Jack in the Box Inc (JACK) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Incorporated third quarter and fiscal year 2007 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 do not attend the live event. (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 morning's session, we will review the company's operating results for the third quarter of our fiscal 2007. We'll also discuss guidance for the fourth quarter and full fiscal year. 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 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 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 to turn the call over to Linda Lang. Linda?

Thank you, Jerry. Good morning, and thank you for joining us. We have a lot of news to share with you today from our third quarter performance and updated guidance to our expansion plans and proposed stock split. I'll begin with operations. The company achieved another impressive quarter of earnings and experienced strong sales growth at both our Jack in the Box and Qdoba brands. At Jack in the Box, our innovative menu continues to differentiate our brand from other QSR chains. We're utilizing high quality ingredients and adding new products with bold flavors. Earlier this year, we added sirloin steak to our menu. In the third quarter, Jack in the Box became the first major quick serve chain to offer a 100% sirloin burger. Sirloin can serve as a broad platform for us to continue introducing new products. Next week, for example, we're adding a sirloin steak and egg burrito to our breakfast menu. It will be our fourth menu item featuring sirloin. Along with our distinctive menu, we offer guests the opportunity to customize their meals. For example, when our guests order a 100% sirloin burger, they can build it with a choice of cheeses, onions and bacon. Or when they buy one of our new barbecue ranch chicken salads or any of our other entree salads, we'll give them a choice of grilled or crispy chicken strips and serve the toppings and dressings on the side. Menu innovation is an important part of our strategic initiative to reinvent the Jack in the Box brand. Another key element of brand reinvention is our comprehensive restaurant reimaging program, which is giving our restaurants a new look and feel, especially on the inside, where we've completely redesigned the dining rooms and common areas. We're on pace to reimage 100 to 200 restaurants this year, and our goal is to convert the entire Jack in the Box system, including franchise locations, in four to five years. In markets that have been reimaged, we're continuing to see positive sales trends and guest satisfaction ratings that are higher than before the restaurants were reimaged. The results are consistent with our return on investment targets of 20%.

We're also making excellent progress on a second key strategic initiative, growing our business. Construction is currently underway on company-operated Jack in the Box restaurants in two new contiguous markets: Denver, Colorado; and Corpus Christi, Texas. The first restaurants in these new markets are scheduled to open in the next few months. Our franchisees are also entering several new contiguous markets in the coming year: Albuquerque, New Mexico; and Midland, Odessa, and Abilene/San Angelo, Texas. Along with developing new restaurants, our franchise operators are continuing to acquire restaurants from the company. We refranchised 22 restaurants in the third quarter, including a transaction involving 14 locations in Houston.

Moving on to the proposed stock split, we're underway with our plans to implement a two for one stock split in the form of a special stock dividend. Over the past few years, our company's strong performance has contributed to a significant increase in the price of Jack in the Box common stock and delivered great returns to our stockholders. We remain optimistic in the company's continued growth potential and see the stock split as an opportunity to price the stock in a more attractive range for investors. By increasing the number of shares available to trade, we also believe this split can increase the stock's liquidity. Jack in the Box is poised to achieve another strong year of earnings in fiscal 2007. Our strong performance over the past several years is directly related to our ability to successfully execute our strategic plans. We're growing our business, expanding our Jack in the Box and Qdoba brands and surpassing our earnings goals. We're evolving our business model to improve our margins, returns, and cash flows while reducing business risks and costs associated with a system that's predominantly company owned and operated, and we're reinventing the Jack in the Box brand and delivering a better designing experience to our guests. To add some additional perspective on our third quarter results and to update our guidance for the remainder of the year, I'd like to turn the call back over to Jerry Rebel. Jerry?

