Jack in the Box Inc (JACK) 2010 Q1 法說會逐字稿

Good day, everyone. and welcome to the Jack in the Box Incorporated first-quarter fiscal 2010 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, Debbie, and good morning, everyone. Joining me on our call today are Chairman and CEO, Linda Lang; our Executive Vice President and CFO, Jerry Rebel; and Senior Vice President and Chief Operating Officer, Lenny Comma. During this morning's session we'll review the Company's operating results for the first quarter of fiscal 2010 and update guidance for the remainder of the year. Following today's presentation we'll take questions from the financial community.

Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in yesterday's news release and the cautionary statement that accompanies Form 10-Q that will be filed later this week are considered 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 Banc of America-Merrill Lynch consumer conference in New York on March the 10th, the Morgan Stanley retail field trip in Dallas on March the 16th, and the JPMorgan gaming, lodging and restaurant management access forum in Las Vegas on March 17th. Our second quarter ends on April the 11th and we tentatively expect to announce results the week of May the 10th.

And with that I'll turn the call over to Linda.

Thank you, Carol. Good morning. Our first-quarter performance included mixed results that were generally in line with our expectations. Our results continue to benefit from an improved cost structure, largely due to our ongoing refranchising effort, as well as steps we've taken to reduce overhead. This partially offset an 11.1% decrease in same-store sales at Jack in the Box Company restaurants, compared with a 1.7% increase last year. We believe high unemployment rates for our key customer demographics continue to be the biggest factor impacting our sales. In addition, we're continuing to see aggressive discounting throughout all segments of the restaurant industry. Lower grocery prices are also prompting more consumers to eat at home. During the first quarter, we reallocated our media spend to allow us to reach multiple consumer targets, with concurrent messages focusing on both value promotions and premium new products to drive traffic among a broader range of consumers. We are somewhat encouraged to have seen steady sequential improvement in sales and traffic at Jack in the Box since the end of November, when we adjusted our strategy. Same-store sales for the first four weeks of this quarter were down approximately 9%, which have been impacted by harsh weather across the country.

In addition to lapping difficult comparisons resulting from the launch of Teriyaki Bowls in last-year's first quarter, same-store sales in Texas, where approximately 30% of our Company restaurants are located, were negatively impacted by rolling over the the benefit of higher sales following Hurricane Ike last year, as well as severe winter weather this year. The decrease in traffic for the first quarter was less than the overall same-store sales decline, which reflected a lower average guest check for the first time since 2002. The lower guest check was primarily due to multiple value messages, including two bundled value combos; our Bonus Jack combo and the Jumbo Deal. We also offered our Big Cheeseburger and Big Texas Cheeseburger for just a dollar each and our real ice cream shakes were half price during the afternoon hours of the holiday season. In addition, we extended the value message to our breakfast menu and promoted two croissant sandwiches for just $3, which helped to improve breakfast traffic from what we've seen in recent periods During the first quarter we also promoted a new premium tier product, the Southwest Chicken Bowl, as a limited-time offer. This product extended the platform of rice bowls we successfully launched a year ago.

In the second quarter our marketing strategy will continue to balance value and premium products. For example, in early February just in time for the lent season, Jack in the Box began offering our fish sandwich for just $1.49, and on Super Bowl Sunday we launched grilled sandwiches as a new premium platform. These sandwiches are unique among QSRs and feature quality you might expect from a fast casual restaurant, but at a lower price point and with the convenience of drive-through service. We're offering two varieties of grilled sandwiches, each featuring premium-quality deli meats and cheeses served on a new grilled artisan bread. To drive trial of our turkey bacon and cheddar and deli trio grilled sandwiches, which tested very well for us and have strong value and quality attributes, we're offering a sampling event on February 23rd. Guests will receive a free grill sandwich with the purchase of a large drink. The sandwiches are regularly priced at $3.99.

Moving on to Qdoba, although system same-store sales for the first quarter fell 1.7% on top of a year-ago decrease of 1.1%, we're pleased that system same-store sales improved sequentially throughout the quarter and turned positive in the second half. Same-store sales remained positive for the first few weeks of this quarter until severe weather swept across the country. As with Jack in the Box, we've taken steps to strengthen Qdoba's positioning while responding to changing consumer needs. Qdoba's higher-income core customer responded favorably to the December introduction of "Craft 2," a new menu initiative that features more variety, as well as more affordable price points. Craft 2 lets guests mix and match smaller portions of Qdoba's most popular items, like a naked burrito, taco, quesadilla or tortilla soup for just $5.99 in most markets.

