Jack in the Box Inc (JACK) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Incorporated second quarter 2009 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 corporate 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, Kathryn, 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 morning session we will review the company's operating results for the second quarter of 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 managements; 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 and the cautionary statement in the company's Form 10Q filed with the SEC yesterday are 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. These documents are available on the investor section of our website at www.JackintheBox.com. A couple of calendar items to note: Jack in the Box management will be presented the Goldman Sachs lodging, gaming, restaurant and leisure conference in New York on June 2nd and the Wachovia Equity Conference in Boston on June 23. Our third quarter ends on July 5th and we tentatively expect to release earning the week of August 3rd. With that I will turn the call over to Linda.

Thank you, Carol. Good morning. We are very pleased with our performance in the second quarter, especially with the significant improvement in our operating margin compared to the first quarter and continued same store sales growth at our Jack in the Box restaurants, despite the challenging macroeconomic environment. Jerry will talk more about margins in a few minutes. I'd like to focus my comments on sales, menu and marketing strategies and the progress we are making on our long-term strategic goals.

Looking first at sales, same store sales for Jack in the Box company restaurants increased 4/10% in the quarter. On a regional basis same store sales remained positive in California, Texas and Las Vegas. And our Phoenix market continued to show sequential improvement although same store sales remained negative for the quarter. Overall sales trends at Jack in the Box were relatively consistent throughout the quarter and we are pleased with our sales thus far in the third quarter. Economic pressures continued to impact Qdobas system-wide same store sales which decreased 2.3% in the quarter compared to an increase of 2.4% last year. The economy also significantly impacted catering sales during the quarter due to the more discretionary nature of that business.

As we discussed on our last call during the quarter Qdoba tested a bundled meal in about 200 company and franchise restaurants that offered guests any full-sized chicken entree with a small portion of chips and salsa and a regular fountain beverage for $6.99. We had completed the test which was successful in some markets but not all, and we are using the learnings as well as other initiatives as we continue to identify profitable sales building opportunities in the near term. These include driving sales through ongoing menu innovation with products like our seasonal mango salad, broadening our customer base for catering by expanding its availability to smaller groups, and enhancing our loyalty card program. As part of a longer term strategy to better communicate Qdoba's brand positioning and the attributes that make it unique and compelling, next week we will roll out new menu board, marketing materials and other brands elements.

We will be showcasing to our guests our freshness cues through handcrafted preparations of items like our hand-smashed guacamole, cilantro lime rice and our unique and flavorful salsas, as well as the interactive guest service experience that we provide in our restaurants. As for the sales growth we saw at our Jack in the Box restaurants over the first half of the year, we think that the wide variety of products that we offer along with our multi-tiered menu strategy and breakthrough advertising make us better able to weather these challenging economic times. Among the innovative premium products that have been driving sales is our teriyaki bowls which are available with chicken or steak. After launching teriyaki bowls in our western markets in October we rolled them out in our eastern markets in January, eastern meaning Texas.

Another premium product that has contributed to an increase in beverage sales is our line of real fruit smoothies. Since launching smoothies as a new product platform last year they've remain very popular among our guests. In late April we expanded our line with a new tropical flavor. We think it's more importance than ever to continues offering a mix of products that appeals to consumers trading down from other restaurant segments as well as those who are more focused on value. For example, late in the second quarter we added mini sirloin burgers as a new premium product. Mini burgers and sandwiches are increasing in popularity in various segments of the restaurant industry, but we think the quality and value that we offer is unsurpassed at the QSR level. And based on initial results since we introduced mini sirloin burgers six weeks ago, we believe this will be a very successful new product for us.

Our mini burgers represent a new platform for Jack in the Box from which we can launch additional menu items. And for a guest focused on value, in late January we added taco nachos as a new product to our permanent value menu. We also began running a new TV spot in late April that reminds guests of our most popular everyday value menu item, two tacos for $0.99. Moving onto advertising and marketing, in February, Jack in the Box launched a brand campaign that saw Jack, our popular advertising spokesman, hit by a bus on Superbowl Sunday. I'm happy to report that Jack emerged from his coma in March and has resumed his prominent place in our advertising. This brand campaign is intended to differentiate Jack in the Box from our competition by promoting the fact that our full menu is available all day every day. This is especially important as we continue to enter new markets where guests may be unaware that they can, for example, order breakfast any time of the day or night.

