Jack in the Box Inc (JACK) 2010 Q3 法說會逐字稿

Good day everyone and welcome to The Jack in the Box, Inc. third 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, Stacy, and good morning, everyone. Joining me on the call today are Chairman, CEO and President, Linda Lang; Executive Vice President and CFO, Jerry Rebel, and Senior Vice President and Chief Operating Office, Lenny Comma. During this morning's session we'll review the Company's operating results for the third 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 of the business. The Safe Harbor statement in yesterday's news release and a cautionary statement in the Company's Form 10-Q that will be filed later this week 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 Bank of America-Merrill Lynch investment conference in San Francisco on September 14 and the Wells Fargo consumer conference in New York on September 29. Our fourth quarter ends on October 3 and we tentatively expect to announce results the week of November 22. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning. For the third quarter, the 9.4% decrease in same-store sales of Jack in the Box fell below our guidance range and our margins suffered from the sales deleverage. Our Jack in the Box restaurants continue to be negatively impacted by high unemployment and other economic issues, especially in California and Texas where we have our largest concentration of restaurants.

Unemployment among our key customer demographics also remains high. For example, 34.5% of California teenagers were unemployed in June. This is up from 28.6% a year ago and compares to a national rate of 25.7%. And while discretionary spending among affluent segments of the population appears to be benefiting higher end retailers, declining consumer confidence, especially among lower wage earners, negatively impacted our sales. Although our sales outlook remains cautious and largely reliant upon improvement in the economy, we believe we can capitalize on opportunities to differentiate our core brand and further enhance the guest experience at our restaurants through immediate improvements to our menu, service and restaurant environment.

In this environment, consumers are very selective about where they spend their dining dollars. So we really need to deliver the best possible experience to every guest, every time. To this end we have intensified our focus throughout the entire system on delivering a more consistent guest experience. Along with our voice of guest surveys, we are committing additional resources to more closely measure how we're delivering on the key drivers of guest satisfaction. In addition to this increased focus on service, we're investing and making noticeable quality improvements to some of our signature products. You will recall we launched new french fries in March and introduced our new Kona classic coffee blend early in the third quarter. We are further expanding this initiative to other top selling guest favorites.

Lastly, we know that completing restaurant re-images will enhance the overall perception of our brand. Accordingly, we're accelerating our plans and now expect completion at all Company locations by the end of fiscal year 2011. Concurrent with these actions to improve sales, we're continuing to execute a marketing strategy that focuses on both premium products and value promotion. During the quarter, we successfully launched our grilled breakfast sandwich which extended our grilled sandwich platform to include three varieties of sandwiches. Breakfast continued to be our strongest day part in the third quarter even though we did not have an explicit value message. In addition to enhancing our coffee platform with a new premium blend of coffee made with real Kona beans, we also expanded other beverage platforms during the quarter with a raspberry flavored real fruit smoothie and a raspberry shake.

Balancing our new premium products with value promotions, Jack in the Box launched two limited time offers in the third quarter. The first event provided guests a unique way to create their own value meals by combining three of eight popular menu items for just $3. The second event launched late in the quarter and features a new margin friendly product, The Really Big Chicken Sandwich. For $3.99, guests can order a combo meal featuring the new sandwich, a small drink and a small order of seasoned curly fries. At the higher price point, this limited time offer does not have the same negative impact on check average as our Pick 3 for 3 event. We continue to maintain a full pipeline of new products in various stages of development and test. Earlier this week we added another distinctive product to our breakfast menu, a breakfast pita pocket, and later this month we will roll out a fourth grilled sandwich which is very unique to our category and tested well for us.

Moving on to Qdoba, we're pleased with the 4.6% increase we saw in system same-store sales and we attribute the improvement in Qdoba sales to the spending patterns of fast casual customers who have higher levels of consumer confidence as well as the effectiveness of our marketing strategies. During the quarter we reintroduced the seasonal favorites, the Mango Salad as an LTO, and continued promoting our new menu option called Craft 2 which lets guests mix and match smaller portions of some of Qdoba's most popular items. We were also effective in leveraging the Qdoba loyalty card program as well as growing our catering business. And now I'll turn the call over to Jerry.

