Jack in the Box Inc (JACK) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to the Jack in the Box Incorporated fourth quarter and fiscal year 2007 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 could not attend the live meeting. (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 CEO, 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 fourth quarter and fiscal 2007. We'll also discuss guidance for fiscal 2008 and review some long term performance goals for the company. All of this information was provided in this mornings news release. Please note all per share amounts discussed during today's call reflect a two-for-one split of the company's common stock. Following today's presentation, we will take questions from the financial community.

Please be advised 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 is considered a part of this conference call. 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. Good morning and thank you for joining us. Jack in the Box concluded fiscal 2007 with another strong quarter of restaurant operations that contributed to a second consecutive year of record earnings and our third consecutive year of EPS growth in excess of 20%. Net earnings for the quarter and full year exceeded expectations as we effectively managed the commodity cost pressures that our industry is experiencing.

Our strong performance throughout Fiscal 2007 is a result of our success in executing the Company's strategic plans. In September, following its annual review of our long term strategic plan, our Board of Directors again affirmed the course that Jack in the Box is taking and approved the plan's four key underlying strategic initiatives. Growing our business, reinventing the Jack in the Box brand, expanding franchising and improving our business model. Jerry will review the financial highlights for the quarter and year, so during this morning's call, I'd like to devote my comments to the four key initiatives of our strategic plan, beginning with our growth strategy.

The key goals of our multi-faceted growth strategy are to grow earnings, same-store sales and other key operating and financial metrics, as well as expand the Jack in the Box and Qdoba brands. I've already mentioned our impressive earnings growth for the year. Additionally, company-operated Jack in the Box restaurants experienced their highest full year increase in same-store sales since 1999, and the two year cumulative increase of 10.9% is among our highest ever. Our Qdoba brand experienced strong sales growth as well and has now achieved 33 consecutive quarters of comparable sales growth. Our two restaurant brands added a combined 145 locations in 2007.

Growth of our Jack in the Box brand occurred primarily in existing markets as we pursued opportunities to increase our market penetration. We also entered a new contiguous market, Corpus Christi, Texas, near the end of the year and our first restaurant there set an opening week sales record for the Company. In 2008, we plan to continue expanding Jack in the Box into other contiguous markets in Colorado, New Mexico, and Texas through both Company investment and franchise developments. In fact, earlier this week we opened our first restaurant in the Denver market, and sales have been very strong since our opening on Monday. Qdoba continued its aggressive expansion in 2007 and achieved its fourth consecutive year of average unit growth in excess of 20%. Qdoba is a clear leader in the fast casual segment of the restaurant industry and last month, achieved a growth milestone when its 400th restaurant opened in Boise, Idaho.

Moving on to our second strategic initiative, we are about three years into the holistic reinvention of the Jack in the Box brand through major enhancements to our menu, guest service and restaurant environment. Our goal is to differentiate Jack in the Box from the competition and to deliver a restaurant experience superior to that typically found in the QSR segment. When it comes to our menu, few chains can match the quality and variety that Jack in the Box now offers. In fiscal 2007, we became the first major QSR chain to serve sirloin steak when we rolled out products like the sirloin steak and mushroom ciabatta and the 100% sirloin burger. This high quality ingredient can serve as a platform to launch additional innovative products as we did in the Fourth Quarter when we added the sirloin steak and egg burrito to our breakfast menu. We continue to maintain a strong pipeline of new products in various stages of development or test.

We're also raising the bar when it comes to guest service by building upon recent internal service initiatives at Company restaurants to help attract high quality applicants for team member positions, which can ultimately improve productivity, maximize retention, and reduce training costs. We're also looking to leverage new technologies to improve speed of service and guest satisfaction. As an example, in 2007, we equipped all Jack in the Box restaurants with contact list credit card readers, which enables our guests to pay at the front counter or drive through, simply by holding in front of the readers their credit cards embedded with RFID technology. We're also testing self-serve kiosks, which offer guests an alternative method of ordering inside our restaurants, and outside of our restaurants, at certain high volume locations, we're positioning team members near the menu Board to process drive through orders utilizing a portable wireless communications device.

