Jack in the Box Inc (JACK) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box fourth 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 our Chairman, CEO and President, Linda Lang; Executive Vice President and CFO Jerry Rebel, and Chief Operating Officer Lenny Comma, who was promoted to Executive Vice President last week.

During this morning's session, we will review the Company's operating results for the fourth quarter of fiscal 2010 and discuss guidance for the first quarter and fiscal 2011. We will refer to non-GAAP measures during our discussion and a reconciliation is posted on our website at investors.jackinthebox.com, in the presentations and webcasts section. 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 will 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 most recent form 10-Q are considered part of this conference call. Material risk factors, as well as information leading 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 managers will be participating in the Credit Suisse holiday conference in Orlando on December 7th. This is the net in a consumer confidence in New York on January 11. Our first quarter ends on January 23rd, and we tentatively expect to announce results the week of February 21st. With that, I will turn the call over to Linda.

Thank you, Carol, and good morning. In the fourth quarter, the 4% decrease in same-store sales at Jack in the Box Company restaurants was slightly better than our guidance, and an improvement from the 9.4% decrease we saw in the third quarter. Of the 540 basis point improvement in sales, we saw a 250 basis point sequential improvement in traffic and a 290 basis point sequential improvement in average check, compared to the third quarter. The increase in average check was driven primarily by mix as the promotions we ran during the quarter generated a good response. California remained our best performing market this quarter, and we were encouraged to see improvements in Texas, our biggest Company market, which was on par with California on a two-year basis. We also began reporting Jack in the Box franchise same-store sales this quarter, which were down 2.8% versus last year.

We remain focused on enhancing the entire guest experience in order to earn their next visit. We believe the investments we have made to deliver more consistent service, improve the quality of our signature products, and enhance our facilities are beginning to resonate with our guests. During the fourth quarter at Jack in the Box, we implemented a complex a program to improve guest service by delivering a more consistent dining experience. Along with evaluating restaurant performance via our voice of guest surveys, additional resources are being committed to more closely measure how restaurants are executing the key drivers of guest satisfaction. This is a system-wide effort that has been enthusiastically embraced by both our franchise and Company operators.

Over the years, we have created one of the most varied and innovative menus in the QSR industry. At the heart of this menu, our core products that have been guest favorites for many years, especially among our most frequent customers. By improving these core products, we believe we can reengage lost customers and create an even broader appeal for these guest favorites. We took steps in 2010 to improve several staples on our menu. In April, we introduced new French fries and a new premium blend of coffee made with real Kona beans. Next up were our tacos, which is our top-selling menu item. We recently improved our tacos, and last Tuesday, we had a free taco giveaway at our restaurants. We had an incredible response and generated trial of more than 4.5 million tacos, or more than 2,000 tacos per restaurant.

The next improvement impact several products. We have rolled out a new hickory smoked bacon that really adds flavor to our products, ranging from croissants and breakfast sandwiches, to chicken sandwiches and premium burgers. There are still more improvements to come, and we will be communicating these enhancements in our promotional messaging to make our guests aware of the changes.

Another major factor in driving guest satisfaction is the restaurant environment. We have been reimaging our restaurants inside and out with a comprehensive program that is keeping Jack in the Box relevant in the highly competitive QSR landscape. Our restaurants that have been reimaged have higher attribute ratings than the rest of our system, and we are seeing higher sales at reimaged locations and markets that also include restaurants that have not been reimaged. We have made tremendous progress towards reimaging our entire system and are now targeting substantial completion of this program systemwide by the end of 2011.

Along with these actions to improve sales, we are continuing to execute a marketing strategy that focuses on both premium products and value promotion. Our value message in the fourth quarter emphasized a combo meal featuring a new product, the Jack's Really Big Chicken Sandwich. Priced at just $3.99, the combo features the new sandwich, along with a small fountain drink and a small order of seasoned curly fries. We also have a couple of value promotions planned for the first quarter of fiscal 2011, including two croissant sandwiches for just $3, and last week, we introduced our double patty bonus Jack in a combo meal with a small order of fries and a small drink for just $3.99.

In addition to the Really Big Chicken Sandwich combo and the new pastrami grilled sandwich we added in August, we expanded our breakfast menu in the fourth quarter with the breakfast pita pocket. Breakfast remains our strongest daypart in the quarter.

One of the key components of our strategic plan is new unit growth for both brands. In fiscal 2010, a combined 82 Jack in the Box and Qdoba restaurants opened, including locations in several of our newest markets. 30% of the new units opened in 2010 were in new markets. These locations continued to perform well with overall AUVs tracking higher than our system average. Just three weeks ago, we opened a restaurant in another new market, Kansas City. Although that restaurant was not part of our class of 2010, opening week sales were more than $125,000, which is an all-time high for a Company restaurant.

