Jack in the Box Inc (JACK) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Jack in the Box Incorporated third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks and instructions, I would like to turn the call over to Mr. Jerry Rebel, Senior VP and Chief Financial Officer of Jack in the Box Incorporated. Please go ahead, sir.

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 third quarter operating results and discuss fourth 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 [inaudible]. 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. Also please be advised that Business Wire had inadvertently attached the prior quarter's balance sheet to this morning's news release. Business Wire has since reissued the news release with the correct balance sheet.

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, everybody. . Jack in the Box had another strong operating quarter, as you can see from this morning's news release. For the third quarter, the Company reported net earnings of 23.9 million, or $0.66 per diluted share. Year-to-date net earnings totaled $70 million or $1.89 per share. Please keep in mind that the third quarter of 2005 included a $0.06 benefit from the resolution of a tax matter. We're particularly pleased with our bottom line for recent quarter, considering the higher than expected increases in beef cost, which ran about 18% higher than a year ago.

The two new Ciabatta burgers that we introduced at the end of May proved very popular with our guests, as expected, and contributed to a 2.8% increase in same-store sales during the quarter, which was on top of a 3.9% increase last year. Our fast, casual concept, Cuda -- Qdoba Mexican Grill, also posted a strong operating quarter, with another double-digit increase in same-store sales, on top of a high single-digit increase a year ago. Qdoba has now achieved 24 consecutive quarters of higher same-store sales. Qdoba's operating performance continues to imp -- improved, as expected, and the chain was accretive to earnings for the quarter and year-to-date. We also continued to expand our c-store operations during the quarter, ,with four new Quick Stuff convenience stores and fuel stations opening along with Jack in the Box restaurants.

Since announcing our ambitious plan to reinvent the Jack in the Box brand nearly two years ago, we have made significant progress in upgrading our menu, service levels and restaurant facilities, as Linda will discuss in more detail. We are also expanding our franchising strategy, a key on-going component of the Company's long-term strategic plan, and have increased the percentage of franchise locations to nearly 25% of our system, and this compares to approximately 20% at the beginning of fiscal '04.

In addition to improving operating margins and returns on capital, a goal of our franchising strategy is to accelerate cash-flow that we can use to expand our system, reinvent the Jack in the Box brand, buy-back shares, and pay down debt. Early in the third quarter, for example, the Company completed a $65 million share repurchase authorization. So in the past year, we repurchased $100 million of Jack in the Box stock.

In a few minutes, Jerry will provide the details of our solid performance for the third quarter, and update you on our guidance for the remainder of the year. But first, I'd like to turn the call over to Linda for a review of our core Jack in the Box brand. Linda?

Thank you, Bob. Good morning. As Bob mentioned, the two new Ciabatta burgers that we introduced in May have been extremely popular with our guests, and indicative of the high-quality care that we're emphasizing with our menu. By focusing on quality and innovation, we're offering a variety of products that appeal at a broader base of customers versus the traditional 18 to 34 years old male target.

Breakfast continues to be an important day part for us. During the quarter, we strengthened our menu by adding a Meaty Breakfast Burrito, which is served with a side of fire-roasted salsa. And next month, we'll begin rolling out a new premium sandwich for our breakfast menu. Even though our breakfast products may be most appealing to the early-morning crowd, our guests can order any Jack in the Box product at any time of the day or night, yet another point of differentiation for Jack in the Box.

We also expanded our line of real cream shakes during the third quarter with a new flavor, Blueberries 'n' Cream, and reintroduced our Root Beer Float, a seasonal favorite, at the beginning of the fourth quarter. Rounding out our roster of recent menu additions, last week we introduced a new deli-style sandwich, called the Ultimate Club. Our version of the classic club sandwich features sourdough bread piled high with quality meats, like slices of Black Forest Ham and oven-roasted turkey, along with cheese, bacon, lettuce and tomato. These products are excellent examples of how we're keeping the Jack in the Box menu relevant to a broader base of consumers.

Along with menu innovation, another key element of our holistic approach to reinvent the Jack in the Box brand is to improve the level and consistency of guest service at our restaurants. Our news release mentioned some of the recent programs we've launched to achieve our guest service goals. Many of these new programs improve guest service by focusing on our restaurant employees, programs like computer-based training, which is more effective, efficient and employee-friendly method of training. Or our healthcare program, which provides restaurant employees access to affordable healthcare , including dental and vision coverage.

