Jack in the Box Inc (JACK) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box third quarter 2008 earnings conference call. Today's call be is being broadcast live over the internet. A replay of the call be will available on the Jack in the Box website starting today for those who would 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 Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Thank you, Wendy, and good morning, everyone. Joining me on our call today are: Chairman and CEO Linda Lang, our President and Chief Operating Officer, Paul Schultz, and Executive Vice President and CFO, Jerry Rebel. During this mornings session we're review the company's operating results for the first quarter fiscal 2008 and discuss guidance for the fourth quarter and full fiscal year. Following today's presentation, we'll take questions from the financial community. Please be advised during the course of our presentation and our question-and-answer session today, we will make 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 in the business. The Safe Harbor statement in yesterday'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 10K, 10Q, and other public documents filed with the SEC. And with that I'll turn the call over to Linda.

Thank you, Carol. Before I go on I would like to take this opportunity to welcome Carol to Jack in the Box. I think most of you this morning's call know that Carol joined Jack in the Box last month as our VP of Investor Relations and Corporate Communications. During her lengthy career in finance and investor relations, Carol has earned an outstanding reputation in her field and is well respected among the investment community. We feel very fortunate to have her on board, and are really looking forward to her contribution to our organization. Again, Carol, welcome.

Thanks, and I'm have happy to join the Jack in the Box team.

Carol has nearly completed the transition of IR responsibilities from Hal Sachs, who as most of you know will be retiring at the end of this year. Hal is also here with us this morning as he has been on these calls for many, many years. Hal has been with Jack in the Box for nearly 30 years and has been a tremendous asset in managing our relationships with our analysts, our major investors and financial partners. Hal, I would like to thank you for all that you have done over the years for this organization.

Thank you, Linda, for your kind comments, appreciate it.

Sure. While Hal continues to transition his IR responsibilities to Carol, he will continue in his capacity as Treasurer until the effective date of his retirement. Now taking a look at third quarter results, I would like to offer my perspective on some of the numbers that we reported yesterday. On the strength of new products introduced during the quarter, like our real fruit smoothies, same store sales at company Jack in the Box restaurants were only slightly negative in the quarter versus the 2% decrease that we forecast in mid-May. Our two-year cumulative same-store sales increase of 7% for company Jack in the Box restaurants in the third quarter improved upon the 6.3% two-year cumulative increase those restaurants achieved for the second quarter of 2008.

Same-store sales at our company restaurants in California, Phoenix, and Las Vegas combined improved versus the second quarter of 2008. These markets account for approximately 40% of total company restaurants, with California now representing about 31%. Same-store sales outside of these markets combined remained positive, improving on both a one-year, and two-year cumulative basis. On the cost side, higher commodity and utility costs continue to negatively impact our business in the third quarter, but we're pleased with how our restaurants are performing in this difficult environment. Our restaurant management teams are doing a great job in running their businesses. As a result, we continue to see improvements in labor management during the quarter. We're also seeing lower turnover at our restaurants, which is resulting in additional cost savings.

In addition, profit improvement program initiatives implemented to reduce field and other G&A expenses help to partially offset the inflationary costs we are seeing. While we believe that price increases will be necessary, we recognize that consumers are coping with higher costs for everything from fuel and utilities to groceries. With that in mind, we will proceed cautiously when it comes to raising prices. To that end, we have engaged a well recognized pricing consultant to develop recommendations for location level prices intended to optimize profit at every restaurant.

Our tiered menu strategy from premium products like our sirloin burgers to value offerings like the recently introduced nacho cheese burger and nacho cheese chicken sandwich is keeping Jack in the Box relevant to a wide range for consumes, including those whose discretionary spending has been especially hard hit by the country's economic problems. It is important to emphasize that all of our products on our value menu are engineered to provide great value to our guests, without negatively impacting our restaurant margins. We've got a great lineup of new products on our fourth quarter calendar, intended to drive traffic to our restaurants. This kind of menu innovation as well as our marketing savvy are at the heart of our strategic initiative to reinvent the Jack in the Box brand. Another key initiative of our strategic plan is to expand our franchising activities, and we continued to make great progress on that front. In 2008, we have accelerated the rate of our refranchising efforts, including 17 company restaurants refranchised in the third quarter, which were all in California. We have sold 30% more locations to date this year than during the same period in 2007. We are now 53% franchised in California, up from the low 40% range two years ago.

