Jack in the Box Inc (JACK) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Incorporated fourth quarter and fiscal year 2008 earnings conference call. Today's call is being broadcast live over the internet. A replay of the call will be available on the Jack in the Box website starting today. (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.

Thanks, Laurie, and good morning, everyone. Joining me on the call today are our Chairman and CEO, Linda Lang; our President and Chief Operating Officer, Paul Schultz; and Executive Vice President and CFO, Jerry Rebel. During this morning's session, we will review the Company's operating results for the fourth quarter and fiscal year '08, discuss our guidance for fiscal 2009, as well as our long-term outlook for the business. Following today's presentation, we will take questions. Please be advised that during the course of our presentation and our question and answer session today, we may 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 of 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 10-K, 10-Q and other public documents filed with the SEC. A couple of calendar items to note. We expect to file our Form 10-K for fiscal year 2008 in the next few days; and Jack in the Box management will be presenting at the JPMorgan Mid-Cap Conference on December 4th, and the Cowen & Company Consumer's Conference on January 12th. Both conferences will be in New York; and to help your planning during the busy year end earnings season, our first quarter of 2009 ends on January 18th, and we tentatively expect to release earnings the week of February the 16th. And with that, I'll turn the call over to Linda.

Thank you, Carol. Good morning. Between the slowing economy, food cost inflation, tightening credit markets and Hurricane Ike, we faced a number of challenges on several front during the fourth quarter, but still delivered earnings of $0.47 per diluted share. Our bottom line showed full year earnings of $2.01 per diluted share; both the fourth quarter and the full year were negatively impacted by $0.04 to $0.05 due to Ike. Excluding the impact that Hurricane Ike had on our restaurants, fourth quarter comparable sales growth at Jack in the Box Company restaurants would have been slightly positive for the quarter and in line with our expectations.

We were pleased to see sales trends continue to improve in California, where our Company restaurants experienced positive sales growth in the quarter. Our same store sales for the year were up two-tenths of a percent, on top of a very strong 6.1% increase in fiscal 2007. Economic pressures are impacting our fast casual subsidiary, Qdoba Mexican Grill, as well, which experienced its first quarterly decrease in system-wide same store sales in more than nine years. For the full year, same store sales at Qdoba were up 1.6% for the year on top of a 4.6% increase last year. Although we remain cautious about how aggressively we raise prices in this environment, as we discussed during our third quarter call, we retained a well-recognized pricing consultant to develop recommendations using their proprietary scientific approach designed to optimize profits at each location. We saw positive sales and margin results in a test in Company and franchise restaurants; and as a result, we raised prices at Company locations by approximately 2.5% earlier this month.

Our focus continues to be on premium products versus deep value or discounting messages. We have a tiered menu strategy that is keeping our brand relevant to a wide range of consumers, including those trading down from other restaurant categories as well as those whose discretionary spending has been especially hard hit by the country's economic problems. We provide variety on our menu, including innovative products that are not typically offered in the QSR segment, such as the Breakfast Bowls and Pita Snacks that we introduced in the fourth quarter, and our real fruit smoothies, which continue to sell well. Another new product that we are excited about is our Teriyaki Bowl, which we added to the menu in most of our Western U.S. markets in late October. This product features a generous serving of steamed rice, broccoli and carrots, with a choice of either all white meat chicken or sirloin steak, topped with teriyaki sauce. Our Teriyaki Bowls are a great addition to non-burger alternatives on our menu, and have a lower than average food cost. We have been pleased by initial reception to this unique product in the QSR segment, and are looking forward to expanding them into our Central U.S. and Southeast markets later in the fiscal year.

As we noted in our press release, our Board of Directors in September approved the continuation of our long-term strategic plan, which focuses on expanding franchising, improving our business model, growing our business and reinventing the Jack in the Box brand. Since announcing our strategic initiative to reinvent the Jack in the Box brand, our teams have done a great job of developing new products that are relevant to the evolving tastes and budgets of our guests. We are also making progress on the other key aspect of our brand reinvention initiative -- enhancing our restaurant facilities and improving guest service. Nearly half of all Company restaurants and more than 40% of the entire Jack in the Box system now reflect our new restaurant image. We remain on track to reimage all restaurants, including franchise locations, by the end of fiscal year 2011.

Because the restaurant's exterior is very visible to the consumer, we are prioritizing the system-wide completion of all exterior elements of our reimage program by the end of fiscal 2009. We think there's an opportunity for to us achieve a more cohesive brand image throughout our system by completing the exterior elements of the reimage program first. Another initiative that we expect will have a positive impact on guest service is the recent consolidation and realignment of all Company and franchise restaurant operations, which should improve communications, integration and consistency at all locations system-wide. We are also leveraging new technologies to improve speed of service and guest satisfaction at our restaurants. In 2008, we expanded our test of self-serve kiosks, which offer guests an alternative method of ordering inside Jack in the Box restaurants. We are seeing higher average checks with kiosk transactions and are planning to install this technology where the frequency of use is expected to be highest based on restaurants that experienced positive results in the test.

Regarding refranchising, we exceeded our forecast in the fourth quarter and despite the challenging market conditions. We continue to see high demand to purchase Jack in the Box restaurants from existing franchisees, as well as strong interest generated from our new franchisee recruiting efforts. Our plan is to accelerate the pace of our refranchising efforts over the next five years, which would allow to us reach our goal of franchise ownership in the range of 70 to 80% by the end of fiscal year 2013. While the lending environment is currently more difficult than in the past, refranchising is a multi-year strategy for us; and with our cash flow needs met through operations as well as our credit facility, we can afford to be patient if necessary. Moving on to our third major strategic initiative, improving the business model, we continued to sustain improvements in labor management at our restaurants, and saw turnover among team members reduced to near record low levels in 2008.

Our efforts to reduce packaging and food costs, as well as field and other G&A expenses, are helping to offset the high commodities and utility costs we are seeing, and will have our organization well-positioned when economic conditions improve. As far as strategic initiative to grow our business, Jack in the Box expanded into Denver, Colorado in fiscal 2008, as well as three other new contiguous markets in Texas. In 2009, our franchisees plan to continue expanding our brand into additional new contiguous markets in Colorado, New Mexico, and Texas. Additional markets have been approved for Company seating, and our plan is to convert these new markets to franchise markets in the future. 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 evolve our business model to one that is less capital-intensive and not as susceptible to cost fluctuations.

