Jack in the Box Inc (JACK) 2008 Q1 法說會逐字稿

Good day everyone, welcome to the Jack in the Box incorporated first quarter fiscal 2008 earning could say presence call. Today's call is being recorded. A replay will be available on the Jack in the Box website starting today for those who can 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 the Jack in the Box Incorporated. Please go ahead.

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 first quarter of fiscal 2008 and discuss guidance for the second quarter and full fiscal year. 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 and 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, 10-Q and other public documents filed with the SEC. Now I would like the turn the call over to Linda Lang. Linda?

Thank you, Jerry. Good morning and thank you for joining us. As you can see in our news release this morning, Jack in the Box today reported diluted EPS of $0.60 in the first quarter, which exceeded the First Call consensus estimate by $0.03. The overall health of our business is strong with Jack in the Box and Qdoba brands each continuing to grow sales and our efforts to control labor and other costs offsetting some of the impact of continued high commodity costs and regional economic pressures.

For the quarter, same-store sales at Jack in the Box company restaurants increased 1.5%. This was our 18th consecutive quarter of comparable sales growth. Price increases were approximately 2.5% in the quarter. Along with a 5.6% increase in the first quarter of last year, the two-year cumulative increase of Jack in the Box was 7.1%. Our restaurants in Texas, the southeast and other key markets continued to perform quite well, but we have seen a slow down in certain western markets such as some of those in California due to an unstable housing market, continuing high fuel prices and increases in unemployment. These factors contributed to same-store sales growth in the quarter falling below our guidance.

Same-store sales at Qdoba system restaurants increased 4.5% in the first quarter, extending Qdoba's streak of consecutive quarters of comparable sales growth to 34. The key initiatives of our strategic plan have us well positioned to continue achieving our near term earnings expectations, and to continue growing our business in the years ahead. Our two restaurant brands added a combined 35 units in the quarter with Jack in the Box opening 10 new locations and Qdoba 25 new restaurants. Both brands expanded into new states, with Jack in the Box opening our first restaurant in Colorado in the Denver area, and Qdoba opening our first restaurant in Mississippi. We are also planning on entering new contiguous markets in Texas this calendar year with new franchise Jack in the Box locations expected to open in Midland-Odessa, Abilene, St. Angelo and Wichita Falls. An additional franchise market, Albuquerque, New Mexico is expected to open either late in 2008 or in early 2009.

As we noted in our news release, Jack in the Box introduced several new products in the first quarter. Our Sirloin Steak Melt for example, the most recent extension of our innovative sirloin steak platform, began rolling out to our restaurants in mid December. Other new products launched in the first quarter included grilled chicken strips with teriyaki dipping sauce and a chicken fajita pita featuring a whole grain pita. Also in January, we expanded our line of shakes made with real ice cream with the addition of our Cherry Chip Bliss shake. Among the new products scheduled for introduction in April is a BBQ Bacon Sirloin Burger which will feature a seasoned 100% sirloin patty topped with two slices of American cheese, crispy onion rings, bacon strips, and BBQ sauce, and served on a bakery-style bun. We will be expanding our breakfast menu with a warm cinnamon roll dribbled with icing.

Looking further ahead, Jack in the Box in continue our premium beverage menu, which now includes a new blend of coffee that we introduced in the first quarter. In April, we will begin rolling out two all Jack in the Box locations our next new beverage platform, real fruit smoothies, also in April, we plan to begin offering iced coffee as an additional coffee beverage for our bests. We are excited about the impact that these premium drinks are expected to have on our business, especially our line of fruit smoothies. Working with our beverage partner, Coca-Cola, we will offer three different smoothie flavors, each made with nonfat yogurt and minute maid fruit juice, strawberry banana, mango and orange sunrise. We have got a strong pipeline of other new products in various stages of developments or tests that slated for introduction in our third or fourth quarters. In addition, we have several promotions planned to increase traffic in markets effected by the slowdown in discretionary spending. Those promotions include the bundling of menu items such as the Big Deal that we launched in January as well as product price promotions.

