Cracker Barrel Old Country Store, Inc. and its subsidiaries (collectively, the "Company," "our" or "we") are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store® restaurant and retail concept. Unless otherwise noted, management's discussion and analysis of financial condition and results of operations ("MD&A") relates only to results from continuing operations. All dollar amounts reported or discussed in Part I, Item 2 of this Quarterly Report on Form 10-Q are shown in thousands, except per share amounts and certain statistical information (e.g., number of stores). References to years in the MD&A are to our fiscal year unless otherwise noted.

The following MD&A provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. MD&A should be read in conjunction with the (i) condensed consolidated financial statements and notes thereto in this Form 10-Q and (ii) the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended August 1, 2008 (the "2008 Form 10-K"). Except for specific historical information, many of the matters discussed in this report may express or imply projections of revenues or expenditures, plans and objectives for future operations, growth or initiatives, expected future economic performance, or the expected outcome or impact of pending or threatened litigation. These and similar statements regarding events or results which we expect will or may occur in the future, are forward-looking statements that involve risks, uncertainties and other factors which may cause our actual results and performance to differ materially from those expressed or implied by those statements. All forward-looking information is provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these risks, uncertainties and other factors. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "trends," "assumptions," "target," "guidance," "outlook," "opportunity," "future," "plans," "goals," "objectives," "expectations," "near-term," "long-term," "projection," "may," "will," "would," "could," "expect," "intend," "estimate," "anticipate," "believe," "potential," "regular," "should," "projects," "forecasts" or "continue" (or the negative or other derivatives of each of these terms) or similar terminology.

We believe the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements. Factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to, those contained in Part I, Item 1A of the 2008 Form 10-K, which is incorporated herein by this reference, as well as other factors discussed throughout this report, including, without limitation, the factors described under "Critical Accounting Estimates" on pages 24-28 of this Form 10-Q or, from time to time, in our filings with the Securities and Exchange Commission ("SEC"), press releases and other communications.

Readers are cautioned not to place undue reliance on forward-looking statements made in this report, since the statements speak only as of the report's date. Except as may be required by law, we have no obligation, and do not intend, to publicly update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any future public disclosures that we may make on related subjects in reports that we file with or furnish to the SEC or in our other public disclosures.

This overview summarizes the MD&A, which includes the following sections:

· Results of Operations - an analysis of our condensed consolidated statements of income for the periods presented.

· Liquidity and Capital Resources - an analysis of our primary sources of liquidity and capital expenditures.

· Critical Accounting Estimates - a discussion of accounting policies that require critical judgments and estimates.

All explanations of changes in results of operations are discussed in descending order of their magnitude.

Results of Operations

Overview of Quarterly Results

Total revenue decreased 0.7% in the second quarter of 2009 as compared to the second quarter of 2008. Operating income margin was 6.2% of total revenue in the second quarter of 2009 compared to 7.2% in the second quarter of 2008. Income from continuing operations for the second quarter of 2009 decreased 9.3% as compared to the second quarter of 2008. The decrease in income from continuing operations reflected the following:

· lower restaurant traffic and lower retail sales,

· higher retail cost of goods sold,

· higher group health costs,

· higher utilities expense,

· higher store management wages,

· non-recurrence of the prior-year gain on the sale of the remaining Logan's property we had retained,

· higher workers' compensation expense and

· higher property taxes.

These decreases were partially offset by the following:

· lower income taxes,

· lower general insurance expense,

· lower interest expense,

· lower store miscellaneous expense,

· lower food costs,

· lower store bonus accruals,

· lower professional fees and

· higher menu pricing.

Diluted income from continuing operations per share of $0.81 decreased 4.7% from prior year due to the decrease in income from continuing operations partly offset by lower average diluted shares outstanding.

Overview of Year-to-Date Results

Total revenue decreased 0.9% during the six-month period ended January 30, 2009 as compared to the six-month period ended February 1, 2008. Operating income margin was 6.0% of total revenue for the six-month period ended January 30, 2009 as compared to 6.7% in the six-month period ended February 1, 2008. Income from

· lower restaurant traffic and lower retail sales,

· higher utilities expense,

· higher store management wages,

· non-recurrence of the prior-year gain on the sale of the remaining Logan's property we had retained,

· higher retail costs of goods sold,

· higher food costs and

· higher property taxes.

These decreases were partially offset by the following:

· lower income taxes,

· lower general insurance expense,

· non-recurrence of manager meeting expense,

· lower interest expense,

· lower professional fees and

· higher menu pricing.

