Jack in the Box Inc (JACK) 2003 Q4 法說會逐字稿

Welcome to the Jack in the Box Incorporated fourth quarter 2003 earnings release conference call. Today's program is being recorded. A replay will be available on the Jack in the Box website starting today for those who could not attend the live event. (OPERATOR INSTRUCTIONS). At this time for opening remarks, I would like to turn to Mr. John Hoffner, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning and welcome to the Jack in the Box fourth quarter and fiscal 2003 conference call. I am John Hoffner, EVP and Chief Financial Officer. Joining me today are Chairman and CEO Bob Nugent, and President and Chief Operating Officer, Linda Lang. During this session, we will review the Company's fourth quarter and fiscal year operating results. Additionally, as stated in the press release issued this morning prior to our call, the Company has affirmed its earnings guidance for the first quarter and fiscal 2004, which is provided in our press release issued on September 17. We have included certain non GAAP financial information in this conference call to help supplement our reported results and enhance investors' overall understanding of our current financial performance and prospects for the future. Reconciliations to GAAP reported results are found in this morning's press release, which was also filed on form 8-K with the SEC. You may access that filing through our website, JackintheBox.com, by clicking on the link for SEC filings on our investor page.

Also, please be advised that this presentation contains forward-looking statements about sales, earnings, expenses and other financial performance indicators. These statements reflect management's expectations for the business and are based on current information. Actual results may differ materially from these expectations based on risk to the business. The Safe Harbor statement in today's earnings release outlines some of these risks and uncertainties, and is considered a part of this conference call. Other material risk factors, as well as information relating to Company operations, are detailed in public documents filed with the SEC.

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

Thanks and good morning everybody. Before I begin, I would like to take a moment to congratulate Linda Lang on her new roles with Jack in the Box. During our Board meeting last Friday, Linda was promoted to President and Chief Operating Officer and appointed to our Board of Directors. I've had the good fortune of working with Linda said she joined Jack in the Box in 1985, and have been extremely impressed by her abilities and appreciative of the many contributions she has made to the organization. I can think of no one more qualified than Linda to oversee our operations as we transition from a regional quick service chain to a national restaurant company. Her promotion and appointment to our Board are well-deserved. Congratulations, Linda.

Thank you.

Back to our operating results. Jack in the Box today reported $16.4 million for the fourth quarter, or 45 cents per diluted share. Excluding an unusual after-tax charge of $1.7 million related to lease assumption obligations on five sites arising from the recent bankruptcy of a previously owned restaurant chain called Chi-Chi's, earnings per diluted share were 49 cents, as forecasted. These results compare with $14 million, or 35 cents per diluted share, earned in the fourth quarter of last year, which included after-tax charges of $6.1 million related to a legal settlement and $4.3 million related to store closures. For fiscal 2003, our net earnings were 73.6 million, or $1.99 per diluted share, compared with 83 million, or $2.07 per diluted share a year ago. Excluding the previously mentioned unusual charges in both years, earnings per diluted share were $2.04 for fiscal 2003, as forecast, versus $2.33 for the prior year.

We're extremely pleased with customer response to new products that we've launched during the second half of the year, which Linda will discuss in more detail in a few minutes. On the strength of those introductions, fourth quarter same store sales improved 9/10 of 1 percent, compared with a 2.7 percent decrease last year. For fiscal 2003, same store sales decreased 1.7 percent versus an 8/10 of 1 percent decrease in fiscal 2002. Throughout fiscal 2003, Jack in the Box restaurants continued to feel the effect of soft economies in some of our major markets, along with increased competitive discounting. Additionally, we incurred significant cost increases for insurance, utilities, food and packaging, and our new POS system. Because 80 percent of Jack in the Box restaurants are Company operated, such cost increases can more directly impact our bottom-line than our franchise competitors. However, this high level of direct ownership can also have its distinct advantages. Perhaps the biggest is our ability to create, execute and efficiently manage large scale initiatives, such as the successful rollout of our assemble to order program a few years ago. We'll be leveraging this attribute again as we move forward with our three to five year program to reinvent the Jack in the Box brand.

