Jack in the Box Inc (JACK) 2005 Q2 法說會逐字稿

Good day, everyone. And welcome to the Jack in the Box Inc. second quarter 2005 earnings 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 cannot attend at the live event.

[OPERATOR INSTRUCTIONS]

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Jerry Rebel, Senior Vice President and Chief Financial Officer of Jack in the Box Inc. 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 second quarter operating results, and discuss third quarter guidance, and 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 that 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 our most recent 10-K and other 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. Good morning, everyone.

As you can see from this morning's news release, Jack in the Box reported second quarter net earnings of $0.55 per diluted share, compared with $0.51 a year ago. Year to date net earnings totaled $1.23 per diluted share compared with $0.90 for the first half of fiscal 2004, which included a $0.15 first quarter charge related to refinancing.

Same-store sales at Jack in the Box restaurants increased 3.1% during the quarter, that's on top of an 8.2% increase last year. With same store sales beating our forecast of 1% and with the company achieving favorable results in many other areas of operations, Jack in the Box was able to exceed our second quarter EPS guidance by $0.05. We were able to achieve this level of profitability despite beef costs that ran about 18% higher than a year ago.

Our fast casual concept, Qdoba Mexican Grill, also posted a strong quarter, with a double digit increase in same-store sales. That's on top of a double digit increase a year ago. Qdoba has now reported 23 consecutive quarters of higher same-store sales.

Regarding our third restaurant brand, JBX Grill, we're pleased with our learnings during the test phase of this concept, information that is helping us further improve our menu and facilities, as well as guest service, at both JBX Grill and Jack in the Box. As a reminder, we have a total of nine restaurants open in the first two market tests. Five are in Boise, Idaho, and four in Bakersfield, California. With these market tests successfully launched, and the purpose of the two San Diego learning labs fulfilled, the Company has converted the menu at those two restaurants back to Jack in the Box.

Our fourth brand, Quick Stuff, continues to perform well and expand, with 35 locations now operating in six states. For those of you who are unfamiliar with Quick Stuff, each of the convenience stores includes a major brand fuel station and a full-size Jack in the Box restaurant. The Company operates and derives revenues from all three businesses at these locations, which would otherwise be too expensive for a stand-alone QSR restaurant.

For the quarter, we added 12 new Company and franchise Jack in the Box restaurants as planned and three new Quick Stuff c-stores. We also added 18 Company and franchise Qdobas, three more than forecast. We attribute the positive results that we've seen over the past seven quarters to the effective execution of our strategic plan to become a multibrand national restaurant company.

Sales and earnings are up, our balance sheet and cash position are strong, our franchising strategy is expanding, and we're delivering on our promise to increase shareholder value. One great example of this is the successful completion of our share repurchase programs. Including the authorization that we completed on May 6, Jack in the Box has repurchased $100 million of stock during the last nine months.

In a few minutes, Jerry will provide the details of our solid performance for the second quarter and update you on our guidance for the remainder of the year. But first I would like to turn the call over to Linda for a review of our Jack in the Box brand and brief update on JBX Grill.

Linda?

Thank you, Bob. Good morning.

I would like to reiterate how pleased we are with the 3.1% increase in Jack in the Box same-store sales, which occurred on top of the significant 8.2% increase last year. We've now seen same-store sales at Jack in the Box increase for seven consecutive quarters. Contributing to the quarter's strong sales results were the new chicken ciabatta sandwiches that we introduced in February.

Over the years, our guests have rewarded menu innovation at Jack in the Box with their loyalty. 15 years ago as an example, we were the first major fast food chain to serve a burger on sourdough and today our Sourdough Jack is one of the most popular premium sandwiches on our menu. Based on the response to our pannidos and chicken ciabatta sandwiches, as well as products currently in test, we are confident that we can generate the same level of enthusiasm for ciabatta, which is a high quality, hearth-baked artisan bread. Later this month we will introduce two new premium burgers on ciabatta, again becoming the first major fast food chain to use this high quality ingredient on a number of different sandwiches and burgers.

Along with adding premium entree products we are also strengthening our dessert and breakfast menus. In April, Jack in the Box introduced a new flavor Blueberries 'n' Cream to our line of real ice cream shakes. And earlier this month we added the high protein, Meaty Breakfast Burrito which is served with a side of fire-roasted salsa.

