Cracker Barrel Old Country Store, Inc. (CBRL) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Cracker Barrel Fiscal 2017 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jessica Hazel, Senior Manager of Investor Relations. Please go ahead.

Thank you, Olsen. Good morning and welcome to Cracker Barrel's fourth quarter fiscal 2017 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 2018 fiscal year. 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, we will refer to non-GAAP financial measures for the prior fiscal year, adjusted to exclude the prior year impact of the reduction of provisions for uncertain tax positions, as well as the impact of the prior year elective reinstatement of the work opportunity tax credit. Excluding these tax effects from financial results provides information that may be more indicative of the company's ongoing operating performance while improving comparability to other periods. This information is not intended to be considered in isolation or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of the non-GAAP information to the GAAP financials are provided on the last page of this morning's press release which is posted in the investors section of our website, crackerbarrel.com. In addition, 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 company'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. I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran. Sandy?

Thanks, Jessica. Good morning, everyone. As you can see from today's press release, we ended fiscal 2017 with strong earnings growth delivering earnings per share that exceeded our previously stated expectations. I believe our performance this year reflects the strength of the differentiated Cracker Barrel brand and our ability to execute against our strategic initiatives to deliver topline results that outperformed both, the casual dining industry and the specialty retail industry during a highly competitive and challenging year. Also I'm very proud of our management and field leadership teams, their efforts throughout the year resulted in delivering annual cost reductions that exceeded our fiscal year target and contributed significantly to our fourth quarter and full year earnings performance. There are many accomplishments during the fourth quarter and the fiscal year and I'd like to share a few highlights. First, we grew our fourth quarter operating income by 7% over the prior year fourth quarter. Second, we delivered fiscal 2017 operating income of 10.7% of revenue compared to 9.6% of revenue in the prior fiscal year. Third, our 2017 earnings per share increased 11% over adjusted EPS in the prior fiscal year. And fourth, we generated $321 million in cash from operations which allowed us to once again increase our quarterly dividend and declare 2017 special dividend resulting in a 5% dividend yield. Jill will discuss our financial results in the fourth quarter in detail and I'll speak to you about our business priorities for fiscal 2018 but before that I'd like to provide you an update on our fourth quarter. During the fourth quarter we remained focused on maintaining brand awareness by continuing to market and communicate the unique quality of our food, like our breakfast LTOs including Strawberry French Toast and Peppermill Steak n' Eggs. The price value relationship at Cracker Barrel, the variety of our retail merchandize and our friendly welcoming service. Through the return of our Campfire meals we continue to evolve our communication channel strategy focusing on the role of each of our brand communication touch points and reaching a broader demographic of people with the right message. Our summer marketing efforts allowed us to more precisely target current and future guests with an integrated marketing campaign and increased media wave that featured eight weeks of national cable and five weeks of national Hispanic advertising. Incremental in the fourth quarter were seven weeks of local TV in five focused more markets and seven weeks of local spot radio in 26 markets. Additionally, we expanded our digital support of our Campfire meal promotion by adding geo-targeting advertising and by producing fun and creative multi-media content to increased timeliness and relevance in order to increase our social content and online media appeal. We believe our fourth quarter marketing efforts supported our continued position of topline outperformance versus the casual dining and specialty retail industries as our performance gap widened during concentrated periods of advertising, specifically during the back half of the fourth quarter. Our retail team continues to navigate through a very challenging and highly promotional retail environment. We're disappointed with performance in apparel, accessories and candle categories, as well as with the number of guests making a retail purchase. Through the quarter we worked hard to identify supplemental sales opportunities and to carefully manage mark down spend, maximize vendor support and manage year-end inventory levels. Regarding our cost reduction initiatives, we set out at the beginning of the year to reduce annual operating cost by $15 million to $20 million. Our operations teams did a great job absorbing changes into their daily operation and we realized savings from several initiatives earlier than we had anticipated. As a result, we delivered 15% above the high end of our fiscal year target achieving our three year strategic goal as outlined back in 2014 of removing $50 million in annual cost from the business by the end of fiscal 2017. Through focus and dedication, these initiatives supported our operating income margin improvement and delivered fourth quarter earnings per share growth above our expectations. Finally, during the quarter we opened two new Cracker Barrel stores bringing our total store count at year end to 645 Cracker Barrel locations and four Holler & Dash locations across 44 states. As we look to the future, we'll continue to focus on the enhanced core business, expand the footprint and extend the brand long-term strategic plan that's driven our success and resulted in nearly 50% increase in earnings per share over the last three year period. We continue to see evidence of the highly pressured restaurant and retail industry. And to address the realities of this environment and respond quickly to consumers' needs