Jack in the Box Inc (JACK) 2005 Q4 法說會逐字稿

Good day, everyone, welcome to the Jack in the Box fourth-quarter and fiscal year 2005 earnings conference call. [OPERATOR INSTRUCTIONS]. At this time, for opening remarks and introductions, I would now like to turn the call over to Mr. Jerry Rebel, Executive Vice President 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. Joining me today are Chairman and Chief Executive Officer Linda Lang and President and Chief Operating Officer Paul Schultz.

During this session, we will review the Company's fourth-quarter and fiscal year 2005 operating results and discuss first-quarter and fiscal year 2006 guidance which was provided in this morning's news release. Following today's presentation, we will take questions from the financial community.

We have included certain non-GAAP financial information in today's news release and on this conference call to help supplement and enhance investors' overall understanding of our current financial performance and prospects for the future. Reconciliation to GAAP reported results are also included in this morning's news release, which is available on the Jack in the Box web site.

Please be advised that our presentation contains forward-looking statements that reflect Management's expectation 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 such as information relating to Company operations are detailed in our most recent 10-K and other public documents filed with the SEC.

Following today's presentation, we will take questions from the financial community. But first, I will turn the call over to Linda.

Linda?

Thank you, Jerry. Good morning.

We are very pleased with how Jack in the Box ended fiscal 2005. We exceeded earnings guidance in the fourth quarter and met our sales forecast despite the temporary closing of more than 200 Jack in the Box restaurants due to Hurricane Rita. Late in the quarter, we shifted our advertising creative to support a new Bread is Back campaign promoting our line of sandwiches on heart-shaped ciabbata bread.

I know some of you on this morning's call live outside our markets and therefore miss out on our advertising. You can get a flavor for the creative we've produced to support this campaign, and view a TV Commercial that ran in our general market by logging on to our web site at Jackinthebox.com and clicking through to a new web site we developed as part of the campaign.

Our per share earnings for the quarter in fiscal year was $0.59 and $2.48 respectively, $0.03 higher than prior guidance. Same-store sales also improved, increasing 1.5% for the quarter and 2.4% for the year. A lot of credit for that sales growth goes to our new menu innovation and R&D teams and the new products we have been rolling out.

Our fast-casual brand Qdoba Mexican Grill experienced strong sales during the year, with same-store sales increasing 11.8% on top of a 9.3% increase in fiscal 2004. As expected, Qdoba was accretive to earnings for the fourth quarter and fiscal year. Qdoba has nearly tripled in size since we acquired it in January of 2003. We have opened 77 new restaurants in 2005 for a year-end total of 250 locations. That is a growth rate of more than 40% over prior year. And we plan to add another 85 to 95 new locations in 2006.

We are also expanding our Jack in the Box brand, with new company and franchise locations, including 45 to 55 new restaurants planned for 2006. As in 2005, several of the new Jack in the Box restaurants planned for 2006 will be built adjacent to Quick Stuff stores, which is our own proprietary brand of convenience store. Quick Stuff is intended to be a growth vehicle for us.

In fact, we plan to leverage this concept, which also includes a major brand fuel station, to expand Jack in the Box into new contiguous markets beginning this year. By sharing the development costs among the three businesses, we can build restaurants in high traffic areas that might otherwise be too costly for a stand-alone restaurant, and by operating all three businesses, we are generating revenues and profits from multiple sources.

Profitably growing the Company as we did in fiscal 2005 is one of the three major initiatives of our long-term strategic plan which we updated in September. A second major initiative is to reinvent the Jack In the Box brand through menu innovation, upgraded service execution, and re-imaged restaurant facility. The goal of brand reinvention is to clearly distinguish Jack In the Box from our competitors in all areas and provide our guests with a dining experience that they can not get anywhere else.

We want to establish an emotional bond with our guests and be their preferred choice of restaurants in our segment of the industry. Through our innovative products and use of high-quality ingredients, like ciabbata bread, we are making our menu more appealing to our core customers, as well as others who are also attracted to the convenience of our drive-thru and portability of our product.

In addition to menu changes, we are making other improvements at our restaurants to deliver higher and more consistent levels of service. It takes the right kind of people to excel at guest service. They must be satisfied in their job, motivated to perform, and have opportunities to grow with the Company. We have rolled out and expanded several internal programs intended to develop a higher caliber and more motivated workforce.

For example, we offer computer-based training at all of our locations and an interactive ESL program that gives our Spanish-speaking employees an opportunity to improve their English skills. We also offer every restaurant employee access to affordable health care, including dental and vision coverage for themselves and their families.