The third aspect of brand reinvention is a major renovation of our restaurant facilities. In fiscal 2007, 200 company and franchise restaurants were reimaged with a comprehensive program that includes a complete redesign of dining rooms and common areas. We've seen positive sales trends and higher attribute ratings in markets where all of our restaurants have been reimaged. We expect the entire Jack in the Box system, including franchise locations to be reimaged over the next three to four years.

In addition to growth and brand reinvention, our third strategic initiative is to continue expanding our franchise operations to generate higher margins and returns for the Company while mitigating business costs and investment risks. In fiscal 2007 we sold 76 company Jack in the Box restaurants to franchisees. Additionally, franchisees developed more new Jack in the Box locations than ever, and entered into development agreements to build more locations over the next few years. Many of those restaurants will be in new contiguous markets. In 2008, for example, our franchisees plan to expand the Jack in the Box brand into Albuquerque, New Mexico, and two Texas Markets, Abilene-San Angelo and Midland-Odessa. Nearly a third of the Jack in the Box system is franchised. Through a continued refranchising and development of new franchise restaurants, our long term goal is to grow the percentage of franchise ownership by approximately 5% annually, and to move towards a range of franchise ownership more closely aligned with that of the QSR industry. Ultimately, approximately 70 to 80%. Our Qdoba system is predominantly franchised and our goal is to continue expanding that brand as primarily through franchised growth.

Our fourth major strategic initiative is to improve our business model. As Jack in the Box transitions to a new business model comprised of predominantly franchise restaurants, we plan to improve restaurant profitability and returns and increase the long term value of the business. We'll also focus on profit improvement initiatives to reduce G&A and improve operating margins without negatively impacting our guest experience. Other initiatives include a new restaurant prototype featuring a reengineered kitchen. Before turning the call over to Jerry, I want to take this opportunity to thank our dedicated employees for executing our strategic initiatives and producing such impressive results in fiscal 2007. The year was not without its challenges, but our employees' resourcefulness and perseverance kept this organization on track with its goals.

I'd like to also comment on a recent challenge that our organization overcame in October, when wildfires struck Southern California. Poor air quality caused by the fires in San Diego County prompted us to voluntarily close our corporate offices, although all essential functions remained staffed. 15 company and franchise restaurants in San Diego were temporarily closed for varying lengths of time, from a few hours to a few days due to evacuations or power outages, but none of our restaurants or facilities suffered damage and our sales were mostly unaffected. I'm proud to report that in addition to donating several thousand meals to the American Red Cross, evacuation centers and firefighters and others on the front line, the Jack in the Box Foundation has committed $120,000 to the American Red Cross and other relief agencies. In total including food and services, our support is estimated at about $175,000.

And now, Jerry will take a closer look at the financial side of the business. Jerry?

Thank you, Linda. Our per share earnings of $0.43 in the fourth quarter exceeded the high end of the range forecast by the company and analyst first call consensus by $0.05. With $0.04 of the improvement due primarily to higher sales, improved labor efficiencies, and leverage on fixed costs, with $0.01 of the improvement resulting from fewer shares outstanding due to stock repurchases during the quarter. This compares with $0.46 a share earned in 2006, which included approximately $0.12 a share from the sale of the company's 25 restaurants in Hawaii. As Linda mentioned, Jack in the Box just completed its third consecutive year of EPS growth above 20%. In fiscal 2007, we earned $1.88 per diluted share versus $1.50 last year. As a reminder, this year's performance included an approximate $0.04 per share benefit from an insurance settlement in our third quarter.

Driving the earnings growth this year was a significant increase in same-store sales. In the fourth quarter, same-store sales at company operated Jack in the Box restaurants increased 5.2% on top of a year ago increase of 5.9%. Contributing to the sales growth was a price increase that we took mid quarter on certain products and add-on ingredients. We continue to evaluate opportunities for additional price increases in 2008. For the full year, same-store sales increased 6.1%, which contributed to a double digit two year cumulative increase of 10.9%. Restaurant operating margin in the quarter was approximately 60 basis points higher than our internal forecast due to fixed cost leverage from higher sales this year and labor efficiencies. Our fourth quarter price increase helped offset increases in commodity costs. As expected, commodity prices remained high in the quarter, beef costs which moderated somewhat with increases in production were up 6% in the fourth quarter versus last year , slightly higher than expected but lower than the 9% increase we saw in the third quarter. Costs for eggs and cheese were up more than 30 and 40% respectively, versus the fourth quarter of last year as worldwide demand for dairy products remained strong.