To improve the level and consistency of guest service at our restaurants we will continue to develop initiatives that can directly influence our guest dining experience, such as new technologies like self serve kiosks that are currently in test at several dozen locations, along with the menu and guest service, another important factor contributing to a superior dining experience is the restaurant environment, and enhancing our restaurant facilities is the third major aspect of our brand reinvention initiatives. In the first quarter, the company and franchisees reimaged 51 restaurants, with a comprehensive program that includes a complete redesign of dining rooms and common areas. Including restaurants reimaged to date in the second quarter, we are well on our way to our full-year target of reimaging 350 to 400 restaurants, including 100 to 150 franchise locations. We expect the entire Jack in the Box system, including franchise locations to be reimaged over the next three to four years.

We recognize the importance of investing in the long-term future of Jack in the Box which is what we are doing with our restaurant reimage program as well as a new restaurant prototype that debuted late in 2007. This new generation of restaurant features a completely redesigned exterior. incorporates elements of our reimaging program, and features a reengineered kitchen design to increase throughput. Our new restaurant design also affords us an opportunity to test various green initiatives that can reduce energy and water usage while generating return for the company. We are currently testing energy efficient lighting, kitchen equipment and building materials at these new locations.

Earlier, I mentioned some of the factors that is are impacting discretionary spending in some of our markets. We believe our efforts to control labor, other restaurant costs and G&A will somewhat mitigate the impact of these near-term economic pressures. We also expect that thee new products that we will be rolling out over the remainder of the year, including additions to our innovative menu of sirloin products and our premium beverage platform will support continued sales growth at our restaurants, as well as transaction building promotions planned for certain markets. As a result of these initiatives, when the macro economic pressures subside, we believe that our business will be better positioned to continue achieving our long-term goals.

We have a well conceived strategic plan in place that has delivered solid results since its implementation four years ago. With a dedicated, experienced team of employees and franchisees executing the strategic initiatives of of that plan, we remain optimistic about the near-term and long term prospects for our company. Now I will turn the call back over to Jerry for a closer look at the financial side of our business. Jerry?

Thank you, Linda. Again, good morning, everyone. Again, Jack in the Box reported diluted EPS of $0.60 in the first quarter, which exceeded the First Call consensus estimate by $0.03. The quarter same-store sales at Jack in the Box company restaurants increased 1.5%, which was slightly below the low end of the range forecast and compared to a 5.6% increase last year.

Slower than expected sales growth and continued high food costs were partially offset by focused across the board expense controls at our restaurants, support and corporate G&A levels. Gains on sales of restaurants to franchise were approximately $0.03 per share higher than our forecast, primarily due to the average gain per restaurant of $600,000, was about 25% higher than the same quarter last year. Food packaging costs were 32.8% of restaurant sales in the quarter, About 170 basis points higher than last year which was consistent with each of the prior two quarters with continued high costs versus last year for cheese, cooking oil and eggs.

Weather conditions contributed to a short-term supply based increase in produce of 10% in the quarter, and beef was up modestly at 3%. I would like to provide some detail on the cost control initiatives that Linda and I spoke of earlier. All comparisons referenced are versus the first quarter of 2007. Labor costs were down 40 basis points after including the impact of minimum wage increases, due to tight labor management, including improved scheduling and reduced overtime. Utility usage was down approximately 9% on average, in restaurants where we have completed the kitchen enhancement installations. We reduced restaurant operating costs, including costs associated with package redesign, uniforms and supplies of smallwares and we reduced field G&A by approximately $2.5 million due primarily to our refranchising strategy and other expense reduction initiatives. We have a long history of implementing profit improvement program initiatives such as these cost control strategies just mentioned, which should continue to have a positive impact on earnings in the future.

During our fourth quarter conference call last November, we discussed incremental facility costs that we were anticipating in 2008, for accelerating our restaurant reimage and kitchen enhancement projects. These costs included in SG&A, along with an impairment charge in this year's first quarter, were approximately $0.03 a share higher than similar costs last year. With respect to our forecast for fiscal 2008, we are raising the high end of our full-year earnings guidance, due primarily to our first quarter results. We now expect to earn $1.98 to $2.08 per diluted share versus $1.88 per share last year. For the year, we have narrowed our same-store sales estimate to an increase of 2 to 3% for Jack in the Box company restaurants, with the second quarter sales guidance of 1 to 2%.