Another key component of our strategic plan is refranchising, which remains a critical element in transforming our business model. Over the last five years, we have re-franchised 680 restaurants and increased franchise ownership from 25% to nearly 57% of the Jack in the Box system. We are ahead of our plan in achieving our goal to increase franchise ownership to 70% to 80% of the Jack in the Box system by the end of fiscal 2013.

Moving on to Qdoba, we are pleased to report another strong quarter of positive same-store sales growth as we continue to see an increase in the spending patterns of fast casual customers. System same-store sales at Qdoba increased 5.6% for the quarter and 2.8% for the full year. During the quarter, Qdoba launched a very successful online campaign that attracted new customers and increased the frequency of our existing guests. Qdoba is doing a great job of leveraging social media to drive traffic to our restaurants.

During the quarter, we also saw significant growth in Qdoba's catering business. Although fiscal 2010 was a very challenging year for Jack in the Box, I would like to take this opportunity to thank our employees and franchisees for all their hard work over the past year. I am grateful to each of them for their continuing support and focus in executing our strategic initiative.

Before turning the call over to Jerry, I want to reiterate the steps we're taking to position the Company for future sales growth and margin expansion. We are improving many of our top-selling core products. Our marketing strategy for the year continues to emphasize both premium products and value promotion. We have implemented a comprehensive systemwide program to improve guest service by delivering a more consistent dining experience. We are expediting the completion of our restaurant reimage program. We are expanding the Jack in the Box and Qdoba brands in both existing and new markets, and we are moving the Jack in the Box brand to a business model that is 70% to 80% franchised. Now let me turn the call over to Jerry.

Thank you, Linda. Good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. Reported fourth-quarter earnings of $0.07 per share compared to $0.70 last year. The full-year EPS was $1.26 versus $2.27 last year. As we announced in late September, we closed 40 Jack in the Box Company restaurants located primarily in the Southeast and Texas. The charges related to these closures reduced EPS by approximately $0.33 for the year. We believe these closures will benefit future earnings, cash flow and returns. Our average unit volume for 2010, excluding these restaurants, would have been approximately 2% higher than the actual number of 1.297 million. Consolidated restaurant operating margins were negatively impacted by about 70 basis points in 2010 by these restaurants.

In late September, we gave an update on the timing of a refranchising deal we have previously discussed. That transaction to purchase a full market by a new franchisee to the Jack in the Box system did not close in the fourth quarter, and is now likely to be broken up into smaller transactions. As we noted previously, that was worth about $0.17 per share, roughly $25 million in proceeds and about $15 million in overall gains, as compared to the guidance we issued in August.

Restaurant operating margins decreased 330 basis points to 12.5% of sales in the quarter. The breakdown is as follows. Food costs were up 90 basis points, driven by commodity inflation of approximately 3%, slightly better than our guidance of 4%, and compared to 5.5% deflation in last year's fourth quarter. Sales deleverage negatively impacted margins by approximately 110 basis points and higher workers compensation and other insurance costs accounted for approximately 50 basis points of the decline versus last year. The remaining 80 basis points was due primarily to higher repairs and maintenance expense, as well as additional costs relating to guest services initiatives that we talked about last quarter.

As you saw in the press release, we have reclassified impairments and other charges from SG&A expenses in the income statement. Excluding the charges related to the closure of the 40 restaurants, the two lines combined were in-line with our full-year guidance for SG&A. SG&A decreased by $17.3 million for the year and was 10.6% of revenues, compared to 10.5% last year. Let me highlight some items that impact the full year. The 53rd week added approximately $3.6 million to SG&A. Pension expense increased by $17.6 million due primarily to lower discount rates. Insurance recoveries related to hurricane Ike resulted in a $4.2 million benefit. Mark to market adjustments on investments according to Company's nonqualified retirement plans resulted in a year-over-year decrease in SG&A of $3 million. Incremental advertising spending totaled $6.5 million for the year, and incentive compensation declined by $6.1 million in fiscal 2010. In addition to these items, our refranchising strategy and planned overhead reductions lowered G&A costs by approximately $14.8 million for the full year.

In September, our Board approved a subset of our pension plan effective December 31st, 2015. Participants will no longer accrue benefits after that date, and new employees hired after December 31st, 2010, will not be eligible to participate in the plan. The objective of this decision was to reduce the overall volatility of our retirement program, and is expected to result in lower pension expense and generally lower pension contributions over time. The financial impact of this decision was immaterial in fiscal year 2010.

Moving on to our refranchising strategy. We sold 108 Company Jack in the Box restaurant franchisees in the fourth quarter and 219 restaurants during the year, the highest number we have sold in any year since embarking on the strategy. Fourth-quarter transactions included the sale of an entire market with lower-than-average sales and cash flows, which generated lower proceeds and gains. It is expected to be accretive with future cash flow and earnings. Excluding this transaction, average gains in proceeds for the fourth quarter were $352,000 and $510,000 respectively.