You'll note in our Press Release that we modified our approach on guidance to provide more insight on longer term key metrics and targets. We'll continue to provide quarterly forecasts on our same-store sales expectations for Jack in the Box and Qdoba, but will no longer provide quarterly earnings guidance. As we accelerate the rate of our refranchising strategy, just plan to include 100 to 120 restaurants in 2008. Our ability to accurately predict the quarterly impact of such transactions becomes more difficult. In fiscal 2008 we expect to earn between $1.98 and $2.06 per diluted share. On same-store sales growth of 2 to 4%, versus the $1.88 per share last year, and again, $1.88 includes an insurance settlement in the third quarter that adds $0.04 to our 2007 earnings.

Some of the business initiatives supporting the long term strategies that Linda outlined earlier are expected to add costs that are included in our earnings guidance of $1.98 to $2.06. These initiatives which will help position our business for future growth include financial assistance of $25,000 per restaurant to incentivize franchisees to reimage their restaurants more quickly. We estimate this contribution to our franchisees will reduce earnings by about $0.04 per diluted share in fiscal 2008. Our franchise community is planning on reimaging 100 to 150 restaurants in 2008, up from 13 in 2007. We plan to increase the number of Company locations reimaged in 2008 to approximately 250. We're also accelerating the installation of new kitchen equipment, which will accommodate new menu platform rollouts and are expected to reduce energy and labor costs and improve speed of service.

Facility charges associated with these and certain other improvements are expected to reduce diluted EPS by about $0.06 compared to those similar costs in 2007, and finally, restaurant operating margin is expected to be down approximately 20 basis points from 2007 due primarily to higher commodity costs. Generally, we expect commodity costs overall to be up in the 1 to 2% range over 2007, with higher increases for cheese and shortening; however for the first two quarters, we expect commodity costs to increase in the 3 to 5% range, again with significant increases in cheese and shortening and more modest increases for beef. And now I'd like to turn the call back over to

Thanks, Jerry. We'll go ahead and take your questions at this time.

Thank you. (OPERATOR INSTRUCTIONS). The first question comes from Mr. Chris O'Cull from SunTrust. You may ask your question.

Good morning, guys.

Good morning, Chris.

Jerry, first question regarding the guidance. Your long term guidance calls for 12 to 15% earnings growth, yet the high end of your fiscal '08 guidance falls short of that long term range. Would you explain what prevented you guys from targeting the longer term growth rate in '08?

Yes, Chris. A couple things. One I think is the higher food cost, and we are continuing to see higher food costs as everybody else is, and you may recall that our first two quarters of last year saw relatively and significantly lower food costs than what we have been experiencing here in the last two quarters. That's a piece of it. The other piece though is the investments that we're making in our strategy, which includes the franchise assistance and the additional facility charges, so I think if you add back the facility charges and the reimage assistance, because they're real costs, they aren't comparable to what we did in 2007, you get very close to that 12 to 15% range. In fact, you may actually be a little north of that 12 to 15% range.

Great, thanks. And Linda, one question regarding just your plan. One of your competitors has benefited in terms of comps in franchise development from increasing their national cable advertising each year, and I know you guys utilize national cable as part of your media strategy but I was wondering at what point does your plan call for a materially higher usage of national cable?

Right, Chris, we've actually increased our national cable advertising quite significantly over the last couple of years, and we will plan, we plan to increase it again in 2008 , so we are ramping that up, the spending in national cable

Can you quantify what percentage of your media budget is dedicated to that medium?

Yeah, we really haven't shared that, Chris. It's not as significant as the Sonic advertising, I think you're probably referring to Sonic. It's not as significant but it's definitely much more than we had three years ago.

