Jack in the Box Inc (JACK) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. third quarter fiscal 2011 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. During the question and answer period, please use your handset when asking a question. Please do not ask over a speaker phone. 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, Stacey, 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 Executive Vice President and Chief Operating Officer, Lenny Comma. During this mornings session, we'll review the Company's operating results for the third quarter of fiscal 2011 and update our 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 accompanying the most recent Form 10-K 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 document are available in the investors section of our website at www.jackinthebox.com.

A few calendar items to note. Jack in the Box management will be participating in the Telsey Advisory Group's fall 2011 consumer conference in New York on September 27, and our fourth quarter and fiscal 2011 ends on Sunday, October 2. We tentatively plan to announce results on Monday, November 21, after the market close with our conference call to be held at 8.30 AM Pacific Time on Tuesday, November 22. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning. We are very pleased with the third quarter results we reported yesterday. The 4.7% increase in same-store sales at Company Jack in the Box restaurants exceeded our expectations and was driven by strong traffic growth, up 3.4%, and an increase in average check. The increase represented our fourth consecutive quarter of sequentially improving trends in sales on a two year basis. All of our major markets posted strong same-store sales growth for the third quarter including California, Texas, and Arizona. Year-over-year, we saw same-store sales increases across all day parts during the third quarter.

Systemwide, Jack in the Box same-store sales growth for the quarter exceeded that of the QSR sandwich segment for the comparable period, according to the NPD Group's sales track weekly. Included in this segment are the top 11 sandwich and QSR burger chain competitors. We believe our improving sales trends are a result of the holistic approach we've taken to improve the guest experience at our restaurants by focusing on enhancing our menu, guest service and the restaurant environment. As expected, high commodity costs continue to pressure restaurant margins, which Jerry will discuss in a minute. To offset some of these inflationary pressures, we took a 1.4% price increase at Company Jack in the Box restaurants in mid May. We continue to be cautious on taking price in this environment given our focus on driving traffic,and we consider both the competitive landscape, as well as grocery store inflation in our pricing decision.

Our marketing calendar in the third quarter featured a combination of value promotions and a premium product introduction. We concluded our $4.99 All-American Jack combo early in the third quarter before launching a premium product extension of our popular grilled sandwich lines, the Bourbon Barbecued Steak grilled sandwich, a limited time offer at the end of April. The quarter also featured a three taco combo meal value priced between $2.99 and $3.49 depending on the market. And late in the quarter, we reintroduced our popular Really Big Chicken Sandwich combo which is priced at $3.99, including seasoned curly fries and a drink. To help our guests more easily navigate our menu while showcasing our variety, we installed new menu boards throughout our system in June. The new menu boards also highlight average check builders while encouraging trial and sales of higher margin products. We continue to make great progress on the comprehensive reimaging program we've been implementing at restaurants throughout our system.

At the end of the third quarter, nearly 1,600 restaurants, or 72% of our system, featured the interior and exterior elements of this program. With 88% of Company restaurants reimaged and 64% of franchise locations, we remain on pace to substantially complete our restaurant reimaging programs systemwide by the end of the calendar year. We believe the investments we've made to improve the overall guest experience at our restaurants are resonating with our guests. Since launching a systemwide program in the fourth quarter of last year that focused on delivering a more consistent guest experience, we've seen improvement in our customer satisfaction measures, especially in the areas of order accuracy and cleanliness. In March we began pursuing opportunities to improve speed of service, another key driver of guest satisfaction. This is an area that has tremendous upside potential for us and one in which we're already seeing improvements.

Moving on to Qdoba, our restaurants enjoyed another strong quarter with same-store sales up 5.1% systemwide. On a two year basis, same-store sales were up 9.7%. These improvements were driven largely by a combination of transaction growth, approximately 2% pricing and higher catering sales. Qdoba is on pace to nearly double last year's new unit growth, including the 24 locations acquired from franchisees this year and three opportunistic transactions, Qdoba represented nearly 24% of our Company store base at quarter end and continues to be an increasingly important part of our business. After the end of the quarter, we acquired eight franchise units in Nebraska and South Dakota.

Before turning the call over to Jerry, I'd like to reiterate that our number one priority this year has been to drive sales and traffic at Jack in the Box, and we've been successful at doing just that, posting higher sales and transaction growth in each of the first three quarters of the year, due largely to investments we're making to enhance our food, service and facilities. We recognize that these investments may pressure margins in the near term, but should build sales and brand loyalty over the longer term.

To recap the steps we're taking, we're improving many of our top selling core products and continuing to emphasize both premium products and value promotions in our marketing calendar. We're investing resources to improve guest service by delivering a more consistent dining experience. Phase II of the systemwide plan is fully implemented and already generating positive results in order accuracy, cleanliness and speed of service, as well as other key drivers of guest satisfaction. We're on track to substantially complete our restaurant reimage program systemwide by the end of the calendar year, and we're ahead of our timeline to increase franchise ownership to 70% to 80% of the Jack in the Box system. And now I'll turn the call over to Jerry. Jerry?