Our franchisees are helping our organization achieve another major strategic initiative, growing our business. Among the new restaurants opened in the third quarter, were franchise locations in Abilene, San Angelo, and Odessa, Texas. As we continue to sell restaurants, we also often entering in to new development agreements which will enable our franchisees to fill in existing markets as well as expand our brand into new DMAs. We're making solid gains on a fourth key strategic initiative: improving our business model. This is a sweeping strategy that goes beyond the ownership mix of our restaurant and involves all aspects of our organization.

We're looking hard at the way we are do business and are actively pursuing opportunities to improve our processes and procedures. For example, your new product re-engineering process significantly shortened the amount of time that we were able to bring our real fruit smoothies to market. And again, this has been a great new product launch for us. Continued success in executing each of the major initiatives of our long-term strategic plan is key to our ability to grow earnings and free cash flow, in order to create a business model that is less capital intensive and not as susceptible to cost fluctuations. Now I'll turn the call over to Jerry, for a closer look at the financial side of our business. Jerry?

Thank you, Linda. And again, good morning. Yesterday afternoon we reported third quarter earnings of $0.51 per diluted share, compared to $0.54 last year, which included a benefit of approximately $0.04 a share due primarily to an insurance recovery. Last year's quarter also included a lower tax rate, which accounted for a difference of approximately $0.03 per diluted share. Linda just reviewed our sales performance for the quarter, so I'll jump right into a discussion of restaurant operating margin.

Overall, restaurant operating margin decreased 70 basis points versus the prior year, to 16.7% of sales, but was consistent with our internal expectations, and 20 basis points higher than in the second quarter. Food and packaging costs in the third quarter were 50 basis points higher than last year. For the third quarter shortening was up 52%, eggs were up 28%, and cheese was up 20%. For some perspective, those three commodities combined account for nearly 12% of our food costs. Beef, which is our largest single-commodity purchase at approximately 20% was up 1% versus the third quarter of last year. Along with higher food costs, utilities were also up by 40 basis points in the third quarter, primarily due to higher gas and electricity rates. These factors were somewhat mitigated by our continued focus on labor management, which generated a 30 basis point improvement in labor costs versus last year. As part of our reimage incentive program for our franchisees we paid approximately $1 million in incentives based upon completed reimages, which reduced franchise revenues.

As you may recall we announced earlier this year an incentive payment program of $25,000 per restaurant to our franchisees, assuming certain time and other requirements were satisfied. There were no such payments last year. With respect to SG&A, on both a quarter and a year-to-date basis, the absolute dollars spent were lower than the prior year after adjusting for the insurance recovery in fiscal year 2007. Gains on the sale of 17 company-operated Jack in the Box restaurants to franchisees totaled $15.2 million in the third quarter, compared with $12.3 million in the year-ago quarter from the sale of 22 restaurants. Through the first three quarters of fiscal 2008, cash proceeds on 68 Jack in the Box restaurants totaled to franchisees averaged $793,000 per restaurant, and gains averaged $636,000 per restaurant. Future cash proceeds and gains on sale will very based on the cash flows of the specific restaurants we franchise.

Before I review our fourth quarter and full-year guidance, I would like to provide some additional color with regards to the composition of our commodity cost and our outlook. Let's address the outlook first. Overall we expect commodity costs in the fourth quarter to increase about 5% versus last year, which is consistent with the increase that we saw in both the second and third quarters. The increase in the fourth quarter is expected to be driven by higher cost for beef, which we believe will increase in the high single-digit range for the balance of the calendar year. We're seeing prices stabilize for cheese, dairy and eggs, however, which is expected to partially offset the higher beef prices in the quarter.

