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Edited Transcript of CBRL earnings conference call or presentation 18-Sep-18 3:00pm GMT

Q4 2018 Cracker Barrel Old Country Store Inc Earnings Call

LEBANON Sep 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Cracker Barrel Old Country Store Inc earnings conference call or presentation Tuesday, September 18, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Hannon

* Donald H. Hoffman

Cracker Barrel Old Country Store, Inc. - SVP of Marketing

* Jeffrey M. Wilson

Cracker Barrel Old Country Store, Inc. - Principal Accounting Officer, VP & Corporate Controller

* Jill M. Golder

Cracker Barrel Old Country Store, Inc. - Senior VP & CFO

* Sandra Brophy Cochran

Cracker Barrel Old Country Store, Inc. - President, CEO & Director

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Conference Call Participants

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* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jake Rowland Bartlett

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Jon Michael Tower

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael W. Gallo

CL King & Associates, Inc., Research Division - MD & Director of Research

* Robert Marshall Derrington

Telsey Advisory Group LLC - MD & Senior Research Analyst

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Cracker Barrel Fiscal 2018 Fourth Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Adam Hannon, Manager, Investor Relations. Please go ahead.

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Adam Hannon, [2]

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Thanks, Brandon. 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 onetime noncash 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.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; Senior 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 are 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?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [3]

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Thanks, Adam, and good morning, everyone. This morning, we announced fiscal 2018 adjusted earnings per diluted 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.

A 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 guests' 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.

This include declines in guest experience metrics and a lack of emphasis on our value proposition and on delivering cravable 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 rigorously 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 are prioritizing a focus on the guest experience to drive traffic in 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 dayparts.

And 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 is going to require steady improvements in a number of areas, which will take some time.

Next, we're focused on introducing new and cravable 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 cravability. 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 2 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 exemplifies the cravability 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're 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's 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.

And third, we're finding 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 4-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, and 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 and 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 that it will take some time to implement our plans and to reverse the trends in traffic.

And with that, I'll turn the call over to Jill.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [4]

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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 onetime noncash 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 benefited from the extra week in the fiscal year.

Adjusted for the impact of the extra week and the onetime noncash 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 8 new Cracker Barrel locations and 3 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 mix favorability was driven primarily by our Crafted Coffee program.

Fourth quarter comparable store retail sales increased 1.3%, with increases coming primarily within women's apparel and books and stationery.

Moving on to expenses. Total cost of goods sold in the quarter was 30.3% in 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 a 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 theme 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 then 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 in 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 reduction as part of our cost savings initiative.

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 earnings 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 the range of flat to 1% and comparable store retail sales growth in the range of flat to 1%.

Given recent trends, we believe a more cautious approach to fiscal 2019 sales is appropriate. We expect to open 8 new Cracker Barrel stores in fiscal 2019.

We anticipate our fiscal 2019 menu pricing will be approximately 2%. We expect increased food commodity costs 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 categories.

We have locked in our pricing on approximately 50% of our commodity requirement 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 million 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 million 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 Day, we now believe that it will take us an additional 1 to 2 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 3-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 million 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 3-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.

And with that, I will turn the call over to the operator so that we can take your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jake Bartlett with SunTrust Robinson Humphrey.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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First, Jill, on the margin outlook for 2019, you're looking for a 40 basis points of deleverage. If you could just walk us through the pushes and the pulls there. It looks like you have some -- the cost cutting should help by maybe 30 to 40 basis points. But then you have 50 to 70 basis points of D&A pressure -- some pressure on labor, given the wage inflation that you're expecting. So roughly flat with commodities, maybe lapping some of the lack of incentive comp in 2018. Maybe help us understand why it wouldn't be more than 40 basis points kind of given those moving pieces.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [3]

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Okay. So there's a couple of pieces. So 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%. And then as we look towards 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 faced are higher depreciation, higher accrued incentive compensation and higher workers' compensation. As I mentioned in my prepared remarks, we expected that higher depreciation and incentive comp is approximately 80 basis points. And some of that will be offset by the favorability in our cost saving initiatives that we outlined at approximately at $10 million to $12 million. And then I guess, I would say, in addition, we have some inefficiencies in fiscal 2018 in some of our underlying productivity measures, and we're also assuming some improvement in those areas as well.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [5]