Early in the second quarter Qdoba rolled out an online promotion that leverages the Craft 2 campaign. Qdoba also enhanced its kids meals in the first quarter and took steps to strengthen its catering business and increase return visits. Sales have responded nicely and our expanded loyalty program remains very popular among Qdoba's core customer and is a big driver of return visits. We've seen reports of a boost in confidence among the more affluent segment of the population, while consumer confidence among those with lower income levels have remained depressed. We think this helps explain the divergence in sales trends at Qdoba versus Jack in the Box.

To improve the level and consistency of service at our restaurants, our employee training remains focused on the fundamentals of guest service and our investment, along with lower turnover, is favorably impacting service execution. Last-year's guest satisfaction scores improved significantly over the prior year, and we continue to build upon that improvement in the first quarter. The Jack in the Box system was more than 47% franchised at quarter end, and we expect to cross over the 50% mark later this year. We're pleased with the progress we're making to achieve our goal of being 70% to 80% franchised by the end of fiscal 2013. We're already realizing the benefit of lower capital spending, G&A costs and advertising expense resulting from our refranchising strategy. Jack in the Box is continuing to expand and during the quarter we broke ground on two new contiguous markets in Oklahoma -- Tulsa and Oklahoma City -- and expect those locations to open later this year. Sales volumes in new markets continue to exceed our overall system average.

In these difficult times, we believe it's more important than ever for us to maintain our charitable support of organizations that support the community. In November we launched a system-wide fundraiser that offered guests a limited edition antenna ball for a $1 donation, with all proceeds benefiting Big Brothers Big Sisters. I'm happy to announce that this fundraiser raised more than $340,000 for this organization. I'd like to thank our guests for their tremendous generosity and express my appreciation to all our employees and franchisees for their tremendous support of this event. Not only did our franchisees play a major role in the success of this fundraiser, they've been very supportive of our overall business strategy, as well. Our relationship with our franchise community remains very strong as we work through the difficult macro environment together for the long-term health of the brand.

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. First-quarter earnings were $0.43 per diluted share compared to $0.49 last year. Refranchising gains were lower than last year by approximately $0.09 a share. Restaurant operating margin was 14.3% of sales compared to 14.6% last year. Our focus on cost control helped to mitigate the sales deleverage, which we estimate negatively impacted first-quarter margins by approximately 250-basis points. Food and packaging costs improved by 230-basis points, as year-over-year commodity costs were approximately 7% lower in the quarter, despite higher produce costs, resulting from unusually cold weather in key growing regions of the country. As a reminder, commodity costs were up nearly 8% in the first quarter of last year. Beef was down about 19%, and cheese was down approximately 18% from last-year's first quarter. In addition, the benefit of price increases and margin improvement initiatives positively impacted margins. Franchise margins were lower than last year, due primarily to franchise sales deleverage. We control the leases on a majority of our franchise locations, and charge the franchisee rent based upon the greater of a percentage of sales or a fixed minimum rent. As our underlying rent expense is fixed, significantly lower franchise sales compressed the margins.

SG&A decreased by $17.4 million due to several reasons that we described in the press release. It is probably worth running through these to get a gauge on what we believe is more ongoing in nature to help you get a more realistic run rate. Our refranchising strategy and planned overhead reductions resulted in about $4 million of the decrease. You probably recall that in the fourth quarter of last year we implemented 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 2010. Roughly half of the $5.5 million decrease in advertising cost was due to refranchising and these savings should continue. Mark-to-market adjustments on investments supporting the Company's non-qualified retirement plan positively impacted SG&A by $2.1 million in the first quarter this year, as compared to a negative impact of $5.8 million in last-year's first quarter, resulting in a year-over-year decrease in SG&A of $7.9 million. Our full-year guidance does not reflect any additional mark-to-market adjustments. The insurance recovery related to Hurricane Ike resulted in a $1 million benefit, and while we do expect more in Ike-related recovery, the timing and amount are uncertain. They should not be considered recurring and additional recoveries are not included in our full-year guidance. Facility charges declined by $4.3 million, and these may fluctuate from quarter to quarter, depending largely on capital spending and impairment charges in each quarter.