Our full-year same-store sales guidance for Qdoba remains unchanged at a 4 to 6% increase, including a 3 to 5% increase in second quarter. We are also raising the high end of the range for our full-year expectations on gains and cash flow resulting from our refranchising efforts. We are now forecasting 45 to $50 million in gains on refranchising 100 to 120 restaurants with resulting cash flow of 65 to $75 million. We believe that we will be in the range of the other assumptions supporting the full-year earnings forecast that we issued last November. Now, I'd like to turn the call back over to Linda. Linda?

Thanks, Jerry. We'll be happy to take your questions at this time.

(OPERATOR INSTRUCTIONS). One moment. Our first question comes from Larry Miller with RBC Capital Markets. Your line is open, sir.

Yes, hi, guys.

Hi, Larry.

I had two questions if I may. Linda, you mentioned that sales were slower in some of the western markets, and just, I am sure there's a lot of noise there. So I have two questions on that. Are you able to kind of separate out what is the macro trend of housing and so forth and what might be the weather, you had the fires in San Diego as an issue, and a lot of rain there, and also related to that, you talked about doing more value-oriented promotions. Can you give us an idea how that Big Deal meal worked in some of those more challenged economical markets there?

Sure. It is difficult to kind of tease out what's weather-related, what's macro. Our belief is that it is more macro related and less weather related. Certainly the weather has been worse this winter but we don't think that had a significant impact on our sales in the west. We think it is more related to reduced consumer spending, the housing has been significantly affected in California. So we think that's more of the, of the case and really. our plan is to get people back in the door Jack in the Box to really drive traffic. The Big Deal helped us in that regard. It was a very short promotion. It was a three week promotion, but we do plan on, we have another promotion that starts actually next Monday in some markets in the west.

And then I had a question, Jerry, I am still surprised that the cost of goods is up so much. And the reason I am surprised is that beef costs really were a big headwind for you guys at the end of last year. And it seemed to be less so right now, you are running about 2.5% price. Is there a mix shift going on on the menu toward that lower more value-oriented stuff that's causing some shift or is there something else we are not seeing that might help explain cost of sales being up in that range?

Larry, we weren't maybe as surprised as you may have been. The food costs for us, the 32.8% is right on where we were in Q3 of last year as well as Q4 of last year. And while you are right, beef increased higher in Q3 of last year versus where it was in '06 on a consecutive quarter to quarter basis, beef is pretty much where it had been for the last two quarters. And we continue to see high costs for cheese, eggs, and cooking oil, but we think this is pretty consistent with where our expectations were for the quarter.

Just on those 50s, is that, you guys have been mixing in, are we seeing any, I guess we are not seeing the pricing on beef?

Can you say that again you were breaking up on me just a bit.

Sorry about that. I remember at the end of the fourth quarter you said you were seeing some easing of the 50s that you mix in on ground beef to the $0.50 range from $1. Is that still the case?

Our 50s were in the mid $0.50 range for the quarter.

Okay. Thank you, guys.

Thanks, Larry.

Our next question comes from Dean Haskell with Morgan Joseph.

Congratulations on a great first quarter, Linda, Jerry and the whole team.

Thanks.

Can you give me more disclosure on the company openings and closures in the first quarter as well as franchise openings and closure, the detail in the release is a little sketchy.

Sure. Dean, for Jack in the Box, ten restaurants were opened, six company, four franchise. Company and franchise each closed two restaurants. On Qdoba, company openings were four, franchisees opened 21. And Qdoba franchise locations, six closed in the quarter.

Okay. And then more directly, Larry's question, was there a mix shift toward value? Did you see that in perhaps even on just the west coast.

We didn't really see that, Dean. We track our bottom share mix. We didn't see a significant increase in the bottom share mix.

Okay. Good. Congratulations again.

Thanks a lot.

Our next question is from Chris O'Cull with SunTrust Robinson Humphrey. Your line is open.

Good morning everyone.

Hi, Chris.

Hi. My first question relates to the promotions, Linda you talked a little about the new smoothies, do you expect to see a shift in preference from the milk shakes to the smoothies, and if so, would that not have a benefit to margin.

There is a little bit of transfer or cannibalization of the shake mix, but not significantly. We are seeing that it is a different customer and in our test markets that we got overall incremental beverage sales with the smoothie introduction.

And if there is any cannibalization, it should be higher profit pennies.

