Jack in the Box Inc (JACK) 2008 Q2 法說會逐字稿

Welcome to the Jack in the Box Inc. second quarter fiscal year 2008 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 could 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 Inc. 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'll review the Company's operating results for the second quarter of fiscal 2008. And discuss guidance for the third 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 managements expectations for the future. Which are based on current information. Actual results may differ materially from these expectations based on risks to the business. 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. And 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 appreciate everyone making our call this morning, which started about a half an hour earlier than usual. We are excited to host some of you at our investors conference tomorrow here in San Diego and hope the earlier start time for this call has helped with your travel schedule. At tomorrow's conference, which will also be webcast live through our website, we plan to provide an in-depth look at our operations. A number of senior executives will be presenting information on both of our restaurant brands regarding franchising, growth, marketing and our financial outlook.

As you can see in our news release this morning, Jack in the Box today reported diluted per share earnings of $0.44 in the second quarter. While we experienced some softening in sales during the quarter as we rolled over high sales increases in fiscal 2007, our two year cumulative same store sales increase for Jack in the Box has been strong. Our restaurants in California, Las Vegas and Phoenix have been impacted by the housing down turn as well as higher fuel costs and unemployment. However our restaurants and other parts of the country, especially in Texas and the southeast performed well in the quarter. With economic pressures impacting consumer dining habits the tiered menu strategy at Jack in the Box provides our guests a wide selection, ranging from premium products to value-priced options. Our premium products are appealing to guests who are trading down from other restaurant segments while our value menu appeals to guests who are feeling the pinch from higher gas and grocery prices.

In markets most affected by the slowdown in discretionary consumer spending we'll continue to emphasize value in our advertising. In addition to promoting limited time value-priced offerings, our new product introductions planned over the remainder of the year include two value-priced additions. Menu innovation remains a major focus at Jack in the Box. Our recent introduction of real fruit smoothies and iced coffee demonstrates our ability to deliver the flavor and high quality our guests have come to expect at juice bars and coffee houses. But with the added convenience of drive through service that only our segment of the restaurant industry can provide.

Our real fruit smoothies are made from a blend of Minute Maid fruit juice and nonfat frozen yogurt and come in three delicious players, mango, orange sunrise and strawberry banana. Already our smoothies are proving popular as snacks as well as as a breakfast add on . We began rolling out this new beverage platform in April and expect it to be system wide by July. Coffee is another premium beverage platform that offers a lot of upside potential at Jack in the Box. This week we began offering three rich and delicious flavors of iced coffee at virtually all of our restaurants. Menu innovation along with upgrades to guest service and our restaurant facilities are the key elements of our strategic initiative to reinvent the Jack in the Box brand. Our comprehensive reimage program includes a complete redesign of the dining room and common areas. Since the current reimage program was adopted in 2006, more than 500 Company and franchise Jack in the Box restaurants, nearly a quarter of our systems have been reimaged.

In addition to brand reinvention, another key initiative of our strategic plan is improving our business model. We are very pleased with the steps that we are taking to control labor and other restaurant costs as well as general and administrative expenses. These steps are creating a cost structure that will have us well positioned when economic conditions improve. The two other key initiatives of our strategic plan are to continue growing our business and expanding our franchising activities.

Through the first half of fiscal 2008, the Company and our franchisees have opened restaurants in several new contiguous markets. Those restaurants are performing very well with sales exceeding our expectations. Their success demonstrates the strength of the Jack in the Box brand. Franchisees are also expanding the Jack in the Box brand into several other new contiguous markets in Texas such as Abilene where the first Jack in the Box restaurant opened earlier this month. Construction is currently underway on new franchise restaurants it in Odessa and San Angelo.

The key initiatives of our strategic plan along with our ongoing success in controlling costs have us well positioned to continue growing our business in the years ahead. We realize there will be challenges to our business given the weak nd uncertain economic climate in many of our western markets. However with a dedicated, experienced team of employees and franchisees executing our plan, we remain optimistic about the near term and long term prospects for our Company. Now I would like to turn the call over to Jerry for a closer look at the financial side of the

Thank you, Linda, and again good morning. Our second quarter earnings of $0.44 per diluted share exceeded the First Call estimate. For the quarter, same store sales at Jack in the Box Company restaurants decreased 0.1% compared with a 6.4% increase a year ago. System same store sales at Qdoba increased 2.4% on top, in the quarter on top of a 3.5% increase last year. Lower than expected sales and higher food costs reduced the second quarter restaurant operating margin to 16.5% of sales. Food and packaging costs in the quarter ran about 190 basis points higher than last year. Cooking oil up about 50% versus last year, cheese up about 35% and eggs up about 20%. Beef was up just under 1% versus the second quarter of lasted year.