Since launching the campaign we've seen a significant increase in our ad awareness in all of the major market areas we track. Our media strategy remains focused on communicating to various audiences multiple messages pertaining to new product introductions, our value proposition and branding. Service is another major focus of our Jack in the Box brands reinvention initiatives, and our investment in employee training to reinforce the six key tenants of guest service is resulting in better execution at our restaurants. By focusing on hot food, a clean environment, friendly employees, order accuracy, a hassle free experience and speed of service, our restaurants received noticeably higher guest satisfaction scores in the second quarter.

We are also continuing to successfully execute our refranchising strategy. In the second quarter we sold 46 company restaurants. Our system is now 41% franchised and we remain on pace with our goal to be 70% to 80% franchised by the end of fiscal 2013. Our restaurant reimage program also remains on track with our goals. We've now completed exterior enhancements at more than 55% of the Jack in the Box system including franchise locations, and expect to be substantially completed with this almost of our reimage program system-wide by fiscal year end. And 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 good morning, everyone. We were pleased with our second quarter earnings from continuing ops which totaled $0.51 per diluted share versus $0.44 last year. We were also pleased with the sequential improvement in restaurant operating margin which increased from 14.6% of sales in the first quarter to 16.5% of sales in the second quarter and equal to prior year. Of the 190 basis points improvement in margin versus the first quarter, 180 basis points were due to a decrease in food and packaging costs, year over year commodity cost inflation moderated to approximately 3.3% in the quarter versus nearly 8% in the first quarter, with beef increasing 6.6% versus 20% in Q1. The 80 basis points improvement in food and packaging costs versus last year resulted from favorable product mix including the addition of margin friendly products like teriyaki bowls, the benefit of the 2.5% price increase we took in November at Jack in the Box, and margin improvement initiatives.

Restaurant operating expenses were 51.3% of sales, down 10 basis points from Q1, but up 80 basis points versus last year. Higher rent, depreciation and sales deleverage at Qdoba accounted for about half of the unfavorable variance, with the remainder due primarily to higher depreciation cost, resulting from the kitchen enhancement program we completed last year and our ongoing restaurant reimage program at Jack in the Box. Compared to last year, consolidated restaurant labor was slightly favorable and utility costs were essentially flat. Labor costs continued to benefit from lower turnover, reflecting the soft overall labor market and the internal benefits we provide to our employees such as access to affordable healthcare and opportunities for career advancements.

Our restaurant operating margin is expected to improve for the second half of the fiscal year due primarily to lower anticipated food cost inflation, lower utility costs, the benefits of margin friendly products, like our new mini sirloin burgers, and margin improvement initiatives. Those initiatives include: minor product modifications, packaging changes, and reduction in cost for certain supply items and small [wares]. SG&A was 50 basis points higher than last year reflecting impairment charges of approximately $3.2 million. Unlike the first quarter, mark-to-market adjustments on the cash surrender value of insurance products supporting our nonqualified retirement plans were not significant in the quarter versus prior year. With respect to our distribution business, in April we announced the outsourcing of the transportation services portion of our supply chain to JB Hunt. This will reduce our risk associated with the transportation business without increasing our cost. We expect the vast majority of our affected employees will be offered positions with JB Hunt.

On refranchising, we sold 46 company operated Jack in the Box restaurants to franchisees and six transactions with gains totaling $17.2 million in the second quarter compared with $11.6 million in the year ago quarter from the sale of 23 restaurants. The average gains in the quarter were lower than the recent quarters due to lower than average sales volumes and cash flows resulting -- or relating to the restaurants sold. For example, nearly half of the restaurants sold in the second quarter had average sales volumes approximately $300,000 lower than system average. While in the first quarter more than half of the restaurants sold had average sales volumes more than $250,000 higher than system average. We provided $3.3 million in financing during the quarter on two of the six transactions. At quarter end we had about $9.3 million of outstanding notes receivable related to franchising transactions, of which $1.6 million has been repaid thus far in the third quarter.

Before I review our guidance for the third quarter and fiscal 2009, I'd like to provide an update on our commodity cost outlook for the remainder of the year. On beef for the balance of the year we anticipate beef cost to be favorable with the biggest benefit in Q4 as we lap the spike in [fifties] that we saw last summer. We had 100% of our 90s covered through July and 75% of our 90s covered through August at about $1.27 a pound. We have fixed price contracts for 100% of our chicken needs through March of 2010 and are looking for opportunities to extends our contracts further. Chicken costs for the year are projected to be approximately flat versus a year ago. On bakery we have fixed price contracts for 65% of our needs through the ends of the fiscal year. Current thinking for bakery is up 9% for the full year rolling over a 1.8% increase in fiscal 2008.