Thank you, Linda, and good morning. All of my comments this morning regarding per share amount refer to diluted earnings per share. Third quarter earnings were $0.44 per share compared to $0.57 last year. As you saw in the press release, third quarter results were negatively impacted by approximately $0.06 per share by several items that were not included in our previous guidance for fiscal year 2010.

We had three items that impacted our SG&A line. Impairment charges of approximately $0.03 per share and mark-to-market adjustments on investments supporting our nonqualified retirement plan of approximately $0.02 per share were partially offset by insurance recovery related to Hurricane Ike of approximately $0.02 per share. An increase in workers compensation reserves negatively impacted payroll and employee benefit costs by approximately $0.02 per share.

Higher workers compensation costs are expected to continue in the fourth quarter as the cost per claim is trending higher even though our number of claims is trending down. We wrote off approximately $500,000 in deferred financing costs in connection with the refinancing of our debt during the quarter. Charges included an interest expense and negatively impacted earnings per share by approximately $0.01 in the quarter. The 9.4% decrease in same-store sales was 1.4% lower than the mid point of our guidance. Our restaurant operating margin was approximately 200 basis points below our internal expectation. 50 basis points of that was due to the increase in workers compensation reserves and the remainder was due primarily to deleverage from lower same-store sales.

Our average check declined approximately 2.5% during the quarter as value promotions had a negative impact which more than offset price increases of 1.2%. Versus last year, restaurant operating margins decreased 420 basis points to 14.2% of sales. We estimate that sales deleverage negatively impacted third quarter margins by approximately 280 basis points. Adjustments to workers compensation reserves accounted for approximately 100 basis points of decline versus last year. Commodity inflation of approximately 2% was in line with our expectations but negatively impacted margins as compared to prior year when we experienced about a 1% deflation in commodity costs. Even though SG&A was impacted by several items discussed in the press release, our refranchising strategy and planned overhead reductions resulted in about a $3.2 million decrease a quarter and $12.3 million year-to-date versus last year.

With the sale of 58 Jack in the Box restaurants, we crossed the 50% milestone and were 51% franchised at quarter end. And we remain on track to achieve our goal of being 70% to 80% franchised by the end of fiscal 2013. We did not provide any financing for the seven deals that closed during the quarter and we are maintaining our full year guidance with respect to the number of restaurants we expect to sell, although there is one large transaction included in our guidance where the closing is less certain. During the quarter, we opportunistically acquired 16 franchise Qdoba restaurants in the Boston area. Which is consistent with our strategy of Company operated growth in larger, more urban markets. At a total purchase price of approximately $8.1 million, we acquired these restaurants for less than the build-out cost.

Before I review our guidance for the fourth quarter and full year, I'll 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 by approximately 1% reflecting our fourth quarter expectations of approximately 4% inflation, compared to prior year when commodity costs declined by 5.5%. Increase in the fourth quarter is being driven by higher beef costs which account for approximately 20% of or our spend and higher pork cost which account for approximately 5% of our spend. We expect beef costs to be up approximately 15% in the fourth quarter compared to a decrease of 17% in last year's fourth quarter. We have 50% of our import 90s covered through October at $1.54 per pound with some additional coverage spread in to February of next year versus approximately $1.30 last year and current market prices in the $1.62 to $1.65 range. Pork costs are expected to be up more than 30% in the fourth quarter. The increase in beef and pork costs will be partially offset by lower chicken, shortening and bakery costs which combined account for approximately 23% of our spend and are expected to be about 7% lower in the fourth quarter.

Now let's move on to our guidance for the balance of the year. For the fourth quarter we expect same store sales for Jack in the Box Company restaurants to decrease 4.5% to 5.5% and system wide same-store sales for Qdoba to increase 3% to 4%. Same-store sales guidance reflects trends we've experienced in the first four weeks of the quarter. For the full year, same-store sales at Jack in the Box Company restaurants are expected to decrease approximately 9% and increase approximately 2% at Qdoba. We reduced our full-year guidance for restaurant operating margins in the low 14% range, reflecting the impact of our lower sales guidance and the corresponding deleverage of approximately 90 basis points as well as higher commodity and workers compensation costs. As a result of the lower sales and margin guidance and the items that impacted third quarter, earnings per share are expected to range from $1.65 to $1.75 per share.