Correct. Exactly.

Okay. Good. And then it looks like your comp guidance for the second quarter implies an acceleration on a two-year basis from what was reported in the first. What gives you comfort that you can achieve that guidance?

Right. I think it is around our marketing plan and our targeted promotions to get traffic back in on the west.

Okay. So the big deal or the value oriented promotions weren't targeted I guess to specific traffic issues last quarter but they will be going forward?

They were but it was really only a three week promotion, Chris. So we are doing a little longer promotional in the second quarter.

Okay. That's fine. And then, a question, Jerry regarding the commodities, can you tell us which commodities you are exposed to price fluctuations in '08?

Maybe what I can do is give you guys a little more color than what we usually do around some of our contract pricing. For commodity. We usually don't talk a lot about that, but with food costs where they are it makes a little more sense to offer a bit more. Where, if we take cheese as an example, I am going to talk about some of the commodities that have really seen significant price increase. I am not going to run down through all of them. But between now and the end of our fiscal year, depending upon the month, we have somewhere between 60 and 80% of our cheese needs covered with contracts that are at higher prices than what we would like them to be, but at prices lower than today's current market price. We are pretty pleased about that, and that's part of the comfort that we have with our guidance going forward.

Eggs, not quite as much coverage there. We are exposed on eggs after June but we have 100% contracted up until June. Cooking oil, the forward contracts on the cooking oil are just a race that we don't think makes a lot of sense to take a great deal of coverage beyond the next couple of months but we are pretty well protected on that through the end of the second quarter. Beef, we are contracted like we usually are. Our chicken contracts expire at the end of March and we are in negotiations obviously now. And we do have a fairly modest increase based upon those current discussions baked into the full-year guidance, Chris.

Okay. What about wheat?

That helps.

What about wheat, Jerry?

Talking about bakery for a bit. We have two-thirds of our bakery needs are contracted through 2008 and we have one-third of the needs is up in the late second quarter early third quarter time frame. Again we are in negotiations with those bakery suppliers and we do have an increase baked into the forecast for that.

Okay. Great. One last question and Paul, I will ask it of you. The labor productivity improvements you are seeing, what's driving, what initiatives are driving this improvement?

I wish I could share something magical with you but it is good old-fashioned cost control focused on labor usage and overtime in those restaurants that were not meeting targets.

Okay. Okay. Great. Thank, guys.

Thanks, Chris.

Our next question comes from Brian Moore with Wedbush Morgan Securities. Your line is open.

Good morning.

Hi, Brian.

Linda, maybe I was hoping you could give us some color on the product platforms and I know that historically has been a stronger same-store sales driver just thinking about how many additional, beyond the ones we've talked about this morning we might expect for this calendar year as well as for calendar year 2009 and then if you could also perhaps maybe with the smoothie platform, address the complexity issue in terms of store-level execution, ticket times, what your experience has been there.

Sure. Brian, we just don't disclose much at all on the marketing calendar for competitive reasons. We continue with our strategy of one new product platform a year, so this year it's smoothies, we'll continue with some line extensions around the sirloin product, and we have another product, a unique innovative product coming in the fourth quarter. I can't give you much additional information on that.

With regards to the smoothies, operationally, not an issue, we did not see an impact, a negative impact on speed of service. It does require some equipment, new equipment that will be installed starting in the next 90 days or so. It is a roll out for the system that will take about four months. It is working well for us. We have tested it extensively. It is a great program.

Great. Thank you. Just maybe one follow up question related to the remodels, hope we could get an update, on I guess the sale that's associated with those remodels, if you are seeing a mix shift between drive-thru versus in-store dining, as well, when those might be completed. Also how you think about those cash flows, the free cash flow that might be once you get those remodels done, might be used to accelerate store development or are you more likely to look to additional share repurchases?

Let me talk quickly on the remodels and then Jerry will talk about the use of cash. On the remodels we continue to track the early market tests of Waco and Seattle. They're still out performing the system even two years into postremodel. I feel good that the reimage is meeting our expectations in terms of the return on that investment. And we are just seeing general overall increase in the business. So higher consumer ratings in those restaurants in those markets that is giving us a positive halo and stronger across the board business. And then on the free cash flow, Jerry, if you want to just --?

