Jack in the Box Inc (JACK) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to the Jack in the Box Incorporated third quarter fiscal 2006 earnings conference call. Today's call is being recorded. [OPERATOR INSTRUCTIONS] At this time, for opening remarks, and introductions, I would 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 third quarter of fiscal 2006 and discuss fourth 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. Reconciliations to GAAP reported results are also included in this mornings 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. The 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 I'd like to turn the call over to Linda Lang. Linda?

Thank you, Jerry. And good morning. Jack in the Box reported another strong quarter of operating results this morning with net earnings for the third quarter up about 22% over last year on a comparable basis. Same-store sales and restaurant operating margins were also up for the quarter. Jerry will provide additional details on these and other financial highlights in his remarks, so I'd like to speak to some of the strategic initiatives that continue to fuel our performance.

The first is profitable growth. With three brands in our portfolio, more than 2,300 system-wide units and a presence in 43 states, we're well on our way of achieving our long term strategic goal of becoming a national restaurant company. Still, there is tremendous upside potential for continued expansion in both existing and new markets. Although we expect to add approximately 115 new units to our system this year, Jack in the Box has a presence in only 17 states and Qdoba's 300 units are spread along 40 states. Qdoba is already a franchise business model with approximately 78% of the system franchise operated. Although we will continue to add some company restaurants, Qdoba will continue to grow predominantly through franchising. Most Jack in the Box restaurants, on the other hand, have been operated by the Company primarily through the sale of Company restaurants to existing franchisees, we've increased franchising to more than 27% of our system.

We've also began entering sale and development agreements with new operators. This morning, we announced such an agreement with [Audio Difficulties] an experienced operator in Hawaii. By increasing our franchising activities we can generate higher returns and margins while mitigating business costs and investment risks.

Our second strategic initiative is reinventing the Jack in the Box brand through menu innovations, upgraded service executions, and an enhanced restaurant environment. Our menu today features a variety of high quality products that appeal to a broad range of consumers, including women and men older than the typical 18 to 34 year old fast food customer. Along with our burgers and chicken sandwiches, we offer pita's, a fresh fruit appetizer, and a line of entree salads including a new Acapulco chicken salad added in the third quarter. Real ice cream shakes like our new Vanilla Malted Crunch Shake and desert menus that also include our recently introduced chocolate chip cookie cheesecake made with Nestle Toll House semisweet morsels. Our innovation center has been a tremendous asset to our product development efforts and I'm pleased to say that our pipeline is full of products in various stages of development or test.

On upgrading service at Jack in the Box restaurants we're focusing our attention on both sides of the service counter. We've launched several internal service programs to attract higher quality applicants for crew member positions, improved employee productivity, maximized retention, and reduced new employee training costs. We've also expanded payment options to include credit and debit cards and a reloadable Jack Cash store value card.

The third pillar of brand reinvention addresses the restaurant environment. Earlier this year, we began market testing a comprehensive reimaging program that includes a complete redesign of the dining room and common areas. Interior finishes include ceramic tile floors, a mix of seating styles, decorative pendant lighting, and graphics and wall collages. Other elements of the program include music, uniforms, menu boards, and packaging along with new paint schemes, landscaping, and other exterior enhancements. In the third quarter we began reimaging Jack in the Box restaurants in Seattle with this new program. Including our Seattle and Waco markets along with individual restaurants in other markets, we expect to have reimaged approximately 150 locations by fiscal year end. Preliminary guest feedback has been very positive.

Clearly, the QSR world is changing. Driven by increased consumer expectations and heightened competition from other restaurant segments. Jack in the Box has a long successful history of reinventing itself to remain relative to the changing expectations of consumers, leveraging the resources at our innovation center and the talents of our team of dedicated employees, we want to stay at the forefront of change. And now I'd like to turn the call back over to Jerry to discuss our third quarter performance in more detail as well as guidance for the fourth quarter and full year. Jerry?

Thank you, Linda and again, good morning. As we reported, net earnings in the third quarter increased to $0.77 per diluted share versus $0.66 last year. Year-to-date earnings increased to $2.09 per diluted share versus $1.89 last year. As a reminder, our 2006 results include the effect of expensing stock options whereas fiscal 2005 results did not. Earnings per share for the quarter exceeded the mid point of our guidance and the First Call consensus estimate by $0.11. Approximately $0.08 of this improvement versus guidance was due primarily to higher restaurant operating margin resulting from lower cost related to commodities and Worker's Compensation insurance, along with profit improvement program initiatives and lower SG&A expense. The remaining $0.03 of the improvement was due to a lower tax rate resulting from tax planning initiatives and tax credits.