Pension expense increased by approximately $5.2 million due primarily to lower discount rates. Higher pension expense is expected to continue throughout the year, but it is non-cash, as it relates largely to a change in the discount rate of our pension measurement date and will not impact our funding levels. It is important to note that as of January 1st of 2010, our pension plan is considered fully funded based on the IRS funding calculation. As to refranchising, we completed the sale of 23 Company-operated Jack in the Box restaurants to franchisees in five transactions, with gains totaling $9.4 million in the first quarter compared with $18.4 million in the year-ago quarter from the sale of 29 restaurants. Average gains were $408,000 in the quarter, lower than last year's average of $633,000 due to the sales volumes and cash flows of the restaurants sold. The first quarter of 2009 included the sale of the entire Santa Barbara market, which has substantially higher-than-average sales, cash flow and resulting gains.

Total proceeds for the quarter related to refranchising, including cash and notes receivable, were $14.3 million, or an average of per restaurant. Notes receivable from refranchising activity are now approximately $7.8 million, down from $10.6 million at the end of the first quarter. We currently expect Q2 2010 gains to be lower than Q2 of last year due to the timing of refranchising transactions, but we continue to expect full-year gains on the sale of approximately 150 to 170 Jack in the Box restaurants to total between $60 million and $70 million, with total proceeds resulting from the sales of $85 million to $95 million. We repurchased 2.1 million shares of our stock in the quarter at an average price of $18.98 per share and about $57 million remains available for repurchases under the terms of our current credit facility under a board authorization, which expires in November of this year. We also repaid approximately $25 million under our term loan during the quarter, as required, while borrowing $17 million on our revolver.

Before I review our guidance for the second quarter and fiscal 2010, I'd like to provide an update to our commodity cost outlook for the remainder of the year. Overall, we expect commodity costs for the full year to decrease approximately 1%, reflecting the approximate 7% decrease experienced during the first quarter. Commodity costs in the second quarter are expected to decline by approximately 1% and an increase in the third and fourth quarters as compared to prior year. Specific to our major commodity purchases, beef, which accounts for approximately 20% of our spend, for the full year we are anticipating beef costs to be about 3% lower than 2009, with the biggest benefit already experienced in Q1 when prices were 19% lower than last year. We have 100% of our import (inaudible) beef covered through April at $1.30 to $1.38 per pound versus approximately $1.37 last year. We expect beef 50s to average in the $0.75 to $0.85 per pound range in Q2 versus approximately $0.80 per pound in Q2 last year. Beef prices have been moving up over the last few months and so we would expect a favorable year-over-year benefit in beef to end in the second quarter. Chicken is our second largest commodity, accounting for approximately 10% of our spend. We have renegotiated and extended our contract through March of 2012, at prices that are lower than our previous agreements.

Now let's move on to our guidance for the balance of the year. For the second quarter, we expect same-store sales for Jack in the Box Company restaurants to decrease 8% to 10%, and system-wide same-store sales for Qdoba to range from flat to down 2%. Our guidance reflects the sales trends we've seen thus far in the quarter, which have included some unfavorable weather and many of both brands' markets, particularly in Texas for Jack in the Box, where we have 30% of our Company restaurants. I won't repeat all of the full-year guidance included in the press release, but here's our current thinking on some of the line items that have changed since our last guidance. Same-store sales in the Jack in the Box Company restaurants are now expected to decrease 5% to 8%, with trends improving in the second half of the year. SG&A expense, as a percent of revenues, is now expected to be in the mid-11% range, a little higher than our prior guidance as a result of lower than originally expected sales. Diluted earnings per share are expected to range from $1.85 to $2.05 per share, with same-store sales volatility being the biggest wild card. As a reminder, for every 1% change in Jack in the Box system same-store sales, we estimate the annual impact to earnings is $0.06 to $0.08, depending on flow-through and assuming stable cost. For every ten-basis point change in restaurant operating margin, the estimated annual EPS impact is approximately $0.02.

Now I'd like to turn the call back over to Linda for some final comments.

