Jack in the Box Inc (JACK) 2005 Q1 法說會逐字稿

Good day and welcome to the Jack in the Box Incorporated First Quarter 2005 Earnings Release Conference Call. Today's call 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 and introductions I'd like to turn the call over to Mr. Jerry Rebel Senior Vice President and Chief Financial Officer of Jack in the Box Incorporated. Please go ahead sir.

Thank you. Good morning, and welcome to the Jack in the Box Conference Call. I'm Jerry Rebel Senior Vice President 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 first quarter operating results, and discuss the second quarter guidance as well as our updated forecast for fiscal 2005 that we provided in this morning's news release. Please be advised that our presentation contains forward-looking statements about sales, earnings, expenses, and other financial performance indicators. These statements reflect management's expectations for the future which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor Statement in today's news 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.

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

Thank you, Jerry. Before I begin I'd like to welcome Jerry to our quarterly conference call which is his first since his promotion last month to Chief Financial Officer. Jerry previously served as Controller of Jack in the Box, and he brings a wealth of experience to his new role with the company. Jerry has already proven his leadership abilities at Jack in the Box and elsewhere and we feel very fortunate to have him in this key position on our Executive Team.

Thank you, Bob.

I'd also like to take this opportunity to acknowledge the newest member of our Board of Directors, David Tehle. David is Executive Vice President and Chief Financial Officer of Dollar General Corporation and has an impressive background in finance and accounting with several major companies including Haggar Corporation, Stanley Works, Ryder System, and Texas Instruments. David currently serves on the Audit and Compensation Committees of our Board of Directors.

For our first quarter, which ended January 23rd, Jack in the Box reported net earnings of 25.4 million or $0.68 per diluted share. Now, this compares with 14.4 million or $0.39 per share in the same quarter a year ago which included a $0.15 per share charge related to refinancing. Same store sales at Jack in the Box restaurants increased 2.2 percent on top of a 3.1 percent increase last year. We were slightly below our guidance of two and a half to three percent due primarily to unusually severe rainy weather in some of our larger western markets in January. We added 11 new company and franchise Jack in the Box Restaurants during the quarter as planned, and expanded our JBX Grill concept to two new test markets where it is generating a positive customer response.

Our Qdoba Mexican Grill brand extended its string of consecutive quarterly same store sales increases to 22 with an increase in the double digit range for the quarter. Qdoba opened 22 new company and franchise locations in the quarter bringing the total number of restaurants now in operation to 198. Qdoba is celebrating its 10th anniversary in 2005 and in the second quarter our fast casual Mexican chain will celebrate the grand opening of its 200th location and I want to send my congratulations to our Qdoba Management Team on both of these impressive milestones.

Our chain of proprietary convenience stores called Quick Stuff added three locations during the quarter. As with our other Quick Stuff sites, each store includes a major brand fuel station and is paired with a full sized Jack in the Box restaurant. Quick Stuff remains an important part of our multi-tasked growth strategy with a company operating all three businesses at these locations.

As you can see from our balance sheet, even after completing a $35 million share repurchase program near the beginning of the quarter we continue to have significant cash reserves on hand, the result of strong operation -- operating cash flows and proceeds from the sale of restaurants to franchisees. With this in mind our board has authorized a new $65 million share buyback for fiscal 2005. Successful completion of the program is expected to provide a benefit of approximately $0.03 per diluted share in fiscal '05.

In a few minutes Linda will provide an updated -- an update on our plan to reinvent the Jack in the Box brand including enhancements to our menu, new guest service initiatives and a program to reimage our restaurant facilities. And then Jerry will update our guidance for fiscal 2005 and provide details on our expectations for the second quarter. We've long known that our second quarter would be a challenging one from a comparative perspective as we roll over one of the highest ever quality increases -- quarterly increases in same store sales thanks in large part to the successful launch of our Pannido Sandwich line a year ago.