Lastly, I want to talk for a moment about the refinancing we completed in June. Under the terms of our new agreement we have a $400 million five-year revolving credit facility of which $148 million was outstanding at the end of the quarter, and a $200 million five-year bank term loan. The interest rate is LIBOR plus 225 to 275 with no floor and the current spread is at 250 basis points. The spread is based upon our debt to EBITDA ratio. The new agreement provides us with a longer term capital structure to support our strategic plan. We've also increased flexibility with a greater portion now under the revolver and substantially higher baskets for returning cash to shareholders of up to $500 million. We also have substantially lower required principal amortization than our previous agreement with only $40 million of required payments through calendar 2012. That concludes our prepared remarks. I'd now like to turn the call over to Stacy to open it up for questions.

Thank you. We are now ready to begin the question-and-answer session. (Operator Instructions) Our first question is from Joe Buckley, Bank of America.

Thank you. Jerry, question on the margins in the quarter and the deleveraging. I realize sales were a little bit below the guidance range but the deleveraging seemed very, very severe. You outlined a number of items that were not in the original guidance, I guess, but are you at the point sales-wise where these higher cost ratios are going to continue for a while?

Joe, I think a couple things here. If you look at the mid point of our down 7 to down 9, we did miss that by 140 basis points. I think also this quarter, unlike quarters one and two where we had the benefit of improving food costs, where we had commodity cost deflation, we actually had commodity cost inflation for the first time this year up about 2%. So we did not get the mitigation effect against those lower sales trends in Q3 that we did in Q1 and Q2. Also, our two-year trend did decline from down 8.2 to down 10.4 and that had a larger impact on the deleverage.

Okay. And question on the sherry repurchase. There was no activity in the quarter. Were you precluded from buying stock because you were redoing the debt agreement?

That's exactly right, Joe. We were in the middle of that debt agreement and right in the middle of our open window which precluded us from either buying in the open window or from implementing a [10D51].

Okay. And just one more. There's reference to breakfast in the Earnings Release. Could you maybe talk about day parts and was breakfast better than other day parts in terms of same-store sales?

Yes, Joe. Breakfast was our strongest day part and held up pretty well, actually, and that's a result of the Grilled Breakfast Sandwich introduction, the upgraded coffee. In fact, we did not have a value promotion during the breakfast day part, so we held up very well breakfast day part. Our biggest loss really was at the dinner day part and two reasons for that. One is we believe from a competitive standpoint that we really -- we did get impacted by the aggressive discounts going on by the pizza players and then, secondly, with our three for three promotion we just did not get enough incremental traffic to offset the average check decline because, in fact, our traffic was just slightly better than it was last quarter. So traffic held up versus last quarter, all of our deceleration in sales was as a result of the average check decline. From a regional standpoint, California -- both California and Texas weakened, but Texas weakened more than California. So Texas is still a very challenging market for us.

Okay. Thank you.

Thank you.

Our next question comes from Jeffrey Bernstein of Barclays Capital.

Great. Thank you. This is actually a follow-up to that and then a separate question. You just mentioned I guess Texas and California, Texas weakening a little bit more so. I'm just wondering -- I know you highlight unemployment and demographics as clearly the major factor in the slowdown but I'm just wondering how you get comfortable that pulling out the unemployment and the demographics that perhaps whether or not Jack in the Box is losing share to competitors, not necessarily pizza but even within your own burger segment, perhaps losing share other than just the macro factors that maybe will not return when the macro gets better. How do you gauge something like that when there's so many headwinds?