Brand re-invention is a centerpiece of our strategic plan to transform Jack in the Box from a regional quick serve restaurant chain to a national restaurant company. To achieve this goal and to build shareholder value over the long-term, we plan to manage and grow a portfolio of brands. Our core business is, of course, Jack in the Box restaurants, and in 2004, we expect to add approximately 65 new restaurants. As announced in September, we intend to slow new unit growth over the next two years to conserve our capital and focus on brand re-invention.

Another brand in our portfolio is Qdoba Mexican Grill, which we acquired in January. For the second year in a row, Qdoba experienced double-digit increases in same store sales. In 2003, Qdoba added 26 new restaurants, bringing the total number of units at year-end to 111. In 2004, following continued strengthening of its management infrastructure, we expect Qdoba to add approximately 100 new units.

The third brand in our portfolio is our proprietary convenience store concept called Quick Stuff, which also combines a fuel station and a full-size Jack in the Box restaurant at a single site. Five new Quick Stuff stores opened in 2003, and we had 18 such sites operating at year-end. We plan to add another 15 sites in 2004. It's important to remember that Qdoba and Quick Stuff represent future growth opportunities for Jack in the Box, and today are not material components of our operations. Additionally, each concept is managed separately by a team of experienced professionals from their respective industries. Their focus on day-to-day operations of their businesses enables our management team to give Jack in the Box restaurants our full attention.

As we stated in September, we believe brand re-invention presents a tremendous opportunity for Jack in the Box to set a new standard of QSR excellence. By making major enhancements to our menu, guest service and restaurant facilities, both inside and out, we believe we can provide a unique dining experience that is without equal in our industry today.

Now, our new President and Chief Operating Officer, Linda Lang, will provide an update on our marketing and operations. Linda?

Thanks very much Bob, and good morning. As Bob mentioned, we've seen strengthening in same store sales since introducing our line of entree salads in April. Also contributing to the improvement was Turkey Jack, the QSR industry's first-ever turkey burger, and a creamy caramel shake which we introduced in July and September, respectively. On the strength of these new products, along with others already introduced or currently in tests, we are targeting a 1.5 to 2 percent increase in same store sales for the first quarter of fiscal 2004. We've already had great response to our new chicken breast strips since introducing them last month. Consistent with our commitment to higher quality, they're made with all-white meat sliced from whole chicken breasts.

Within the next few weeks, we'll roll out two new premium products, again featuring high-quality, fresh ingredients -- the Roasted Turkey Sandwich, made with sliced turkey breast meat, and the Ultimate Club Sandwich, which also includes sliced roasted turkey breast meat along with hickory smoked ham. Both include fresh lettuce and tomatoes and are served on a hearth-baked role. Our final menu edition in the quarter is a re-introduction of a seasonal favorite, an eggnog shake.

To improve margins, we have continued to reduce our reliance on discounting. However, we are still offering value priced products at profitable margins, like our Hamburger Deluxe, Breakfast Jack and beef tacos. Consistent with our strategy of broadening our target, we are developing products that appeal to a broader audience. Our primary target is still young men 18 to 34 years old; however, our new products also appeal to women as well as guests older than the typical quick serve customers. Adding to the wider range of choices on our menu is our guest's ability to customize their meal to create the flavors they crave; for example, replacing a beef patty with a turkey patty on their favorite burger; substituting or omitting sauces on their sandwich or adding fresh produce; or choosing one of our low-fat or reduced calorie dressings, and using the side toppings sparingly on their salad. This flexibility to customize is especially important to guests interested in limiting fat and calories, as well as those seeking to add even more flavor to their meal.

