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Cracker Barrel Old Country Store, Inc. (CBRL) Q4 2018 Earnings Conference Call Transcript

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Cracker Barrel Old Country Store, Inc. (NASDAQ: CBRL)
Q4 2018 Earnings Conference Call
Sept. 18, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome the Cracker Barrel fiscal 2018 fourth quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note this event is being recorded. I would now like to turn the conference over to Adam Hanan, Manager, Investor Relations. Please go ahead.

Adam Hanan -- Investor Relations

Good morning, and welcome to Cracker Barrel's fourth quarter fiscal 2018 conference call and webcast. This morning we issued a press release announcing our fourth quarter and full fiscal year results and our outlook for the 2019 fiscal year. In this press release and on this call, we will refer to non-GAAP financial measures for the fiscal year, adjusted to exclude the impact of the 53rd week that occurred in our fourth quarter and a one-time, non-cash revaluation of the company's net deferred tax liability that occurred in our second quarter.

The company believes that excluding these 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.

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On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; and our Vice President of Marketing, Don Hoffman; and Vice President and Principal Accounting Officer, Jeff Wilson. Sandy will begin with a review of the business and Jill will review the financials and outlook. We will then open up the call for questions for Sandy, Jill, Don, and Jeff.

On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that in many cases are beyond management's control, and may cause actual results to differ materially from expectations. We caution 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 the press release and re described in detail in our reports that we file with or furnish to the SEC.

Finally, the information shared on this call is valid as of today's date and the company undertakes no obligation to update it, except as may be required under applicable law. I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran. Sandy?

Sandra B. Cochran -- President and Chief Executive Officer

Thanks, Adam, and good morning, everyone. This morning we announced fiscal 2018 adjusted earnings per share of $9.23, which includes the benefit of our 53rd week. While we accomplished a lot in fiscal 2018, our performance in the fourth quarter was challenged, as the softer traffic trend we saw in May persisted in June and July contrary to our expectations, resulting in performance that fell below our expectations.

We believe there were a number of factors that contributed to the fourth quarter traffic decline. The primary driver was the underperformance of our Campfire menu and marketing promotion. This was the third consecutive year of the promotion and in an attempt to provide new news and maintain relevance, we introduced several new menu items that unfortunately did not resonate with guests. Additionally, our media strategy was not as effective as we had anticipated. Our decision to run fewer weeks of media at higher concentrations, along with other changes to the marketing mix and messaging did not have the desired impact.

In addition, we believe that higher gas prices, which ate into our gas discretionary income, and a lower number of miles driven in key states compared to last year hurt our fourth quarter traffic. While we believe these issues exacerbated traffic shortfalls in the fourth quarter, we also believe there are other issues which contributed to traffic erosion over both the quarter and the entire year. These include declines in guest experience metrics and a lack of emphasis on our value proposition and on delivering craveable food offerings. We believe that these factors particularly impacted our lighter users, who disproportionately visit us during the fourth quarter.

I'm concerned with our traffic trends, and over the past few months our team has been vigorously analyzing the underlying factors of our underperformance. I'm confident that we've begun addressing the issues and I believe we will drive long-term growth through a heightened focus on the guest experience, food, and value, along with the continued expansion of our off-premise business.

Let me start with the guest experience. Service and hospitality has always been foundational to the Cracker Barrel brand. We continue to believe that it is a differentiator and a strength, but we must do a better job in consistently delivering this experience our guests expect. To achieve this, we're prioritizing a focus on the guest experience to drive traffic and sales. We've been reevaluating the touch points we have with our guests in order to execute more consistently, particularly at dinner, which has been the most challenged of our day parts.

Because we believe firmly that our guest experience begins with our employees, we're also taking a deeper look at our employee experience. This has been a holistic review and while I'm confident that we are taking the right steps, it's going to require steady improvements in a number of areas, which will take some time. Next, we're focused on introducing new and craveable food. Throughout the year, we'll be introducing new items, both to our core menu, as well as to our seasonal menu promotions, as we seek to satisfy guest desires for greater variety and craveability. These new items are rooted in what our guests know and love, but extended into new offerings.

One of the initiatives I'm most excited about is the introduction of bone-in fried chicken to our core menu. Our culinary team has developed a delicious offering -- a hand-breaded, 4-piece half chicken served with two made-from-scratch sides and a choice of bread that is executable at high volumes. We began testing this last fall in order to understand operational complexities, equipment configurations, and guest perceptions of the product.

Based on the positive results from this test, we've expedited the rollout of this platform, and approximately 45 stores are currently serving our bone-in fried chicken. We plan to have nearly 170 additional stores serving the offering before the Thanksgiving holiday and we anticipate completing the rollout by the summer. We believe the bone-in fried chicken exemplified the craveability our guests desire and that it has the potential to drive increased traffic and sales.

