CBRL Group, Inc.

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CBRL

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Q4 2008 Earnings Call

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Sep. 16, 2008

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MANAGEMENT DISCUSSION SECTION

Operator: Good day everyone and welcome to the CBRL Group fourth quarter conference call. Today’s call is being recorded and will be available for replay today from 2:00 PM eastern time through September 30th, 2008 at 11:59 PM eastern, by dialing 719-457-0820 and entering pass code 9326974.

At this time, for opening remarks and introductions, I would like to turn the call over to Diana Wynne, Senior Vice President of Corporate Affairs. Please go ahead.

Diana S. Wynne, Senior Vice President, Corporate Affairs

Thank you, Sean. Welcome to our fourth quarter 2008 conference call and webcast this morning. Our press release announcing our fiscal 2008, fourth quarter and full year results and our outlook for fiscal 2009 were released before the market opened this morning. We urge caution to our listeners and readers in considering the information on our expectations, trends and earnings guidance. We remind you that we don’t review or comment on earnings estimates made by other parties.

In addition, any guidance that we give speaks only as of the date it is given and we do not update our own guidance or express continuing comfort with it, except in broadly disseminated disclosures such as this morning’s press release and this call.

The restaurant industry is highly competitive and trends and guidance are subject to numerous factors and influences that can cause future actual results to differ materially from such trends and guidance. Many of these factors 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 fillings that we make with the SEC. And we urge you to read this information carefully.

The company disclaims any obligation to update disclosed information on trends or guidance and should we provide any update after today, they will be made only by broad disseminations such as press releases or in our filings with the SEC. We plan to release fiscal 2009 first quarter earnings and same store restaurant and retail sales for fiscal August, September and October on Monday, November 24, 2008 before the market opens.

On the call with me this morning are CBRL’s Chairman, President and CEO Mike Woodhouse, CBRL’s Interim CFO and General Counsel Forrest Shoaf; and Cracker Barrel’s Senior Vice President of Finance, Doug Couvillion. Mike will begin with a review of the business, Doug will review the financials and outlook, and then Mike will return to close. We will then respond to your questions.

With that, I will turn the call over to Mike. Mike?

Michael A. Woodhouse, Chairman, President and Chief Executive Officer

Thanks Diana. Good morning everyone and thanks for joining us this morning. Our 39th year of operation was one of the toughest ever faced by the restaurant industry. Consumer confidence fell to 16 year lows, as a result of high gasoline prices, rising food costs at the grocery store, falling home values and a shrinking job market. So no one is surprised people responded by cutting back the number of times they dined out. Good news is that Cracker Barrel Old Country Store remains the preferred choice for many. It’s a place where multi-generational families can gather. It’s also one of the few places where travelers and locals alike can find consistently great tasting country cooking.

By providing honest value, which we define as high-quality food with ample portions at a fair price, which incidentally means that we have not reduced quality or portion sizes in response to current cost pressures, we have performed better than many in the casual dining industry as measured by comparable store sales published by Knapp-Track. With an average check of $8.59, we continue to offer a great value without discounting or coupons.

The impact of commodity market changes on our cost of goods, especially the effects of heightened global demand for corn or other grains was a 6.6% increase in food product prices in the fourth quarter and a 6% increase for the year as a whole. While we were more efficient in the use of labor hours, the costs of utilities and supplies continue to increase. It’s always been our goal to offset margin pressures from higher costs with selective price increases. Our goal in 2008 was to use pricing to offset the dollar impact of commodity and labor cost increases, and we achieved that goal for both the fourth quarter and for the full year.

In the retail business, we carried more low margin domestically-sourced products and we used more markdowns, which along with surcharges on freight also increased our costs. Despite the pressure on profits, we continue to generate strong cash flows; net cash from operating activities was $124.5 million, which funded an $87.8 million of capital expenditures. We also returned capital to shareholders by paying a dividend of $0.68 a share and repurchasing $52 million of stock outstanding, retiring approximately 7% of the total stock outstanding at the beginning of the fiscal year.

Our brand is as relevant today as it was in 1969 when we opened our first store. It’s all about the experience in creating a strong emotional attachment to the Cracker Barrel brand. Winning the “Best Family Dining” chain award from Restaurants & Institutions magazine for the 18th consecutive year helped to prove the point about the power of our brand. We also know that loyalty can’t be taken for granted. We want our guests to receive a great Cracker Barrel experience each and every time. And it takes great people to make that happen every day. And we believe we have a unique advantage in attracting and retaining top caliber employees with our wages, benefits and training programs.

We continued to make good progress in reducing turnover in fiscal 2008. And we’ll again make that a focus in fiscal 2009. The Rising Star Program, which we introduced in 2007, has helped reduce hourly employee turnover to below 100%, which is a remarkable number in the full-service restaurant industry. Our management turnover is below 20%, another measure of our focus on refining job responsibilities in order to provide our guests with the absolutely best dining experience. Lower employee turnover begins a positive chain reaction that results in higher guest satisfaction, increased productivity throughout the store and lower costs for training and hiring. Our restaurant initiatives continue to focus on improving the speed of service and improving margins.