We know it will take our full attention to realize the tremendous upside potential of our Jack in the Box and Qdoba brands. This is why we made the difficult decision to sell our chain of Quick Stuff convenience stores. I'd like to thank everyone in our organization, including our field and store employees who have worked so hard to develop this award-winning brand; and since announcing our intent to sell Quick Stuff, I've been even more impressed by the character and integrity they've shown as we prepare that chain for sale. Before I turn the call over to Jerry, I'd like to acknowledge a couple of exciting events that will benefit our primary charitable partner, Big Brothers/Big Sisters. Since late October, we've been selling a new antenna ball called Beanie Jack in our restaurants, with all profits going directly to Big Brothers/Big Sisters. We are also very excited to showcase our partnership with Big Brothers/Big Sisters at the 2009 Tournament of Roses parade in Pasadena, California.

We will be entering our first-ever float in the parade, which will be seen by millions of people. As part of this event, we're offering guests the opportunity to enter a sweepstakes online to win a football package trip to the Rose Bowl in Pasadena. We've been a strong supporter of Big Brothers Big Sisters for more than a decade, and we're very excited about the opportunity to promote the wonderful efforts of this worthwhile organization and give back to the community. And now I will turn the call over to Jerry for a closer look at the financial side of our business. Jerry?

Thank you, Linda, and good morning, everyone. My voice is crackling a little bit this morning, so I apologize in advance. As Linda stated, 2008 presented more than a few challenges. To respond to those challenges, we decided to focus on things we could control, such as labor and SG&A management; and on new products like smoothies and Breakfast Bowls, which we launched earlier than planned and which helped us to mitigate much of the impact of the down economy. With that said, let's take a look at our Q4 results. We estimate the impact of Hurricane Ike on EPS was approximately $0.04 to $0.05 per share.

On the top line, we lost approximately 1300 Company operating days, which impacted our same store sales by an estimated full percentage point in the quarter. The hurricane impacted restaurant operating margin by about 50 basis points. Overall, food and packaging costs were about 180 basis points higher than the same quarter last year, led by higher beef costs, which increased by more than 18% in the quarter -- double what we had anticipated in early August when we announced third quarter results. Alone, these negatively impacted restaurant operating margin by approximately 100 basis points, and was driven by higher than expected costs for (inaudible). Shortening was up almost 60%, and potatoes were up 8%. Combined, these commodities contributed to a 7% increase in overall food cost for the quarter, which was the highest increase for fiscal 2008 that we saw.

Along with higher food cost, utilities were also up by 60 basis points in the fourth quarter, primarily due to higher gas and electricity rates, as well as mark-to-market accounting on a hedging arrangement which cost about 20 basis points. Repairs and maintenance costs were also higher by approximately 30 basis points due to timing and extreme heat in several markets, which required the unexpected repair or replacement of HVAC units. In addition to these factors, margins were impacted by sales deleverage from a 5.2% same store sales increase last year to a negative .8% in Q4 2008. The good news, though, is that we do not expect our restaurant operating margin to continue at this level -- and I'll discuss our outlook in more detail in just a couple of minutes. Our SG&A expense rate reflects lower revenues, resulting from the reclass of Quick Stuff to discontinued operations net on our P&L. The impact of the reclass was to reduce the distribution and other sales line by approximately $111 million and $90 million in the fourth quarter of 2008 and 2007, respectively.

For 2008, Quick Stuff revenues were 462 million versus 363 million for fiscal 2007. The effect of the reclass raised our reported SG&A expense rate to 11.3% for the year, whereas without the reclass, SG&A would have been 9.6% of revenues. Now just as a note, I believe you'll fine the information that you will deem necessary for your models in the 10-K regarding continuing operations for the quarter for the past two years. If not, though, give Carol a call and we will be happy to provide that for you or put it on the website. On our refranchising efforts, we exceeded our targets for both number of units and gains for the year. We sold 41 Company operated Jack in the Box restaurant to franchisees, with gains totaling 23.1 million in the fourth quarter, compared with 11.9 million in the year ago quarter from the sale of 24 restaurants.

For the full year, we sold 109 restaurants versus 76 last year, and gains for the full year averaged 609,000 versus 501,000 last year; and gains for the quarter average 564,000 this year versus 494,000 last year. During the fourth quarter, credit for franchise financing became much tighter than we had experienced in the past; and for us and our franchisees, this had the effect of slowing down deals but not stopping them. So to turn over operations to franchisees as planned, we provided bridge financing while the franchisees completed the loan process with their lenders. At fiscal year end, we had approximately $20 million outstanding on two deals, of which 11 million has since been repaid and the remainder is expected to be repaid in the next couple of weeks. CapEx in fiscal 2008 increased to approximately $181 million compared with $154 million last year, with the increase due primarily to investment in kitchen enhancements, due to the equipment in the Jack in the Box reimage program and 11 more new Company Qdobas in -- or (inaudible) in 2007.

Of the 2008 total, I'll provide you a little detail. We spent $51 million on new restaurants, 81 million on remodels and maintenance CapEx, and about 37 million was spent on restaurant and other equipment. The remainder would be on IT and non-restaurant items. In this environment, it's worth noting that our balance sheet remains strong, with no required debt repayments until fiscal 2010, and then only modest repayments are required until 2012. We also have ample room under our debt covenants. Before I review our guidance for the first quarter and for fiscal 2009, I'd like to provide some insight on our commodity cost outlook for the upcoming year. We expect overall commodity costs to increase 7 to 8% in the first quarter, led by an approximate 20% increase in beef costs. Commodity costs should then moderate over the remainder of the year, with the full year increase expected to be in the 3 to 4% range.

Let me give you a little more detail on some of our major commodity purchases. Beef is our single largest food cost, accounting for nearly 20% of our spend. The high beef costs we are seeing are primarily driven by still high trim prices, which are running over 50% higher in quarter one than a year ago, with 50s at about $0.81 a poind versus $0.53 a pounds last year in the quarter. However, 90s are currently trading at levels similar to last year, and we clearly view that as a positive trend; and we expect moderation in the price of 50s as we move through the rest of the year. Chicken is our second largest commodity, accounting for 12% of our spend, and we have fixed price contracts on chicken that run through March of 2010 for 80% of what we use. We also have fixed price contracts in place for bakery and potatoes, with 60% of our bakery needs covered through December and contracts for the remainder 40% expiring over the course of the fiscal year.

