Cracker Barrel Old Country Store, Inc. (CBRL) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Cracker Barrel Second Quarter 2012 Conference Call. Today's call is being recorded and also will be available for replay today from 2 p.m. Eastern Time to March 7, 2012, at 12:59 a.m. Eastern by dialing (719) 457-0820, entering passcode 7064033. And now at this time for opening remarks and introductions, I'd like to turn the conference over to Barb Gould. Please go ahead, ma'am.

Thanks, Kathy. Good morning, and welcome to Cracker Barrel's Second Quarter Fiscal 2012 Conference Call and Webcast. This morning, we issued a press release announcing our second quarter results and outlook for the 2012 fiscal year. In this press release and on this call, we will refer to non-GAAP financial measures adjusted to exclude charges and tax effects of the proxy contest concluded at the company's recent Annual Meeting of Shareholders. The company believes that excluding these charges and tax effects from its financial results provides information that may be more indicative of the company's ongoing operating performance while improving comparability to prior periods. This information is not intended to be considered in isolation or as a substitute for financial information prepared in accordance with GAAP. The last page of the press release includes a reconciliation from the non-GAAP information to the GAAP financials. The press release can be found in the Investor section of our website, crackerbarrel.com. In that press release and during this call, statements may be made by management of their beliefs and expectations of the company's future operating results or expected future events. These are what are known as forward-looking statements, which involve risks and uncertainties, and in many cases, are beyond management's control and may cause actual results to differ materially from expectations. We urge caution to our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning's press release and are described in detail in our reports that we filed with or furnished to the SEC. We urge you to read this information carefully. We also remind you that we do not comment on earnings estimates made by other parties. In addition, any guidance or outlook we provide or statements we make regarding trends speak only as of the date they are given, and we do not update or express continuing comfort with our guidance, outlook or trends except in broadly disseminated disclosures such as this morning's press release, filings with the SEC or as otherwise required by law. On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; and Senior Vice President and CFO, Larry Hyatt. Sandy will begin with a review of the business, and Larry will review the financials and outlook. We will then open the call up for questions and Sandy will return to close. Sandy?