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

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [6]

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Okay. And then, Sandy, looking at the approach for going forward in what you expect to drive results, see improved results on '19 on the top line. If you could talk about the daily delights in the Sunrise Specials, kind of within that $4.99 breakfast. It looks like -- I mean, this is something that you told us about a year ago, and it looked to be in test for the whole year. How confident are you that, that is a sufficient kind of value message to break through in this environment? What was the experience so far in the test in a little over 100 stores, I believe, you had it?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [7]

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All right. Well, why don't I start, and then I'll turn it over to Don. And 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 on looking at ways to bring new news to both those 3 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. So Don, why don't you speak to the daily delights in particular?

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Donald H. Hoffman, Cracker Barrel Old Country Store, Inc. - SVP of Marketing [8]

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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. And the overall premise behind that program was everyday value that customers can count on at 3 specific price points, at that being $4.99, $5.99 and $7.99, respectively, for breakfast, lunch and dinner. So we also wanted to use that program to not only call attention to those 3 price points but to perhaps periodically inject some new news behind those in 3 tiers. And what we've been finding is that the program seems to resonate well. We had some good learning in the first quarter. We ran -- we expanded our tests in our second quarter to 12 markets from 9 markets. We used 4 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 in Three Cheese Grilled Cheese nationwide. And then earlier this year, we put the daily delights offering as a permanent offering on our core menu systemwide, so now every day that somebody comes in, they will see categories of that $4.99, $5.99 and $7.99 called out. And then as Sandy mentioned, and you're probably aware, our current national advertising focus is on everyday value, including some new product news that we put in into lunch and dinner daypart, including biscuit pot pie and biscuit French toast. So I'll end by saying, just reiterating what Sandy said, is 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. And 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.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [9]

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I'm going to make one more point, Jake, just to highlight. Don kind of said it, and you might have noticed it that I think our culinary team has done a good job and they continue to work on how to -- continue this by 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 with the biscuit French toast at breakfast at this very attractive price point, and then at lunch and dinner this biscuit potpie is a great value and it's sort of new news in a new category that's tried and true.

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Operator [10]

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Our next question comes from Michael Gallo with CL King.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [11]

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Sandy, a couple. One question and 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 at the current environment. And 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 improve getting those guest scores going in the right direction again. And then I have a follow-up.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [12]

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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. So 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 more 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, that works at dinner and in every market. And 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.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [13]

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That's helpful context. And then a follow-up for Jill. Just your commentary on the first quarter. I think if I look back to the first quarter of '17 -- excuse me, first quarter of fiscal '18, you had a 31 or so percent tax rate. This implied that the guidance is down. It seems to imply either a meaningful further deceleration in traffic trends or pretty significant decline in operating margin. Sort of back of the envelope, it looked like about 170 basis points. So could you help me with whether we're taking about that right? Should we be thinking 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 now some of the other stuff flows through that might put further pressure on margins?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [14]

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Michael, thank you for that question. Yes, as I said in my prepared remarks that we do expect first quarter to have EPS modestly below prior year. And there's 3 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 kind of inter-quarters. And then, as I mentioned, commodities for next fiscal year -- for the 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. And then, the other piece of it would be around the incremental depreciation within the quarter as well. And 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.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [15]

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Okay. Again, helpful context. And 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 to be a learning curve as you kind of roll that out and get the volumes per store up from a margin standpoint? Or how should we think about just training and all the complexity around as you put that in more stores?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [16]

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Yes, there will be a learning curve. There has been a learning curve. We have, as I mentioned, I think, have it now in 45 stores. We'll have it in another 170 before Thanksgiving. Then, we'll take a break from 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 any time 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 trade is 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.

