Jack in the Box Inc (JACK) 2009 Q4 法說會逐字稿

Good day everyone and welcome the Jack in the Box Incorporated fourth quarter and fiscal year 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 Corporation Communications for Jack in the Box. Please go ahead.

Thank you, Sheri and good morning everyone. Joining me on the call today are Chairman and CEO, Linda Lang, our President and Chief Operating Officer, Paul Schultz and our Executive Vice President and CFO, Jerry Rebel. During this morning's session we'll review the Company's operating results for the fourth quarter and fiscal year 2009 and discuss guidance for 2010. And 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 and the cautionary statement in the Company's Form 10-K to be filed with the SEC in the next few days 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 on the investor section of our website at www.jackinthebox.com.

A few calendar items to note. Jack in the Box management will be presenting at the JPMorgan Mid Cap Conference in New York on December 3rd, the Wedbush Morgan Securities conference in Santa Monica, California on December 8th and the Cowen & Company consumer conference in New York on January 12th. Our first quarter ends on January 17th and we tentatively expect to announce results the week of February 15th.

With that I'll turn the call over to Linda.

Thank you, Carol. Good morning or I guess good afternoon for some of you. Our ability to grow earnings in this recessionary environment was largely due to the successful execution of our strategic initiatives including refranchising, new unit growth and improving our cost structure. Our performance in these areas more than offset weaker sales trends which had been felt throughout most of the industry as unemployment climbed to the highest level in 26 years.

For the full year, earnings from Continuing Operations increased to $2.27 per diluted share, compared to $1.99 per diluted share last year. Excluding the negative impact from Hurricane Ike last year, EPS increased by more than 11% which reflected our ability to improve restaurant operating margins, reduce our overhead and refranchise restaurants despite weaker than expected sales. We refranchised 194 Jack in the Box restaurants this year, more than in the last two years combined. Despite the difficult credit markets we made significant progress in transforming our business model.

Other accomplishments in 2009 including strengthening our long-term positioning as a premium QSR brand by adding several innovative high quality products to our menu, including two new platforms. Opening 64 Company and franchise Jack in the Box restaurants and continuing successful expansion into new markets. Completing exterior reimages at substantially all Company and franchise restaurants, improving guest satisfaction scores, outsourcing our transportation business, and completing the sale of Quick Stuff. We are pleased with our execution on these and other strategic initiatives, though our enthusiasm is tempered by the ongoing pressures that the economy is having on consumer spending. So let's talk about sales trends.

Same-store sales at Company Jack in the Box restaurants decreased 6% in the fourth quarter, with significant weakening in the last half of the quarter. We're continuing to see lower sales in fiscal 2010 with sales down approximately 10% through the first seven weeks of the year as we lap some difficult comparisons following the successful roll-out of our Teriyaki Bowls last year. We believe our sales have also been negatively impacted by our restaurants being heavily concentrated in states with higher unemployment than the national average -- particularly California, Arizona and Nevada. And although unemployment in Texas is lower than the national average it hit a 22 year high during the quarter. In addition, unemployment rates for our core customer demographics which skews towards young males and Hispanics are substantially higher than the overall rate. According to the Department of Labor, on a seasonally adjusted basis, 16 to 24-year-olds had a very rough summer in 2009, with fewer than 50% working.

Along with rising unemployment, we've seen more aggressive discounting throughout all segments of the industry. A significant decline in grocery prices is also prompting more consumers to eat at home. In the fourth quarter, we saw an increase in sales of premium products due largely to the new menu items launched in fiscal 2009 like our Chicken Teriyaki Bowl, Mini Buffalo Ranch Chicken Sandwich and Mini Sirloin Burgers. Our bottom tier was also up as a result of our Big Cheeseburger offering. However to continue to see weakness in our breakfast day part and mid-tier category which we attribute primarily to rising unemployment as well as continued falloff in sales of side items and carbonated beverages, which suggests consumers continue to cut back on discretionary spending.

We don't want to jeopardize our long-term strategic positioning as a premium QSR brand. However, we do understand the need to offer compelling value in order to effectively compete for market share. We have thoroughly analyzed our sales trends and as a result have made several changes to our 2010 marketing plans to better respond to the difficult market conditions. One of the major changes includes a reallocation of our media spend to allow us to reach multiple consumer targets with concurrent messages. Our focus will include premium new products and platforms, price point promotions, breakfast, mid-tier products and beverage promotions. However, with most economists predicting rising unemployment through next year and given the level of competitive discounting across the industry, our sales outlook is much less certain than we would like.

