Jack in the Box Inc (JACK) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Incorporated first quarter fiscal 2006 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 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 Executive 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. 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 operating results for the first quarter of fiscal 2006 and discuss second quarter and fiscal year guidance which was provided in this mornings 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 website. 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 risk 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 factor 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, I'd like to turn the call over to Linda Lang. Linda?

Thank you, Jerry. Good morning. We're off to a great start in 2006 with sales and earnings in the first quarter increasing more than expected. Jack in the Box same-store sales were very strong with an increase in both average check and transactions. Our marketing messages in the quarter promoted our premium products and value menu and the response among our core and moderate customer contributed to a same-store sales increase of 5.5% at company restaurants compared to 1.5 to 2% increase forecast and a 2.2% increase last year.

Our line of sandwiches and burgers served on hard baked Ciabatta bread has been especially popular among customers. Over the past few years as part of our strategic initiative to reinvent the Jack in the Box brand the culinary experts at our innovation center have done a great job of enhancing our men with unique new products like things that feature high quality ingredients while also focusing on improving existing products. In measuring the progress that we're making to reinvent the Jack in the Box brand, we believe we are successfully executing on the first pillar. Menu innovation. We have had a consistent history of successful product introductions and currently have a pipeline of new products that are in various stages of development, test, and rollout.

We're also making measurable progress on the second pillar of brand reinvention. Upgrading service execution. By leveraging the power of our people and unique culture we believe that we can provide a better dining experience for our guests and make Jack in the Box their preferred QSR brand. Not only is it important to recruit the right kind of individuals for our restaurants, but we want to properly train and motivate them to deliver superior levels of service while we also support their personal goals. Over the past year we have rolled out a number of internal service programs intended to do just this, including an interactive computer-based method of training, an affordable healthcare program including vision and dental coverage and an English as a second language program to improve the communication skills of our Spanish-speaking workers.

We have also implemented a team approach of management in the field with area coaches responsible for coaching restaurant teams to achieve excellence in all aspects of restaurant operations. This has been a comprehensive undertaking that largely focuses on enhancing the relationships between our hourly workers, restaurant management, and field personnel. In the third quarter, we hosted a break-through, three-day conference for all of our company and franchise restaurant managers, the ones most responsible for making our service vision a reality with every guest every time. This event was so successful in engaging our managers and providing them tools for improving guest service that we're reinforcing the message throughout our regions to engage our restaurant workforce in the service vision.

The third pillar of brand reinvention is enhancing our restaurant facilities. We're currently testing at several locations new interior and exterior designs that more effectively integrate Jack's personality into the facility. Elements of our comprehensive restaurant reimaging program include new color schemes, furniture, lighting, flooring, and landscaping, as well as music, menu boards, product packaging, and employee uniforms.

Our other restaurant brand Qdoba Mexican Grill also continues to perform very well. System same-store sales increased 7.9% on top of a 12.5% increase in last year's quarter. Qdoba has now increased same-store sales for 26 consecutive quarters. And as expected, Qdoba continued to be accretive to company earnings in the first quarter.

Our third brand is our proprietary chain of convenience stores called Quick Stuff. Which has enabled us to develop Jack in the Box restaurants in high-traffic areas that would otherwise be too expensive for a stand-alone restaurant.. This concept generates revenues and profits from our restaurant and Q store as well as in major brand fuel stations. By leveraging the synergies of three compatible businesses.

Franchising remains an important strategy for us, one designed to generate higher returns and margins while mitigating business cost risk and investment risk. Most Jack in the Box restaurants are company operated, although in the last three years we have increased the number of franchise restaurants to about 26% of our system total, up from 19% in 2002. We plan to further increase the number of franchise locations to about 35% of our system total by 2008, and to an even higher levels in the years thereafter.

Qdoba on the other hand, is a predominantly franchise business model with nearly 80% of the restaurants independently operated. New unit growth for this brand will continue to be mostly franchise. As a company we have come a long way in the past three and a half years since we announced our long-term strategic goal of becoming a national restaurant company. Our businesses are performing well, our company's financial position is strong and we've continued to remain focused on increasing shareholder value. To discuss our first quarter performance in more detail as well as guidance for the second quarter and full year, I would like to turn the call back over to Jerry. Jerry?

Thank you, Linda, and again, good morning. As we reported net earnings in the first quarter increased to $0.70 per diluted share versus $0.68 last year. As a reminder last year's quarter did not include the expensing of stock options which would have been approximately $0.05 per share. Earnings per share were higher than our guidance of $0.57 to $0.59 and the First Call consensus estimate of $0.58.

The improvement versus guidance was due primarily to significant increases in sales and slightly higher gains in the sale of restaurants to franchisees. Partially offset by higher costs of utilities and tomatoes. First quarter EPS also reflected a benefit of about $0.02 from our share -- from our repurchase of approximately 1.4 million shares of common stock and a charge of about $0.04 from the settlement of a legal matter. Net earnings increased 11% in the first quarter of fiscal 2006 after adjusting for the effect of stock option expense in the first quarter of 2005.