Earnings per share increased 22% in the third quarter of fiscal 2006 after adjusting for the pro forma effect of stock option expense in the third quarter 2005. Year-to-date earnings per share are up more than 17%, again after adjusting for the pro forma effect of stock option expense last year. Same-store sales at Jack in the Box Company restaurants increased 2.9% in the quarter with an increase in average check slightly offset by a decrease in transactions. Year-to-date, same-store sales were up 4.3% with an increase in both average check and transactions. For the quarter, system same-store sales at Qdoba Mexican Grill increased 6% on top of the 10.3% increase in 2005 and year-to-date, system same-store sales at Qdoba are up 6.5% on top of a 12.3% increase last year. Qdoba continues to be accretive to earnings.

Restaurant operating margin was significantly higher for the quarter at 18.7% of sales, this is a 60 basis point improvement versus the mid point of our guidance and 150 basis points higher than last year. The increase versus last year is due primarily to lower commodity cost, principally beef, cheese, and pork. Profit improvement program initiatives partially offset by higher utility costs. Beef costs were down approximately 11% versus last year.

Moving on to the remainder of fiscal 2006, we are increasing our earnings guidance for the full year to approximately $2.72 to $2.74 per diluted share including the effect of expensing stock options. This forecast does not include the effect of the pending sale of our Hawaii restaurants. We expect this transaction to be completed near the end of the fourth quarter and to positively impact earnings by approximately $0.20 to $0.24 per diluted share. We also expect this transaction will be neutral to earnings in subsequent years.

Finally, our full year guidance for the same-store sales at Jack in the Box Company restaurants at 4 to 4.5% increase. And now I'd like to turn the call back over to Linda. Linda?

All right thank you, Jerry. Now, we'll open it up for your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Joe Buckley of Bear Stearns.

Thank you. Had a couple of questions. First, on the fourth quarter guidance, sales, you're obviously looking for sales to pick up a little bit in terms of the rate of same-store sales increase from the third quarter. Could you talk about what gives you that confidence and maybe in that context talk about the heat wave in California whether you've seen any impact on sales from that?

Sure. Hi, Joe, how are you?

Good, how are you doing?

Good. The guidance for fourth quarter is 3.5 to 4.5 so it is a little bit higher than our third quarter actual at 2.9 but we're actually on a two year cume coming in about the same so we're rolling over a little bit softer numbers in fourth quarter. Last year we had 1.5% increase so that's some of it, and the rest really is our belief in the strong calendar, promotional calendar that we have for the rest of the fiscal year. So that's why we feel comfortable with our guidance for the fourth quarter. Regarding the heat wave, I don't believe we've seen a big impact.

Okay. And then Jerry, a question, or Linda, a question on margins. Is there a reason the fourth quarter margins sequentially would be much worse than the third? Anything changing on the food cost side, for example, that make you a little bit more cautious?

No, Joe. Food costs will be about the same as they were in the third quarter, so we're not seeing anything there. Typically though, our fourth quarter margin is a little lower than our third quarter margin, and that has something to do with the mix of products that we have in our pipeline for this quarter as well as beverage sales tend to slow down a little bit in the fourth quarter, for our fourth quarter anyway, as you have back-to-school activities going on and there's just less traveling out there. But it's still in the neighborhood of 50 to 70 basis points up over the prior year for our guidance. So it's still a pretty healthy restaurant operating margin for the quarter.

Okay, thank you.

Thank you. Our next question comes from Jeff Omohundro of Wachovia.

Hi, this is actually Jason Belcher for Jeff. Just a couple of questions. First, what was the break out for company versus franchise openings at Jack in the Box in the quarter? And also I was wondering where we stand on the reimaging initiatives in terms of the 150 unit target for '06, and if maybe you could give us some examples of any other markets that you're either currently looking at or plan to be reimaging in soon.

I will talk to the number and then Linda can talk to the reimage. We opened -- out of the ten restaurants, we opened seven company and three franchise.

Okay, and on the reimage, we got approximately 150 locations and we're on track for that, so we've completed Waco, the Waco market which was 17 locations and we're well on our way to completing all of Seattle market which is about 90 plus locations. We should be complete with all of the Seattle by the end of our fiscal year, and we have an additional 30 or so, 20 to 40 locations that are kind of scattered throughout our system. So we're on track.

Okay, thanks very much.

Yes. You're welcome.

