Jack in the Box Inc (JACK) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box, Incorporated second 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. During the question and answer period, please use your handset when asking a question. Please do not ask over a speaker phone.

At this time for opening remarks and introductions, I would like the 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 is Chairman and Chief Executive Officer, Linda Lang. Our President and Chief Operating Officer, Paul Schultz,is not with us this morning. Paul is currently visiting our re-imaged restaurants in Waco along with representatives from our franchise community.

During this session, we will review the Company's operating results for the second quarter of fiscal 2006 and discuss third quarter and fiscal year 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 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 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.

Now I would like the turn the call over to Linda Lang. Linda?

Thank you, Jerry. Good morning. As you can see from our news release this morning, the Company enjoyed another strong quarter with Jack in the Box Company same-store sales increasing 4% and earnings per share up 17% over last year after adjusting for the pro forma effect of expensing stock options in 2005.

By taking a holistic approach to improving our core business through changes to our menu, guest service and restaurant environment, we are building loyalty among our core customers as well as a broader base of consumers looking for great food with the convenience of quick service. Our menu, for example, includes more innovative and high quality products than ever before. In the past two years, we've added several entree salads and a line of sandwiches and burgers served on hearth-baked ciabatta bread. These products have been particularly appealing to our core customers as well as women and men who skew a bit older than the typical fast-food consumer. Looking ahead, we've got a full pipeline of products in various stages of development or test including several we're preparing to roll out beginning next month. These products include a premium burger on sourdough bread, a new entree salad, a new variety of real ice cream shake, a cheesecake dessert, a fresh fruit cup, and bottled water from Dannon.

In addition to menu innovation, we're receiving positive feedback from guests regarding the service we're providing at our restaurants. Since we began reinventing the Jack in the Box brand in fiscal 2003, we've launched several internal service initiatives intended to attract and retain high caliber employees, ultimately improving the level and consistency of guest service in our restaurants. These initiatives include a computer-based training system, a program to help our Spanish-speaking workers develop their English skills, and access to affordable healthcare including dental and vision coverage. This healthcare program, which we introduced to all part-time restaurant employees in 2004, is being honored this month by one of the nation's leading healthcare providers as the first of its kind to serve restaurant employees as a major quick serve chain. We're also continuing to roll out to our regions new training programs and coaching procedures intended to leverage the unique culture at Jack in the Box and engage all of our corporate and field employees in the Company's strategic vision.

The third element of brand re-invention is a full scale re-imaging of our restaurant facilities. We want to create an inviting atmosphere that reflects the personality of Jack, our fictional founder and popular spokesman. In the second quarter, we began a market test as a comprehensive re-imaging program that includes a new exterior and interior paint scheme, upgraded decor and furnishings, music, uniforms, menu boards and landscaping. Construction is currently underway in a second market where all of the restaurants will be re-imaged with the new design.

In addition to Jack in the Box, our other brands, Qdoba Mexican Grill and a proprietary chain of convenience stores called Quick Stuff, continued to perform well. Qdoba had another strong quarter with system same-store sales increasing 5.6% on top of a 14.6% increase in 2005. Qdoba has now experienced 27 consecutive quarters of positive comparable sales growth.

Through new restaurant development and the sale of Company restaurants to existing franchisees, Jack in the Box is executing its strategy to expand franchising to generate higher returns and higher margins while mitigating business costs and investment risk. The second quarter sale of 13 Company operated restaurants to franchisees increased the percentage of franchised Jack in the Box restaurants to 27% of our system at quarter-end compared with 24% a year ago and 19% in 2002.

We believe our strong results in the first half of the fiscal year are due to the continued execution of our strategic plan which we announced a few years ago. We've got a number of exciting events coming up on our marketing calendar and are confident that we can build upon the success over the remainder of 2006. I have been impressed by how our employees at all ranks of the organization are responding to our strategic plan. Their high level of engagement and enthusiasm are leading to new thinking and new approaches to our business that can further benefit our restaurant operations and increase shareholder value.

Now to discuss our second quarter performance in more detail as well as guidance for the third quarter and full year, I would like the turn the call back over to Jerry.

Thank you, Linda, and again, good morning everyone. As we reported, net earnings in the second quarter increased to $0.61 per diluted share versus $0.55 last year. Year-to-date earnings increased to $1.31 per diluted share versus $1.23 last year. As a reminder, our 2006 results include the effect of expensing stock options whereas fiscal 2005 results did not. Stock option expense would have been approximately $0.05 and $0.03 per share for the first and second quarters of fiscal 2005, respectively.

Earnings per share exceeded 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 higher restaurant operating margin, Jack in the Box same-store sales increases at the high-end of the range forecast, and slightly lower stock option expense, partially offset by higher pension and incentive compensation expense. Earnings per share increased 17% in the second quarter of fiscal 2006 after adjusting for the pro forma effect of stock option expense in the second quarter of 2005. Earnings per share for the first half of fiscal 2006 were up nearly 14%, again after adjusting for the pro forma effect of stock option expense in the first half of last year.

Same-store sales at Jack in the Box Company restaurants increased 4% in the second quarter with an increase in both average check and transactions. Year-to-date same-store sales are up 4.9%.

For the quarter, system same-store sales at Qdoba Mexican Grill increased 5.6% on top of a 14.6% increase in 2005 and year-to-date system same-store sales at Qdoba are up 6.8% on top of a 13.5% increase last year. Qdoba continued to be accretive to earnings in the quarter.

Restaurant operating margin was 17.6% of sales in the second quarter, an improvement of 50 basis points versus last year, with the increase due primarily to lower commodity costs, principally pork, cheese and beef, as well as improved labor management, Profit Improvement Program initiatives and fixed cost leverage on same-store sales growth, partially offset by higher utility costs which were 20 basis points higher than last year.

