Jack in the Box Inc (JACK) 2003 Q3 法說會逐字稿

Good day, and welcome to the Jack In The Box third quarter 2003 earnings release conference call. Today's call is being recorded. A replay will be available for a limited time on the Jack In The Box web site, starting today for those who could not attend the live event.

(OPERATOR INSTRUCTIONS)

At this time, for opening remarks and introductions, I would like to turn the call to Mr. John F. Hoffner, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to the Jack In The Box third quarter conference call. I'm John F. Hoffner. Joining me today are chairman and CEO, Robert J. Nugent, subsequent and executive vice president of Marketing and Operations, Linda A. Lang.

During this session, we will review the company's third quarter operating results. Let me also remind that you the company's earnings guidance for fourth quarter and fiscal 2003 can be found in the press release issued this morning prior to the conference call.

Please be advised that this presentation contains forward- looking statements about sales, earnings, expenses and other financial performance indicators. These statements reflect the management's expectations for the business, and are based on current information. Our actual results may differ materially from these expectations, based on risks to the business.

The Safe Harbor Statement in our earnings release outlines some of these risks and uncertainties, and is considered a part of this conference call. Other material risks risk factors, as well as information relating to company operations are detailed in public documents filed with the SEC.

Now, Robert J. Nugent will open our conference call. Following today's presentation, we will take questions from the financial community. Bob?

Good morning, everyone. As we noted in today's release, Jack In The Box earned $19.8 million in the third quarter, or 54 cents per diluted share. And this compares with $24.2 million or 60 cents in a year ago.

We exceeded our EPS estimates due primarily to the resolution of a tax matter that lowered our expected income tax rate to 32.5% from 38% as forecast. Our fiscal 2003 earnings per share estimate is now $2.03 to $2.06, and that's due primarily to the tax benefit. We expect to return to our usual income tax rate of 38% in fiscal 2004.

Overall economic weakness, competitive discounting, and cost increases continue to affect our business. We experienced increases in workers' compensation insurance, utilities, and food and packaging costs. We also had higher costs than last year as a result of equipment leases and maintenance contracts for our new POS system rollout, which we expect to complete by January of next year.

It's important to note that this new system replaces older technology, and this new technology will enable all company restaurants to process debit and credit card transactions. Same-store sales during the quarter decreased .2 of 1% percent, compared to a 1.5% decrease last year. As you may recall, our third quarter guidance called for a 2.5% decrease in same-store sales, following a 3.3% decrease year to date through the second quarter. So although we have a way to go, we were pleased by the upward trend in the third quarter. We attribute much of this improvement to a new line of premium salads that we call Jack's Ultimate Salads.

Though food and packaging costs for these products were higher than average, our salads have produced both incremental sales and profit. Linda A. Lang will have more to tell but our salads in just a moment. Regarding our other brands, Qdoba Mexican Grill continued to produce double digit same-store sales increases. Qdoba now operates our franchises, 98 units, and that compares to 79 this time last year.

Quick Stop, our proprietary brand of convenience stores, coupled with a Jack In The Box and a fuel station, also continue to maintain year to date double digit same-store sales increases. Though neither of these two concepts are material, they are not material components of our consolidated results so far, we are encouraged by these strategic initiatives and their long-term potential.

Now, Linda A. Lang will update us on the marketing picture and John F. Hoffner will give you financial performance information.

Thank you, Bob, good morning. As Bob mentioned, same-store sales trended upward from where we were earlier in the year, as well as from guidance. We're encouraged by this improvement for two reasons. First, it indicates our salad program is working. Next, it reinforces our belief that consumers are looking for higher quality food and are willing to pay for it.

If you haven't tried one of our new salads, I hope you get a chance to soon. That's the best way I know to communicate the value of our premium product strategy. The chicken club, Asian chicken and Southwest Chicken salads deliver a level of quality typically available only outside the quick store category, but at a significantly lower price.

Moreover, these salads have broad appeal beyond our typical target of men, 18-34. We are also pleased with early results from our new premium sandwich, Jack's Turkey Burger. We introduced it at the beginning of the fourth quarter. Jack In The Box is the first chain in the QFR segment to offer a turkey burger as an alternative to beef and chicken.

Like our salads, the turkey burger is also appealing to a broader audience.

These new products are recent example of how we have shifted to a premium strategy and how we have reduced reliance on discounting. We believe that differentiating ourselves with higher quality food will create a brand worth remembering. Today's consumers have more sophisticated food palates than ever before. They eat out more often. By tapping into their preferences, we believe we can create products consumers want more often, products they will go out of their way for.