Our capital expenditures were lower than our full-year guidance of $125 million to $135 million. About half the difference is permanent, resulting from lower costs with 12 new Jack in the Box restaurants open during the quarter, two restaurants under construction that were purchased by franchisees, and lower costs for reimages and capital maintenance projects. The other half is timing related to lower construction and progress spending for new restaurant construction and reimages slated for early 2011 completion.

Before I review our guidance for fiscal year 2011, let's talk about our commodity cost outlook for the upcoming year. Overall, we expect commodity costs for the full year to increase by 1% to 2%. With higher inflation in the first half of the year, when we are lacking deflation of nearly 7% in the first quarter and 1% in the second quarter.

Specific to our major commodity purchases, beef, which accounts for 20% of our spend, and we are expecting the full year of beef costs to be up 6% to 7% versus 2010. We expect beef costs to be up approximately 9% in the first quarter, compared to a decrease of 19% in the first quarter of 2010. With a favorable price spread to import 90s, we are maximizing the use of domestic fresh 90s beef, with current market prices in the $1.45 to $1.50 per pound range, versus $1.37 last year. We have 100% of our import nineties covered through January at $1.58 per pound, and 25% coverage through March at $1.50 per pound, versus approximately $1.38 last year, and current market prices in $1.70 range. We expect beef 50s to average in the $0.65 to $0.70 range per pound in Q1, versus $0.67 a pound last year.

Pork accounts for about 5% of our spend and is expected to be up approximately 9% for the full year. Again Q1 will be most negative as we compare record high pork prices at the beginning of Q1 to more seasonal prices last year. Cheese also accounts for about 5% of our spend. It is expected to be up 7% to 8% in the year.

Major items that are positive. Bakery which is 9% of our spend is expected to be down 4% for the year. Although the weak market has increased 20% since June, our wheat and flour coverage has allowed us to avoid this increase. We have 55% of our bakery needs covered through December 2010, and contracts for 45% expiring in March 2011 when the weak market is expected to ease somewhat. Poultry, which is about 11% of our spend, is expected to be down 2% for the year. That has been from new fixed-price contracts that took effect last February and March, which are lower than previous contracts by almost 6%. Thus, Q1 will be the most favorable with some favorability extending into Q2. As a reminder, we have fixed price contracts on chicken that run through March of 2012.

Produce, which is about 5% of our spend, is expected to be somewhat lower in 2011. As we lapsed difficult growing conditions for tomatoes and lettuce last year. We also have fixed price contracts in place for potatoes, which account for approximately 8% of our spend, and 100% of our potato needs for the full year are contacted with prices essentially flat versus the prior year. Additionally, our assumptions including ongoing supply chain savings that we are achieving through contracting and strategic sourcing. We also expect our overall packaging cost to be slightly lower, also helping to offset some of the higher commodity costs.

Now let's move on to our guidance for fiscal 2011. For the first quarter, we expect same-store sales for Jack in the Box Company restaurants to range from down 1% to up 1%, and to increase approximately 4% to 6% at Qdoba system restaurants.

Here's our thinking on some of the key components of our full-year guidance. Same-store sales are expected to range from down 2% to up 2% at Jack in the Box Company restaurants. Same-store sales are expected to increase approximately 2% to 4% at Qdoba system restaurants.

Restaurant operating margin for the full year is expected to range from 14% to 14.5%, depending on same-store sales and commodity inflation. While the closure of the 40 restaurants in the fourth quarter 2010 will have a positive impact on margins, we expect it to be largely offset by commodity costs inflation of 1% to 2%, as well as quality improvements to our core products. SG&A expense is expected in the mid-10% range, excluding impairment and other charges. While pension costs are expected to be approximately $3 million lower, we assumed $8 million of higher accruals in fiscal 2011 versus 2010.

Impairment and other charges -- excuse me -- impairment and other charges include accelerated depreciation and other costs on the disposition of property and equipment. For modeling purposes, we estimated approximately 70 to 80 basis points for this line. Diluted earnings per share are expected to range from $1.41 to $1.68 per share. Gains from refranchising are expecting to contribute from $0.66 to $0.78 per share, as compared to $0.65 in 2010. Operating earnings per share, which we are defining as diluted EPS on a GAAP basis, less gains from refranchising, are expected to range from $0.75 to $0.90 per share. Diluted EPS includes approximately $0.10 to $0.12 of incremental reimaging incentive payment to franchisees in 2011 as compared to 2010. As a reminder, franchisees receive a $20,000 per restaurant incentive from us when they complete their reimaging.

Let me walk you through a comparison of our 2010 results to our 2011 guidance, which is also provided on the investor relations section of our website. Our reported EPS for fiscal 2010 was $1.26 per share. Excluding gains from refranchising of $0.65, would result in operating earnings as we are defining it of $0.61. Adding back charge related to the closure of the 40 stores of $0.33, and excluding the positive impact of hurricane Ike insurance recovery of $0.05, the 53rd week, $0.03, and the lower tax rate, $0.07, would equate to about $0.79 per share on a comparable basis. This compares to our operating earnings guidance for 2011 of $0.75 to $0.90 per share, which includes $0.10 to $0.12 of incremental reimage incentive payments.