We are enhancing guest service in other areas as well, such as expanding payment options to include Mastercard, Visa, Discover and American Express. In fiscal 2005, Jack in the Box became the first major quick serve chain to offer store value cards. Our Jack Cash cards are convenient for personal use or as a gift and are reloadable. In fact, with the holidays approaching, we are currently promoting these cards as a great stocking stuffer, and are offering guests two free tacos or a small shake with every $10 Jack Cash card or reload.

Qdoba offers its guests a similar stores value card as well as a loyalty program that enables guests to accumulate points with every purchase, ultimately rewarding frequent users with free entrees. Stored value cards and loyalty programs are additional ways that we are building customer loyalty for our brands.

Driving product innovation and building long-term customer loyalty is the third major component of our strategic plan and crucial to driving incremental traffic and building average check. These programs, along with our internal service initiatives, have already made a positive impression on our guests.

At Jack in the Box, for example, our Guest Service stores have improved since we rolled out a new restaurant evaluation program called "Voice of the Customer" near the beginning of fiscal '05. By calling the phone number or logging on to the web address printed on their order receipt, guests rate their dining experience by answering questions on attributes ranging from food freshness to speed of service. This program provides each restaurant with more relevant and more frequent guest feedback on their dining experience then the mystery guest program we used previously and at a much lower cost.

As strong as fiscal 2005 was for Jack in the Box, we are focused on achieving even higher sales and earnings targets in 2006. Including the Bread is Back campaign we launched near bet beginning of this fiscal year, we have got a great promotional calendar planned and exciting new products that we think will be a hit with the customers.

On behalf of Jerry and Paul and our entire management team, I want to thank each one of our employees for the great results that we reported today and acknowledge their contributions in strengthening our organization. Their ongoing dedication and hard work is moving Jack in the Box closer to our long-term goal of becoming a national restaurant company.

And now I would like to turn the call over to Jerry to discuss our fourth-quarter and fiscal 2005 results and review our guidance for the first quarter and fiscal 2006. Jerry?

Thank you, Linda. And, again, good morning, everyone.

Details of our fourth-quarter and fiscal 2005 financial results are provided in our news release issued this morning. Our news release also includes earnings guidance and sales estimates for the first quarter and fiscal year 2006. The earnings guidance and underlying assumptions remain unchanged from when they were first issued on September 21. Rather than repeat all of that information on this call, I will emphasize that few key points contained in the release that I hope will be helpful.

As we reported, net earnings for the fourth quarter increased to $0.59 per diluted share versus $0.56 per diluted share last year. Excluding the special items in both years, notably the JBX Grill charge in 2005 and the extra week in fiscal 2004, net earnings increased 20% for the quarter, or about 13% on an operating basis when excluding other revenues.

For the year, net earnings increased to $2.48 per diluted share, compared to $2.02 per diluted share in 2004. Excluding the special items in both years, such as the JBX Grill charge and the tax rate reduction in 2005 and the 53rd week and the refinancing charge in 2004, earnings increased approximately 15% in 2005 versus the comparable 52-week earnings in 2004. Excluding other revenue, earnings were up about 11%.

Same-store sales accompanying Jack in the Box restaurants increased 1.5% during the fourth quarter and were consistent with guidance despite the impact of Hurricane Rita, which caused the temporary closure of more than 200 Texas locations and negatively impacted same-store sales in the quarter by approximately 50 basis points. Most restaurants reopened within a week of closing and the five locations that remain closed today are expected to reopen in December.

The $0.03 per share increase over our prior guidance in the quarter is primarily attributed to a positive $0.02 from increased sales, a positive $0.01 from higher other revenues, and a positive $0.04 mail-over tax rate partially offset by a negative $0.04 due to the impact of Hurricane Rita.

For the full-year, restaurant operating margin was 16.9% of sales, down slightly from 17% a year ago, with the decrease due in large part to significantly higher food costs, primarily beef and produce partially offset by improved labor management and Profit Improvement Program initiatives. These costs increased approximately 11% over 2004 and produce costs were up about 9% for the year.

Our SG&A expense rate was 11.3% of revenues in the fourth quarter compared with 11.6% in 2004. And 10.9% of revenues for the full year compared with 11.4% a year ago. The fourth-quarter charge of $3 million or $2 million after tax to cancel the JBX test is included in SG&A. The reduction in the SG&A rate compared with prior year are due primarily to sales leverage on higher Quick Stuff, distribution and restaurant sales.