Thank you. Our next question comes from Rachel Rothman of Merrill Lynch.

Hi. This is Tisha in for Rachel. A couple questions for you. First is can you tell us what is leading to the reduced 2006 unit development forecast at Jack in the Box and Qdoba?

Sure. I think we've come a little bit short in the last couple of quarters and for the same reasons that we've answered before is essentially very difficult development environment out there. A lot of it has to do with delays and the permitting process, delays by our developers and especially in the case of Qdoba where most of our growth is with franchisees who don't have a lot of control over the development process and the developers timeline. That's where we're running into some delays.

So at Qdoba, it's mostly a cut down on the franchise end?

Right. Because that is the vast majority of the growth.

Okay. And also a question on your cash. What led to the large increase in cash in this last quarter, and is the extra cash balance what has contributed to the decline in your net interest expense or your interest income? Or is there something else that's lowering your interest expense number?

Well, let me answer the second part of that question first. The interest income is due primarily to higher rates that we're receiving on the cash invested and then certainly, the higher cash invested is contributing to that rather substantially. In terms of the cash position, I think most of that is due to a pretty healthy year of operations so far. We're generating good positive cash flow from operations. We're generating good free cash flow and we continue to generate cash in the sale of our company operated restaurants to franchisees, so it's a matter of executing on the strategic plan and delivering pretty positive results.

Okay. And following up on that, given the large cash balance, why haven't you been more aggressive in your share repurchases?

Well, we have -- do have approximately approximately $100 million remaining with authorizations from our Board and we certainly have that room under our credit facility. As you may know, we are -- it's not a good idea to buy during a closed window and our window has been closed for most of the third quarter. What I'll tell you is while we don't tip our hand to when we're going to be in the market, our current guidance assumes that there is, that the shares outstanding would include no additional share repurchases for the fourth quarter.

Okay. And then could you tell me how much was the Worker's Compensation benefit on operating margins during the quarter on a percentage basis and how much of this was non-recurring or what should we expect to carry forward?

First of all without breaking the details of the Worker's Comp which we don't usually break that out and we don't break out the details of our other restaurant operating costs except for food costs, there's really two things that are driving the Worker's Comp reduction. One is internal, one is external. On the internal side, a couple years ago, we put into place a pretty robust safety program including a very comprehensive return to work program. So that's what's going on out in the restaurants. Additionally, within our insurance group here, we've put forth a tremendous effort to close out our Worker's Comp claims as quickly as we possibly can. Obviously, the quicker that you close those out, the less chance they have to become big claims, so that's what we're doing on the internal side.

Externally, with our California costs, Governor Schwarzenegger put into place a couple years ago some Worker 's Comp reforms that while I won't say balance the playing field they certainly better balance the playing field from what it was between employers and claimants and all of those has helped drive down our Worker's Comp insurance costs. So I don't view any of these items as being one-time. I would expect that our Worker's Comp assuming the same environment would continue to trend at today's rates.

Okay. So one final question. What do you see in terms of trends in beef prices? Do you see a continuing benefit like in this recent quarter or are beef prices kind of trending differently?

Well, we saw an 11% decline off of an 18% increase over the prior year, and that 18% increase was on top of a 4% increase in the prior year, so while we're seeing beef costs decline, they're certainly not at historical lows by any means. For the fourth quarter, we're seeing beef prices to basically remain where they are which would equate to about a 6 to 7% decline from fourth quarter last year.

Okay. All right thank you. Thanks.

Thank you.

Our next question comes from Paul Westra of Cowen & Co.

Hi, there, it's actually Collin Gahin for Paul. Just a quick question on the remodels, as you gain more experience any update on the budgeting for them per store?

Yes. We have as I said completed close to 100 so far, and we had guided to around 100,000 per location. It looks like based on what we're experiencing that it's going to be higher than that. On average probably in the range of 100 to 150,000; however we are continuing to value engineer, we are continuing to do consumer research to make sure that the design is what will be the final design, so it's still a work in progress, but it's going to be higher than the 100,000 that we had originally planned.

And is that varying a lot by market as you look at Seattle versus maybe some of the Texas markets?

We're seeing some differences, yes, by market but again we haven't gotten our final design. We haven't gotten our final volume discounts on production elements, design elements and so fourth, so it's still early to come up with an exact number.

Okay, thanks a lot, Linda.

Sure.

Thank you. Our next question comes from Chris O'Cull of SunTrust.

Yes, good morning. Linda, could you tell us what's going to be the focus of the advertising spots in the fourth quarter? Is it going to be the Outlaw burger, breakfast, this value combo? All of the above?

