Jack in the Box Inc (JACK) 2006 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] Good day everyone, and welcome to the Jack in the Box Inc. Fourth Quarter and Fiscal Year 2006 earnings conference call. Today's conference is being recorded. A replay will be available on the Jack in the Box website starting today for those who cannot attend live events. [OPERATOR INSTRUCTIONS]. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Jerry Rebel, Executive Vice President and Chief Financial Officer of Jack in the Box Inc. Sir, please go ahead.

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 fourth quarter and fiscal year, 2006. We will also discuss guidance for fiscal 2007, as well as some long-term goals for the Company. All of this information was provided in this morning's news release. Following today's presentation we will take questions from the financial community.

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 Save Harbor Statement in today's news release outlines some of these risks and uncertainty, 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 10K and other public documents filed with the SEC. And now, I'd like to turn the call over the Linda Lang. Linda?

Thank you, Jerry, and good morning. Jack in the Box today reported record earnings for both the fourth quarter as well as fiscal year 2006. It was an especially strong year for us in several areas due to our continued success in executing the elements of our strategic plan.

We concluded fiscal 2006 with the fourth quarter increase in same-store sales of 5.9% at Company-operated Jack in the Box restaurants. This contributed to our highest full-year increase in same-store sales in 7 years. The sales growth, including an increase in both average check and transactions, confirms that we're on track with our strategic initiative to reinvent the Jack in the Box brand. When we announced this ambitious initiative three years ago, we saw an opportunity to create a guest experience that didn't exist in the quick-serve segment of the restaurant industry. Our vision was to create a dining destination, a place that still offered drive-thru convenience, but with enhanced interior amenities that invited guests to relax and enjoy their meal in a comfortable environment.

In the past three years, we've made considerable progress toward achieving this vision. Our menu, for example, now features even more innovative, high quality products like our Ciabatta burgers and sandwiches. Entree salads, appetizers ranging from natural-cut fries and mozzarella cheese sticks to a fresh fruit cup, and several new flavors of shakes made with real ice cream.

We're also raising the bar on customer service and measuring our restaurants' performance through a program called Voice of the Customer, which invites guests to evaluate their dining experience in areas ranging from product freshness to restaurant cleanliness. Our goal is to deliver great service for every guest, every time. This requires service-oriented restaurant employees who are engaged in their jobs and aligned with the Company's service vision. Over the past year at meetings across our system, we shared this vision with the management teams from every restaurant and regional office. We developed strategies and provided tools to help those individuals who are most responsible for making our vision a reality. We're also helping our restaurants recruit and retain a more motivated work force by launching several internal service initiatives, such as access to affordable healthcare and improved training programs. In addition to positively influencing customer service, these initiatives can also reduce turn over and training costs in the process.

And finally, through most of 2006, we were testing a new reimage program that gives our restaurants a new look and feel, especially on the inside where we've completely redesigned the dining rooms and common areas. We're pleased with the sales trends and positive guest feedback at these restaurants, and plan to continue rolling out the reimage program. Our goal is to reimage our entire system in four to five years. Along with our progress and reinventing the Jack in the Box brand, we're making strides on the other key initiatives of our long-term strategic plan, which are to profitably grow the Company and to expand franchising.

Between our Jack in the Box and Qdoba brands, we now have a presence in 43 states. Last year, we added more than 100 Jack in the Box and Qdoba restaurants, and are projecting an additional 120 to 135 new locations in fiscal 2007. We also continue to add our proprietary brand of convenience store call Quick Stuff, which are constructed adjacent to a full-size Jack in the Box restaurant and include a major brands fuel station. We opened 11 Quick Stuff sites in 2006.

Looking ahead, we plan to continue adding new Company and franchise Jack in the Box restaurants and to expand the brand into new continuous markets. Our goal is to increase the number of new franchise-developed restaurants to a level that approximates the annual number of new Company-developed restaurant. We'll also expand our Qdoba brands, which like Jake in the Box, has considerable room to grow. Our long-term goal is to add 75 to 100 new Qdoba restaurants a year.

Our third strategic initiative is to increase franchising activities, including new unit development for both restaurant concepts, as well as continued sales of Company-operated Jack in the Box restaurants. Last year, we refranchised 82 Jack in the Box restaurants, including all of our Company locations in Hawaii. Since announcing franchising as a focus of our strategic plan, we have increased franchise ownership of the Jack in the Box system to more than 29%. Our long-term goals are to grow the percentage of franchise ownership by approximately 5% a year, and to move towards a range of franchise ownership more closely aligned with that of the QSR industry. Franchising is a proven economic model and a growth vehicle in an industry that is predominantly franchised. It adds flexibility to our growth strategy and provides an opportunity for us to penetrate new markets with local operators, while also mitigating increases in operating costs and investment risks. Our franchising strategy is already contributing to higher margins, returns, and cash flows, which we expect to continue.