and competitive challenges we must evolve and we must do so while remaining committed to our Cracker Barrel brand integrity, strive affinity for our brand and loyalty from our guests. So I'd like to spend the rest of my time on today's call talking about how we'll accomplish that objective in 2018 and beyond. Three of our fiscal 2018 priorities are convenience, value and menu variety and we believe through a focus on these items we can build on our position of strength to drive sustainable sales growth in the coming quarters and years. So let me begin with convenience. Studies show that consumers continue to rank convenience as the leading factor in choosing the foods they eat in both, food at home and food away from home occasions. As people are more pressed for time they will continue to look for meal solutions that offer flexibility and convenience and the market expects this trend to continue. In 2018 we plan to address consumers' needs for convenience through growth in our off-premise business. During fiscal 2017 we tested and enhanced off-premise platform in approximately 100 stores and we were pleased with the results. By the end of this quarter we expect to have completed a system-wide rollout of our new off-premise platform. This platform offers guest traditional Cracker Barrel home style meals for small groups of 6 to 10 or large groups of 18 of 24. And these offerings can be ordered online or in-store and picked up at the guest convenience. We're launching the program with more than 20 on-tray offerings like our ham, egg n' cheese casserole or our fresh fruit and yoghurt breakfast or the home-made chicken and dumplings or roast beef with gravy at lunch and dinner. We believe we can not only take market share in this space but also position ourselves long-term as a key player in off-premise business within the casual dining industry to expand the program into new opportunities. I'm excited about this opportunity and we'll be sharing more with you about our off-premise business plans including our individual to go-strategies, growth in special occasion offerings like our Holiday Heat n' Serve and our long-term plans for off-premise business all at our upcoming analyst and investor day. Moving to value; we believe offering high quality home [Indiscernible] food and everyday value is one of the many qualities that differentiate our brand within the industry. However, as consumer needs evolve and they redefine their personal view of value in this highly promotional environment, we must be responsive and more aggressive in our approach to value. To further engage as a value player in the restaurant space we're testing an enhanced everybody value platform at breakfast, lunch and dinner and we'll be supporting this with four week television media flight within our test market. The tests will both focus on new menu offerings, as well as highlighting our current everyday value offerings as we add variety and excitement to our very successful menu categories. The enhanced platform is strategically designed with enticing products anchored on an entry level price point at each day part. So there will be new product offerings like a loaded macaroni n' cheese dinner at a $7.99 dinner price point and a biscuit French toast breakfast which offers a twist on our current offering bring something new and unique to our guests for only $4.99. So these are just a couple of the new products that will be offered during the initial test phase. To reinforce our value positioning in the industry, we plan to introduce the new offerings in approximately 100 stores, monitor their results, and work to mitigate financial risk by offsetting potential negative trade with check driving add-ons. We're very focused on our retail business and believe a greater emphasis on value is critical to better position ourselves to compete in what we consider to be a very promotional environment. In fiscal 2018 we will improve how we communicate, not only the affordability of our merchandise offerings but also the quality and exclusivity of our assortments placing greater emphasis on our price value relationship. So for example, our children's apparel assortment will be priced at $19.99 and below which provides our guests with boutique styling at affordable pricing while maintaining our quality standards. In addition, we're working to refresh our assortments regularly to maintain merchandise at affordable prices, ensuring guests can find compelling products at any price point. And we believe this is the right approach to grow our sales gap and to achieve our long-term business growth. One of the first menu variety initiatives we're introducing this year is a new coffee platform. With ice and flavored latte's we believe the platform will complement the strength of our breakfast all day offering through our check favorability and promote guest perception of variety of menu offerings. I'll look forward to sharing more details regarding our coffee platform and other menu variety initiatives in the future. I'm very encouraged by these fiscal year plans to drive sustainable top line growth. I believe a sharp focus on convenience, value, menu variety will create a solid foundation for our long-term strategic plans. And to finally establish these key initiatives and ensure a great guest experience fiscal 2018 will be an investment year. So we believe it's the right time to invest in our brand to drive top line sales growth, to increase capital spending, additional staffing and store level training, to support not only our 2018 business priorities but also our larger multi-year projects like the introduction of a new POS system which will provide us with a platform for additional functionality like server tablets. Much of the fiscal 2018 investment cost will be weighted to the first quarter of the fiscal year to support the training and launch of several initiatives at our Bi-Annual Managers Conference which occurs later this month, as well as to support our value testing which we believe is an important investment that will drive top line sales growth. As a result of these efforts we anticipate sequential quality improvements in sales and earnings during the fiscal year and into fiscal 2019 as initial investments are completed and we begin to yield favorable top line results. And with that, I'll turn the call over to Jill. Jill?