With each of our unique and well managed restaurant and retail brands effectively competing in their respected industry segments I'm very pleased with where Jack in the Box is positioned in the competitive landscape. I want to reiterate my confidence in our long-term strategic plan and my confidence in the people at Jack in the Box, JBX Grill, Quick Stuff and QDOBA who are successfully executing the elements of that plan.

And now I'd like to turn the call over to Linda for an update on our Jack in the Box and JBX Grill brands.

Thank you, Bob. Good morning.

The first quarter was a very busy one for Jack in the Box. We introduced several new products which contributed to our sixth consecutive quarterly increase in same store sales. New menu items included a premium Chicken Cordon Blue Sandwich. A new entree salad, the Chicken Caesar and two seasonal ice cream shakes, Pumpkin Pie and Eggnog. The second a perennial favorite. Our new products were each developed and tested at our innovation center in San Diego which opened last year. We also added to our Jack in the Box kids meals a four ounce serving of Motts Original Apple Sauce. Along with the new menu items we introduced a holiday antennaball during the quarter. The new design featured Jack's familiar likeness adorned with reindeer antlers and a bright red nose and it was offered free with all large combo meals. With holiday gift giving in mind in November we began offering re-loadable gift cards at our Jack in the Box Restaurants. These Jack's Cash Cards which are also promoting as Personal Spending Cards are available in any amount from $5 to $100.

In the first quarter we launched a new program for evaluating guest service called "Voice of the Customer" which asks randomly selected customers to rate their experience in an automated survey via telephone or Internet. This program provides restaurant managers with more relevant and frequent guest feedback regarding their Jack in the Box experience than did our previous Mystery Guest program and is expected to save the company about one million annually in costs.

Along with new menu items, restaurant promotions and guest service programs, we are also contin -- continued -- we also continued developing initiatives that target another key Jack in the Box audience. Our employees. The way we see it, if we're striving to serve the best food and deliver the best service in the QSR industry, we need the best employees. At Jack in the Box, we believe in a concept called the "Service Profit Chain". That links engaged satisfied employees to higher levels of guest service which in turn promotes -- which in turn promotes restaurant sales and higher profits for the company. Several initiatives have already reduced crew turnover to all time low levels. Not only do tenured employees tend to deliver higher and more consistent levels of guest service, increased retention saves the company in recruitment and new employee training costs. Among the new initiatives we've recently implemented is a health care program including vision and dental benefits for all restaurant hourly workers. We were the first major QSR burger chain to offer full and part time restaurant employees access to such a program. As an additional incentive to crew members with more than a year's service Jack in the Box will pay a portion of their premiums.

We're also -- we are also providing more support to our restaurant managers which will help them achieve their sales goals and help ensure operational consistency throughout our Jack in the Box chain. We're rolling out new structured coaching process that our area managers now called Area Coaches will use to help restaurant managers identify opportunities to improve the restaurant's operations and create step by step business plans to achieve such opportunities.

Improving the quality of our menu and raising the level of service in our restaurants are two major elements of our holistic approach to reinvent the Jack in the Box brand. The third major element of brand reinvention is to enhance the ambience of our restaurants by upgrading the buildings both inside and out. We are currently in the process of re-imaging one of our restaurants and plan to test the variation of the new design at approximately 50 other locations over the course of the year. If the new designs are successful we plan to reimage our system at a pace of about 200 per year.

Emerging from our efforts to reinvent the Jack in the Box brand is our new fast casual burger and sandwich concept called JBX Grill. During the quarter we expanded our test of this concept to Bakersfield, California and Boise, Idaho where we now have a total of nine restaurants operating. Based on learnings gained since they debuted to San Diego locations nearly a year ago, we opened the new JBX Grill with a new flame grilled cooking platform, expanded menu and several interior design modifications including a more open dining area. The market tests are yielding positive results and as you might expect, we're gaining additional learnings, such as the need for more in restaurant seating and kitchen area modifications to accommodate product demands. We plan to incorporate these new learnings in our next phase of the concept which we now expect to commence in 2006.

Earlier I mentioned several menu items that were developed and tested at our new innovation center. We're very pleased with how this state of the art facility is contributing to our business especially after less than a year in operation. In addition to building a pipeline of new products, we're also developing new equipment and processes at this innovation center to deliver those products more efficiently to our customers.