Thank you, Jerry. As Carol mentioned at the beginning of the call, our new Chief Operating Officer, Lenny Comma, is joining us this morning. Lenny was previously Vice President of operations for all Jack in the Box restaurants in the western half of our system and took over as Chief Operating Officer after Paul Schultz retired last month. Lenny has been with the Company for more than nine years and brings a wealth of experience and leadership to our executive team. We're looking forward to his continuing contributions in the years ahead. Welcome to the call, Lenny.

And now I'd like to turn the call over to the operator to open it up for questions. Debbie?

Thank you. (Operator Instructions). Thank you. Our first question comes from Joe Buckley from Banc of America. Your line is open.

Thank you. I'm going to start with two questions, I guess. Talk a little bit about what your research is showing on brand attributes. Given the size of the same-store sales declines, how confident are you that it's macro, little bit of weather added on there that had you down double digit as opposed to some slippage in brand attributes?

Joe, do you want to ask the first question and then you'll have a follow-up question?

Yes, please.

Oh, okay. Good morning, how are you?

Good, how are you doing?

Good, good. We really believe that the challenges that we've had with regard to Jack in the Box is macro related and it's related to the high unemployment among the core consumer; both the general market consumer, that younger, lower-income consumer, as well as the Hispanic consumer. From our research we're executing very well in terms of the guest experience. From our attribute ratings and our new product research they're scoring very well. I can tell you the grilled sandwiches, the early indication is that they're -- the consumer is very positive with the launch and scored very high in terms of quality ratings, as well as value ratings, so we know that from a consumer standpoint that value is very critical, not only for the bundled meal deals, but also the premium products. So we purposefully re-reciped the grilled sandwiches so that we could launch them at a $3.99 price point and we think that's really key to delivering a great product that's differentiated, premium positioned, but also a good value. So this isn't -- we do not believe that this is a brand issue whatsoever.

Okay. Second question, unrelated and maybe more directed to Jerry. Talk about the confidence in the full-year refranchising target and maybe you can talk about the wisdom of executing the plan with comps down so much, whether the buyer's appetite is diminished or the valuation is diminished and should you be proceeding as aggressively as originally planned?

Sure, Joe. Good morning. Make a couple comments on that. We took a hard look at all of the components of our fiscal-year outlook at the end of the first quarter and we did change many, including sales and earnings, which we guided down. We did not feel a need to change our expectations on our refranchising outlook at all and a couple reasons for that. One i, franchisee demand remains quite strong and we're also getting demand from -- and a lot of interest from outside franchisees, as well. We feel very good about that. Clearly, the franchisees know what the sales trends are, the lenders know what the sales trends are. We were pretty transparent with that back in November and we're transparent with that again today and, of course, they certainly look at the individual deals and the restaurants that hey're going to lend against. We completed five transactions in the first quarter, only one of which required some financing assistance on the part of Jack in the Box, and that has already been fully repaid by the franchisee securing some additional outside financing. So we haven't seen anything yet in the demand, the willingness of the lenders to lend, or in our ability to get the price that we think is the right price that would cause us to temper our outlook on refranchising at all this year.

Okay.

Joe, I would add, also, that the franchisees, they understand that this is an economic headwind for us and that they feel very confident in the leadership of the brand, the health of the brand, and the positioning of the brand as the economy improves. So even those in Texas, where the economy has really weakened in the last couple of quarters, they're very interested in expanding their business because they see the long-term opportunities for the brand. It's a 20-year commitment versus just having to deal with the current economic situation, so that's why I believe that's also a factor in keeping the demand level up from our franchisees.

And, Joe, just one add on there is, remember what we've said in the past is that we don't have to refranchise, we're not having to pay down debt to be able to -- or to have -- to require us to refranchise and so as a result, we are not discounting these transactions to levels that we don't think make sense for us.

Okay, thank you.

Our next question is from Chris O'Cull of SunTrust. Your line is open.

Good morning, thanks. Jerry, my question relates to the new stores, the Company has a fairly sizable investment in Jack -- new Jack units so would you update us on just the financial performance of some recent openings?

Yes, Chris, we haven't talked about what the returns are on those locations. What we have said is that the restaurant -- particularly new restaurants in new markets where he we have the new prototype have been -- have had higher than system average AUVs and they're higher than existing market new restaurants AUVs also, so we've been quite pleased overall with new restaurant growth. One of the things that you can look at in terms of the wisdom of building new restaurants in new markets is what are franchisees doing and we continue to have franchisees build new restaurants in new markets and that's with their own cash, obviously, and so they continue to see the returns there, as well.