We expect the high cost of commodities will continue through the second half of our fiscal year. Our forecast for the second half of fiscal 2008 calls for an approximate 3% increase in commodities over fiscal 2007 and includes significant increases in the price of cooking oil with some moderation in the growth rate on eggs and cheese. We expect beef to be up in the range of 1 to 3% the second half of the year. In the second quarter we locked in chicken prices with various suppliers ranging from 6 months to 24 months at an average increase of just over 1%.

Although commodity costs are significantly impacting our restaurant operating margins our actions to control costs mitigating their full impact and lowering our cost structure exclusive of commodities. For the quarter labor costs are down 40 basis points from last year, due primarily to effective labor management including reduced overtime. The ongoing roll-out of our kitchen enhancements including energy saving equipment is continuing to drive down electricity costs by approximately 8% on average. We now have more than 1100 of our restaurants with the new kitchen equipment.

Our profit improvement program initiatives have helped to reduce restaurant operating costs in the area of packaging, supplies and small (inaudible), and our refranchising strategy and a strong focus on profit improvement program initiatives reduced field and other G&A expenses excluding advertising by approximately $3.4 million for the quarter versus last year.

For fiscal 2008 we have lowered our same store sales estimate for Jack in the Box Company restaurants. We now expect sales to be flat for the full year and down approximately 2% for the third quarter. The two year cumulative increase of 5.4% for the third quarter. The two year cumulative increase of 5.4% in our upcoming third quarter is down approximately 1%, from the second quarter's two year Q due to primarily to continued softness in consumer spending. For fiscal 2008 we are affirming our full year earnings guidance of $1.98 to $2.08 per diluted share and and with that I would like to turn the call back over to Linda. Linda?

Thank you, Jerry. We'll go ahead and take your questions now.

(OPERATOR INSTRUCTIONS) First question comes from Brian Moore, Wedbush Morgan.

I guess some clarity, maybe, on the cost of sales, if you could help us understand maybe some of the pressure from mix during the quarter. You had two value promotions at one point. And then as well, where you sit on the beef trimmings for the second half the year?

Brian, I heard the second part of that question if you could let me answer that one first. Then if you could reask the first part again, that would be helpful to me. The beef trimmings for the second half of the year, right now our forecast for the third quarter is about $0.70 a pound plus or minus a little bit. Last year for the third quarter we ran about $0.80 a pound. Where we think the pressure is on beef, particularly for the second half of the year the imports on the $0.90. Right now we are covered for the third quarter at prices between $1.40 and $1.47. So we feel pretty good about the beef situation right now. Certainly compared to last year.

Okay. Thanks. The first part of my question was actually related to, I guess, the pressure on dairy. And given comments by some coffee restaurants and thinking about where the pressure was there. Was it from mix? Is there a mix issue in terms of the value promotions that were being run during the quarter?

Yes. Pressure on cheese was primarily with respect to cost. We did not start to see our cheese increases last year until the beginning to mid third quarter of last year. So we are rolling over relatively modest or low cheese prices last year. We had our cheese prices covered for about the first half of last year at somewhat lower than what market rates were.

Okay. The question on sales trends, I guess given the Q3 guidance, would it be fair to assume that the negative 2% guidance is based on the first month of the third quarter?

Brian this is Linda. When we set the guidance for quarter three, we considered several things. One is the strong roll over from last year, so quarter three, prior year was up 7.4%, so strong roll over number. And we also did consider the most recent sales trends and felt that it was prudent to be somewhat conservative, given really the uncertainty of the economic climate. And especially in those, in our major markets in California, Arizona and Nevada. We have strengthened the promotional calendar later in the year, it's a little back-end loaded and we two believe this two tier strategy makes sense for our brand where we have both premium products as well as value-priced products.

Okay, thanks, Linda. Any trend in terms of day parts or day of the week where you may have seen softness during Q2 or Q3?