Thanks, Barb. Good morning, everyone. I'm pleased to report on our second quarter results, which were better than we expected, mostly on the strength of our sales performance. We're seeing the positive effects of our various sales driving initiatives coming together and generating momentum in our business. During the quarter, we saw a continuation of the sequential improvement in sales and traffic trends, and traffic in the second quarter was positive for the first time in over a year even after adjusting for the favorable effects of a milder winter weather. We also outperformed the industry, leading the KNAPP-TRACK casual dining index for both sales and traffic by a considerable margin. As a result, despite increases in commodity costs and the anticipated additional investment in marketing spending this quarter, our diluted EPS before proxy cost was equal to last year's second quarter and ahead of our expectation. Larry will review the financial results for the quarter in more detail, and I'll spend most of my time this morning updating you on the progress we're making on the strategic initiatives. But I'd like to take a moment at the outset to pay tribute to our founder, Dan Evins, who passed away on January 14. Danny retired at the end of 2004, and the people who knew and worked with Danny have a lot of stories about those times, many of them quite funny and filled with respect for what Danny was able to accomplish in creating and building Cracker Barrel. With his focus on honest values such as an insistence on quality products at a fair price and genuine Southern hospitality, he created in Cracker Barrel a unique, authentic experience that fostered lasting connections with our guests. How Danny thought about our guests and his business from the beginning is captured in our mission statement of Pleasing People. As we move forward, we'll honor Danny's legacy by remaining true to this mission as we work to preserve the vital connection with guests and employees that's been there from the beginning. To accomplish this, as we've outlined previously, our plans are centered on 6 strategic priorities: first, introduce new marketing messaging to better connect with our current and potential guests and to reinforce our authentic value; second, implement refined menu and pricing strategies to increase the variety and everyday affordability of our menu; third, enhance our restaurant operating platform to generate meaningful and sustainable improvements in the guest experience; fourth, drive retail sales growth by continuing to improve assortments and deliver great value; fifth, implement initiatives to reduce cost to offset at least a portion of the impact of higher food commodity costs; and sixth, to leverage our strong cash flow generation to both reinvest in the business and increase our return of capital to shareholders. We continue to see progress on all these fronts, and we'll remain focused on them as we navigate through what is still a challenging and competitive consumer environment. The need for Cracker Barrel to offer solid value and affordability remains high. While recent employment data are moving in a favorable direction, the pace of improvement remains slow and consumer spending is still being pressured by higher grocery and energy costs. In response, many in the industry are focused on promotional discounting, and restaurant consumers continue to find a wide variety of aggressively priced offers. We're cautious in our outlook, and our focus remains on enhancing and reinforcing Cracker Barrel's affordability through our menu and pricing strategies and our marketing messages. We launched our new marketing strategy early in the second quarter. We've refined the target audience for our media message, and we're concentrating our advertising spending in the second and fourth quarters to increase advertising support to cover the entire chain during our key sales periods. We ran national cable TV advertising from mid-November to mid-December that introduced our new message centered on highlighting wholesome connections through our brand -- with our brand through our new “Handcrafted by Cracker Barrel” campaign. This was the first time ever that Cracker Barrel has advertised nationally, and we're pleased with the results. Based upon our research, we reached our target users and strengthened their perceptions of Cracker Barrel across a range of key consideration attributes. We believe the new advertising was an important contributor to our sales spreads in the quarter, and we expect to continue this strategy later in the year. We're also pleased with our efforts through our gift cards business during the important holiday season. This year, we added open denomination cards, as well as holiday-themed cards, and we're pleased with the response from our guests. We've begun to leverage our updated website to extend the Cracker Barrel experience and engage our guests outside of the store. Our objective is to build another vehicle to reach our guests directly and at a lower cost than many other channels. While we're still in the early stages of this initiative, we were excited by guest response to our initial efforts. We launched an online checkers tournament, which attracted almost 50,000 participants who collectively played a total of almost 400,000 games. In conjunction with the fall festival event in our stores, we invited guests to go online and upload pictures of themselves enjoying the event. In both cases, we are pleased with the response from our guests, and we plan to continue engaging our guests online with fun, brand-appropriate events and developing direct connections from which to communicate with them. We're gaining traction in our second strategic priority to define our menu and pricing strategy. We believe our guests continue to be focused on value and affordability. We introduced Weekday Lunch Specials at $5.99 back in September to enhance our perceived affordability and to drive traffic. We believe this program positions us in the minds of our guests as offering solid value that extends beyond lunch and our guest feedback measures confirm this, showing sustained improvements over last year in overall value. During the second quarter, we introduced new add-ons, including a loaded baked potato and a baked potato topped with broccoli and cheese to provide appealing sides to add to our lunch specials, and we're successfully selling these add-ons, both with daily lunch specials and with other menu items as well. We believe our lunch program continues to be an important element in driving our sales growth. Our seasonal promotions are intended to build usage frequency, while providing product variety and reinforcing value with offerings designed to appeal to both our most frequent guests and our lighter users. Our holiday promotion, which ran through January 4, featured pineapple Wholesome Mornin' Sampler, cinnamon pancakes and cinnamon streusel French toast