Okay. And then one other question related to -- just as a follow up on CapEx and investments. When you look at the -- in the past I know you guys have remodeled a lot of stores and sold some of those to franchisees and still received higher funds because they've been fully remodeled. Is the reduction in CapEx largely attributable this year to selling these stores before they've been remodeled, so shouldn't we expect a ower proceeds for these stores that are being sold?

There -- a couple things. The reduction in CapEx this year is due primarily to a large effort that we had on our exterior reimage enhancement program. Last year we did every single one of the stores, whether we were going to refranchise them or not, so we're rolling off of that. We are being more cautious with respect to CapEx on those locations that we intend to refranchise over the course of next year or so. That's also having an impact there, as well. On the other hand, we do know that on our restaurants that have been reimaged, that they are seeing less of a sales decline than the restaurants that have not been reimaged, and so we still believe it's very important for us to continue with that reimage strategy, be it on the part of the franchisees or on the part of the Company.

Okay, great. Thanks, guys.

Thanks, Chris.

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

Hi, thanks, Linda. Maybe you could talk about just the overall QSR environment, the discounting that I think we saw really accelerated in calendar fourth quarter and I think you highlighted Burger King specifically last quarter. Are you seeing the discounting, or the impact from the discounting lessening at all and then how do you plan on tackling value as the year-over-year benefit from commodities starts to wane as the year progresses?

Good morning, Steven. I don't think currently that the discounting has been reduced. I think there's still aggressive discounting on the part of -- Burger King's still promoting the $1 double cheeseburger, although I understand that they are going to be moving off of that in mid April so I think that will help the QSR segment. But we continue to see aggressive discounting and a lot of value messaging by McDonald's with their breakfast value menu and other QSR players, so haven't really seen a decrease in discounting. With regards to our value messages, we really are not moving into the aggressive discounting. We're really -- what works for us is these bundled meals where we can put together unique items that are differentiated, unique to Jack in the Box, and sell them at a compelling price point. Example is the Jumbo Deal. It was a jumbo Jack, two tacos, small fries and a drink for $3.49. Pretty margin friendly but also very, very good value for the consumer and that was an effective promotion for us. We'll continue to do those types of bundle deals going forward and we're very, very cognizant of the impact to the margin. We do not want margin eroding deals.

Okay. And then just -- you mentioned the average check was weaker and so the traffic decline was less than the comp, can you just provide some more color, some magnitude around that, if you saw it decelerate throughout the quarter, if you're seeing some stability in your average check piece?

Right. Well, we have -- we did see throughout the quarter an improvement in the two-year traffic numbers, so because of the number of discounted -- the Jumbo Deal really we believe had the most impact on the average check and was a fairly decent mix. But we've moved off of that in terms of media and we're moving to the grilled sandwiches, which should help lift and restore the average check. It's really early in the promotion right now, but we know that it's a balance. So we want to get the traffic in, we want to drive traffic with those value promotions, but we also know that having the innovative top-tier product is important to driving visits, as well as improving the average check.

Okay, thanks very much.

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

Yes, I'll stick to the one follow up and one question, as well. Can you guys -- on a follow-up question, can you guys talk about how the franchisee finance market stands today, specifically what percent of equity are the franchisees being required to put in? Is it still north of 30%? And then can you talk about -- and related to that, do you find the franchisees are having to make a decision between I want to buy some stores but I'd want to remodel but I'm in a remodel program right now and I have so much equity requirement to be in these deals that it's preventing them from actually -- or limiting the number of your buyers? And then I have a question.

That's a great question. Let me address the first one first, the amount that they're putting in. It honestly -- it varies, it depend on what other kind of collateral the franchisee's putting up, but on average the 30% number is in the ballpark. Some will have a little less than that, some will have a bit more, but 30% is a good number. On the decision-making process for what can the franchisees do, I think that enters into it some. I think it's also important to note that the franchisees have to reimage, based on a schedule that we have and it's in the franchise agreement that they have to do so. Also, just because they're buying restaurants doesn't mean necessarily that they can borrow that same money to reimage, because the lenders are much happier about lending for cash flow than they are about equipment and remodel CapEx. So I'm not sure that it's a zero sum gain or that they're fungible with respect to the use of the proceeds. Having said that, we're still getting pretty good interest from lenders, both from regional and local banks on the part of the franchisee with the lending institutions and, of course, GE Capital's been back in the game and has been very helpful with us in continuing to execute the refranchise strategy.