We're also on track with our innovation center, which we expect to open next summer. The innovation center will give us the space to expand our new products research and development, and bring together R&D with Marketing. Importantly, the center will enable Jack In The Box to bring better products to market faster.

Now I'll turn the call over to John F. Hoffner, who will review our third quarter financial results.

Thank you, Linda. And good morning again. In the third quarter, Jack In The Box opened 21 new company restaurants. We ended the quarter with a total of 1534 company restaurants, and 1920 Jack In The Box restaurants systemwide, an increase of 4.3% from a year ago.

Qdoba ended the quarter with 98 restaurants systemwide, compared to 79 last year. As Bob mentioned, same-store sales at Jack In The Box company restaurants decreased .2 of 1% percent in the third quarter versus 1.5% decrease last year. Year to date, our same-store sales have decreased 2.4% compared to a .3% decrease a year ago. Third quarter Same-store sales improved primarily due to the introduction of the new premium salad line. Qdoba produced a double digit increased in systemwide same-store sales on top of the double digit increase in the third quarter of 2002.

Consolidated company restaurants restaurant sales were $444 million, versus $428 million a year ago. Year to date, company restaurants sales were $1.42 billion, compared with $1.4 billion last year.

Consolidated systemwide sales during the quarter grew to $569 million and grew to $1.79 billion year to date. Other revenues in the quarter were $6.9 million, versus $6.5 million forecast, and $4.7 million last year, primarily related to our objective of increasing the U.S. of franchising in our business model as we grow.

We had 14 Jack In The Box conversions during the quarter, compared with 5 last year.

Year to date, other revenues were $25.4 million, primarily related to 28 conversions versus $12.9 million from 14 conversions in fiscal 2002. Total revenues during the quarter increased 5.9% to $489 million, and increased 4.1% year to date to $1.57 billion.

Our restaurant operating margin was 16.5% of sales versus 19.4% in the third quarter of 2002. This was primarily due to higher worker's compensation insurance, utilities and food and packaging costs, as well as the costs related to our new point of sale system rollout.

Food and packaging costs were higher than last year, as a result of our new salad line introduction, as well as higher beef and produce commodity costs. Our year to date restaurant operating margin was 16.6% of sales, compared with 18.6% last year, and also partially due to the deleveraging of fixed cost from lower same-store sales year to date.

Third quarter gross profit rate was 17.7% of revenues, compared with 20% a year ago for the same reasons just mentioned, but were partially offset by higher gains on sales to franchisees. Year to date, gross profit rate was 18.1% of revenues, compared with 19.4% in 2002. The company expects that cost increases associated with insurance, medical benefits, and the new POS system, as well as pension costs, will continue into the next fiscal year.

The company will provide guidance on its strategic plan, and fiscal '04 earnings on September the 18th. SG&A expense rate for the quarter was 10.6% of revenue, versus 11.2% forecast, and last year's rate of 11.1%, primarily due to the company's ongoing profit improvement program initiatives, which have helped to offset increases in our pension costs.

Year to date, SG&A expense rate was 11.1% of revenues, the same as last year. Third quarter earnings from operations, or operating income, was $34.8 million, compared with $41 million in 2002, and included $2.1 million in additional other revenues, primarily related to gains and fees on restaurant sales to franchisees. Year to date, operating income was $109 million versus $124 million last year, and included $12.5 million in additional other revenues.

Operating income, plus depreciation and amortization was $51.1 million during the quarter, compared with $57.3 million a year ago, and year to date was $163 million versus 178 million last year. Our interest expense for the quarter increased to $5.5 million versus $5.1 million in the third quarter of fiscal 2002, primarily due to borrowing costs associated with the acquisition of Qdoba, and fees associated with the company's refinancing this past January.

Year to date, interest expense was $19.6 million, compared to $17.6 million last year. Our projected annual income tax rate for fiscal 2003 is now 36.2%, compared to 38% forecast and 33.9% in fiscal 2002. The lower rate versus forecast and the low rate last year resulted from the favorable resolutions of land-standing tax matters. The company expects to return to its normal income tax rate of 38% in fiscal 2004.

Our net earnings were $19.8 million in the quarter, versus $24.2 million last year. And year to date, net earnings were $57.3 million, versus $69.1 million for 2002. Diluted earnings per share were 54 cents in the quarter, compared with 49 cents forecast, primarily due to the lower income tax rate, and versus 60 cents in 2002.