As we add new foods to our menu, we're deleting others in order to focus on better-selling, more profitable product. This effort is expected to produce higher margins and improve kitchen procedures, resulting in faster and more consistent service. An effort led by our 12 regional vice presidents is also intended to simplify restaurant operations, so that managers can focus more of their time on training, good quality and guest service. Our programs to improve guest service are not going unnoticed. Last month, QSR Magazine ranked Jack in the Box as one of the nation's best drive-through operations. Based on attributes including service time and order accuracy, Jack in the Box tied for fifth among all QSR chains in the magazine's Best Drive-through in America (indiscernible). Our high-ranking continues the trend of improvement from our 10th place finish last year, 13th in 2001 and 20th in 2000. When the magazine's 2004 study is published next fall, we will have in place additional initiatives intended to move our guest service standard even higher; for example, a new mystery guest program to better assess the restaurant experience from a customer's point of view; new evaluation tools for recruiting more service-oriented employees; computer-based training to help new and existing employees learn about their position, new products and operating procedures; and finally, a new satellite enabled POS system, which is easier for employees to use, improves speed of service and provides better information tracking. This new system also enables credit and debit card purchases, which is resulting in higher average check.

Before turning the call over to John Hoffner, I want to give you an update on the progress we're making on our new 70,000 square foot innovation center. Construction is running a little ahead of schedule and we expect to occupy the new center by the summer of 2004. By uniting R&D with marketing and other key support functions, this new facility will enable Jack in the Box to bring better product to market faster. And now, John will review our fourth quarter and fiscal year results. John?

Again, good morning. In the fourth quarter, Jack in the Box opened 27 new Company restaurants and opened 90 for the year, as planned. We ended the year with a total of 1553 Company restaurants and 1947 Jack in the Box restaurants system-wide, an increase of 4.6 percent from a year ago. Qdoba opened 15 new Company and franchise restaurants during the fourth quarter and 26 for the year, bringing its system total to 111 units. Same store sales at Jack in the Box Company restaurants increased 9/10 of a percent in the fourth quarter versus the 2.7 percent decrease last year. Fiscal year same store sales decreased 1.7 percent compared to an 8/10 of a percent decrease a year ago. Qdoba ended the quarter and the year with double-digit increases in system-wide same store sales on top of double-digit increases in 2002.

Our consolidated Company restaurant sales in the quarter were 442.5 million versus 424.1 million a year ago. For the fiscal year, Company restaurant sales were 1.86 billion compared with 1.82 billion last year. Consolidated system-wide sales during the quarter grew to approximately 570 million from 522 million a year ago, and grew to 2.36 billion in fiscal 2003, up 5.5 percent from last year. Other revenues in the quarter were 5.6 million versus 5.7 million forecast, and 7.2 million last year. We had 8 Jack in the Box conversions during the fourth quarter, the same as last year. For the fiscal year, other revenues were 31 million, principally from 36 conversions, versus 20.1 million from 22 conversions in 2002 -- all related to our objective of continuing to increase the use of franchising in our business model. Total revenues during the quarter increased 6.4 percent to 493 million, and increased 4.7 percent in fiscal 2003 to 2.06 billion. Restaurant operating margin was 15.8 percent of sales versus 18 percent in the fourth quarter of 2002. Fiscal year restaurant operating margin was 16.4 percent of sales compared with 18.4 percent last year. Both shortfalls were primarily due to higher workers' compensation insurance, utilities, food and packaging, rollout of our new point-of-sale system, and the deleverage of certain fixed costs from lower sales.

Fourth quarter gross profit rate was 17.2 percent of revenues compared with 19.6 percent a year ago. Fiscal year gross profit rate was 17.9 percent of revenues compared with 19.4 percent in 2002, primarily due to the drop in restaurant operating margin, partially offset by some higher gains on sales to franchisees. Our SG&A rate for the quarter was 10.9 percent of revenues versus 10.7 percent forecast, due to the unusual $2.6 million charge related to lease assumption obligations on five sites arising from the recent bankruptcy of the Chi-Chi's restaurant chain, which was previously owned by the Company. SG&A expense rate was 3.4 percent lower than last year, primarily due to the Company's ongoing profit improvement program initiatives, to lower incentive bonus accruals, and charges of 15.7 million in last year's fourth quarter for a legal settlement and store closures. Fiscal year SG&A expense rate was 11.1 percent of revenues, down from 11.9 percent in fiscal 2002, for the same reasons. Excluding the previously described unusual charges, in the fourth quarters of both years, SG&A expense rate was 10.4 percent revenues versus 10.9 percent a year ago. And for the year, excluding those same charges, SG&A expense rate was 11.0 percent versus 11.1 percent in 2002.