Cheese costs were 20% lower in Q2 versus the year ago, better than the 5% decrease we experienced in Q1. We are expecting our cheese costs to be 13% lower for the full year as our forward positions role off. Dairy and eggs were down 11% and 10% respectively in the quarter and we expect continued favorability for the rest of the year. Putting all that together our full year forecast now calls for commodity costs to increase approximately 3% versus our prior outlook of 3% to 4%. And for modeling purposes we expect Q3 to be up less than 1% and Q4 down approximately 4% versus last year, I'm sorry -- 2% versus last year in the fourth quarter.

Now let's move on to the rest of our guidance for the balance of the year on some key line items. We expect same store sales for Jack in the Box company restaurants to range from flat to plus 2% for both the third quarter and full year. We anticipate system-wide same store sales for Qdoba will decrease 2% to 4% in the third quarter and 1% to 3% for the full year. Restaurant operating margin for the full year is now expected to be in the 16% to 16.5% range compared with 16.1% in fiscal 2008. And we raised the low end of the range of our guidance forecast and now expect $2.08 to $2.20 in EPS from continuing operations including franchise gains of $60 million to $70 million. And now I'd like to turn the call back over to Linda for some final comments.

Thank you, Jerry. I would just like to reiterate how pleased we are with the company's overall performance during the quarter. Our teams are doing a great job of executing on the four major initiatives of our long-term strategic plan. And along with a tremendous support of our franchisees and their hard work, our business continues to perform well despite a difficult economic environment. And now I'd like to turn the call over to the operator to open it up for questions. Kathryn?

(Operator Instructions) Thank you. Our first question comes from Larry Miller, your line is open.

Yes, thanks. Maybe I can squeeze in my follow-up in advance, too. Can you just give us an update on the credit markets and maybe if you have an idea when you may not have to be a bridge lender? And then I was just curious about also the stimulus. Was that a benefit last year for you guys? Thanks.

Larry, this is Jerry. Let me take the credit markets first. We are seeing some easing in the credit markets and I think that's evidenced by the fact that we only offered the financing assistance on two of the six deals in this quarter. I think it's a little too soon to say that's the trends, though. I'm not sure exactly when we will back off of that. But we are pretty pleased with the ability of many of the franchisees to get the financing for the full deal at fairly reasonable rates with reasonable amounts of equity in.

Regarding the stimulus you're talking about the stimulus last May, was it?

That's correct, yes.

We really didn't see much of an impact or benefit from that, Larry.

Great. Thanks, guys.

Thank you.

Our next question comes from Chris O'Cull, your line is open.

Good morning, guys.

Good morning, Chris.

Linda, Jack has introduced obviously several new or really unique items like the teriyaki bowls. So would you comment on how that has affected your customer mix, and on the flip side, what risk you're monitoring as you expand the base?

Right, for really several years now we've been on our multi-tier marketing strategy which is really about introducing the unique, more premium products like the teriyaki bowls, even the new mini sirloins. And so we have seen a benefit in reaching those more moderate customers and that's been growing over the last several years and continues to grow as we launch these premium products. But I can tell you we also are seeing a little bit of an increase in our what we call the bottom tier mix or dollar menu mix. So this multi-tiered strategy is really working for us, Chris, in terms bringing in those lighter users but also appealing to the more frequent users with the value messaging, both bundled deals like taco nachos and pita snacks.

Our next question comes from Joseph Buckley, your line is open.

Thanks, it's actually Stephen Barlow for Joe. Were there other regions that offset the positive comps in California and Texas beyond Phoenix? And was there any swine flu impact in southern California and Texas?

We have not seen an impact from the swine flu. And from a regional standpoint we were solid in California now third quarter where we had positive comps, Phoenix as we mentioned sequentially has improved but is still negative, and Texas remains strong. Northwest was effected by the weather in the quarter slightly.

Okay. Could you also talk about performance by day part and specifically breakfast in California given unemployment and breakfast significance to comps over the past --

We don't provide details on day part by region but we can tell you breakfast remains stable. So we saw about the same mix in breakfast. So no weakness in breakfast.

Great. Thank you.

Thank you.

Our next question comes from Robert Derrington. Your line is open.