Thank you, Linda. As Linda mentioned, Jack in the Box experienced another strong quarter with earnings and same-store sales significantly higher than last year. Third quarter earnings increased to $1.08 per diluted share versus $0.77 a year ago and exceeded the high end of the range forecast by the company and analyst First Call consensus by $0.19. $0.08 of that improvement was from higher sales and franchise revenues, along with expense controls, partially offset by higher food costs, approximately $0.07 from an insurance recovery and $0.04 was due from higher gains from the planned refranchising of 22 Jack in the Box restaurants, which had higher than average cash flows. 14 of these refranchised restaurants were in Houston, which prior to the sale was exclusively a company-operated market. Through the first three quarters of fiscal 2007, earnings were $2.90 per diluted share versus $2.09 earned during the same period last year. Restaurant operating margin in the quarter was 50 basis points below our internal forecast and 130 basis points below last year, primarily due to higher commodity costs. These costs were up approximately 9% versus prior year, driven by tight supply and high feed costs. We expect beef costs will moderate somewhat in the fourth quarter, but remain approximately 4 to 5% higher than last year's fourth quarter. Egg and cheese costs were also up substantially for the quarter, largely driven by strong global demand for dairy products. We expect food costs to generally track higher than 2006 for the balance of the calendar year, and as mentioned earlier, with some moderation in beef costs versus the third quarter.

These expectations are included in our earnings guidance for the fourth quarter, which is forecast at $0.72 to $0.76 per diluted share compared with last year's earnings of $0.95 per diluted share. As a reminder, the fourth quarter last year included a benefit of $0.25 per a share from the sale of our company-operated restaurants in Hawaii. We expect another strong quarter of same-store sales growth will help mitigate the anticipated impact of higher commodity costs. Same-store sales at Jack in the Box company-operated restaurants are forecast to increase 4 to 4.5% on top of the 5.9% increase last year. Our business remains strong and our two restaurant brands continue to perform well. For the year, same-store sales at Jack in the Box company restaurants are forecast to increase approximately 5.5 to 6%, which would be our highest increase since 1999. Same-store sales at Qdoba system restaurants, which were up 4.2% through the first three quarters, remain forecast at 3 to 5% for the full year. Our earnings forecast for the full year is $3.62 to $3.66 per diluted share, which represents an improvement of approximately 20% over prior year, including the positive impact of the Hawaii transaction last year. Now I would like to turn the call back over to Linda. Linda?

Thank you, Jerry. Now we'd be happy to take your questions.

Thank you. We'll now begin the question and answer session. (OPERATOR INSTRUCTIONS) One moment. We'll wait for our first question. Our first question comes from Rachael Rothman with Merrill Lynch. You may ask your question.

Good morning. It's Victoria Hart for Rachael Rothman. On the insurance recovery that you recorded this quarter, is that something that's maybe recurring in next quarter or is it completely one time?

That was one time.

And then the acquisition of Qdoba units, can you just explain the backdrop behind that?

Yes. That was an opportunistic situation where there were two partners that were involved in running these restaurants. They wanted to -- one of the partners wanted to get out of the business and the other one did not have the opportunity to buy out his partner, so we stepped in and repurchased those units.

Okay. Do you anticipate any further purchases of franchise restaurants on the Qdoba side?

No. That's not our strategy going forward. We saw this as a good growth opportunity to develop that market out as a company market.

Okay. You guys have been doing phenomenally well on the same-store sales front and next quarter's guidance sort of tracks along on a two-year basis. I know you don't disclose the traffic and price increase, but can you give us a sense for whether it came more strongly from traffic or whether it was more pricing impacted?

It's -- the price is about 1.2%, just in real price increase, and then the remainder of that is split pretty evenly between traffic and mix.

And in terms of the pricing, is that something that will be embedded into next quarter as well?

Yes. The 1.2 would clearly be in the next quarter as well.

Okay. Then can you just speak -- was the strong same-store sales -- did you see a majority of that coming from the new Sirloin launch or any more additional color you have regarding the same-store sales?

We see the overall business strong. Our breakfast [day] part has been growing nicely. The reimages are helping. We have great execution at the restaurant level, and then we have pretty compelling products, including the sirloin burger -- a very strong product launch for us.

If you were to pull one thing out that really helped in the traffic flow, is there something in particular that ate at the quarter?