Diluted income from continuing operations per share of $1.38 decreased 2.8% from prior year due to the decrease in income from continuing operations partly offset by lower average diluted shares outstanding.

The following table highlights operating results by percentage relationships to total revenue for the quarter and six-month period ended January 30, 2009 as compared to the same periods in the prior year:

                                            Quarter Ended                     Six Months Ended
                                    January 30,       February 1,       January 30,       February 1,
                                       2009              2008              2009              2008
Total revenue                              100.0 %           100.0 %           100.0 %           100.0 %

Cost of goods sold                          35.3              35.3              33.5              33.2
Gross profit                                64.7              64.7              66.5              66.8

Labor and other related expenses            37.1              36.1              37.9              37.4
Impairment and store closing
charges                                       --                --                --               0.1
Other store operating expenses              16.8              16.8              17.6              17.4
Store operating income                      10.8              11.8              11.0              11.9

General and administrative
expenses                                     4.6               4.6               5.0               5.2
Operating income                             6.2               7.2               6.0               6.7

Interest expense                             2.1               2.3               2.3               2.4
Interest income                               --                --                --                --
Income before income taxes                   4.1               4.9               3.7               4.3

Provision for income taxes                   1.2               1.7               1.1               1.5

Income from continuing
operations                                   2.9               3.2               2.6               2.8
Loss from discontinued
operations, net of tax                        --                --                --                --

Net income                                   2.9 %             3.2 %             2.6 %             2.8 %

                             Quarter Ended                     Six Months Ended
                     January 30,       February 1,      January 30,        February 1,
                        2009              2008              2009              2008

Revenue:
  Restaurant                 74.4 %            73.3 %            76.8 %            76.3 %
  Retail                     25.6              26.7              23.2              23.7
    Total revenue           100.0 %           100.0 %           100.0 %           100.0 %

The following table sets forth the number of units in operation at the beginning and end of the quarters and six-month periods ended January 30, 2009 and February 1, 2008, respectively:

                                                    Quarter Ended                      Six Months Ended
                                             January 30,       February 1,       January 30,        February 1,
                                                2009              2008              2009               2008

  Open at beginning of period                        581               566               577                562
  Opened during period                                 4                 4                 8                 10
  Closed during period                                --                --                --                 (2 )
  Open at end of period                              585               570               585                570

During the six months ended February 1, 2008, we also replaced an existing unit with a new unit in a nearby community. Replacements are not counted as either units opened or closed.

Average unit volumes include sales of all stores. The following table highlights average unit volumes for the quarter and six-month period ended January 30, 2009 as compared to the same periods in the prior year:

                             Quarter Ended                     Six Months Ended
                     January 30,       February 1,       January 30,       February 1,
                        2009              2008              2009              2008

  Revenue:
   Restaurant       $       802.7     $       817.2     $     1,591.6     $     1,638.8
   Retail                   276.1             297.5             480.5             508.2
    Total revenue   $     1,078.8     $     1,114.7     $     2,072.1     $     2,147.0

Total Revenue

Total revenue for the second quarter of 2009 decreased 0.7% compared to the prior year second quarter. For the second quarter, comparable store restaurant sales decreased 1.5% and comparable store retail sales decreased 7.0% resulting in a combined comparable store sales (total revenue) decrease of 2.9%. The comparable store restaurant sales decrease consisted of a 3.1% average check increase for the quarter (including a 3.6% average menu price increase) and a 4.6% guest traffic decrease. The comparable store retail sales decrease was due to a decline in guest traffic and lower guest spending on retail products during the important holiday season. We continue to experience the effects of pressures on consumer discretionary income in our guest traffic and sales. Sales from newly opened stores partially offset the decrease in comparable store restaurant and retail sales.

Total revenue for the six-month period ended January 30, 2009 decreased 0.9% compared to the six-month period ended February 1, 2008. For the six-month period ended January 30, 2009, comparable store restaurant sales

Cost of Goods Sold

Cost of goods sold as a percentage of total revenue for the second quarter of 2009 remained flat compared to the second quarter of the prior year at 35.3%. Costs of goods sold as a percentage of total revenue benefited from a shift in the mix of sales versus prior year to restaurant sales from retail sales, the latter of which typically have a higher cost of sales. The increase in retail cost of goods sold as a percentage of retail sales resulted from higher markdowns of retail merchandise and lower initial mark-ons of retail merchandise versus the prior year. Lower food costs resulted from higher menu pricing partially offset by commodity inflation. The increase in commodity inflation from a year ago was primarily due to increases in oils and produce.