Okay, and then Linda, if you consider the pace and approach you're using to grow the Qdoba brand coupled with the pace of refranchising Jack, it doesn't appear that Qdoba will ever be a meaningful benefactor to growth, given that by the time it becomes a meaningful contributor to income, it may likely be pretty far along its development cycle. I guess my question is, is Qdoba really another meaningful growth vehicle for the Company?

We believe it is. They have grown significantly 20% or more in terms of unit growth, their same-store sales growth has been very impressive, and there's still a lot in development under development agreements so we do believe it's a growth vehicle for us.

Okay, at what point does it become more of a contributor to the income of the Company do you think?

Chris, we're adding in the neighborhood of 20 restaurants, plus or minus this year, in terms of the corporate growth. We're also looking at, we're going to spend more time going into some markets such as Manhattan, so we are looking at a more of an urban approach to the Company growth as related to Qdoba and again they're growing in the 60 to 70 units per year on the franchising side, so their earnings were up significantly this year, and you'll see that when you look at our 10-K, and they are are probably in the neighborhood of about 5% of our total earnings right now and that's up quite significantly from just a couple of years ago.

Okay, great and then one last question and I'll get back in the queue. In order to get a handle on the benefits you're getting from trade down versus new product introductions, can you kind of give us information or help quantify the impact your mix is having or the value offerings versus premium products? Are you seeing any type of mix shift think or are they growing at an equal rate?

The mix shift between the premium and value?

Right. Your lower price point items.

Yes, where we've seen the gain is really in the trade up to our premium items, so we're not seeing significant trade downs to our bottom tier items.

So the premium products are becoming a bigger contributor to your overall product mix?

Yes, correct.

Okay, thank you, guys.

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

Thanks. A couple of kind of facility sort of questions. I guess first, could you talk a little bit in the new prototype, you mentioned reengineered kitchen, just elaborate a little bit on that and in particular, do you see an opportunity in speed of service?

This is Paul, yes. Some of the key components of the new kitchen are increased capacity through the installation of a dual-sided grill, a dual assembly line. The kitchen is certainly more open and showcases our quality to a much greater degree. There's quite a number of enhancements.

Jeff, we have experience with that, with our opening in the Denver market, and we've been able to execute at very high sales volume.

And how are the kitchen enhancements that you're currently doing and the remodeling, how is that flowing through the P&L, the spending on that?

This is Jerry. You won't see a significant amount of that flow through this year. Where you'll start to see it, because we're rolling that out this year. We've completed a little less than a third of that and we'll complete the rest of that over the balance of the year, which is what's driving the facility charges. You'll start to see though a reduction in utilities. One of the pieces in equipment uses significantly less energy than what our current piece of equipment does. We're also adding in some refrigerated storage right at the point of assembly, which will significantly improve our ability to continue to add high quality premium products to our menu offerings and then also in some locations we're putting in a clam shell grill which will also help the speed of service.

This is Paul again. I would add to that that the combination of those elements also realizes some improvement in productivity, there for, there's some labor pick up.

And you'll actually see some of that labor pick up this year to help offset the increase in the food costs. We also have included some utility savings as a result of that also, but you'll see much more of that impact 2009 and beyond, as we complete this project this year.

When you think about these potential enhancements with speed of service plus things like the contactless credit card payment, the handheld ordering devices and so fourth, what do you see as terms of the opportunity there in terms of magnitude?

We really haven't quantified it at this point.

Okay, thank you.

You're welcome.

The next question comes from Mr. Chris O'Cull of SunTrust. You may ask your question.

Wow, I got back in the queue but I little quicker than I thought.

Hi, Chris.

Hi. Just a follow-up on the guidance. Does your guidance for '08, does it reflect share repurchases ?

It reflects the share repurchases that we completed in the fourth quarter, and it assumes that average shares outstanding to be flat with what the average was in the fourth quarter, Chris.

Okay, great. And then Jerry, would you break down the CapEx plan for '08 in a little more detail?