We are particularly excited about two new sandwiches that were inspired by a similar product at JBX Grill but developed at the innovation center exclusively for Jack in the Box. The Bruschetta Chicken and Classic Chicken sandwiches tested extremely well for us and we began rolling them out system wide earlier this month. Those sandwiches are served on high quality ciabatta bread, an ingredient similar to the ciabatta baguettes we use for our Pannidos The Bruschetta Chicken Sandwich features a grilled chicken breast along with real provolone cheese, green leaf lettuce, mayo onion sauce, and diced tomatoes that have been marinated in basil, garlic, olive oil, vinegar, and parmesan cheese. The Classic Chicken Sandwich features a grilled chicken breast along with reduced fat herb mayo, sliced tomato green leaf lettuce and red onion spices.

We recognize we're rolling over very high sales comparisons in the second quarter. But with products like our new Chicken Ciabatta sandwiches complimenting the innovative menu items launched in the first quarter along with other major elements of brand reinvent -- reinvention that we're pursuing we're building a solid foundation for continued sales growth and continued operational efficiencies at our restaurants.

Now I'd like to turn the call over to Jerry for review of our financial performance and earnings guidance. Jerry.

Thank you, Linda. And again, good morning.

The details of our first quarter financial results including comments on both the income statement and the balance sheet have been provided in our news release issued this morning. Also provided in the release is the company's earnings' guidance and sales estimates for the second quarter as well as updated earnings guidance for fiscal year 2005. As such, I will not repeat all of that information on this call, but rather will emphasize a few key points contained in the release that I hope will be helpful. As we reported, earnings per diluted share for the first quarter were $0.68 compared with the company's guidance of approximately $0.66 and $0.39 last year or $0.54 excluding the $0.15 charge related to the refinancing of the company's credit facility in 2004. The $0.02 per share increase over guidance in the quarter is primarily attributed to the following. $0.04 from higher other revenues, $0.02 from a reduced income tax rate and $0.01 from lower interest expense. Partially offset by $0.02 due to lower restaurant operating margin from higher tomato and beef costs and $0.03 from softer sales from unusually severe rains during January in many of our major western markets.

Other revenues were 8.8 million in the quarter versus 7.3 million last year primarily from the sale of 13 Jack in the Box restaurants to franchisees versus ten twelve forecast and 19 last year. The variance and average gains reflect differences in the specific sales and cash flows of the restaurants sold. We continue to have a full pipeline of qualified franchisees interested in expanding and purchasing additional restaurants. Reflecting our continued strategy of expanding our franchising program, we now estimate other revenues to be $30 million in fiscal 2005 primarily from gains in the sale of approximately 54 restaurants to franchisees four more than original forecast. Our restaurant operating margin in the quarter was 16.3 percent of sales versus 16.6 percent forecast primarily due to higher commodity costs for tomatoes and beef partially offset by effective management of labor. Restaurant operating margin increased 50 basis points compared to last year due primarily to leverage from higher sales, effective labor management, and lower cost for occupancy. Each resulting from on going profit improvement program initiatives.

As forecast, our SG&A expense rate was 10.8 percent of revenues in the quarter compared with 11.3 percent in 2004. Primarily due to greater leverage from increased distribution and Quick Stuff sales along with our continued profit improvement program initiatives. In the quarter, interest expense was $4.9 million compared with 5.5 million forecast due to lower than expected borrowing rates and versus 16.7 million last year excluding a $9.2 million charge related to the company's refinancing in 2004. This decrease is primarily due to lower interest rates associated with the refinancing and subsequent repricing of our senior credit facility.

Early in our second quarter we also achieved an additional 50 basis point reduction in the interest rate on our $270 million term loan which is expected to further reduce interest expense by approximately $1.2 million annually. Our income tax rate was 35.7 percent in the quarter compared with 37.9 percent last year due to the retroactive reinstatement of the work opportunity tax credit program and continued tax planning initiatives. We now expect the income tax rate for the full year to be approximately 36.4 percent. Capital expenditures were $31 million, slightly above the 25 to 30 million forecast. Our projected capital spending for the fiscal year remains unchanged at 125 to $135 million.