Moving on to Qdoba, system same-store sales decreased 3.1% in the quarter, in line with our expectations versus a year ago decrease of 1%. As with Jack in the Box, we're taking steps to strengthen our positioning while responding to changing consumer needs. In December, Qdoba will be rolling out two new menu initiatives that feature more variety as well as more affordable price points. I'd like to take a moment to congratulate the Qdoba team for receiving the Gold Award in the Mexican Restaurant category in the annual Consumers Choice n Chains survey conducted by Restaurants & Institutions Magazine.

As I mentioned earlier, aside from the economy and its impact on restaurant sales, we made progress on several major initiatives related to the service and environment pillars of our comprehensive brand reinvention strategy. To improve the level and consistency of service at our restaurants, we've stepped up employee training to reinforce the fundamentals of guest service and our investment is favorably impacting service execution. Throughout the year our restaurants received noticeably higher guest satisfaction scores. Also contributing to the higher guest service scores is lower employee turnover at our restaurants which reached all-time low levels in fiscal 2009. As for our restaurant environments, we completed the exterior enhancements of our comprehensive reimage program at substantially all Company and franchise locations. We're now turning our focus to reimaging the remaining restaurant interiors.

I want to address another positive accomplishment -- expansion of the Jack in the Box brand. During the year 64 new restaurants opened versus 38 last year. 25% of our development in 2009 was in new markets, where we continue to perform exceptionally well with overall AUVs tracking higher than our system average. We'll continue to invest in expanding the Jack in the Box brand in 2010. In fact, early in the first quarter, we broke ground on two new markets in Oklahoma -- Tulsa and Oklahoma City. We also celebrated a growth milestone at Qdoba during the fourth quarter -- the opening of our 500th restaurant -- one of the 62 locations opened during the year.

Our ability to expand our restaurant brands in this recessionary environment and successfully advance on other major strategic initiatives is a testament to the commitment of our employees and franchise community. I'd like to thank each of them for their hard work, diligence and help in executing our strategic plan. Now I'll turn the call over to Jerry for a closer look at the financial side of our business. Jerry?

Thank you, Linda.

Our fourth quarter earnings from Continuing Operations increased to $0.70 per diluted share, compared to $0.45 last year. Excluding the negative impact from Hurricane Ike of approximately $0.04 to $0.05 and the increase in refranchise gain of approximately $0.12, EPS still increased by more than 15%, due primarily to improved restaurant operating margins. Despite lower than expected sales, our restaurant operating margin of 15.8% was in line with our expectations, improving 220 basis points versus last year which was impacted by the hurricane and high commodities. We estimate that sales deleverage negatively impacted fourth quarter margins this year by approximately 180 basis points.

Food and packaging costs improved by 320 basis points as year-over-year commodity costs were 5.5% lower in the quarter. Slightly better than our forecast. As a reminder, commodity costs were up 7% in the fourth quarter of last year. The biggest benefits to this year related to beef, which was down approximately 17% and cheese which was down approximately 31% from last year's fourth quarter. In addition the benefit of price increases and margin improvement initiatives positively impacted margins.

Labor costs at 29.6% of restaurant sales were up 30 basis points from last year due primarily to sales deleverage and the impact of the most recent Federal Minimum Wage increase which went into effect in July. Labor productivity initiatives and record low turnover helped to mitigate these impacts. Occupancy and other costs were up 70 basis points from last year as sales deleverage, higher depreciation resulting from the kitchen enhancement program we completed last year and our ongoing restaurant reimage program at Jack in the Box, were partially offset by lower utility costs. SG&A decreased by $4.7 million due to factors described in the press release, but was 10 basis points higher than last year as a result of lower revenues. Included in this line were severance costs relating from our -- resulting from our implementation in the fourth quarter of plans to reduce our support center and field staff by approximately 6%. This reduction should result in annualized savings of approximately $6 million of which we expect $4 million to be realized in fiscal year 2010.

On the refranchising front we completed the sale of 96 Company operated Jack in the Box restaurants to franchisees in eight transactions with gains totaling $34.3 million in the fourth quarter, compared with $23.1 million in the year-ago quarter from the sale of 41 restaurants. Average gains were $357,000 in the quarter, lower than last year's average of [564] per restaurant due to sales volumes and cash flows of the restaurants sold, including one larger market transaction that we were able to close earlier than we previously anticipated. Of the 96 restaurants that we sold, 56 had below average annual cash flows with gains on sale averaging just under $200,000 per restaurant. The gains on the remaining 40 restaurants with more typical cash flows averaged $580,000 -- $587,000, in line with last year.