Good morning everyone and thank you, Sandy. I would like to begin by discussing our financial performance for the fourth quarter of fiscal 2017 and the full fiscal year, and then our outlook for the 2018 fiscal year. In this morning's release, we reported fourth quarter net income of $53.9 million or $2.23 per diluted share, representing a 5% increase over prior year earnings per diluted share of $2.12. For the full fiscal year, we reported net income of $201.9 million or $8.37 per diluted share, representing an 11% increase over prior year's adjusted EPS of $7.55. For the quarter, we reported total revenue of $743.2 million, a decrease of 0.3% when compared to prior year revenue of $745.6 million. Our restaurant revenue increased 0.3% to $611.3 million while our retail revenue decreased 3.1% to $131.9 million. Comparable store restaurant sales in the quarter decreased 0.8% as average check increased 0.9% and traffic decreased 1.7%. The increase in average check reflected menu price increases of approximately 1.4% and a decrease in menu mix of approximately 0.5%. The fourth quarter mix on favorability was driven primarily by the shorter duration of the summer Campfire menu promotion. Comparable store retail sales decreased 4.4% driven primarily by fewer guests being converted to a retail purchase. Total cost of goods sold in the quarter was 29.2% of total revenue, a 140 basis point improvement from the prior year quarter. Our restaurant cost of goods was 25.2% of restaurant sales compared to 26% in the prior year quarter. This 80 basis point improvement was driven by favorability cost mix from a shorter summer Campfire menu promotion of favorable commodity market and continued savings from our targeted food management initiative. On a constant mix basis, our food commodity costs were approximately 130 basis points lower in the quarter than in the prior year quarter, driven primarily by deflation in beef and eggs categories, partially offset by inflation in the fruits and vegetables category. Our retail cost of goods sold was 48.2% of retail sales compared to 50.9% in the prior year quarter. This 270 basis point improvement was primarily the result of reduced markdown expense versus the prior year quarter. Our retail inventories at year end were $119.4 million compared to $114.6 million at the prior year end. Labor and related expenses were $257.9 million or 34.7% of revenue, a 30 basis points improvement from the prior year. This improvement is primarily driven by a reduction in employee benefit expense due to favorable claims experience and continued favorability from our cost savings initiatives. Other store operating expenses in the quarter were $148.2 million or 20% of revenue compared with other store operating expenses of $142.7 million or 19.1% of revenue in the prior year quarter. The largest components of this 90 basis point increase were the previously discussed planned increases in advertising spend and depreciation expense. Store operating income was $119.7 million in the fourth quarter or 16.1% of revenue compared with store operating income of $114.4 million or 15.3% of revenue in the prior year quarter. This growth was supported by favorability in the commodity market and our annual operating costs reductions totaling approximately $23 million. We exceeded our fiscal year cost reduction target as we realized costs savings from several initiatives earlier than we anticipated realizing those savings. This favorable timing result was driven by our field leadership team and their ability to successfully absorb changes into their daily operations. General and administrative expenses in the quarter were $36.5 million or 4.9% of revenue which is flat to the prior year quarter. Operating income was $83.2 million or 11.2% of revenue compared with operating income of $77.6 million or 10.4% of revenue in the prior year quarter, an improvement of 80 basis points. Interest expense for the quarter was $3.6 million which is flat compared to the prior year fourth quarter. Our effective tax rate for the fourth quarter was 32.4% compared to an effective tax rate of 31.1% in the prior year quarter. For the full fiscal year, our adjusted tax rate was 32.4% compared to an adjusted tax rate of 31.8% in fiscal 2016. Our capital expenditures for the full fiscal year totaled $110 million compared to $113 million in the prior fiscal year. Turning to our balance sheet; we ended the fiscal year with $161 million of cash and equivalents compared to $151 million at the prior fiscal year end. During the fiscal year the company declared regular quarterly dividend payments which totaled $4.65 per share and a special dividend payment of $3.50. Our total debt was $400 million at year end. With respect to our fiscal year 2018 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. With that being said, we expect to report earnings per diluted share for the 2018 fiscal year of between $8.85 and $9. This earnings estimate assumed total revenue of approximately $3.1 billion reflecting anticipated increases in comparable store restaurant sales in the range of 2.5% to 3.5% and comparable store retail sales in the range of flat to 1%. This guidance is based on the anticipation of continued sales pressures from industry and macro factors while also considering our expectations of success from our fiscal 2018 business priority. We expect to open 8 or 9 new Cracker Barrel stores and 3 or 4 new Holler & Dash stores in fiscal 2018. We anticipate our fiscal 2018 menu pricing to be in the range of 2% to 2.25%. We expect an increase in food commodity cost on a constant mix basis of approximately 1.5% for the fiscal year. We have locked in our pricing on approximately 40% of our commodity requirements for fiscal 2018 compared to 45% at this time last year. We anticipate 2018 wage inflation on a constant mix basis of approximately 2.5%. We expect our operating income margin for the year to be relatively flat to prior year as a percent of total revenue. This guidance includes a target of $7 million to $8 million in reduced expenses from the anticipated continued success of our costs savings program. We expect depreciation expense of between $95 million and $100 million for the year, and net interest expense of between $16 million and $17 million. We expect an effective tax rate for the fiscal year of between 31% and 32%. We anticipate that capital expenditures for the year will be in the range of $150 million to $160 million. The increase in our capital expenditures plan includes costs associated with the acquisition of sites and construction for new stores, as well as additional cost for key initiatives to support our three-year strategic plan. These initiatives include off-premise, specialty coffee beverages, POS systems, and server tablets to name a few. Please note, the 2018 fiscal year is a 53-week year and we expect the impact of the 53rd week which is included in our guidance to be an additional earnings per diluted share of approximately $0.30. For the first quarter of fiscal 2018 we expect to report earnings per diluted share of between $1.85 and $1.95. As Sandy shared, the first quarter will include significant investments to drive topline sales growth. These first quarter investments specifically are Bi-Annual Managers Conference where several major initiatives will be trained and launched system-wide, our general and administrative expense to support project staffing and our value testing are expected to lever sales and earnings growth in fiscal 2018 and beyond. Additionally, our first quarter and full year guidance does not include the unquantified impact of Hurricane Harvey and Hurricane Irma. Given the recency of these events, 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, damages to our physical locations or support for our employees. It is possible that these storms could impact EPS by approximately $0.15, a significant portion of which we expect to be in the first quarter. And with that, I will turn the call over to the operator so that we can take your questions. Thank you very much.