We just -- we continue with our premium product strategy and all of our products are building the business. Sirloin was a very strong product for us, so if you had to pull one thing out, that's probably the thing that would make the top of the list, but it's all working together in concert.

Okay. Lastly, on the G&A, you had quite a bit of leverage in the quarter and some of it was due to the insurance recovery, but some of it was also to lower pension expense. Is that something we should anticipate again for fourth quarter?

Yes. We would expect the pension expense to continue to be lower in the fourth quarter, and that's really driven by the return on our pension assets, which has been fine, but more importantly the discount rates on our bond portfolio remain very consistent with where they were last year.

Okay. On a year-over-year impact, how much did pension contribute?

We have not disclosed that.

Okay. All right. Thank you very much.

Thank you, Victoria.

Thank you. Our next question comes from Larry Miller with RBC. You may ask your question.

I have two questions, please. Can you help me kind of put in context the idea of putting some capital work in unit growth -- company-owned unit growth and the strategies that you guys have been pursuing towards refranchising and cash flow management?

Larry, do you want to rephrase again? You were breaking up just a bit. If you can --

Sure, no problem. I guess what I'm getting at, you've been pursuing a strategy toward refranchising and capital management and returns. How does the new market growth, the new company-operated growth -- is that an acceleration of growth and how does that fit into the strategy of what I would call -- characterize as improved capital management?

Larry, we've talked probably for the better part of the last year about opening new contiguous markets, and Denver is one that we're opening. Corpus Christi happens to be another one. So that's been part of our ongoing strategy and is not an acceleration of the company growth, but a part of the previously-discussed company growth model. So you wouldn't expect us to see a ramp-up company growth in a significant way because we're opening up new markets. I think the more important news on the new market entrance is the fact that we have franchisees opening up into brand new markets for the first time.

Okay, that's great.

Larry, just to add on there, in Denver, we're going to gain a lot of learning in entering that new market for us. We have a new prototype that we're going in with, a brand new building, a brand new kitchen design that's more efficient and will allow for more throughput. We want to gain that learning and we can apply it to our franchise operators as they enter new markets.

That's helpful. The second question I had was -- there's some concern, I guess, given where the credit markets have gone about the franchisee's ability to finance purchases of stores. What is your sense of the franchise finance community as it exists today as the franchisees are telling you?

With respect to the credit tightening, I think most of that is going to be on the high-risk loans where there's going to be some reassessment there by the lenders. That's not the category that our franchisees fall into. And we continue to hear that they are not having any difficulty with respect to financing, either for their reimaged restaurants or for the refranchising strategy. We do not see that as an issue going forward, Larry.

Okay. Thank you, guys.

Thank you.

Thank you. Our next question comes from Brian Moore with Wedbush Morgan Securities.

Good morning.

Good morning.

I'm hoping you can maybe speak to the impact of mix shift on the cost of sale line during the quarter? And I guess specifically, when I'm wondering is, did you sell maybe more beef products than you expected?

Out of the 210-basis point decline or increase in food costs in the last quarter versus the prior year I would say the majority of that -- the vast majority of that was rising food costs, but you would see mix in the range of 40 to 60 basis points.

And would that include the beef as well as the egg and cheese that you cited in the press release?

Absolutely.

Related to breakfast -- okay. I guess in terms of the macro environment, can you talk about what you're seeing that would give you confidence that for the balance of the year we're looking at 4 to 5%?

The real issue for us was in the third quarter, we have a -- I don't want to get into too much detail about our beef blend, but the fat trimmings, which we tend to buy on the market, it just doesn't freeze very well. The historical average on that is, call it $0.45 to $0.50 a pound. We average about $0.83 a pound in the third quarter and we're averaging $0.55 to $0.60 a pound in the first quarter, which is consistent with what we've seen so far during the first few weeks of the quarter.

Final question. On the sales that's required for the 20% ROI on the reimages, can you talk about what that is? And have you done any experimenting with different exterior color schemes? I think some of your peers have seen slightly higher sales lifts or ROIs when they have changed the color of the restaurant outside?

