Jack in the Box Inc (JACK) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. first quarter 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.

Thank you, Stacy, and good morning, everyone. Joining me on the call today are Chairman and CEO, Linda Lang, President and our Chief Operating Officer, Paul Schult, and our Executive Vice President and CFO, Jerry Rebel. During this morning's session, we'll review the Company's operating results for the first quarter fiscal 2009 and discuss guidance for the remainder of the year. Following today's presentation, we'll take questions from the financial community.

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 to 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. These documents are available on the investor section of our website at www.jackinthebox.com.

A couple of calendar items to note. Our 10-Q was filed last night and is available on our website this morning. And in March, Jack in the Box management will be presenting at the Bank of America Merrill Lynch Consumer Conference in New York, the JPMorgan Game and Lodging Restaurant Leisure Conference in Las Vegas, and the Morgan Stanley Retail Field Trip in Arizona. Our second quarter ends on April 12th, and we tentatively expect to release earnings the week of May 11th. As a reminder, we recently enhanced the investor section of our website. If you have not already done so, please sign up for e-mail alerts, and you will be notified of our news releases, presentations and regulatory filings. With that I will turn the call over to Linda.

Thank you, Carol. Good morning. Overall our first quarter performance included some bright spots. Same-store sales for Jack in the Box Company restaurants were positive, increasing 1.7% for the quarter. We were pleased about our results in California where we saw positive same-store sales for the second consecutive quarter, as well as positive same-store sales in Texas and Las Vegas. In addition, results in our Phoenix market, although still negative, showed improvement from last quarter. We attribute a portion of the positive sales results in Q1 to the launch of our Teriyaki Bowls, which were introduced in our western US markets in October. We saw a benefit to our sales in those markets and believe this new platform provides opportunities for several different line extensions.

Teriyaki Bowls were introduced to the rest of our system on January 29th. To address our customers who are being pinched by the economy, in January we offered a limited time promotion, the Jumbo Deal, which featured a Jumbo Jack burger, two tacos and a small order of fries for $2.99, a great value for our guests. As we discussed on our last call, we raised prices at Company locations by approximately 2.5% in November. As you may recall, we indicated previously that our price increases are designed to improve profit and not necessarily to boost sales by the nominal amount of the price increase. With that in mind, overall price was up 1.9% versus last year. While we believe there may be additional price opportunities, we will continue to be cautious about how aggressively we raise prices, given the economy and rising unemployment. In addition to the completion of the system wide rollout of Teriyaki Bowls, later this quarter we will launch another new platform with the introduction of Mini Sirloin burgers. This premium product, which rivals the quality and taste of similar items offered by casual dining restaurants, features a trio of 100% sirloin patties topped with American cheese, grilled onions and ketchup serve odd a bakery style bun inspired by the flavor of a Hawaiian sweet roll.

Our investment and training has contributed to a steady improvement in guest service scores. We're reinforcing our employee training efforts on six tenets of guest service; hot food, a clean environment, friendly employees, order accuracy, a hassle free experience, and speed of service. These initiatives are resulting in a better dining experiences for our guests who gave our restaurants noticeablely higher satisfaction scores in the first quarter. We continue to execute our refranchising strategy during the quarter despite the difficult credit market, which Jerry will discuss in more detail in his comments.

We ended the quarter with 39% of the Jack in the Box system being franchised. Our reimage program remains on track with more than 50% of the Jack in the Box system having completed exterior enhancements including 924 restaurants now featuring all interior and exterior elements of the program.

As for Qdoba, economic pressures continued to impact our performance as system wide same-store sales declined by 1.1% versus an increase of 4.5% last year. Qdoba has been cautious about raising prices given the environment and took a 1.7% price increase in October. Last week Qdoba launched a bundled meal promotion in about 200 Company and franchised restaurants that offers any full-sized chicken entree with a small portion of chips and salsa and a regular fountain beverage for $6.99. While this is a lower price point than if the items were ordered a la carte, it still has a relatively low food cost. As an example, if a guest trades from a regularly priced steak entree to a chicken entree bundled meal our margins increase.

On the gross front, sixteen new Jack in the Box restaurants opened during the first quarter, including 12 Company locations. A franchisee opened the first restaurant in Colorado Springs, which set an opening week record with sales of more than $130,000 dollars. The Qdoba system opened 17 locations during the quarter and remains on track to open 60 to 80 new restaurants this year.

Before I turn the call over to Jerry, I wanted to talk for a minute about our new brand campaign which launched on Super Bowl Sunday with a regional ad showing Jack being seriously injured after getting hit by a bus. The campaign is designed to reengage our core customer and promote our customer's ability to order anything on the menu any time of day. In addition to traditional media outlets like local TV, national cable, radio and billboards, we are utilizing viral marketing to connect with our target audience. Although our bus spot aired only once on television, it has been used more than 1 million times on Yahoo and YouTube. Combined with viral videos and other ads related to the campaign, the videos have been viewed online more than 3 million times. Our latest ad which began airing Monday, Jack is now out of surgery, thankfully, and unfortunately in a coma. All I can say regarding Jack's recovery is stay tuned.