Thank you, Linda, and good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. Third quarter earnings were $0.38 per share compared to $0.44 last year. Refranchising gains were $0.13 lower than last year. Operating earnings per share, which we define as EPS on a GAAP basis less gains from refranchising, were $0.25 compared with $0.18 last year. Average weekly sales for Jack in the Box Company restaurants were up 9.6% in the quarter resulting from the 4.7% increase in same-store sales that Linda discussed and the benefit of our refranchising activities. Restaurant operating margin decreased 170 basis points to 12.5% for the quarter. As we said on our May call, we expect the Q3 restaurant operating margin to be similar to our full year guidance. Food and packaging costs were up 210 basis points in Q3 as compared to 190 basis points in Q2. The increase was due primarily to commodity inflation of approximately 6.5% which was in line with our expectations compared to approximately 5% in Q2 and 2% inflation in last year's third quarter. The increase was partially offset by pricing which was about 2.2% higher in the quarter reflecting a 1.4% increase that was taken in mid May.

In addition to commodity inflation, food costs were impacted by product mix and promotions. Labor costs were 80 basis points lower than last year as we had approximately 50 basis points worth of leverage on the same-store sales increases. Insurance costs were also about 50 basis points lower as last year's results were impacted by higher workers compensation costs. These decreases were partially offset by higher field bonuses as well as higher unemployment taxes in several states. Occupancy and other costs increased 50 basis points in the third quarter. In addition to the new menu board we mentioned on our last call, we introduced new uniforms throughout the entire Jack in the Box system during the quarter. The total cost of the rollout was approximately 80 basis points in the quarter, of which approximately 50 basis points, or about $1.6 million was incremental to last year.

SG&A dipped below 10% for the quarter and was not impacted by mark-to-market adjustments. Following the completion of our refranchising strategy, our target for G&A, excluding advertising, as a percentage of systemwide sales, is to be in the 3% to 4% range and Q3 year-to-date, we were approximately 4.3%. Our momentum on refranchising continued with the sale of 112 Jack in the Box restaurants in the quarter and 226 restaurants year-to-date, ahead of our previous full year guidance. As of the end of the quarter, Jack in the Box system was two-thirds franchised. Three full markets were sold during the quarter, including 70 restaurants in one market that had lower than average sales volumes and cash flows which was not included in our prior guidance. While this transaction resulted in minimal gains, it generated approximately $14 million in cash including both proceeds and franchise fees, and the franchisee will assume responsibility for completing the reimages which will save the Company approximately $6 million in CapEx this year. In addition, this transaction is expected to be approximately $0.03 accretive to annual operating earnings going forward.

We repurchased nearly 3 million shares of our stock in the quarter at an average price of $21.65 per share and year-to-date have repurchased nearly 6.5 million shares at an average price of $21.61 per share. We have $60 million available for repurchases under a Board authorization which expires in November of 2012. In the first three quarters of this year, we have returned nearly $140 million in cash to shareholders via share repurchases. Before I review our guidance for the fourth quarter and full year, I'd like to provide an update to our commodity cost outlook for the remainder of the year.

We expect commodity inflation for the full year to be approximately 5%. Some key points with respect to our major commodity prices. Beef accounts for more than 20% of our spend. For the full year, we now are anticipating beef products to be up approximately 13% versus our prior expectation of 14% inflation. We expect beef costs to be up approximately 15% to 16% in the fourth quarter. Our Q4 forecast is for beef 90s in the $1.90 per pound range and beef 50s in the $0.80 to $0.90 per pound range.

Cheese accounts for about 6% of our spend, and we continue to expect a 13% increase for the year. We have 100% coverage on cheese through the remainder of the fiscal year. Additionally, we have more than 50% of our spend for cheese covered for fiscal year 2012. Bakery accounts for about 9% of our spend, and we continue to expect a 1.5% decline for the year. We have 90% of our bakery needs covered through December 2011 and approximately 30% of our needs covered through the January to April 2012 timeframe. There has been no change in our outlook for chicken, which is about 9% to 10% of our spend, as we have fixed price contracts that run through March of 2012. We continue to expect costs to be down 2% for the full year with Q4 approximately flat versus last year.

Now let's move on to the rest of 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 increase from 1% to 3% and systemwide same-store sales for Qdoba to increase 3% to 5%. Our guidance reflects the sales trends we've seen thus far in the quarter. Commodity costs for the fourth quarter are currently expected to increase by approximately 7%, driven by higher costs for most commodities other than poultry. Q4 restaurant margins are expected to range from approximately 13% to 14%, depending on same-store sales and commodity inflation. The sequential increase in margins versus our Q3 margin of 12.5% is due primarily to the restaurants we sold late in the third quarter which should add about 50 basis points, as well as the cost of new uniforms and menu boards, which totaled approximately 80 basis points in Q3 that will not recur in Q4.