With the ROI, what we've just talked about is the sales necessary to get about a 20% return, which is on an average investment cost of $150,000. We haven't given anymore detail with respect to that, but I think the math runs out pretty easily.

This is Paul. With regard to testing exterior color schemes, we had done some of that previously, and believe that sticking with our current color scheme but applying simply a fresh coat of paint is the way to go.

Thank you very much.

Thank you.

Next question comes from Steven Rees with JPMorgan. You may ask your question.

Hey, thanks. You got some nice leverage on the labor line this quarter. Just wanted to know what drove that beyond the comp performance. And if you expect that to continue in the fourth quarter to potentially offset some of the commodity cost pressure, should we expect a similar decline in restaurant margins in the fourth quarter?

What I think you'll see is, we will see food cost moderate somewhat because of what we just talked about on the beef complex. We clearly get significant labor leverage and other fixed and even somewhat fixed cost leverage on higher same-store sales. So to go from a guidance of 5 to 6 up to 7.4%, we achieved about 80 basis points worth of overall leverage on that, on labor as well as the other lines. With the same-store sales at 4 to 4.5%, we're not going to see quite that leverage that we had seen in the third quarter. However, we're not going to see food costs be as high as they were in the third quarter either.

Okay, great. That's helpful. If you could just help me or walk me through how you decide which new markets receive new store development, and perhaps in the past how have new stores performed and new contiguous markets versus some of the new units that you're building in existing markets? Do consumers -- are they aware of the brand, do they know it in some of these newer markets?

We have not entered into new markets, really, for several years. So Denver will be the first new market that we're entering since we entered the Southeast back in 1999. But we've gone in, we've done a lot of brand image research. There is a high level of awareness of the Jack in the Box brand because of the proximity to our other markets, and we feel very optimistic. We have a great prototype going in there. We've got a great lineup, a great menu, so we're feeling very positive about our ability to be successful in the Denver market.

Okay, great. Perhaps you can talk about, Linda, where you see the next opportunity to further differentiate your brand? You've done some great work on the product side and most of the QSR players are getting into premium burgers now. Is there another category you're going to go after?

We're really taking a holistic approach. We talk about our menu innovation, and we'll continue on that front with the premium product strategy. We think we have more opportunity on the beverage side as well as the breakfast category. And then from a service standpoint, we're putting a lot of effort in improving the service execution -- staffing at the right levels, getting the right people in place, having the right training programs and so forth. And then on the environment, we're very pleased with our reimage program. We're seeing a great benefit from that. So we have about 118 locations completed, so we'll continue to roll that out. All of that combined, I believe, will continue to strengthen our ability to compete in the marketplace and make us more differentiated from the competitors.

Great. Thank you very much.

Next question comes from Jeff Omohundro with Wachovia.

Thanks. I've got two. First, I'm wondering if you could give us just your thinking around the refranchising gain trends as we look out to '08. Do you think the pace can be sustained next year relative to this year?

In terms of number of restaurants reimaged?

No, on the refranchising gains.

Jeff, are you referring to the number of or the average gain?

The number of.

Okay. Actually, we think the number of is likely to increase, which is consistent with what we've been saying all along -- we said 70 to 80, now we're saying 75 to 80 as the year has gone on, but that we would expect that to increase as we go forward with the strategy.

Good.

Jeff, just to share some statistics with you, back in 2000, the average number of units per operator was around three or four, 2003 it was around five, and right now we're close to eight on average per operator. And the number of franchise units has increased close to 50%, but the number of operators has increased only about 10%. So we're getting that consolidation -- we're selling units to those operators that are proven operators that want to grow their business. We've only had to bring in three -- we've only brought in three outside operators, actually, and they have come to us. So we think there's still a strong demand and a good pipeline of franchise operators that are interested in buying more company operations.

Thanks, that's helpful. Also, moving on to the reimaging program, just wonder if there's any more color around some of the trends you're seeing there? for example, is there any difference in dine-in versus drive-through performance?