100% of our potato needs for the full year are contracted with an average increase of about 12%. Potatoes account for about 8% of our spend. Two other commodities that individually account for 5% or more of our spend are cheese at 6% and produce at 5%. We have 40% of our cheese needs contracted through January at roughly current market prices, which are running about 6% lower than last year. Produce costs are currently flat year over year. On a positive note, we currently expect full year reductions for cheese, cooking oil and eggs versus the prior year. Now let's move on to our guidance for fiscal 2009. Now, while we don't normally provide quarterly EPS guidance, we felt it important given the economy, the credit markets and volatility in commodity costs to provide some information regarding our thinking about the first quarter. So we expect same store sales for Jack in the Box Company restaurants to range from flat to plus 2% and system-wide same store sales for Qdoba to be approximately flat. As we've discussed, we expect overall commodity costs to increase 7 to 8%; which, combined with our same store sales expectations, should drive operating margin of between 15 and 15.5% versus 17.1% in last year's first quarter.

Commodity costs are expected to account for the majority of the variance in fiscal 2008 first quarter restaurant operating margin, which the 17.1% last year was the highest that we experienced in the year . Diluted earnings per share from continuing operations for the first quarter are expected in the range of $0.50 to $0.55, including franchise gains of 15 to $18 million. Given the current state of the credit markets, franchise gains are more difficult to predict; but we have a good pipeline of deals that have been negotiated, and loans are in process. It is possible that one or more of these deals, however, could slip to a later quarter if franchisee financing is delayed. Now for the full year, we're expecting same store sales at Jack in the Box Company restaurants to range from flat to a 2% increase, and same for Qdoba system restaurants. Restaurant operating margins for the full year is expected to be approximately 16%, similar to fiscal 2008, with food costs expected to increase 3 to 4%, offset by a decrease in utility costs and the impact of price increases.

Gains in the sale of 120 to 140 Jack in the Box restaurants to franchisees are forecasted to range from 60 to $70 million, with 80 to $90 million in cash proceeds resulting from the sales; and, of course, are dependent on available franchise financing. CapEx is expected to range from 175 to $185 million, with key variances, including reductions in spending on restaurant equipment as we completed our kitchen enhancements and smoothie roll-out in fiscal 2008; and offsetting this decrease is increased Company development of Qdoba, completion of the exterior reimages of all Jack in the Box Company restaurants, and continued interior reimages. Diluted earnings per share from continuing operations are expected to range from $2 to $2.20, including franchise gains. Now, I realize our guidance has a wider range than typical; so I thought it might be useful to provide our sensitivity to fluctuations in both sales and restaurant operating margins.

For every 1% of same store sales growth, we estimate the annual impact to earnings is roughly $0.06 to $0.08 per share, depending on flow through and assuming relatively stable costs. For every ten basis point change in restaurant operating margin, the estimated impact -- the estimated annual EPS impact -- is approximately $0.02 a share. Remember that our earnings per share guidance from continuing operations excludes the results of Quick Stuff, as well as any potential insurance recovery related to Hurricane Ike. And now I'd like to turn the call back over to Linda for closing remarks.

Thank you, Jerry. Before opening the call to Q&A, I would like to just thank our employees throughout the organization, as well as our franchisees, for all of their contributions during these challenging times. We couldn't execute our strategic plan as effectively as we have without their support and dedication. I would also like to acknowledge the tremendous strength of the Jack in the Box brand; even in tough times, our brand remains compelling to our guests, as well as attractive to prospective franchise operators interested in investing in our business. And with that, we will open up the call for your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Chris O'Cull with SunTrust.

Good morning, guys.

Good morning, Chris.

Good morning, Chris.

A couple of questions. Let me start off first with just the menu items that you guys have introduced, Linda. You guys have added quite a few in the past 12 months. Are you seeing any changes to your speed of service?

No, we haven't, Chris. Actually, we've been able to maintain our speed of service even with the introduction of the new products.

Okay. And I know you've introduced a lot of new promotion -- or value products. Do you attribute the reversal in the California trend to the changes you made to that plan?

No, you know, Chris, we really haven't offered any deep discount products throughout the system. We are really focused on this three-tier strategy, which is premium products like our smoothies -- we believe smoothies really helped in the California market. The Pita Snacks, which are priced at $1.99 -- so they are good value, but you wouldn't consider them a discounted product. And now with the new Teriyaki Bowls, they tested very well. They have the potential to do extremely well for us as we roll it out now in the western markets, and then we will be rolling it out, I believe, at the end of January, beginning of February, in the rest of the system. So it's really across the board. We continue to have the value menu, but we have our mid-tier items and then we have our premium products. And we've actually seen a shift -- a little bit more shift to our premium products if you were to look at our menu mix across all of our tiers.

Wow. Okay, great.

Just let me add to that that the -- particularly on the smoothies and the Teriyaki Bowls -- both of those have lower than average system food costs, so we would consider them to be pretty margin friendly for us also.

Okay. And then, let me turn my attention to bone\less beef inflation. Jerry, did you mention what the assumption was for your guidance for fiscal '09 for the B-50s?

No. If you look -- let me talk about 90s also. When we looked at where we were on August 5th when we provided guidance, we weren't too far off on our 90s estimate. We did expect, however, that the 50s were going to be in the $0.60 to $0.65 per pounds range, which still would have been higher than fiscal '07. But what we saw was that the 50s averaged about $0.90 to $0.95 a pound during the quarter. That's where we missed it.

Okay. And then when you look at your guidance for fiscal '09, are you expecting boneless beef to inflate 10%, or -- ?

No, where we are, on the 90s again, they are at about level to where they were last year. In fact, we are seeing the 90s continue to come down, particularly for the import, as worldwide demand lessens. So we are not anticipating increases for the 90s. On the 50s, though, the 50s are still higher. We are buying them at about $0.80, $0.81 a pound right now, which is up from $0.53 a pound in the fourth quarter -- or in the first quarter last year. We do expect that to moderate somewhat. I think our current thinking is that it may be -- rather than 50% higher, they may be 20 or 30% higher in Q2, and then start to down from there.