Year to date, earnings per share were $1.54, versus $1.72 last year. Capital expenditures were $31.4 million, versus $37.2 million in last year's third quarter and were lower than prior guidance. The company is now leasing a greater portion of its stores rather than purchasing them due to favorable financing terms.

Year to date, capital expenditures were $81 million, versus $91 million in 2002.

Now, let's take a look at balance sheet and cash flow highlights. At the end of the third quarter, our current ratio was .6 to 1 versus .5 to 1 last year. Our debt to ratio at year end was compared to .5 to 1 in 2002. Our total debt was $303 million versus $251 million at the same time last year, primarily related to our $45 million acquisition of Qdoba.

In January, the company replaced placed that's $175 million revolving credit with a new senior credit facility, comprised of $150 million, 4.5 year term loan and a 200 million three-year revolver.

Accounts receivable were $9 million higher than 2002, due to short-term bridge loans made to qualified Jack In The Box franchisees on restaurant purchases. Other current assets were $27 million lower than last year, primarily due to a reduction in sinking funds related to the retirement of $10.3% financing lease obligations, and to a decrease in asset sale for sale and leaseback.

Other assets were up $52 million from 2002, primarily related to the establishment of intangible assets related to the Qdoba acquisition, approximately $9 million of which is amortizable.

Our current liabilities were $66 million lower than last year, primarily related to the reclassification of the company's senior credit facility to long-term debt, following our refinancing transaction in January, as well as to the retirement of the financing lease obligations. Long-term debt was up $122 million from 2002, primarily related to the senior credit facility reclassifications, and to the Qdoba Qdoba acquisition financing.

Other long-term liabilities were $27 million dollars higher than last year, primarily due to increases in deferred taxes, straight line rent, and pension obligations. Stockholder's equity was slightly lower than last year, as increases to retained earnings were essentially offset by reductions for share repurchases and a pension liability adjustment.

Finally, the company's year to date net income, plus depreciation and amortization, minus its cash capital expenditures was $33.7 million, versus $32 million last year.

Now let me turn the call back over to Bob, and we will take your questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Jeffrey Omohundro from Wachovia Securities.

Hi. Two questions. First, on the success of your turkey product. Are you considering different products in that line and what the sourcing of that might be if you are? I'm curious about the supply given the size of your system.

And then the second relates to the accounts receivable line item, it's up slightly from last quarter. I'm wondering, are those the same franchisee loans?

And also, as a follow-up to that, what the momentum looks like on refranchising. I noticed in Q 4RBGS the expectation, I think, say little bit later versus the prior year. How do you see the momentum going forward on that?

Linda, why don't you talk about the turkey burger and John, you can talk about the last two.

Jeff, on the -- I think your question was two fold. One is are we able to secure product sourcing or commodity sourcing for the turkey burger. And the answer is yes, we've had no problem getting the commodity, the product. And we are in terms of new product development looking at many other products that are nonbeef products.

Okay.

Hey Jeff, this is John. Essentially, the accounts receivable balance has not changed very much from Q2. And as we said on our last call, we have been making these loans on an interim short-term basis to franchisees who have been in the Jack In The Box system a long time, and who are very, very good operators, and are creditworthy people.

This is really just to help them obtain bridge financing until they can put permanent financing in place, which, as you know, right now, in the marketplace, franchisee financing is pretty challenging.

With respect to the momentum, I think we're pretty much on track with what we gave in the way of guidance throughout the year. We are going to do slightly more than 30, maybe 36 conversions for the year, and I think that's up from 22 last year. I think that's about right on plan.

Thank you very much.

You bet.

I'll move now to Robert Wettenhall with Lehman brothers.

Hi, good morning.

Good morning.

I wanted to understand better, back in the fourth quarter of last year, you were talking about the best burger ever and emphasizing how that was going to anchor the menu.

Now there seems like there are a lot of new product introductions, especially the salads. Is this shift (inaudible) strategy away from the QSR burger business?

Well, you broke up pretty badly there. Let me repeat to you what I think you asked. And if you are speaking into a speaker phone, that's not working.

So, any way, what I heard you say is a year ago, we had our promotion of best burgers ever, and now we are into salads and turkey burgers. Are we trying to move out of the QSR hamburger segment. Is that your question?

I'm just trying to understand in the sense that it seemed like there was a big emphasis on promoting the best burger ever. Now there seems like there is a new emphasis on salads and just from a strategic standpoint, vis-à-vis the menu, what is the goal per se?