Developing innovative high quality products is a key element of our strategy to reinvent the Jack in the Box brand. Another is to deliver a high level of guest service at our restaurants. We're seeing positive results in achieving this objective with new training programs like computer-based training as well as a new program for evaluating guest service called "voice of the customer." And a number of internal service initiatives intended to attract an even higher caliber of worker, while also continuing to reduce turnover, which remains at an all time low level.

One such initiative that has been very well received among our restaurant employees is the new affordable health care program, including medical, vision, and dental care, that we began offering all full and part-time workers late last year.

Moving on to the third major element of brand reinvention -- upgrading our restaurant facilities, we began testing in the second quarter, a new interior and exterior design for Jack in the Box. The design enhancements are intended to create a more contemporary atmosphere and promote more in-restaurant dining. Approximately 50 restaurants will test the new designs in fiscal 2005, and assuming results are successful, we expect to reimage about 200 restaurants each year thereafter at an approximate cost of 100 -- $100,000 per location.

Quick serve remains a very competitive segment of the restaurant industry. And we're seeing other chains adding new products, attempting restaurant makeovers or otherwise trying to improve the dining experience for their guests. But we've seen no major chain add the kind of quality to their menu that we are, nor test such a comprehensive scope of initiatives as their brand reinvention. We feel very confident in our ability to roll out a program of this magnitude, given our strong relationship with our franchise community, and their steadfast support of our strategic plan. We saw this work to our advantage a few years ago when we introduced our assemble-to-order program, and we're seeing it again today with brand reinvention.

As Bob mentioned earlier, we're now testing our new JBX Grill concept at nine locations in Boise, and Bakersfield, including two restaurants that opened early in the second quarter. We've been conducting extensive consumer research on JBX Grill and continue to gain insight into how we can further improve this fast casual concept.

For example, in the new test markets, we've moved to an entirely different flame-broiled cooking platform and have expanded the dining areas and modified the service counters to improve traffic flow and merchandising. We will continue to leverage the learnings gained during this test phase to benefit both the JBX Grill and Jack in the Box brands.

Looking ahead, with a strong line-up of products, and a creative marketing calendar in place, we're confident that we will maintain our positive sales momentum through the remainder of the year.

Now, I would like to turn the call over to Jerry for a review of our financial performance and earnings guidance. Jerry?

Thank you, Linda.

The details of our second quarter financial results, including comments on both the income statement and 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 third quarter and fiscal year. 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 second quarter were $0.55, compared with the Company's guidance of approximately $0.50, and $0.51 last year. Year to date, earnings per share were $1.23, compared with $0.90 last year, or $1.05 last year when excluding a $0.15 charge related to refinancing the Company's credit facility in the first quarter of 2004.

The $0.05 per share increase over guidance in the quarter is primarily attributed to the following -- $0.09 from higher same-store sales, improved labor management; fixed cost sales leverage, and profit improvement program initiatives, partially offset by higher food costs, primarily for beef, produce, and cheese; $0.02 from higher revenues primarily from the sale of Jack in the Box restaurants to franchisees; and $0.01 from lower interest expense.

These benefits were partially offset by $0.05 from higher SG&A expense, due primarily to increases in incentive accruals, as well as the expenses associated with Sarbanes-Oxley compliance, and $0.02 from a nonrecurring expense associated with the cancellation of a utility contract. Other revenues were $8.6 million in the quarter, versus $5 million last year, primarily from the sale of 13 Jack in the Box restaurants to franchisees, versus 14 forecast, and seven last year. The variance in average gains reflects differences in the specific sales and cash flows of the restaurants sold.

For the full year, we now estimate other revenues to be $31 million versus $30 million originally forecast, primarily from gains on the sale of approximately 57 restaurants to franchisees, three more than previously forecast.

Our restaurant operating margin in the quarter was 17.1% of sales, versus 16.7% forecast. Primarily due to the increases in same-store sales, fixed cost leverage, improved labor management, and profit improvement program initiatives, partially offset by higher commodity costs and utility expenses. Restaurant operating margin decreased 40 basis points compared with last year, due primarily to higher food costs and a significant sales leverage gained from last year's 8.2% same-store sales increase. These costs were up approximately 18% from a year ago.