Yes. Our plan was -- our thinking and our plan and what we're seeing is that we have capacity at the dine-in. Only 10% of our business is dine-in business right now and we know that the transaction in the dine-in is higher -- the profitability is higher than the transaction of the drive-through, because they buy the [size of] drinks. So that's favorable trend for us in terms of dine-in business, but we're enjoying a nice sales lift. All the studies, the image studies and customer satisfaction studies that we've done are showing positive results as well.

Thanks.

You're welcome.

Our next question comes from [Joe Fischer] from Bear Stearns.

Hi. Thanks. I'm calling for Joe Buckley. A couple of questions. One, I wanted to ask you about the impact or potential impact going forward of the national minimum wage increase, given your Texas exposure. And you also mentioned some labor efficiencies in the press release. If you could give us a little color on that?

The minimum wage, we -- in our markets, California, Arizona, Washington State -- we already operate in states that have state minimums that are significantly higher than the new federal mandate. In fact, in many of the markets that we operate in, those locations that are impacted by the federal mandate, we already pay in excess of what the new federal minimums are. It will clearly have some impact, but it's going to be immaterial, even into next year.

Okay. And could you speak to the labor efficiencies that you mentioned in the release?

It really just gets to continued focus on outliers that we have within our -- within the labor standards and managing those as well as also -- clearly we get labor efficiency from the higher same-store sales.

And was labor actually down year over year in the third quarter?

We want to say yes. We don't typically break out the labor piece here.

Okay. Appreciate it. The other thing you mentioned in the release I wanted to ask you about the was the profit improvement programs. Could you give us an idea of what those entail?

Yes. They range from things such as optimizing packaging -- looking at different costs for cups, as an example. Looking at the size of cups that we may use in our drinks, looking at that versus competition, looking at the size of products, looking at expanding the vendor base so that we get competition within the vendor ranks for price, swapping out vendors when that makes sense. There's a whole host of issues.

Okay. And is that something that you'll continue -- you'll see ongoing benefits from initiatives like that? Basically, are these things you're just now looking at, beginning to look at, or has this been several quarters now?

It's been an ongoing effort. We have a whole team against this looking at opportunities to improve the margin. I would say we've stepped up that effort quite significantly given the commodity cost environment. So they will be ongoing, they're not one-time changes, and we look at everything from product specifications, ingredients, recipes, portion sizes. There's quite a long list that we're working on.

Okay, great. Just one more. It was mentioned earlier, G&A ex the insurance recovery was still down. Do you expect it to be down in dollars year-over-year again in the fourth quarter?

We had targeted our G&A costs to be flat for the full year and we still think that we are on target for that to happen, Joe.

Okay, great. Thanks a lot.

Thank you.

Our next question comes from [Stuart Frio] with Hunter Global.

Jerry, just a question related to that SG&A commentary. How much of the savings of the refranchising are flowing through today into the SG&A? And when you think out two to three years as you continue to refranchise, is it possible that SG&A absolute dollars could be flat to down from here?

SG&A dollars -- exclusive of the advertising cost, which is going to be flat as a percentage of our sales.

Right.

The other G&A costs, quite honestly, will have to be down over time as we continue with the refranchising strategy. In fact, we've made great progress on that over the last couple of years, particularly out in the field.

Okay. So as we model it out a couple years and we get to a new company-owned restaurant number, the SG&A number should go down in step with the lower company-owned units, right?

It will go down over time. It's more of a step function increase, though. You're not going to see it go down with every restaurant that you sell, but you will see it go down as you sell a chunk of restaurants.

Okay. And the deals you're looking at now for refranchising, are those -- I know you just did the Houston market, you did 14 in Houston, I know we did Hawaii about a year ago. Are the deals you're looking at now are starting to get a little chunkier and we're selling larger groups of stores?

I would say there are more of those larger groups of store deals within the mix.

Okay.

But we are still selling restaurants to existing operators that look like four, five, six, seven restaurants at a time, also.

Okay. And then as you refranchise these units, what kind of development agreements are you getting? For example, the guy that buys 14 franchises in Houston, what kind of commitment does he make to build new units?