Chris, we haven't done that historically. We're not prepared to do that today. We may begin to break that out a little bit more in detail. What I can tell you though is the significant increase from the 154 this year to the 175 to 185 is due to a couple of things. One, we accelerated the opening of some restaurants into the fourth quarter this year late that we had originally thought were going to be opening up in the first quarter, we actually had the opposite of construction delays, which you don't usually get. Some of the cash though for those openings will actually occur early in the first quarter of 2008, so that's about $7 million of that increase and then the remaining piece of the increase is really due to the kitchen enhancements and the increase in the reimage program so it's similar CapEx for this year except for those three items.

Okay, great. And then Paul, can you kind of describe your day part guest count trends in some detail in terms of just breakfast, lunch, dinner, snack?

They're actually all up.

Okay, great. And Paul, one other question. I believe most of the industry doesn't provide an incentive to franchisees to reimage their units. Could you explain why the Company felt they needed to do that and whether you're seeing any ancillary benefits from the franchise community from this program?

Well we simply wanted to accelerate the rate at which they completed the programs. We each benefit when that occurs.

Chris, just from a financial perspective, we will receive obviously the 5% royalties, but remember we also get about a 3.5% rent spread on average for our franchise locations since we control the lease, so it really is, it's a two pronged strategy, one, we get the increase on those royalties and rents much more quickly, and also, there's just a great overhang for the brand to get the entire brand up to the reimage standard much more quickly and while that's difficult to quantify that, we just think it's the right thing to do from the overall brand image perspective.

So the rental markup is on a variable arrangement?

Yes, it is.

Yes.

Great. Okay, thanks, guys.

Your next question comes from Mr. Harry Dima of King Street Capital. You may ask your question.

Hi, guys and gals. I've got a couple of them. Thanks for taking it. You put in a pricing of about 2% in the quarter and 1.3% for the year. Looking at a bunch of the comps to you guys, seems like a bunch of people have taken higher pricing. Was there a strategy in place to keep that pricing increase lower and could there be more in the future or is this sort of a go slow, try to keep it limited idea?

Yes. We have 2% in our plan for next year, for '08, and that's actually double what we typically do in a year. We generally budget around 1% price increase and so we take a pretty cautious approach to pricing given the current economic environment, and the fact that we frankly are already kind of at the high end in terms of average check for our segment, so we're very conservative in terms of testing any price increases, so we actually put it in the marketplace, we test it prior to rolling out price increases , so we continue to evaluate and look at opportunities to take price increases where we feel it's

And then, thanks for that, Linda. The Qdoba pricing, you gave good pricing details for Jack. Can you talk about pricing at Qdoba?

This is Jerry, but Qdoba did take a price increase in the fourth quarter also. It was a little more aggressive than what we were but it's important to note that their key competitor, Chipotle has been very aggressive on taking price over the last couple quarters, and that gives us quite honestly a bit more license to go a little higher.

And then of the 350 reimaged restaurants that you've done, how many of those have been done by franchisees as opposed to you guys, and sort of, how do the new contracts with franchisees either for new builds I would assume they're obviously new image restaurants or the new plan restaurant but how do they, when you sell some of these things, how does that reimaging plan get worked into that?

Franchisees so far have done 12 or 13 restaurants this year and we plan on them doing 100 to 150 next year, and so clearly, that's been accelerated and we believe that that is due in part to the $25,000 worth of re image assistance. With respect to the new restaurants, franchisees opened up 16 this year which is more than what they've ever done in the past, and our development agreements in selling restaurants to franchisees have increased our development agreements and they plan to open up somewhere in the neighborhood of that 16 next year, slightly lower than that so we're very pleased with that and then what was the other part of the question? When we sell restaurants to franchisees, if they've been reimaged, that cost gets passed on to the franchisee.

Okay, and I have two real quick ones. What was D & A for the year?

G & A?

Depreciation amortization.

About $94 million.

About $94 million, and then the last question was if you look at your out year plan of 2010, 2011, do you plan CapEx would go back down to more normal $125 million? Is it possible that that number is I would say conservatively high in so much as you plan on continuing to refranchise restaurants and continue to resell them off so if you accelerate that into '08 and '09, '10 by the time you get out to '11 and all of these are reimaged, you should have far fewer restaurants on your books, so is that CapEx number potentially lower than your comfort range so to speak?