Okay. And then, when you look outside of the boneless beef, I mean, you -- it sounds like you have a number of your other commodities already contracted -- what's the greatest risk to your commodity inflation guidance for 2009 outside of the boneless beef?

Outside of the boneless beef, the biggest risk would likely be on the 40% that we don't have contracted on bread; although we do like the trends that we are seeing on wheat and flower costs right now. But I think that's the major one. We do have, as I mentioned, chicken, 80% contracted through 2010.

Okay. In you chicken contracts, there's no sort of -- they are not indexed to do feed costs or anything of that nature?

No, they are not.

Okay.

They're not. We just renegotiated that deal at pretty favorable rates. In fact, we are expecting poultry to be flat with where it was in 2008.

Okay. And then just two other questions. Is your credit -- do your credit facility agreements limit your ability to provide bridge financing to franchisees?

Yes. We have two baskets that total $75 million that we can provide that kind of financing to franchisees. I will mention, though, that it's -- the bridge financing is something that we would use own a limited basis, which the credit markets froze up quite severely mid to late fourth quarter for us. So we felt it appropriate to use that, as certain lenders were just not lending any more money until the end of the third quarter. We had already announced these sales to our employees. We felt it prudent to go ahead and make the switch, particularly with a letter of intent or a letter of commitment from their lending -- from their lender. I think the more obvious choice -- or the preferred choice -- would be to provide mezzanine financing on occasion to franchisees to help bridge the gap from what might be -- might have been typically requested in terms of capital (inaudible) from the franchisee to what is currently being requested. But the good news is for that, Chris, we would still get somewhere between 90 -- or 80 to 90% of the overall cash flow in from that deal. So we still feel pretty good about that, and we would expect to float that for somewhere in the neighborhood of 12 to 24 months for franchise locations.

Okay. And the pool of lenders that are active in this market for you guys, is it still pretty large?

You know, what we've seen is -- I guess with every bad news there's some good news here. What we have seen is a significant pull back from GE Capital particularly. Many of our franchisees used them in the past, but quite honestly it was fairly easy. GE Capital still tells us that we are one of their favorite brands and they like our franchisee base -- they are very familiar with us. However, as I think everybody is aware, GE Capital is not actively lending until the end of -- until at least the end of the calendar year. Now, what that's caused, though, is that many of our franchisees have gone and sought and actually secured financing from some regional banks.

So I think what this is going to end up doing in the longer term is to provide a greater pool of available financing options to our franchisees, even when GE capital comes back in. And so as an example, the -- we are anticipating three deals in Q1, which we all have letters of intent from lending institutions, and one in fact has a letter of commitment already -- all three are from new lenders.

Great. Thanks, guys.

Thanks, Chris.

Thank you. The next question comes from Larry Miller with RBC Capital Markets.

Yes, thanks. I wonder if I could just follow up on the mezzanine financing part. Jerry, when you look out at the 120 to 140 deals that -- or units that you expect to sell in fiscal 2009, how much -- how many of those deals in your models now have some sort of mezzanine financing that you're providing in place? And -- or might have it in place? And what's the total dollar value that you would be committed at a maximum? And then just related to that, it sounds like you were, throughout your comments, reasonably cautious on the credit markets. I assume you like the idea of accelerating the franchise -- the refranchising -- but what kind of confidence levels should we all have in your ability to hit that 120 to 140 this year? And I have one more question, as well.

Okay. Let me talk about the mezzanine financing first. Out of the three deals that I've discussed in the first quarter, right now we think that will be offered to only one of those deals, and I think in total that might be in the 2 to $2.5 million range. Now, think it's important to note that that's not cash out the door. It just reduces the cash flow coming in. And I think we expect to have that deal -- or that particular loan for about a two-year time frame. So it's small dollars on a per-transaction basis, and it is a short window in which we would expect it to receive repayment. So I think that's important to note. If we did every deal of the year at a 20% mezzanine financing, it would be in the neighborhood of 15 to $20 million. So it's not huge. We had talked about what 80 to $90 million of cash flow coming in; if we did every single one of the mezzanine financing, you would have somewhere in the neighborhood of 65 to $80 million still coming in. So we think it's a very good way for us to continue to move the franchising strategy forward and to still generate a significant amount of cash flow for us. But we don't think -- we do not think, Larry, that we are going to have to do this to every single deal.

Okay. And then your confidence in the pipeline? Can you also talk about what kind of franchisees get financing from you guys? Do they have to have certain criteria standards in place?

Absolutely. We would -- first of all, they have to meet standards just to be able to purchase restaurants from us. And in order to do that, there are certain financial ratios, which would include fixed cost coverage ratio, debt to EBITDA ratios, like would you see in any normal financing. So we would make sure that they hit that. First of all -- and then secondly, we would only do this to existing franchisees, because one of the things that we do when we provide this kind of financing is we also cross default to their existing franchise locations, so we know that we are well-protected on that. So if we are going to sell five restaurants to a franchisee that already has ten, that makes sense. We wouldn't do this to sell five restaurants to a franchisee who had two, because we wouldn't feel like the protection would be there for us. So we would loan this very, very conservatively.

Okay. And then also, just on the CapEx, can you kind of give us an idea of how much that exterior remodel costs and the interior remodel costs? And it sounds like, if I am doing the math roughly right, there's about 1,100 units left that need this total reimage. Is that right?

No, I that think the total is not right. They are more in the 700 range that would need that. Remember, we would just be doing this for the Company units for us. The franchisees would end up doing their own. The average cost is going to be between 30 and 40,000 for the exterior. What that depends is, when we are doing the exterior we also will go in and touch some of the interior elements if there is a need. So if we see things that need repair or replacing, we will go ahead and do them at that time; and the total reimage cost is now between 150 and 160.

Okay, thanks very much, guys.

Thanks, Larry.

Thank you. The next question comes from Joe Buckley with Banc of America.