Total proceeds for the year related to the refranchising of 194 restaurants including cash and notes receivable were $116.5 million, or an average of $601,000 per restaurant. Overall we are extremely pleased with the progress we made on our refranchising strategy, considering the tight credit markets and the overall economy. Importantly, we currently expect to cross over the 50% franchise mix sometime in fiscal 2010 -- an important milestone in getting to our ultimate target of 70% to 80% franchise by the end of fiscal 2013.

As for Quick Stuff, we completed the sale of all 61 convenience stores during the quarter with total cash proceeds of $34.4 million. As a result, we will have a required repayment of $21 million on our term loan in February of 2010.

Before I review our guidance for fiscal 2010, I will provide some insight regarding our commodity cost outlook for the upcoming year. Overall, we expect commodity costs for the full year to be approximately flat with year-over-year comparisons favorable in the first half of the year and negative in the second half. Specific to our major commodity purchases, beef accounts for nearly 20% of our spend and for the full year we are anticipating beef costs to be 2% to 3% lower than 2009, but the biggest benefit in 2001 is we lapped the 20% spike we saw in last year's first quarter. We have 100% of our import 90s covered through February at $1.30 per pound. We expect 50s to average in the $0.60 to $0.65 per pound range in Q1 versus approximately $0.79 per pound in Q1 last year.

Chicken is our second largest commodity accounting for approximately 11% of our spend in 2009 and we have fixed price contracts on chicken that run through March 2010 for 100% of what we use. We also have fixed price contracts in place for bakery and potatoes with each accounting for approximately 8% of our spend. We have 80% of our bakery needs covered through June 2010 and expect costs to be approximately flat year-over-year. 100% of our potato needs for the full year are contracted with prices slightly favorable to last year.

The other three commodities that individually account for approximately 5% of our spend are pork, cheese and produce. Pork cost is projected to run significantly lower in the first half of the fiscal year and then move higher through the remainder of the year as lower pork supplies and improving exports should play into the market during the last half of 2010. We are currently on market prices for cheese which is running about 13% lower than last year's Q1 and produce costs are currently running slightly higher year-over-year.

Now let's move on to the rest of our guidance for fiscal 2010. For the first quarter, we expect same-store sales for Jack in the Box Company restaurants to decrease by approximately 10% and system wide same-store sales for Qdoba to decrease by approximately 5%. Our guidance reflects sales trends that we've seen thus far in the quarter, the impact of rolling over the 2.5% price increase taken last November at our Company Jack in the Box restaurants and overall industry trends.

I won't repeat all of the full year guidance included in the press release but here's our current thinking on some key line items. Same-store sales at Jack in the Box Company restaurants are expected to decrease 3% to 7%, with results anticipated to be weaker in the first half of the fiscal year as we lap more difficult comparisons. In addition, we will be rolling over full year price increases of 2.8% and we currently expect to be extremely cautious about raising prices in 2010. Restaurant operating margin for the full year is expected to range from 15% to 16%, depending on same store sales and assumes that commodity costs for the full year are approximately flat with greater favorability in the first half of the year.

Gains on sale of restaurants of approximately 150 to 170 Jack in the Box restaurants to franchisees are forecast to range from $60 million to $70 million with $85 million to $95 million in total proceeds resulting from the sales. We currently expect Q1 2010 gains to be lower than Q1 2009 due to higher average gains resulting from the sale of our Santa Barbara market last year. SG&A expense is expected to range from 11% to 11.5% of revenues, similar to this year, reflecting lower absolute dollars spent resulting from our refranchising strategy, the closure or downsizing of some regional offices and the reduction in staff I mentioned earlier.

Diluted earnings per share are expected to range from $1.90 to $2.10 a share with same-store sales volatility being the biggest wild card. Given that our guidance has a wider range than typical, particularly on same-store sales, I thought it might be useful to provide our sensitivity to fluctuations in both sales and margins. For every 1% change in Jack in the Box system same-store sales, we estimate the annual impact to earnings is approximately $0.06 to $0.08 per share depending on cash flow and assuming stable cost. And, for every 10 basis point change in restaurant operating margin, the estimated EPS impact is approximately $0.02 per share.

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'd like to take this opportunity to thank Paul Schultz for his nearly four decades of service to Jack in the Box.

As we announced in September, Paul will be retiring at the end of January. Paul, on behalf of the Board, our management team and everyone else here at Jack in the Box, thank you for your many contribution to the business over the years. You have been instrumental in defining our core values and creating a unique culture here that strengthens our organization and distinguishes Jack in the Box in the marketplace. Your insight, wisdom and humor has really made this an enjoyable and personally rewarding place to work.

Thank you Paul.