for breakfast, and homemade beef stew and Apple Herb Roast Chicken n' Dressing and Southern pecan praline chicken salad for lunch and dinner. We followed it with our winter promotion, which began on January 16. The winter promotion features chicken n' dumplins and Roast Beef Dinner for our more traditional users. For guests that want something lighter, we're offering Fresh Apple N' Homemade Chicken Salad. Our breakfast offerings continue to include the Wholesome Mornin' Sampler, and we introduced the Sweet Potato Pancake breakfast. We're excited about the menu development efforts we have underway. We're working on enhancing our salads and our daily lunch specials, creating a new better-for-you section on the menu and restructuring our country dinner plates to build value perception. We'll update you as we make progress. Turning to our next strategic priority, I'll update you on the continued progress we're making to strengthen the guest experience by improving the restaurant operating platform. In addition to the enhanced training that we described in our last call, we made a modest capital investment to enhance the equipment and technology package to make it easier for our employees to deliver a consistent guest experience. We believe our efforts are paying off and contributing to the strengthening of our sales trend. We're pleased with the sustained improvement in our guest satisfaction scores, which were up from the same quarter last year across a spectrum of key measures. In particular, we noted solid increases in our primary areas of focus such as friendliness and attentiveness of our servers, temperature of food and speed of service. As we announced previously, we've set a single day restaurant sales record on Thanksgiving Day. Without the improvements to our operating platform, our stores could not have handled these volumes. Thanks to the hard work of our dedicated operations teams, we're confident that we're on the right track to enhance the guest experience, which is central to building repeat visits and growing traffic. Moving to our next priority, growing our retail business. I'll remind you the second quarter's the most important quarter for us because of the holiday shopping season. In a year of continued consumer and economic challenges, we were pleased with our retail performance in the second quarter this year as we posted a 3.4% increase in comparable store retail sales. Our retail sales results for the second quarter were driven by strong performances in the core categories of apparel, food and toys. Women's apparel, accessory and jewelries had strong increases versus last year. Value-oriented programs such as our $19.99 wrap, as well as upstated styling in our everyday and seasonal women's apparel, drove growth in this category. Children's apparel also performed well in response to expanded assortment. We believe the combination of style and price in our children's apparel has resonated with our guests. In toys, we're very pleased with the success of our new exclusive private label line of dolls, Butterflies, which exceeded our expectations for sales and generated a lot of buzz in social media. We plan to build on this success with the introduction of 3 dolls in March. Our food business truly is the result of increased assortments and improved floor positioning for certain categories such as our nostalgic beverages, which were moved to a more prominent location in the store. Finally, we saw growth in our collegiate business during the quarter as we featured collegiate items as part of our Great Gifts offering during the holiday season. The gains in these businesses were partially offset during the quarter by declines in our seasonal Christmas lines and in home décor. We believe seasonal décor items are highly discretionary, and in this economic environment, not what our guests were looking for. While consumer spending in this environment remains a challenge, we're cautiously optimistic about our retail outlook for the second half of the year. We expect to carry over our momentum in children's and women's apparel and accessories, our garden themes are off to a good start and we believe we have solid assortments lined up for the spring. We're sustaining our efforts against our next strategic priority to reduce costs and improve our margins. As expected, we continue to anticipate commodity cost increases this year in the 5.5% to 6.5% range. In an environment where consumers remain highly price sensitive, we're planning modest menu price increases, which are expected to more than offset the dollar impact of these cost increases, but not offset the margin impact. As a result, we continue to work on a number of cost savings initiatives. We completed the rollout of our first phase of our enhanced labor management system in the second quarter and are encouraged by our results to date. We expected this new system to deliver lower hourly labor cost, and the results we achieved in the second quarter were at the high end of our expectation. Our new management transportation system is now online. The new system will help us optimize our right-on-schedule for delivering retail merchandise from our retail distribution center to our stores. We expect to begin realizing cost savings from this initiative in the second half of the fiscal year. We're pleased with the cost management efforts of our operating teams in the quarter as our store level cost controls remain tight. Compared to the same quarter last year, we saw lower maintenance and utilities expenses, and we continue to realize the benefits of our organizational streamlining initiative. Finally, we continue to be committed to a balanced approach for capital allocation which means reinvesting to profitably grow the brand, while also returning capital through dividends, debt repayments and share repurchases. We generated strong cash flow in the first half of the year, with our cash from operations almost double the prior-year period. Before turning the call over to Larry, I'd like to say, again, that we're pleased with our results for the second quarter and we continue to be encouraged by the success of our strategic focus. We saw guest traffic growth in the quarter and posted better than expected increases in both restaurant and retail sales. We managed our cost effectively, seeing the expected benefits from our cost savings initiatives. However, we're not letting our success in the second quarter lead to complacency for the rest of the year. The environment is still challenging as we face competitive pressures, a challenged consumer and ongoing pressure from commodity costs. We're committed to continuing our progress with our initiatives, and I'm confident that we're well positioned to leverage the strength of our highly differentiated brand to continue to deliver strong results and great returns for our shareholders. And with that, I'll turn the call over to Larry to discuss the financials. Larry?