[Operator Instructions] Our first question comes from Michael Gallo with C.L. King. Please go ahead.

Good morning. Just a brief one if I may, obviously there are some challenges you had already here first quarter, I was wondering what gives you the confidence in the 2.5% to 3.5% comp forecast and also the improvement in retail sales given the industry challenges. So I was wondering if you assume the industry gets better, there is something you're seeing in terms of the initiatives and also your confidence that you’ll be able to get more pricing this year versus what you've got in the fiscal year just ended without and still be able to significantly improve traffic from current trend? Thanks.

Good morning, Mike. Let me take a shot at that one. So first of all, we do believe that there will be some -- there is a modest expectation for improvement in the industry through the fiscal 2018 year, and that's based on a variety of factors so that the consumer will improve the commodity environment, may change the relationship between food at home, food away from home; commodity increases may also change the level of promotional discounting that's going on in the industry, as well as there appears to be some -- the possibility for some rationalization in the industry in terms of number of units and all of those I think would help the overall industry environment. With that being said, we continue to believe that consumers will look towards the brands that they trust and that based on the consistency of their past experiences and that they will look for brands that are familiar, friendly, approachable, that they feel safe and we believe Cracker Barrel is one of the most differentiated brands of the industry with a long history of delivering that guest experience is well positioned to do that. So specifically in terms of how we intend to continue to outperform the industry and to what we hope is even increase that gap is through a variety of topline initiatives which we mentioned of course in the call are off-premise program. I think it's going to be very interesting and powerful in the top line, our value program which we will be reinforcing and enhancing that we’ll starting the test as we mentioned, specialty coffee is a third way. So we have a number of initiatives to address the restaurant side. On the retail side, we -- just like the restaurant side we anticipate that we'll be continuing to navigate in the challenging environment and that our merchandisers have done a good job as we have moved through it focusing our offering on value, not only on improving the value which was already I think very good but on doing a better job of highlighting it and communicating it in the stores to our guests. And the operations team, I think is working very hard to deliver the kind of service and conversion support that we need to capture the sales that we're expecting. Jill, you want to add to that?

