Jack in the Box Inc (JACK) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Incorporated third 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, Angie. Good morning, everyone. Joining me on the 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's session, we'll review the Company's operating results for the third 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 this for the business. The Safe Harbor statement in yesterday's news release and the cautionary statement in the Company's Form 10-Q filed with the SEC last night 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 10-K, 10-Q, and other public documents filed with the SEC. These documents are available in the investor section of our website at www.jackinthebox.com.

A couple calendar items to note. Jack in the Box management will be participating at the RBC Capital Markets Consumer Conference in New York on September the 16th. And our fourth quarter and fiscal year ends on September 27th, and we tentatively expect to release results the week of November 16th. With that, I'll turn the call over to Linda.

Thank you, Carol. Good morning. As you saw from our news release, our third quarter performance included positive earnings results. On one hand, we're very pleased with the continued improvement in our restaurant operating margin, especially in light of the sales deleveraged at both Jack in the Box and Qdoba. We're also pleased with our refranchising efforts, including the expected sale of a lower performing market. On the other hand, the same store sales deceleration we experienced at Jack in the Box was unexpected, but not inconsistent with what we've seen across the industry.

Same store sales at our Company Jack in the Box restaurants decreased 1% in the quarter. On a regional basis, same store sales in Texas remained positive. California turned slightly negative, but was better than the overall results, while Las Vegas and Phoenix were worse. At the time we issued third quarter guidance, same store sales were strong, but comp sales deteriorated near the end of the quarter. The nation's weakened economy is continuing to impact discretionary spending with rising gas prices and unemployment. Additionally, we're seeing significant promotional and discounting activity at other QSRs as well as in the casual dining segment of the industry. We expect the sales environment to remain challenging for at least the balance of the calendar year, which is reflected in our fourth quarter guidance.

To address our guests' need for value, we believe the most effective strategy for us is to bundle product and offer them at a compelling pricepoint without significantly eroding margins. In mid-July, for example, most of our system began offering a bundled meal called the Big Deal. It features a cheeseburger, taco, small order of fries, and a small drink, all for $2.99. This is a tremendous value for our guests. We currently have additional value-priced products or promotions in test elsewhere in our system. In the third quarter, we saw growth in sales of our premium products as well as our value offerings, and our lunch and dinner dayparts remained relatively stable.

But we saw some weakness in our breakfast daypart, which we believe was due in part to rising unemployment. This week, we launched a new breakfast item, a chorizo sausage breakfast burrito, which we think will help refocus consumers' attention on Jack in the Box in this important daypart. We often saw some falloff in sales of side items, carbonated beverages, and shakes, which we believe is indicative of consumers continuing to cut back on discretionary spending.

Economic pressures also continue to impact Qdoba's systemwide store sales, which decreased 2.8% in the quarter, in line with our expectations. May and June is a time when catering sales are typically high as people celebrate graduations, and for Qdoba, Cinco de Mayo is a popular occasion that also drives catering sales. But our catering business remained soft during the quarter, another casualty of tightened consumer spending.

Along with menu innovation, service is a major focus of our Jack in the Box brand reinvention initiative. Our investment in employee training to reinforce the six key tenets of guest service continues to favorably impact 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 once again received higher guest satisfaction scores in the third quarter, continuing the improvement we saw in the first half of the year.

We're also pleased with our restaurant development pipeline and the performance of our newest locations. We now expect to open approximately 60 Jack in the Box restaurants for the year.

Finally, we expect to complete the sale of our 61 Quick Stuff convenience stores before fiscal year year end. I want to thank all of our Quick Stuff employees for their hard work and dedication, especially during this transitional phase.

Now I'll turn the call over to Jerry for a closer look at the financial side of the business. Jerry?

Thank you, Linda, and good morning. Our third quarter earnings from continuing operations were $0.57 per diluted share, compared to $0.50 last year, up 13%, despite gains which were $6.5 million lower than last year. Our restaurant operating margin is at 18.4%, slightly better than we expected, up 170 basis points versus last year, and up 190 basis points during the second quarter.

Food and packaging costs accounted for most of the improvement last year, and we saw some favorability on the commodity cost front. Year over year commodity costs were 0.8% lower in the quarter versus inflation of 3.3% in the second quarter, and nearly 8% up in the first quarter. The biggest benefits versus our prior guidance related to beef. It was down approximately 4%, and cheese was down more than 25% from last year's services. In addition, margin friendly products, like our Mini Sirloin Burgers and Teriyaki Bowls, along with the benefit of effective price increases at Jack in the Box and margin improvement initiatives, positively impacted markets.