Regarding our earnings guidance for the second quarter we expect per share -- we expect earnings per share of approximately $0.50 consistent with our budget and compared with $0.51 per share reported last year. Our guidance includes an approximate one percent same store sales increase on top of an 8.2 percent increase last year. Restaurant operating margin is estimated at 16.7 percent compared to last year's 17.5 percent due to higher commodity costs this year and the significant cost -- the significant cost leverage realized from last year's 8.2 percent same store sales increase.

Our updated earnings guidance for the fiscal year of $2.43 a share compares to our original guidance of $2.33 and $2.02 reported for fiscal 2004. Same store sales are estimated at 2.5 percent for the year at the low end of our original forecast of 2.5 percent to three percent. Due primarily to the weather related sales softness in the first quarter. Remember, our updated guidance for the fiscal year includes the effect of extending stock options as required beginning in our fourth quarter. Key components of the $0.10 increase in our guidance for the year are as follows. Increases of $0.06 due to lower income tax rates, $0.05 due to higher other revenues, $0.02 from lower interest expense, and $0.03 from our [$65 million] share repurchase program partially offset by $0.03 due to lower sales from the harsh weather in the first quarter and $0.03 do due to the expensing of stock options.

And now we'll turn the call back over to Bob and we'll take your questions.

Amber, we're ready for questions.

[Operator Instructions]

I'm sorry, Amber. What did you say?

We'll pause a moment to gather questions.

Okay. Fine.

Joe Buckley, Bear Stearns.

A couple of questions. You mentioned higher beef costs in the -- in the quarter. I guess I'm just curious what you're thinking about beef on a go forward basis, if you'll get some relief if the Canadian border reopens in a week or two.

Yes, Joe, this is Jerry. Our general outlook for beef will be to continue to remain high through our second quarter. As you know, the Canadian border remains closed for beef and cattle which continues to put pressure on beef prices. We believe that the Canadian border will open later in the year and that will tend to have a moderating effect on beef prices for the year.

You said a couple of weeks. Joe, the original planned opening for the border was March the 7th. Our intelligence t -- now indicates that that date is being slipped by some amount.

Okay. Bob, has the USDA announced that or is that what you're expecting?

That's what we're expecting.

Okay. I had not heard that. I also had just a question on -- on the Jack Cash Cards, just kind of curious, what kind of response you got, people took advantage of them during the holiday season as gifts?

Yes, we launched it in November and we did see purchases -- strong purchases right before the holidays and then a lot of redemption in January but I can tell you it's not a -- it wasn't a huge impact in terms of our sales, the percentage of sales. It was done fairly early in the holiday season but our plan is to promote it throughout the year and -- and -- and really market it more aggressively.

Okay. And just a question on the restaurant margin. Your full year margin, you're still forecasting at 17.2. Obviously both the first quarter and second quarter -- well first quarter actual second quarter expected is below 17. It kind of implies roughly 18 percent margins in the second half. I guess I'm -- I'm -- I'm looking to verify and then just curious, sort of the driving factors of that if commodities are -- are a big part of that?

Yes, Joe, this is Jerry. One, we -- we do believe that commodity costs will moderate in the second half of the year. We also have a very strong profit improvement program here and we're working on many initiatives that will help to reduce some of the costs of the other components of our restaurant operating margin during the balance of the year. And also we continue to have excellent control of our labor costs within the restaurant. So we're very comfortable with that 17.2 percent guidance for the year.

Our PSA sales in the third and fourth quarters are above what they are in the first and second quarters so you get leverage on your margin from that.

Okay. Thank you.

[Operator Instructions] Rachel Rothman (ph), Merrill Lynch.

Hi, good morning. Would you mind just discussing a little bit about your new Jack in the Box prototype, what that will kind of look like, or do you have any slides that maybe we could take a look at now or what the next milestones would be that we should look for?