No, it was really across-the-board. What we've seen is we have seen our -- kind of the mid, what we call the mid tier transactions. Those are things like Ultimate Cheeseburger, Sourdough Jack. They are not real high premium products, they are not the value products. That is what we have lost sales on. Those probably are the construction workers that have lost their jobs or they are simply trading down into value products or out of the -- out of the segment.

Okay. Anything on the sales gap between remodels and the comps you reported? Has that been sustained? Or was the deceleration similar with the remodel restaurants during the quarter?

Well, it really is more regional based. It is hard to kind of net out the two. We are just seeing weakness on a more regional basis, regardless of whether there is a reimage or not.

Then on products I guess if I may understand correctly, I'm not sure if you are doing a $20 kind of stored value card, get $5 free. But I'm wondering what the value promotion is going to be in Q3?

Stay tuned.

Stay tuned. Okay. How about the sirloin burger, the line extension there could you maybe characterize the success of that item relative to the previous line extensions, the sirloin melt and patty melt?

I would say the sirloin steak melt was a little stronger product in terms of mix, it was a little more unique so that was probably a little more successful in terms of a product introduction. The barbecue bacon sirloin burger, the mix was a little bit lower than what we had seen in our test results, but still very solid. Still those are both strong products for us. Again, it was not really our premium products that we were seeing the weakness it was more of this mid tier product line that we saw some weakness and actually a little bit of weakness on the value products as well.

Okay and smoothies in how many stores currently?

We have smoothies in 300 locations.

And the expectation the end of July that will be fully rolled out?

Yes, I'm sorry. We have 600 locations with smoothies and the expectation is to have it completed by July. End of July. And early results look good. I mean they really are selling -- selling well.

Linda, you certainly have been in the industry a long time. Maybe any kind of macro view on, I guess what we have seen has been a trade down within or deceleration of sales within fast food or QSR it seems casual diners have suffered for so long and QSR had held up well. Now we just get negative retail sales in yesterday for restaurants QSR sales seem to be softening . Any thoughts on your experience during previous down

Well, you could go back to 2000, 2001 where some of it was self inflicted because we were doing agressive discounting at that time. There is a little fear of that perhaps if you read about Taco Bell they are rolling out a very aggressive value menu. I think it's all related to the economic conditions. And you have that, coupled with the high fuel costs, and the regional, regionality of the low housing market. I think it's a little bit tougher. It's tougher than I've seen if my 20-something years in the industry.

Okay. Thank you. Just one final question on G&A, maybe for Jerry. Tremendous improvement on a dollar basis and percentage. How should we think about that going forward? Three to five years out, given, I guess, from a nominal basis as well as a percentage of sales basis?

It's much easier to talk about the nominal basis rather than the percent of sales. We have a strong focus on continuing drive down our overall cost structure. Not just G&A, but all of our costs. And we would expect to continue to see G&A reductions until we have reached that level of 70, 80% franchise operated restaurant. So I would continue to expect to see annual decreases in G&A over the next at least three to four years and probably beyond.

Could you remind us just what the -- is it a dollar number per store that we could maybe tie it to per refranchise store?

Yes. We were estimating about $28,000 per restaurant. And that has proven to hold up over the last year, 15 months.

All right. Thank you very much.

Our next question comes from Mr. Larry Miller, RBC Capital Markets. Sir your line is open.

Thank you very much. I just had two questions, guys. Some of your competitors out there have been talking about having issues refranchising stores. It looks like you got a lot done in the quarter, that the plan came down a bit to the lower end. Can you kind of give us an update on the franchise finance world as you guys see it?

Larry, this is Paul. There is no question our franchisees and the lenders are looking more closely at the deals and requiring more equity in the deals. But to date we have not had a deal unwind due to financing.

Great. And the pipeline still looks reasonably full?

At this point, yes.

Okay. Great. Then my second question was just on the guidance and I'm just trying to understand maybe what's expected in your guidance and what's not? From two areas, same store sales? Is there any same store sales expectation built in for the Smoothies and the coffee program? Any rebates at this point?

Yes, no. We really haven't built anything significant in, Larry, for either rebates or the coffee or smoothie program.

Okay, great. Then just on the EPS side, as it kind of trickles down the P&L, anything built in for additional share repurchases or?

No, we do not have anything additional baked if for new share repurchases.