Our SG&A expense rate was 11.1% of revenues in the quarter, compared with 10.7% forecast, and 11.3% last year. The increase versus forecast was due primarily to higher incentive accruals based on the Company's improved performance, and costs associated with Sarbanes-Oxley.

In the quarter, interest expense was $3.5 million, compared with $4.1 million last year, due primarily to lower interest rates associated with the refinancing and subsequent repricings of our senior credit facility. The most recent of which occurred early in the second quarter.

Also in the quarter, through reduced exposure to rising interest rates, the Company converted approximately $130 million of its $270 million term loan from floating rates to fixed rates for the next three years. The conversion to fixed interest rates is expected to increase interest expense in the second half of the year by approximately $0.01 per diluted share.

The weighted average shares outstanding were 37.4 million compared with 36.8 million last year. With the increase due primarily to additional stock-option exercises which were partially offset by the Company's share repurchase program. The increase in average shares unfavorably impacted the EPS comparison versus last year by $0.01.

Regarding our earnings guidance for the third quarter, we expect earnings per diluted share of approximately $0.60 compared with $0.56 reported last year. Our guidance includes a same-store sales increase of approximately 3 to 3.5% on top of a 3.9% increase in the third quarter last year. For the year, same-store sales are now estimated to increase approximately 3% versus our previous estimate of 2.5%.

Our updated earnings guidance for the fiscal year of $2.46 per diluted share compares to our previous guidance of $2.43, and $2.02 reported for fiscal 2004. The components of the $0.03 per share increase from the -- from our previous guidance are as follows -- $0.09 from higher same-store sales, fixed cost leverage, improved labor management, and profit improvement program initiatives, partially offset by higher commodity cost, primarily beef; $0.02 from higher gains on sale of restaurants to franchisees; and $0.03 from the deferral of stock-option expensing until 2006.

These benefits are partially offset by $0.08 from higher SG&A expense, due primarily to increased incentive accruals and costs associated with Sarbanes-Oxley compliance; $0.02 from a nonrecurring expense associated with the cancellation of the utility contract; and $0.01 from higher average shares outstanding due to stock-option exercises. Please note the $0.03 improvement from the deferral of expensing stock options is fully offset by the utility contract cancellation and the higher average shares outstanding.

And now, I will turn the call back over to Bob. Bob?

Okay, thanks, Jerry.

Before we move on to the Q&A portion of today's call, I want to take this opportunity to discuss my decision to retire from the Company, which was announced earlier this month. I've had a long and very enjoyable career here at Jack in the Box. The past 26 years have gone by quickly for me because this is such a great place to work. I'm very proud of what we've accomplished here, for our guests, our employees, our shareholders, and our franchisees. But I want to spend more time with my family and pursue my personal interests.

With the Company on such solid footing and its financial condition as strong as it has ever been, this is the opportune time for me to do just that. The quality of the people here at all levels of the organization, gives me the confidence to make this decision without any hesitation. Linda is a great example of the kind of experienced executives we have at Jack in the Box, and I know that many of you on today's call know Linda and know that she is a proven leader who I think will continue to do an outstanding job for the Company when she takes over as Chairman and CEO in October.

We also announced this morning that our Executive Vice President of Operations and Franchising, Paul Schultz, will succeed Linda as president and chief operating officer. Paul's more than 32 years of experience with the Company, and is an excellent choice to take over from Linda. Few people have a better understanding of our business or the competitive arena in which we operate than Paul does. Like Linda, Paul's preparedness and rising through the ranks of the organization, confirms the effectiveness of our succession planning process to ensure continuity in leadership.

With such a tremendous depth of talent and experience throughout all levels of Jack in the Box, and a well-conceived dynamic strategic plan in place, I am extremely confident that this Company will continue to prosper for many years to come. In addition to Linda and Paul's promotions, I'd also like to congratulate Jerry on his promotion to Executive Vice President of the Company, which will be effective on October 3.

And with that, ladies and gentlemen, I will open it up to any of your questions. Christine?

Thank you, sir.

[OPERATOR INSTRUCTIONS]

The first question comes from Mr. Dean Haskell with JMP Securities. Sir, you may ask your question.

Thank you very much.

First of all, I would like to congratulate Bob Nugent. Thanks, Bob, for a great run.