Good morning, everyone. And thank you, Sandy. I would like to begin by discussing our financial performance for the second quarter of fiscal 2012 and then our outlook for the third quarter and the 2012 fiscal year. In this morning's release, we reported our financial performance for the quarter and year-to-date on a GAAP basis and adjusted for charges related to the recently completed proxy contest. Adjusted for those charges, we reported net income for the second quarter of $27.9 million or $1.20 per diluted share. In comparison, our net income in the prior-year quarter was $28.8 million or also $1.20 per diluted share. Our revenue in the quarter was $673.2 million compared to $640.3 million in last year's second quarter. Restaurant revenues increased 5.2% to $503.5 million and retail revenues increased 5% to $169.7 million. Comparable store restaurant sales increased 3.5% as traffic increased 1.1% and average check increased 2.4%. The increase in average check reflected menu price increases of approximately 2.2% and a favorable mix impact of 0.2%. Comparable store retail sales increased 3.4% in the second quarter. As indicated in this morning's release, the absence of inclement weather in this year's second quarter versus the prior-year quarter contributed to the increase in comparable store traffic and sales. Our total cost of goods sold in the quarter was 35% of revenue, a 70 basis point increase over the prior-year quarter. Our restaurant cost of goods was 27.5% of restaurant sales compared to 26.6% in the prior-year quarter. Food commodity costs were up approximately 6% in the quarter compared to the prior year, which was more than 2.5x our increases in menu prices. Costs for beef, eggs, seafood and coffee were up sharply from last year. Our retail cost of goods was up slightly to 57.1% of retail sales compared to 57% in the prior-year quarter. Our retail inventories at the end of the quarter were $92.3 million, representing a reduction of $5.8 million compared to the prior-year quarter as a result of our efforts to optimize inventory levels in several categories and better align our receipts with sales. Our store payroll and related expenses were $234.9 million or 34.9% of sales compared to $223.2 million or 34.8% of sales in the prior-year quarter. Our hourly wage expense decreased by 30 basis points as we continued to see productivity improvements due to our enhanced labor management system. Our employee benefits expense declined 20 basis points due to improvements in claims experienced in the current plan year. These reductions in hourly wage and employee benefit expenses were more than offset by higher workers' comp expense due to a prior-year actuarial adjustment and higher store and district manager bonus expenses due to our relatively strong performance. Our store operating expenses in the second quarter were $119.1 million or a 17.7% of revenue as compared with $112.2 million or 17.5% of revenue in the prior-year quarter. Our advertising expense, which is included in other store operating expenses, was $6.3 million or 80 basis points of sales higher than -- in the second quarter than in the prior-year quarter. As we discussed in our first quarter conference call, we have changed the quarterly pattern of media spending with relatively higher spending levels in the second and fourth quarters, and lower spending levels in the first and third quarters. For the full year, though, we expect advertising spending at the same historical level of approximately 2% of sales. The higher advertising expense in the quarter was partially offset, with reductions in maintenance expense, utilities expense and credit card fees as a percent of sales. Our store operating income was $83.8 million or 12.4% of revenues as compared to $85.5 million or 13.4% of revenues in the prior-year quarter. Adjusted to exclude proxy contest expenses, our general and administrative expenses in the quarter were $33.2 million or 4.9% of revenue compared to $33.1 million or 5.2% of revenue in the prior-year quarter. Our operating income in the second quarter adjusted for proxy contest expenses was $50.6 million or 7.5% of revenue compared to $52.5 million or 8.2% of revenue in the prior-year quarter. Our interest expense in the quarter was $11 million compared to $11.8 million in the prior-year quarter. The reduction in interest expense is due primarily to lower debt levels and lower non-use fees in this quarter as compared to the prior-year quarter. Our effective income tax rate was 29.5% for the second quarter compared to 29.2% in the prior-year quarter. The tax rate was higher than our prior expectations, due primarily to the failure of Congress to extend the work opportunity tax credit at the end of the calendar year. Our capital expenditures in the quarter were $20 million or $38.8 million on a year-to-date basis compared to $22.4 million in the prior-year quarter and $40.6 million in the prior-year first half. Our balance sheet continues to be strong. At the end of the quarter, our long-term debt, including current portion, was $550.2 million and we have unused capacity on our revolver in excess of $150 million. We ended our quarter with $119.4 million of cash and equivalents, which is an increase of $56.1 million since the end of the prior year's second quarter. We did not repurchase any shares in the second quarter. We had 23.3 million weighted average diluted shares outstanding for the second quarter, a reduction of 0.6 million shares from the prior-year quarter. This reduction in shares outstanding was due primarily to share repurchases in the third and fourth quarter of the prior year. With respect to the company's outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's release and in our reports filed with the SEC. Conditions in the U.S. economy and the prices and supply of food and oil continue to be concerns. But bearing that in mind, we expect total revenue for fiscal 2012 of between $2.55 billion and $2.6 billion. We are, again, raising our full year earnings per share guidance range, this time by another $0.10 and now expect adjusted earnings per diluted share of between $4.20 and $4.35, excluding proxy contest expenses of $0.16 per diluted share. The 2012 fiscal year is a 53-week year, and we expect that the 53rd-week impact, which is included in our guidance, to be additional revenue of approximately $50 million and additional earnings per diluted share of approximately $0.25. As a result of delayed construction starts on 2 stores previously scheduled for opening late in the fiscal year, our revenue projection for 2012 reflects that the expected opening of 13 new Cracker Barrel stores rather than the 15 we originally planned. We are currently forecasting comparable store restaurant and retail sales growth for the year in the range of 1% to 2%, with menu price increases in the range of 2%. We expect increases in food commodity cost on a constant mix basis of between 5.5% and 6.5% for the year, with the most significant increases in seafood, oil, coffee, eggs and beef. We have locked in our pricing on approximately 69% of our commodity requirements for the remaining 2 quarters of fiscal 2012 compared to 65% at this time last year. We expect our adjusted operating margin for the year, excluding proxy contest expenses, to be between 7.2% and 7.4% of revenues. And we expect our depreciation expense to be in the range of $64 million to $66 million for the fiscal year, our net interest expense to be approximately $45 million and our effective tax rate to be between 29% and 30%. We anticipate capital expenditures in the range of $85 million to $95 million, including new store investments of between $45 million and $50 million and maintenance CapEx of between $30 million and $35 million. In order to provide additional visibility into our future performance, we have provided quarterly earnings guidance for the current quarter. For the third quarter of the 2012 fiscal year ending April 27, we expect to report net income of between $0.70 and $0.75 per diluted share. And with that, I will turn the call over to Sandy. Thank you very much.