Perfect. Then just a clarification then ask I'll hop off. On the food cost side, it sounds like there are some pushes and pulls but generally it sort of, I think what we thought is that sort of 1% to 2% inflation for the year still a good number Jerry?

For food costs?

Yes. Or has that gone -- I mean, that's what you were talking about not too long ago.

Food costs for the full year will be up in the 3 to 4% range.

Okay. 3 to 4. And that's just the change sort of -- it wasn't that the first half was more than you thought at sort of the back half was going to be a little bit higher?

--was up 5%.

Okay. That's helpful.

Our next question comes from Mr. Steven Rees of JPMorgan.

Thank you. Just on the full year earnings guidance, with the same store sales range coming down 2 to 3% I would have thought there would have been more earnings downside just given how many Company stores you do own. What drove the upside relative to your previous expectations or what surprised you on the cost side that allows you to keep that full year unchanged?

Part of that is the rollover on the food costs, so we do expect some improvement in restaurant operating margin over where we were in the first half of the year because of the rollover effect of the higher food cost last year. We are expecting some improvement there. We expect continued lower operating costs, lower labor and lower G&A.

Okay. And then just on, on just menu mix, some of your competitors are talking about negative mix. I thought it was interesting going to your comments that it sounds like you are seeing more pressure store in the middle of the menu range and partially on the value side. Can you talk about how mix as trending for your system?

In terms of the mix impact on our same store sales?

Yes.

We don't usually give a lot of detail around that.

Okay. But are you seeing pressure? I mean is the strength on the higher end, is that enough to offset the value side or are you seeing pressure in your overall average check?

We are seeing, as Linda mentioned earlier, we are seeing improvements and continued strength in the top tier. And it is this middle tier piece that we are losing. And it's not necessarily related to a particular day part.

Okay.

It is more traffic related is really the softness.

Okay. That's helpful.

We are just seeing those mid tier transactions and some of the value transactions.

Okay.

That we are now addressing in our calendar. Our promotional calendar.

Okay. Just finally on value, it sounds like that's going to be more, prevalent in the second half. How are you thinking about that? Are you engineering products specifically designed signed for value that aren't going to be dilutive to margins? Or are you going to consider some temporary price reductions?

There are new product introductions that are value-priced.

Okay. They are specifically designed too that.

Yes.

Great. Thank you.

Our next question comes from Mr. Keith Siegner Credit Suisse. Your line is open.

One quick question. I noticed in the long-term outlet there was some change in the language related to Qdoba and CapEx . I was wondering if you could just tell me a little bit -- are you thinking differently about that brand and how you might want to invest it in over the next two to three years? It sounds like you might be more open to accelerating Company owned unit

Yes, that is correct. We have, and it's something the return on the investment in Qdoba Company, clearly the returns are very strong. And it makes sense for us to go in and accelerate the growth of the Qdoba Company restaurants and build out more rapidly those Company-owned markets. So we are accelerating the growth, we haven't laid out those plans exactly yet. But traditionally we run about 10, only about 10 Corporate or Company locations a year. This year we are close to doubling that and then we'll accelerate from that going forward.

Does that have any impact on your targeted growth for Jack in the Box or not?

No it shouldn't. It is still a relatively small number. We have been shifting our growth on the Jack in the Box side from Company growth to franchise growth so we'll continue to do that.

One quick follow-up on the refranchising. I understand that no deals have fallen through . it does seem like the gains on the refranchising and the proceeds keep coming in higher than the long-term guidance for that program. Has there been -- have you been focusing primarily on getting the deals done for the higher quality stores. Is this something we should think about possibly catching up next year when say the financing is better for the lower performing stores? How should it go to think about

We have been targeting, Keith, selling the restaurant in markets that we believe will be better served as being franchised, owned and operated. So it's not around a sales volume target. What you, I would tell you though, that the reason that the cash as well as the gains have been going up is really twofold. One is it is a function of the cash flows. And of the restaurant that we are selling. So to some extent you could deduce that we are selling a little higher volume restaurants than what we had been. But that's not by design. It's designed more around which market do we want to sell. And the other thing is if you just compare this to three or four years ago, our average unit volumes were up quite substantially over that time frame so you would expect to get higher gains and higher sales prices from those restaurants as a result of the improved operations.

Okay it is not really a function of say the current environment for the franchise? Okay. One last question, is it possible we could get us a little information about the trends throughout the quarter? Say the monthly trends and how that progressed on the comps basis?