Thank you, I have a couple of questions as well. You mentioned the California same store sales, I think for Jack in the Box specifically, turned positive in the fourth quarter. Could you trace back and just remind us when California went negative? And if you can size it a little bit in terms of how negative it went versus maybe how positive it was in the fourth quarter, just to provide perspective?

Sure. California became negative quarter 2 of '08. So in quarter 4 we are almost -- in fact, all the major California markets became positive. What we are seeing systemwide now in the east, in the Texas markets, the same store sales slowed down slightly and that's because they were rolling over very high numbers in '07 -- 10 plus percent in '07.

Okay. That was going to be my next question. What was sort of offsetting California.

Right. It was Texas, and it was really the strong rollover, Joe.

Okay, okay. And then, the release mentions -- I may read it hear for a moment -- in the first quarter discussions, talked about continued volatility in the financial markets which is expected to impact SG&A and the tax rate. Could you elaborate on that?

Yes, Joe, we have -- like I think many companies do -- we have some life insurance instruments that we use to fund, if you will, non-qualified retirement plans; and we are required to mark those to market, which we do, and that impacts the SG&A rate. And the gain or the loss on those mark to markets are not -- on those life insurance products are not tax deductible or taxable. So it affect the -- so when we are writing down those investments -- or those life insurance instruments -- it increases the effective tax rate.

Are the life insurance instruments used with respect to the pension plan? So is it kind of tied to the pension plan ultimately?

No, these are non-qualified. These would be deferred comp type programs.

Okay. And then a question on SG&A, obviously, when we get the numbers restated by quarter for Quick Stuff, I guess some of this will be evident. But it sounds like you're guiding for SG&A as a percent of revenues to be relatively flat -- I think it was 11.3% -- and you are saying 11 to 11.5%. Is the absolute number, though, likely to be down because the revenue number would be down? Just given the refranchising activity?

Yes, I think that's true. And then also we had -- you need to consider the bonus accrual in there also, which was lower this year and we would expect that to go back up to more normal levels next year.

Okay. And then just one more, just on share repurchases. I know you didn't do anything in the fourth quarter from the release, and a lot of companies have just sort of stopped. And given volatility in the markets and so forth, that's understandable, I think, in a lot of cases. But it seems -- I think it's a more critical part of your -- the refranchising puzzle, I guess -- I don't mean puzzle in a bad sense, but the refranchising strategies. How are you thinking about share repurchases for fiscal 2009?

Yes, Joe, I think one is we are taking a cautious view of that right now in really two parts. One is because of all the volatility in the financial markets, which is the reason that we didn't do anything in the fourth quarter -- and I think a lot of the other companies are now doing this also; but also, based on what you just said, it is a part of the refranchising strategy. To the extent that the credit markets freeze or lessen some of that refranchising, Joe, we are going to be cautious with respect to share repurchases. I will remind you that we do have $100 million still authorized from our Board.

Okay. Thank you.

Thanks, Joe.

Our next question comes from Jeff Omohundro with Wachovia.

Thanks. Just two. I guess first on the pricing increase that was recently taken, maybe give a little more detail on the components of the increase and what you're thinking as you look out into '09 about the additional pricing potential? That's my first question.

Yes, this is Linda. On the pricing, we just took a 2.5% price increase, and that was really based on the results of our tests that we had in place at both Company and franchise locations, and that was through our work with our new pricing consultants. So what we'll do is we put that in place. So far it looks good. We will analyze that in sometime, and then we will look at whether or not we have opportunities to take additional price this year.

Okay. My second question is related to the kiosk test -- and I understand you are seeing some higher check. I'm just curious if there's any other operational learnings that you're gathering, such as speed of service or line speed or anything of that nature? Thanks.

Hi, Jeff, this is Paul. We certainly find that there is a demographic of guests that really likes it and perceives it as an improvement to the service. There is obviously folks that would much rather talk to a computer screen than talk to a human being, and it definitely helps with the order accuracy as well.

Great. Thanks.

Our next question comes from Keith Siegner with Credit Suisse.

Thanks. I had a quick question on the Company contribution to the franchisees for the remodel. In the past, you talked about it being 25,000 per unit. With the acceleration to do the exterior first, how does that affect the contribution? Do they get a contribution this year to do the exterior? Does it only come when they do the interior? How should we think about that?

Hi, Keith, this is Paul. I'll answer that one. We've actually -- in order to accelerate the franchisees' commitment to complete the exteriors, we've committed to them to take 5,000 of our $25,000 commitment contribution and move that toward the interiors -- or the exteriors, excuse me. So they will get 5,000 for the exteriors, and then when they complete the interiors to specification and on time they will get the additional $20,000.

Okay. That is definitely helpful. Another question. As part of the long-term goals, the unit growth goal for Jack in the Box is definitely very clearly indicated to be 3 to 4%, with accelerated openings in the new markets where the awareness is high. But when you look at the '09 guidance, I mean, you are still well below this. And granted, this is a tough environment; but should we think about an acceleration in 2010 toward that target if things stabilized? And maybe when you get to that 3 to 4%, how much of that should we think of it as coming from franchisees?

Right. If you look at our new market openings over the years, we've actually significantly increased the number of franchise openings as a percent of our total new unit growth. So you will continue to see two things. One is the acceleration of actual units -- total units -- opened; as well as the percent that are opened by our franchise operators. So, yes, you will see a ramp up. You will see a ramp up more on the franchising side. And we also referred to this seating strategy as well in our press release, which for example, going into Denver -- where the Company goes in, enters the market, puts in three or four locations, proves the concept in a new market -- in fact, we are very pleased with the results in our new markets -- and then at some point in the future offer that market up to franchisees -- franchisees that would be interested in going in and filling out the market.

Okay. And then one last quick question on Qdoba. I'm just a little bit surprised about what's going on at the comp. Have you done any tests on customer satisfaction to see maybe does the concept or the offerings, does it need any tweaking maybe to enhance the value proposition to customers? Have you done any tests like that recently?

You know, we continue to monitor customer satisfaction in Qdoba; and I can say it's still a very strong, very compelling brand that delivers well on the guest expectations. We are even more focused on quality and customer experience than ever before. And it's really -- it's the consumer decrease in discretionary spending. They are hit just as much as other restaurant concepts have been in this economy. We are -- we've been more conservative with pricing at Qdoba, certainly, than our main competitor. We believe that's the prudent thing to do. We are encouraging our franchise operators to investment spend in local store promotion, local store marketing, because that's really what it's all about for Qdoba. And we've ramped up and seen more usage in our frequency Loyalty Club with the Qdoba Card.