We also believe this will be a strong off-premise offering and are looking forward to additional opportunities through line extensions. We're very excited about the fried chicken platform, but the initiative is complex, as the platform requires multiple new pieces of kitchen equipment. Our time line is aggressive, but we are prioritizing initiatives such as fried chicken that focus on traffic and sales.

Another major focus is value. We continue to believe that everyday value is a key differentiator for the Cracker Barrel brand. In the current environment, in which there is a heightened focus on value, both from our consumer and our competitors, we must do a better job of communicating and reinforcing our value offering. We plan to do this in several ways. First, making value and affordability priorities for our culinary team through all stages of product development for menu promotions, as well as for core menu additions.

Second, leveraging our Daily Delights menu platform. As a reminder, we tested this during fiscal 2018 before implementing it systemwide in August. We incorporated our fall menu promotion into Daily Delights and supported this promotion with several weeks of national TV media. We believe our Daily Delights platform will help us reinforce our value proposition, particularly in the face of higher gas prices and intense competition around value. Third, we're refining our communication strategy to focus more on our unique menu items, as well as placing greater emphasis on value and price point messaging.

Our next major focus is off-premise. In fiscal 2019, we plan to grow this business by introducing new offerings, increasing our awareness and delivery coverage, and improving our processes and execution. I'm excited about several new offerings we'll be adding to the catering menu in the first quarter, such as our four-layer breakfast bowls and a chicken-and-waffle sandwich, as we continue to add compelling offerings.

Delivery remains a growing segment within our off-premise for the industry. And in fiscal 2019, we'll be expanding both our third-party and in-house catering delivery platforms. We anticipate having third-party delivery, which has a higher level of appeal to our younger guest base, available in over 200 stores by the end of the fiscal year. We plan to add to our in-house catering van fleet, so that it covers a large subset of our system.

Also in recent months, we've added a catering sales manager in key markets. The early results have been positive, as these positions help drive awareness in sales, and we'll be expanding to additional markets over the course of the year. We believe that the expanded fleet of catering vans coupled with the catering sales managers will help further unlock the B2B catering opportunity. We gained many learnings after rolling out our off-premise platform and in fiscal 2019, one of our priorities is to simplify and enhance our operations to drive an improved guest experience.

In closing, though our fourth quarter performance fell below expectations, we accomplished important foundational work in fiscal 2018, but we must do a better job in driving traffic and delivering a consistent guest experience. The Cracker Barrel brand remains strong and differentiated and while I'm confident that our plans have begun addressing the issues and will drive long-term value creation, our short-term outlook is more cautious, as we believe it will take some time to implement our plans and to reverse the trends in traffic. With that, I'll turn the call over to Jill.

Jill Golder -- Senior Vice President and Chief Financial Officer

Good morning, everyone, and thank you, Sandy. I would like to begin by discussing our financial performance for the fourth quarter of fiscal 2018 and the full fiscal year, and then our outlook for the 2019 fiscal year. In this morning's release, we reported fourth quarter net income of $61.4 million, or $2.55 per diluted share compared to prior-year earnings per diluted share of $2.23.

Adjusted for the impact of the 53rd week in the current year, fourth quarter earnings per share were $2.19. For the full fiscal year, we reported net income of $247.6 million or $10.29 per diluted share, representing a 22.9% increase over the prior year EPS of $8.37. When adjusting to reflect our one-time, non-cash revaluation of our net deferred tax liability associated with the Tax Act, our adjusted EPS for the fiscal year was $9.23, which includes an estimated $0.36 benefit from the extra week in the fiscal year. Adjusted for the impact of the extra week and the one-time, non-cash revaluation of net deferred tax liability that occurred in the second quarter, full fiscal 2018 earnings per share were $8.87.

For the fourth quarter, we reported total revenue of $810.9 million, an increase of 9.1% when compared to prior-year revenue of $743.2 million. Restaurant revenue in the quarter was $665.3 million and retail revenue was $145.6 million. Adjusting for the impact of the extra week, our total revenue for the quarter was $752.5 million.

On a 52-week basis, our restaurant revenue increased 0.9% to $616.9 million, and our retail revenue increased 2.8% to $135.6 million. Our fourth quarter total revenue increase was driven by positive comparable retail sales and the opening of eight new Cracker Barrel locations and three new Holler & Dash locations since the prior-year fourth quarter, partially offset by a decline in Cracker Barrel comparable store restaurant sales.

Cracker Barrel comparable store restaurant sales in the quarter decreased 0.4%, as average check increased 3.1%, and traffic decreased 3.5%. The increase in average check reflected menu price increases of approximately 2.7%, and a favorable menu mix impact of 0.4%. The fourth quarter mixed favorability was driven primarily by our crafted coffee program. Fourth quarter comparable store retail sales increased 1.3%, with increases comparing primarily within women's apparel and books and stationery.