Yes. Michael, I'll just add -- you asked about the pricing confidence and you know, we're going to continue to leverage our tiered pricing strategy which has allowed us to make sure that we've got appropriate pricing across different geographic areas and that's something that we pay close attention to. So that gives us more confidence that we'll be able to appropriately pass through that pricing. And then just to reinforce what Sandy talked about and what we mentioned in our script, as we're looking at the top line sales growth, we anticipate sequential improvements in our quarterly sales growth as we fully implement each of the initiative that Sandy discussed, and so those initiatives and their impact are built into that guidance.

So just as I know, it's a little hard with the hurricane but -- I mean, in terms of what you've seen to-date in the first quarter comp, I mean should we assume similar trends to what we've seen in recent months or help us with a context that we could just understand the cadence of how backend loaded that number becomes? Thanks.

This is Jill. From a comp standpoint it's just early for us to tell; so you know, as we talked about in my prepared remarks the $0.15 that we included at this time that includes an impact on the top line from store closures and expected reopening, as well as associated cost. It does not include sales recovery, it's just a little too early for us to have an assessment of that top line impact at this point.

Okay, helpful context. Thank you.

Our next question is from Jake Bartlett with SunTrust. Please go ahead.

Great, thanks for taking the questions. First, in the first quarter you've given us the EPS guidance. Can you help us with what your expectation is? What comp is baked into that EPS guidance?

Jake, we don't provide anymore color than that on our quarterly guidance and right now given the hurricane and what we're trying to work through, there is -- it's a pretty muddy environment.

Okay. And when you talked about the $0.15, new impact from store closures and potential costs, are you -- I assume you've also -- by the nature of your brand you're seeing some benefit from the evacuation traffic and stuff like that. Are you kind of including that but not the store closures, I hope we understand what you've -- that the hurricanes have impacted you in some different ways than other concepts I imagined?

Yes. Jake, the $0.15 is really based on our assumption of the associated cost of the store closures as well as the loss kind of sales from the store closures. It does not include an assumption in the sales recovery at this time, it's just too early again for us to assess that.

Okay. And then some have kind of wondered whether the eclipse was a traffic driving event for you guys given all the travels, did you see anything with that?

Yes, travel around the solar eclipse event resulted in some modest traffic favorability in the weeks surrounding the event and that favorability is built into our guidance.

Okay. And then just digging into your initiative a little bit when you -- with off-premise, can you remind us or tell us what percentage of sales that ended up being in '17 and how that grew versus '16? And then I'm also curious, I imagined that's just really addressing the 60% of your business that's local; does that dynamic affect that you are on the highway and have 40% traveller sales? Does that limit your opportunity with off-premise?

So I'll start Jake. So our off-premise sales for last fiscal year were approximately 7% and we did see some modest growth in that over the prior year and Sandy, do you want to provide any color?

Yes, I think your point about the travel guest Jake is a good one. It's -- one of the things we had to do because I think the off-premise opportunity is certainly on trend with where consumers are, where a lot of brands are focused. And we've spent some time as a team trying to determine where we as a brand could play with the most success and what we could deliver. And that's why focused on a Holiday Heat n' Serve which was lot of the test. So whereas we might not be as well positioned as some of the competitors who are even located closer to where consumers live or their lunch locations and maybe that's not the kind of occasion we're going to be known for, we did have a lot of credibility and success in our holiday family gathering, so we started there understanding what guests would want and when you're here at Analyst Day and you see the menu, I think what we're trying to carve out is more large party and menu or groups that would appeal to our local guest. We do have some initiatives to improve both the delivery of our individual to go and our -- and the packaging and the systems around it online ordering and so on so I do think we'll be able to take advantage also of the individual. We do have marketing in addition to target and we're talking about like a 10-mile radius of our stores as what we see is the opportunity.

Got it. And can you share what the results -- I mean, what you saw in tests? It sounds like it's given you great confidence, given your guidance that you're going to see an improvement in sales but what was the -- maybe what was the mix was of off-premise in those test markets for your -- really this offering?