Same-store sales at Jack in the Box Company restaurants increased 5.5% in the first quarter with an increase in both average check and transactions. This exceeded the 1.5 to 2% increase forecast due to strong customer response to marketing messages promoting our premium products and value menu along with general economic improvement in the retail sector and favorable weather in many of our major markets versus last year. For the quarter, system same-store sales at Qdoba increased 7.9% on top of a 12.5% increase in 2005, and Qdoba continued to be accretive to earnings in the quarter. Compared with guidance our restaurant operating margin was negatively impacted by approximately 70 basis points due to higher cost of utilities and tomatoes. And compared with last year, our SG&A expense rate was negatively impacted by approximately 30 basis points due to the aforementioned legal settlement and an additional 30 basis points from the expensing of stock options.

Moving on to the remainder of fiscal 2006, we are increasing our earnings guidance for the full year and adjusting certain underlying assumptions for this estimate. For the full year, we now expect to earn approximately $2.57 to $2.60 per diluted share, which is up from our previous forecast of approximately $2.50 to $2.54 and compared with $2.48 earned in fiscal 2005. The fiscal year 2006 guidance includes the effect of expensing stock options as required which is forecast at approximately $0.15 per share. Fiscal 2005 results did not include the expensing of stock options which also would have been approximately $0.15 per share excluding the effect of accelerated vesting of retiree options.

Our earnings guidance for second quarter is $0.57 to $0.59 per diluted share compared with $0.55 last year, which did not include about $0.03 per share of stock option expense. We're expecting same-store sales at Jack in the Box Company restaurants to increase 3 to 4% in the second quarter, and we're increasing our full-year estimate to 3.5 to 4.5%, which is up from 2 to 2.5% previously forecast. Now, I'd like to turn the call back over to Linda. Linda?

Okay. We will now be happy to take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Rachael Rothman of Merrill Lynch. You may ask your question.

Hi, guys. Sorry I have a little bit of a cold. Can you talk about -- it seemed around the time of the Chipotle IPO that there was a bunch of expectations from our client base that you guys would look to take Qdoba public. Can you maybe talk about what your long term plans are, or intermediate term plans for Qdoba and whether or not you are happy keeping it as it is part of your portfolio, et cetera.

Hi, Rachael, this is Jerry, I can tell you at this time that we certainly followed the Chipotle IPO and we was as intrigued and impressed by that as anybody else was. But as of now we have no current plans to do anything similar with Qdoba.

Given the strength in the IPO have you guys thought about providing more disclosure around the economics of the Qdoba business?

We're-- in our last--.

Can you give operating profit for the whole segment.

We did discuss unit economics for our brands and that was on our website, I believe, for about a week or so. We have another analyst's conference scheduled for early in March, Rachel and we will be going over that exact same information, so I would encourage you to look at the website for that, which we will be webcasting.

Perfect, I appreciate it. And if I could just one question on Jack in the Box, you guys for the second quarter are looking for a pretty significant pick up in the restaurant level margins. Is that because you have seen moderation in utilities, or is something else going on? Where do you expect that leverage to come from versus the first quarter?

I think two things. One is we will expect some moderation on utilities. The utility rates particularly for natural gas were up in the low to mid-teens at various times in the first quarter. Recent spot market has those down around $7 now for natural gas, and as I'm sure you know that natural gas is used to fuel--.

Yes.

-- a number of the electricity plants also so that seems to be a very strong bellwether for utility costs. So we are expecting to see some decline versus the first quarter, but I think the most significant impact on year-over-year restaurant operating margin is the fact that we saw extraordinarily high beef costs last year they were up 18% in '05 versus '04 in the quarter and our forecast for beef is in the -- would be to be down in the 2 to 4% range for the quarter and for the year.

And are you guys locked in a beef contract for the balance of the year?

Pardon me?

Do you have a contract in place in beef -- for beef for the rest of the year.

We do contract for certain commodities from time to time as -- as the prices warrant and as the market warrants. We really don't talk about how much we have contracted at any point in time but we certainly look at it.

Just one quick one. Can you tell us what percentage of your COGS for utilities is? Or as a percent of sales roughly what the magnitude of that line item would be.

Well, we haven't disclosed that discrete line item what we did this time because it was such an extraordinarily impactful number for the quarter. We say it was up 50 basis points over our guidance. If it helps you versus last year we were up about 60% -- excuse me, 60-basis points over last year's number.

Okay.

Without telling you the exact percent.

Okay. I'll try to back into that math. Thank you very much.

Our next question comes from Jeff Omohundro of Wachovia. You may ask your question.

Thanks, I actually have a couple. Maybe to start, if you could give us an update on where you are on the reimaging program. Last I recall you were looking for 150 units.

Right. Hi, Jeff, how are you.

Hi, good.

We had announced 100 to 150 reimages complete by the end of this fiscal year and we're still on track to do that. We have probably between 20 and 30 of reimage restaurants currently out, completed, and in the field, and we are getting ready to go into a small market in Texas with the next wave of reimage restaurants, kind of an additional design that we have. So we'll continue to roll-out our between 100 and 150 locations this year, but right now it's really too early to have a sense of performance.