Moving on to expenses. Total cost of goods sold in the quarter was 30.3% of total revenue, versus 29.2% in the prior year quarter. Our restaurant cost of goods sold was 26% of restaurant sales, an 80 basis point increase versus the prior year. This increase was driven primarily by the impact of commodity inflation. On a constant mix basis, our food commodity costs were approximately 5.3% higher in the quarter than in the prior-year quarter, driven primarily by increases in eggs and beef. The fourth quarter commodity inflation was approximately $1 million higher than what we anticipated when we issued our guidance on the last earnings call, primarily due to higher costs associated with products featured in our seasonal menu promotion.

Our retail cost of goods sold was 50.1% of retail sales, compared to 48.2% in the prior-year quarter. This was primarily the result of an increase in expected markdowns. Our retail inventories at quarter end were $117.5 million, compared to $119.4 million at the prior-year quarter end. This lower inventory level reflects timing of differences of some of our scene sets.

Labor and related expenses were $286.7 million, or 35.4% of revenue, compared with $257.9 million, or 34.7% of revenue in the prior year quarter. This 70 basis point increase was driven primarily by unfavorability in restaurant hourly productivity, incremental labor hours to support our off-premise program, and higher in-store management expenses. Wage inflation for the fourth quarter increased 2.9% over the prior-year quarter.

Other store operating expenses in the quarter were $160 million or 19.7% of revenue compared with other store operating expenses of $148.2 million, or 20% of revenue in the prior-year quarter. This 30 basis point decrease was driven primarily by favorability and marketing spend compared to the prior-year quarter.

Store operating income was $118.2 million in the fourth quarter, or 14.6% of revenue, compared with store operating income of $119.7 million, or 16.1% of revenue in the prior-year quarter. General and administrative expenses in the quarter were $35.4 million, or 4.4% of revenue, compared to $36.5 million in the prior-year quarter. As a percent of revenue, G&A was favorable versus the prior-year quarter by 50 basis points. This decrease was primarily driven by lower accrued incentive compensation.

Operating income was $82.8 million, or 10.2% of revenue, compared with operating income of $83.2 million or 11.2% of revenue in the prior-year quarter. Adjusted for the impact of the extra week, operating income was $71.5 million. Net interest expense for the quarter was $4.3 million, compared to $3.6 million in the prior-year fourth quarter. Our effective tax rate for the fourth quarter was 21.8%, compared to an effective tax rate of 32.4% in the prior-year quarter. For the full fiscal year, our effective tax rate was 11.1%, compared to an effective tax rate of 32.4% in fiscal 2017.

Our capital expenditures for the full fiscal year totaled $151.6 million, compared to $110.1 million in the prior fiscal year. This increase was driven by new unit openings, our planned initiatives, such as crafted coffee, off-premise, and our new point of sale system.

Our EBITDA for the full fiscal year was $387.2 million, compared to $399.5 million in the prior year. Adjusted for the impact of the extra week, EBITDA was $376 million. In fiscal 2018, we achieved $6.3 million in annual cost reductions as part of our cost savings initiatives.

Turning to our balance sheet. We ended the fiscal year with $114.7 million of cash and equivalents, compared to $161 million at the prior fiscal year end. During the fiscal year, the company declared regular quarterly dividend payments which totaled $4.85 per share, and a special dividend payment of $3.75. Our total debt was $400 million at the quarter end.

With respect to our fiscal 2019 outlook, everyone should be mindful of the risks and uncertainties associated with this outlook, as described in today's earning release, and in our reports filed with the SEC. For fiscal 2019, we expect to report earnings per diluted share between $8.95 and $9.10, compared to fiscal 2018 adjusted earnings per share of $8.87.

This earnings estimate assumes total revenue of approximately $3.04 billion, reflecting anticipated comparable store restaurant sales growth in a range of flat to 1%, and comparable store retail sales growth in the range of flat to 1%. Given recent rends, we believe a more cautious approach to fiscal 2019 sales is appropriate.

We expect to open eight new Cracker Barrel stores in fiscal 2019. We anticipate our fiscal 2019 menu pricing will be approximately 2%. We expect increased food commodity cost on a constant mix basis to be approximately 2% for the fiscal year, with the first quarter seeing even higher levels, driven by unfavorability in the eggs category. We have locked in our pricing on approximately 50% of our commodity requirements for fiscal 2019, compared to approximately 40% at this time last year.

We anticipate fiscal 2019 retail margins will improve over fiscal 2018 as a percent of sales, driven partially by the implementation of a new merchandise strategy, which will optimize our use of markdowns. We anticipate fiscal 2019 wage inflation on a constant mix basis of approximately 3% to 3.5%. We expect depreciation expense of approximately $110 to $115 million for the year. We anticipate net interest expense of approximately $17 million.

As we previously announced, we recently entered into a new $950 million credit facility, as our current credit facility was set to expire a year from now. We expect an effective tax rate for the fiscal year in the range of 17% to 18%. Taking these assumptions into account, we expect full-year operating income margin of approximately 9.3% of total revenue. This guidance includes a target of $10 to $12 million in business model improvements resulting in sustainable cost savings.