We estimate EPS sensitivity as follows. For every 1% change in Jack in the Box system same-store sales, we estimate the annual impact to earnings of $0.06 to $0.08 per share, depending on flow through, and assuming stable costs. For every 10 basis point change in restaurant operating margin, the estimated EPS impact is approximately $0.01 to $0.02 per share. That concludes our prepared remarks. And now, I'd like to turn the call over to Stacey for questions. Stacey?

Thank you. (Operator Instructions). Our first question is from John Glass of Morgan Stanley.

Thanks. I wanted to follow up on the question of, or the topic of store margins, Jerry. You talked about how the closing of the stores, the 40 stores, is going to be mitigated by product investments and the commodities. But what about the stores that you refranchised, clearly the 108 this quarter had lower margins. What were the benefit, or should we expect to see in 2011 from those stores now being off your P&L?

Those are worth, they are worth about 50 basis points.

Okay. So I guess a broader question is, why aren't we seeing more store level margin improvement, just given the refranchising to date? And you are saying it is getting mitigated by these other factors. Do you have a sense of how your franchisees' store margins are, the franchisees that have operated for longer periods of time. Are they materially different than your store margins, excluding the royalty?

They tend to be a little better than the Company margin without regard to the royalty payment, or I should say prior to the royalty payment.

Do you have an estimate of how much more or how much better they are able to operate stores versus you? I am trying to get a sense of how much of this is just endemic in your model, and the pressures you're feeling, versus maybe how franchisees can operate versus you.

You are looking at probably -- it's in the neighborhood of 100 to 200 basis points, and it's driven by typically higher pricing, and also they tend to operate with a little less labor.

Okay. Thank you.

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

Thanks. My question relates to the improving service in the new survey system. Linda, is there any indication that broadening the menu offerings has created too much operational complexity, and is it starting to affect service? And then I have a follow-up.

Okay, no, there is no indication, Chris, that broadening the menu is -- it is no more complex, the menu, than it has been. We have deleted products from the menu to make room for new products, as we've added those new products. And in terms of the improvement in the service, it is really -- let me take a step back, and say it is really the overall guest experience. If you combine the work that we are doing and the investments we're making in improving the guest service execution, so improving the consistency of that through this system where we provide immediate feedback that is very actionable, and that must be responded to immediately, that is going to improve the consistency of our guest experience.

Then we talked about the investments we're making in the product upgrades. Things like the french fry that we upgraded. The coffee that we are seeing significantly higher sales of coffee as a result of moving to that higher Kona coffee blend. We just launched out a new-and-improved bacon. And we have other product improvements that are currently in test as well. The last one that we did was a pretty significant improvement in the taco, improving the execution of it, adding more cheese, more lettuce, more sauce. And that culminated in this big giveaway last week where we really generated a lot of trial to reintroduce that product to our customers.

And then lastly, of course, is the reimage. We completed the exterior reimage, got the benefit in terms of the curb appeal. But we were really falling behind in terms of our interior image, our dining -- our facility as it relates to the new fast casual that are out there. McDonald's investing significantly in their reimages as well.

And the good news is, as we continue to monitor and analyze those restaurants that have been reimaged, we are seeing a sales improvement in those restaurants. And many of those restaurants, as part of the reimage, we are also putting in the new logo, which signals a change to our customers. So, all of that is really an overall strategy, and a very comprehensive plan to improve the overall guest experience. Kind of a long-winded answer to your question, but I think it is necessary to really talk in the broader sense.

No, I agree, and it was helpful. Just a follow-up. It seems like most of the restaurants that have successfully promoted value in this environment have done so with a consistent price message, such as the $1 menu, the two for $20. Do you think there is an opportunity to improve the value messaging at Jack? Is there an opportunity to create some more price certainty for some of the consumers?

Yes, we actually had done more of the $1, or if you recall, the pick three for $3. And what has worked for us, generally, Chris, is the bundled value meals, where we have a unique product offering like the really big chicken sandwich, like the bonus Jack that we have now going on this quarter, and we pair it with french fries, a beverage, maybe tacos are included in that bundled meal. It is a very compelling price point. It is differentiated, and it does not erode the margins as significantly as what we see with the deep discounting. We will continue in that strategy in terms of the value offerings to our customers.

The last time you all ran the bonus Jack, I know Burger King was running a pretty aggressive promotion. What are you expecting from the bonus Jack this year in terms of driving traffic? I know it has a pretty strong following.