Now let's take a look at our commodity composition. As I said earlier, beef is our largest single commodity, accounting for 20% of our spend. There are limited opportunities for us to enter into forward contracts on the entire beef complex. However, on the lean trimmings or [90s], we have about 20% of our needs covered through December. With import [90s] now priced at a premium to domestic, we are moving most of our needs to the domestic market. Our second largest commodity is chicken, accounting for 12% of our spend. We have fixed-priced contracts on chicken that run through March 2009 for 65% of what we use and 35% through March of 2010. The next three largest commodities all of which we have contracts for include soft drinks, bakery, and potatoes, which account combined for approximately 25% of our spend. Our potatoes contract is the shortest, expiring at the end of our fiscal year.

The only other commodities that individually account for more than 5% are currently cheese and produce. With respect to cheese, we have 75% of our needs covered through October, and about 40% through December. And we have various produce contracts that cover us through fiscal 2009. I know that was a lot of detail, but I hope the additional color will be helpful for you.

Now let's look at our guidance for the fourth quarter. Same-store sales at Jack in the Box Company restaurants are expected to be approximately flat on top of a 5.2% increase in the year-ago quarter. And same-store system restaurants are expected to range from flat to a 1% increase on fop of a 5.8% increase in the year-ago quarter. Wrapping up, I'll only highlight the more noteworthy changes to our full-year guidance since mid-May, rather than reiterate all of the information provided in our news release. For the full year, we're narrowing our EPS guidance to a range of $2.01 to $2.05 per diluted share versus $1.87 per share last year. Our refranchising initiatives is now expected to deliver $55 million to $60 million in gains on the sale of approximately 100 Jack in the Box restaurants to franchisees, with $70 million to $75 million in cash proceeds resulting from those sales. As a note, we do expect to file our third quarter 10Q in the next day or two. And now, I would like to turn the call back over to Linda for closing remarks. Linda?

Thank you, Jerry. Before opening the call to Q&A, I would like to summarize the progress that we're making in executing the four key initiatives of our long-term strategic plan. We're growing our business by adding new Jack in the Box and Qdoba restaurants, including locations in new contiguous markets. Restaurant openings in these new markets have been very strong and have exceeded our expectations.

Our brand reinvention initiative is keeping our innovative menu relevant to a broader base of consumers while our restaurant employees are increasing their focus on improving guest service, and our restaurant reimage program along with our new restaurant prototype are creating a warm and inviting environment for our guests. We're expanding our franchising activities, increasing the ownership stake that franchisees have in our system as we move toward a goal of being 70% to 80% franchised. And we're improving our business model by adopting more efficient processes and practices, maximizing efficiencies in our restaurants, and improving the cost structure of our field and administrative facilities. And now we'd be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) One moment for the first question, please. Our first question is from Chris O'Cull. You may ask your question and please state your company name.

Hi. Good morning, everyone, this is Chris from SunTrust.

Good morning, Chris.

Hi, Chris.

Hi. Linda, it appears that McDonald's plans to expand the middle tier of its menu items priced around $1.30 to $2. How do you think that will impact Jack's business?

In terms of our product pipeline, I feel really good about the products that we have, and the snack platform that we'll rolling out with the pita snacks, those are priced at $1.99 and will be very competitive that anything that McDonald's as allowed in that price range. So I feel confident with our platform of the snack wraps, also with -- Chris, on the breakfast bowls as well. It's a really about offering the unique innovative products with high-quality ingredients but really good value for the money, which is what we have in our pipeline going forward.

Do you think it may help with the more value-sensitive users, if they don't have as many new options on that dollar menu at McDonald's because of the focus on the middle tier?

Yes. Absolutely, I think if they make a move to move off of the $1 double cheeseburger, that would be helpful.