While we remain confident in the $40 million cost savings target we shared at our analyst's day, we now believe that it will take us an additional one to two years to achieve this target. This is primarily due to updated expectations related to the timing of implementation of our new point-of-sale system. As a result, the operating margins we targeted for the three-year period ending in fiscal 2020 are likely to take a few more years as well.

We anticipate that capital expenditures for the year will be approximately $160 to $170 million. The increase in our capital expenditure plan includes costs associated with the acquisition of sites and construction for new stores, as well as additional costs for key initiatives to support our strategic plans. These initiatives include fried chicken, off-premise, and our new point-of-sale system, to name a few.

We anticipate that our depreciation in fiscal 2019 will be approximately $20 million more than what we incurred in fiscal 2018, which reflects our higher capital investments. This increase, along with the impact of more normalized incentive compensation, negatively affects our anticipated operating margin by approximately 80 basis points. We remain committed to a balanced approach to capital allocation.

For the three-year period of fiscal 2018 to fiscal 2020, we now anticipate that our total capital expenditure will be $450 million to $500 million, and that we will open approximately 25 new Cracker Barrel stores. Given the increased capital investments in our initiative, it may be meaningful for investors to evaluate our performance before the impact of the increased depreciation resulting from the investments by using metrics such as EBITDA. Our guidance implies an increase in fiscal 2019 EBITDA, adjusting for the impact of the extra week of approximately 4% to 5% compared to the prior 52-week year.

In considering our disclosure practices, we have decided to cease offering estimates or ranges of quarterly earnings. However, based on the challenges we faced with fourth quarter traffic trends, anticipated higher commodity costs, and an increase in first quarter media spend to support our fall menu promotion, we believe our fiscal 2019 first quarter earnings per share will be modestly below the fiscal 2018 first quarter earnings per share.

Neither this expectation nor our full-year guidance includes the unquantified impact of Hurricane Florence. Given the recency of this event, we are unable to fully estimate the potential negative impact from traffic and sales loss, as well as expenses that could be incurred, such as food waste, damage to our facilities, and support for our employees. With that, I will turn the call over to the operator so that we can take your questions. Thank you very much.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Jake Bartlett with SunTrust Robinson Humphrey.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking the questions. First, Jill, on the margin outlook for 2019, you're looking for 40 basis points of deleverage. If you could just walk us through the pushes and the pulls there. It looks like the cost-cutting should help by maybe 30 to 40 basis points. But then you have 40 to 70 basis points of G&A pressure, some pressure on labor given the wage inflation that you're expecting. Roughly flat with commodities. Maybe lapping the lack of incentive comp in 2018. Help us understand why it wouldn't be more than 40 basis points, given those moving pieces.

Jill Golder -- Senior Vice President and Chief Financial Officer

Okay, so there's a couple of pieces. As you look at our reported fiscal year this year, our margin of 9.7% includes the 53rd week leverage. So, on a 52-week basis, the more accurate comparison is 9.5%. Then as we look toward our outlook of approximately 9.3% for overall revenue margins, there's a few things. Three of our largest year-over-year headwinds that we face are higher depreciation, higher accrued incentive compensation, and higher workers' compensation.

As I mentioned in my prepared remarks, we expect that the higher depreciation and incentive comp is approximately 80 basis points. Some of that will be offset by the favorability in our cost savings initiatives that we outlined of approximately $10 to $12 million. Then I guess I would say in addition, we had some inefficiencies in fiscal 2018 in some of our underlying productivity measures and we're also assuming some improvement in those areas as well.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Is there a way you can quantify those inefficiencies? That's an important part of the puzzle here, I think.

Jill Golder -- Senior Vice President and Chief Financial Officer

Not really. It's all built into our 9.3% ROF guidance.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Okay. Then, Sandy, looking at the approach for going forward and what you expect to drive results, improve results in '19 in the top line, if you could talk about the Daily Delights and the Sunrise Specials within that $4.99 breakfast. It looks like this is something you told us about a year ago and it looked to be in tests for the whole year. How confident are you that is a sufficient value message to break through in this environment? What was the experience so far in the test in little over 100 stores, I believe you had it?

Sandra B. Cochran -- President and Chief Executive Officer

All right. Why don't I start and then I'll turn it over to Don. I can reiterate a couple of the points that I made, which is that one, we continue to believe that everyday value is a key differentiator for the Cracker Barrel brand, and that it continues to be a focus for our consumers. And that our competitors are very aggressively out there communicating and reinforcing the discounting in theirs. The Daily Delights platform is a way for us to communicate the everyday value on the menu at both breakfast, the Sunrise Specials, the weekday lunch specials, and the country dinner plates at dinner.