In summary, we continue to execute the four major initiatives of our long-term strategic plan and believe we are performing well in a difficult economic environment. Now I will turn the call over to Jerry for a closer look at the financial side of our business. Jerry?

Thank you, Linda. Good morning, everyone. Diluted EPS from continuing operations of $0.49 per share was below our guidance of $0.50 to $0.55 due to two primary factors, restaurant operating margin was a little shy of our forecast, and SG&A expenses were a little higher. Restaurant operating margin was 14.6% of sales in the first quarter compared with 17.1% in the same quarter last year versus our guidance of 15% to 15.5%. The press release covered the factors that contributed to the decrease in margins versus prior year which by in large were expected, I would talk about the myths versus guidance.

Food and packaging costs came in at the high-end of our guidance, up nearly 8% overall. Remaining shortfall versus guidance was due primarily to sales deleverage at Qdoba, and modest increases in utilities and labor at Jack in the Box. As Linda mentioned, we believe that our investments in this pending labor and training contributed to higher guest satisfaction scores in the first quarter. Importantly, restaurant operating margin is expected to improve the balance of the fiscal year due to lower food costs inflation and a decline in utility costs and the rolling off of above current market forward positions on cheese and natural gas taken in the fourth quarter of last year.

With regards to SG&A, mark-to-market adjustments on the cash surrender value of insurance products supporting our nonqualified retirement plans were greater than we expected during the quarter. These adjustments are noncash and have no impact on the future funding of these plants.

On refranchising, we continue to execute on our plan in spite of the difficult credit markets. We sold 29 Company operated Jack in the Box restaurants to franchisees and three transactions with gains totaling $18.4 million in the first quarter, compared with $16.3 million in the year ago quarter in the sale of 28 restaurants. Per unit gains for the quarter averaged $633,000 versus $584,000 in Q1 last year. The restaurants refranchised during the quarter were located in Texas, and southern and central California including the entire Santa Barbara market. The Company provided $5.3 million in financing during the quarter on two of the three deals, and now has $6.3 million of outstanding notes receivable relating to the refranchising transactions following the repayment of $19 million by franchisees during the quarter. Although we increased the number of new Jack in the Box restaurants expected to open in the year, we continue to expect capital expenditures in fiscal year 2009 to be between $175 million and $185 million. The 2009 CapEx total approximately $70 million relates to new Jack in the Box and Qdoba restaurants compared to approximately $51 million for new restaurants last year.

Before I review our guidance for the second quarter and fiscal 2009, I would like to provide an update to our commodity cost outlook remainder of the year. We expect food costs moderation over the remainder of the year with full year increase expected to be in the 3% to 4% range which should generate year-over-year increases in restaurant operating margin over the second half of fiscal 2009. Let's take a look at some of our major commodity purchases to help fill this out for you. On beef, overall beef costs were up 20% in Q1 versus a year ago. Beef 50's were the major driver being up 44% in the quarter. Although lean trimming started the quarter well above last year, they fell back and ended the quarter below year ago levels.

Going forward, we anticipate beef cost increases to moderate each quarter driven primarily by a year-over-year reduction in import 90's due to a higher US dollar versus last year and reduced world demand. We have 100% of our import needs covered through May, and currently 50's are running approximately $0.75 a pound versus $0.65 last year and 90's are approximately $1.30 a pound versus $1.45 last year. On chicken, we have fixed price contracts for 100% of our needs through March of 2010. In chicken, costs for the year are projected to be flat versus a year ago. On bakery, we have fixed price contracts in place for 65% of our bakery needs. Contracts for 10% of our needs expire in July, with 25% floating as we continue contract negotiations with current and alternative suppliers. Our current thinking for bakery is up 7% for the year rolling over a 1.8% increase in 2008. Cheese costs were 5% lower in Q1 versus a year ago, compared to the year-over-year market decline of 15% due to forward positions in place from the prior year. We are expecting our cheese costs to be 12% lower for the full year as the full repositioned roll off.

Let's move on to our guidance for the balance of the year. We expect same-store sales for Jack in the Box Company restaurants to range from flat to plus 2% for both the second quarter and the full year. We anticipate system wide same-store sales for Qdoba to be flat to down 2% both the second quarter and the full year. Restaurant operating margin for the fiscal 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, the impact of price increases, and the rolling off of the above current market forward position that we just discussed. We have not assumed an improvement in the financial markets though we revised our full year SG&A guidance to be in the mid-11% range.