Well, all of the above.

Okay.

We'll continue with the big deal combo. That's a relatively short promotion, and then we do generally rotations of media spots against our primary message which will be the Outlaw burger and chicken sandwich as well as our I believe our shake program and we've got our biscuit rollout as well. So we'll do a rotation of spots.

Okay. So are you seeing, right now are you seeing indication of the consumers trading to a lower product, a lower price product or is there any shift in the day part mix right now?

Well, we don't disclose a lot about the details on our day part mix or even our bottom tier versus top tier, but right now, we're on a value message, so you would generally see some shift depending on what your primary message is on air.

Right. One other question too. It appears the price that's being paid for the Company stores when they're being sold to franchisees is on the rise. Why not increase the available supply of restaurants?

Well, Chris, this is Jerry. The average price has been increasing. What that would tell you is that the cash flows and the PSA's on those stores that we're selling are somewhat higher than what we've traditionally sold. The Hawaii PSA sales are some of our higher volume units in our change day. I would suggest to you that in terms of the rate of increase that the Hawaii is such a rate in increase. We're going to do about 57 restaurants this year plus the Hawaii on top of that so we had an opportunity to attract a very experienced QSR prior franchisee with other brands, local to Hawaii and as you can imagine, managing a market such as Hawaii is a bit more expensive for a chain to do than it would be for a local operator, so it was an opportunity that we took advantage of and I would suspect we would continue to do so.

Jerry, do you expect fiscal '07 you will be able to refranchise maybe 80 to 90 restaurants?

We haven't yet talked about that, Chris. We'll be out probably in November with our guidance for next year.

Okay. One last question about the remodels. How do you -- you've tested or you're testing I guess in Waco and you're opening or you're remodeling restaurants in Seattle. Do you have a sense for how your select markets or sites to remodel going forward?

Yes. We are actually testing several approaches. One is going into full markets like we've done with Waco and Seattle. The other is we've identified kind of a ranking of our restaurants in terms of the need for reimage, and then we've also looked at clusters of restaurants. So we're trying the different approaches and we'll be analyzing the results of those particular approaches in the first quarter of next fiscal year and then we'll make the decision on the best approach to rollout a reimage program.

Okay. Now, I know you were testing a branding spot in the Waco market. Did you find that that was effective way to increase awareness about the new image?

We really haven't, Chris, disclosed any of the details at all on the results, either from Waco or Seattle.

Okay. Thanks, guys.

Sure, thank you.

Thank you. [OPERATOR INSTRUCTIONS] And our next question comes from Matthew Cullen of Thompson, Siegel, Walmsley.

Good morning, thanks for taking my question. Could you just talk a little bit more about the sort of higher reimaging costs? I remember with JBX kind of hearing the term sort of success based capital spending. Just want to make sure that you guys are prepared to sort of update us probably with the end of fiscal year '06 results with the fact that this increased spending is causing a return -- is driving a return. Thanks.

Right. I think that would be a requirement for going forward beyond where we are -- where we will be at the end of the fiscal year, so we know what our hurdle rates are, what kind of lift we have to get in terms of top line and we'll kind of flow through we need to get in terms of profit. So we understand with an increase in the cost that we are going to have to also generate the returns and get the kind of lift in sales and profit. So we're working on that and we will provide you with more information as we're able to analyze. Right now, Seattle is still, there's restaurants closed and there are restaurants that are under construction. Waco was just completed about ten weeks ago, I believe, so so far, things are looking good, but we'll give you more, we'll provide more color and more detail in November. Probably not the final results because we will just have completed Seattle at the end of September.

Okay. And then just a final question on the fourth quarter comp guidance. Does that include any increase in transactions or is that simply sort of, excuse me. Is that simply a ticket based comp increase or is there some sort of built in transaction rebound as well? Thanks.

Yes, this is Jerry. We really don't provide that break down on the guidance. We have recently started the break down the fact that the transactions are either positive or negative after the quarter is over, so we'll provide that same color at the end of the fourth quarter.

Let me ask the question another way which is, are you comfortable with there being a rebound in transactions in the fourth quarter?

I'm going to have to stick with that last answer.

Fair enough. Thank you.

Thank you.

Thank you. And at this time, I'm showing no further questions. So I'll turn the conference back over to you.

Great. Thank you, everyone, for joining us this morning and we will be speaking to you in November regarding our fourth quarter and full year results. All right thank you. Goodbye.

This concludes today's conference. We thank you for your participation.