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 $2.60, $2.63 per diluted share, which is up from our previous guidance of approximately $2.57 to $2.60 and compared with $2.48 earned in fiscal 2005. The fiscal year 2006 guidance includes the effect of expensing stock options. Fiscal 2005 results did not include the expensing of stock options which would have been approximately $0.15 per share, excluding the effect of accelerated vesting of retirees options.

Our earnings guidance for the third quarter is $0.65 to $0.67 per diluted share compared with $0.66 last year. Last year included a benefit of approximately $0.06 per share due to a lower tax rate resulting from the settlement of a prior year's tax matter and did not include about $0.03 per share of stock option expense.

Just as a reminder, our tax rate last year was 31% in the third quarter and 32.2% in the fourth quarter. We're expecting same-store sales at Jack in the Box Company restaurants to increase 3 to 4% in the third quarter and 3.5 to 4.5% for the full year. Now I would like the turn the call back over to Linda. Linda?

Thank you, Jerry, and now we'd like to open up the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Jeff Omohundro, and please state your company name.

It's Wachovia. Two questions. First would be if you could elaborate just a bit more regarding the Waco market test, a little bit more about the goals in the redesign and what the initial consumer response might be? And then also, we are seeing a bit more competitive efforts around breakfast. Just wondering if you're planning further initiatives like the breakfast ciabatta? Thanks.

Sure. Hey, Jeff, how are you?

Good, thanks.

Good. Regarding Waco, we went into the entire market and with every single restaurant, the exterior redesign is really more of a refresh, so we didn't do a lot of structural changes to the restaurant exterior. It was more of a painting and some graphic treatment on the exterior. We also did a landscape kind of refresh. Really most of the work and most of the cost has been on investing on the interior remodel, and that is fully changing out all the furniture, fixtures, lighting. The color scheme and the decor items are more upgraded, so a little bit more muted colors, tiling, a little more sophisticated interior as well as very interesting graphic treatment that really brings not only Jack into the restaurant and his personality into the restaurant but it showcases the variety and the quality of the products on our menu. We also included -- we have new packaging planned. We have new menu boards. We have new uniforms as well and we put music back into our restaurants. So overall, a really holistic approach to the re-image and upgrading of the facilities in Waco. Now it's really too early to report on the response. We're going in, we're doing consumer research, and as Jerry mentioned, we have a group of executives and franchisees down in the marketplace. We just completed, within the last couple of weeks, the last few restaurants, so I would say Jeff, it is really too soon to talk about results.

Okay.

In terms of the competitive environment and the breakfast offerings, we are looking at breakfast products and have items in test and planned for the future.

Very good. Thanks.

You're welcome.

Our next question come Toju Ukonabarua. You may ask your question and please state your company name.

Hi, this is Toju from Merrill Lynch. Just a couple of questions. Do you think you can provide us with a little more color on your unit forecast construction delays that you experienced?

Sure. We really haven't reduced our overall new unit development. Really what has occurred is because of the very tough environment, development environment, in terms of escalating costs, it has taken a bit longer in our development process, especially with regard to the permitting of our sites, so it is really the plan is more back end loaded with a few sites moved into fiscal 2007.

Okay, and which markets, you're using one market that you experienced some delays or -- ?

No, it's really across the board, not in any specific market.

Okay. Would you be able to break out the unit openings per Company franchise for the different concepts?

We haven't really reported out the breakout or publicly reported the breakout. We combine both franchise and Company development in our guidance.

Okay, and did you repurchase, I wasn't sure, repurchase shares during the quarter?

We did not.

Okay, and a couple quick questions on Qdoba. I know in some recent investor presentations, you provided a 22% EBITDA margin for mature stores. Where is the EBITDA margins today, and could you also provide us with the Company level operating profit margins and what this may include or exclude?

Let me talk about the update in the EBITDA margins. We update those once a year based upon information that's contained in our Form 10-K. We would not expect to update that information until sometime in the January time frame of '07.

Okay. For a newer store, where approximately are the EBITDA margins versus a percent for the mature stores?

What we said is that they take about three years to mature for a Qdoba location. Other than that, we have not talked about where the EBITDA margins are on a store opening or before they get into maturity.

Okay. For mature store, what would restaurant operating profit margins be?

Again, that hasn't been disclosed. What we did disclose, though, was that 22% that you referred to in our -- in one of our presentations or actually a couple of our presentations that we've made to analysts during the first two quarters of this year.

Okay. And would you be able to say what percent of sales your rent typically is for Qdoba?

We have not.

Okay, and one more question on refranchising. What are your long-term plans for refranchising, and how many stores do you feel you can refranchise in a given year without impacting the cash sales price?

Well, I would just point you to look at the history. We've been increasing our -- we've been increasing the number of restaurants that we are refranchising for each of the last few years, and we have not seen a decline in the sales price. The sales price is highly driven by the cash flows and the profitability of the restaurants that we are selling. I would -- and while we are forecasting current year refranchise locations to 55 to 60 which is comparable to what last year numbers were, we are forecasting an increase in the average gain, so I do not see a decline in the demand or in the potential sales price of our restaurants to franchisees.

And you forecast long-term approximately 55 to 60 a year?

We're doing 55 to 60 this year. We've not talked about anything beyond that other than to say that we expect to be about 35% franchised by the end of fiscal '08.

Okay. Sorry, one more question on margins. That was a big boost to your EPS. Can you remind us about what type of contracts you have for beef at the moment?

We contract beef when we feel the market is appropriate for us to contract beef, but we don't usually describe the nature of our contracts or how much of any particular commodity we are contracted for at any particular time.

Okay. Thank you, guys.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS]

Okay. Thank you. Thank you for joining us this morning. We look forward to speaking with you all again in August regarding our third quarter results.

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