Thank you, Dean.

Congratulations, I'm sure the horses and the wineries will be very happy to have you working hard with them.

Thanks, Dean.

A question I have, a comment that Jerry made, on the $0.09 gain from the same-store sales increase, did I hear that right?

It was $0.09, attributed it to the same-store sales increase, the improvement in restaurant operating margin, which included our continued efforts to control labor costs and also fixed costs leverage on the additional sales and profit improvement program initiatives.

And that was before -- ?

Offset by the food cost, Dean.

Which was also $0.09?

No.

A total of $0.09? Okay.

A total of $0.09.

Okay. Thank you very much.

Yes.

The next question comes from Mr. Jeff Omohundro with Wachovia Securities. Sir, you may ask your question.

Thanks.

Linda, you mentioned a creative marketing calendar in place for the rest of the year. I wondered if you could maybe run through that a bit and just some general on your marketing efforts.

And then also, if you could talk a little bit about the Win Jack's Stuff promo, I see you have a -- basically a 50% win rate. I mean how do you view that versus basically discounting?

Right. Hi, Jeff, how are you?

Fine. Thank you.

Good.

Regarding the marketing calendar, we're really continuing to pursue our strategy of upgrading the menu by adding innovative premium quality products. So, the chicken ciabatta sandwiches are an example of that. We're coming up at the end of May with two burgers, the original ciabatta burger and a double bacon and cheese ciabatta burger. So those -- those are the types of products that we have in our line-up in this next -- this next quarter.

Beyond that, Jeff, I really don't go into the details of what we have on our marketing calendar, just for competitive reasons. But, because of our innovation center and because of the capabilities that we've built over the last year, we really have a solid pipeline of new products in development or in test at this time. So we're feeling very good about our upcoming plans.

With regard to Win Jack's Stuff, this was a promotion that we did last year, and it proved to be very successful and really drove, kind of the more frequent users who respond to these promotional events. And what it allows us to do, is it allows us to upgrade our guests from smaller combos to the larger combos. So they get a win -- a game piece when they purchase a medium or a large combo, and the one in two chance is really just to incentivize people to visit the restaurants and purchase those combos which helps drive our beverage sales up and helps with our food cost margin. So we really don't see it as a discounting per se, not like discounting a product or something.

I guess -- I mean -- I didn't ask the question very well. But really what I want to get is the balance between the premium product initiatives and maintaining affordability, which is I think one of the benefits of the Win Jack's Stuff promotion, given that high win rate.

Right. Well, you're right. That is targeted really towards those more frequent users that are looking for something and respond to these kind of -- these promotions.

And we continue to have our value menu, so it really is a -- kind of a two-pronged dual target, those that are looking for value, so we continue to have value offerings and those that are looking and willing to pay a little bit more for those higher quality products.

Thank you.

The next question comes from Mr. John Beisler with Monarch Research. Sir, you may request your question.

Good morning. Two quick financial questions. What is the interest rate on the $130 million of notes?

We have -- this is Jerry. Hi, how are you?

Good.

We have two specific interest rate contracts that total $130 million. The average of those two will be about 6.02%.

Okay.

And secondly, within the guidance for the third quarter, the other income line is forecast to be 6 to $7 million.

Correct.

And that includes 18 to 20 restaurants, in terms of the refranchising.

That's correct.

The second quarter, there were only 13 stores, and the total came out to be somewhere around $8.5 million. Is -- is -- was there a -- the second quarter stores were a higher quality store? Or the third quarter would be more of a lower cash flow quality store? Just looking to see which one is more of a normalized rate in terms of the store sales.

Well, the normalized -- it is difficult to peg a normalized rate because the way that we price these restaurants to sell to our franchisees, are reflective of the sales and cash flow generated at each specific restaurant. So, it would be safe to assume that the lower rate in the third quarter would generally reflect restaurants that have lower sales volumes.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]

The next question comes from Ms. Rachael Rothman with Merrill Lynch. Ma'am, you may ask your question.

Thanks. Congratulations to all of you.

Thank you.

Thanks, Rachael.

I just have a question on your share repurchase. I saw that you guys completed the authorization after the close of the quarter. If I remember correctly, as of the end of the last quarter, you guys would have needed an amendment to your credit facility to purchase more. Is that still the case? Or have you already gotten an amendment to your facility? Or am I one quarter out of date in my memory?