But as I mentioned, we are going to seek additional ways to both understand how our guests look at value, what kind of value they look for from us, and how we can do a better job of delivering it through our food. So, our culinary team is focused at looking at ways to bring new news to both those three platforms, as well as other platforms. For example, we're seeing great value scores on our bone-in fried chicken offering, the abundance of it.

Secondly, although we are leveraging the Daily Delights platform, and Don will speak in a minute to the testing of it, and we'll continue to do so, we will look to find other ways to communicate and reinforce the value, both in our communication strategy and our messaging strategy, and in our guest experience. So, all part of the value equation is the experience you have and the price you pay, and we're looking at that holistically, trying to get even more emphasis on this. Don, why don't you speak though to Daily Delights in particular?

Don Hoffman -- Senior Vice President, Marketing

Sure. Thanks, Jake. Just for frame of reference, we started the Daily Delights test and we spoke to that in our Q1 call for fiscal '18. The overall premise behind that program was everyday value that customers can count on at three specific price points. That being $4.99, $5.99, and $7.99, respectively, for breakfast, lunch, and dinner. We also wanted to use that program to not only call attention to those three price points, but to perhaps periodically inject some new news behind those three tiers.

What we've been finding is that the program seems to resonate well. We had some good learning in the first quarter. We expanded our test in our second quarter to 12 markets from 9 markets. We used four weeks of national television to support that and in-store merchandising. We started to move a couple of products to our national menu. As an example, we moved our pick-2 combo and our 3-cheese grilled cheese nationwide. Then earlier this year, we put the Daily Delights offering as a permanent offering on our core menu systemwide. So, now everyday that somebody comes in, they will see categories of that $4.99, $5.99, $7.99 called out.

Then as Sandy mentioned and you're probably aware, our current national advertising focuses on everyday value, including some new product news that we've put in the luncheon and dinner day part, including biscuit pot pie and biscuit French toast. So, I'll end by just reiterating what Sandy said, that Daily Delights is one of the strategies that we're using to reinforce everyday value, but we continue to keep value top of mind in product development that we do, and in other offerings and pricing strategies that we use throughout the business model. We are excited about that bone-in fried chicken because even though when customers have experienced that product, they think it's bountiful and a very good value for the amount of food they're getting for the price.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you so much.

Sandra B. Cochran -- President and Chief Executive Officer

I'm going to make one more point, Jake, just to highlight. Don kind of said it and you might've noticed it. That I think our culinary team has done a good job and they continue to work to continue this, but bringing new news to the Daily Delights category. So, if you noticed in our fall promotion, what we did in both the retail store and on the promotion was to highlight biscuits, which is something our guests know us for and love us for. And in introducing both the biscuit French toast at breakfast at this very attractive price point, and then at lunch and dinner, this biscuit pot pie. At $7.99 it's a great value, and it's sort of new news in a category that's tried and true.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you so much.

Operator

Our next question comes from Michael Gallow with CL King. Please go ahead.

Michael Gallow -- CL King & Associates -- Analyst

Good morning. Sandy, one question, one follow-up. I think you alluded to in your prepared remarks some commentary about some softening of overall guest metrics. You've obviously done a very good job of managing labor in the current environment. I was wondering if there's any concern that perhaps you've overmanaged that line item down and whether you might have to put some back as you think about improved getting those guest scores going in the right direction again? And then I have a follow-up thing.

Sandra B. Cochran -- President and Chief Executive Officer

Well, yes, you're right. I did mention it in the remarks. As we analyzed what was happening in the business, particularly in the fourth quarter, we did deeper dives into the guest experience and what was happening and we continue to do that. I won't say that we don't think there isn't some labor component, but what I will say more is we're looking at every piece of it. How we are training our employees, how we are communicating to them, how we define the service model.

So, one of the things that we do at Cracker Barrel is we have something called "check back check down," where we'll often give a table their check early on. We found that if you're traveling and you're in a hurry, that sort of allowed you to have the experience that you wanted and you could control. We're not sure that works at dinner and in every market. If you're not familiar with the brand, it isn't necessarily about labor, it's just a practice that we may need to rethink whether that's delivering the guest experience that people want and that we want to provide.

So, we are looking holistically at the entire thing. We will look at everything we've done to impact the experience, including the changes that we've made to labor, technology, hiring practices, training practices, communication practices, as we address the issue and continue for this to be a strength, which it has been since the beginning in the brand.

Michael Gallow -- CL King & Associates -- Analyst

That's helpful context. Then a follow-up for Jill. Just your commentary on the first quarter. I think when I look back to the first quarter of fiscal '18, you had a 31% or so tax rate. To imply that the guidance is down would seem to imply either meaningful further deceleration in traffic trends or pretty significant decline in operating margin, sort of back to the envelope. It looks like about 170 basis points. Could you help me with whether we're thinking about that right? Should we think about the sales potentially being and the traffic being softer in Q1 versus Q4? Or is it just the lapse in some of the commodity and how some of the other stuff flows through that might put further pressure on margins? Thanks.