Restaurant operating expenses were 50.1% of sales, equal to last year. Good labor cost controls and lower utility costs offset higher depreciation resulting from the Kitchen Enhancement program we did last year, and our ongoing restaurant re-image program at Jack in the Box, as well as higher rent, depreciation, and sales deleveraging at both brands. Lower turnover continued to benefit labor costs, and we believe is also contributing to the higher guest satisfaction score as Linda mentioned earlier. Qdoba margins improved significantly in the second quarter due to lower commodities and margin improvement initiatives. SG&A was 10 basis points lower than last year, as impairment charges and higher pre-opening costs were largely offset by favorable mark to market adjustments on cash surrender value of insurance products supporting our non-qualified retirement plans.

On refranchising, we completed the sale of 23 company operated Jack in the Box restaurants to franchisees, and three transactions with gains totaling $11.1 million in the third quarter, compared with $15.2 million in the year ago quarter in the sale of 17 restaurants. Partially offsetting the gains in the quarter was a $2.4 million loss related to the expected sale of a lower-performing Jack in the Box Company operated market that we anticipate will be completed by the end of the calendar year. We recorded the estimated loss on this transaction in the third quarter, as accounting rules require us to recognize losses when they are probable, even though the transaction has not yet closed.

Excluding this loss, average gains were $482,000 in the quarter, lower than last year's average due to the sales volumes and cash flows of the restaurants sold. We provided $5.3 million in financing during the quarter on one of the three refranchising transactions. At quarter end, we had $12.3 million of outstanding notes receivable related to the refranchising transactions, of which $2.8 million have been repaid thus far in the fourth quarter. For the full year, we now expect to complete the sale of approximately 150 Company-operated Jack in the Box restaurants to franchisees, up from our prior expectation of 120 to 140 restaurants. The uncertainty of the exact timing on some of the transactions is reflected in our guidance range for gains and EPS for the year. Overall, we are pleased with the progress we've made this year on our refranchising strategy considering the tight credit markets.

As for Quick Stuff, we recorded an after-tax loss of $14.1 million, which is included in discontinued operations. We expect the proceeds to be approximately $29 million plus the value of inventories, which at the end of the quarter were approximately $6 million. And for clarification, Quick Stuff is the only item included in discontinued operations.

Before I review our guidance for the fourth quarter, I'd like to provide an update on our commodity cost outlook for the remainder of the year. In Q4, we're projecting beef costs to be 15% lower than last year as we lap the spike that occurred last summer. This should drive a significant improvement in restaurants' operating margins compared to Q4 of last year. We have 100% of our important [commodities] covered through October at prices in the low $1.30s, somewhat higher than our Q3 costs of $1.27 per pound. We expect these [50s] to average in the mid $0.70 per pound range in Q4, versus approximately $0.80 per pound in Q3. Other commodities, such as pork and cheese, are expected to increase slightly in Q4 compared to Q3, but will still be significantly lower than last year's fourth quarter.

Our full-year guidance now calls for commodity costs to increase by approximately 2%, versus our prior outlook of approximately 3%. As we start to look into 2010, we expect commodity costs for the full year to be approximately flat, with year over year comparisons more favorable in the first half of the year than the second half. We will further update our thinking on commodities on our November call.

Now let's move on to the rest of our guidance for the balance of the year, on some of the key line items. We expect same store sales for Jack in the Box Company operated restaurants to range from down 2.5% to down 4.5%; and systemwide same store sales for Qdoba to decrease from 2% to 4% in the fourth quarter. Our guidance reflects the softer sales trends we've seen since mid-June for Jack in the Box. We expect our fourth quarter restaurant operating margin to be approximately 16% of sales versus 13.6% last year, which was impacted by Hurricane Ike and high commodities. Restaurant operating margin is expected to be lower in Q4 versus Q3 due to the following -- the sales deleverage of Jack in the Box Company restaurants, as we're forecasting comps down more than we saw in Q3. Deleverage aside, Q3 typically generates a higher restaurant operating margin than Q4, due primarily to higher seasonal sales volumes and higher beverage incidence in the third quarter. And lastly, the impact of the recent federal minimum wage increase.