Thanks, Linda, especially for your leadership, support and friendship over the years. We're really quite blessed here at the corporate support center and innovation center to be surrounded by a truly incredible team of extremely talented and highly committed professionals. And I am particularly proud of our field operations teams, our franchise community and those out there who support them. And I feel extremely fortunate to have been a part of this for 36 years. Thank you.

As a result of our strong succession planning process, we expect a smooth transition from Paul to Lenny Comma, who will be our new Chief Operating Officer. I believe some of you may have met Lenny during one of the investor conferences in the past year. Given his extensive experience in restaurant and retail operations and franchising, as well as his leadership qualities, we know he'll have a big impact on the future of this organization. And, now I'd like to turn the call over to the operator to open it up for questions. Sheri?

(Operator Instructions) Thank you. Our first question comes from Joseph Buckley. Your line is open.

Hi. Thank you. I would like to zone in on the sales performance a little bit more. You gave us a fair amount of detail but I'm curious if you maybe could put a little more quantification around some of the regional variances, what you might be seeing in California and in Texas, for example.

And then just why you think you're losing share in this environment. Sounds like you are trying to hit value pretty hard. It doesn't seem to be resonating. Do you think it's a function of having pushed the brand higher over the past couple of years in terms of a more premium positioning and maybe more premium check? Is that in the short run the -- coming back to haunt you a bit?

Yes, good morning, Joe or good afternoon, Joe. Let me take a step back and talk a little about our ongoing strategy and then I'll talk about Q4 and then what we're seeing so far in Q1. And our overall strategy, and you touched only, is really to protect and leverage our brand equity of variety and new product innovation. So, protect our position as a premium QSR.

But as I indicated, we do know that we need to offer compelling value, especially in this very competitive marketplace. But we want to offer value that doesn't erode our margins. So it's really about growing profitable sales and the fact that we were able to deliver the restaurant operating margin of 15.8% really shows you that despite the sales being soft that we were really focused on promotions that were not going to erode margins and we believe this is very important to both us -- as the corporate headquarters -- and then also to our franchisees.

If you think back on where we were last quarter and when we had our update, we were holding our own in June and July when we had our Mini Chicken and Mini Sirloin and then we rolled out the $2.99 Big Deal offer. We transitioned to that promotion -- that worked actually pretty well as a bundled meal. It's unique in the marketplace and offers a great deal of value. From there we moved into a promotion -- system wide promotion -- called Jack's Big Rip Off. And, frankly we began to lose some traffic there. It just wasn't as compelling as some of the value offerings that we saw by the larger chains and actually the casual dining chain. So we went off of new product news, top tier product news and we really didn't have a compelling value message.

Looking at Q1 -- a couple things that have happened in terms of our rollover and seeing that sales down 10%. One is we're rolling over the introduction of Teriyaki Bowls in our Western market. So that was a very strong launch last year. So that's been a tough rollover. And the other thing that we're rolling over is the benefit that we got in Texas after the hurricane. So we really saw our business increase, especially in Houston, after the hurricane and we're rolling over those tough numbers.

So what is our strategy going forward? We understand we really have to offer -- we have to be on air with two concurrent messages and I talked about that briefly. We've changed our media plan. We've been able to move some media around, reallocate media spend, so we'll be back on air with new product news. In fact, our lineup for 2010, we have a new platform coming in in quarter two. So we will continue with our new product innovation among premium products. And then we'll continue with our promotions -- more in the bundled meal promotion where it's more differentiated, offers great value and it's unique to Jack in the Box -- and it doesn't erode our margins. That's really what we're doing to address the sales weakness.

Q1 in terms of what we're seeing so far, traffic hasn't gotten any worse. Where we've seen it really is the erosion in our average check. And, that's because we've been on a pretty aggressive discount with our $1 Cheeseburger. Does that help, Joe?

It does some. I know you don't release monthly numbers but the first quarter -- what you're implying is the first quarter year ago, the first half was stronger than the second half?

Correct. So we would expect that it will get -- the rollovers will get easier toward the back half of this first quarter.

Okay. And then it's not exactly a follow-up, but another question here, this one probably more for Jerry. Part of the refranchising equation historically has been share buyback.

Right.

And I realize you paid down a lot of debt this year around did not buy shares but can we anticipate the share buyback being reactivated in fiscal 2010.

Yes, Joe, let me talk about that. We did -- this time last year we had $91 million outstanding under our revolver which was very unusual for us to have that much revolver and we were able to pay that off completely throughout this fiscal year 2009.

Talking about 2010, we do have $68 million -- a little less than that -- of required debt repayment under our credit facility, under our term loan. $21million of which is required due to the selling of the Quick Stuff convenience stores.