We found that when guests wait less than 15 minutes for their food, they’re much more likely to return and recommend our restaurant to others. Our Seat to Eat initiative includes process simplification and new types of equipment and new kitchen and service configurations. We’re currently testing this package in three districts. Assuming success in this expanded test, we’ll start the rollout across the system in the second half of fiscal 2009.

Another way to increase speed of service is to simplify the menu. We’re testing another version of the Best of the Barrel menu currently. This menu has several new products added to attract back the guests who had their favorite item removed in the original Best of the Barrel test. We’ve added three Fireside Country Breakfast Skillets--ham and cheese, smoked sausage and veggie.

We’ve also brought back the popular lemon pepper trout as both a Country Dinner Plate and a Fancy Fixin’s dinner. We’re testing this version of the Best of the Barrel menu in an expanded group of stores right now during the first quarter and will evaluate the results before the end of the second quarter with a planned rollout in the third quarter.

Separately, in fiscal 2008, we successfully completed the elimination of artificial trans fats from our food without affecting the quality or the taste in any way.

To build our profitability we continue to focus on our outlier stores, the stores with the greatest opportunities for financial improvement. We developed tools and management processes to improve margins by focusing on food waste, labor productivity and supply and maintenance costs. By focusing efforts on these stores, we added $4 million of profit to fiscal 2008. In 2009, we’re making these analytical tools available to all of our stores and we are adding utilities to the focus.

Next, I want to talk about the progress we’re making in our retail business in an extremely difficult retail environment. Our comp store sales were up 0.8% in the fourth quarter. This is an especially positive performance because Cracker Barrel retail shops are not typically destination shopping places and restaurant traffic slowed as consumer’s purchasing power declined in the fourth quarter. We’re seeing these positive results as the implementation of our new retail strategy, which we developed over the past year, is kicking in.

In fiscal 2008, we introduced floorset location optimization into our retail business, which integrates all parts of the merchandising cycle. In simpler terms, this is part of our effort to generate higher sales and profits from every square foot of retail space. Also we’re looking for -- we’re always looking for new themes to link the retail offerings with our authentic restaurant experience. For example this years Family Road Trip theme tied seasonal restaurant and retail items to a national summer promotion. Each retail theme includes related impulse items such as nostalgic candies or toys.

The goal is to create a fun shopping experience. Our customers call it a “ the thrill of the hunt”, discovering what’s new in the retail store throughout the year. We’ve also introduced iconic packaging to many of our retail products that reinforce Cracker Barrel’s Old Country Store roots. There is a lot more involved in retail than merely selling products. We now measure the contribution of each product to our success by evaluating product selection and customer feedback as well as sourcing and supply chain cost.

One example is women’s apparel, where we now have a much better understanding of customer preferences, how to best source that product across the various locations and when to reorder. We’ve adopted the similar process to improve our pricing. Other actions that are enabling us to drive improvements in the sales and profitability of the retail business include enhanced point-of-sale capabilities, additional training of our retail staff and more detailed market research.

Looking at specific trends, toys, especially the Webkinz line, continue to perform well in the quarter. Home products also saw substantial improvement driven by the quilts and the Celebrations and Family Forever themes that tied in with the Greatest Family Road Trip promotion this summer. Apparel continued to be weak during the summer.

To drive traffic into our restaurant retail stores we need to build awareness outside the four walls. Billboards continue to be our primary form of advertising as we quickly show the brand promise and provide directions to the next location. We’re testing new billboard designs around middle Tennessee right now and we’re looking to refresh the system later in fiscal 2009. The new designs communicate our core brand messages like “Breakfast all day”, “Eat, shop, relax” and “Half restaurant, half store, all country”.

At the end of fiscal 2008 we completed a TV advertising test, which was designed to stimulate awareness of Cracker Barrel as a local place to eat as well as a much loved relaxing place for travelers. While we saw meaningful increases in traffic and retail sales, enough to more than break even in the test markets, our overall geographic footprint limits the number of markets in which we can profitably run TV. So we’re in the final stages of developing a plan to run a combination of TV and radio advertising in fiscal 2009. And in some markets we’ll be featuring the new product offerings that I discussed earlier, in the advertising.

We introduced our first national promotion in May 2008, the Greatest Family Road Trip. We gave away over 30 million game pieces to our guests for the chance to win free meals, GPS navigational systems and the grand prize. Betty Brown who eats breakfast every Sunday morning at our Princeton, West Virginia store chose the $250,000 cash alternative as the grand prize winner. In addition, guests won 138,000 Cracker Barrel gift cards and 52 navigational systems during the promotion. It’s always difficult to determine the full benefit of a promotion, especially when it’s system wide, but we believe it was creative, it was certainly new and it was fun for our employees and guests. And in fact, in the months of June and July, despite some predictions that our guest traffic would be disproportionately affected by lower summer travel, we continued to outperform our industry in guest traffic.

Another program helping to bring more people to our doors is the Cracker Barrel gift card. By doubling the number of major retailers who carry our gift cards in fiscal 2008, we saw gift card sales increase 16% over the previous year.

Country music goes hand-in-hand with down-home country cooking, and we’ve continued to expand this important tie to the Cracker Barrel brand with the sales of CDs available exclusively through our stores. Offerings in the fourth quarter included music by Aaron Tippin and Ricky Skaggs. The latest release by Kenny Rogers is now available exclusively through our Cracker Barrel Old Country Stores.