Okay. And then when you look at the prices or the products that you have taken price increases on, have you seen much demand sensitivity to those increases?

Generally in our test -- and we do test price increases, that's really what we're looking at. We offset the price -- we ensure that we're getting flow through on the price increases, so the 2.5% is working for us, but as I indicated, that we are engaged with a pricing consultant, and we'll provide more information for you guys later, probably in November at the November call.

Okay. Okay. And then two more questions, have -- I know you have started to advertise the refranchising opportunities. And I think you have even hired some folks inside to help support that effort. Have you seen much traction from that effort?

Chris, this is Paul. We actually just recently begun. But yes, we have definitely seen a fair amount of interest in our program.

Okay. Okay. And then Jerry, just a modelling question, you ended the quartered with about $70 million more in debt than you had in the second quarter, yet the interest expense was less. Is that because you are moving down on the pricing grid?

The -- couple of things, Chris. One is the $70 million worth of debt was not throughout the entire quarter. We have seen a lower interest rate for generally Q2 versus Q3, but the share repurchases, which is really what generated the $70 million worth of debt in the third quarter happened at a fairly slow pace throughout the quarter, so the average debt for the quarter would have been significantly lower than that $70 million, Chris.

Okay. Could you give us the share count at the end of the quarter?

Yes. The fully diluted or the actual?

The -- I guess either one will work.

Actually if you look at the balance sheet that was in the press release yesterday, the shares are there less the treasury stocks, so you can get exactly to that number.

Great. Thanks, guys.

Thanks, Chris.

Thank you, our next question system from Keith Siegner, you may ask your question and please state your company name.

Credit Suisse. Just a quick question, I want to follow up on the franchise margins a little bit. I understand the complexities of having the contributions to the franchisees. I understand how that's impacting. But I was wondering if you could just talk a little bit more about the dynamic, because we had that in place in second quarter to some extent as well, and this was the first quarter where the franchise margin was actually down year over year. Just if you could help us understand maybe the pressure from the mix shift between royalties and profit revenues, maybe how much was related to initial franchise fees? If you could help us understand the dynamic of why that is actually down this quarter would be very helpful.

The third quarter was the first quarter this year where we have had significant payments to franchisees. We had -- we paid on 42 restaurants in the third quarter, only 64 restaurants out of the entire year. So it doubled the payments that we had in both Q1 and Q2 combined. If you factor out that $1 million on the revenue line, we would have been within 10 basis points or so of where the margin was last year. Now having said that, what's a bit, perhaps, more complicated in our franchise margin line, is the fact that we have -- we charge franchisees rent for our properties that tends to be at a roughly 3.5% higher rate than what we pay, but that will fluctuate based upon the individual restaurants sold. So you are going to see some fluctuation on that from time to time, but it's not going to create significant changes. The significant change in the quarter was the payment of the $1 million in the change on the reimage program.

Would it be safe to assume that on a year-over-year basis there was more property revenue contribution to the total franchise revenues than the prior year?

Yes, we made no contributions to franchisees for the reimage program last year. This was a program that we just began this year.

No, I mean on the property revenues, since they do carry a slightly lower margin than just royalties --

Okay. I see what you are saying. Sure, exactly.

Okay. And then one other question about the franchisees, and we were talk about getting more interest from the marketing. I know this is a tough environment operationally, and from a liquidity perspective, but can you tell us where you stand now on the commitment pipeline? What's changed maybe in the last couple of months? Has anybody new signed up? Any updates along that front would be helpful.

Are you referring to the refranchising pipeline or the development pipeline?

The development pipeline, actually.

The development pipeline is -- continues to be high for us compared to historical levels. I think what we said back in May where we were -- we had 85 to 90 restaurants with development agreements, and we haven't seen a decline in that, and when we saw restaurants of franchisees they were typically development agreements associated with those. We would expect that to continue to grow over time.