Well you may have noticed there were two words following the 125 million, so we do think it has potential to go lower. The wildcard here though is to the extent that we build in new markets with company money to see for franchise locations, so we may go into a new contiguous market and build up five or six restaurants or so, and then sell those to franchisees, which would keep the CapEx up in that range. That's why we said 125 or less, but other than that, Harry, you're on it, it will be a little lower than that. Thanks so much.

Yes.

Thank you.

Our next question comes from Rachael Rothman of Merrill Lynch. You may ask your question.

Hi, everybody.

Hi, Rachael.

Just a couple quick questions. First, thank you so much, Hal, for advocating for additional disclosure. I really appreciate that. So thank you, guys.

I've got a big bonus this year.

I work at Merrill so clearly I can't give it to you but I hope somebody does. So, as you guys kind of look back at Fiscal 2007, your results finally came up at $1.88 which I think was about 25% above your initial guidance. Can you talk about what surprised you the most to the upside because obviously a delta of 25% is pretty big and how should we think about potential drivers of upside for fiscal 2008 and your current EPS guidance is below your three year target?

A couple things there, Rachel and I may not get all of them and then I may not give you all of them with the exact precision , but there were a few things that has driven that. One, the initial guidance I think we were pretty clear on this, did not include the impact of share repurchases with the Dutch tender and then the follow on to complete with that Dutch tender was we think that share repurchases over the guidance probably added somewhere in the neighborhood of $0.06 a share. While we didn't sell more restaurants than we thought, the average gains were higher and that was probably worth about $0.08 a share and these are round numbers, and then but clearly, the vast majority of that was due to sales, which were at 6.1%, which was near probably 60% higher than what we had originally guided to, and restaurant operating margin was 40 basis points higher, so we did get tremendous flow through on those sales and in essence despite of the fact that we had significant food cost pressures in Q3 and Q4. Were it not for that,. I think we would have beat the numbers by much higher but it was all because of for the vast majority, it was high quality flow through on much higher

Okay, and given your outlook for 2 to 4% comps next year, how should we think about your ability to leverage margin? What level of same-store sales do you think is kind of the base level needed?

On a normal year, Rachel, we would, it takes somewhere between 1 to 2% to stay flat on restaurant operating margin. So normally you'd expect to see improvements with the restaurant operating margin at levels above that, and it's not pro rata. We get significant uplift the higher those sales grow. This year, however, 2 to 4% we're actually suggesting the restaurant operating margin is going to be down by about 20 basis points and it's due to the higher food cost we're expecting in the first half of the year.

You may remember that we had very low food costs in our first two quarters, and so we have those to roll over and were it not for that, we would see leverage, but we are seeing leverage within that restaurant operating margin down about 20 basis points. We are seeing leverage on the fixed costs. We're seeing leverage on labor.

And can you just remind us, do you guys have a 10 B5-1 in place or how do you go about your repurchases?

Yeah, we have used virtually everything in the past, in the 10 B5-1, the open market purchases to the Dutch Tender, although other than the Dutch Tender, we've never actually disclosed previously how we plan to do those and we're going to stick with that practice.

Okay, and then in terms of the cost, the management costs associated with your company operated restaurants that are allocated to G & A, are you carrying your district Managers or your regional Managers or any of those costs in your G & A and what are the opportunities to leverage your G & A as you refranchise?

Yeah, we are showing reductions in those costs, as we continue to sell restaurants and you'll see while we haven't given you the exact number on that, we are suggesting that G & A will be down in the 10% range next year and that's due in large part to the reductions in the field-related G & A because of the selling 100 to 120 restaurants.

So just categorically, can you quickly break down for us what titles you have in restaurant operating costs and which are in G & A? Not the dollar value, but --

Yeah --

Structurally, what categories.

Yeah, their functions?

Yeah.

The people in the field would be your above unit level management, meaning area coaches and regional Vice Presidents, and office staff and associated support staff.

And your District Managers that oversee I don't know, make up a number five to seven restaurants maybe they go in one of their restaurants every single day but aren't assigned to a particular one unit, are they in G&A or are they at the restaurant level?

They are in G & A.

Okay. So everybody above the restaurant Managers is in G & A?

That's correct.

Great. Thank you so much.