We expect CapEx to be approximately $175 million for the year, and our preliminary view is that CapEx should come down by about $25 million next year. And finally, we expect the full year EPS from continuing operations of $2.11 to $2.18, including franchise gains of $65 million to $70 million. And now I'd like to turn the call back over to Linda for some final comments.

Thank you, Jerry. Before opening up the call to questions, I want to emphasize that we remained focused on the long-term execution of our strategic plan, including menu innovations, re-imaging, and refranchising the Jack in the Box brand, as well as expansion into new markets for both brands. While investing in the future, we remain committed to evolving our cost structure to reflect the primarily franchised organization. As a result, we believe the Company and our brands will be very well positioned for success when the economy improves. Lastly, I'd like to take a moment to thank all of our employees and franchisees for their tremendous support and continued dedication. Now I'd like to turn the call over to the operator to open it up for questions.

(Operator Instructions). Thank you. Our first question will come from Larry Miller with RBC. Your line is open, sir.

Yes, thanks. Actually I have one question, two parts, if you will. Linda, can you talk about in the quarter the sales weakness that you think was macro, and maybe the sales weakness that you think might have been related to a product promotion, maybe the Chicken Sliders that didn't work as well as maybe you thought it would be. And then secondly, you mentioned value as a way to get sales back on track. Can you share with us any specific data point or things that would make people more comfortable that, yes, it's value that you can do and how you're differentiating value relative to everyone else who's doing a lot of, like you mentioned, promotional discounting things?

Okay. Good morning, Larry. I'll talk about the quarter sales. As you know, in the last call, we were pretty bullish on our sales, and things started out well in the quarter. And really around June, mid-June, or so, early June, we really saw a decrease, a significant deterioration in sales, with June coming down about 4.4%. Okay. July has improved a bit from that, and is running about middle of our guidance range. I think most of it, Larry was macro related. We saw a positive mix on our product promotions, and so we really contribute the sales weakness to -- we initially thought it was potentially all of the discounting that was done at the casual dining and bar and grill concept. However, as we now hear from those concepts, that they experienced weakness as well.

My theory is that -- and this is just a theory, because I'm not an economist, is that we typically see a nice lift in the summer as kids are off of school, and as college kids come home, and get part-time sales jobs. And we just did not see that typical seasonal lift, and I don't think most of the competitors saw the lift that we would see in June. If you look at unemployment rates among teenagers, very high, at about 24%. So they're just not getting that summer -- the summer jobs and don't have the discretionary income or spending that they would typically have. So I think the products are still working well in terms of our value offerings and what we have planned to address the sales weakness. We'll continue the strategy of our -- our [bar mill] strategies. So we will continue to see line extensions along the smoothie platform, around the bull platform, around the mini platform. However, we will augment that with additional value promotions, and those value promotions are less about discounting -- or they're more around discounting bundled meals.

So pulling together products, such as The Big Deal that offer pretty compelling price points, but from a margin standpoint, they are not eroding our margins. We have several items, value products and promotions and tests, including a product that we developed and perceived to be at value price, yet it's margin neutral or margin friendly, actually. We also have a promotion that has -- that will be -- we will be watching that's very targeted, designed to drive traffic, but also increase sales of our beverages and sides, which we've seen some weakness on, as I had indicated in my comments. So does that help?

Yes, that's great. Thanks. I appreciate the color.

Sure.

Our next question will come from Joe Buckley with Bank of America, Merrill Lynch. Your line is open, sir.

Thank you. Linda, you addressed this in some sense already, but I had the same reaction, was wondering if some of the casual dining discounts were affecting you because you had done such a good job moving the brand up over the last couple of years. And even though those comps are negative, they're a little less negative in some instances. And I guess I'm curious if you're convinced that that's not a factor, or you think it might be somewhat of a factor, just how you're thinking about it?

Joe, I think there probably is some impact there, simply because the price points are so compelling when you look at meals under $7, you look at 2 for $20. There probably is some impact, and it's hard to say, because I don't have all the details on whether or not they're seeing big traffic increases. So I think the other issue is, on the QSR side, we're seeing a lot or more coupons, coupon draws out there, pretty aggressive discounts in coupons.

And just coming back to margins for a moment, so food costs [decided] to be a lot more favorable in the fourth quarter. So it's only a question of balancing that versus deleveraging, if it comes -- things stay the way they are?