Okay. Thank you.

Thank you. Our next question is from Joe Buckley. You may ask your question, and please state your company name.

Thank you. I'm with Bank of America. Question on the pricing, you mentioned in the release you are up 2.5% year to date. That sounds relatively low. And I guess I'm curious if you think you are trailing competitors on pricing. then as you hire this pricing consultant, it sounds like you may go -- I think you said location by location. What have you done previously? Have you priced sort of regionally or by general market or what could potentially change as a result of that?

Right. Hi, Joe, this is Linda. Yes. I do think the 2.5% is low relative to the competitors, and we have been working with this pricing consultant for a couple of months now. So we should see something in the next few months -- early -- 30, 60, 90 days, so -- and their approach is a little bit different than our approach. They are taking it down to the restaurant level. We have typically priced by pricing tiers which generally follow regional or geographic areas, so it a little bit different approach. It's little more scientific, and we think there is upside there.

Okay. And then another question on the pricing. It sounds like you have added or are in the process of adding a fair amount of value items, and we have seen with other companies that if you provide a value alternative, you may be able to price a little bit more aggressively on some of the core items. And I guess I'm curious if you would agree with that, if you think that might make sense, and if you might go in that direction, as you add sort of more value-oriented products to keep the value halo in effect.

I think it will be important for us to look at all of that, Joe, in consideration with our pricing strategy. We'll be looking at all of the tiers, all of the price points, and we really haven't added a lot of value products or discount products, it was really just the two nacho products that we took our product menu as really new news in that area. I would consider the pita snacks to be a good value but not necessarily value priced or on our value menu.

Okay. I see. Yes, I just -- if the price point is $2, I think it may serve both.

Right. Exactly.

Okay. Thank you.

Thanks, Joe.

Thank you. Rachael Rothman, you may ask you question and please state your company name.

Hi. Good morning, it's Rachael Rothman from Merrill. Just had a quick question, you guys have done such a terrific job on the refranchising. Can you kind of highlight for us what has made you successful where we see so many other chains really struggling both on the proceeds per unit and on the number of units?

Hi, Rachael, this is Paul. I think our success thus far has been largely predicated on the fact we have been selling the preponderance of our restaurants to our franchisees who are in pretty good financial condition and who have a lot of interest expanding the brand.

Rachael, when it comes to bringing in outside operators, if you look at the strength of our brand especially in the new markets, with the new prototype and how well we're doing there, it's a very compelling brand.

And can you talk a little bit about, are you guys remodeling first and then refranchising, or are the stores that you are remodeling predominantly stores that will be refranchised much later or that will remain company owned?

We have actually done both depending upon the deal.

Okay. And can you help segment for us your planned 2008 kind of capital expenditures, how it breaks down between the remodel and the new units, and maybe Qdoba and Jack in the Box or any other color you can give?

Yes, Rachael, just let me pull that up here. Okay. If you look at new sites for Jack in the Box, it's going to -- I'm going to give you this in approximate numbers, about $29 million for new locations, roughly $125 million for what we would call restaurants facility and brand reinversion. Let me tell you some of the things that are in there. It is the $150,000 per copy of roughly 250 or so company reimages. It is -- it includes capital maintenance. It includes the -- our kitchen conversion, and it includes the rollout of our new smoothie platform. Qdoba is going to spend in the $17 million, $18 million range for a whole host of capital expenditures, most of which that will be related to new locations.

Great. And then one more if I could -- I'm not sure if I missed this, but as you guys look out and we think about modelling the franchise revenue line, do you guys have a sense for the pace of the franchisee remodels, or what the pace of the incentives will be? How we should think about incorporating that into our franchise royalty line, and then can we fairly assume that that's almost 100% flow through?

Yes, the [$25,000], yes. Yes, we -- the franchisees have the statement stated goal that we do to remodel over the next three to four years, 2008 is included in that three to four-year number. I would suggest that I would tend to model that more ratably over the next three years for lack of a better way to do that. We do have a specific schedule that the franchisees will have to follow. It's going to approximate that, though.