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Operator [17]

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

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [18]

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I had a couple quick housekeeping questions, and then maybe 1 or 2 longer term. The first is just on the $10 million to $12 million of cost savings, where is that going to show up on the margin side? Again, what sort of lines? Is that labor? Is that other OpEx?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [19]

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Yes, Greg. This is Jill. So 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, and then the remainder, there's a little bit in G&A and a little bit in other operating.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [20]

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Okay. That's helpful. And 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 kind of once you get past this investment cycle, what the CapEx run rate would be?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [21]

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Yes. I think, at this point, beyond this kind of 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 million to $500 million, we're really not prepared to talk beyond 2020.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [22]

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Okay, got it. And then maybe 2 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? Like I guess, you kind of pushed out the cost savings you're expecting. What is the new POS system basically effect in terms of labor or other OpEx? How does it show up in your business model?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [23]

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Okay. So from the point of sale standpoint, there's a few things that it does on the cost savings, and then we believe it will also help on the sales side, but I'll talk to the cost savings. And so 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 both 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 3 that help with the cost savings.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [24]

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And the timing of this now is more -- is it just a year or 2 later than you were expecting before?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [25]

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Yes. We've kind of stepped back and looked at the prioritization of our key initiatives, and really given our focus on guest service as well as chicken, we've decided to slow down the POS a little bit. We 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'd look to increase that, 70 or 80 or so in the current fiscal year.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [26]

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

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [27]

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I guess I'll be consistent with what we've said in the past is that 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 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.

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Operator [28]

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

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [29]

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

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Jeffrey M. Wilson, Cracker Barrel Old Country Store, Inc. - Principal Accounting Officer, VP & Corporate Controller [30]

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The expected increase in interest rate -- or the expected increase in interest expense is due to an increase in rates. 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.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [31]

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Okay. That's terrific. Sandy, looking at directionally, as we move through the course of this fiscal year, the company's 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 Hurricane Florence has had on the business in the first quarter?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [32]

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

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [33]

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Okay. So the guidance of flat to up 1 doesn't include whatever negative impact in the first quarter. And I think directionally you said that assume that 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 should expect that the earnings growth in same-store sales growth is going to be heavily leaning towards the back half of the year? Is that reasonable?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [34]

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So we're not giving quarterly guidance on the same-restaurant sales.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [35]

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Got you. Okay. Could Jill or Sandy help me understand for a second? It sounds like COGS on the retail piece of the business appeared to be -- I think, the outlook was a little bit more favorable. And I think it was mentioned that's due to some kind of a change in the markup or the markdown strategy? Can help us understand that?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [36]

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Sure. So markdown optimization is really the practice 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, chain-wide to 50 off, they may be able to start at 50 off in 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 maintained margins at the end of the year. And we are anticipating, which was reflected in the guidance, an improvement in retail margins for fiscal '19.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [37]

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Okay. And kind of directionally, thinking about the line items, food costs, labor costs, 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 in the business?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [38]

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No. So as we talked about in our comments that -- so 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 towards that line item. So that's what you're seeing there, Bob.

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Operator [39]

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Our next question comes from Stephen Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [40]

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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.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [41]

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Okay. So 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 remained close due to flooding, that 3 will be opened later this week by Thursday, but we're still working through that. And I do want to say that we are 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 Hurricane Harvey and Irma, the negative impact on same-restaurant sales was approximately 30 basis points, and I believe that was $0.07 in EPS in the quarter.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [42]

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

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [43]

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So 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 both the business model and the build-out potential. So that's what the team did, and 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 as well and the menu. And then when we're ready, we will continue expansion.

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Operator [44]

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Our next question comes from Jon Tower with Wells Fargo.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [45]

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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. And I know historically, when you introduced a new menu, which has been March and then sometime around the August/September time frame, 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?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [46]

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

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [47]

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Okay. And then just going to the fried chicken test. I'm just curious, I know in the prepared remarks there was discussion about it driving traffic in sales. And 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?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [48]

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We're not -- with only 45 stores and a relatively short time frame 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. But we are excited about how much both the guests love it and our operators tell us that it is very popular.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [49]

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

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Jeffrey M. Wilson, Cracker Barrel Old Country Store, Inc. - Principal Accounting Officer, VP & Corporate Controller [50]

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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.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [51]

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Okay. And then just lastly, Sandy, I noticed that there's a new employment agreement that struck with you back in late July, and that 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.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [52]

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So 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. And they consider the 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 chose to look outside the organization.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [53]

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

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [54]

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

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Operator [55]

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This concludes the question-and-answer session. I'd like to turn the conference back over to Sandy Cochran for any closing remarks.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [56]

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Well, thank you for joining us today. As we look forward to 2019, we plan to build on our brand strengths 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.

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Operator [57]

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