Hi, Rachel. This is Linda. I didn't quite get the back half of your question. The new prototype, meaning the reimage? The Jack in the Box reimage?

Yes.

Yes, we currently, in fact this Friday, will complete our first reimage here in San Diego and we're doing an exterior rehem -- reimage just really more paint, some cleanup on the exterior. Most of the work will be done on the interior dining room with new fixtures, lighting, flooring, so forth. Using a more upgraded, I say color pallet and material and finishes. So it's really to improve the overall ambiance of the -- the in-store dining so that we can gain in-store customer traffic. The cost is about $100,000 and assuming that our first 50 restaurants are successful, we'll -- we'll roll it out starting next year at a pace of about 200 per -- per year.

And have you -- is it at all similar to JBX or have you taken any learnings from those prototypes and incorporated them into it?

It's a different look. The JBX Grill concept, we are trying to keep that very distinct from the Jack in the Box concept. But we are -- we are incorporating some of the Jack imagery because that seems to be very popular and we learned that from the JBX Grill interior design but it does have a different -- a different look.

And after you guys open this on Friday, will th -- will there be any slides or anything we can take a look at? Do you have any -- ?

Will there be --?

Any slides, do you have any photos?

Yes. We can -- we'll be taking photographs and so forth.

Perfect. I will follow up with Hal and try to get them. Thank you so much.

Okay. Sure.

Jeff Omohundro, Wachovia Securities.

Yes. Thanks. My first question, I'm wondering if you can update us on elements of menu strategy as it relates to complexity and the number of items and what you're thinking are -- that might be given the pace of new product introductions?

Sure. Hi, Jeff.

Hi.

We started, gosh, probably close to two years ago really going after two target consumers. We expanded our target consumer from the traditional male 18 to 35-year-old to more moderate users expanded age both male and female. And really with upgrading our menu and we rolled out the Pannido Sandwich Line. we rolled out salads but we are also continuing to -- to develop products that are targeted to what we call the more frequent QSR users. However, we are not developing products that are aggressively discounted. So for the lineup of the year, you'll see sort of dual product promotions. We will continue with new products, some that are targeted towards more of the moderate users with higher -- higher end premium products similar to our Ciabatta Chicken Sandwiches that we just rolled out. We have got some burgers lined up. We plan to refresh the Pannido Line, Salad Line, our shakes continue to do well for us. So we have a pretty strong lineup for the balance of the year.

But in terms of the total number of menu items, I know you've taken some items off. I just wonder about overall item count on the menu and complexity changes?

Yes, we -- we constantly are looking at our menu to optimize it and we're -- we have ongoing plans to delete products as we bring new products in so we don't get our menu too complex or operations too complex. So we're always evaluating that looking at the complexity from an operational stand point, the sales, the margin that's generated from each of our menu items and it's really an ongoing program.

Okay and then I might have missed in your comments, but was there any reference to your ad spending targets and percentage of sales for -- for the year?

Yes. No, we did not reference ad spending? We really don't provide details on ad spending.

Thanks.

[Operator Instructions] Joe Buckley, Bear Stearns.

Hi, thank you. Just a couple of follow-ups. Was curious what you're seeing in credit card mix as a -- as a percent of your transactions or percent of sales however you want to talk about it?

Yes, we -- we don't give specific percentage of credit card percent of sales but I can tell you that it continues to increase with building awareness out in the marketplace.

Linda, when did you first introduce it?

Oh, it's been -- it was about a year -- a year ago.

Okay.

We started rolling out. It took us about six to nine months or so to roll out system wide and it was tested in Las Vegas, a couple of years ago at least. But we completed the rollout about a year ago.

Okay. And could you give us a -- a sense of the company versus franchise break down at Qdoba?

You mean store count?

Yes.

Yes. We have -- let me think about that for a second. There's -- as I indicated there's 198 total. There's 145 franchised.

Okay. And did that -- did Qdoba contribute to EPS in the quarter?

I'm sorry, Joe. Is Qdoba what?