Moving on to fiscal 2006, we are affirming both our earnings guidance of $2.50 to $2.54 for the full year and the underlying assumptions for this estimate as described in our September 21 news release. This represents an 8% to 9% improvement over the comparable 2005 results, which do not -- which do not include the expensing of stock options.

As a reminder, SFAS 123-R requires the expensing of stock options in our fiscal year 2006, which we estimate at approximately $0.15 per diluted share for the full year, the stock options were expensed in fiscal 2005, the expense would have been approximately $.15 per diluted share excluding the effect of accelerated vesting of retiree stock options.

Now, if I could turn the call back over to Linda. Linda?

Thank you. We'll be happy to take your questions.

[Operator Instructions] Our first question comes from Rachael Rothman.

Hi, guys, this is actually [To Zhu] in for Rachael. The first question is just to see if you can get an update on the restaurant re-images during 2005? Hello?

Hi, this is Linda. I was not quite clear. An update on the restaurant re-images?

The restaurant reimaging program for the restaurants being remodelled during 2005.

We are -- our plan is to reimage 100 to 150 during this fiscal year in 2006.

Okay.

We currently have a couple -- couple of design schemes out in test but it is too early at this time to really make any comments on the results of that. We have an additional scheme that has been developed and those restaurants will be reimaged towards the middle or third quarter of this fiscal year.

Okay. I saw -- did you mention that the estimate for 2005 had been approximately 50 -- do you have an update on how many were actually completed?

We had updated that number at the last conference call that we had approximately 20 -- 20 to 24 reimaged in '05. Okay. And my next question is with regard to the Qdoba brand, a 46% guidance for 2006 seems to be trending lower than in previous years, can you discuss what trends you are seeing or are you simply being conservative on that? We feel comfortable with that range that we are giving on Qdoba, and a lot of that has to do with the maturity of those particular restaurants in the status quo population, that they are concentrated in one particular market. And so those restaurants are maturing and we will not expect the sales trend to stay as high as it has been the last couple of years.

Okay. That makes sense. And then lastly, in the other revenues, I saw that in 2005, it came in at $33 million above the previous guidance. The 58 restaurants were in line with your previous comments. Can you just discuss what that upside was from?

Yeah, hi, this is Jerry. We price our restaurants based on the earnings and cash flow of the particular restaurants that we are selling, and we were over by about $1 million for -- for the full year due to the -- due to the differences and the cash flows and the restaurant operations.

Okay. Thanks, guys.

You are welcome. Thank you.

Thank you.

Our next question comes from Jeff Omohundro of Wachovia.

Thanks. A couple of questions. I guess, first, can you talk a little bit about the extension of the ciabbata line to breakfast, how that is working and what other opportunities you might see for ciabbata products?

Great. Hi, Jeff, how are you?

Good, good, thank you.

We are very pleased with all of the Ciabbata products we have introduced from -- we started with the Chicken Ciabbata and a couple of those, the bruschetta and the classic. We did our burger line, double and a single, and then we extended it to breakfast, and a lot of the inspiration from these products came from our JBX Grill concept. So great learnings and benefit from the JBX Grill.

You can expect to see more product and line extensions on ciabbata over the next year. We have built that into our -- into our new product pipeline. So very pleased with -- with the whole entire line of ciabbata products.

Great. And on the -- on the ESL initiative, maybe a little bit more of an update on that. How is it being accepted by staff and what is the utilization on it?

I am going to let Paul Schultz answer that question.

Hi, Jeff, this is Paul. The acceptance by the team members has been nothing less than outstanding. We anticipated it to be very well received, but to be honest, it even exceeded our expectations. I think it is going to pay big dividends for us going forward.

Great. And then my last question is on utilities. Maybe a little bit of an update on outlook there and where you stand on contracting.

Well, Jeff, this is Jerry. The outlook is higher utility costs, certainly for the first quarter, and also, perhaps, into the second quarter. We would expect them to moderate after the second quarter. Where we are with respect to contracts, particularly on natural gas is -- we are looking at running some contracts that cap the overall costs on natural gas at about where it is today.

I can tell you, though, that those contracts are fairly difficult to get at reasonable prices. So we are looking at it, but I -- I think on the good news for utilities, particularly on natural gas, is it's been in that $10 to $11 range for about the past 30 to 60 days, and we really haven't seen it move up above that. So we are at least pleased with that. I don't know if that's the upper end, but at least it has plateaued around that area.

Very good. Thanks a lot.