Our new English as a Second Language program we're planning to roll-out this quarter that can help our Spanish-speaking employees improve their English skills. By strengthen our workers communication skills, we can build upon the improvements we've already seen in our guest service evaluation, and also help these employees qualify for additional career opportunities at Jack in the Box. Programs like these are helping Jack in the Box retain its restaurant work force, and redu -- reduce crew turnover to all-time low levels, which also benefits our bottom line by reducing new employee training costs.

Regarding the third major aspect of brand reinvention, upgrading our restaurant facilities, we are currently testing reimage designs at our restaurants. These tests include new interior and exterior designs, and are intended to improve our guest experience and promote more indoor dining. Our entire organization is excited about the progress we're making to reinvest the Jack in the Box brand.

A few weeks ago, Bob and I joined several other members of our management team at ar -- at our annual franchise conference. As a group, our franchise partners have been very pleased with our efforts to reinvent the Jack in the Box brand, and are extremely supportive of the direction we're moving as a company. In fact, a number of our Jack in the Box franchisees are also big fans of our Qdoba concept, and have signed development agreements for that brand, as well. There is a great spirit of comradery at Jack in the Box that unites employees at all levels of organization with our franchise operators. This spirit and our culture are what makes Jack in the Box unique among our competitors. It's fueled by common desire to succeed and it's helped move Jack in the Box closer to our goal of becoming a national restaurant company.

And now I'd like to turn the call over to Jerry, for a review of our financial performance and earnings guidance. Jerry?

Thank you, Linda. And again, good morning. The details of our third quarter financial results, including comments on both the income statement and balance sheet, have been provided in our news release issued this morning. The Company's earnings guidance and sales estimates for the fourth quarter and fiscal year are also included in the release. 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 third quarter were $0.66, compared with the Company's guidance of approximately $0.60 and $0.56 last year. The 2005 earnings include approximately $0.06 from the non-recurring resolution of a prior years tax position, which reduced the Company's third quarter tax rate. Year-to-date earnings were $1.89 per diluted share, compared with $1.46 last year, or $1.61 last year, when excluding a $0.15 charge related to refinancing the Company's credit facility in the first quarter of 2004. The $0.06 per share increase over guidance in the quarter is primarily attributed to the $0.06 from resolution of a prior year tax position, a positive $0.05 from lower SG&A expense, due in part to profit improvement program initiatives and lower training costs, offset by a negative $0.05 from lower restaurant operating margin, partially offset by higher franchise royalties and rents. The lower restaurant operating margin was due primarily to higher costs for beef and produce, partially offset by improved labor management and profit improvement program initiatives.

Other revenues were $7.2 million in the quarter, slightly higher than last year, primarily from the sale of 20 Jack in the Box restaurants to franchisees, as forecast, versus 12 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 estimate other revenues to be $32 million versus 24 million last year, primarily from gain from the sale of approximately 58 restaurants to franchisees. Our restaurant operating margin was 17.2% of sales in the quarter, versus 18.2% forecast, and 17.7% last year. Higher than expected beef and produce costs were partially offset by improved labor management and profit improvement program initiatives. Beef costs were up approximately 18% in the quarter, compared to last year. Our SG&A expense rate was 10.6% of revenues in the third quarter, compared with 11.1% forecast, and 11.3% last year. The decrease versus forecast is due primarily to profit improvement program initiatives and lower training costs.

Weighted-average diluted shares outstanding were 36.4 million versus 37.3 million last year, with the decrease due primarily to the completion of our $65 million share repurchase program on May 6. Regarding our earnings guidance for the fourth quarter, we expect earnings per diluted share of approximately $0.63, compared with $0.56 reported last year, or $0.53 when excluding the $0.03 benefit of the 53 week in fiscal 2004. Our guidance includes a same-store sales increase of approximately 3% on top of a 4.1% increase in the fourth quarter last year. Also our restaurant operating margin is estimated to increase to 17.9% of sales versus 17.6% last yea,r due in part to same-store sales growth and profit improvement program initiatives.

For the fiscal year, we now expect earning of $2.52 per diluted share, $0.06 higher than previously forecast, due primarily to the lower tax rate in the third quarter. We expect restaurant operating margin to improve for the full year to 17.1% of sales, from 17% last year, even after absorbing the effect of significantly higher beef costs, which we now expect to be approximately 12% to 14% higher than in 2004. For the year, Jack in the Box same-store sales are projected to increase 2.5% to 3% on top of the 4.6% increase in fiscal 2004.

