they were either unable to get or unable to get quickly and have available to them while they were in the store..

We'll hear next from Robert Derrington with Wunderlich Securities..

Sandy, how should we think about Wholesome Fixin’s as you see it today as a percent of your menu restaurant sales versus where do you think it'll trend over time?.

Well, I'll start, maybe I'll ask Chris to add something to it. So to step back and just remind everyone that Wholesome Fixin's was really designed to address the guest perception that they were limiting visits to the brand because couldn't find, easily find, something healthy.

And so the introduction of Wholesome Fixin's was designed, over the long term, to make it easy for people, because we certainly, even prior to this, had healthy things there, this made it easier for them. And then to, over the long term, change perceptions of the brand.

So the category features 10 offerings that's across breakfast, lunch, dinner, as I mentioned. All of that went into the stores in August and we supported it with all the marketing. It is -- we're pleased with it.

We do believe that it is driving the perceptions that we had wanted in terms of healthy options and so on, and that we will be able to build on this as we move forward and offer more things.

But, Chris, why don't you add to that?.

I think as Sandy mentioned, I think we've been very pleased with the introduction of Wholesome Fixin's, seeing key brand measures move, things around that you would expect to move tied to a program like Wholesome Fixin's.

[indiscernible] "offers appealing healthy options", "uses fresh ingredients" and, certainly, "is a restaurant I can trust." The fact that we were able to put it into our stores with minimal disruption or no disruption and continue to see improvements in our key operational measures is a critical testament, as well.

We're really pleased with the products in terms of seeing the OSAT value scores and how those have scored for those products.

And then as we look forward, believe we need to continue to invest in this category and to maintain interest and build further credibility by offering the guests limited time options, and so we'll do that throughout the balance of the year.

So for example, right now, in our holiday promotion, you can find a salad, which is featuring Wholesome Fixin's, talking about Wholesome Fixin's. So as we move forward, you can continue to expect those things, Bob, as we look to kind of build credibility with our guests..

Would you expect it to be more of a defensive measure or one that where we should actually be able to track and see some incremental traffic from it?.

Well, I think, initially, it was designed to address this -- what we were clearly hearing, which is people were restricting their visits and to address what we call the veto vote. So people wouldn't come because one person in the party said I can't get anything healthy.

With that being said, we've identified better-for-you as a key need state and, over time, as the perceptions of the brand change, as we continue to develop out the category in terms of more offerings and have new news in it, I think it can drive traffic.

We hear in our research that people who like the category and try it, they say that it will induce them to come more often. One of the things about the category that we've learned, though, is that you may buy Wholesome Fixin's on Monday, but you don't necessarily want it over the weekend.

So it is a category that many people who maybe really use our regular menu items more often will selectively choose that or will take pieces from it. So, for example, the turkey bacon that's in the Good Morning Breakfast is being added a lot to our regular breakfast.

And some of our healthy sides, our broccoli and our fresh steamed vegetables, are very popular. So what we've done is we've given our guests the option, and I think that, that will, as we give increased choice and appeal and message against us, it'll just give more reasons for guests to use us..

If I could, a real quick follow up, Sandy. Your retail business has certainly gotten a lot more stable, over time, and you guys have done a terrific job managing that piece of the business.

As we commence this Christmas holiday season, how should we think about what's different this year versus last? And obviously, you're not into the kind of niche products you had from years past, but what is it that you continue -- that you're offering this year that you think will keep it fresh and keep consumers using it?.

Well, first of all, I'm really pleased with the progress that our retail team has made in terms of the quality, breadth and uniqueness of our assortment. And it appears as though this is going to be, potentially, an even more promotional Christmas than last year was, so it will be important.

One of the things we focused on, coming into the Christmas, was our value. So I think our Great Gifts assortment is compelling. I'm really pleased with the initial reaction to our Christmas decor, our seasonal, the ornaments and things like that. And we've got a number of themes that are somewhat different for us.

We are featuring some Ford merchandise, it's an anniversary of the Ford Mustang. So we've targeted some of our merchandise to our male guests. We've got things like Duck Dynasty. So I think that the merchants have done a good job of sort of no guests left behind, where they try to offer a variety of things at a very good price point.

So sort of an affordable indulgence, if you will, since it is largely an impulse buy for us. And -- but all of that is happening in the backdrop. As I've said in my remarks, what I believe is a very challenging environment for the consumer and then with the [indiscernible] competitors, I think it's likely to be a very promotional season..

And next we'll go to Steve Anderson with Miller Tabak..

Going back to the average check of 2.9%.

When you break it down to menu and mix, can you give the exact numbers on that?.

Sure. The pricing impact is 2.5%, the mix impact is 40 basis points, Stephen..

And our next question comes from Chris O'Cull with KeyBanc..

Sandy, how do you avoid less advertising investment in the second and fourth quarter not impacting same-store sales?.

Well, as a reminder, one of the things that -- as we look at our advertising, what -- we look at, awareness, attitudes and changes in behavior. And what we're seeing is we've now in our third year of our program is we're seeing improvements in unaided awareness, we're seeing improvements in how the guest perceives the brand.

So the main message recall is focusing them on quality, experience and variety. We believe we're seeing increased frequency across all the user groups and so what we're focused now on is how to optimize for the effectiveness and efficiency across all the channels.

In terms of the investment we made in Q1, it was largely -- or completely, to build awareness and credibility for the guests looking for the lighter meal and making them aware of Wholesome Fixin's.

We are happy with the sales performance and we believe that the awareness that we drove in that quarter will help us in the second quarter and the fourth quarter..

Okay.

And then given commodity prices are coming down or at least not going up as much, would the company consider taking less menu price increases, especially if the industry is more competitive or more promotional?.

I can tell you that we are very careful about every price increase we take. So although we've guided you all to a point for the year and that's certainly baked into our plans, before we actually do any price increase, it's tested, we have a lot of consideration.

So as the year progress, we would certainly evaluate where the market was, where our competitors are, what the guests' reaction to the price increase was through our test, and we will continue to be very careful about it. This is certainly not a environment where we would like to take more price than we thought was prudent..

What did you say the pricing plan was for the remaining quarters?.

Chris, for the full fiscal year, we are anticipating price increases about in the 2% to 2.5% range..

Okay, okay.

And then, Larry, would you break down the components of the CapEx plan for this year?.

The -- well, without getting into a lot of specifics, maintenance CapEx is going to be in the $40 million to $45 million range. New store CapEx will be in the $35 million to $40 million range. And the balance, we expect, to be investment in our various sales and margin-driving initiatives and information systems..

And with no further questions, I'll turn the call back to our speakers for any additional or closing remarks..

Great. Thank you. Well, thank you, all, for joining us today. I'm pleased with our first quarter results. I'm encouraged by the initial progress we've made in our business priorities. We look forward to building on this success of the first quarter through the remainder of the year.

We appreciate your interest and support, and wish you all a safe and happy holiday season..

And ladies and gentlemen, that will conclude today's conference. Thank you again for your participation. You may now disconnect..