Right. Very good question. First, let me just take a little bit of a step back and certainly we are not happy with the sales situation, none of us are. And we're also not happy with the economic headwinds that we're facing and the impact to our customers, but we do know there are things that we can control and there is action that we can take now that will bring customers back and stop the erosion of the share decline. So those things that I briefly talked about are really focusing on the guest service execution being more consistent and we know we have an opportunity to be more consistent through our own voice of the guest surveys that we do. So we have invested in a monitoring system that we have in place that we can take very immediate action on guest service issues.

Secondly, an improvement in food quality and we have traditionally been known as a premium positioned QSR player and other competitors have stepped up in the food quality arena. So it's really about investing in our food quality and enhancing the food quality. And then, lastly, on the environment, we've gone out, we've done all of our exterior re-images and we are now making the commitment to complete the interior re-images because, again, we have an opportunity to enhance the environment for our guests. And all of this we believe will lead to increased sales by bringing our guest back more frequently. This does require some investment, some investment spending, as I mentioned, on the monitoring of our guest service execution as well as our food quality enhancements. And there could be somewhat of a lag between when we get the increased sales as a result of those actions and the cost. So we have reflected that additional investment in our guidance for full year of earning. And maybe I'll let Jerry just add a little bit more color to that as well as the capital impact.

Sure. The investment that Linda talked about in the quarter are going to add -- are going to cost about $0.04 a share and it's roughly 15 basis points in margin for the full year and 60 basis points in margin for the quarter. And then, additionally, with the acceleration of the re-image, we will not plan on spending any additional CapEx to do that. We're accelerating that this year without any additional CapEx. We've had the benefit of many of our new locations opening under purchase sale lease backs which has a lower cash investment for us and then looking out into 2011 we would expect to do the exact same thing and not have a significantly different CapEx next year versus this year.

Okay. And then just, Jerry, if I could follow up on that in terms of I guess perhaps comp sensitivity, wondering in terms of a point of comp what that might be to annual earnings in this environment. Seems like it's overly aggressive 4Q guidance reduction. I think you said it was about $0.04 from these incremental investments, but it looks like you're reducing fourth quarter guidance relative to where consensus was and what not by more than $0.15, yet you only missed the third quarter by a few pennies. If comps are getting better on a relative basis, only down 4-5 versus 9-10, why would the guidance reduction be down so significantly other than kind of the incremental investment. Is there anything else unique to the quarter or what might drive that?

Let me just help walk everybody forward on the prior guidance versus new guidance. If you look at the midpoint of each prior guidance to this guidance, it's about a $0.25 reduction. And so the way that we looked at that was as follows. Look at the midpoint of the prior sales guidance would have been down 7.5%. We're now forecasting down approximately 9%. So based on our previous expectations and previous sensitivities around the 1% same-store sales change of $0.06 to $0.08, we're estimating that's going to cost about $0.12 per share for the year. And then if you add to that the items that we called out separately in the third quarter which had $0.06 of additional charges, so that's $0.18 in total, and then we also have an additional $0.02 of expected workers comp adjustments and increase in accruals going forward, that gets you to $0.20. The remaining $0.05 is some additional sales deleverage and investments that we just spoke about.

Great. That's very helpful. Thank you.

Thank you.

Our next question comes from Jeff Omohundro of Wells Fargo.

Thanks. Just one question. On the discussion regarding the re-franchising expectations, I think Jerry made a comment about one large transaction. Sounded like the visibility was a little limited there. Is that reflected in the range of Q4 gain guidance so that if that one slipped a quarter you would be at the lower end of the range or would you be below it and maybe any more color on the components of the re-franchising gains and the momentum there. Thanks.

Sure. Actually, the momentum -- let me answer the last part of the question first. The momentum we think is very strong. Even in the third quarter we sold 58 restaurants in the third quarter. We sold 111 restaurants year-to-date. If you go back a few years, we were selling far less than that in the entire year. So the demand remains strong from both existing and new franchisees. The deal in question, so-to-speak, for the fourth quarter is a large deal and because it's a large deal it would actually take us to below the range. We do like the overall transaction. We like the franchisee. We're excited about it. But the certainty of exactly when a deal such as that closes, we do by its nature have a lot less visibility on that.