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

Thanks, Jerry. We'r -- we'd now like to open up the call to your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]]. Our first questions from Jeff Omohundro with Wachovia.

Good morning. I wonder if you could give us a little bit more color on strategically where you think you're going in terms of the premium product mix, given the momentum you're seeing there?

Hi, Jeff. How are you?

Good. How are you?

Good, thanks. Yes, we continue our strategy of menu innovation of rolling out those high-quality premium products, you know, starting with the salads, then the Pinettos (ph) and then our Ciabatta line, which was really inspired by our JBX Grill. And the Ciabatta line has proven to be very successful for us. So, you'll continue to see those premium products, premium shakes. At the same time, though, we do understand that there are those value consumers, so we -- we are also looking at new products in the value arena. And, for example, the Meaty Breakfast Burrito was priced at $1.99, so it was really targeted to those looking for something a little bit -- you know, better value in the breakfast day part. But we will continue the strategy of -- of menu innovation.

And then, also, on the new language program, where do you think -- where do you think that leads to? Do -- d -- do you associate any benefits in turnover or availability of workers? Where does that go?

Yes, absolutely a benefit in turnover or improved retention. You know, it's a skill that we've struggled for years to figure out how we can provide English as a second language to our restaurant employees, and this program involves a -- its a machine, it's really a hand-held tablet or computer. It's kind of modeled after -- I think there's a toy that's out there on the marketplace, I can't remember the name of it, but it's very simple to use, it's very user friendly. It's self paced and the response that we are getting from the crew members is very, very positive. So if we can do anything that, you know, improves their skills, really life skills and work skills I think that's a great thing.

And when we -- when you look at the remodeling initiatives, I might have missed it on the call, but I think at one time it was a 50 target this year. Are you on track on that?

Right. We have a couple of designs out there now, and we have several restaurants in development. We've made some changes to the design and we are, right now, a little behind schedule. So we may not mak -- we probably won't make that 50 in this fiscal year. But we're -- we're just continuing to monitor it and to learn and enhance the design as we go. We want to make sure that we've the right design before we -- we expand it further.

So,are you halfway there, or?

I -- you know, I can give you a little bit more in September, as we get closer to next year's plan, but we are going to be probably short, given where we are with the design. We've got, like I said, a handful out there and several in development.

Okay.. thank you very much.

Sure.

Our next question is from Mark Sheridan with Johnson Rice.

Good morning. I was actually going to ask -- also ask a question about the facilities program. Just so I can think about it a different way, because I kind of appreciate this as the -- kind of the third leg to the -- to the stool, as you've addressed things with the menu and with the service. And now you're talking about bringing facilities up -- up to the -- up to par with the new experience that you're providing, is there anything you can do -- I mean, I've been in the JBX Grills, is -- are there elements of what you've learned in the JV X Grill that's feasible to do in -- in a Jack in the Box, just yo give us a sense?

Yes, I mean, absolutely. In fact, it's the same design team that designed JBX Grill that has provided us with the design for Jack in the Box. So, I use the word, you know, it's inspired by JBX Grill. but we have learned a lot from JBX Grill and the things that work and don't work so well. So, that's all been incorporated into the design we have for Jack in the Box. And, we're not there yet. We still -- we've got a couple of design schemes out there. We're -- we're looking to enhance it even more.

Linda, is there any sense as to -- you know -- and I understand it takes some time to get there, so I certainly don't want to encourage rushing that process, but is there any sense internally with when you get there, an appreciation for how -- how quickly or how rapidly it could be implemented?

Yes. We've looked at different roll-out scenarios and, you know, if -- if this thing proves out and meets our return expectations, I think we can ramp it up fairly quickly. But, I -- it's just really too early to the say what those numbers would be or what the roll-out would look, like at this point.

But, is it fair to say that it would -- if you get comfortable without it would be a -- it would be a higher priority for your capo -- capital than -- than most other things you do now, correct?

Yes. That's fair to say.

One other question then on beef, as you talk about current outlook for beef. Can you update us a little bit with how -- how fluid the for -- forward-markets are for -- for ground beef and what's your purchasing guys are telling you, you know, as they look out a little bit further?