Yes, we guided down one, to plus one for the quarter. That is embedded in our guidance as what our expectations are. And let me just talk about sales real quick. In terms of regional performance, we talked about Texas improving on a two-year cum basis. Texas really did improve quite a bit more than California. California still remains challenged. From just a same-store sales basis, they are the best performing, but from a two-year cum, we really saw the improvement in Texas, so that is a positive.

Great, thanks.

You're welcome. Thanks, Chris.

Our next question comes from Matthew DiFrisco of Oppenheimer.

Thank you. My question is with respect to the reimaging contributions to franchisees. I think you'd spent in total $0.06, it impacted earnings in 2009. I cannot find how much it was for fourth quarter or the full year for 2010.

And then I just wanted to get a better handle of, you sound like you're going to be completely done with the reimaging as of 2011 will be the plan. So, would one then be correct to look at this as far as, you lose all of that expense, which looks like it could be a couple of pennies plus the $0.10 to $0.12, so maybe $0.13 to $0.15.

On top of that, I would assume eventually these impairment charges go away with the combination of the remodel being done, but also better comps should bring less impairment-related charges. So do you think -- or should we be correct to be conditioned to look at 2012, a year where you're just going to have a natural earnings power improvement of close to maybe $0.30?

Lots of information there, Matt. Let me see if I can answer all of that. First of all, the reimage contribution for fiscal 2010 were $1.455 million. That will be broken out on the 10-K when we file that in the not-too-distant future, here. If you look at what we said, $0.10 to $0.12 incrementally in 2011 would equate to an additional $8.5 million to $10.5 million of contribution to get that number.

You are also right with respect to that being primarily a 2011 charge. You are likely to see some spill-over into 2012, but it would be substantially less than what you are going to see in fiscal 2011.

I think you are also correct on the impairment and other charge line. What we are looking at for next year is roughly 70 to 80 basis points coming off of about a 90 basis point charge here in 2010. 2010 was just around $21 million. That included about $4.5 million of impairment on other restaurants that were not cash flowing positively. The remainder was due primarily to write-offs and such associated with that disposition. Most of that was due to reimages.

You'll expect to see that piece of that charge go up in 2011, as we do intend to reimage more restaurants. But you are right, that will fall off. It won't fall off completely, but it will be down substantially in 2012.

Okay. And then I guess in your comparability of EPS, you were trying to help us understand that. I missed it -- did you back out also the reimaging contributions to franchisees, because it seems like it was more burdensome in 2009, and about half of what it was in 2010 then. 2010 was half of 2009.

What I did was I just took the 2010 as a base, with the $1.455 million in there. I did not back it out or adjust to 2009. What I did in the comparison to 2011 was just simply to mention that our $0.75 to $0.90 for operating EPS includes an incremental $0.10 to $0.12. I did not want to suppose what you guys should do with that, but I did want to make sure that you had all the data.

Right, but comparability for 2009 to 2010, 2010 benefited by $0.03 for having less reimaging contributions?

I do not have that right in front of me here. But if you are looking at that in the 10-K, then the answer to that would be yes, about $0.03, yes.

Okay, thank you very much.

You bet.

Our next question comes from Jeffrey Bernstein of Barclays Capital.

Great. Thank you. Just one question and one follow-up. The question is more on the refranchising. Looking at all of the units that were franchised this quarter, it seems like the gains are slowing. Obviously, there is one market that is weighing that down. Just wondering whether you can talk, as you look out over the next two plus years, and finish off your refranchising, would you expect that more of the markets going forward are going to be more of these lower performing markets as we get down to the end? Or would you expect perhaps lower multiples on those markets?

I'm just wondering whether you could give some color on the remaining markets. Perhaps a little color on the reason why that last franchise transaction didn't work, whether it's financing issues related. Trying to just size up the refinancing pipeline over the next couple of years, and then I had a follow-up. Thanks.

Jeff, you have a lot in there. If I forget to answer part of this, just let me know that I did, and I will jump back in on that. But here's the way I think I would look at the refranchising gains flowing in. I will remind everybody that what we said in the past, which is still true today, that the gains, the average gains and proceeds were largely driven by the cash flows of the restaurants that we sell. And certainly this year was no exception to that. I expect that there will be no exception to that going forward.

It might be a little helpful if I dive into some of the details here to give you some additional perspective on what we saw in fiscal 2010 versus 2009. So in 2010, we sold 104 restaurants that had lower-than-average cash flows and unit sales volumes, or about 47% of the total that we sold in 2010. That is a little higher on a percentage basis than what we sold in 2009. But if you look at the higher performing restaurants, restaurants that had substantially higher AUVs, and substantially higher cash flows, and our 2010 total represented 22% of our total units sold had those higher cash flows. Only 2% of the restaurants sold in 2010 had that. So what you saw in 2009 and prior was the higher sales volumes from these other restaurants were offsetting the lower performing unit gains. We did not see that in 2010 because we did not sell that many higher performing units here.