Yes, thank you. Linda or Jerry, I'm not sure who to direct the question to. I'm kind of thinking about as you go through your refranchising strategy over time, ultimately that will affect the number of dollars I would imagine that you need on your G&A line. And you've given us some directional color on a percent of revenue. But I'm just wondering as we go forward as you peal back more stores out to the franchise community, how will that line change longer term?

Yes, Bob. This is Jerry, let me take a stab at that. If you go back, if you look back at fiscal 2008 for the -- during the two years ending 2008, we actually reduced our SG&A cost by almost $11 million in that time frame at about 120 basis points. Now, in that time frame we also closed two regional offices that saved about $2.5 million in total as a result of that which we were able to close regional offices as we get a significant number of restaurants refranchised in a single geographic area. So we would expect to see more of that going forward. Now if you look at this year, we haven't had the same rate of reduction this year as we had in the prior two years. Part of that is because we have not yet been able to close an additional regional office.

And the other thing that I will add is kind of clouding the numbers this year is the fact that we've had about $3 million of additional impairment charges this year versus last year, then we've also had the mark-to-market issues that we've talked about particularly in the first quarter. So when you factor both of those out, we are seeing a little G&A leverage this year, although not nearly as significant as in the past. However, we remain committed to continue to reduce G&A. And we will be able to provide more color on that in later calls, probably not the next call but later calls after that.

Great. Thank you.

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

Thanks, wonder if you could provide a little more color on the initial consumer response to the mini sirloin burgers, how mix has tracked? And also a little more on the margin implications around the product and what you are thinking of regarding evolving it into a platform for future growth? Thanks.

Sure. Good morning, Jeff. While you will have heard that other QSR chains indicated a weakening in March and April, and just we did not see that trends. And in fact with the launch of mini sirloins the last six weeks we do feel very positive about the initial response to that product, consistent with the findings that we had in our test markets, and feel very comfortable with that will be well within the range of our sales guidance. It is a product that is favorable to our -- in terms of food costs and favorable from a margin perspective. And does create a platform for other products or line extensions and those products are already in development and actually in test.

Excellent. Thank you.

Thank you.

Our next question comes from Steve Rees, your line is open.

Hi. Thanks. In addition to the slow down in March which it doesn't sounds like your concept experienced, we are also seeing some pressure on menu mix in the quick service industry. Can you just comment on how your mix held up on your quarter if you are seeing any pressure on average check?

Our mix was flat, so we did not see pressure on mix.

Okay. And then just a follow up on that, it sounds like the mini sirloin burgers are off to a good start and you've been successful with a lot on the premium side this year. Are you seeing any increased competitive discounting that concerns you in any of your major markets where you think you might have to move towards more explicit price points?

Steve, we've seen a lot of discounting and it continues, but I'd say it's not any more aggressive than what we've seen in the last couple of quarters. There is a lot of couponing, a lot of discounting, but it's probably on par with what we've seen.

Okay. Perfect. Great. Thank you very much.

However, I do -- I will add, though, we've seen a lot more discounting from the bar and grill or the casual dining concepts.

Our next question comes from Matt DiFrisco, your line is open.

Thank you. Can you give us some color on what you look like right now as far as your franchise base, how much you have in the pipeline, given the recent sale of stores year to date versus where you were last year and the pipeline? So I'm just trying to forecast what the 15 or so opening for 2009, how big that could get in 2010 and beyond as we look at you becoming more of a franchise concept?

This is Paul. We currently have 30 active development agreements that encompass 73 restaurants that are committed to be built through 2012 and a very significant number of those have already, are already approved sites.

Okay. That's great. What does that look like versus -- how much did that get added to buy the recent sales, that 73, what did that look like a year ago, ballpark?

I'm not sure. I don't have that at my disposal.

Thank you.

Our next question comes from Steve Kron, your line is open.

Hi, guys, thanks. The refranchising the stores, it seems as though this quarter in particular the economics of those stores that were sold were maybe certainly underperforming the system. Should we expect that that's the make up of the stores that will beery franchised going forward? More of them are underperformers. And I guess the question is what kind of impact should we expect that's going to have on restaurant level margins at the existing company stores on a go-forward basis?