You are welcome.

Thanks, Jeff.

[OPERATOR INSTRUCTIONS]. Our next question comes from Larry Miller of Prudential Equity Group.

Hi, guys.

Good morning, Larry.

Hi, Larry.

I was curious if you could give more color on the shift of the advertising to the Bread is Back campaign and what it was that you were initially planning.

Well, if you recall the last conference call on September 21, we had lowered our sales guidance, and one of the reasons for lowering that guidance was because we had lower-than lower-than-expected sales of the product that we were at the time advertising, that was the Ultimate Club Sandwich. We made a decision to move off of that and move on -- back on to our ciabbata line, and we launch the Bread is Back campaign and shortened our actual -- our advertising against the Ultimate Club, and that really did help our sales at the end -- end of the year. So that -- that's what was planned. We went back to the ciabbata.

Okay. Thanks. Also just -- maybe you can give us an update on some of your commodity contracts. I think, your forecast for '06 is calling for lower beef prices, yet the stock markets wouldn't suggest that. So what is it you are hearing on -- on beef that makes you more comfortable about lower prices in '06.

Well -- this is Jerry, Larry.

Jerry.

What we are seeing on beef is, our beef complex has a combination of a lean and the fat component and while I will agree with you we are not seeing much in the way of price declines on the lean portion, although it is stable, we are seeing much lower rate on a per-pound basis on the fat portion, which is down into the $0.50 to $0.55-per-pound range. And back in the summertime it was in the $0.95 to $1-per-pound range. That's what we are seeing currently, and as a result of that, our beef forecast for fiscal '06 is down about 3% to 5%.

Nobody is eating fat anymore? One final question on the SG&A expense line, look lower -- especially exclude the charges, that a function of lower bonuses or just better leverage or can you place any color on that?

No, it is primarily better leverage.

Okay. All right, thanks, guys. Great start to the quarter

Thank you.

Thanks, Larry.

Our next question comes from Joe Buckley of Bear Stearns.

Hi, thank you. I had a couple of questions. Can you talk a little bit about the Jack Cash Card and remind us when you introduced that and what your experience has been so far?

Sure, hi, Joe, how are you?

Doing well, Linda, how are you?

Great. We introduced Jack Cash Card last November before the holiday season, and we got good results on that last year, but it was -- it was quite limited really to just being the holiday period. We have now gone out and promoted it with -- with a promotion with the -- with the two free tacos or a small shake with the purchase of a $10 cash card or a reload of a cash card, and that seems to be working well for us. So we are really trying to go out there and promote it a little bit more than we did during the last year.

Did people use it last year primarily for gifts? Is that what you are anticipating again?

That's what we saw. We saw it more for gifts. We are hoping we will get more frequent use of it, and have higher reloads and more frequent reloads by just promoting a little bit more throughout the year versus just the holiday season.

Okay. A question on Qdoba. It continues to perform very strongly for you. I think the language in your release, you -- you said it was accretive but not material. But as it continues to grow in size, any thoughts of -- of spinning it off or separating it in some way to try to bring out its value?

Hi, Joe, this is Jerry. At this point in time, we intend to continue to operate Qdoba as part of the Jack In The Box family of brands here. But, you know, clearly as it becomes more material, we will begin to provide a little bit more color into their operations. In fact you are may have noticed that this quarter we began to discuss the discrete same-store sales growth numbers rather than give those high single-digit to low double-digit ranges we have been giving previously.

I did notice. Of the 250, can you share what the breakdown is company versus franchise?

Oh --

There are about 77% franchise-owned and, I think, -- we can get that you exact number. If you bear with me for just a second.

Okay. I can always get that from you later if it is easier.

193 are franchise.

Okay. And then just one more question: A number of companies have told us that the regions affected by hurricanes are seeing very strong sales post-hurricane period. I was curious if you experienced that in Texas either at the end of the September quarter or into the first.

Yeah, Joe, this is Jerry again. We don't typically comment about markets, but I -- though I don't want to deviate from that too much, I think this is a little different situation here. I would agree that with what you are hearing others have said. We did see a somewhat stronger sales performance in those markets that were evacuated as families started to come back in to the market and repopulate. So we saw very much the same thing.

Okay. Thank you.

You are welcome. Thanks, Joe.

[OPERATOR INSTRUCTIONS].

I show no further questions.

Okay. Is Is that is it for the questions? Well, thank you very much for your questions this morning and for your time. We appreciate it. Goodbye.

Thank you for participating this today's conference. You may disconnect.