But with respect to share repurchases, we do have $97 million still remaining under our credit facility, and authorized by our Board. And that authorization expires in November of 2010. The other thing that I'll say is without telling folks exactly what our plans are, that historically we have not allowed share repurchase plans to expire.

Okay. Fair enough. Thank you.

Joe, let me just address -- you had asked about regional performance and our positioning as more of a premium brand. The weakness really in our businesses continues around breakfast, sides, drinks and mid-tier which we believe are really related to unemployment. And if you think about our high concentration in the state of California, the September unemployment rate in California was 12.2% and there are many pockets in California where we do business that are over -- well over 13% unemployment rate. So that's definitely another factor in terms of our sales.

Okay. Thank you.

Our next question comes from Steven Rees of JPMorgan. Your line is open.

Hi. Thank you. I think you ended the third quarter with a positive average check, if I remember correctly, and it does sound like that's weakened. So could you just talk about the average check trend throughout the fourth quarter as you focus more on aggressive value promotions, whether or not you've seen that stabilize and what you're doing to perhaps get that moving in the right direction?

Right. Towards the end of '09, average check was still positive so we were still seeing the benefit of those premium -- the top tier Teriyaki Bowl and Mini Sirloins -- the rollout of that. As we rolled over into fiscal 2010 first quarter so far we are seeing erosion, an erosion in average check, and that's really because we've been off of new product news, really since quarter three. Now, we are changing that. We have moved to new product news with the new Southwest Bowl --chicken bowl -- and then going forward as I indicated, we will be launching actually a new product platform that is a premium product.

Okay. And then just to follow up on that, can you talk about how much of the down 10% is average check versus traffic and whether or not you've seen any signs of traffic stabilization throughout October and thus far into November?

We have seen -- we're not going to provide details on the breakdown but we have seen traffic stabilization. It's slightly better.

Thank you very much.

Our next question comes from Jeff Omohundro of Wells Fargo. Your line is open.

Linda, you touched on it a little bit but I'm just curious where you see Jack in the Box being most successful. Is it on the bundled offerings? Is it going to be a de-emphasis on price point efforts like the $1 big Big Cheeseburger. Maybe you can give us a little more on your thinking around the value side strategies.

Yes, it will be a de-emphasis on the $1 product. It's really hard to differentiate yourself with a $1 Cheeseburger against what's out there in the marketplace. So what has worked well for us in the past and what we have plans in 2010 is more of the bundled meal. That's a very compelling value, higher price point, obviously. But still compelling price point for a meal that includes some products that are unique to Jack in the Box. So differentiated value but still a very compelling price point.

And then just one more, on Qdoba -- when thinking about the development plan and looking out to 2010 and really beyond, is there a change -- any change on your thinking of the longer term development potential there?

No. I'd say this is a temporary slowdown really because of the lack of credit available to the franchisees and the fact that development has slowed down significantly with big developers not getting the financing and they're really -- we don't want to go into these centers -- retail centers -- without tenants being adjacent to us. So that's really -- our plan would be to -- again, when the economy improves, we see some growth out there, credit markets loosen, that we would ramp up the growth.

Very good. Thank you.

You're welcome.

Our next question comes from Larry Miller of RBC. Your line is open.

I had a two-part question on refranchising. Jerry, I think you said that the lower gains on sale was due to several stores in the portfolio that you sold that had lower cash flows and if you look at the number that you guys plan on doing for 2010, which is a big number again -- and by the way, congratulations on that, I think at the beginning of the year nobody thought you could do it because of the credit conditions -- but that trend about lower cash flows seems like it's going to continue so can you give us a sense of what the balance of the portfolio looks like in terms of cash flows relative to history.

And then secondly, related to that, have the franchisees been a little more difficult in negotiating because of the same-store sales trends. And, can you just talk about the general level of appetite they have for buying the Company stores.

Let me thank you for the congratulatory words there. But let me talk about the full year 2009 first. We really sold -- out of 194 restaurants that we sold in 2009, 88 of them had what I would call below or perhaps even substantially below average unit level cash flows. And if you look at the cash flows, excuse me, if you look at the gains of those restaurants which were under $250,000 each, and then compare the remaining 106 restaurants that we sold in 2009 at a prior year, the gains this year on the remaining 106 were $590,000 versus last year's $609,000. So that would tell you that on similar cash flows for similar performing restaurants, that the franchisees weren't negotiating substantially differently than what they had in the past. Multiples are still staying fairly consistent for us.