We'll be happy to take your questions now.

[Operator Instructions] We'll go first to Brad Ludington of KeyBanc Capital Markets.

I wanted to ask on the TV ad campaign. You said that you expect, Sandy, to start this back up later in the year. Can you share a little bit more, specifically on timing, is that going to be in the fourth quarter or could it be third and fourth or how does that -- how do you expect that to come out?

Well, thank you, Brad, for the comment about the quarter. And, yes, we were pleased with the results of the ad campaign in the second quarter. As I had laid out, what we intended to do this year was to concentrate our spending in the second and fourth quarter when our guest visits were the highest and our sales opportunities, therefore, the highest. So I would expect to go back into the market, so that the end of the third and through the fourth is when we'll be back in again with TV and radio again.

Okay, good. And then on the labor management system, the rollout was completed this past quarter, I believe. How do you -- it looks like most of the savings from that were offset from service level initiatives the quarter. Do you expect the management system to better offset those initiatives going forward, or should we expect to continue to see pressure like that?

Brad, to specify, the savings that we saw in the labor management system were largely offset on the labor line due to higher workers' compensation expense versus last year. And the reason for that higher workers' comp expense has to do with an adjustment to the actuarials done last year.

So we do plan, Brad, to pursue additional opportunities in both to continue to enhance labor management and then some other food production areas and training for employees. So we've got a number of other cost initiatives ongoing.

We'll move next to Joe Buckley of Bank of America Merrill Lynch.

Question on the enhanced operating performance. Is it tied to last year's Seat-to-Eat initiatives? Are we seeing the benefits of that coming through on somewhat of a delayed basis? And related to that, I think you mentioned a small capital investment that was made to enhance the operating capabilities. Could you elaborate a little bit on that, please?

Sure, Joe. First of all, yes, I think Seat-to-Eat was one of several contributors to the performance in the quarter. So I think that between the marketing messaging, the progress we made on our menu strategy and our retail sales, but when you go to the operating platform, I think the enhancements that Seat-to-Eat provided allowed us to handle the volume, for example, on Thanksgiving Day, and to provide a consistent experience, and then you couple that with the training that we did over the past few quarters with our entire staff about the guest experience and how to improve that. I think all of those played a factor in contributing to the results. In terms of the capital investment, it was less than $2 million, and it was largely things like some additional technology in the back of the house, some additional printers, some additional monitors, some adjustments we made to some of the stores in the chain, which allowed us to more consistently deliver the guest experience.