Can you give any kind of orders of magnitude, the size relative to the overall guidance?

Yes, it's worth about $0.17 a share.

Okay. Thank you.

Thanks, Jeff.

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

Thank you. Linda, you guys have talked about unemployment impacting the business but do you think immigration issues may be negatively affecting Jack?

That could very well be affecting us, yes, absolutely, especially in Arizona.

How do you address potential demographic shifts in a state like Arizona where Jack has a large concentration of stores and appears to over index with the group?

You have to target that consumer. You have to give them a reason to choose Jack in the Box over any other competitor. I think the initiatives that we have in place will also capture that group as well. And with our multi-tiered marketing strategy, it really is about a relatively broad consumer base with the premium products, the value products, and our innovation around the breakfast day part.

Okay. Thanks. Thank you for that. Jerry, just a follow-up or another question regarding CapEx, looks like you guys are on track to be below the annual guidance. Is that fair? Or is there some larger investment planned for the fourth quarter?

Well, the acceleration of the re-image program, Chris, begins now. So we'll expect to have a fairly significant number of re-images completed in the fourth quarter somewhere in the range of about 100 in the fourth quarter. So that will make that up. And we should be within the range that we guided to.

Should we expect similar CapEx in 2011 that we're seeing this year?

Yes, what I said earlier is that even with the acceleration on the CapEx on the re-imaging through 2011, because of our ability to do more purchase sale leasebacks and just different priorities on the CapEx, we should be pretty close to that same range, Chris.

Okay. Great. Thanks, guys.

Thanks, Chris.

Our next question comes from Matthew DiFrisco of Oppenheimer.

Thank you. I was wondering if you could give us just an update on where perhaps how the EBITDA breaks down between the two brands, given that there's been a pattern now of Qdoba doing substantially better than guidance and Jack somewhat falling a little short. Is I guess the assumption, is it correct to assume that even though Qdoba is smaller in scale that it is greater than it represents as a percent of your store base?

We're just pulling those numbers. Matt, I'll point you to in our 10-Q that will be filed later this week we do disclose segment profitability.

Right.

I think you'll see those numbers when we report here later this week. I think in general your directional comment on the contribution is correct, that I think Qdoba's a little bit higher.

Okay. So just wait for the Q? Should I wait for you to answer that or no?

Wait 10 seconds.

It's up so far for the year, Matt, just in terms of the total EBIT basis, operating earnings basis, it's about 7% -- it's a little bit more than the 7% versus about 5% last year on a year-to-date basis.

Does that answer your question, Matt?

7% total, versus 5% total last year.

Yes.

Also, just following on to your guidance, for same-store sales if I look back at the transcript there was some commentary last year that July picked up from June, which -- but your quarters, fourth quarter, fiscal 4Q was substantially lower than fiscal 3Q, so would it be correct to assume that July was the strongest month of fiscal 4Q of last year, so you're lapping now your toughest lap?

Correct. That is correct.

Okay. And your comment with your guidance is predicated on what you've seen through the first four weeks. So we're assuming you're in that range right now while lapping the toughest comparison, correct?

Correct.

Thank you.

You're welcome.

Our next question comes from Robert Derrington of Morgan Keegan.

Yes, thank you. Linda, could you help us with a little bit of color on the development piece for both brands? Aside from the refranchising program, fiscal 2009 clearly development was ahead of the pace that we're seeing for this year for both Qdoba and Jack in the Box. And so as we think forward, given the change, the delta, should we think in terms of next year that development very likely will be also a little bit more conservative given the operating trends?

On the Qdoba side, we really -- the reason that development has slowed down especially in the franchise community, is because of the lack of real estate available, as well as financing. That has been a challenge is getting financing. That is also true for the Jack in the Box franchise community where they are developing in new markets. It is very tough to get access to credit for new restaurant development and new markets. And we will be giving more guidance relative to our growth targets but you wouldn't see a substantial increase or a substantial slowdown just as a general comment.

Very good. Thank you.

Thank you.

Our next question comes from Keith Siegner of Credit Suisse.