Jill Golder -- Senior Vice President and Chief Financial Officer

Michael, thank you for the question. Yes, as I said in my prepared remarks that we do expect first quarter to have EPS modestly below prior year. There's three primary factors. One is the traffic trends that we saw in the fourth quarter. So, overall negative traffic trends, although we don't want to comment on inner quarters. Then as I mentioned, commodities for next fiscal year or fiscal 2019, we expect to be in the range of 2%, but we expect them to be a bit higher than that in the first quarter, which further pressures margin. Then the other piece of it would be around the incremental depreciation within the quarter as well.

Then we've also added incremental marketing spending, as Don and Sandy just talked about, the national rollout of the Daily Delights program. We supported that with media, which we did not have in the first quarter of last fiscal year. So, those are the primary drivers that are putting pressure on the earnings and margins in the first quarter.

Michael Gallow -- CL King & Associates -- Analyst

Okay. Again, helpful context. Then just one more follow-up. As you think about the fried chicken rollout, obviously you have complexity and you have equipment and so, should we think about that as there will be a learning curve as you roll that out and get the volumes per store up from a margin standpoint? Or how would we think about training and all the complexity around as you put that in more stores?

Sandra B. Cochran -- President and Chief Executive Officer

Yes, there will be learning curve. There has been a learning curve. We have, as I mentioned, I think we have it now in 45 stores. We'll have it in another 170 before Thanksgiving. Then we'll take a break for the installation and start again in January. But our operations team and the project team on this I think have done an excellent job of seeking and adjusting to the learnings we've been seeing. We have tried to factor in the learning curve and the inefficiencies inherent in that into the guidance. But anytime you roll something that complex in terms of equipment, that complex in terms of what it's doing to the menu, and where all the trades are coming from and how that's impacting labor, and that complex with the consumer, we're trying to introduce an entire new platform, I think that there is risk associated with it.

Michael Gallow -- CL King & Associates -- Analyst

Thank you.

Operator

Our next question comes from Gregory Francfort with Bank of America. Please go ahead.

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

Hey, guys. I had a couple quick housekeeping questions and then maybe one or two longer term. The first is just on the $10 to $12 million of cost savings, where is that going to show up on the margin side? What sort of line? Is that labor or is that other opex?

Jill Golder -- Senior Vice President and Chief Financial Officer

Greg, this is Jill. Cost savings are primarily in the labor line. I'd say 50% to 60% are in labor. About 20% to 25% are in cost of goods sold. Then the remainder there's a little bit in G&A and a little bit in other operating.

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

Okay. That's helpful. Then in terms of where you're running the capex now, where do you think the longer term maintenance capex is for this business? Is it below the level that you're going to see next year? And if so, how far below as we think about once you get past this investment cycle what the capex run rate would be?

Jill Golder -- Senior Vice President and Chief Financial Officer

I think at this point, beyond the clarity that we gave for 2020, because in my prepared remarks what I said is over fiscal 2018 to '20, we now expect to spend total capital in the range of $450 to $500 million, we're really not prepared to talk beyond 2020.

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

Okay, got it. Then maybe two sort of longer term pictures. In terms of the POS system that you're putting in place, what does that allow you to do in terms of the cost savings? I guess you kind of pushed out the cost savings you're expecting. What does the new POS system basically affect in terms of labor or other opex? How does it show up in your business model?

Jill Golder -- Senior Vice President and Chief Financial Officer

Okay. So, from the point-of-sale standpoint, there's a few things that it does on the cost savings and we believe it'll also help on the sales side, but I'll talk to the cost savings. One of the things that it allows us to do is have the tablets. So, server tablets would be part of that. Which we believe will help the guest service experience, along with us being able to manage better, manage labor and leverage labor. Also, we're looking at a new labor system, kind of following that, as well as a new food cost management system that we would use with the new point-of-sale. So, those are the big three that help with the cost savings.

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

And the timing of this now is more, just a year or two later than you were expecting before?

Jill Golder -- Senior Vice President and Chief Financial Officer

Yeah, we've stepped back and looked at the prioritization of our key initiatives. Really, given our focus on guest service, as well as chicken, we've decided to slow down the POS a little bit. We've also found with the implementation of our point-of-sale, it required a little bit more training to bring the team up to speed. So, right now, we've got in the range of 40 stores on the POS and we've looked to increase that 70 to 80 or so in the current fiscal year.

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

Okay. Then a last one for me and I'll shut up. Just on the special dividend, as you think about that increasing over time, it seems like you've gone up about $0.25 a year. I think I look to this year, you're going to have to start borrowing meaningful to pay that. Is that something you're comfortable doing and how do you approach basically adding debt for a dividend payment?