That's helpful, thanks. And then I was wondering your thoughts on pricing. It sounds like the pressure on check is new for you guys and does that cause you to change your thoughts on how much price you want to take, specifically as commodities are going to be a little bit less favorable over the next several quarters coming up?

Right. We still are very cautious about taking price, Larry, and we do use the consultant, who has a pretty sophisticated model in determining our price opportunities, so we continue to evaluate and analyze with our consultant.

Can you share with us what kind of pricing you're running now and what you thing you might run in the next -- the balance of fiscal 2010?

Yes, we're running about 2% price.

Thank you.

Next question is from Jeff Omohundro of Wachovia Securities. Your line is open.

Thanks. Jerry, you mentioned the sequential improvement in comp slightly off of fiscal Q1 with fiscal Q2 tracking around down 8% to 10% and it sounded like that's what you're seeing in the market now, but I think you also commented that there might have been some weather in that. Wonder if you would care to quantify it and perhaps a little color on the Texas market, as well?

It's tough to quantify what the weather is. I know a lot of -- I've seen others that have gone out there and actually put a number out there. It's fairly difficult. You have weather -- some weather last year, you have weather this year, but clearly Texas, particularly south Texas, is not used to the snow and so to steal one of Carol's lines, white Christmas in Texas is not a positive sales catalyst, which -- and, of course ,we had rains in California, the Pacific Northwest has had some inclement weather and we're all seeing what's going on across the country. I think last week we had snow on the ground in 49 out of 50 states, so that hasn't helped either the Jack in the Box brand or the Qdoba brand.

Yes, but --

Just to add on, we always hate to talk about weather and blame weather. I think weather probably was a factor -- somewhat of a factor. I can tell you, though, in terms of the deceleration in sales between fourth quarter and first quarter, that really was a result of the weakening Texas market. Feels like California has perhaps stabilized so that's a little bit of encouraging news, but it hasn't gotten any worse in California. Texas is challenged with the economy there.

Thank you.

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

Hello, this Jake Bartlett in for Matt. I had a follow-on question on the refranchising and then had another question. Your comments about the franchisees understanding this is a difficult environment and they're still willing to come to the table, is that imply -- are you implying that you're getting a higher multiple now, considering that you've troughed operating results? It would seem you need to get a higher multiple now to justify not holding off until an improved environment. And then also if you could give us an update on the 70 stores that were being sold in Sacramento and how that auction went, whether you participated at all? And then I have a follow-on.

Okay. On the refranchising, no, we're not getting a higher multiple on that, but the way that we price the restaurants is based upon a 20-year franchise relationship. And so, as an example, when sales were up 6.1% three years ago we weren't modeling in those kind of sales increases going forward and we're certainly not modeling into our pricing formula now sales down 11%. So it's a more normalized sales growth over a 20-year timeframe which is how we baked it into the model. With respect to the bankruptcy update, the court has approved the purchase rules and the process. That is under way now. We would expect to have that completed some time over the next couple of weeks. Really can't comment about our willingness or ability to participate in that, but you'll learn more as soon as all that becomes public.

Okay, and then I just had one modeling question on G&A. It looks like fairly lumpy is a little bit lighter than you expect it to be for the average in this quarter. It was partly due to the investment changes but wondering if you could just give us a little more insight into the progression throughout the year with facilities charges and all those moving parts. Just seeing what you expect it to do throughout the year on a quarterly basis?

Yes. Let me -- first of all, let me speak about the facility charges. It's difficult to give quarterly guidance on facility charges because oftentimes you don't know what they are until they're there and if we knew what they were right now we would have already had to have reported them. So -- but I would say we're not expecting our facility charges, knowing what we know today, to be higher than what they were last year. A couple other things, though, that I will talk about on the annual SG&A to give you some impact. There's three things that I think I would want to point out that are driving fundamental lower G&A costs. One is the corporate overhead and some associated field staff that we reduced at the end of the fourth quarter and into the first quarter this year. We said that was about a $6 million annualized number, $4 million this year. We also sold 194 Company units to franchisees last year. We've said in many meetings and conferences that that's about a $24,000, $25,000 per restaurant reduction offset by $3,000 or $4,000 worth of added G&A related to the franchising side. Those (inaudible) will be ongoing and we continue to expect to have that shift in the advertising cost as we sell franchise locations from Company to franchise. Those are real, those will be ongoing.