You're welcome.

Thanks, Rachel.

Our next question comes from Mr. Dean Haskell of Morgan Joseph. You may ask your question. Good morning.

Good morning, Dean. How are you Linda?

Good, how are you doing?

And Hal, and god, I'm sorry, I've forgotten, Mr. Jerry Rebel.

Jerry and Paul. We've got a whole bunch of people here.

Okay, commodities first quarter, second quarter are up pretty strong 3 to 4% so you're looking for those to be down a couple of percent in the back half of the year. Where do you think that's going to come from, Jerry?

It is likely to come from cheese. Cheese was up in the, it was over $2 for awhile, and in the 1.90 range much of that time frame, you can get cheese right now for those months between $1.60 and $1.70 so we have taken some protection there so we feel pretty good about that. And we expect beef to be down slightly in the 1 to 2% range for the second half of the year and again rolling over high numbers you may remember beef was at $0.83 a pound for us in the third quarter and they've already come down in the fourth quarter for us to $0.57 a pound so we are seeing some reductions in that and we're not forecasting them to be up in the mid 80s and even higher than that in the back half of the year. Those are two key pieces.

Okay, what is your beef contract run out?

We have, we do lock in prices for beef from time to time. In fact we always have something locked in right now. We have our import 90s pretty well locked in for most of the first quarter, the 50s tend to float on the open market.

Okay, so you're using an import 90 so any further weakness in the dollar would not be good. On the sirloin side --

Dean, just let me stop you there. What we've seen is we have not seen, I don't know if anybody else has, but we have not seen beef 50s move up because the weakness in the dollar. They've been pretty stable in the $1.30 range between $1.30 and $1.35 and that's exactly what we're seeing now and the dollar hasn't gotten any better over the last six months.

But you're importing the 90s, right?

I'm sorry, my mistake. Thanks for catching that for me.

Okay that's it's about $1.30 a pound on the import 90s?

Yes, sir.

Okay, the movement to a more of a premium mix as you mentioned earlier, how is that impacting your beef costs as well?

It's not impacting the beef cost. We are cheerily in the third quarter of this past year '07 with the sirloin burger introduction, we clearly sold more beef than what we would normally sell because of the introduction of that product and the overwhelming success we had with that product. It didn't impact the beef cost per se but it did impact the margins somewhat because we were selling more beef at higher rates.

Okay, and my final question, talk about the cost of re imaging both the front of the house and the back of the house and the return you expect to get on those, please?

Yes, we really aren't doing much with the back of the house. The reimage program is primarily front of the house, restrooms, things that the guests can see and touch and also some enhancements to the outside, the drive through area, paint and landscaping and so fourth. The cost of the reimage is, we've said between 100 and 150 depending on the age and the size of the restaurant. Most are running closer to the 150 range, and we've also talked about sales generation that would be necessary to achieve about a 20% cash on cash return and we've been pretty happy with the results so far in us getting what our target return is.

Okay, but you mentioned a kitchen reimaging in your press release. What's that going to cost?

We haven't talked about that specifically but that is going to cost, I'll tell you that's around $30,000 a restaurant.

Okay, good. Congratulations. By the way I love the steak egg burrito breakfast burrito.

Awesome.

It's one of my favorites as well.

Thank you, Dean.

Our next question comes from Mr. Joe Buckley of Bear Stearns. You may ask your question.

Thank you. Just a follow-up on Dean's. The $30,000 for the kitchen set, that's basically equipment replacement then? It's not like a remodel of the footprint in any way in the kitchen?

No, all equipment.

Okay, and the charges, I think it's $0.06 a share that you expect from the kitchen move and the remodel cost, is a lot of that accelerated depreciation? Is a lot of that non-cash?

It's all accelerated depreciation or specific write-off, Dean. It's all non-cash stuff.

Jerry not Dean, please. He's got your name, but --

I'm sorry, Joe.

That's okay. I'm just joking and then lastly, the company openings for Qdoba seem to pick up a little bit in the fourth quarter and i think you're targeting a few more for '08. With a fourth quarter company openings was that just coincidental that they all fell in the quarter or are you pushing the company side a little bit more?