Yes, that's exactly right, Joe. If you look at the fourth quarter margins or likely, we're going to get probably a couple hundred basis point improvement on the food cost side. We'll get about 50 basis point improvement from the rollover of the Hurricane Ike. We'll get some utility help also. But we will get some -- and then the rest of it will be the deleveraging on the downside, going from down 0.8% to down 3.5% -- or excuse me, down 2.5% to 4.5% So the deleverage will offset a number of the positive trends.

Okay. And then just one more question. I understand the value approach and the bundled meal approach in trying to create value. Will advertisement spend or marketing spend be picked up in any way to try to respond to the sales softness as well?

No. We're not increasing our advertisement spend. However, media rates are down. So we are getting a little bit more for our money, and we're doing more viral marketing as well.

Okay. Thank you.

Our next question will come from Chris O'Cull with SunTrust. Your line is open, sir.

Good morning, guys. Linda, my question relates to the refranchising program. I guess, in the respect of if the economy -- or if the sales are starting to soften and we do see Company store profits come under some pressure, would that affect in any way your willingness to sell stores if their profitability does go down, or how does that act pricing and that kind of thing?

Right. I think you're aware of the model that we use to determine the breakeven price for selling a franchise restaurant. So, yes, it would have impact. We certainly would not want to go out and significantly reduce the value in response to softening sales or weakening margins. So we have -- the benefit is that we do have the flexibility in terms of executing the franchise strategies. We do not have to sell the restaurants, and we wouldn't sell them at a significant discounted value.

Where are the restaurants that are being sold today? Are they continuing to be focused around California? I know at one point, Texas became a larger Company owned market than California for you guys.

Right. We have been selling them across the system, although Texas was a very large Company market for us. And so there have been several deals that have been done in the Texas market, and we would expect to continue that as well.

Q3, most of the restaurants sold were in Texas.

Great. Thanks, guys.

Our next question will come from Robert Derrington with Morgan Keegan. Your line is open.

Thank you. If I could follow up on Chris's question a second ago on the refranchising, can you give us some color on the market on which you took a loss? Are there more like that? Were there specifics about that that made you go ahead and bite the bullet and take a loss on that refranchising?

The issue with that particular market is that it was an underperforming market, and oftentimes, in under-performing markets, we can actually do better on those letting the franchisees run them with local knowledge. They'll have a better opportunity to turn around the sales performance given the local knowledge and local contact. And we haven't identified what that market is because of the uncertainty around the closing of the market, and fact that resulting from that uncertainty, we have not informed all of our employees yet. So we'll let you know more about that market as things materialize.

Jerry, are there other markets in which there may be some risk along similar lines?

Nothing of any significance, Bob. I think, by and large, we would expect to make markets -- I mean, we expect to make money when we sell restaurants to franchisees. This is the first group of restaurants that we've sold where we experienced a loss, and while I wouldn't rule out there could be others, I would expect the vast majority to continue to show a nice gain.

One last one if I may. Can you update us on the financing for the franchise -- the refranchising process? Do you anticipate additional loans to franchisees to help the process, or are you seeing any loosening up there?

Well, what we're seeing is -- we are seeing some loosening, and I'll use that term loosely, if you pardon that expression. But as an example, GE Capital has come back in. So they announced that they were going to do a deal with one of our franchisees, and we're seeing a willingness for them to be able to lend at more competitive rates than what they were willing to lend at earlier in the year. So I think that's a positive sign. And we're not, at this point, having franchisees having significant difficulty getting financing. The issue has been the timing of the transactions. So deals that used to take 30 or 45 days to close are much less predictable and are taking much longer, and that's evidenced by the wider range of our guidance in the fourth quarter, with a $5 million spread out there on our expected gains.

Okay. Super. Thank you very much.

Our next question will come from Jeff Omohundro with Wells Fargo. Your line is open, sir.

Thanks. Just a question on the value side, The Big Deal from -- just maybe a little color from initial response since you rolled that out, what the consumer is saying? And is it out throughout the whole system yet, and how long would you anticipate running the promo? Thanks.

Good morning, Jeff. Generally, we see very nice response to Big Deal, and it's -- the response so far have been very good in terms of The Big Deal. We would expect generally -- we run promotions anywhere from four to eight weeks. And I forgot, your other -- was there another question? Oh, and is it in the majority of the system? Yes, it is in most of the systems.

Great. Thanks very much.

You're welcome.

Our next question will come from Steve Rees with JPMorgan. Your line is open, sir.