Jill Golder -- Senior Vice President and Chief Financial Officer

I guess to be consistent with what we've said in the past is as we look at ways to create value for our shareholders, it's something that we review with the Board on a regular basis and the Board considers a variety of options. As you've seen in the last several years, given our unique circumstances, we've found the special dividend to be a great way to deliver value to our shareholders and that is something that we'll continue to talk about with the Board.

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

Understood. Thanks.

Operator

Our next question comes from Robert Derrington with Telsey Group Advisors. Please go ahead.

Robert Derrington -- Telsey Advisory Group -- Analyst

Thank you. Just a couple of housekeeping items. Jill, on the higher interest expense this year, is that based on a higher effective borrowing rate? Or is that based on a combination of both that as well as higher borrowings versus the $400 million you currently have outstanding?

Jeff Wilson -- Vice President and Principal Accounting Officer

The expected increase in interest rate or the expected increase in interest expense is due to an increase in rate. Our swap rates reset at the beginning of the fourth quarter each year, so we're at an effective rate of 3.7%, versus previously at 3.2%.

Robert Derrington -- Telsey Advisory Group -- Analyst

Okay, all right. That's terrific. Sandy, looking directionally as we move through the course of this fiscal year, the company same-store sales guidance. Directionally, it sounds like the first part of the year is obviously going to be softer, given a number of issues. Does the same-store sales guidance for the company include whatever negative impact that Florence has had on the business in the first quarter?

Jill Golder -- Senior Vice President and Chief Financial Officer

This is Jill. No, it doesn't Just given the recency of the event, it does not include the impact of Florence. We're still trying to work through that.

Robert Derrington -- Telsey Advisory Group -- Analyst

Okay. So, the guidance of flat to up 1% doesn't include whatever negative impact on the first quarter. And I think directionally you said that assume the first quarter will be a weaker trend. So directionally, I would assume that given that weaker trend and obviously things like the rollout of the bone-in fried chicken, we would expect that earnings growth and same-store sales growth is going to be heavily leaning toward the back half of the year? Is that reasonable?

Jill Golder -- Senior Vice President and Chief Financial Officer

We're not giving quarterly guidance on the same restaurant sales.

Robert Derrington -- Telsey Advisory Group -- Analyst

Gotcha. Okay. Jill or Sandy, help me understand for a second. It sounds like cogs on the retail piece of the business appear to be, I think the outlook is a little bit more favorable. I think you have mentioned that's due to some kind of a change in the markup? Is it the markdown strategy? Can you help us understand that?

Sandra B. Cochran -- President and Chief Executive Officer

Sure. Markdown optimization is really the practice of which we were doing, but really only in our collegiate assortment in having different markdown cadences in different stores depending on the inventory levels and our expectations about demand by store. So, it really just allows the buying team, instead of taking an entire theme, for example, chainwide to 50% off, they maybe able to start at 50% off for stores, for example, in North Carolina, that are going to have more retail inventory just by virtue of being closed for the last few days. And to take them at a different cadence.

That involves, it's a much more complex process, both from the buyers having to think about how to do it and then our systems to support that kind of thing. Overall though, we believe it will have a meaningful impact on our maintain margin at the end of the year and we are anticipating, which was reflected in the guidance, an improvement in retail margins for fiscal '19.

Robert Derrington -- Telsey Advisory Group -- Analyst

Okay. Kind of directionally thinking about the line items, food cost, labor cost, operating expenses. Within those items, it sounds as though directionally the highest pressure would come particularly in operating expense from higher depreciation. Is it reasonable that labor will only go up a smidge as a percent, given some of the puts and takes within the business?

Jill Golder -- Senior Vice President and Chief Financial Officer

As we talked about in our comments, labor inflation is expected to be in the range or wage inflation in the range of 3% and 3.5%. That said, many of our cost savings initiatives are geared toward that line item. So, that's what you're seeing there, Bob.

Robert Derrington -- Telsey Advisory Group -- Analyst

Okay, terrific. Thanks. I appreciate it.

Sandra B. Cochran -- President and Chief Executive Officer

Thanks, Bob.

Operator

Our next question comes from Stephen Anderson with Maxim Group. Please go ahead.

Stephen Anderson -- Maxim Group -- Analyst

Yes, good morning. Just a couple of follow-ups. First of all, for the sake of comparison, I just want to see how many store closure days you had with Hurricanes Harvey and Irma last year, and I have a follow-up on another topic.

Jill Golder -- Senior Vice President and Chief Financial Officer

Okay. With this fiscal year with the hurricane, which we're still kind of sorting through, we've got approximately 5 stores remain closed. We had 37 stores that were closed or had some modified hours at some point in time. We're hopeful that of the 5 that remain closed due to flooding that 3 will be open later this week by Thursday. But we're still working through that. I do want to say that we're pleased that we've had no reported injuries from our employees or team members, so we're glad that everyone is safe there.

What we shared last year with Hurricanes Harvey and Irma, the negative impact on same-restaurant sales was approximately 30 basis points. I believe that was $0.07 in EPS in the quarter.