With respect to their appetite, I guess the best example that I can give you is the most recent quarter where we sold 96 restaurants in the quarter and that was more than any other year except for the prior year, so I would suggest to you that that would indicate that we still have high levels of interest from our franchisees and of course that was in the midst of a down 6% same-store sales quarter. With respect to next year, I think just by virtue of looking at the average gains that we're projecting for next year that we have included in there some additional markets that have lower than average cash flows that would cause those numbers to be in that $400,000 to $425,000 average gain level.

Difficult to predict exactly when they're going to occur, Larry or if they occur at all. We may end up selling more normal performing restaurants within the mix. It's a little difficult to predict but we are anticipating we would continue to sell some of the low performing, lower cash flow generating units right now.

And just a quick follow-up. Is that $400,000 to $425,000 a good number for the remaining balance as you guys think about getting to the more normal level of franchise mix?

It's difficult to look that far out. We do still, though, have a number of what I would call normal to average cash flowing restaurants -- even higher than average cash flowing restaurants -- still available for sale. And I would expect those would average -- those gains would average similarly to what we've seen over the past couple years.

Okay. Thanks.

Our next question comes from Matthew DiFrisco of Oppenheimer. Your line is open.

Thank you. I was wondering if you could just talk about where the stores were sold. I'm sorry if you said that was already in South Carolina and North Carolina. Just wanted to clarify that. And also, if in ahead -- you are looking at doing anything different as far as specific to the California market with breakfast. Anything more aggressive as far as trying to get value there. One of your competitors was talking about dollar breakfast meals. Is there anything you're addressing with the breakfast side.

I'll take the breakfast question. Yes, we have some bundled promotions planned for breakfast and we also have a significant upgrade in one of our breakfast products that we think will help rebuild that breakfast business. So we're not giving any details on that at this point in time.

And let me address where some of the lower cash flowing restaurants were. Out of the 56 that we sold in the quarter, we had a 39 -- out of 56 lower performing or lower cash flowing restaurants that we had sold in the fourth quarter -- 39 of those were in the Rio Grande Valley -- along the Texas, Mexican border. And they had both lower than average unit volumes as well as lower than average cash flows. And then we also sold some in the desert areas of California, that while their AUVs were pretty typical, the higher cost structure there dictated lower average cash flows.

Okay.

We did not sell any stores in the other markets that you had mentioned out in the Southeast.

Okay. And then also just looking at your plans ahead, is there any reason to be concerned that the current comp environment might eat into the demand by franchisees to buy incrementally more stores from you? Obviously sometimes same-store sales for other brands and your brand has been an indicator of future expansion rates for the franchisees. But are the franchisees cautious in this environment or more cautious with those comp environment or is it purely a long-term decision and the financing is there now so might as well go out and buy. Curious if we should be more concerned.

More the latter. And, you gave a great answer to the question that you asked. I really do believe it's more the latter and if you look at -- as we sit here today, we are not seeing any reduced demand. Tough to predict going forward, but we don't see reduction in demand right now.

Okay. Thank you.

Our next question comes from Steven Kron of Goldman Sachs. Your line is open.

Hi. Thanks. First question, Linda, just going back to the discussion around margins and holding margins versus trying to chase market share. And I think your message is pretty clear on where you stand on that. I guess I'm just wondering, if the sales environment for you doesn't sequentially improve like your guidance would suggest, I guess at what point do you feel like you have to be a little with bit more aggressive from a tactical standpoint and I guess related to that, as you're looking through the rest of this year, not only are you cycling some easier numbers but is part of the thought process here that competitors will become -- who are currently a bit aggressive right now -- they'll have to become a little more rational as their cost profiles start to rise?

Well, that certainly is our hope is that the competitors will become more rational and they probably have some incentive to become more rational now at this point. And so we are -- actually, we are ramping up our value messaging. However, it's really around this bundled meal.

And what we've done with our marketing plan and our media buys is to allow us to concurrently have two messages which we previously used to just have one message on air. We would flight either a new premium product or a value message. Now we have the ability to flight both a premium product message with a new product as well as a bundled value message. What we've seen with our sale is as we come off the value message we lose traffic. As we come off the premium product message, we lose check.

So the ability to keep the check average up as well as drive traffic, we believe is really the solution going forward.

For context, I guess -- it doesn't sound like you're planning on spending more dollars, it's just you're allocating it equitably between the two. Does that mean that dollars spent on value this quarter or in the upcoming quarters will be less than what you just did in the fourth quarter?

Not necessarily. We've been able to shift some media -- without going into a lot of detail -- from really general branding messages to more focused messages.

Okay.

And we would consider investment spending at some point in the future if we felt that was necessary.