If you look at the 104 units that we sold that have lower than average cash flows, there were five deals. We generated a little more than $25 million in proceeds on those deals. If you look individually and collectively, they are going to be accretive to future operating EPS. We estimate that to be about $0.04 to $0.05 accretive. We are generating additional cash flow, and instead of being dilutive like many refranchising transactions are, these are accretive.

So, when you think about how do we use the refranchising cash flows, typically we have been repurchasing stock on that. We repurchased $97 million worth of stock this year, or about 4.9 million shares. This $25 million that we had from the lower-than-average unit volumes and the lower gains generated about 1.3 million shares repurchased. We are going to generate on these transactions $0.04 to $0.05 accretion on EPS, and bought back 1.3 million shares.

So we can look at this as it is driving down the average gain, but I think if you look at what the benefit to the business is, and what the benefit to the shareholders is, these are absolutely fantastic deals. We'll want to continue with these. What we have also said in the past is that we can afford to be patient. We do not have to sell restaurants to franchisees to pay down debt, or to be compliant with debt covenants That continues to be true.

And I can assure you that we will continue to be patient, particularly with selling the better performing units, as we're not going to take a discount on those. We are not going to reduce the multiple. We are going to get fair value on those. And if that means that we do not sell those, that means that we will not sell those. So some of that is included -- some of that thinking is included in our 2011 guidance, as you see where the average gain is around $300,000 a unit, and that comes from that thinking.

And additionally, you asked a question about how many more restaurants. If you look at, we need to sell -- to get to the midpoint of our range is about 400 restaurants left to sell between now and the end of 2013.

And would you say that of that 400 left to sell, what percentage of those are above the system average versus below?

Well, if you can look at what we are forecasting for 2011, we are not anticipating many of these being above system average, otherwise the average unit gain would be substantially higher. Again, we are going to be very conservative on the selling of those restaurants, making sure that we are getting full value for those and not taking a multiple discount on those higher-performing units.

Okay, and just the clarification. I know you had made a couple comments about California and Texas. I was just looking for a little bit more color, perhaps the sequential comps through the quarter. I was a little confused. I know you said California was your best market in terms of, I guess that was the absolute comp, but yet you were disappointed. Maybe you were talking about one year versus two years. I was wondering whether you can talk about sizing up where California and Texas are on the comp spectrum. When those markets might have turned positive on a one or two-year basis. Thanks.

Yes, California on an absolute basis for the quarter was better performing than Texas. But on a two-year basis, California slightly weakened, and Texas improved. So, they actually, on a two-year basis, they are now the same in terms of same-store sales. So California -- unemployment in California is still very high. A lot of uncertainty in California because of the budget situation. But there is new leadership in place, so we will see what happens there.

Great. Thank you.

Our next question comes from Keith Siegner of Credit Suisse.

Thank you. A quick question on Qdoba, actually. The guidance builds in quite a step up in franchise unit growth. I wonder if you could give us an update about what the pipeline for unit growth on the franchise side of the Qdoba system looks like. Maybe what the timing of those unit openings looks like for this year to give us some sense of where the run rate is at the end of the year?

And then also, have there been any changes in the fee/royalty structure, any incentives on Qdoba? Anything along those lines would be helpful. Thank you.

Sure, if you recall in 2010, we really slowed down the growth at Qdoba, and especially if you compare the 21 franchise locations, versus almost 40 in 2009, and almost 60 in 2008 for Qdoba franchise new unit growth. The reason for that was, one, a lack of available credit for the franchisees. Two, the lack of available sites because of pull-back and development of those lifestyle centers where it makes sense to put a Qdoba. And three, the sales performance was more challenging four quarters ago, three quarters ago.

Since that time, the credit, the financing is more readily available. There is some secondary commercial real estate that is becoming available, and there are some pretty good deals out there. And then the turnaround in the Qdoba business is really getting the franchisees to feel more bullish about growth with Qdoba. So that is why Gary feels very confident in the unit growth for Qdoba franchisees ramping up in fiscal 2011.

Keith, on the incentives or change in any of the structure, we have identified some, what we refer to as target markets, where we want franchisees to develop. We have a two-year timeframe to reduce their royalties from 5% to 2.5%, and we have lowered the franchise fee from $25,000 -- or $30,000 down to $15,000 for those locations. Those are target markets. We have not said what they are. But the other ones, though, regular existing markets, or the non-target markets continue at the existing full royalty and franchise fee rates.

Okay. And then one really quick follow-up. The EPS guidance, does that factor in any share repurchases? I know you actually increased the authorization here. I was wondering if the EPS guidance itself actually factors in any repurchases.

It does.

Okay. Thanks.

Our next question comes from Jeff Omohundro of Wells Fargo.

Thanks, just one more question on breakfast, if you don't mind. I appreciate the comments about the Kona performance. But could you expand a bit more on the expanded breakfast menu? How, for example, the pita performed? And with stepped up competitive activity at breakfast, do you see increasing support, media support, marketing support, through the year? Thanks.