Stephen Anderson -- Maxim Group -- Analyst

Thank you. In those, no mention of Holler & Dash in this report. I saw in the guidance that you do not include any openings for this year. I just want to get any kind of update that you can provide for us and whether the reason you're seeing putting a moratorium on growth there?

Sandra B. Cochran -- President and Chief Executive Officer

From the beginning, our plans were to open a group of Alpha stores, if you will, in diverse markets. So, both geographical and real estate-wise, to validate our assumptions and to get learnings around the business model and the build-out potential. So, that's what the team did. I'm really proud of what they've accomplished and how the guests have responded positively to the brand. The consumer feedback continues to be strong.

Fiscal '19 then is going to be focused on making adjustments to the model and our processes based on the learnings before further expansion. So, they will be working on the P&L side and the menu. Then when we're ready, we will continue expansion.

Stephen Anderson -- Maxim Group -- Analyst

All right. Thank you.

Operator

Our next question comes from Jon Tower with Wells Fargo. Please go ahead.

Jon Tower -- Wells Fargo Securities -- Analyst

Thanks for taking the questions. Just a few, if I may. First, in terms of thinking about pricing for the year, I know you exited the fourth quarter at a 2.7% clip. I know historically when you introduce a new menu, which has been March and then sometime around the August/September timeframe, that's when you've traditionally taken price. So, the 2% that you've guided for '19, how should we think about that throughout the year?

Jill Golder -- Senior Vice President and Chief Financial Officer

The 2% that we've guided, to your point, we do. We take it two times per year. I think it's going to be -- we're just checking -- it should be relatively flat this fiscal year. As you're looking at overall check, one thing that I would remind you of our crafted coffee, which we'll be wrapping on the full rollout of that at the end of April.

Jon Tower -- Wells Fargo Securities -- Analyst

Okay. Then just going to the fried chicken tests, I'm just curious. I know in the prepared remarks, there was discussion about it driving traffic and sales. I'm curious if you're able to parse out whether that's actually new traffic or if you're seeing increased frequency of current guests?

Sandra B. Cochran -- President and Chief Executive Officer

We're not. With only 45 stores and a relatively short timeframe and lots of other things going on in the chain during that time, we're not able to get a good read at this point on really either traffic or sales. Based on the consumer research we've gotten and how it's mixing in those stores, we are excited about how much both the guests love it and our operators tell us that it is very popular.

Jon Tower -- Wells Fargo Securities -- Analyst

Okay. I might have missed this, but on the new credit facility, with the old one expiring a year from now, why take up the size of up? I think $950 million versus $750 million before?

Jeff Wilson -- Vice President and Principal Accounting Officer

Sure. Well, as you said, the credit facility was set to expire about a year from now. We had the opportunity to increase the size. There was a significant amount of interest amount among the participating banks. The rates were good and we decided at that time that we would increase the level.

Jon Tower -- Wells Fargo Securities -- Analyst

Okay. Then just lastly, Sandy, I noticed that there's a new employment agreement that was struck with you back in late July and it triggered a question in my head about succession planning for the company. So, if you wouldn't mind talking about perhaps how the company thinks about succession planning, particularly for the CEO role, that would be great.

Sandra B. Cochran -- President and Chief Executive Officer

I can tell you our Board is very focused on the issue of executive succession. Not only at the CEO level, but across the senior leadership team. They consider they issue of CEO succession at every Board meeting, both assessing what internal candidates may be available, as well as thinking about the characteristics they would seek if they choose to look outside the organization.

Jon Tower -- Wells Fargo Securities -- Analyst

Okay. I think it said in the agreement something about you having to notify the company a year in advance of moving on. Did I read that correctly?

Sandra B. Cochran -- President and Chief Executive Officer

I agreed as part of that contract that I would provide at least 12 months prior notice. That's correct.

Jon Tower -- Wells Fargo Securities -- Analyst

Okay, awesome. Thank you very much for the questions.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Sandy Cochrane for any closing remarks.

Sandra B. Cochran -- President and Chief Executive Officer

Well, thank you for joining us today. As we look forward to 2019, we plan to build on our brand strength and execute our business initiatives to drive sales growth and achieve sustainable business model improvements. We appreciate your interest and support and thank you for the time this morning.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 59 minutes

Call participants:

Sandra B. Cochran -- President and Chief Executive Officer

Jill Golder -- Senior Vice President and Chief Financial Officer

Don Hoffman -- Senior Vice President, Marketing

Jeff Wilson -- Vice President and Principal Accounting Officer

Adam Hanan -- Investor Relations

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Michael Gallow -- CL King & Associates -- Analyst

Gregory Francfort -- Bank of America Merrill Lynch Research -- Analyst

Robert Derrington -- Telsey Advisory Group -- Analyst

Stephen Anderson -- Maxim Group -- Analyst

Jon Tower -- Wells Fargo Securities -- Analyst

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