Fourth quarter earnings from operations, or operating income, was 30.9 million compared with 24.4 million in 2002. For the fiscal year, operating income was 140.2 million versus 148.6 million last year. Excluding the previously described unusual charges in both years, our operating income was 33.5 million in the fourth quarter versus 40.1 million a year ago, and was 142.8 million in fiscal 2003 versus 164.3 million last year. Depreciation and amortization was 16.8 million during the quarter compared with 16.7 million a year ago, and was 70.3 million in fiscal 2003, the same as last year. Interest expense for the quarter was 5.2 million versus 5.3 million last year. For the year, interest expense increased to 24.8 million from 22.9 million in fiscal 2002, primarily due to borrowing costs associated with the acquisition of Qdoba and the amortization of fees associated with the Company's refinancing this past January. Our annual income tax rate in fiscal 2003 was 36.2 percent, as forecast, and compared to 33.9 percent in fiscal 2002. The lower rates in both years resulted from favorable resolutions of long-standing tax matters. The Company expects to return to its normal income tax rate of 38 percent in fiscal 2004.

Earnings per diluted share were 45 cents in the quarter compared with 35 cents reported last year. These results include the unusual after-tax charges of 1.7 million in 2003, related to the lease obligations assumed as part of the Chi-Chi's bankruptcy, and 10.4 million in 2002, related to the legal settlement and store closures. The Company does not anticipate any additional future charges from the Chi-Chi's bankruptcy. Excluding these unusual charges in both years, earnings per diluted share in the quarter were 49 cents, as forecast, versus 61 cents last year. For the year, earnings per diluted share were $1.99 compared with $2.07 reported in 2002. Excluding the previously described unusual charges in the fourth quarters of both years, earnings per diluted share were $2.04 in fiscal 2003, as forecast, versus $2.33 in 2002.

For the fourth quarter of 2003, our consolidated financial results included the following for Qdoba -- revenues of 7.6 million and earnings from operations of 0.1 million. For the partial year, since the acquisition in January, Qdoba produced revenues of 20.5 million and earnings from operation of 0.6 million. As forecast, Qdoba was slightly dilutive to our fiscal year earnings results after accounting for interest expense associated with the acquisition. At year-end, Qdoba assets totaled 55.6 million. Diluted weighted average shares outstanding for fiscal 2003 were 37 million versus 40.1 million in fiscal 2002, primarily due to the repurchase of 2.6 million shares during the year. Capital expenditures and capital lease commitments in the fourth quarter decreased to 41 million, from approximately 52 million last year and compared with 55 million forecast, principally due to savings achieved on new store buildout costs. Fiscal year capital expenditures were slightly more than 121 million versus 143 million in 2002, due primarily to fewer new restaurants opened, fewer purchases of new sites and savings on new store buildout costs. The Company is now leasing a greater portion of its new stores rather than purchasing them, due to favorable financing terms.

Now let's look at our year-end balance sheet and cash flow highlights. Our current ratio at year-end was .6 versus .3 last year, primarily due to a reduction in current liabilities and a temporary increase in our cash balances. The Company currently has no balance outstanding on its revolving credit facility. Our debt-to-equity ratio was .6 to 1 versus .5 to 1 last year. Total debt increased to 303 million from 250 million at the end of 2002, primarily related to the $45 million acquisition of Qdoba in January. Accounts receivable were 5 million higher than in 2002, principally due to short-term bridge loans made to qualify Jack in the Box franchisees on restaurant purchases during the year.

Other current assets were $12 million higher than last year, primarily due to an increase in assets held for sale and leaseback. Other assets were up 56 million from 2002, primarily related to the establishment of the intangible assets for the Qdoba acquisition, approximately $9 million of which is amortizable. Our current liabilities are 96 million lower than last year, primarily related to the reclassification of the Company's senior facility to long-term debt, following the refinancing transaction in January, and to the retirement of 70 million in 10.3 percent financing leased obligations.