And next we'll move to Robert Derrington of Morgan Keegan.

A couple questions to kind of tie together. Obviously, it appears as though, Larry, specifically the cash, has built year-over-year. Is there a strategic plan or use for that, or is it just simply not having stepped up and repurchase shares? And as it relates to that, how does that tie in with the performance in the new stores and the fact that you've got 2 stores that are pushed back a little bit? Is that part of the reason, obviously, why the cash is up as well?

Yes. Bob, the movement of the opening of the 2 stores from the end of the current fiscal year to relatively early in the next fiscal year's a relatively minor contributor. As you may recall, we were saying in the first quarter that we expected our capital expenditures to be in the rate of -- in the range of $90 million to $100 million, now we're saying $85 million to $95 million. So there's some minor movement as a result of the movement of the store openings, and additionally, our ability to reduce some CapEx spent elsewhere. As a result of our strong financial performance, our management of accounts payable, our management of retail inventories, we did end the quarter with more cash than we ourselves anticipated as a result of the proxy contest. And then our subsequent quarter end quiet period, we were hurt not in the market buying stock in the second quarter.

And next we have Bryan Elliott of Raymond James.

Just a quick question on the advertising swing. If you could help us with the sense of what the deltas might be, Q3 and Q4, given the change in the spending, just some range there, maybe playing off the 80 bps delta that we saw here in Q2.

Sure, Bryan. We anticipate that our advertising spend in the third quarter will be down versus the third quarter of the prior year of order of magnitude, $1 million to $2 million and anticipate in the fourth quarter, our advertising spend versus the prior-year quarter to be roughly flat.

Okay. So -- and $1 million to $2 million would be on a base of...

On a base -- our third quarter spend last year was in the, like $11 million to $13 million range.

So, okay. So it was mainly this quarter, then. There really isn't much. Little bit, but okay. All right.

And Steve Anderson with Miller Tabak has the next question.

My next question -- my question is with regards to the comparable sales, and I think, Larry, I had asked you this question before. Were you able to quantify the jump in same-restaurant sales in some of the areas that did not have television advertising support before?

No. Because we -- first of all, Steve, thanks for the congratulations. No, we weren't able to quantify it, we were -- it was national. So although we lose our ability to compare, we do think that by bringing the message deeper into the market was important. We're committed to continuing to support more of our stores and continue the strategy, and we were happy with the performance.

And next you have Chris O'Cull of SunTrust Bank.

Sandy, it doesn't appear that traffic improved during the time period that you ran the national cable advertising. Were you surprised that traffic wasn't stronger during that 4-week period, given the messaging?

No, I think relative to KNAPP-TRACK, what you'd see is we did outperform the industry. One of the contributors to that was the marketing messaging. I was pleased to see that the performance continued in January after we were out of the market, which is what we had hoped we'd see. But we had a lot of things going on. The improvements in the operating platform, the progress we were making on the menu with DLS [ph] and our promotion, so -- our retail assortment, there were a lot of contributors to the quarter, but overall, I was very pleased with the quarter.

Do you in -- I want to make sure I was clear. Do you expect to run national cable during the fourth quarter as well this year?

It's a new strategy. We want some time to better understand it, so I'm not going to commit until we've reached definitive conclusions. But everything is on the table.

Okay. And just one last one, Larry. Why did stock compensation increased so much year-over-year during the quarter? And do you expect that to continue in the back half?

The -- Chris, let me get back to you on that one, okay?

[Operator Instructions] We'll go back to a follow-up from Brad Ludington.

Larry, I got a question on the -- we've got the EPS guidance of $0.70 to $0.75 for the third quarter. Is there a same-store sales range or assumption built into that?

Brad, we said that we are anticipating that our same-store sales growth for the year would be a positive 1% to 2%, with menu price increases in the range of 2%. Roughly, that works out to the back half of the year; traffic, approximately flat for the third and fourth quarters. We think that given our susceptibility, particularly to -- in the summer travel season to potential increases in gasoline prices, that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.

Okay, very helpful. And then on the second quarter -- I'm sorry if I missed this, but did you mention what gift card sales were? Were they up, down or in between during the quarter?