No, I don't think we'll give into more detail on the test. I mean we'll just provide you with more information about the specifics of the plan when we talk with you all in October.

Okay. And then lastly on the value and issue with enhanced value, just -- I'm trying to understand whether that pressures, margins you made it come and how the first quarter is going to have some margin pressure from that. Was that just the initial marketing effort, help us understand why that's pressuring the first quarter and will that be a pressure to margins for the remainder of the year?

Well, we've designed the program that we felt would deliver within the guidance for the first quarter and offsetting whatever margin pressure we have from trade through the add-ons and some margin driving items. We'll see after the test what the consumer behavior is but I want to be clear what our value initiative is really designed to do is to reinforce the value that currently exists in the menu and this environment with the level of promotional activity and the noise out there we want to be sure that our guests understand that you can find value on our menu at everyday part at a very compelling price point. So if you remember about three years ago -- no, I'm sorry, about five years ago we focused on weekday lunch specials and we highlighted our $5.99 lunch specials and used lunch as hallow [ph] than to dinner. We then focused on our $7.99 menu or category at dinner, our country dinner plates. We haven't really focused on our $4.99 breakfast offering and what this program will do, it adds a little bit of new news to each of the programs so there is a loaded Mac n' Cheese, there is a new sandwich at lunch, there is this new breakfast offering with the biscuit French toast. And it highlights that the value is there and what we don't know and which is why we're testing, which is what we did when we rolled weekday lunch specials back in 2011 is the level of trade that it will result. So more to come as we go through the year.

Great. Thank you very much.

Our next question is from Austin [ph] with Longbow Research. Please go ahead.

Good morning. With the hurricane impact obviously, of course trying to fill in results but is there any benefit or potential benefit from people that are evacuating; obviously you guys -- travellers make up such a huge portion of your business that could help offset some of the store closures that I'm sure went on in both cases?

I guess what I would say is the hurricane impacts that we're looking at right now from Harvey and Irma, we're still trying to assess -- I think each one of these storms is going to impact the consumers in the areas differently. There have been times in past when there have been storms that we have seen a benefit as the consumer is -- or the -- some residents are travelling either to leave the area. But then there is also the offset of the impact from the store closures.

Sure, it makes sense. And then I guess from a pricing front, as the commodity cost after being [indiscernible] the last couple of years not going back up; has that changed how you think about pricing, obviously market being competitive also goes into that but if you may take more and/or worst pricing, for your '18 but in the next couple of years versus what you've done the last couple of years?

So we won't talk here beyond fiscal '18 but in fiscal '18 as I said in our guidance, we're looking at pricing of 2% to 2.25% and we're going to leverage our tier pricing strategy to make sure that it flows through appropriately to the consumer and honestly, we're always balancing with investments, with our cost management and I think we've shown historically that we've been very successful in all three of those fronts.

Great, thanks for that. And if I could just one more and then I'll hop back in the queue. On the cost savings front, obviously of course this wrapped up very impressive $50 million three-year program; any sort of outlook on how much more that there could be to garner from a savings standpoint in coming years?

So in fiscal '18 we're expecting $7 million to $8 million in cost savings and we'll be talking more about that at the Analyst Day in October.

Got it. Makes sense, thank you.

Our next question is from Gregory Frankfurt with Bank of America.

This is actually John Michael on for Greg. I just had a quick one on that retail margin that Jill mentioned was on a reduced markdowns. Just wondering, is that kind of favorability you see it sustainable going forward?

You mean the favorability that we saw in the fourth quarter?

Yes.

I'm not anticipating it, the team did a very good job in our fourth quarter of managing the inventories of getting a lot of vendor support for the programs that we did, as well as not doing markdowns that weren't driving incremental volume. In general though given the way we expect the environment to continue, we're anticipating having to really sharpen the pencil on value with things like $19.99 children's apparel and we're prepared for margins to be -- not have that level of improvement and in fact flat to slightly down depending on the quarter.

Okay, that makes sense. Thank you.

Our next question is from Jeff Farmer with Wells Fargo. Please go ahead.

Good morning. What gives you guys confidence that your efforts around convenience menu variety; I think value for the partial outline there. It can drive that pretty material step-up in same-store sales under your team? And I asked that question only in the context of the last couple of years your same-store sales guidance have proven to be overly aggressive, so clearly a couple of years ago you were seeing some things that you guys gotten excited about, I thought you'd deliver on. Why do you think carrying into '18 not these things we're excited about this year you will deliver on this year?