Cost of goods sold as a percentage of total revenue increased to 33.5% for the six-month period ended January 30, 2009 compared to 33.2% in the six-month period ended February 1, 2008. This increase was due to commodity inflation, higher markdowns of retail merchandise and lower initial mark-ons of retail merchandise versus the prior year partially offset by higher menu pricing and a shift in the mix of sales versus prior year to restaurant sales from retail sales, the latter of which typically have a higher cost of sales. The increase in commodity inflation from a year ago was primarily due to increases in oils, produce, grain products and poultry.

Labor and Other Related Expenses

Labor and other related expenses include all direct and indirect labor and related costs incurred in store operations. Labor and other related expenses as a percentage of total revenue increased to 37.1% in the second quarter of 2009 from 36.1% in the prior year. This increase was due to higher group health costs, higher management costs, higher workers' compensation expense and the effect of lower guest traffic partially offset by lower store bonus accruals and menu pricing. The increase in group health costs was due to higher medical claims. The increase in management costs was due to wage inflation and higher staffing levels. Although our limited scope actuarial reviews completed during the second quarters of 2009 and 2008 resulted in reductions in workers' compensation expense, we recorded a smaller reduction in the second quarter of 2009 as compared to the prior year. The decrease in store bonus accruals reflected lower performance against financial objectives in the second quarter of 2009 versus the same period a year ago.

Labor and other related expenses as a percentage of total revenue increased to 37.9% in the six-month period ended January 30, 2009 as compared to 37.4% in the six-month period ended February 1, 2008. Higher management costs and the effect of lower guest traffic were partially offset by menu pricing. Management costs increased due to wage inflation and higher staffing levels.

Impairment and Store Closing Charges

We did not record any impairment or store closing charges in the first six months of 2009. During the first six months of 2008, we closed two stores, which resulted in impairment charges of $532 and store closing charges of $345 (see "Impairment of long-lived assets" in Note 2 to the Consolidated Financial Statements contained in the 2008 Form 10-K for additional information).

Other Store Operating Expenses

Other store operating expenses include all unit-level operating costs, the major components of which are utilities, operating supplies, repairs and maintenance, depreciation and amortization, advertising, rent, credit card

Other store operating expenses as a percentage of total revenue increased to 17.6% in the six-month period ended January 30, 2009 as compared to 17.4% in the six-month period ended February 1, 2008. The increase was due to higher utilities expense and lower guest traffic partially offset by lower general insurance expense and higher menu pricing. Lower general insurance expense resulted from revised actuarial estimates.

General and Administrative Expenses

General and administrative expenses as a percentage of total revenue remained flat compared to the second quarter of the prior year at 4.6%. The non-recurrence of the prior-year gain on the sale of the remaining Logan's property we had retained was partially offset by lower professional fees.

General and administrative expenses as a percentage of total revenue decreased to 5.0% in the six-month period ended January 30, 2009 as compared to 5.2% in the six-month period ended February 1, 2008. The decrease was due to the non-recurrence of expenses associated with a manager meeting which was held in the prior year and lower professional fees partially offset by the non-recurrence of the prior-year gain on the sale of the remaining Logan's property we had retained. The next manager meeting is scheduled to be held in 2010.

Interest Expense

Interest expense as a percentage of total revenue decreased to 2.1% in the second quarter of 2009 as compared to 2.3% in the second quarter of last year. The decrease was due to lower average interest rates partially offset by higher average debt outstanding.

Interest expense as a percentage of total revenue decreased to 2.3% in the six-month period ended January 30, 2009 as compared to 2.4% in the six-month period ended February 1, 2008. The decrease was due to lower average interest rates partially offset by higher average debt outstanding.

Provision for Income Taxes

The provision for income taxes as a percent of pre-tax income was 29.4% in the second quarter of 2009 and 29.9% in the first six months of 2009. The provision for income taxes as a percent of pre-tax income was 34.9% in the second quarter of 2008, 34.5% in the first six months of 2008 and 30.2% for the full year of 2008. The decrease in the effective tax rate in the first six months of 2008 to the first six months of 2009 reflected higher employer tax credits on both an absolute dollar basis as well as a percent of pre-tax income due to the decrease in income from continuing operations. The decrease in the effective tax rate from the full year of 2008 to the first six months of 2009 reflected higher employer tax credits as a percent of pre-tax income partially offset by the non-recurrence of reserve adjustments resulting from the expiration of certain statutes of limitations, which generally do not occur in the first two quarters of any year.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our $250,000 revolving credit facility (the "Revolving Credit Facility"), which will expire on April 27, 2011. Our internally generated cash, along with cash on hand at August 1, 2008, proceeds from exercises of share-based compensation awards and our borrowings under our Revolving Credit Facility were sufficient to finance all of

We believe that cash at January 30, 2009, along with cash generated from our operating activities, the borrowing capacity under our Revolving Credit Facility and the expected proceeds from the planned sale-leaseback transactions described below will be sufficient to finance our continued operations, our continued expansion plans, our principal payments on our debt and our dividend payments for at least the next twelve months and thereafter for the foreseeable future.