We do development agreements with every sale where it's practical to do so. The whole idea, of course, to grow the franchise base as quickly as possible. So whenever it's practical and feasible to tie it to a development agreement, we do so.

So ultimately what kind of unit growth should we look for in Jack in the Box, percentage-wise, over the next, whatever, two to four years? 3 to 5% unit growth, or is that too high?

We've been doing about 2.5% unit growth [here to 4], and what we said is we want to bring the franchise unit development up to be about 50% of the total unit development and they're going to be about 33% of that this year. We don't intend to accelerate company unit developments at all, but we would expect franchise to increase somewhat to be on pace with the company over time.

Okay. And the last question, it doesn't look like you bought back any stock in the quarter -- is that right?

We did not.

Okay. What are you thinking about share repurchase from here?

Well, we still have $100 million authorized from the board and our credit facility still has just under $300 million worth of powder out there.

So it's just a question of price or cash flow or what's -- what's driving that decision?

It is -- we'll look at this opportunistically and we just have not disclosed in the past when we plan to be in the market, other than for the Dutch tender that we had last year.

Okay. Thank you.

Thank you.

Next question comes from Dean Haskell with Morgan Joseph.

Good morning. Thank you. Can you give me the number of stores company-owned Jack in the Box and Qdoba and then for each of the franchise brands as well?

Sure, Dean. The total Jack in the Box system has 2,107. Franchise locations are 667 as of the end of the third quarter. And for Qdoba, 371 restaurants, 288 of which are franchised.

Okay. And quick stuff. Doesn't seem like there's a lot of development going on there. Have you ceased development in that area?

We haven't ceased it, Dean, but we have talked about slowing that as we are testing food, service, and other opportunities to increase the sales volumes there. They are still profitable, but before we continue with further development in a significant way, we want to improve the unit economics there.

Has the volatility in gas prices had any impact on that decision, or --?

No.

No. Really, the decision was driven more by the increase in the construction costs, the development costs for these fuel sites.

Okay. Thank you very much.

You're welcome. Thanks, Dean.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from [Harry Dima] with King Street Capital. You may ask your question.

Thanks. I've got a couple them here. Starting with some of the refranchising questions -- obviously you bought some Qdobas back, as you answered. Is that something that you sort of looked at it opportunistically to buy them back? Is that also something considering that's more of a franchise brand that you ultimately plan on refranchising those as well, or is that something that just happens to be in a market where you for whatever reason feel you need to own it?

Yes. It was really more opportunistic on that particular deal. We haven't really bought many at all. In fact, I don't believe we bought any back franchise Qdoba. If we did, it's been just very few. But we continue to develop Qdoba as a predominantly franchised brand in the 80 plus percent with a couple of markets -- a few markets that we've gone in and developed as company markets.

Is this a -- can you tell us where you bought the restaurants?

In western Michigan.

Western Michigan. Okay. Just another question on refranchising. Obviously, if you go back a year, year and a half ago when you started this, you were one of the few that had a ton of company-owned restaurants. Now you take a look at what's going on with Applebee's -- obviously, IHOP has said we're going to refranchise as many as we can. You look at what's going on with Brinker -- they're in the process of -- unlike you guys, they can't seem to run their restaurants for positive comps, so they're in the process of selling those off. Have you found in any of these cases that the people you're talking or are sitting there going wait a second, I've got a whole bunch of other concepts that I can think about? Or do you think you're dealing with a separate group of people?

I think it's a separate group of people. As I mentioned earlier, the majority of the deals have been Jack in the Box operators and they're very interested in increasing their Jack in the Box ownership, the number of units. It's a different operating model. Our operators want to be in the Jack in the Box business, they love the brand, they know the business model, so there's a lot of demand. They're not out there looking at Applebee's or Chili's or anything.

Right. Just moving on to your remodels. Obviously, that's been -- looks like it's been successful by all means. If you sort of go through the math on that, it looks like you're just sort of backing into a number of where same-store sales -- if your overall business at Jack in the Box was up where it was, that same store sales at those restaurants, the remodeled restaurants, probably would have had to be up mid-teens. Is that a fair assessment on what's going on there so far, to meet your criteria and to get the numbers that you got?