Sure. Hi, good morning, Jeff. Actually, breakfast was our strongest day part, and in fact, increased the mix at the breakfast day part. We'll continue our strategy of supporting breakfast with new product introductions. We had a two for $3 breakfast croissant, so possibly some value promotions at the breakfast day part. But certainly the improved coffee, the grilled breakfast sandwich that was our line extension of the grilled breakfast platform, and the breakfast pita all helped with that. And in addition to that, the new bacon, the improved bacon, is on several of our breakfast items, and that also is very appealing to the consumers.

And in terms of media support in the new year?

Yes. I will not give details on our marketing plan, but there will be continued media support around the breakfast day part.

Very good. Thanks.

Thank you.

Our next question comes from Rachael Rothman of Susquehanna.

Hello, this is Jake Bartlett in for Rachael. I just had a question on the impairment and other charges. You said it was going to be about 70 to 80 basis points. When I back out the other impairment charges not related to reimaging, it is about 70 basis points in 2010. Yet there are more stores being reimaged in 2011. I am just trying to reconcile that, why it doesn't go up significantly from 2010 levels.

It actually, it is 90 basis points in 2010, about $21 million. But that includes $4.5 million of just impairment of other restaurants that were not associated with the closures. And we're not expecting that to repeat itself. But then add to that the additional write off of the additional reimages.

Right, but if I back out that $4.5 million, I get about 70 basis points in 2010, so it does not accelerate very much. Maybe if you could give us an idea of how many reimages you did in 2010 versus what you expect to do in 2011. I calculated about 200, but that might be wrong.

Yes, I think that is where you are going wrong. We have 114 that we did in 2010. We expect to do about 150, plus or minus, in 2011. Keep in mind that will depend somewhat on the pace in which we are completing some of these refranchising transactions.

So 150 left to complete your whole system. I thought you were -- .

150 left to complete the Company units.

Okay.

And write-offs associated with franchisees reimaging their restaurant.

Okay. A question about the franchise growth at Jack in the Box. I think it was about five to 10 units. Is that just being pressured by the fact that you are refranchising so many stores, and that is taking some of the demand away? Or is it financing pressures? If you can characterize why the slowdown there.

The biggest piece of the slowdown is the focus on the franchisees completing their restaurant reimage program. It really is as simple as that.

Okay. And then lasty, you talked about being patient with your best performing stores. You can wait to sell those. But why not be patient with the worst performing stores, waiting for those to recover? I would assume that they are a victim of the current state of affairs in the economy and such. Wouldn't you be getting a pretty good lift with just an improvement in the economy on those stores?

Well, I guess what I would ask is, how patient do you want us to be? We generated about $25 million in proceeds, that is going to be $0.04 to $0.05 accretive. So I'm not sure that waiting is going to make that transaction look significantly different. Clearly, we had the benefit of seeing the details of each and every single one of these transactions, and you guys don't have that. But what you're talking about is exactly what we look at in addition to pricing. We look at the timing, do we think it's going to get better, or do we think this is a great deal for us. Clearly on the 104 lower-performing units that we closed this year, we thought that that was a great deal for us. And also, keep in mind it is an opportunity for us to continue to reduce overhead.

Right, Got it. I guess just looking at how many refranchising this in the year was higher than your expectations, and you still had a big transaction fall out. It seems like you are going faster than you expected a year ago. On that point, is it possible -- I mean, you said in the press release you were ahead of schedule with refranchising. Do you expect to be considerably ahead of the end of 2013 to actually finish this up?

Well, we expect to finish it by the end of 2013. I think it just depends on how fast we are able to move the remaining markets.

Right. Okay, thank you very much.

Our next question comes from Paul Westra of Cowen & Company.

Hi, good morning. Just a quick question on, if you can comment on what you're seeing in probably your best performing markets. I was hoping, are you getting what you had hoped as far as the essential guest check increases, and I guess philosophically, what I am looking to maybe have you comment on is the remodeling efforts. You obviously hope to position Jack in the high-end QSR, and even into the fast casual space. Are you seeing in your best market recoveries now that all the things you hoped for as far as guest check, and maybe even more dine-in sales? Or is it still too early to tell that maybe the recession has changed consumer behavior for the longer term?

Right. Let me give you, on the mix and traffic and check. Actually, we did improve check significantly this last quarter. Quarter three, we had really lost on mix or in check because we had that very aggressive three for $3, pick three for $3. So moving off of that really helped with the check.

And sequentially, we also saw an improvement in traffic as well. In some of the California markets, we have actually turned positive. So that is very good. I mentioned before in Texas, we had from a two-year cum basis, had really picked up quite a few basis points in the Texas market, and especially in the market in which we went in and did several reimages. We are beginning to see the positive improvement in terms of sales from those reimages.