Okay. And then the last just follow-up on the regional side of things, I understand California remains very difficult. If you had to say which region saw the biggest departure from what the third quarter trend was, is it California or was it Texas?

It would be California -- as well as Phoenix is still very much suffering.

Okay. So those sequentially got more -- worse than what Texas had done?

Correct.

Okay. Thank you very much.

You're welcome.

Our next question comes from Keith Siegner of Credit Suisse. Your line is open.

Thanks. Jerry, a quick question for you. So you mentioned $68 million of required debt repayments this year. Just to step back for a minute, what's the Company's target or comfortable debt levels at this time, just from a longer term perspective? Where are you comfortable with leverage?

Right now, we have a $415 million term loan. That will work itself down to call it $300 million, $350 million. We're comfortable in a range of $300 million to $400 million.

Okay. And then another question in terms of the cash allocation. Pension contributions have been large the last two years, over $25 million. You're overfunded on the plans. What's the plan for pension contributions for this year?

The plan for pension contributions is about $22 million on pension.

Still that high?

Still that high, yes. While we've seen a nice rebound in the asset performance, we stuck to our asset allocation methodology, the discount rates have hurt the funding levels a little bit. So we're going to keep with that $22 million in there for this year unless we see signs that the discount rate is likely to change favorably.

And then one last question. The sensitivities that you gave for EPS around both comp and margins, they're the same as they were last year.

Right.

Even though you're getting to be a good bit more franchise.

Right.

Help us think about that.

Yes. They are similar to last year but this also -- we have a higher rate of franchise revenues in these numbers also and so I -- that's also playing into it more than what it was last year. And on the margins, it's still six to eight, although that is starting to move down some, Keith.

Okay. Thank you.

Our next question comes from Larry Miller of RBC. Your line is open.

Yes, thanks again. I just wanted to ask you about the relative trends between Qdoba and Jack in the Box. It almost seems counter intuitive if you will because Qdoba has a much higher check average than Jack in the Box and yet same-store sales even on a multi-year basis are holding up better than Jack in the Box. Again, you would almost expect the opposite to happen.

You did mention that there was no product -- new product news at Jack in the Box -- but I don't think Qdoba does a lot of new product innovation or at least doesn't have the marketing skill that Jack in the Box has. So I was just curious if you had any thoughts what is it at Qdoba that seems to be working slightly better or is it a geographic dispersion on that concept?

Right. I think it's three things. One is the competitive environment is not nearly the same as what it is in the QSR segment -- the competitive environment in fast casual. It's really a different demographic, consumer demographic, so it skews a little bit older, more affluent which are less impacted by the unemployment rates. And also the difference in the regional penetration.

Okay. Thanks. That's helpful.

Our next question comes from Rachael Rothman of Wedbush. Your line is open.

Hi, good afternoon. Can you talk a little bit about how you're approaching the negotiations with the franchisees with respect to refranchising the assets given the cash flows are depressed currently? And maybe why you're not holding back on some of the refranchising to a time when sales -- when the sales trajectory is more positive and when you may be able to capture more of the upside?

Yes, Rachel, a couple things on that. One is we said before and I think we're pretty consistent with this is that -- one, we don't have to sell restaurants to franchisees, and so as a result if it doesn't look like the multiples or the purchase prices are high enough for us, we will hold back. So we don't need to generate that kind of cash to pay down debt or anything so we have a pretty good capital structure here.

Having said that, the way that we're approaching the negotiations with franchisees now is the same as we've been approaching them over the last several years, and this is -- remember, this is a 20 year, if not married, it certainly is a 20 year relationship here -- and so we're estimating cash flows over that time frame and we're not assuming that the current market conditions continue for the next 20 years. And so the way that we're pricing these in does assume some rebound in the fairly near future. Does that help?

Yes, thank you. So are they willing to buy them on a basis of a five-year trajectory or is there pushback where they're saying -- well, 2009 and fiscal 2010 are depressed and so I'm still going to give you the same multiple that I had but the cash flows are depressed and thus the proceeds that you're getting are lower than you may garner if you waited.

Make no mistake, they are negotiating. However, we are holding firm on our negotiations and they are looking at the upside. Many of these folks are looking at -- while they look at this in terms of a 20 year basis, they really look at this primarily over the life of their financing. For most of these, this isn't a five to seven year financing window so that's really the time frame which they're looking at these units.

Okay. And then in terms of CapEx, looking out over a longer term horizon, can you just remind us at what point we should expect that to begin to trail off as you've made your way through the capital reinvestment program?