It's -- it's not fair to look at that thing in terms of a 7% same-store sales for the company in total and then looking at [say a Seattle] and say, well, they must be up low to mid-teens there. What you really need to look at is those restaurants in those markets and how they were performing prior to the reimage and where they are now, and what their growth patterns were prior to the reimage and where they are now. Not all of our markets performing exactly the same as the system average, obviously.

Sure. I guess one can assume that the reimaged restaurants in order to meet your hurdles would have to perform better than your average?

Yes, I think that's true.

That's true.

That's a true statement.

Okay. Last question here. Maybe I'm just confused on this -- obviously, you don't live in a vacuum. You look at what's going on in the market today. People seem to have not enjoyed your performance for whatever reason. I would guess it's because it looks like you lowered your fourth quarter consensus estimate down. If I go back through last fourth quarter last year and strip out the $0.25 gain that you had to get to $0.70, and sort of what I would just call operating EPS, and your range is $0.72 to $0.76 this year and yet you have fewer shares, obviously some more debt, and 4 to 5% comp out there for the quarter, what am I missing? Is it just that the 4 to 5% is just right on the cusp of the operating leverage and therefore you just don't get any operating leverage given the commodity cost gains and therefore real growth is effectively zero and you have to lower shares to contribute to a few extra cents, or am I missing something else?

The story there is food cost. While we don't think beef is going to be as high as it was in the third quarter, we are still forecasting food cost to be higher than what it was last year, fairly significantly. So although not at 210 basis points.

Right. So you're getting some leverage, but it's extremely low then relative to last year on the -- I guess another way to say it is in order to get any leverage on the bottom line, you need 5% plus on the top line?

No. We're going to get leverage on comps that are anywhere above 2 or 3%. But clearly, there is -- it's not a straight line improvement from say 3% to 4 to 4.5 as it is from 3% to 7.4. It really turbos up on the leverage when you get above that 4 to 5% range, but we still get leverage and we expect to get some in the fourth quarter from that 4 to 4.5% same-store sales growth.

Okay. So again, maybe I'm just being stupid here. If I strip out the gain on sale from Hawaii last year, your earnings were $0.70 a share, right?

Correct.

And your range here is $0.72 to $0.76, right? That's what you just put out there for this year? This fourth quarter?

Correct.

That's in your release. So -- and you certainly have fewer shares outstanding this year than you did last year.

Right.

Again, more debt. So if you were at $0.70 last year, you're at $0.72 to $0.76 this year, and you're getting positive leverage, obviously, you don't have any gains -- I would hope you have no gains embedded into that $0.72 to $0.76 from any sales potentially. Is that correct?

No, we have gains in there.

You do have gains in there?

Right. But we had more gains -- the Hawaii was split out separately last year because that was --

So large?

-- a large deal. We had gains in the fourth quarter last year that were in addition to the Hawaii gains.

Right.

-- this year also.

If you compare the gains ex Hawaii last year versus the gains this year, could you give -- I guess what I'm trying to get at is, just from a pure operational basis, what do you think earnings are going to -- since you gave out the guidance, what do you think earnings are going to be up fourth quarter to fourth quarter, just so I get a sense of how much leverage you're getting off the 4 to 4.5%?

If you look at -- well, let me answer that two ways. If you look at just the fourth quarter and you want to strip out all the gains in both years, we're going to be -- within that range, we're going to be flattish from where we were last year.

Okay.

But now -- however, I'm not getting the point is on the no leverage. We are getting leverage from the increased same-store sales, but we're giving it back with respect to the food cost piece.

Right. Which was sort of -- I guess that was the point of my question, which was trying to figure out. So you do gain -- you do gain SG&A leverage, obviously, but in order to really overcome the food costs that we're seeing now, you really need to be 5% or above, basically?

Fair point.

That's -- that's what I was trying to get at, ultimately.

We need more than a 4 to 4.5.

That's a valid point.

Yes, okay. All right. Yes.

You're spot on.

Okay, great. I appreciate it.