It's a good question. And I think over the last few years we've learned a lot and we've been testing some of these initiatives. Of course what has changed over the last few and was unanticipated is that the industry didn't improve, in fact it deteriorated more than we had anticipated. So as I mentioned before, some amount of our guidance this year does anticipate a modest improvement in the industry environment and I do believe that our key initiatives are on trends with the consumer interest, with behaviors, I think they are appropriate for the brand. I think our operators will be very focused on delivering them, we have the opportunity at conference to do in-depth training and familiarization with the programs and I think our marketing team, I'll let Don speak in a minute has got plans to support these initiatives with sort of comprehensive integrated marketing plans. Don, do you want to speak to any of that?

Sure. What I would just add Jeff is that I think as Sandy has just indicated, we are seeing industry growth in these areas that we're establishing initiatives. We believe we're in a unique position to capitalize on that growth and some of the early experience we've been having in test market and limited launch in these areas has been showing improvements that we're seeking. Our off-premise growth has been very optimistic and we want to keep capitalizing on that.

Okay. And then just two more, hopefully quick follow-ups on some of the more financial stuff that I hope to find in this. Just G&A dollars, so that absolute numbers fall in the last couple of years; stock based compensation, it looks like there is -- it saw [ph] pretty materially in the most recent year but how should we be thinking about G&A dollars moving forward as we get into '18?

So as we look at '18, we're thinking that G&A will be -- as a percent of sales will be slightly up, it's one of the areas that we're investing to support our sales driving initiative. So we've invested in some additional headcounts and you will see that in G&A.

Okay. And then the final question, interest expense in '18 is up a little bit, is that a function of just higher interest rate expectation or a little bit more debt, what's driving that increased interest expense expectation?

This is Jeff Wilson. The level of debt is expected to remain the same that is due to an increase in our slop rates.

Okay. Thank you.

Our next question is from Robert Darrington with Chelsea Group [ph]. Please go ahead.

A number of my questions have been answered already. But Sandy, kind of back to the 2.5% to 3.5% same-store sales guidance, can you give us some degree of how does the mix effect -- you know, we know menu pricing, obviously there is a traffic component, can you give us any kind of a guide on what you're expecting out of traffic and ultimately what the positive effect on mix would be from the off-premise programs?

I'm trying to see how I can answer. So we do get an improvement in mix based on our specialty coffee program. And -- but our off-premise…

Yes, off-premise will be primarily traffic. You will remember when we readjusted our traffic count on previous call, that helped to take into account the impact of off-premise.

Okay, all right. So you will be sub-dividing whatever the check is, let's say it's a $100 check by the number of essentially on-trays within that $100 check to factor into the traffic number, they will remember that correct?

Yes, potentially. Potentially that's the methodology, yes, that will be right.

Okay, all right. And then Jill, could you help me on your calculation for same-store sales; when you have stores that are closed do those get removed from the same-store sales calculation?

No, they are still included unless they are closed for a significant amount of time.

Okay, all right. Any kind of color on how many stores were materially affected during the -- either of the two hurricanes?

Yes, we had a number of stores impacted. So for Hurricane Harvey we had approximately 20 stores that were impacted and for Hurricane Irma we had approximately 100 stores that were impacted at some point in time and we still have maybe 25 or so that are still closed.

Does that include -- was there material or physical damage? Should we expect that some of those [indiscernible] be removed from productivity for a while or will it just be a matter of restoring power; how do we think about that? So that will affect your second quarter results.

Yes, the $0.15 includes our expectation for any material damage and when we'd expect to get them back up and running, again with the information that we have at this point in time.

Okay. So of the 120 stores affected, are they mostly back operating again?

Yes.

Okay, terrific. Thank you. I appreciate it, that's all I've got.

Our next question is from Steve Anderson with Maxim Group. Please go ahead.

Yes, keeping on the hurricane discussion, certainly I might expect to see some impact and -- so I want to see if you're raising from your suppliers about any price increases for [indiscernible] orange juice or maybe some of the protein, now they are coming out of our Texas so what's your thoughts are on that?

That's a good question. So at this point from a commodity perspective or product perspective, we're currently unaware of any crop risk associated with the storm. So we're not aware of any impacts associated with that.

All right. Thank you.

Our next question is a follow-up from Michael Gallo with C.L. King. Please go ahead.