Our long-term debt was up 147 million from 2002, primarily related to the senior credit facility reclassification and to the Qdoba acquisition financing. Other long-term liabilities were 55 million higher than last year, primarily due to increases in pension obligations, deferred taxes and deferred rent. Stockholders equity was slightly higher than last year, as increases to retained earnings were substantially offset by reductions for share repurchases during the year and a pension liability adjustment increase primarily related to a decrease in our discount rate. Finally, the Company's fiscal year net income plus depreciation and amortization, minus capital expenditures, was 31.7 million in 2003 versus 10.7 million last year.

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

Thank you John. We are ready for questions.

(OPERATOR INSTRUCTIONS). Dean Haskell, J&P Securities.

Congratulations on a good quarter. Can we talk about same store sales at .9 percent positive in the fourth quarter? How much of that is driven by mix or traffic or check average increases?

This is John. It's mostly an increase in average check. That's partly driven by the fact that we've now started to offer credit and debit cards in our restaurants, in almost all of our restaurants at this point. And that is continuing to help us with our average check. We did not disclose the specifics of the increases (indiscernible) average check or the changes in transactions, however.

Jeff Omohundro, Wachovia Securities.

I wonder if you could talk a little bit about the restaurant promotional spending? I guess it was up in the quarter. And maybe also, touch a little bit more on the marketing strategy, given the re-invention of the brand and the product pipeline. What is your current thinking as we move into the new fiscal year?

On the promotional expenses, in the last quarter of the year we had a licensed antenna ball with the N.F.L. teams, and that caused somewhat a higher increase in our promotional costs for that quarter. However, it was a successful promotion and the cost was offset by the increased sales that we generated with the promotion. In terms of our lineup of products, we have several products that we have already successfully tested that are in the pipeline and in the lineup for the fiscal year. This next product is called Classics on a Roll; they are two a sandwiches, premium priced sandwiches -- one is the turkey sandwich and the other one is a club sandwich. And we have several other products and promotions that are already, we feel, very strong that are in the pipeline for this fiscal year. The chicken breast strips also fit with our strategy of upgrading the quality of our products. That was a product enhancement, very strong response from our customers. In addition to that, we have improved over coffee over the quarter. So we're beginning to take a look at our product lineup of our menu and move towards our upgraded menu that we are going to be rolling into the brand re-invention initiative.

You mentioned the coffee. I thought that the -- I think you have an Arabica bean, but I thought that was in test. Has that been rolled out?

That has been rolled out.

Joe Buckley, Bear Stearns.

A question on the cash flow, specifically the capital expenditure numbers came in lower than you thought for the fourth quarter. Are you thinking any differently about fiscal 2004 at this point? Talk about why it came in low for the quarter, if you did more leasing than buying, or if there is something else behind it?

This is John. It's a couple of things. One is we've continued to work constantly on the cost of our new store buildout, and we continue to make improvements on that -- number one. Number two, we are leasing more stores than purchasing, and we've done that pretty much throughout '03. At this point, it's too early to talk about what the implications are on that with our capital budget for fiscal 2004, which I think is pegged at around 150 million. We're going to continue to work on improving the costs of our new store buildout throughout the year. And some of the things that we've achieved this far in '03 may carry over into '04 and give us a little bit of upside on that number. But at this point in time, we are going to need more visibility during the year before we make any changes to that forecast.

John, just give us an update on the notes from the franchisees in the Accounts Receivables. Any change in that balance during the quarter, or have any of those been repaid yet it?

We are up about $5 million from last year, not a lot, and we have had significant repayments during the year. We had, as you know, 36 conversions this year versus 22. And that's partly why our notes receivable are up a little bit at year-end. However, the notes that we have outstanding have been repaid over time, and I think we've had something more than $20 million repaid during this year alone.

Brian Hunt, Wachovia.

Sorry if I missed this -- the CAPEX outlook for the current year we are in now? And also, could you delineate the pieces of that CAPEX?