Okay. Thanks.

You're welcome.

Thank you. The next question comes from Matthew DiFrisco with Oppenheimer.

Thank you. I had a couple of bookkeeping questions. First, you said bakery goods are hedged December. Is that December '08 or '09?

'09.

Okay, thank you for that clarity -- '09. And then with respect to the tax rate on the sales, what is the applicable tax rate that you are using on that proceeds generated from the franchise sales -- store sales to franchisees in the current quarter, and also your guidance?

It's whatever the effective tax rate is for that quarter or for that year. So for the quarter, I think it was 35.3 or 4. And for next fiscal year, we are guiding 39 to 40%. It's the exact same effective tax rate that we do for anything else.

Okay. That's interesting. Then also, just how many stores have the kiosk test right now?

We have about 30 locations with the kiosk. And we will be rolling that out to more restaurants that make sense in terms of the profile of that restaurant, and it really has to do with the demographics in that trade area, the percent of dine-in transactions, as well as the menu mix. The higher -- the more premium products we see on the menu mix, the higher the success rate is on the kiosk according to our test.

Okay. And then also just as far as the California comp, a follow-up to that question I think Joe asked, with respect to what do we have ahead as far as -- and what was the fourth quarter California comp versus the third quarter California comp a year ago lapsed? Did it get a benefit from dropping off? I remember this time last year you had -- not you don't have them again this year again -- but California fires were disruptive also in Southern California a little earlier in the quarter. Was the fourth quarter aided by an easier comp, and what is the outlook versus -- for the lap that we have coming up in 1Q '08?

Right. We don't really provide details by market on quarterly sales; but I can say that they are -- prior year was positive in all but one of the major California markets. So the two-year (inaudible) was positive.

So you were lapping a positive comp. Okay. And then I assume you're lapping a positive relatively close comp also in the first quarter similar to 4Q?

Yes, that's accurate.

Okay. And then the pricing, can you just clarify, you said you took 2.5. So is that now basically what you're carrying on is that on top of -- how much do we have remaining from the 1.5 you had in the third quarter continuing, and when does that cycle off, if any?

Yes, you know, I don't have that off the top of my head. We don't really provide all that detail on the rollover. But we had price of 2.2% in fiscal '08. So there will be a small amount of that lapping in '09. And then we just took the 2.5% in November -- and we had 1.4 in effective price in Q4.

Okay. So 2.2 for all of '08, 1.4 in Q4, and you just put on 2.5. So presumably you are going to be significantly north of 2.5 for a couple of quarters?

Well, what you call significant may be 3% or so in total.

Right. Okay. Appreciate that. Thank you very much.

Hey, Matt, just before you go, I misspoke on the bakery concept -- I just want to clarify that it's through December of 2008.

So December 2008.

Not 2009, yes. I apologize for that.

So you are in the market now to look at pricing, and you should probably be taking a look at the spot which seems to be getting more favorable. So I would assume '09 is going to be more favorable?

It very well could be.

Great. Thank you.

Our next question comes from Rachel Rothman with Merrill Lynch.

Hi, sorry about that. I just wanted to circle back if we could on the G&A and the question on the percentage or dollar savings, since we don't have the complete set of pro formas from Quick Stuff or discontinued ops. I guess if you guys include your advertising expense below the line in G&A as you continue to refranchise, even with the higher bonus accrual expected in '09, wouldn't dollar G&A have to be down fairly significantly given the -- call it 200 unit decline in the number of Company operated stores?

Yes. We will see -- there's no question. We will see a decline -- for every dollar of sales that we transfer to a franchisee we are going to save 5% of that in advertising costs. So absolutely, you should see G&A costs down.

Okay. And then layering on top of the advertising savings, I know in the past years you've kind of broken down in chunks of stores how much regional oversight you're able to eliminate from a dollar perspective. As we think about the swing between '07 and '09, just using those because maybe the bonus accruals would be similar, how should we think about the headcount reductions as a further opportunity to lever the G&A -- or the G&A dollars?

That should be similar. We are -- what we've done in the past is we've -- it's been about $28,000 on average per restaurant refranchise. That does have variability, though, from any given quarter or from any given year depending on where we happen to be refranchising. So if we are refranchising -- and I would say the market is going to be a little higher than that if we are refranchising locations in an already existing mixed market like Houston or such as LA, that's not really quite as significant. But we have averaged $28,000 a unit.

Okay. And then can you help us -- you gave some good sensitivity around margin and around the same store sales. Is it possible to link the two together? Meaning, how should we think about the commensurate basis point decline in the margins that you would experience at a flat comp or a 3% decline or a 5% decline? Or maybe how do you think about the attribution fixed versus variable split of your overall restaurant level margin so we could do the calculation ourselves?

Yes. Rachel, what we've calculated in the past -- and I think this holds true -- is that it takes about 2% of comp to keep margins flat. We've also said that that assumes that there's fairly stable food costs. Clearly, that was not the case in the latter half of 2007 all the way through 2008, and likely not to be the case in early 2009. But we are seeing some softening of the overall food costs. So what we are expecting for 2009 is that with the 3 to 4% increase in price -- excuse me -- 3 to 4% increase in commodity costs, that we are expecting about a 2.5% increase in price and keep margins basically flat. So that would tell you that we are looking for some other margin related cost reductions in there also.

Okay, and --

(Inaudible) as you might want, but it's just difficult to give those kinds of sensitivities in this kind of environment.

Yes. No, I'm just thinking like goal posts -- obviously, not what your estimate is, but a lot of people refer to on the upside it would -- we would require 3% same store sales to hold things flat, or 2 or 4 -- it depends on the company. But I guess we are getting into an environment now where a metric on what the margin pressure commensurate with the same store sales decline would be, would be just as helpful to give people some sensitivity around --

Okay, well, let me go back and -- for -- in stable markets or in stable (inaudible) food costs, we think about 2% of what we need to be flat. What we've said last year, 2008 needs to be about 4% to be flat with the higher food costs, which were up in the 5 to 6% range total for the year.