Thank you.

Our next question comes from Paul Westra with Cowen and Company.

Great. Thank you. Good morning to you guys. A follow-up question maybe to the question you just answered on the margin outlook, Linda, you said 1.2% pricing for this quarter and what you expect to be in the fourth quarter? And if that was correct, can you think about moving that up? We're seeing a lot higher pricing elsewhere.

We're evaluating our pricing at this moment, so we're out there, doing surveys and stuff looking at opportunities there on the pricing.

Are you testing in certain locations, and if so, are you getting any pushback at a higher level?

We'll be out in the -- we're always testing pricing scenarios, some more aggressive than others. So we'll evaluate those results.

So if you see any perpetually high food costs like we're seeing here in the second half of your fiscal year, you'll certainly have that lever to pull?

I think, Paul, it's fair to say that we're not going to sit here and let food costs continue to impact operations the way that it is here in the short-term, looking at the fourth quarter. So we'll look -- as Linda mentioned earlier, we're taking a much more aggressive look on margin enhancement opportunities than what we typically do, and we're pretty aggressive on that typically, and we're also looking at pricing opportunities. But to -- so we're going to manage through it versus having it manage us.

Okay. Sort of related question, if you look at the spot prices on some of the different series out that we all look at, it didn't seem as though ground beef was up substantially -- I know there's buying mechanisms. Nothing's changed in the way you acquire mix or purchase your beef on a sequential basis for the fiscal year?

Paul, you're kind of cutting out.

It sounds like you're on a bad cell phone commercial.

Sorry about that. When we look at the spot pricing, at least the series we look at for ground beef, it doesn't look as though the shares we're looking at, that ground beef was up so substantially. I was curious if you had changed -- I know the mix shifts separately, but in your purchasing or the way you acquire mixed beef has changed substantially?

No. The way we're buying has not changed substantially. The big change for us -- and I think if you're looking at beef prices in general, I would tend to agree, particularly on the lean portion, which has been fairly consistent on a price per pound over the course of this year. The real driver for us has been in the fat trimmings, which has bounced around rather dramatically from a low of -- the low $0.40 a pound range to up over $1 a pound at various times during this past quarter, $0.30 being earlier in the year, or $0.40 being earlier in the year. We expect that to come down in the fourth quarter. Like I said, there's a $0.55 to $0.60 a pound range, but still higher by about $0.10 a pound or so than what we typically see.

Great. If you wouldn't mind one last question on Qdoba, you didn't give too much color, but if you could give us a little bit more, comps seem to be pretty consistent and solid at that 4% level. But I was just wondering if you can give your overall confidence in the brand -- any regional performance differences, new or old markets, performance differences, and then a question on development as well. It seems this year you were much stronger seasonally developed in the third and fourth quarter. Should we expect the same for next year?

Overall, it continues to do well. We're not seeing any big regional differences in performance, so still strong costs. In terms of development, yes, they did a very good job of building a stronger pipeline and making sure that we get our franchisees' development agreements met and the timing more predictable. So, yes, we're kind of smoothing out that development cycle and feel good about next year as well.

And as we look out next year, we should be thinking roughly the same percentage growth, roughly the same absolute numbers, or could you give us any --?

You'll hear more about that in November.

Worth a try. Thanks.

Good try.

Our last question comes from Joe Fischer with Bear Stearns.

Hi, thanks. I wanted to follow-up to something earlier. I believe you said 10% of sales were dine-in sales, is that correct?

Currently, that's about right.

And that doesn't include if I walk in and take it to go, right?

That's carryout sales.

So about what percent goes through the drive-thru, can you tell us that?

About 70%, close to 70%.

So with all the menu innovation, the premium products, I assume these are a little bit more complex. Have you noticed any slowing of the average drive-thru time?

Slightly, but not significantly.

Okay. Great. Thank you.

You're welcome.

Thank you. We'll turn it back to Linda Lang for closing comments.

Great. Thank you for your questions and thank you for joining us this morning. Good-bye.

Thank you for attending today's conference. You may now disconnect.