Yes. The outlook for fiscal 2004 is about $150 million. We don't break down the specific components of that, but the majority of it is really related to new stores for Jack in the Box, new stores for Qdoba, the brand re-invention, test markets that we are going to implement during '04, and to the move into our new innovation center this year.

Next, could you tell us what rent was for the year in fiscal '03?

Our rent number is right around, let's just say $175 million.

(OPERATOR INSTRUCTIONS). A follow-up from Joe Buckley.

I'm sorry. I am wondering if you can just update us on your outlook on the commodities, specifically beef? What you are thinking for fiscal '04, in terms of cost?

I would say in general, we believe that beef costs are going to remain high for the first couple of quarters, and then they are going to begin to taper off in the latter part of the year. We are still optimistic about the opening of the Canadian border. And we don't think consumers are going to stand still for these exceptionally high prices that they are now going to have to pay in supermarkets and restaurants around the country. And we baked that into our forecast. In general, I think we feel commodity costs will be relatively stable throughout the year, and we do not see any material exposure. It may be necessary -- if we are wrong on beef costs, it may be necessary for the Company to consider price increases to help offset some of that impact. So we are still evaluating that.

One more -- I know you issued a release talking about the effects of the fires a week or so ago, but could you talk a little bit about whether that impacted business at all here in the first quarter, or how disruptive it was or wasn't?

We had about 17 locations in Southern California that were impacted for a short period of time. They were closed for 1 to 2 days during the fires. We don't see that it's materially impacted our sales.

This is John. As we disclosed in that press release, we -- the Company in total suffered no direct property damage throughout the fire. We did have some of our employees who lost homes and we -- the corporate office, the fire got within, I guess, a mile or so of our corporate offices. So we lost a little bit of time here at the corporate office. But on balance, I think we would say that we were very, very fortunate at the Corporation, in terms of the way we came through it.

Dean Haskell.

On Qdoba, you report earnings of $100,000 for the quarter and $600,000 for the year. Is that after Qdoba's G&A, and that must be before interest, of course?

That's correct.

Brian Hunt.

I was wondering if you could talk more directly about what you're seeing on the insurance front, both health and workers' comp related? My understanding is workers' comp expenses in California were up in the 20 percent range this past year. Again, I was wondering if you could give us the outlook for both of those expense line for next year?

Is that Jeff?

No, this is Brian Hunt with Wachovia.

Sorry, I didn't hear your name. I apologize. Our outlook for insurance on workers' comp will continue to be high in '04. However, there is some activity proposed by the insurance commissioner in California to help lower those costs to employers by reducing benefits paid. And as you know, based on legislation that has been passed not only in California but in Texas in the last year or so, the increases in benefits paid out have gone up significantly, as much as 40 and 50 percent on an average claim basis. So we are budgeting for those costs to remain high. What we're doing to mitigate that is to install -- have installed during 2003 a new safety program that is having a very, very positive effect now on bringing down the number of claims that we are seeing for workers' comp. And that will take some time for it to work its way through the system, but we are very encouraged by the progress that we are seeing. On the health care front, we've seen an increase in our health care costs, but I think we have done some things with respect to restructuring our programs to help mitigate those costs, the increases, both for our employees as well as the Company. And new legislation has been passed in California which is a form of mandating health care costs for employers whose employees meet certain criteria for number of hours worked and length of time served with the Company. That legislation doesn't take effect until 2006, and there's an awful lot of conversation going on within the state about that legislation. And we'll just have to wait and see how its final form takes shape.

Could you give us an idea of how far down the road the insurance commissioner's proposal is on the workers' comp, and trying to get that passed and signed?

At this point we don't have any visibility on that. It just was communicated by him this week, and it still has to be digested by the Legislature.

(OPERATOR INSTRUCTIONS). It appears that that is all the time we do have for questions. I will turn things back to you all for any additional or closing remarks.

Thank you, everybody, for listening today. I appreciate your support. We'll look forward to talking with you in February to discuss our results for Q1 of 2004. Goodbye.

That concludes today's conference call.