The other two things that I want to talk about are the pension expense. The pension expense, we do expect that to continue throughout the year. We said it was worth about $5 million in the quarter. I'll tell you, we thing it's about a $17 million increase year over year, [where] last year that's due, again, to the change in the discount rate as of our measurement date. It's an accounting thing, it's non-cash. And then the other thing is -- I wanted to mention is the mark-to-market. While it was extraordinarily negative first quarter last year, by the time we got to the end of the year it was less than $300,000 worth of a change. So we'll expect -- we'll be rolling over some positive mark-to-market in the next three quarters. Having said all of that, even with the additional pension expense, we expect a significant dollar reduction in SG&A this year versus what it was last year, even after covering that $17 million in additional pension expense.

Okay, thank you.

Our next question is from Robert Derrington of Morgan Keegan. Your line is open.

Yes, thank you. Linda, if I could ask a question, specifically on your last call you talked about a reallocation of your media spend to reach multiple consumer targets with concurrent messages. Can you -- given the trend that we've seen this most recent quarter after you made those comments, are you rethinking that strategy any, and if you are or aren't, can you tell us how it's affected your -- last quarter you talked about weakness in breakfast day part, mid-tier category, how has that change in strategy affected the sales within those different components that you saw last time?

Yes, that's a good question. We do believe that the strategy makes sense and that it is working to allow us, with some changes in the media allocation, to target multiple messages, and specifically having a breakfast message, so we know that our breakfast deal, with the two for three croissants did improve the breakfast day part. We also know that the Jumbo Deal was effective in terms of driving traffic -- improving traffic. It did impact the average check, but there was a good mix on that. In terms of the the Southwest Chicken Bowl, which was our premium product, that was not one of our stronger products. The mix was not as high as some of our new product introductions and there was a little bit of weakness there. However, we still believe that it's important to continue to have menu innovation, to have that compelling new product, both premium products, as well as those bundle deals. So we will continue to go forward with that strategy, we believe it makes sense.

Linda, the follow-up to that, given that your Company generally is pretty sophisticated about testing products before you roll them out, did you know in advance that the Southwest Bowl wouldn't do as well and if so, why did you proceed with it?

Yes, we did know that it was more of a niche product and it didn't play out as well in some of the markets where it was not tested. We test in limited markets and we get consumer response and we know what the feedback and mix is. It did okay but not a seller, wasn't a home run, and I would compare that to the grilled sandwiches that we're seeing significantly higher menu mix on the introduction with the grilled sandwiches. And I also think the value, the pricing had an impact. The Southwest Chicken Bowl was priced at $4.29. It was above $4 and many of the franchisees priced it significantly above that. Whereas as we've really -- I think we've been very successful in maintaining and holding the $3.99 price point on the grilled sandwiches.

Great, thank you.

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

Thanks. I just had a question on the franchise expense that you talked about a little bit before. Could you tell us a little bit about the rent situation? Number one, it sounds like there's a floor price -- it's a percent of sales with a floor price. Where is the floor price relative to what you would have to pay to lease the property, and then if you are actually the primary lease? And then how many of the franchisees right now are at the floor?

I'll answer one of those questions. (LAUGHTER) Let me answer the first one. The way that we price the restaurants is their minimum rent is almost entirely above our minimum rent and we also get to pass on scheduled rent increases that we would receive under the underlying master lease, we get to pass those on, as well, so there is a baked in spread anyway. But that spread is depressed somewhat, or diminished somewhat as they have significant sales reductions. So clearly on a double-digit type of same-store sales reduction, they're going to start paying lower rent and get closer to that minimum level than where they are today. Can't really answer for you exactly how many restaurants are at the minimum. Probably wouldn't disclose that if I had that right at my fingertips anyway. But we're not in the habit of providing large-scale rent relief to our franchisees, so we would expect to see this turn around as we see sales turn around.

So it sounds like a fairly linear relationship, both on the way down and on the way up, so in a recovering sales environment historical normal levels can still be applicable given the change in sales?

Yes, linear, yes. Completely linear on the up side, it has a floor on the down side, though.