Yes. A couple things there. What we've said in the past is that -- and I think it holds true in this quarter and I think it will hold true going forward, is that we haven't been focusing on selling underperforming units recently and in the past we hadn't been focused on selling the higher performing units. We have market level plans that we are executing against currently to sell restaurants in those markets that we've chosen to exit from a company operations perspective. If you look at last year, the AUVs, the restaurants that we sold, were essentially equal with the AUVs of the entire company. I would expect that we would see going forward the sales of restaurants that behave a lot like the system average. Now having said that, we will see quarters where we have an accumulation of the lower performing units being sold, and we will also have quarters like we had in the first quarter where we have an accumulation of higher performing restaurants being sold. So I don't know if that helps you a whole lot, but that's the truth.

That's fair. And one other question, just related to the gross profit margins, Jerry, you gave us basically three areas where the gross profit margins, the contributors to the improvement, and particularly on a year over year basis, the 80 basis points, you talked about the commodity inflation versus price, you talked about mix of products and you talked about margin improvement initiatives. Can you maybe, on a year-over-year basis bucket where the, really what was the greatest contribution? And as we think about it going forward it seems like commodity, deflation is going to start to play a bigger role certainly as we head into the fourth quarter and maybe into 2010, do we start to cycle a lot of these margin improvement initiatives such that focus is going to be a little bit more on the commodity costs coming down?

The only thing I would add to that, Steve, would be pricing also had an impact. So if you look at 2.5% pricing and the 3.3% commodity cost inflation not quite offsetting one another, but some what offsetting, then I would look at this in terms of the product and the margin improvements being about equal, give or take a little bit. But we have a very robust margin improvement, a process that we have in place every year, this year we've been making a lot of progress on a lot of key changes here. So I think that may be the key change versus prior years.

Okay. Thanks.

Our next question comes from Keith Siegner, your line is open.

Thanks. During the SG&A discussion you talked about how last year you were able to close some of these regional centers and that this year there haven't been any. I was just wondering if you could remind us how many regional centers you have in place right now, maybe how close you are to potentially being able to close any more? For example, are there any additional closures factored into guidance for the rest of this fiscal year at this time?

Can't comment on -- this is Paul, can't comment on the future, but we currently have 12 regional offices and there's no additional closures forecasted in our guidance this year.

Okay. If I could sneak in one more question, then. Cash flows and proceeds from refranchising remain very much on track with the plan. It looks like it's mostly being allocated toward debt reduction. Could you just remind us about what the plan is or for how you are going to allocate the cash flow and proceeds going forward? Should we continue to expect it to go towards debt reduction, etc.?

Yes, I don't know, Keith, that I would classify us as using refranchising proceeds to pay down debt. We actually drew up the revolver at the end of the fiscal year, because we were concerned. If you think back to the September time frame, we were concerned about a member of the bank that were in the credit facility, so we purposely drew up that revolver. We are just paying that back town to a level that we feel comfortable with from an operating perspective. I would classify the debt reduction more around that area. With respect to additional uses of refranchising cash, we still do have $100 million worth of share repurchases authorized by the Board, and we said this year that we intend to offset dilution from stock options, and we haven't yet purchased any shares this year, so we still have some availability for that. But I will reiterate we are not focused on paying down debt, particularly not with half of our debt being at LIBOR plus one and an eighth.

Great. Thanks.

Our next question from Jonathan Waite. Your line is open.

Quick question on the [comp end] for the third quarter. Looks like on the Qdoba, you obviously put that at a lower rate than what you were tracking the second quarter and your comparison is easier, and at Jack in the Box you are kind of a little above where you were tracking the second quarter and your comparison is about the same. Is that more a factor of how well the mini burgers are tracking, or is there something else?

Yes, I think that's fare that we really didn't consider where the launch of the mini burgers in setting our guidance.

Okay. Can you talk at all about your refranchisee pipeline for the third quarter?

We are very comfortable with our guidance for the full year which we said 120 to 140 units, and one of the reasons that we stopped providing quarterly guidance on our refranchising activity is they can get a little lumpy, but we are very comfortable with 120 to 140 so far for the full year. And remember, we've already completed 75 such of those deals, 75 restaurants I should say.

Okay. One last quick question, then, how long do you anticipate providing financing as part of these refranchising deals?

Yes. We don't have a definitive time line on that. What we said, though, when we began the program which was just this fiscal is that we did not anticipate this being a long-term program, it was really just to be used as a tool until the credit markets returned to some degree of normalcy. But it's not something that we want to continue to carry on indefinitely.

And you would think that the credit markets at this point not quite back to normal yet?