I would say not start to trend off but continue to trend off. We did $180 million last year in 2008, $153 million in 2009, and forecasting $125 million to $135 million this year. But having said that, after 2012, we should be at about $110 million or less going forward.

Perfect. Thank you.

Our next question comes from Steve West of Stifel Nicolaus. Your line is open.

Just a couple quick follow-up questions. Can you talk about -- you've mentioned that your consumer base skews more towards Hispanics and that's where the higher unemployment rates, maybe either quantify or qualify how much it skews towards Hispanics or maybe other minority groups. And, maybe I need to ask [Matt] this question -- on the franchising as far as the unit growth, why over the last couple years as you're trying to get more towards that 70% to 80% franchise mix, yet your new unit growth is still skewing more Company-owned. Is there a reason why franchisees aren't growing more. Are they tapped out because of the remodels you are doing? Can you talk about what's going on there?

Well, actually franchisees -- they grew 21 restaurants this year and I know this doesn't -- that doesn't sound like a big number but that's the most that they have ever developed and right now it's very difficult for franchisees in any system to get financing available for new unit growth, particularly in new markets. And remember, 25% of our new unit growth in 2009 was in new markets and many of those, the franchisees are building, are in fact in new markets. That's taking a little bit longer and again, the financing is creating some difficulty on that.

Okay.

On the consumer base, Steve, we don't disclose the specific demographics of our consumers but I can tell you we do index and all the research that we've done, we do index high relative to our competitors with the Hispanic consumer.

Okay. And Linda, just maybe then is it more because you're in SoCal primarily. Does that have a lot to do with the California bias there? Or is it that way across your system?

No, even -- well, yes, that's true, overall if you were looking nationally. But even among the local competitors, we skew high, just with the variety of our products and some of the products that we have on our menu, we do very well against the Hispanic market.

Okay. Thank you.

(Operator Instructions) Our next question comes from Michael [Lullebin of Set]. Your line is open.

Just wanted to go back and touch on that credit environment again and as it relates to the financing that you guys are doing for some of these refranchisings. I know that it's just less cash in, but have you seen a difference in the let's say quality of the franchisee's capitalization that are coming, looking for this type of financing? Or are you seeing any difference in the quality of the markets that you're selling that need this financing as well?

No, I think it's -- the reason that we're doing the financing is we expect to do this on a fairly short-term basis. But the reason that we're doing that is because of the more difficult nature of the credit markets. Rather, we're selling to a franchisee who is requesting some assistance on the financing or not, we have the exact same credit standards for them. So in fact, quite honestly, we would be less inclined to provide some financing assistance to a franchisee who may be less credit-worthy, if you will, than we would for those that would be more so. So we're really managing the balance sheet risk on this we think pretty effectively.

All right. Great. Thanks. That's all I've got.

Thank you.

Operator, why don't we take one more question before we wrap.

Thank you. Our next question comes from Matthew DiFrisco of Oppenheimer. Your line is open.

Thank you. I was just wondering if, following onto Steven's question -- with respect to getting the franchisees to grow a little bit. One of your competitors -- Sonic, for instance -- is looking to do a couple of teasers there to get the growing going a little better -- no royalties first five years, waiving fees in some developing markets. What are you doing along those lines?

When you commented on the competitive environment among the hamburger guys for Jack, I think also Carl was mentioned that -- I can't help but think it looks like there's -- and just confirm this. It looks like there's a strong correlation between when Burger King rolled out their double cheeseburger at a dollar, that it looks like your trends weakened. Would one conclude that -- similar to what we have in New York here -- that McDonald's wasn't 100% penetrated in most of your markets with the dollar so it was really incremental when Burger King came out with the dollar double cheeseburger in California across the board. For instance, in Manhattan, they don't have it for McDonald's, but they do have it now for Burger King so it is a big draw now and a very good value equation so I'm just curious if that was a similar effect in California, potentially.

Yes, I think that's true, with the Burger King dollar double cheeseburger, yes.

With respect to what we're doing to incentivize franchisees to build in new markets, we have just rolled out this year a reduction in royalties for the first two years. Taking our traditional 5% royalty rate down to 2.5% for the first two years for their new restaurants that make up 10% of what that market total we think can generate. And we just started that this year.

So is the philosophy there that it still though should be a net gain as far as boosting -- you're still getting the advertising dollars from that person or the contribution into the advertising fund.

Exactly right. We're just getting slightly less royalty rates on those for that two year time frame but it is a good incentive for franchisees to build out their development plans. And this is, again, this is only for new markets.

Perfect. Thank you.

Great. Thank you very much. Thanks for joining us this morning or this afternoon. We'll talk to you in February.

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