With the Thanksgiving holiday nearly upon us, it seems appropriate to thank the people most responsible for the record results that we announce this morning; our dedicated employees and franchisees, who have worked extremely hard in the many areas to build our brands. I'd like to thank our many stakeholders for their support, including our shareholders, financing partners, and suppliers. We emphasize a team environment at Jack in the Box, and it truly takes a team effort with everyone focused on achieving our common goal to continue delivering the kind of results that we announced today. Again to all of you, thank you. And now, I'd like to turn the call back over to Jerry to discuss our fourth quarter and fiscal year performance in more detail, as well as discuss earnings guidance for the first quarter and fiscal 2007. Jerry?

Thank you, Linda. And again, good morning, everyone. As discussed in our news release this morning, we adopted FIN 47 as required, which resulted in a cumulative effect of accounting change of $0.03 per diluted share. My following comments, however, refer to earnings from operations before the impact of FIN 47.

In the fourth quarter, earnings before the cumulative effect of the accounting change increased to $0.95 per diluted share, compared with $0.59 last year. For the full year, earnings before the cumulative effect of the accounting change increased to $3.04 per diluted share, and this compares with $2.48 in fiscal 2005. As a reminder, our 2006 results include the effect of expensing stock options, whereas fiscal 2005 did not. Fourth quarter earnings exceeded the high end of our range previously forecast, an analysts First Call consensus estimate of $0.66. The primary reasons for the improvement was as follows in approximate amounts:

$0.25 is attributed to the sale of 25 Jack in the Box restaurants in Hawaii to a franchise operator. $0.05 of the improvement was due to operations, with same-store sales of Jack in the Box Company restaurants increasing 5.9% in the fourth quarter, with an increase in both average check and transactions. Restaurant operating margin was consistent with guidance, and was up 50 basis points from last year to 17.8% of sales. Driving the improvement in restaurant operating margin were higher sales in 2006, along with generally lower food costs. Lower worker's compensation insurance and profit improvement program initiatives were partially offset by higher costs for tomatoes and utilities. Beef costs for the quarter decreased approximately 6% in the prior year. $0.02 of the improvement was due to lower-than-expected state income tax rate, and we recorded a $0.3 per share impairment charge for six restaurants in our Southeast markets.

Looking ahead to fiscal 2007, we're forecasting earnings of $0.78 to $0.81 per diluted share for first quarter, and $3.02 to $3.07 for the full year. Also for the full year, we're forecasting same-store sales increases of 3% to 4% at Jack in the Box Company restaurants, and 3% to 5% at Qdoba system restaurants. As a reminder, earnings guidance for the first quarter and fiscal year 2007 do not reflect the effect of the tender offer we announced this morning due to uncertainty as the number of shares that will be tendered, nor does it reflect the effect of the new credit facility. However, we believe that closing the new credit facility and the effect of a successfully completed tender offer will be accretive to earnings. I'm sure that you noticed our news release did not include the same level of detailed guidance for the quarter as we've included in the past. We have decided, however, to provide management's longer term goals for the Company rather than focus on quarter-to-quarter projections, which we believe is more useful for our shareholders. The level of detail for annual guidance is essentially unchanged. And now, I'd like to turn the call back over to Linda. Linda?

Thanks, Jerry. We also announced this morning that Jack in the Box helped commence a Dutch Auction tender offer. If you have questions on this tender offer, please call the information agent identified in this morning's news release. We will be unable to answer any questions on this call pertaining to the tender offer. Again, contact information for the information agent is included in this morning's news release on the tender offer. And now, we'll be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from Jeff Omohundro with Wachovia.

Hi, it's actually Jason Belcher for Jeff. My first question relates to store openings. I was wondering if you could give us a breakout for Company versus franchise openings both for the quarter and for your '07 guidance?

For the year on the 36 Jack in the Box locations, seven were franchised for the full year. For the quarter out of the restaurants opened, three were franchise locations for Jack in the Box. For Qdoba, out of the 71 for the year, 13 were Company, and for the quarter, four were Company.

Thank you. And could you give us comparable numbers for the '07 guidance.

No, we don't provide that in the guidance. We generally just talk about that after they are already opened.

Okay. And secondly, I was wondering if you could share with us some of the other markets where you're reimaging the Jack in the Box units in addition to Waco in Seattle.

We have several markets where we are doing clusters of restaurants within the market, and then we have a couple of additional smaller markets we planned for fiscal '07. But at this point, we are not disclosing yet what those markets are.

Okay. Any other detail you can provide in terms of the benefits that you're seeing in those markets? Waco, Seattle, or the others?