Excellent. Thank you so much.

Yes.

Thanks, Rachael.

Thank you, Jeff Omohundro, you may ask your question and please state your company name.

Thanks, Jeff from Wachovia. First question, is on the refranchising, perhaps you can give us an update just on your sense of refranchising momentum. And also an update on the financing market for refranchising transactions right now.

Jeff, there's no question that the lending institutions are looking more closely at the deals and often requiring more money into the deal, but it has not been a barrier to date for us to franchise restaurants. We haven't lost a deal yet due to financing, and we continue to have a very good level of interest, particularly from our existing franchisees to purchase restaurants.

And with the pace of new product innovations, such as the smoothies, I wondered if you could talk to kitchen productivity and the kitchen-enhancement initiatives, what the status is on that.

The kitchen enhancements are essentially completed. There are some smaller units that have not yet been completed, but the vast majority of the kitchen enhancements are done. I will let Paul speak to the efficiencies.

There's no question that the improved equipment and resultant agencies have provided for better efficiencies, and clearly enabled us to do more with product lines that would have been much more challenging for us to do had we not done the remodel.

Jeff, the other thing that I'll add is, while it may be difficult to see in today's utility environment, the electric usage on one particular piece of equipment is showing significant savings with about 8% lower electricity usage in those restaurants.

Very good. And then finally, at the analysts' meeting a few months ago, you demoed your kiosk order system. Just curious about what the status of that project might be and how it's working in tests.

Yes. Jeff, we're still testing that, still analyzing that -- the kiosk. We're also looking at alternatives to that particular one that you saw at the analysts' day.

Very good. Thanks.

Thanks.

Thank you. Matthew DiFrisco, you may ask your question, and please state your company name.

Yes. This is Jake Bartlett in for Matt. I'm calling in from Oppenheimer. We're wondering about the boost you're getting from the remodels. Is there any way you can quantify -- I guess the top-line boost you are getting from the remodels?

Yes, this is Jerry. What we have said in the past is what we have been targeting here is a 20% return on the invested capital of about $150,000. So, clearly, you need a little less lift from a high-volume restaurant, and you need a little more lift from a low-volume restaurant, because the cost of your remodel is exactly the same. That's why we haven't been talking about what your overall target at lift is. What we can tell you though, is based on our market test that we were generating sales sufficient to cover that 20% return.

Okay. And are you -- is there any requirement that the franchisees do the remodel, or is it more by choice and with the incentives?

They are definitely required to do it.

Okay. Within the next three or four years, I guess?

Correct.

Okay. I'm also wondering what the lead time to your -- to the deals are with the refranchising, just to get -- kind of get an idea to your visibility. How long does a typical deal take?

It varies depending upon the size and complexity of the deal, but at a minimum, it would be several weeks to a couple of months, could be much, much longer if it's a more complex deal.

Okay. And also in just trying to get an idea of what the 17 looked like in this quarter. I mean, were they to a number of different franchisees or how many different franchises were involved in those transactions?

That was two transactions involving two franchisee operators.

Okay. And was there anything driving the focus on the California market, or was that just kind of anomaly in the quarter?

We have identified the markets entirely across our system, that we believe we want to have company only, as well as those we want to have mixed markets, and we're just continuing to execute along that plan, and any I don't know if I want to get into anymore color than that.

Okay. Thanks.

Thank you. Brian Moore, you may ask your question and please state your company name.

Good morning, Brian Moore with Wedbush Morgan. Question on smoothies and same-stores sales growth, I just was hoping Linda maybe could help us understand the magnitude of that product relative in terms of sales mix, some of your other introductions, or maybe speak to a weighted number of stores during the quarter or store weeks, because it just seems like the flow through to Q4 should have been a little bit greater in terms of your comp guidance, and I'm wondering if there was conservatism built in or something else?