Okay. And then I guess on a second question, if you could help us understand these construction delays that's leading to what looks like a pretty back-end loaded schedule for the year.

Yes, there's a full range of issues, some of them have to do with weather -- well, the weather was very good in certain pockets of the U.S. We did run into some weather where we were developing. Others have to do with the developer delays when we're going into shopping centers, permitting delays, and then some actually had to do with cost increases that essentially took the project off the table and had to be replaced with another new site. So it's -- I'd say that's -- there's several different reasons for the construction delays which really had as you said it's back-end loaded. Both on the Qdoba side and on the Jack in the Box side.

Okay. And also, I wonder if you could break down the Company versus franchise opening details just for housekeeping in Q1, and were there any closings? That is my last question.

The Jack in the Box openings were all company. And there was one Jack in the Box close, and that was also a company-operated location.

Thank you very much.

Mark Sheridan with Johnson Rice you may ask your question.

Yes, Jerry, real quickly a unit break down for Qdoba will you give that to us of the 23 opened in the quarter?

The 23 opened was 20 franchise and 3 company.

Okay. Linda, could you maybe give us a little more detail on the success you saw in the quarter with the gift card program, and then I had another question about the reimaging program. You know--.

Jack in the Box gift card program we were more aggressive this year in promoting that so we offered either a free shake or two tacos with the purchase of a gift card and we more than doubled the sales of gift cards this holiday season versus last year. If you were to extrapolate that, though, and look at the sales in the January month, it's not -- it wasn't material enough to really drive huge increases in our sales. I think the sales -- the 5.5 in the quarter, a lot of that sales -- or some of that sales we saw simply because retailers were -- a lot of customers were out at other retailers redeeming gift cards so very strong retail market for us and we we benefited from that, but we were pleased with our gift card program this year, and continue to support it.

And in the press release today you talk about the strong sales in the first quarter fueled by marketing messages on premium products in the value menu, and forgive me if I missed the detail breakdown of the value menu as you described the first quarter success in the release. But I'm more familiar with what you are doing from a premium product focus, but in terms of having kind of a dual pronged focus on the value side, can you just update me as to what you were doing in the quarter from a value perspective.

Sure. Well just backing up from a marketing perspective, and as you indicated we do have a two-tier marketing strategy, and really it's to -- what we say build and protect against our core frequent customers, and those are the ones that are a little more value conscious and especially during the January time frame so we actually promoted some of our value menu offerings, particularly the two tacos for $0.99 was a message that we were out there with. We did not do any additional new items, new value menu items, however, we were communicating and just reminding people that we have a value menu. And then on the other side is to grow and build against those more moderate customers that are looking for the more premium sandwiches. So we went back out with our our Ciabatta line, with our burgers and chicken and our breakfast Ciabatta sandwich. And then most recently rolling out the ultimate sourdough cheeseburger which is positioned as a premium product. Does that help.

Yes, ma'am, very much. One quick question at the end. Of those 20 or 25 reimaged stores that you have out there now, how many different design patterns is that, and are you to the point where you have kind of one or two that you think will garner the lion's share of the remodel look?

We have two out in the field currently and we will soon have three. Our hope is that we'll get it down to the best one, and that's our expectation.

Thank you, Linda, very much.

You're welcome.

[OPERATOR INSTRUCTIONS] Our next question comes from Mark Kalinowski of Buckingham Research. You may ask you question.

Hi, two things I would like to ask about. The first is regarding the reimaged stores. Can you tell us where the 20-plus stores that have opened so far, what market or markets they may be in, and any hurdle rates or return on investment characteristics you are hoping to get from these reimages as they proceed over time? And second is just trying to understand the outstanding same-store sales growth from the quarter you just reported a little bit better. Trying to read in between the lines, it doesn't look like there was any one really gigantic hit product that drove things, but rather that the business across the board seems to have picked up. Just curious if my read on that is generally correct and what might have led to that type of a dynamic in the quarter? Thanks.

Okay. Let's see -- the first one on the reimage. The restaurants that we have out currently reimage are really scattered throughout various markets. So it isn't any particular market. However, I did just make note that we are with the third design going into a small market in Texas, and I think we will be doing 20 -- 19 locations. Shortly. Within the next few weeks.

Okay.

And yes, we do have hurdle rates and expectations on returns, but we have not disclosed what those hurdle rates are at this point in time.

Okay.

Okay? And then regarding the sales, yes, your observation -- you are correct, sales were strong across the board. We had indicated that we saw improvements in both average check and transactions, and it's really driven by strong promotions we had the multitiered marketing strategy where we had new products, new premium products as well as the value message, strong retail markets, good weather especially compared to last year in some of our markets, but it really was across all day parts and all parts of our menu, breakfast, lunch, and dinner.

Sounds good. Thanks.

Thank you.

At this time we have no further questions.

Thank you very much. Thanks for joining us this morning. Good-bye.