Not quite back to normal yet. I think banks have a lot of cash on their balance sheet. They are still not lending it at anywhere close to what would be a normal rate of lending it at this point.

Okay. Thanks a lot.

(Operator Instructions) Our next question comes from Matt [Venli], your line is open.

Yes, hi, in for Steve West today. Just a quick question on the Jack in the Box comps. Was there any trending in any of the other regions that was significant? Since California and Texas make up most of the system remained positive, were there any regions like the rest of the midwest or the southeast maybe that were trending negatively or at least sequentially worse than the first quarter?

Yes, we covered most of the markets in terms of the Texas and California. We indicated that the northwest was hurt by weather. That's really -- those are probably the key areas.

Okay. And then just one more, on Qdoba, was there anything in terms of day part mix or less catering that drove the comp a little worse than maybe previously expected.

Yes, catering did absolutely have an impact -- a negative impact on the sales trends.

Okay. Thank you.

Thank you.

Our next question comes from Larry Miller, your line is open.

Yes. Hey, guys, I just want to follow up on the competitive environment question and how you might approach it. A lot of people are doing a lot of bogo offers, I have a friend in Hawaii, it sounds like in that market you've been offering a free slider. Is that an approach you might take on the mainland, here in the rest of the system? Is that -- how do you balance profit and sales in that regard? Then I have two other quick once I'll slide in after that. Thanks.

Yes, we will continued to more of the bundled meal deals. So we have if you'll recall the big deal and so forth. Those kind of bundle meal deals work for us from a value standpoint. We do some couponing when we launch a new product. And then we have our everyday value menu. We are actually on air right now with two tacos for $0.99, which is a very compelling value offering. But every once in a while you will see a franchisee, like the franchisee in Hawaii, do their own value promotion, but system-wide generally we will stick with the bundled meals, the reinforcement of our value menu everyday offering and, of course, the way we put like the mini burgers is actually a very good value relative to what you can get at the casual dining restaurant.

Great. That's helpful. And then just two things, Jerry, when you guys outsource the transportation part of the distribution business, how does that affect the P&L? Is it also a revenue reduction and a cost reduction, or is it just one or the other?

We would expect cost to be pretty neutral on that for at least the first couple of years and then we would start to get a little benefit on that if some of our truck leases role off and we were able to take advantage of JB Hunts leasing rates. So you should really see no change in that at all. We are just outsourcing the transportation element of our supply chain services.

Okay. That's helpful. And then last thing, is there any directionality you can provide us based on the contracts you have in terms of beef and how much it might be a benefit, or is it still a headwind for you for Q3 and Q4? Thanks.

Beef, yes, beef, we -- on the 90s, what I said is that we have all of our 90s needs through the third quarter at about $1.27 and 75% of ours through August at about $1.27 also. They were in the -- versus the prior year, call it in the $1.40 plus range versus the prior year. And we would expect the noncovered portion of the beef to be probably in the mid $1.30 range for the 90s for the balance of that fourth quarter. 50s, we are looking at probably mid 80s, both in the third quarter this year versus third quarter last year. The real benefit would be in the fourth quarter as they were mid $0.80s this year, however we expected mid $0.80s this year versus about $0.95, $0.96 a pound last year.

That's in the fourth quarter but not the third, right?

Right.

Okay. Third quarter was about $0.80, $0.85 if I remember correctly, was that about right?

Third quarter was mid $0.80s, $0.85, $0.86, in that range.

Okay. Thank you very much. Appreciate that.

Our next question is from Chris O'Cull, your line is open.

Yes, thanks, just a quick follow up. Jerry, the company has been incurring a lot of accelerated depreciation at the restaurant level, I assuming that's associated with the remodel program. If you exclude these project related write-offs it appears the restaurant margin target for this year is only about 100 bips lower than your peak margin. Is there any structural reason why a Jack operator shouldn't expect margin improvement beyond your prior peak levels?

Yes, Chris, actually the accelerated -- let me draw a distinction here. The accelerated depreciation, or what we would normally call the write-off, is really part of our G&A costs. The depreciation that is increasing in -- at the restaurant operating margin level is due primarily to the kitchen enhancements which we completed last year and the ongoing reimage program.

Okay. So the ongoing -- so that's the permanent depreciation going forward, the write-offs are at the G&A line?

Correct.