Yes. Hi, this is Jerry. I'll answer that question. This year we have had a more difficult time in securing forward-pricing on beef, just because of the volatility in the markets. With the Canadian border opening, certainly we should see some softening on those prices and, in fact, we are seeing some -- some softening on those prices. The -- the lean portion of the complex has been moving downward much more slowly than the trim portion of -- of the complex. We will, though, be -- be looking at trying to lock in some prices, as -- as the lean trimmings start to come down in their price. Right now, it's $1.30 to $1.40 a pound range. They are off from the high, but we're continuing to monitor that,. And as far as forward purchasing on the fat trimmings, that becomes much more difficult, as you tend to lose a little quality if you -- if you purchase frozen on those, and we just don't do that.

Okay. Thank you both for the updates.

[OPERATOR INSTRUCTIONS] Our next question is from Rachael Rothman with Merrill Lynch.

Hi, guys, two quick ones, if I could. As a follow-up on the beef, can you just remind me what percentage of your food costs are beef related?

Well, we don't typically disclose exact numbers, but you're in the 20% to 25% range would be a pretty good proxy for that, Rachael.

Okay. And then, you guys, if I remember correctly, do use a fair bit of Australian beef, right? Is that contracted or am I off there?

We do -- we do use Australian beef. We also use domestic beef. Again, those are the lean trimmings. And we do contract some. We do not typically disclose how much we -- we do contract out. I can tell you that our -- the amount that we have contracted for as of now is lower than what would typically be the case, because of volatility in the market.

Right. Makes sense. And then, I think you guys commented earlier and I just wanted to confirm about your refranchising target. I think the comment was reaching 25%. Is that a shorter term target than the 35% that you guys had laid out as a five-year target?

No. I think that is just a point in time of where we are now, Rachael. We still have a -- a 35% target, which we said was in the four to five-year time frame,which would put us there roughly in 2008, which is consistent with our prior communications.

Perfect. I wasn't sure. I think that's a shorter term target, but I wasn't sure. And the, lastly, on the G&A, can you just talk a little bit about -- G&A came in less than we thought, what you guys will be able to carry-forward, in terms of all of the profit improvement programs and what we should look for as a G&A run-rate?

Well, most of our profit improvement initiatives do, in fact, pay benefits over the long-term and not just short-term, you know, projects. So I think you could expect to see a fair amount of our improvement in G&A carry-forward into the future. I will remind you, though, that our G&A costs are not necessarily spent evenly or incurred evenly throughout the year. And if you look forward to our fourth quarter guidance ,which is up to about 10.9% of revenues from 10.6 in the third quarter, what you'll see driving out is a couple things.

One is the English as a Second Language program that Linda mentioned, will be rolled out in the fourth quarter. and certainly there will be roll-out costs associated with that that we did not experience in the third quarter. And then, historically, if you look at our fourth quarter G&A cost compared with our third quarter G&A cost, they tends to run about 4% higher, and that's included in our forecast for the fourth quarter of this year.

Alright, terrific. Thank you so much.

[OPERATOR INSTRUCTIONS] Our next question is from Ashley Woodruff with Bear Stearns.

Hi, thanks. I have a question on Qdoba. Same-store sales have been strong, as you mentioned, for some time a Qdoba now, and presumably, the unit economics have improved and you said the franchisees are stepping up their expansion a bit. Do you any thoughts on increasing the Company's expansion, your portion of the Qdoba expansion, or do you want to keep that as more of a franchising vehicle?

This is Bob Nugent. The strategy with Qdoba is to make it a franchising model, not an operating model. They are running about 75%, 76% franchised, where we're about 75% or 76% Company-owned at Jack in the Box. I think they will stay in that mode. They will continue to open Company stores. We have markets throughout the -- the country that are Company. And so there's no plans to step up the expansion of the Company stores versus franchise.

Okay. Do you think you might sell some of the Company stores to franchisees or 75% is a -- a good amount?

I think what will happen is that the franchisees will develop at a rate faster than the Company will, and so that the percentage of Company stores will go down, as that happens.

Thank you.

You're welcome.

And at this time, I'ld like to turn the conference back over to Mr. Nugent for any closing remarks.

Well, thank you everybody for joining us today. We will look forward to talking with you next month, when we give our annual update on our strategic plan. Good bye.

Thank you for participating in today's conference call and have a nice day.