There's really more timing, Joe.

Okay, thank you very much.

You're welcome. Thank you.

The next question comes from Mr. Jonathan Waite of McKay Capital.

Good morning.

Good morning.

A quick question for you and I'm not sure that you have discussed this in the past but you know, your stock is trading in the teens below its peers and Chipotle is up near 50-60 times. Why haven't I heard in your calls any discussion about potentially spinning off Qdoba?

Actually, we have gotten that question several times and we really said at this point in time, we have no plans to spin off Qdoba. It's really a different business model than Chipotle. Chipotle is 100% Company owned versus Qdoba being almost 80% franchise, so in terms of earnings, it's significantly smaller than Chipotle, so really it's not even at the point where it would make sense to be a spun off Company or independently traded Company.

Because it's smaller?

Yes.

Okay, so what's your grand scheme as you look outside the 10 years?

Well, we continue to grow Qdoba. We continue to have synergies between Qdoba and Jack in the Box in terms of being the parent company of Qdoba, so we haven't talked about timing of spin off or whether or not we would even spin it off but we just know at this point in time it's not really in the plans.

Okay, thanks.

You're welcome.

The next question comes from Mr. Keith Siegner of Credit Suisse. You may ask your question.

Thank you. Menu innovation has obviously been key recently, and it sounds like a lot of the focus going forward seems to be on more traditional items like burgers and sandwiches. I know you've toyed with smoothies but is think any focus on alternative beverages or maybe some other kinds of products to target afternoon or late night?

Yes. There's quite a bit of focus on the beverage category. For competitive reasons, we're really not going to share the specifics of what we have in test but we do have several items in test at this point in time so you'll hear more about that as the year continues.

Might we see some of these products this fiscal year or is it --

You might.

Okay, with the increased proceeds from the refranchising, strong free cash flows, and no repurchase is really built into guidance, just remind us kind of the priorities from what you might be doing with the cash or how you would think about using that cash?

Our main priority is growth, so we are spending, and in fact, we've talked about ramping up the reimage program from to about 250 restaurants in 2008, and we talked about the kitchen enhancements both of which we think are growth oriented and again, 25,000, the franchise assistance which again we believe is all growth oriented and the right thing to do for the brand. We do have authorization from the Board for $200 million worth of additional share repurchases although we do not have that included into our guidance. We have a history of executing share repurchase programs, and then with respect to new restaurant growth, Linda mentioned two markets that we just entered into, Corpus Christi and Denver. We've been very happy with the results albeit early so you would likely see increased growth in new markets, so and then of course I guess we always have the option to execute share repurchase programs which is a lot of what authorized the additional package for us.

Okay, thank you.

Thank you.

(OPERATOR INSTRUCTIONS). The next question comes from Mr. Joseph Ginko of JPMorgan. You may ask your question.

Hi, actually it's Steve Rees from JPMorgan, how are you ?

Good.

Linda, so you guys pretty much led the way with higher quality premium products and now we're seeing a lot more competitive intrusion into that space specifically of burgers and I guess my first question is have you seen any impact in any of your markets from the competition and where do you see the biggest opportunity to maintain your point of differentiation going forward?

Right. We haven't really seen impact from competitors premium products. Our products all of our premium product launches have been very successful, and we'll continue on the strategy of looking for both shorter term new product ideas but also these longer term what we call platform development. It's really innovation around like for example, sirloin is a platform, so we did the sirloin burger or the sirloin steak, sirloin for breakfast, so we continue to look at various platforms going forward that really truly are innovative to our category and so we're not really concerned about me-too products from the competitors.

And I think you guys just introduced a new coffee. Can you talk maybe about what coffee is as a percent of sales and where you think that can go over time?

I actually don't have the mix on the top of my head and we don't really share mix of specific products. We were actually one of the early chains to introduce a more robust coffee, and so this is an upgrade to that earlier introduction about thee years ago, but we've already seen just from the introduction increase in our coffee sales so we think there's opportunity not only with this but future developments around coffee.

Okay, great. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS).

We'll take one more question if there is one. Sounds like there isn't. Thank you very much for your questions. Have a great holiday. Thanks a lot.