Okay. All right, thank you.

Our next question is from Tom Ford of Kelsey Advisory Group. Your line is open.

Great, thank you very much. I wanted to know if you could talk a little about the -- this quarter I think you're lapping the "Hang in there, Jack" promotion and in the year-ago period you did, at least on a regional basis, some Super Bowl advertising, so i that going to be a tough lap? And then did you do regional Super Bowl advertising this year?

We did do Super Bowl advertising this year. We launched the grilled sandwiches on Super Bowl versus last year's branding message, so yes. No, I think we have solid introduction, we had good reaction to our ad -- Super Bowl ad, so we're feeling optimistic.

Great, thank you.

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

Great, thanks. Hi, guys, just a couple of follow ups at this point. Going back to the question on media where you guys are a little bit more balanced in your messaging, you guys plan your marketing windows and your promotional schedules at least a couple of quarters, I would think, ahead of the actual launch of these things. What are the metrics that you're looking at real time to figure out what's going to be appropriate three, six, nine months from now, and when might you think that that balance and shift in media spend might change? That's the first follow up. And then secondly, you touched a bit on Texas and California, I recognize that's a big proportion of your stores, but are there any other geographies that you're seeing more robust improvement?

I'll answer the second question. No, I would say Phoenix is still very weak -- a very weak market. Like I said, California, good news is it hasn't gotten any worse, so nothing really -- no big changes other than the Texas weakness. And then in terms of our promotional and marketing calendar, it's a pretty -- it's a very analytical approach to how we lay out our marketing calendar. We generally try to have one platform a year, so we just launched the sandwich platform. We then layer new products -- premium products along with what we call average check builders, so that might be a side item, that could be a new and improved side or beverage. And then we have learned that we now have to also have a pretty compelling value message of some kind of bundled meal, as well as a breakfast message; either a new breakfast news or a breakfast bundled deal. So we lay those out, depending on seasonality we factor in commodities, we factor in the sequencing of events, what we're rolling over in the prior year. So it's a pretty comprehensive and sophisticated way in that we lay out our marketing calendar. So it's not one particular factor but it's -- a lot goes into making those -- setting up that calendar for the year.

Okay, thanks.

Operator, why don't we take two more questions.

Thank you. Our next question is from Bart Glenn of D.A. Davidson. Your line is open.

thank you. I was just curious if, given your view on the economy you've made any changes to the timeline of the product development schedule? And then just a second question, sounds like you're seeing some results with the -- more of a bundled message and was wondering if we've seen an increase in attachment of stuff like soft drinks and fries? Thank you.

I'm sorry, I missed the last part of your question.

Yes, the second question was regarding more of a focus on the bundling --

Yes.

-- and was wondering if we've seen an improvement in the attachment of soft drinks and fries as a result?

Yes. With something like the Jumbo Deal, which was -- in fact we made a change to that bundled meal deal to include the drink, which is different than what we did last year to improve the attachment rate and that worked well for us. We raised the price, we included the fry and the drink in that. Pretty good discount but also pretty margin-friendly, as well. So, yes, we do see an improvement there. And then in terms of timelines, we are moving much more aggressive to try to get things out to the market more quickly in response to really a greater need for new products, for news, and for promotions.

Thank you.

And our last question is from Robert Derrington of Morgan Keegan. Your line is open.

Yes, thank you. Linda, when you look at -- we look around the industry we see some of your competition doing things. For example, one of your competitors added a new branded coffee product -- coffee line. When you look at your -- the beverage piece of your business, I know you had tested during the -- I guess the afternoon day part some happy hour or some ice cream-based products. How do you look at that piece of the business? Are there other ways that you can get additional leverage on your beverages, whether it's coffee at breakfast or smoothies in the afternoon, or how do you see that piece?

Yes, I think all of the above. I think it's new flavors, both with shakes and smoothies, some limited promotions around beverages, and then I think these bundled deals that include a drink, as well. We're also looking at our coffee program, so more news on that later.

Would you consider a branded product or do you need a branded product?

I don't think you necessarily need a branded product, but we've looked at the different options and we'll be talking about that soon.

We're thirsty. We're waiting.

Okay.

Thanks.

Thanks everyone for your time today and we will talk to you in May.

Thank you. Thanks.

Thank you. This concludes today's presentation. You may disconnect at this time.