Thanks. Just had a question to follow up on the noticeable quality improvements to some of the signature products. Is this more like just changes in specs, changes in quality or are you going to reformulate products? Could this entail changing of pricing around them? Is it new product introductions? Just a little bit of sense of how you put higher quality to work and what -- how that ties into pricing, please.

Okay. Well, two examples of higher quality products that we've recently launched are the french fries is a higher quality product and actually it's an improvement from an operational standpoint as well, and then our Kona coffee, where we are using real Kona coffee beans. There was an investment in that. It was a higher cost that we did not pass on to our consumers. However, we have seen our coffee sales increase to offset the additional cost that goes into the product. So it will be more in that line where we're actually making changes to our specification, so ingredient improvement, build improvements, recipe improvements. New products is separate, I consider that separate. We'll continue to introduce premium new products that are distinctive to our category.

Okay. But similar to what we've seen then, there is a clear call-out for where the quality investments have been made the customers will know.

Yes, they will know. They will be noticeable and we will communicate what the changes are and we'll probably put some promotions around that in terms of sampling and so forth.

Okay. One quick question, then, on Qdoba. The Craft 2 menu obviously doing quite well. How is that product mixing?

It continues to grow. I don't want to give, for competitive reasons, the exact mix number but it continues to grow. We're very happy with the mix level and we've added additional products to that. In fact, we have the mango salad in the Craft 2 as a choice, a smaller version of the half portion of the mango salad. So very positive, great price points, showcases the variety and for people who are concerned about portion sizes, it's a good option for them.

Okay. Thank you very much.

You're welcome.

Our next question comes from Larry Miller of RBC Capital Markets.

Hi. A couple quick ones. I think you guys mentioned that there was some aggressive discounting as another factor that you might be losing share in quick service market. I was just curious, at least from a philosophical perspective, if you can answer this because you're also doing some value and you mentioned that, but maybe you shouldn't be doing value at all at this point. Is there any way do you guys measure how effective your value promotions are and if you weren't running them what your comps might look like?

Yes, in fact, over the last year we've learned a lot around the value side of the business and what works and what doesn't work and the deep discounting of the single product, $0.99 or $1 doesn't work for our brand. One, it's too -- it erodes the margins too much, I trades people down and I think it hurts the image of the brand. But what we know works are these bundled meal deals. That includes maybe a new product that's reciped and designed to be offered at a value price point but doesn't erode the margin so it has a favorable food cost. Something that includes a drink and it's at a compelling price point. So that is what we will continue to do. We do believe that there is a large percentage of consumers out there that are hurting and that do respond to value and we carefully analyze that as we go in and we test promotions.

That's helpful. And then any early look or thoughts on 2011? I mean we are coming in the fourth quarter, either on earnings or sales, I mean, is it your view I guess at least that sales should stabilize as you start lapping some of those very easy comparisons over the next three or so quarters?

Larry, we're still putting together our forecasts and our budget and our plan, so we'll be able to talk to you about that in November but at this point we're not comfortable. We're still looking at the economy as being a slow recovery, so that will -- that influences our forecast for sales.

Okay. Then last thing, just really quickly, Jerry, you mentioned bakery. Do you have a percentage of just bakery, I think it was bakery, chicken and shortening that you mentioned 23%. How much is bakery. And with wheat prices rising are you guys contracted and, if not, when might we see higher wheat prices roll into the higher bakery costs?

Bakery's about 9% of our spend. We have a little more than half -- it's all contracted through the balance of the fiscal year. So we have a little more than half contracted through December and a little less than half contracted through March.

Is it then that the other 50% would -- is a spot market purchase and we'll see some rising -- maybe some pressure on that or -- ?

We have 50% covered, a little bit more than that covered through December, the remaining 50% is covered all the way through March of next year.

I see. Excuse me. Thank you.

Thank you.

Our next question comes from Rachael Rothman of Susquehanna.

Hello, this is Jake Bartlett in for Rachel. I had a question on your debt levels and where you wanted to peg those and whether you would consider taking down some of your revolver to accelerate stock repurchases, basically your philosophy on that or whether you're comfortable with where you are?