Hi. Thank you. Just given that the slowdown in QSR appears to be fairly widespread in nature, I would just be curious to know if this at all impacts your capital allocation strategies in fiscal 2010 and beyond. I know you mentioned that CapEx is going to come down by $25 million, but I would assume that some of that is from the refranchising and less remodel. So can you talk about how you're thinking about unit redevelopment in the slowdown and what drove the $25 million reduction in CapEx relative to your previous guidance?

This is Jerry. What we're looking at in terms of capital allocation is -- you'll still see us investing in new restaurant growth for the Jack in the Box brand. We'll do about 60 restaurants this year. We may not do quite as many next year, but it's still going to be a fairly healthy number. We do like the average of volumes of the restaurants we have opened up -- the new restaurants in 2008 and 2009 are both averaging higher AUVs than what our system average is. So we like the results there, and we'll continue to invest capital in those Jack in the Box restaurants.

We will probably slow on the Qdoba side a bit. As we sat here about a year ago, we were talking about ramping up Qdoba growth, but the downturn in the development cycles and the ability of developers and for shopping centers and the like to get credit is still difficult. We expect a slow [pro-rated] growth on Qdoba. And with the remodel piece, while we are about 90% complete on Company exterior re-images, we still have about 40% of our interior re-images to go. So I think were it not for the re-image program, we'll probably see even a lower CapEx than what we're currently anticipating for next year.

Okay. And then, just to follow-up, I guess I was surprised by some of the variances between markets, that California is still outperforming, that Texas is still positive. And I guess being a regional QSR Company, I guess, what are you doing to maybe drive sales in those markets that are the weakest, like Las Vegas or Phoenix? Are you doing anything special on the value side of those markets, or are you planning to drive improvement there?

We do some targeted promotions and couponing and so forth, more localized promotions in those markets to try to address the sales weakness.

Our next question will come from Matthew DiFrisco with Oppenheimer. Sir, your line is open.

Thank you. Can you give us an update, either Jerry or Linda, with respect to the development pipeline that you have, how it's changed now that you have beaten the mark, I guess, of the initial goal of refranchising your Company-owned stores? With that, how many development agreements have been added, and if you can put that in the context of what you came in with the year and what you're leaving with, just an incremental add from the target of selling 150 stores?

This is Jerry. We have plans to open about 20 franchise locations this year. I think we opened about 15 franchise locations last year. So the good news is that in spite of the difficult credit markets, the franchisees are opening up more restaurants than what they had been. And I think Paul indicated that we had the pipeline of franchise deals under the development agreement, something in the 80 restaurant range. That's about the same as where it was just a quarter ago. We wouldn't expect to see significant movement for the quarter on that pipeline.

This is Paul. What I would add to it is the under-performing market deal does have a pretty significant development agreement associated with it.

Okay. And with those agreements to come, how do they relate the royalty rate -- the initial royalty rate of those stores relative to the average royalty rate being paid now? Is it higher? Lower? In line? Given that they're underperforming markets.

Well, not all of those -- not all of that backlog is in under-performing markets. So the revenue markets, you can expect to be in line. And on the new locations, depending on when they open, they may have some graduated royalty payments depending on the expected opening day in the underperforming market.

Okay. Great. Thank you.

Our next question will come from Steven Kron with Goldman Sachs. Your line is open.

Great. Thanks. Linda, I guess, just to start off with -- on the same store sales in the prepared remarks, you had indicated that June saw the softening, and you made the comment not inconsistent with the industry overall. Can you just put some context around that, the data you guys looked at? Did your sales soften around the same time as what you saw the industry did? And you cite competitive discounting as potentially one of the reasons for your softness. Did the magnitude of your pressure outpace that of the industry? And related to that, it seems like July came back a little bit for you. Can you put that into the context of what the comparison looked like last year in July? Did it get a little bit easier to cycle? Thanks.

The June softening, I think, is very consistent what we've heard from the industry, both QSR and casual dining. So I don't think it was unusual, or we were different from the competitors in terms of the timing and the magnitude of the sales softening. What happened, in July, I think, was we got the benefit of launching The Big Deal value offering, the bundled meal deals. So that did help bring the sales up, and we continue to see traction with The Big Deal promotions. We are now lapping -- beginning to lap the rollout of smoothies. So that will make it a little more challenging in terms of our sales of our beverage line. But as I indicated earlier, we have efforts underway to really address the areas of weakness of our sales, which as I said were beverages, breakfast, sides, and shakes.