Okay. And if same store sales wind up being worse than your expectation and instead came in down 3, how should we think about what the commensurate margin degradation would be?

It would be lower. I don't have -- I don't have that right here. We are not guiding down 3.

No, no, no. For sure. Again, I'm just trying to get a sense for what the sensitivities are -- and I know people always talk about the positive end of the spectrum, but just in a spirit of putting goal posts on two ends of the spectrum, what would a downside scenario look like? I'm not saying you are guiding to a downside scenario. Clearly, you are not. I'm just saying for those of us on the outside, it would be helpful to get a sense for what that could look like if that were to happen.

Well, maybe I can answer your question for you this way. We would expect roughly a 30 to 40% flow through on sales up or on sales down. So without telling you what that impact (inaudible) operating margin not running this through right, right now, I think you can get pretty close if you factor that into your model for what you think a 3% downside might do to you.

Okay. Perfect. And then just on the performance of the new markets, I know Linda touched on it, can you talk to us a little bit about what the performance has been in your newer markets such as Denver, and maybe why you think they are more successful or what strategies you are employing there that could you translate elsewhere in the system?

Sure. Well, if you look at -- I'll take Denver and Corpus Christi, because those are two company markets that we've just opened -- both have sales average unit volumes significantly higher than the system average. We are seeing more in terms of dine-in business, higher average check. And most of that, I believe, is due to the new prototype that we have. We have the new design. It's the new kitchen, which is more efficient. It's the new dining room. It has the fireplace. It has kiosk in there. We went in with the smoothie launch, so in terms of our positioning in the marketplace, very compelling to the consumers -- it really does fill a need or gap in the marketplace. Does that help?

It does. Thank you so much, guys.

You're welcome.

Thank you. The next question comes from Steven Rees with JPMorgan.

Hi, thanks. Jerry, just on the refranchising, perhaps you can maybe just give us some sense of the margin performance in aggregate of the 109 units that you refranchised this past year. I guess, would you say they were in line with the system, above or below? I'm just trying to gauge the overall impact on your reported restaurant (inaudible) margin from the refranchising.

Yes, Steve, they were in markets all across our system, which would tend to indicate that they are going to be pretty consistent with the overall Company margin that we reported.

Okay, and then for what you expect for the 120 to 140 for next year, is there anything -- I mean, are these better performers, in line or underperformers?

No. We take a market-based approach rather than a performance-based approach. So we know which markets we want to continue to operate in when we complete the refranchising strategy, so we are doing this from a marketplace-perspective. So again, you'd expect the performance on these to mirror what the system is doing.

Okay. And then perhaps, Linda, you could talk about, are you seeing any trade down in your menu or increasing use of your value menu? And I guess we are hearing a lot about price points in QSR and changes to value menu. I mean, do you think you need to change the value menu that you have today?

No, we feel pretty good about where our pricing is and how we've tiered our menus. So weren't haven't seen significant trade down, so the mix of our bottom tier is not up significantly year over year. We've actually seen more growth in the premium product mix than we have in the value menu.

Okay. Great. And then just finally on Qdoba, can you just talk about how the new units that you've opened up there are performing relative to the system? And then maybe just talk about the trends in markets where you have seen increased competition or roll-out from some of the other fast casual Mexican players, how your trends are holding up there?

Right. You know, we don't provide a lot of detail on Qdoba market by market. I can tell you the markets that are hurting are the markets where unemployment is up significantly. And that -- for example, St. Louis is one of the markets that's been challenged for Qdoba. The other market that started -- that opened well was the new market, Manhattan -- solid performance, although with all the layoffs in New York -- and I don't have to tell you guys -- it's been a little more difficult most recently.

Okay. Great. Thank you .

And thank you. The next question comes from Justin Maura with Lord Abbott.

Good morning, guys.

Good morning, Justin.

Good morning, Justin.

A quick follow up on the pricing. I guess it's unclear, the two and a half that you instituted, but you are lapping a 2.2. So wouldn't that just imply 30 bips year over year incremental, then?

No, depends on the timing of the pricing in '08.

Okay, so it didn't start to roll until later in the year?

The 2.5 or the 2.2?

The 2.2, sorry.

It was -- we had multiple price increases that were staggered throughout the year.

Okay. All right. On the franchising, just conceptual, and as you talked about you guys aren't in a hurry, the balance sheet doesn't require it, you are on this path to 2013. Why do you want to keep it in the guidance? I mean, I understand you want to be upfront with people -- this is how many we are trying to sell, this is what the proceeds and the gains we expect. But it just seems to lend itself to confusion when people look at the earnings and the guidance; and if you miss it on just a function of gains being short because some have slipped -- as you guys have alluded to, maybe some have slipped to a quarter or two -- that it just tends to be more confusing than had helpful for people.

Well, I think it's important to keep it in the guidance and in our outlook because it really is a major strategy for us. If you go back over the years, we haven't missed a year in terms of the number of units that we committed to selling and the gains that we had in our outlook. And we feel that given the infrastructure we have in place, given our interest by our existing franchisees, which are very solid -- the average tenure is 21 years of our franchise base and they are still very interested in growing with Jack in the Box. What is unknown to us and why we are being somewhat cautious is really the credit markets; and hopefully, when the government figures out what's going on with the bailout, things will ease up and maybe there will be more backend loaded; but we feel committed, very committed, to making that number of 70 plus percent franchise by 2013. So it's really more of a timing issue. Plus, we have the benefit of providing mezzanine financing if necessary.

No, and I appreciate that clarity; but I guess the question is, if the credit markets are backwards -- which they certainly appear to be -- and you have GE Capital backing out for the time being -- and even though like you said you have got some other banks kind of filling the holes -- at least based on what I think you were saying, some of those banks might be a little bit new to the game so maybe it takes them a little bit longer to get comfortable with the economics and that type of thing. And so when you talk about that and then you say, oh, by the way, we are doing some mezzanine financing too, it seems as though -- and I don't think this is the case -- but it seems as though you guys are trying to push it a little bit just to stay on that tact when maybe '09 is a little bit thinner year just because of the environment we are in, only to reaccelerate it in 2010 or 11?