Brian, the smoothie launch was -- absolutely worked for us, and was very well received by the customers. What we found was that -- and we don't share specific mix on new product launches, but what I can tell you was that it was highly incremental to the beverage category. So that's really where we got the lift in our same-store sales was from the fact that it was incremental and from a margin standpoint, any trade from any other beverage was a positive margin dollar for us. So now, we are almost through -- in fact we're through with the smoothie rollout. We will begin with media support in kind of phase two, which is what we call the eastern division, which really isn't the east for those in the east, it's actually Texas, but we call it the eastern division. And that media support will happen -- will begin on Monday.

Okay. That's helpful. Thanks. I guess a question for Jerry. Certainly appreciate all of the color on cogs. I guess to Linda's comments, how should we think about the impact of mix shift on cogs as we look forward to Q4 in terms of the impact of smoothies or other new products will help offset some of the commodity exposure?

Yes, I think you'll clearly get some help there, and we don't provide specific guidance on individual line items for the quarter. What I can tell you, and the way I would think about the guidance is, if you look at our more narrow guidance which really centered around the midpoint of the wider range that we had in the past, that gives us an implied fourth quarter guidance of $0.47 to $0.51 a share. The consensus out there right now is $0.46. And really the difference between the $0.46 consensus and our upper end of that range is the possibility to generate higher gains. I think in terms of the operations we are generally close collectively to where the consensus was for the quarter.

Okay. Thank you.

Thanks, Brian.

Thank you, Conrad Lyon, you may ask your question and please state your company name.

Yes, hi, thanks. It's Conrad Lyon with Global Hunter. The question is probably for Jerry. The question is refranchising and SG&A impact. How should we look at that as we go forward with -- as the stores get refranchised? Is there a number that we should take out on a per-store basis, or is it just a slow, if you will, erosion from SG&A over time as the refranchising takes place?

Yes, there's a couple of ways to look at that. It's -- you model it on a per-store average basis, and I can tell you in total what that looks like. I'll also tell you it tends to be more of a stair step down as you franchise enough locations in a particular area, or in a particular market, or in a particular state, you are going to get incrementally higher steps down. If you want to -- but I will tell you, we have said this before. What we have been averaging over the last several years, when you factor in all of these stair steps is about $28,000 a restaurant down offset by some increase in the amount of support necessary on the franchise locations.

Okay. Great.

If that's helpful. But it's not necessarily linear with each restaurant sold.

Got you. Okay. That's helpful, thanks. One other question, and this has to do more so just with trends over the last three months. I mean, especially around southern California, clearly we were hit with higher gas prices first before anybody, really accelerated up late May, and now we're seeing them pulled back quite a bit. I'm just curious around the west coast, southern California how your customer behaved at Jack in the Box, if you saw kind of a move down the menu. Clearly we saw your smoothies do well, but I'm just curious if you saw some lower mix combined with some decent traffic here.

Yes, I think it's too soon to tell. When the gasoline prices started to go up, we saw some traffic behavior with a little bit of a lag. They are down. It's important to note though, it's down compared to what? They are still above $4 a gallon here.

Sure.

And I think by most measures that takes a pretty significant chunk out of a lot of consumers' pocketbooks. If that trends continues it will be very good news for us, but right now it's still about $4 a gallon.

Okay. Last question. The tomato issue that we had, just wanted to make sure going forward, was there any one-time impact that we need to weed out going into next year in the third quarter?

No, the reality is that the approximate cost of what we removed and had to destroy was offset by the fact that we were not including tomatoes on the sandwiches until we could get tomatoes back into the system. So it was effectively an offset.

Okay. Great. Thank you very much.

Okay.

Thank you. (OPERATOR INSTRUCTIONS)

Okay. Thank you very much for joining us today, and feel free to give Carol a call with any follow-up questions. Thanks a lot.

Thank you. This concludes today's conference. Thank you for participating. You may disconnect at this time.