A couple things there. We like where our debt levels are right now. And really, when we refinanced we didn't increase our debt levels, we increased our flexibility. So by moving from a larger term loan and a smaller revolver, flipping that around to a larger revolver gives us a great deal of additional flexibility, then also when you look at the fact that we have substantially increased the basket that could go as high as $500 million in a five-year time frame, I think signals our belief in the importance of returning cash to our shareholders as well as our ability to be able to do so. I'll also remind you that over the last five years we've returned a little more than $0.75 billion dollars of cash to shareholders.

Okay. So you're saying that you're comfortable with the level of debt or do you consider taking that up to return cash to shareholders just in terms of increasing the draw on your revolver?

We're comfortable with the level of debt and again we added flexibility to be able to return cash to shareholders. Whether that means that we dip in the revolver a little bit or not will depend on overall cash flow. But, again, we have $500 million of capacity over the next five years.

Are there any restrictions on issuing a dividend or declaring a dividend?

The $500 million basket, again, it can go up to that level, is return of cash to shareholders, it can be a dividend or share repurchases or some combination of the two.

Okay. And then a question just on advertising. You had talked about incremental advertising, $5 million to $6 million in the back half of the year. That's being offset I guess by reducing your spend given the re-franchising. Can you maybe give us an idea as to how much of the incremental advertising came in the third quarter here, what you're kind of -- I guess you're netting out your savings from refranchising, what you expect in the fourth quarter.

What we said at the end of the last quarter was we were going to spend approximately $5 million in incremental advertising over the back half of the year. We spent a little more than half of that, $2.8 million in the third quarter. We expect to spend the remainder of that in the fourth quarter. And you are correct, just by virtue of our re-franchising strategy, we are in fact spending less on advertising, that cost is then shifted to the franchisee.

Okay. Thanks very much.

Our next question comes from Bart Glenn, D.A. Davidson and Company Equity Capital Markets.

Thank you. I was just curious if there are any material differences in comp store sales trends for your high volume versus your low volume stores?

Not -- nothing significant.

Okay. And then just a follow-up question, thanks for quantifying the store monitoring program, just wondering if there are any additional labor investments that might be necessary to try and upgrade actual service levels? Thank you.

At this time we're going to continue to monitor our efforts to make sure that our service levels are consistent. If we find that there's some things that we consistently don't do on behalf of the guests then we may look at investing some labor but at this time it's too early to tell.

One other final. Should we anticipate any sort of sales disruption as you ramp up the re-imaging program in the next quarter?

There will be some as a result of -- typically, when we're doing the interior, we'll have the restaurant open for the drive-through for most of that time frame but obviously the interior will be shut down for a period of time. I will remind you that 70% of our business does go through the drive-through though.

Thank you.

I think we have time to take one more question.

Our final question comes from Tom Forte from Telsey Advisory.

Great. Thanks for taking the time. Can you talk a little about marketing spend. Was it 2.2 in the fourth quarter maintain your weight versus last year and how should we think about the weight given the same-store sales performance?

Yes. The incremental spend does not get us up to the same level as marketing weight as last -- or media weight as last year. So with the sales decline, our weights are reduced.

And then what's your -- last quarter I think you talked about your strategy on beef and your intention not to lock in prices. Wanted to know what your update was today.

Beef, we had said on the call that we do have about half of our 90s locked in for the remainder of the fiscal year and then some coverage beyond that into February at below market trends. Right now market's in the $1.62 to $1.65 range and we're in the mid-$1.50s. Where we float on beef costs is on the 50s. And the 50s are just difficult to go ahead and lock in. Market prices on the 50s today are pretty close to where they were last year.

And then last question, if I may. Was there geographic concentration in the stores that were re-franchised in the quarter?

No, not -- because of our footprint having locations between -- most of our locations in California and Texas, you're going to have some geographic concentration anyway but we did have more in California this quarter than anywhere else.

Thank you very much.

Thank you.

Thanks everyone for your time today and we will speak to you in November.

Thank you very much.

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