Okay. And then I guess, Jerry, just on the restaurant operating profit line, can you quantify like you did with commodities and (inaudible) maybe what the headwind might be from minimum wage in basis points? And I was just wondering, I guess, given the expectation of softer same-store sales, at least in the near term -- are there other levers, from a controllable standpoint that over and above what you typically do that you guys are looking at to protect the margins a bit?

Let me give you some color on the deleverage from Q4 to Q3, because I think it's really what you're asking about. If you look at the minimum wage impact, we think that's at about 20 basis points. And if you look at the normal seasonal trend differences as well as the deleverage, you're probably in the 170 basis point range there. So that would equate to most of the margin decline from Q3 to Q4 on a sequential basis. We do have some leverage that we can pull, with respect to margins if sales continue. But I don't think you're going to see us be able to reduce costs enough at the restaurant level to be able to offset significant things in our sales decline.

Okay. That's helpful. Thank you.

Our next question will come from Keith Siegner with Credit Suisse. Your line is open.

Thanks. One quick clarification and then some other questions. The 150 targets for refranchising, that doesn't include the underperforming market, right? That's calendar year, not by fiscal year end?

That's correct. That does not include that location.

Okay. I just wanted to make that clear. One question -- in relation to franchise remodel, reimbursement expenses, can you just give us a quick update on what the expense was for the quarter and year to date, maybe any changes to that -- I mean, we're coming up to the end of the exterior remodel program. How should we think about that expense going forward?

Let me answer the last question first. We would expect -- if you remember, we had identified we were going to provide franchisees with $25,000 of assistance on their entire remodel program, $5,000 of which would be allocated to the interior.

Exterior.

I'm sorry. Exterior. So we still have the $20,000 to go going forward on those franchise restaurants that have not yet had the interior re-image completed. Year to date, we spent a little -- maybe $1.8 million in [50]. This year, on rebates to franchisees and $1.6 million for the same time last year in the third quarter.

Okay. And then one other question. Next year, fiscal 2010 has a 53rd week. I was just wondering, can you remind us whether expenses are booked on a weeks basis or quarter basis, and therefore whether we see that leverage on D&A and G&A in the fourth quarter of next year, just to make sure we have that straight?

Most of the cost is going to be on a week basis.

Okay.

So I don't think that week would be significantly better than any other week.

One last clarification. The positive mark to market adjustment in Q3 on the retirement policy, can you just tell us in [data points] like you've done in the past how much that was?

Sure. That was a little under $1.7 million in the quarter, and that was slightly more than offset by the additional preopening costs and impairments that we took.

All right. That's it for me. Thank you.

Our next question will come from Rachael Rothman with Wedbush.

Hi. I just wanted to ask about the refranchising if we could. And I'm sorry if I missed it -- Jerry was cutting out a little bit on my end. If you think about the percentage of stores that you've been are refranchising that are these underperforming stores, and you've slightly surprised to the upside in terms of the number of stores as well, how should we think about the organic contributions to the margin just from the elimination of the underperforming stores as we go forward? So basically -- ignoring all same-store sales and food costs, just organically, how is the positive mix shift that will result from that going to impact your margins?

Rachael, without going into a lot of detail on this, you would expect, if we sell a lower performing or under-performing group of restaurants or a whole market, that that would tend to help the margins, because you would obviously expect them to have lower restaurant operating margins, and I'd say that would be a fair assumption. So I think, as we do sell some of those locations, you would tend to see the margin level go up. However, we don't have a significant number of underperforming markets. So I wouldn't expect you to see a tremendous lift on that on a macro level.

As we think about fiscal 2010, it sounds like there may be a divergence between the same-store sales growth and the listed average unit volumes or average weekly sales caused by this positive mix shift, and then some modest benefit to margin. Should we think that for a given level of same-store sales, the performance next year may be better than one would ordinarily think without these changes in the business portfolio? Or how should we think about modeling 2010, forgetting same store, but obviously just incorporating all of these mix shifts and the impact it will have on the [AUVs] and the restaurants?

I don't think the mix shift, based on this anticipated transaction that we just described, is going to be enough to move the numbers, Rachel. I would model, I think, how you have been modeling on that. Of course, we're not ready to talk about full-year 2010 yet anyway, which we will do on the next call.

Did I -- ?

But I don't think we'll see anything significant that will change modeling techniques on this.