Yes, we have been utilizing before most of the free cash flow on share repurchases. And we continue to have a share repurchase program and authorization from our board and ability within with our, under our current credit facility. So, but when you do the cash on cash returns for both Jack in the Box and Qdoba company operated restaurants we plan we would continue to grow those as well. We haven't talked about an acceleration of that program yet but we are entering a new market for for both of those brands.

Okay. Thank you very much.

Thanks, Brian.

Our next question comes from Joe Buckley with Bear Stearns. Your line is open.

Hi, it's actually Joe Fischer sitting in. I wanted to ask you about the slowing sales, if you have seen any day part shift, if one day part has been weaker or if drive-thru versus in-restaurant if you have seen any changes there?

No, it is not any particular day part per se. It is really, and it is very much concentrated in the western markets. So, Texas is still very strong, southeast still very strong and other key markets that we have.

Okay. I think you said you had 2.5% pricing in the first quarter. Is that the amount of pricing that's baked into the guidance for '08 and if not, are you considering taking some additional.

That's it. We have taken the price increase that we have planned.

Okay. Just one more. I was wondering what the cost of the smoothie platform was on a store basis.

It is $8,000 per location.

Okay. Great. Thanks.

You're welcome.

Our next question comes from Rachael Rothman with Merrill Lynch. Your line is open.

Morning, guys.

Morning, Rachel.

There's a longer-term question, Linda, you guys have done a great job on all of the new product news, you seem to have, a great pipeline coming up as well. Can you talk a little bit about how you have been able to develop so many products and introduce them into the restaurant without developing kind of the operational hurdles that we have heard other companies talk about?

Right. We had two things, we have a very, very robust process from idea generation through execution through testing and execution where we have our operations involved, we have our marketing focus involved. We have our QA, our R&D, and so lot of work goes in up front as a development to make sure once we get it in the restaurant it doesn't affect our operations at the restaurant level. Then the second thing is really our capability through our invasion center. So, the fact that we have all of our cross functional teams housed in one 70,000 square foot center with the kitchens we need with mocked up Jack in the Box restaurant and equipment we are testing, I think that gives us a higher likely hood of success when we get into the market. It's the combination of both.

Then if I could just a quick follow up, do you think all of the new products have served more to increase the frequency of the customer that was already coming. or to attract a new clientele?

I would say on the, the premium products, it is really bringing in new customers. So we are expanding our reach. We are getting in some what of the more moderate user with the premium products.

Perfect. Thank you so much.

Thank, Rachel.

(OPERATOR INSTRUCTIONS). Our next question comes from Jeff Omohundro with Wachovia, your line is open.

Thanks. It is Jeff here. My first question, there's some comment that was kind of made in the prepared remarks regarding cost controls and specifically around utilities, it seems fairly significant. I was just wondering if you can elaborate a little bit on what steps have been taken in that area.

This is Paul, Jeff. The 9% improvement in utilities refers specifically to restaurants in which we have installed our new protein staging cabinets. It replaces a peace of equipment that obviously uses significantly more electricity. There's also labor efficiencies related with that.

Very good. And then my other one is a little bit broader but if you could, just talk a little bit to the premium beverage strategy and just a little bit around thinking of broadening the platform in premium beverage, perhaps going even deeper in coffee beyond iced coffee, perhaps to other premium coffee efforts. So, just wondering about that choice. Thanks.

Right. I mean we saw an opportunity and a lot of the other players have as well, in the beverage platform. Smoothies are just a huge trend especially among young people. So we really wanted to take advantage of that trend. We felt we could, Jack in the Box as a brand would have the believability in really delivering a great smoothie product. So working with our Coca-Cola partners, we came up, we tested several version of smoothies and we came up with what we think is a really great product. That's with regard to smoothies, it really isn't over there, Jeff.

We think there's an opportunity to expand the coffee, the coffee transactions and the coffee program. We were one of the first players to really enhance our coffee program a couple of years ago. The competitors kind of followed suit. We have enhanced our coffee again and we are rolling out ice coffee but we are working on other things beyond the ice coffee selection.

I see. Great. Thanks so much.

Thanks, Jeff.

(OPERATOR INSTRUCTIONS).

I think that's it. Thank you very much for your time.

Thank you for your participation. This does conclude today's conference call.