Cash Generated From Operations

Our operating activities from continuing operations provided net cash of $49,834 for the six-month period ended January 30, 2009, which represented a decrease from the $63,590 provided during the same period a year ago. This decrease reflected the timing of payments for interest, accounts payable and income taxes and lower income from continuing operations.

Borrowing Capacity and Debt Covenants

At January 30, 2009, although we did not have any outstanding borrowings under the Revolving Credit Facility, we had $32,362 of standby letters of credit related to securing reserved claims under workers' compensation insurance which reduce our availability under the Revolving Credit Facility. At January 30, 2009, we had $217,638 in borrowing capacity under our Revolving Credit Facility.

The Revolving Credit Facility is part of our $1,250,000 credit facility (the "Credit Facility"), which also includes a Term Loan B facility and Delayed-Draw Term Loan facility, each of which has a scheduled maturity date of April 27, 2013. At January 30, 2009, our Term Loan B balance was $629,872 and our Delayed-Draw Term balance was $150,338. See Note 7 to our Condensed Consolidated Financial Statements for further information on our long-term debt.

The Credit Facility contains customary financial covenants, which include a requirement that we maintain a maximum consolidated total leverage ratio (ratio of total indebtedness to EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization) as follows:

From May 3, 2008 through May 1, 2009 4.00 From May 2, 2009 thereafter 3.75

The Credit Facility's financial covenants also require that we maintain a minimum consolidated interest coverage ratio (ratio of earnings before interest, taxes, depreciation and amortization to cash interest payable, as defined) as follows:

From May 3, 2008 through May 1, 2009 3.50 From May 2, 2009 through April 30, 2010 3.75 From April 31, 2010 thereafter 4.00

At January 30, 2009, our consolidated total leverage ratio and consolidated interest coverage ratio were 3.72 and 5.34, respectively.

We intend to engage in sale-leaseback transactions involving approximately 15 of our stores and our retail distribution center, which we expect to conclude before the end of 2009. Net proceeds from the transactions, which are presently expected to be between $55,000 and $60,000, together with excess cash flow from operations, will be used to reduce outstanding debt.

Share Repurchases, Dividends and Proceeds from the Exercise of Share-Based Compensation Awards

On July 31, 2008, our Board of Directors approved share repurchases of up to $65,000 of our common stock. The principal criteria for share repurchases are that they be accretive to expected net income per share, are within the limits imposed by our Credit Facility and that they be made only from free cash flow (operating cash flow less capital expenditures and dividends) rather than borrowings. During the six-month period ended January 30, 2009, we did not make any share repurchases owing to a temporary suspension of our share repurchase plans.

Our Credit Facility imposes restrictions on the amount of dividends we are able to pay. If there is no default then existing and there is at least $100,000 then available under our Revolving Credit Facility, we may both: (1) pay cash dividends on our common stock if the aggregate amount of such dividends paid during any fiscal year is less than 15% of Consolidated EBITDA from continuing operations (as defined in the Credit Facility) during the immediately preceding fiscal year; and (2) in any event, increase our regular quarterly cash dividend in any quarter by an amount not to exceed the greater of $.01 or 10% of the amount of the dividend paid in the prior fiscal quarter.

During the six-month period ended January 30, 2009, we paid dividends of $0.38 per common share. During the second quarter of 2009, we also declared an additional dividend of $0.20 per common share that was paid on February 5, 2009. Subsequent to the end of the second quarter, we declared a dividend of $0.20 per common share payable on May 5, 2009 to shareholders of record on April 17, 2009.

During the six-month period ended January 30, 2009, we received proceeds of $877 from the exercise of share-based compensation awards and the corresponding issuance of 68,762 shares of our common stock.

Working Capital

We had negative working capital of $17,838 at January 30, 2009 versus negative working capital of $44,080 at August 1, 2008. The change in working capital compared with August 1, 2008 reflected lower retail inventory and timing of payments for accounts payable. In the restaurant industry, substantially all . . .