We actually did bring down the number that we are guiding to based -- versus what we had originally planned for the year. So we have factored all of those conditions in; and the fact that we were able to deliver in the fourth quarter -- and that was when the credit markets were also very tough -- I think bodes well for what we can do in '09.

I -- just to add to that, I think if we had less than fairly high -- I'm sorry, Justin -- if we had less than fairly high confidence we were going to be able to perform between the 120 and 140, we wouldn't have guided there. But I think the fact that we have indicates that we think we've hit the numbers.

Yes, okay. And just on the insurance and the market on the SG&A, is that a rabbi trust, Jerry? Is that --

No,.

It is not rabbi trust structure? Okay. And the Delta, what are we talking about? Just if you can provide that in terms of the potential dollar amount swing? I mean, it's all subject to the market I understand, but is it a couple million dollars? Can it be more than that? Or --

Well, yes. I'll just say -- and this is already factored into the guidance, so -- but if the market got no better from where it was at the end of October, it would be roughly $0.04 on the G&A expense.

Okay.

Or about $4 million.

Okay. That's helpful. And then just lastly on the discounting, are you guys getting a sense -- it certainly seems like the tenor of discounting may be starting up a little bit again? Are you guys -- you mentioned that you're not really seeing that in your menu, but from a competitive standpoint is that a feeling out there at all, or are things pretty well behaved still?

I think thing are pretty well behaved. There are a couple of players -- Taco Bell pretty aggressive with their low cost menu. Wendy's a little bit more aggressive -- but they've been more aggressive since they rolled out their new $0.99 product. But other than that, I wouldn't say that it's real aggressive. It's not like it was in 2000, 2001.

Yes, okay. Thanks a lot.

You're welcome. Thanks. Operator, given the time, let's take two more questions.

Thank you. Our next question will come from Brian Moore with Wedbush Morgan.

Good morning.

Hi, Brian.

Good morning, Brian.

I guess I'll ask the perhaps unpopular, but I think very relevant, question on Q1 comp guidance.

Well then, forget it, sorry. (LAUGHTER).

Forget it? I just -- you know, the stock -- obviously, you look at the stock today and we've had results from other companies reported, and your guidance implies a pretty dramatic deceleration. So given your comments about the teriyaki testing -- well, get the dramatic decline in gas prices we've seen I guess I would ask two parts. First, could you tell us what the quarter to date comp is? And then secondly, could you maybe talk to any regional disparity within California in terms of more housing impacted markets, like Sacramento, the inland (inaudible), if you're seeing any kind of comp divergence there versus other California markets?

Right. We don't provide the quarter to date numbers, Brian; but in terms of the guidance and the way we thought about guiding sales was that we wanted to be somewhat cautious given the uncertainty around consumer spending, especially around the holiday period. That typically is a very strong sales period for us -- the time between Thanksgiving and Christmas -- and we just don't know -- we just don't have a lot of visibility on what's going to happen in terms of travel. We know that travel is down and there's an expectation that it's going to be a pretty tough, lean Christmas. So that's what we -- we wanted to be somewhat cautious in our guidance for the first quarter. With that said, though, I can tell you -- it's very early, but we are excited about the Teriyaki Bowl. It's a great product. It's a great value because it's a meal -- a full meal in one product, and it's also a healthy alternative to the burgers.

Okay. And anything on the regional in terms of housing affected markets versus less housing affected markets?

Not really. I'm not seeing huge variance in the California markets.

Okay. Certainly appreciate that color, Linda. If I could ask a question, I guess, about proceeds per store refranchise. I think we had previously had talked about having a longer term table on the refranchising to preserve the proceeds or transaction value per store. And I'm wondering, how should we think about that value per store as we look out even beyond the current year? Does it decline, does it remain stable, does it go higher?

Brian, this is Jerry. We no longer take that view that we have to go slower to preserve the cash flow and the gain. We continue to have very high demand from our existing franchisees, and we are making traction on our new franchise recruiting process. So we don't really look at it how we did, say, three years ago when we felt that the faster that we went the gain would be lower; and I would point back to evidence of us increasing our franchising activity in each of the last three years, and in each of the last three years the average gains and the average cash flow has been higher.

Okay. Just two final questions, I guess the first on demand. Could you give a color on existing versus new franchisees for both, I guess, new units and refranchising? And then also maybe where you stand on your unit backlog for new development?

Brian, this is Paul. Thus far the demands for units has been primarily from our existing franchisees. , As Jerry mentioned, we've just begun to get some traction on recruitment of new franchisees. We do have interests, but we don't have anything that -- anything of significance that's really

Okay. And then final question -- I will tackle Joe and Rachel's question a different way. Looking at G&A, on a nominal basis should we expect it to decline more or less than the 6 to $7 million you've achieved in reductions the last two years?

Yes, Brian, the only thing I can tell as you is what we've guided to. We didn't provide long-term guidance on the G&A. We do expect it to be 11 to 11.5% of revenues in 2009 -- fiscal 2009 -- I think it was 11.3 in 2008. And that includes that $4 million estimate on increase in cost because of the mark-to-market on the life insurance product. So that's really all I can tell you on that. And with lower revenues, you would expect the cost to be down also. I think you guys can probably get to the number with that information.

Great. Thank you.

Thanks, Brian. Operator, last question, please.

Thank you. Our final question will come from Fitzhugh tailor with Thomas Weisel Partners.

Bringing up the rear.

Hi, Fitzhugh.

Linda, just a quick question -- and based on -- or at least harkening back to your question about the success of the new prototype -- I just wondered, with the acceleration of the exterior reimage, do you possibly give up something in the -- for lack of a better term "wow" effect -- of not doing the inside?

No, because we are actually on track to complete all of the interior reimages at the same pace that we were -- at the same time line as we were -- had planned a year ago, or a couple of years ago. So all we are doing is accelerating the that exterior reimage, which really affects -- because 70% of our businesses is drive-thru, it really affects all of those customers that are going through the drive-thru and every consumer that's driving by a Jack in the Box, so we see it as an upside potential. And we will still go in at the same goal end-date and do the complete interiors as well.

Okay. Great. Thank you very much.

Thank you. Thank you very much. Appreciate your time. We will talk to you again sometime the week of February 16th. Thanks a lot.

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