Similarly, we expect our tax rate for the full year to be approximately 40% as compared to last year's full year tax rate of 37.3%. Gains on the expected sale of 120 to 140 Jack in the Box restaurants to franchisees are expected to range from $60 million to $70 million with $80 million to $90 million in cash proceeds resulting from the sales and are dependent on available franchise financing. We continue to expect diluted earnings per share from continuing operations to range from $2.00 to $2.20.

And now, I would like to turn the call back over to Linda. Linda?

Alright, thank you, Jerry. We'll go ahead and take your questions at this time.

(Operator Instructions). Our first question comes from Joe Buckley, Bank of America.

Hi, it is actually Steven Barlow for Joe. Could you speak further on second quarter margins and is all of the improvement weighted in the third and the fourth? And I think you're running over 3% pricing, and as you look at the rest of the year and kind of those utility and food costs coming down, how do you see pricing?

This is Jerry, Steve. First of all we don't think we're running 3% over on pricing. We took a 2.5% price increase in the first quarter and the effective increase on -- the effected impact on our sales was 1.9% in the quarter, and we've not yet indicated if we intend to take further price or not, although we always look at that. With respect to the restaurant operating margin, I would expect sequential improvement in restaurant operating margin in the second quarter versus the first quarter, but we have not provided guidance on our second quarter. If you look at, maybe just give you a bit more color on some of the forward positions, we had about current market forward positions on both natural gas and cheese that begin to roll off at the end of March, near the end of our second quarter. And so we would expect to see the improvement in margin accelerate in the third and fourth quarter again although we do expect some sequential quarter-to-quarter improvement in Q2. Does that help?

Great. Thank you.

Our next question comes from Chris O'Cull with SunTrust.

Thanks, guys.

Good morning, Chris.

Good morning. Good morning. Jerry, my question relates to margin and guidance as well. I believe you mentioned beef costs were in line with expectations for the first quarter. So what food and packaging costs, and I may have missed this in your presentation, but which of the food and packaging costs surprised you during the quarter?

Well, we were a little higher on produce than what we had expected due to some weather related issues, as well as a slight miss on the cooking oil.

Just as a follow-up, I think you also mentioned labor hours were increased during the quarter which lead to higher labor costs, is that correct?

It was primarily training related hours, Chris, to reinforce our guest service message.

Chris, this is Paul. We did a one-time investment of labor to roll out a new guest service module for our computer-based training to all employees. And we think based upon the results that we are seeing from that in our guest service scores that that was a very wise investment.

Our next question comes from Larry Miller of RBC.

Yes, thanks. First a follow-up and then a question. Maybe it would help if you put some parameters on how much cheese and natural gas heard in terms of basis points in the quarter and the first quarter, Jerry. And then secondly, was there any pressure on the margin from the value promotions that you guys are running and generally, can you speak to what you're seeing in terms of tradedown by the consumer and how that mini product that you're rolling out might be priced and how well it tested in terms of margins? Thanks.

Let me talk about the Mini Sirloin burger launch we're launching the end of this quarter. It is positioned as a premium product, so it is not a discount product or a value priced product, although based on our research and the results in our market test, the consumers do see this as a great value because of the quality of the product. And in terms of margin, it is actually helps our margin with trade from the regular burgers, the sirloin burger, if there is a trade from the full-sized sirloin burger to the mini burgers, it is actually an improvement in terms of our margin.

Larry, with respect to the margin follow-on. The way I would look at this, if you look at the labor investment that we had as well as the utilities, that impacted us versus what we had expected by in the 20 to 30 basis points range in the quarter. And then with respect to cheese, rather than give you a basis point, let me just tell you what we had. We had about 50% of our cheese needs covered through March, and again remember we entered into this when cheese prices were rising. We had about 50% covered through March at about $1.69 a pound, and what we're seeing now is the cheese around $1.20 plus or minus a few pennies. So we didn't get the significant reduction in our overall cheese costs as a result of our forward position, and also I also mentioned on the Qdoba deleverage. And what I will mention there is Qdoba is typically slightly accretive to our overall restaurant operating margin, and due to their salesness as well as the higher costs in Manhattan, coupled with the declining market in Manhattan with all the layoffs there, Qdoba was actually a slight drag on our restaurant operating margin in the quarter also.

Our next question comes from Jeff Omohundro of Wachovia.

Thanks. Just a couple of questions around mix. I guess first, a broadly speaking --how pleased are you around the barbell menu strategy in terms of where you are positioned now in terms of mix? Does one end or the other need to be tweaked some. And then second, looking at the Jumbo Deal and the no beverage component of that offering, how has the beverage mix associated with the Jumbo Deal tracked? Do you find people selecting some of your premium alternatives pairing with that offering? Thanks.