Right. We've been working on the reimage program now for a couple of years and really testing a variety of designs. And this design that we have in test right now up in Waco, or down in Waco, up in Seattle, we're really happy with the design. It's called the Connected design. That's the name of the design because it really does a good job of leveraging and connecting the Jack campaign, the popular Jack campaign, to our restaurant facility and restaurant image. And what we're seeing is, we're really seeing that we're getting an overall lift or haIo on our brand image across a lot of attributes because of the redesign. So the way we view our reimage program is really both an offensive and defensive strategy. So we're getting sales lift from it, from an offensive standpoint. But I think more importantly is that it really enables us to more effectively compete in the marketplace in the long run by this very positive halo that we're seeing on the brand image.

Okay, thanks very much.

You're welcome.

Thank you. Our next question comes from Larry Miller of RBC Markets.

Hi, guys. Congratulations. Just to follow-up on that, I think a couple of years ago, you slowed the unit growth or unit development down as you were trying to figure out the image. I'm just curious where you think you are in that process. I think the initial strategy was that at some point, you would reaccelerate that unit development. Has that thought process changed?

No, that thought process hasn't changed. Really, our development -- where we 'e accelerating the development, Larry, is with the franchisees. So as we refranchise existing Jack in the Box restaurants, Company restaurants, in many cases, we're also selling a development agreement. So we're building a base of franchise developers, and we would expect that franchise development would accelerate in the future.

Okay. And Company ownership -- Company development would remain around the same then?

Exactly.

Great. That's actually good clarity. Then if I could ask two more quick questions. The minimum wage increases that have gone through, you may be a little bit unduly exposed to certain markets that are affected, California is one, and Arizona another. How do you think about protecting margins?

Larry, this is Jerry. We've modeled that all into our projections for this year. We're very careful to not be too aggressive with respect to price increases, but if you look at the minimum wage increases that are going on in our markets today, we believe that we need to raise prices by something less than 25 basis points to cover the cost of that. So it's not a significant price increase, and it falls within the range of what we would normally see with respect to price increases anyway.

Great, thanks. And then, finally, I don't go how much you can discuss, I'm going to ask anyway. Not about the Dutch, but I was more curious about the credit facility. Is the intention to replace the existing term loan with a new term loan, and do you have any sense of what the rate might be?

I can answer the first part of that question, that is disclosed in the tender and in the press releases. We do intend to retire the other facility with that. With respect to the interest rate, I can't comment on that right now.

Okay. Thank you, guys. Congratulations.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Joe Buckley.

Thank you. I apologize. I missed in some of your opening comments. You may have covered this. When I was plugged in, you were talking about the healthcare benefits that you provide to employees. Did you talk about turnover, and what influence you think that may have had on turnover since you instituted that?

I did not specifically talk about turnover, Joe. But it has had a very positive effect on our turnover among those employees who have signed up for the healthcare program. So we're seeing benefits on the turnover rate.

Is there a pretty good sign-up rate among the workers?

It was higher than we expected. We don't disclose the participation rate, but it's based on the understanding of our healthcare provider. The participation rate is higher than what you would expect.

Okay. Then a couple other questions. On the reimages, when you've done a market, does the sales mix or date part or dine-in or drive-thru mix, anything of that sort change after the remodel?

We haven't disclosed a lot of specifics on it, Joe, but I can tell you it's -- the objective of the reimage is to really increase the dine-in incidents because there are -- generally, dine-in is a higher averaged check because we get add on of beverages and side items, and we are seeing an increase in our dine-in business at those locations that have been reimaged.

Okay. That's encouraging. How fast would you expect the franchise expansion to pick up? I think, Jerry, you mentioned that 7 of the 36 openings in '06 were franchise stores. Could that number pick up considerably in '07, or is this more of a multi-year phase-in.

It's really multi-year phase-in. As we sell and bring in new developers into the system, it's going to take awhile for them to build that pipeline.

Okay. And then one last one. I know you aren't able to answer questions on the Dutch Auction specifically, but can you talk a little bit about just the rationale? Are you trying to get ahead of the curve, particularly as you extend the refranchising policy into the long-term? Just curious on the motivation and thought process behind it at this point.

Joe, this is Jerry. I'm not going to be able to answer that. What I would do is I would refer you to the tender offer document which will be filed with the SEC later today. There is a section there with respect to purpose. I would direct you to that.

Okay. That's it. Thank you.

You're welcome. Thanks, Joe.

[OPERATOR INSTRUCTIONS]. We have no further questions. I would like to hand this back to our speakers for any closing remarks.

All right. Thank you for joining us this morning. We look forward to speaking with you next February regarding our first quarter results. Have a wonderful Thanksgiving, everyone. Thanks.

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