Was Qdoba additive for the quarter

Joe, we had I think previously guided -- we had expected Qdoba to be slightly increive (ph) for the year and we're still comfortable with that.

Okay, Jerry one more bookkeeping question. The tax rate too get to your full year number has to go up in the second half. Is there anything in particular driving that -- I mean, it's not big changes but anything else, anything in particular pushing it back up?

Well, this year, Joe, the accounting rules are such that you have to recognize individual tax events such as the WOTC reinstatement. You have to recognize that in the quarter that you get it rather than smoothing the rate throughout the balance of the year. So it makes it very difficult to have any kind of uniformity within the tax rates going forward because the accounting change.

Okay. Jerry, one more accounting question. I saw you're planning to -- you guidance included the expensive -- expensing of options. Do you think you'll restate prior results for the options just to put things on an on apples to apples basis? Or --?

We've taken a look at that, but we -- we view the only downside to the prospective adoption which is what we're recommending here to be a -- an issue of comparability which we think we can handle effectively through communications and in our earnings releases and in our public filings.

Okay. Thank you.

You're welcome, Joe.

[Operator Instructions] Jeff Omohundro, Wachovia securities.

Yes, I was wondering if maybe you could expand a little bit more on the Voice of the Customer Program. I'm impressed by the million dollar savings but are the customers randomly selected off your -- off the guest receipt and then they dial in a number or how is that -- how is that working? And is the breadth of information you think you're going to get, it sounds like timely and relevant, but in terms of the breadth of the information, is it comparable?

Yes. We -- actually tested this probably about a year ago. We started testing one of our markets and it really -- the new technology platform that we have with our POS system allows us to link our POS system so that randomly selected transactions have a transaction -- a code printed on to the receipt which allows them to go either access via Internet website or a 1-800 number. They key in their code and they answer a survey. And I can tell you that we have -- not only improved the breadth of information and like you said, the timeliness but the quality of information is much improved over our previous program which was essentially we hired mystery guest shoppers to do approximately two to two and a half shops per period -- per four week period. Now we're getting a minimum of 50 respondents per period and excellent information. It's very targeted, allows our --our restaurant managers to focus on those things that are really going to improve the -- the guest experience. And it's less expensive.

Sounds great.

As an incentive for the customer to participate, we print right on the receipt that there will be a drawing for those who participate for $10,000 on a periodic basis.

Okay.

And so that -- that's why we're seeing the level of participation that we are.

Got it. Thanks.

You're welcome.

Mark Sheridan, Johnson Rice.

Bob or Linda, I had a question about labor. You talked about some of the (inaudible) things you're doing with vision and dental coverage for hourly employees. Can you talk a little bit and if you said this on the presentation I'm sorry if I'm -- if I missed it, but about what you're seeing out of hourly wage rate trends in general? And also what you've seen from a management level in -- in -- in hourly -- a management level retention and hourly retention over the past year or so?

Yes. We actually have record low retention -- or record high retention, record low turnover among almost every level of our field employees. Since we've been tracking the statistic. And what that does is it really enables us to hold down our labor costs and effectively manage our labor costs plus save a lot of money in our training costs and we're getting more -- we're getting higher productivity and better service out of our -- out of our employees. So the programs that we have that have targeted retention are -- are working for us.

And did you mention anything about wage rate? I don't care as much about averages but maybe changes year-over-year?

Yes. We're loo -- we're seeing about one to two percent increase in average wage versus last year.

And in terms of, lastly with the new benefits, in -- is there a -- a time and -- in terms of a time with the company and, an hourly work week minimum that people have to achieve to be available for -- for those programs to be available for them?

Yes. They have to be an employee for a year.

Okay. Thanks a lot.

And that -- if they're with us a year, we will pay a portion of their premium.

Terrific. Thanks a lot.

It appears we have no further questions today. I'll turn the call back over to Mr. Bob Nugent.

Thank you, Amber. Thank you, everybody, for joining us. We appreciate your support and look forward to talking to you next quarter. Good-bye.

This does conclude today's conference call. You may disconnect at this time.