Yes. I don't think there was the significant difference from one period to the other.

Okay . Thank

Our next question from Mr. Jeff Omohundro, Wachovia, your line is open.

Thanks. Just one question. Interested in what you are doing if the kitchen. Both in terms of the enhancements referred to, designed to handle increased product innovation and also in terms of what efficiency opportunities you might have?

Sure, Jeff, this is Paul. There is two elements two our kitchen enhancement program. One is a refrigerated condiment rail, modular in nature which allows us to keep high quality specialty condiments and toppings and sauces at the point of assembly rather than in a refrigerator that the employees would have to go to, to get the products from. So it enables menu innovation as well as creates some labor efficiency for us. The second element is an improved protein holding cabinet, a replacement to our our patty staging system which provides for a higher quality product, as well create labor efficiencies and has delivered nearly 8, or approximately 8% utility production.

Very good. Thanks.

Thanks, Jeff.

Our next question comes from Joe Buckley, Bear Stearns.

In the last earnings release on the guidance, the same range obviously, $1.98 to $2.08, but you mentioned that that included a variety of items, the contribution of franchisees for the reimaged restaurants, facility charges, a higher tax rate, so forth. Are all those items roughly the same? Or have any of those shifted? Is all that still included in the $1.98 to $2.08 and.

Yes, Joe, they haven't shifted significantly. There has been some modification to it but we just didn't put it in there because we felt it was old news.

Then also just on the same store sales guidance, assuming you do come in down about 2% for the third quarter, just doing a quick calculation it looks like it implies returns to positive comps in the fourth. Is that the right read on that? Is that the game plan to get to flat for the year?

Yes. Modest increase, yes, if you do the math.

Okay. Lastly on the labor side, what are you doing to control the labor costs? And Jerry, I think you mentioned overtime going down. Is that overtime for the managers or assistant managers? Could you kind of walk through what you are doing to control labor costs so well?

Joe, this is Paul. On the control side i's good old fashioned cost control. Nothing more. It's controlling those -- better control over those restaurants that we are using more hours and more overtime. It is predominantly crew overtime. And then the second piece is some labor efficiencies we have gained from the aforementioned kitchen enhancement.

(OPERATOR INSTRUCTIONS) Our next question comes from Mr. Chris O'Cull from SunTrust. Your line is open.

Linda, during the quarter I know you ran the Ultimate Cheeseburger for about three weeks at $1.99 to address this kind of demand for value. Do you think consumers are seeking value from fast food or more price point sensitive? Do you think you need to promote a $0.99 offering?

Chris, I don't think it has to be $0.99. I think what -- what customers, consumers are looking for are good value for the money. So if you look at, for example, Subway's $5-foot long, that is a pretty good value for the money. So I think bundle deals, products that are designed at a fairly low price point. I think that makes more sense than doing an aggressive $0.99 or $0.89, $0.79 price promotion.

Okay, that's helpful. Then, Linda, how many remodels have been completed in California? If you could comment on how those remodels have performed relative to the remodels that were completed in areas like Texas?

You know what, Chris. We'll have to get back to you on that. I don't have information at hand right now on California remodels.

Okay of the percentage of the system done have they been primarily in California?

No. They have been really across the system. You know we did all of Seattle and we did Waco. But now a year and a half plus into the reimage. So the rest of them have been some small markets across the system and then onesey, twosey in different areas.

Jerry, G&A was lower it looks like on a sequential run rate basis. Can you tell us what percentage of this improvement quarter to quarter relates to more permanent savings associated with the refranchising program versus temporary savings like maybe bonus changes?

It's virtually all permanents. There was timing differences improved from quarter one's run rate. But primarily the vast majority of this was permanent savings.

Okay. Great thanks, guys.

Thanks, Chris.

Chris, let me just also mention I want to have one perhaps minor adjustment to my response to Brian Moore. When I said $28,000 down on G&A what I didn't mention is every time that we refranchise a restaurant when we reduce G&A down 28 to that restaurant we add about $5000 in support for the franchise restaurants. I just want to make that clear for your models.

Great . Thanks,

(OPERATOR INSTRUCTIONS)

I think that's a wrap. Thank you very much for joining us this morning. We'll see some of you tomorrow. Thanks.

Thank you for participating in today's conference call, you may disconnect at this time.