There was an improvement in our gift card sales from where it had been. We didn't disclose the amounts or the specifics beyond that, but I think that was partly driven by some new enhancements that we made to our program, specifically holiday-themed and open-denomination cards which we used.

And next we move to a follow-up from Robert Derrington.

One for you, Larry, and one quick one for Sandy. On the proxy contest cost during this past quarter, it looks as though they came in higher than kind of the original level of expectation at $0.10 a share. Any kind of color on that? What was higher than expected?

Bob, that was about $0.02 above what we had anticipated in the first quarter conference call, which works out to be about $500,000 to $600,000. And that was fees for various professionals.

Got you, okay. And then it looks like depreciation guidance is a little bit lower, looks like tax rate guidance is a little bit higher, those kind of wash. But as we -- I'm still trying to think through kind of the company's plan in use of the larger than expected build in cash. Is there some strategy there why at $119 million you've got what certainly is much larger than last year and what typically is larger than you typically have on the balance sheet?

Well, Bob, so as Larry said, this cash level was higher than even we had anticipated. And what I can say at this point is that we're committed to a balanced approach of continuing to invest in the business and a combination of dividends, debt repayments and share repurchases.

Okay. I'm going to jump in because we're kind of past the first round. On the new store, Sandy, are you generally pleased with the performance and the cost that it takes to build? Are these smaller stores, the newer ones you're building now? Are your sales acceptable? How do you look at the returns there?

Well -- and I am generally pleased with the recent new store openings, overall. We have, I think, done a good job of both modeling the sales forecast in the markets and being more precise and accurate about anticipating what the sales expectations are. And then secondly, reducing our cost. We've got a number of initiatives in place to further reduce the investment and to improve the productivity in both our new stores and our existing stores, so I am optimistic that we'll have more to report as we continue with those initiatives. But in general, yes, I'm pleased with the progress that we're making.

Well, it certainly seems to all come together.

And next we'll move to a follow-up from Chris O'Cull.

I just had a follow-up regarding guidance. Larry, the comp in the commodity inflation guidance for the back half of the year is similar to the first half results, yet you seem to be expecting stronger earnings year-over-year, even when you exclude the extra week. I guess my question is, what's the driver of earnings growth year-over-year in the back half?

Well, Chris, while our commodity guidance for the full year has remained the same at 5.5% to 6.5%, it was in the 5 -- I'm sorry, it was around 6% in the second quarter, which as we had indicated in the first quarter, we anticipated would see our highest year-over-year increases in commodity costs. And so that -- we believe on a year-over-year basis, there will be some moderation in commodity cost increases in the third and fourth quarters. We additionally expect that our cost savings initiatives, as Sandy discussed them earlier, will continue to show results in the back half of the year. And finally -- it's just we don't have -- we don't anticipate the negative comparison for workers' comp on the labor line that we saw in the second quarter.

Okay. What was the commodity inflation for the first quarter? Do you have that?

If I remember, it was in the -- it's a high 5. First quarter was about 5.5%.

And our next follow-up will come from Steve Anderson.

I just wanted to see -- you may have mentioned it during the call, but I know last quarter, you said I think you had saved about $0.03 a share -- no, $0.02 per share on the initial rollout of the labor management system. Can you quantify how much of a gain on EPS you have made for this quarter?

Yes. I believe what we said in the first quarter, and I know that what we are saying now is that we had anticipated a savings in the 10 to 20 basis point range. And as I noted in my remarks a little earlier, that we actually saw a reduction in wage expense of about 30 basis points in the second quarter versus the second quarter of the prior year.

Okay. And it's exclusively through the new labor management system or is there other -- something else we should account for?

It is largely a result of the labor management system, Stephen.

And it does appear at this time, there are no further questions. So, Ms. Cochran, I'd like to turn the conference back over to you for any additional or closing remarks.

All right, thank you. Thank you, all, for joining us today. We're pleased with the first half of our fiscal 2012, which has exceeded our expectations as we've made significant progress executing against our key strategic priorities. While challenges remain in the external environment, we're encouraged as we head into the second half of the year, and I remain confident that we have the right strategy and the right leadership in place to move the brand forward and drive shareholder value. We appreciate your interest and support.

This does conclude today's conference call. We'd like to thank you for your participation.