Sure. I would say the barbell strategy is working very well for us. If you look at the results in California and moving to positive now for two consecutive quarters. It was really started with the smoothie launch that worked very well for us, and we then rolled out Teriyaki Bowls which was another premium product, and then we finished that in January, where typically we do see more promotional activity in our sector. We finished with the $2.99 Jumbo Deal which was very popular, I had a very good mix, but we had an employee incentive behind that to really get add-ons of beverage. Now, it is probably not as high as what I would have liked to have seen in terms of beverage, but we did get incremental beverage sales on that Jumbo Deal. So I can say that would be one that would be in our arsenal for the future when we feel like we need to go out there and drive some traffic and respond to those consumers that are really looking for a little bit more value versus going to a $0.99 product. Does that help, Jeff?

Yes, very much. Thank you.

Thanks.

Our next question comes from Matt DiFrisco of Oppenheimer.

Thank you. Just following onto the Qdoba deleverage, I am also trying to understand how potentially the 22 franchise locations, what did they do as far as to the mix of margins both for Qdoba the brand and also the Company in aggregate. Is that a product of laying down the margins as well incrementally year-over-year?

Matt, a couple things. That wasn't a significant impact. They -- restaurants were required throughout the quarter, so they didn't have a full quarter impact there. These restaurants were in markets that we think fit with our launch and our strategic gross plans for Qdoba, and these restaurants, like virtually all of the restaurants across our system, have been impacted by higher unemployment. so to that extent they would have been a drag on margin, but nothing more dramatic than what anybody in any of the other markets would have been. Really the bigger drag was from Manhattan. We had one store right across the street from the building normally known as Lehman which used to have a lot of traffic from that building which is no longer there. Manhattan, as you said, has been a bigger drag.

Our next question comes from Keith Siegner of Credit Suisse.

Thanks. I would like to ask a follow-up question, actually, on those acquisitions. The purchase price paid looks pretty attractive especially if the margins weren't low enough that they weren't a drag on the quarter. Could this transaction be accretive to the full year EPS once you have them in for the rest of the year?

I think it is important to know that Qdoba represents about 5% of our overall earnings. And we are looking at an additional 22 restaurants. I wouldn't suspect a significant impact from these restaurants one way or another.

Okay, one last question then. You maintained the full year EPS guidance range. Can you just talk a little bit about what the differences are between the low end and the high end. Like, what would [asp] happen to the high end versus the low end? Thanks.

A couple things. One would be on the comps, due to the economic condition and uncertainty, as well as we had rising unemployment. The other piece would be on the credit markets related to our refranchising strategy.

Our next question comes from Steve West of Stifel Nicolaus.

Hey, guys, real quick, can you talk about with respect to same-store sales at Jack in the Box in for the quarter, how are they doing and are they still tracking with what you saw in the first quarter, we saw pretty good improvements, especially in the west coast markets. Are you seeing that trend continue and does that give you pretty good confidence for the rest of the year there?

Yes. We don't really talk about our Q2 sales to date. What I can tell you is that we did factor in our performance this last four weeks into our guidance, and weather was not our friend in the last four weeks, especially in some of our major markets.

Okay. Thanks.

Okay.

Our next question comes from Chris O'Cull of SunTrust

Yes, guys. Just another follow-up question. Jerry, if you back out the loss on the insurance products and the impairment costs that were included in SG&A for the quarter, and just annualize that dollar amount for the first quarter, it would imply SG&A much lower than what your full year guidance is. Why should SG&A -- is that true and if so why should SG&A grow in dollars through the course of '09, especially in light of the fact that you guys are accelerating the refranchising?

A couple things, Chris. One is there were within the quarter some adjustments to incentive comps and our performance [does] restricted stock which we would not expect to continue going forward. Having said that, I think other than our mark-to-market issues with respect to the SG&A ,we are very happy with the progress that we're making and continue to make on controlling G&A costs.

Okay. Great. Thanks.

(Operator Instructions). Our next question comes from Matthew DiFrisco of Oppenheimer Funds.

Just a follow-up on the question also where you keep saying New York was a weak market, but in our checks it doesn't seem like they're doing the bundling promotion. And I think I even caught one of the stores where the New Jersey developer came into New York to help launch a couple of new guest service initiatives or something looks like he was trying to work on at the store. But he said that New York was not targeted or is planned to be targeted for the bundling. If this is having that comp problems, is this something that maybe we could look for as incremental in months ahead?

Actually, the bundled meal at Qdoba is currently in test, so we're only two weeks in, and we have it in 200 Company and franchise locations so we certainly would, based on the results of that, consider rolling that to Manhatten. Probably not at the $6.99 price point, but it is certainly something that we would like to potentially expand into Manhatten.

At this time I show no further questions.

Great. Thank you very much.

This concludes today's presentation. Thank you for your participation. You may now disconnect.