Hi, just a follow-up question. I wanted to touch in on the retail business. Sandy I wanted to ask you a question on whether there is more of a structural issue -- I guess if I look at the traffic it improved as you went through the quarter on the restaurant side of the business but the comparable retail sales actually got worse. So how much of this you think is just the structural, the impulse purchase maybe doesn't occur because the customer is moving more online or away from physical store? And to what degree is that sort of out of your control or sort of irrespective of what you do with merchandise? Thanks.

So you're saying -- I'm not sure I understand the question, let me clear. How much of our -- the challenging environment is from the consumer going online?

Yes. I guess from the standpoint it seemed like the traffic conversion of your customers got worse from a comparable retail sales. So fewer are the people coming in were buying retail merchandise. You have the structural shift with the consumers obviously moving online -- to what degree I guess would you say that the weak comparable store sales were a function of your merchandise store execution versus just the structural move away from consumers buying things in physical environment? Thanks.

Okay, now I understand. I think there is a lot of things going on and so what we intend to do is we look to ourselves first to see what we could better and I think our merchants have certainly analyzed the assortment and what they were buying and at what price to see whether we could do something to improve either the marketing, the merchandise or the pricing to improve conversion. Our field teams have done a good job of looking at whether we were providing the right level of sales support to deliver the conversion. It's possible that some elements of conversion are affected by whether guests have any disposable income and whether they are -- if you've just been through a hurricane, you might have things on your mind; you do need to eat but you might not really need to shop for really discretionary purchases. So we've got guests coming into our stores in a number of places who are dealing with different issues in their environment. One of the probably benefits to our brand and our retail store is that our focus is on fun, unique, nostalgic items and heavy on the unique, fun and at a price point that tends to lend itself to an impulse purchase. So although some retailers are finding their assortment can be easily bought online, exactly the same product and actually it's more efficient. A lot of ours cannot we found anywhere else and it's at a price point that -- while they are dining this is something else for them to do. So what we intend to do is to ensure over fiscal '18 that our assortment continues to deliver against those needs. With that being said, if consumers are shopping online they are not out making a trip to the mall. And to whatever degree that's preventing them from saying, I'm going to stop for a meal and an opportunity for us to sell them, that's having an impact. So if they are not going to the movies, if they are not -- to the degree that the shift to e-commerce is impacting consumer behavior in ways that is impacting visits to restaurants, we are having to compete within that environment and are working hard to be sure we can.

Okay. Thank you.

Our next question is a follow-up from Jake Bartlett with SunTrust. Please go ahead.

Great, thanks for taking the follow-up. I had a question about the investments, you mentioned investments in 2018 and not -- I'm talking more about the operating cost investments, and just wondering where those are; I think we mentioned in G&A but what other line items are you -- should we expect higher costs? And then within that question, the first quarter -- you mentioned that investment is going to be much heavier there, is that mostly the G&A from the training or from the conference or what line items are going to be impacted there? And maybe if you can quantify any impact, that would be great.

Sure, Jake. So the investments, first of all, we mentioned on the call our first quarter managers conference where we will be training and launching system-wide several of our important initiatives to drive our topline sales growth like our off-premise platform and specialty coffee, that you see in the store expense line. And then we talked about our investment in headcount to support the initiative which would be in G&A and then additionally, a portion of our increasing capital spend is to support our sales driving initiatives of off-premise and specialty coffee, so that you would see in depreciation.

Okay. Can you quantify how much that conference is going to cost?

It's approximately $2 million.

Okay. And then lastly, on the marketing expense it was up or maybe if you can let us know just what it turned out to be as a percentage of sales in '17? And it's been up the last two years, kind of been a source of deleverage; do you expect it to be up as a percentage of sales again in '18?

Yes. So we ended the fiscal year with marketing 2.9% of sales for the previous fiscal year. And so for '18 we expect the dollars to be relatively flat, so you see some leverage from an ROS standpoint.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn it back to management for our clarifying comments.

People, great, thank you. And I'm happy to report we received an update and currently we only have 8 stores closed.

Great. All right. Thank you all for joining us today. The environment remains challenging, we're encouraged by our 2018 business priorities to deliver top line sales growth and improvements to our business model. Cracker Barrel remains one of the strongest and most highly differentiated brands in the industry. We'll continue to leverage that strength to drive long-term earnings growth. We appreciate your interest and support, and we thank you for your time this morning.

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