Okay. That's helpful. Thank you. And then, Linda, maybe talk a little bit about the decision to feature the mini burgers or promote the mini burgers as a premium product rather than a cheaper product like your competition is doing right now. Do you feel like you have got better -- you've got less competition on the premium side of the mini burgers?

At the QSR level, absolutely. It's such a compelling product and it's not available in any other QSR, but it is available at casual dining, and so I would put the quality on par with what you are getting at casual dining but it's at a much more compelling price points plus we have the convenience of drive-thru.

Thanks.

Our next question, from Fitzhugh Taylor, your line is open.

Thanks, I just had one more question about kind of the near term G&A run rate. The mark-to-market in the second quarter, was that a slight expense albeit not cash, or was it a reversal of some of the expenses you had in the first quarter?

No. When you look at it versus last year it was a slight improvement versus last year, Fitzhugh.

Okay. Great.

And we had benefits in each of the last -- in the second quarter this year and last year.

Right.

But it wasn't material.

Okay. Thank you.

Our next question is from Steve Rees, your line is open.

Hi. Thanks. I just want to do follow up on the decision to slow down a bit on Qdoba, sort of what were the drivers behind that, was it just development delays where these units were getting pushed back into 2010, or was it more a function of slower returns as a result of slowing comps and margins?

It's all of the above. It's really, it's the pressure on the margins and the sales, and in terms of the franchisees, difficulty with getting credit, access to credit and then the development delays, slow down in development.

Okay. And so how should we be thinking about that growth of the brands in 2010 at this point?

We haven't provided guidance yet on 2010, but you would expect it to be lower in terms of what we had originally expected for Qdoba in 2010. But we will give more color on that later this year.

Okay. And then just finally for Jerry, on the operating expense side, you said, operating expense side a lot was pressure from Qdoba and other was due to kitchen enhancements. When do those wrap up in 2008? And if you can quantify that piece of it that would be helpful.

Yes. The kitchen enhancements wrapped up near the end of the year so we should be lapping those depreciation numbers in Q4.

In Q4. And can you quantify the base point impact, was it 25% of what you saw this quarter or less?

What I will say on that is had you look at the overall restaurant appreciation that we've been talking about, hurting margins versus prior year in both Q1 and Q2, that should have much less of an impact without giving you an actual basis point number, it should have much less of an impact when we get to Q4, due to operating cost say in Q4 versus Q1, they were pretty darn similar.

Okay. Perfect. Thanks.

Our next question is from Joseph Buckley, your line is open.

Yes. Just a quick follow up on Qdoba. Last quarter you highlighted the New York market as being a drag. Could you provide any kind of update there?

Yes, it continues to be weak, the Manhattan market. But what we are focusing on is local store marketing, trying to get through on the catering, and then we really worked hard on improving the cost structure at the restaurants as well, and we are also negotiating with the landlords at this point in time for rent reduction, lease reductions.

Our next question is Keith Siegner, your line is open.

Sure, one quick question on the rebranding program. Could you just give us a little bit of information about what the cost was particularly from a CapEx perspective? Has interior and exterior signage all been replaced at this point, or is there more to go? And then just one last soft question on it, it's a pretty material rebranding. How have your customers surveys shown the responses been to that thus far?

You are talking Jack in the Box?

Yes.

With the new logo?

Yes.

Yes. The signage has only been replaced in the Houston market where we lost signage due to the hurricanes. And the rest really we are not doing massive resignage other than what we did in a few test restaurants. We are looking at changing out the signage over the next three-to-five-year time frame. So there isn't a big capital investment with regard to that. The response has been very, very positive, though, in terms of the new logo that we are showcasing on our packaging and on our -- in our advertising.

Thank you.

Operator, we will take one more question.

Matthew DiFrisco, your line is open.

Thank you. I'm sorry if you said this already, but I didn't catch it, on Qdoba, what current price increase do you have? And then also if you could just give us a little bit more detail on rolling out -- why are you not rolling out the new bundling nationally? What are the actual characteristics you are seeing that might be troubling from different regions, different places, and different tests that you've seen so far?

Right. Well, the pricing is 1.7%, and due to competitive reasons we are really not giving a lot of detail on the promotion at Qdoba, but I can tell you it did work in some of the markets, some of the more depressed markets. In other markets it did not drive enough incremental traffic to compensate for the declines in margin.

Okay. Understood. Thank you.

Thanks. Thank you very much. That concludes our call. I appreciate the time. Thank you.

Today's call has concluded. All parties may disconnect.