Okay. Am I correct that earlier in the year -- and maybe the term underperforming is too harsh, but throughout this year, have you been selling lower volume stores? Or did I just get that confused and forget totally, which is entirely possible?

Rachael, we have sold some possible lower-volume restaurants. I think you're right in not classifying them as underperforming. So we can make a lot of money selling -- we can make a lot of money running a restaurant in Houston at $1.1 million that we cannot make that kind of money selling or running a restaurant in L.A. at $1.1 million. You'd have to go to the operating cost there. So I'm not sure that we should equate the difference in the AUVs to necessarily different restaurant operating margin rates.

Okay. But it will impact the spread between averaging of volume growth and same store sales growth as we think about the pace going forward into next year?

I think the math would work out that way.

Excellent. Thank you, so much.

And our next question will come from Steve West with Stifel Nicolaus. Your line is open.

Just real quick, a couple of follow-up questions on the refranchise. You have the $12 million in the outstanding bridge loans. Can you tell me what you think as far as how that will flush out at the end of this year, and with respect to that, is there some risk that those deals don't go through, and then you've got to pull back those transactions? And then the second piece to that, with development, pipeline, are you guys seeing any pull-back or restriction in real estate development? We're hearing that from some other restaurants out there, and I haven't really heard that from you guys. Thanks.

On the financing assistance, we said $12.3 million outstanding as of the end of the third quarter. We then repaid $2.8 million of that thus far. We would expect to have some continued payments against that during Q4. I'm not prepared to say exactly what that looks like for the [balance] of the fourth quarter.

The wild part is -- what we don't know at this point is if there will be any additional financing assistance or any fourth quarter deals that have not yet closed.

On the pull-back, yes, we are seeing that with regard to Qdoba development, developers not getting the financing to complete their development of retail centers. We have not see that in the situation with Jack in the Box with our freestanding prototype.

Okay. Great. Thank you very much.

(Operator Instructions). Our next question will come from Paul Westra, and Paul is with Cowen and Company. Your line is open, sir.

Hi, everyone. Just a question. Given your flat outlook for commodities in fiscal 2010, I was curious to hear what your inflation outlook would be for labor and other key, I guess, inputs going forward. In light of those outlooks, what pricing might be needed to hold margins flat, all things equal, and if that would be your strategy?

Paul, I guess the downside of us providing a couple peeks at 2010 is that -- which we usually don't do -- is you want more peeks. So we're really not prepared to talk what 2010 looks like yet other than the two areas that we already described.

Okay. Fair enough. And then just another commentary on G&A, somewhat related. Outside your refranchising and your activities on that line item, do you expect to get general leverage that you see -- I mean, leverage last quarter? And this may be an effort to curtail -- to hold down costs like you've been doing so far. I was wondering how many other initiatives are underway on that line.

Well, we are -- we always have initiatives on our G&A lines as well as all of our cost lines for that matter. And I think we've done a pretty good job on reengineering some of our cost structure here over the last several years. We continue to have significant efforts ongoing that we would expect to get some leverage going forward. On the refranchising front, though, it does look like we're going to be able to close another regional office here in the very near future, which we would estimate would have an impact of somewhere in the $1 million range in 2010 on a full-year basis. No impact, though, for this year.

Okay. Great. That's helpful. Thank you.

Our next question will come from Matt DiFrisco with Oppenheimer. Your line is open, sir.

Thank you. With respect to the difference you mentioned in the regions, Texas remaining positive, California negative, but not as bad as Arizona and Vegas. Given the heat wave that's going on in Texas, is that market experiencing the same weakness that you cited in beverages, or is that part of the difference in that their beverage business might be holding up a little better given the hot weather on a year over year basis with respect to the other markets that might be negative?

We really saw a weakness across the board in that mid-June timeframe or beginning of June, as all markets really saw the same decline in sales.

So then, in your prepared remarks, you said Texas was positive. Was it not positive then in June?

No, it was not.

It was positive for the quarter, then?

Yes.

And did every market participate in the July recovery the same? So would it be correct to assume that Texas returned to positive in July, or no?

We wouldn't disclose that level of detail, but really across the board we have seen a lift in sales across the board. And actually, I believe that's due to The Big Deal, the markets that have The Big Deal.

Okay. Thank you.

You're welcome. I think that's it. Thank you, very much, for joining us this morning.

And this will conclude today's conference call. You may now disconnect.