No, we had -- our credit facility had authorization already built in to complete the full $65 million share repurchase.

Yes. That's correct. But the amendment had been for 100 million. Are you -- do you need a new amendment to go forward and purchase more or --?

Yes.

I'm sorry?

Yes.

You do. Okay. And is that something that you're currently pursuing or looking at?

We're looking at it, Rachael.

Okay. Perfect.

And then Linda, would you mind just commenting a little bit on what the motivation was for the decision to convert the two San Diego JBX's back to the Jack in the Box brand?

Sure.

The two locations in San Diego really served their purses(ph) -- purpose, Rachael. We went in there with what we had as the original JBX concept, and based on the learnings and insight that we gained in San Diego, we made significant changes and moved those changes into the concept up in Boise and Bakersfield. So it really didn't make sense for us to go in and invest the capital to make the changes in the San Diego locations, because we already had our market test up and running in Boise and Bakersfield.

For example, the -- going from char-grilled, so we did not have char-grilled in the kitchens in San Diego, and we put char-grilled into the kitchens in Boise and Bakersfield. So they served their purpose. It didn't make sense to have two isolated concepts down in San Diego when we have our two market tests.

Great. Thank you so much.

You're welcome.

[OPERATOR INSTRUCTIONS]

The next question comes from Mr. Joe Buckley with Bear, Stearns. Sir, you may ask your question.

Thank you.

Let me add my congratulations to Bob and Linda and Paul and Jerry on your new positions as well.

Thanks, Joe.

Thanks, Joe.

Thanks, Joe.

Just a question on the remodels. The $100,000 remodel, will it be restaurant specific, sort of facelifts? Or is there anything you're targeting in terms of the interior/exterior looks with the remodel program?

Well, we have a full design package for the $100,000. So, we will start with those restaurants that need the upgradings from a priority standpoint, which ones really need refreshing. But the plan is really to upgrade the look, the interior is a much more comfortable, more contemporary, it is a little more inviting, to promote more in-dining visits.

So it really is a -- we're upgrading the facility. And it is not just looking at a few -- a handful of restaurants. Our plan is to get the entire system converted over the next four to five years. Assuming -- assuming Joe, that our tests prove out of the first 50 restaurants that we're going to be doing this fiscal year.

Is there anything special, Linda, you will do to the exterior in terms of the look?

We are not doing a lot in the exterior, Joe. It is really more of a painting and new color scheme, landscaping, curb appeal. So not a lot on the exterior. Most of it is all interior, lighting, furniture fixtures, so forth.

Okay. And Linda, one other question. Some of your competitors have mentioned some pickup in discounting. We're not seeing too many signs of that ourselves but I'm curious if you're seeing much of it.

You know we -- it is isolated. We're seeing it in some markets. And I would say it has picked up a little bit. If you were to look on average out in the marketplace, I think it has picked up a little bit.

Okay. Thank you.

You're welcome.

Our final question comes from Mr. Dean Haskell with JMP Securities. Sir, you may ask your question.

Dean.

Mr. Haskell, please check your mute button.

Yes, Linda, are you still selling beer in the JBX units up in Boise and in Bakersfield?

Yes, but I'm not sure if it is the brand that you like, Dean.

Oh, darn.

We are.

Okay. Which is a very interesting approach, being in that segment with a -- a beer.

Second question, have you seen any significant change in the sales mix between premium products and discount or value products?

Well, over the last couple of years, we've really reduced our reliance on discounting, so yes, our menu mix is definitely changed to be represented less -- we're having less of our menu driven by the discounted products and more driven by our premium products.

Any shorter term counter-trend given gas prices?

Not right now. We want to stay with that strategy. We really don't want to go back to those aggressive discounting days.

No, I was referring to customer actual purchases, have you seen a counter-trend?

No, like I said, to Joe, we've seen a little bit of isolated discounting, in some of those markets where the economy is a little bit weaker.

Okay. Thank you.

You're welcome.

At this time, I would like to turn the conference over to your hosts for closing remarks.

Thank you, everybody for joining us today. We appreciate your support. We will look forward to talking to you about our third quarter results. Until then, take care.