In the follow-up though, if your best performing stores, maybe your best performing markets that are the best-off economically, are you seeing some of the change in consumer behaviors as you hoped for as far as this multi-year strategic plan of -- . Are you seeing the mix shift on the menu as

Yes, we saw a very nice response to the grilled pastrami sandwich, very nice response. We still believe the teacher strategy for those that have money in their pockets, for those that can afford it, the differentiated premium products that have a pretty compelling price point relative to the other fast casual players out there are getting a good response. However, we do still have some economically challenged markets that we have to continue to offer value. And I don't believe there's going to be a significant catalyst in those markets until really unemployment picks up.

And if you compare Jack in the Box to Qdoba, the difference in the customer base is really, if you look at the trend of sales, both Jack in the Box and Qdoba had six quarters of negative same-store sales. Qdoba, we went in about a year before Jack in the Box in terms of the down sales. And Qdoba has come out nicely. Their customers are coming back. And the catering business was up significantly, so businesses are beginning to invest in catering events as well.

So a difference in the customer base, and you see that in retail as well. The higher-end retailers coming back, very high growth. Some of the economic news in terms of retail hiring and holiday shopping, though, there's some positive news out there, so we will just wait and see.

And then I guess the last related question. Your range of same-store sales of your best and worst markets, is that roughly staying the same, or is it widening? A related question.

Yes, without getting into the specifics, I think it is a pretty broad range right now. I would say it's probably widening.

Great. Thank you.

Thank you.

Our next question comes from Steven Barlow, Bank of America Securities.

Thank you, this is actually Joe Buckley with a couple of questions. You mentioned traffic and check improving in the fourth quarter. I think you were referring sequential to the third quarter. Could you talk year-over-year what you're seeing in traffic and check?

Yes, I was talking, Joe, sequentially. I don't know if I have that break down. Hold on. You know what, we will have to get back to you. I don't want to answer just by looking at the notes here real quick.

Okay, that is fair. I can get that offline. But then a question on the projected restaurant margin range, the 14% to 14.5% seems pretty narrow given a four-point range for comp guidance. It seems even narrower if you are picking up 50 basis points from kind of the low performing markets that you refranchised. Can you talk about what am I missing thinking about that? Why, if you are at the higher end of your comp guidance, why wouldn't the margins be significantly higher. And maybe even at the low end of the comp guidance, again 50 basis points head start from the refranchising. Why would we see margins in that range?

Yes, Joe. I think there's a few things going on there. One is, I did talk about the product improvement. I will tell you that is worth about 40 basis points, the way that we're looking at it right now. We are also looking at 1% to 2% commodity inflation, which is also going to offset that as well.

We are not likely to get the leverage that we got this year on some of the labor changes. If you may recall, we had been in the mode of reducing labor over time. And we had been getting the benefit of that through the first three and a half quarters of fiscal 2010. We won't be reducing labor throughout the restaurants next year at all. So we are not going to get the benefit of that going into next year, either. And then, of course, we do have the guest service improvements that we are continuing to work on. I think you have to take all of that into consideration, which is what we did in that 14% to 14.5% range.

Okay. Thank you.

Operator, I think we have time for one more question.

Our final question comes from Matt [Vanvuliet] of Stifel Nicolaus.

Yes, thank you, on for Steve West today. One question on the larger refranchising deal that you discussed of essentially breaking up into separate pieces. Is that just due to making the deal easier, or are we going to have multiple buyers here now? What, if any, details could you provide us on that?

Sure. The franchisee that ended up not completing that large market transaction will very likely be a franchisee at Jack in the Box. We will probably start with just selling him a portion of those restaurants this year. The deal fell out primarily because of the structure that he was looking at with financing, where he decided at the end of the day, he did not like the structure that he was working with on his financing. It was not what you would call a traditional financing structure. He decided to not go forward with that, and to move with a smaller transaction with more traditional financing, which at the end of the day, probably worked out best for him anyway. So it's very likely, though, that we may see this market be split up into smaller deals with perhaps multiple franchisees.

And following up on that, does this give you an opportunity to, maybe in the long run, have better gains for that market that you're splitting up? Or is that not necessarily a piece of the pie here?

No, I don't think so. The market cash flows like the market cash flows, so we were doing what we believe was market-based pricing to the franchisee on that full market deal. And we'd expect to do market-based pricing going forward. I would not expect to see any significant change on that.

Okay, and then just one more question on the breakfast day part, you commented it as the best day part of the quarter. How does that compare to a two-year basis compared to the other day parts? Is this like we are seeing with California, on a magnitude basis it is the best, but comping over something quote unquote easy comps, or where is the two-year trend on each day part, if you could?

We do not typically provide that. I will tell you though that the two-year trend on breakfast is also better than the other day part. It is not just a rollover, which is creating the better improving day part here. Or excuse me, the best-performing day part.

Okay. Thank you.

Thank you, everyone, for joining us. We'll speak to you next quarter.

Thank you.

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