You also mentioned that you were trying to migrate away or expand the consumer base from the 18-36-year-old male target customer.

I'll take that. Our positioning and our strategy has been to promote quality products. And that includes our burger line, that includes our chicken line.

In addition to that, we have stepped up in the R&D area to look at innovative products, such as the turkey burger that appeals across a broader segment. But we're certainly not walking away from our core business of burger, nor are we walking away from our core target consumer of men 18-34.

Okay. And what do you expect share repurchases to be during the year?

Was the question year to date, share repurchases?

I'm just saying do you have a target for the entire year?

Well, we're finished. We had a $90 million share repurchase authorization, and we completed that in the second quarter, and in fiscal '03, we bought back a total of $50 million.

Okay, great. Thanks a lot.

You bet.

We'll go now to Fitzhugh Taylor with Banc of America Securities.

Hi, guys. Just another question on new products. Obviously that has been and will continue to be a big issue in innovations and R&D front.

Can you give us in broad terms how you go about testing these products? And assuming they are tested in store before you roll them out, how broad are the tests and what rates you like to see before you feel comfortable in making them permanent?

Yeah, the way we test products is to make sure that we go into a market test and actually advertise to RE7 replicate exactly what we're going to do in the system, and what we -- The hurtle rate, it's it's got to produce incremental sales and incremental profits.

And secondly, just kind of as the profit improvement plan, I assume like all profit improvement plans, there is low-hanging fruit at the beginning.

Can you talk about what kind of items you are seeing now in the process after you've been in it for a while?

Well, Fitzhugh, this is John. I think the company has reasonably well tapped out the so-called low-hanging fruit.

So most of our improvements now really just come from creative ways of managing the business differently than we were before. I don't think we'll see any step function changes in the way our SG&A rates b have been performing.

It's part of our culture here and it's what we do. As we have spoken in the past, it ranges all the way from little changes that is we make in our restaurant operations to, large and significant changes like even the investment in the POS system, is a profit improvement.

It's an investment in our future to be able to drive sales and improve expenses in the long run. Don't forget, profit improvement for us is not just about expense cuts. It's about profit generation.

Right. Thanks, John.

You bet.

Up next with J & P Securities, we'll hear from Dean Haskell.

Good morning, gentlemen.

Hi, Gene.

Bob, can you give us a little color on the tax resolution. Was that the outstanding with Ralston Purina?

No, I'll let John talk about it.

I can talk just a little bit about it, Gene, it's related to issues of allowing the company to recapture a greater portion of NOL. And some of it goes all the way back to the family restaurants days when the company owned ChiChis and the other is being able to offset some capital gains with capital losses.

Okay, thank you very much.

You bet.

(OPERATOR INSTRUCTIONS) We'll hear from Paul Westra with SG Cohen.

Great. Thank you. A couple of questions. First on Qdoba running double digit comps. Can you talk about how the new units are performing with respect to those -- as far as averaging and profitability.

Paul, it's very difficult to hear you. I know you are asking about Q Qdoba and same-store sales. But I don't know anything beyond that. Can you try it again?

Yeah, sorry. Can you comment on how new stores are performing and new markets are performing vis-à-vis average levels of comps probate ?

Paul, this is John. I'm so sorry. It's difficult to hear you.

What we can tell you is with respect to Qdoba, we're very, very pleased with the performance of the chain. It's growing nicely. They are entering new markets, the new stores in the chain are doing just fine.

And they've done some great things with their menu to improve the quality and broaden their customer base, and we're just delighted with the acquisition thus far.

Does that answer your question?

Are the new stores opening above the averaging volumes of the existing space?

Well, let me just say this. The new stores in Qdoba are performing better than our expectations.

Great. Okay. And second question. Assuming you still believe share repurchases are part of the ongoing shareholder value creation strategy, when would be the first opportunity to ask the board for more authorization?

Well, we just had a board meeting last week, and we did not ask for more authorization, and I don't anticipate any time in the near future.

Can you explain why?

It's not part of the ongoing strategy.

Thank you very much.

And it appears there are no further questions. At this time, I would like to turn the conference back to you for any additional or closing remarks.

Thank you, everyone, for listening in today. Appreciate your support and look forward to speaking with you again.

In fact, we will be speaking with you on September the 18th, at which time we will give you the strategic update and the guidance for fiscal '04. So, until then, take care. Goodbye.

That does conclude today's teleconference. We appreciate your participation and ask that you do have a nice day.