I won't repeat all of the full year guidance in the press release. Here is our current thinking on some of the line items that have changed from our May guidance. We've raised the lower end of our same-store sales expectations for the full year for both brands based on our strong performance in Q3 and expectations for Q4. Same-store sales are now expected to increase approximately 2% to 3% at Jack in the Box Company restaurants versus our prior guidance of up 1% to 3%. At Qdoba, we now expect systemwide same-store sales to increase 5% to 6% versus our prior guidance of a 4% to 6% increase. The restaurants' operating margin for the full year is now expected to range from 12.5% to 13%. We have lowered our full year guidance for SG&A in the mid 10% range to the low 10% range. Our guidance does not reflect any mark-to-market adjustments in the fourth quarter, although if the decline from the stock market we've seen thus far in the quarter persists, that would negatively impact our Q4 results. We've increased the range of units we expect to refranchise this year by 75 restaurants. We've also increased the expected proceeds range by $10 million while narrowing the guidance on expected gains by $5 million.

Our full year guidance for diluted earnings per share is now $1.46 to $1.60. Gains from refranchising are expected to contribute $0.71 to $0.78 of EPS while the $0.01 increase on both ends due to a lower share count. While operating earnings per share, which we define as diluted EPS on a GAAP basis, less gains from refranchising, are expected to range from $0.75 to $0.82 per share. EPS includes approximately $0.09 to $0.11 of incremental reimage incentive payments through franchisees in fiscal 2011 as compared to fiscal 2010. The incremental reimage incentive payments for Q3 were approximately $0.02 higher than last year. The year-to-date reimage incentive payments through Q3 were $4.6 million, of which $3.7 million -- which was $3.7 million, or $0.05 higher than in fiscal 2010. That concludes our prepared remarks. I'd now like to turn the call over to the operator for opening up for questions. Stacey?

Thank you. (Operator Instructions). Our first question is from Jeffrey Bernstein of Barclays.

Great. Thank you very much. Perfect, I have one question and one follow-up. The question just relates to initial thoughts at least on fiscal '12 being at only a month or so away. Just wondering whether you can give any directional color in terms of what you're thinking from a top or bottom line perspective based on what you know already from a commodity standpoint and the way sales are running at this point,. I know you haven't given exact color, and we don't get that until next quarter. But just directionally trying to size up top and bottom line thoughts, and then I had a clarification.

Yes, Jeff. We would prefer to provide our full year fiscal '12 outlook when we have a more comprehensive view of what the entire year is going to look like rather than to parse this out piecemeal. But what I can tell you is with respect to commodities, we're not anticipating a deflationary environment at this time. We did tell you in my prepared remarks where we are covered on various items such as cheese and bread and chicken for at least a good portion of the year. We still see pressure on beef costs, and we really don't see anything at this point that would cause us to believe that beef costs are going to decline into our fiscal 2012. But the other thing, we all know very well that things are a little volatile right now, and we'll have a much better view of what that looks like in November.

Okay, and then just to clarify, I think you mentioned the restaurant margin in the fourth quarter, I believe you said in the 13% to 14% range. Looking back, it looks like you're lapping at 12.5% in last year's fourth quarter, so essentially up 50 to150 bips. But I get the impression from a commodity standpoint like this quarter should not be any better than past quarters, based on your basket of inflation. Can you just clarify the unusuals I think you mentioned or how you plan on getting that margin expansion with commodity inflation having such a negative impact?

If you looked at it versus last year, we will get higher food costs, but we would expect also to receive some lower labor costs. Remember, we had said last year we had experienced higher labor costs as a result from our workers comp adjustments that we had last year. So, we would expect to see some benefit on the labor cost comparison. We also indicated that this year, we would expect to see utility cost improvement versus last year as we have covered all of our Texas and California needs at very favorable rates versus last year, so we would expect some benefit on that as well. We also discussed that last year we had experienced some timing on some M&R, maintenance and repair items, so we would expect to have that look more similar to what it has been this year in the occupancy line. And then also, we need to just point out that we continue to see improving same-store sales trends for guiding up 1% to 3% this year rolling over a down 4% last year, so that is a benefit on a two year trend basis. And of course, as I mentioned in my prepared remarks, we would expect to see some benefit from the refranchise location, particularly those that we sold late in the third quarter.

But you didn't get offer -- did you offer any granularity on the California and Texas comp, being those the big markets?

We did not, but they were both up on a sequential basis and on a two year basis.

Correct. Really, all the markets performed well. California and Texas were both strong, both up significantly in traffic, so that's very good.

Our next question is from John Glass with Morgan Stanley.

Thanks very much. During the course of this year, you've talked about a number of thins that have negatively impacted margins aside from commodities. And those things, just a quick list I made, the service enhancements, you've talked about the franchisee remodel incentives, which I think you just quantified. You just mentioned the new menu boards, uniforms, I think you said you talked about food menu reinvestment. Can you, one, sum up all of those and how much of an impact you think collectively those have had a negative impact on 2011 store margins? And as you think about 2012, how many of those do you think need to repeat in the next year or carry through to the next year and how many are left behind in 2011?

First, let me say wow, that's a big question.

Well, it's really a way of looking at how is your restaurant margins, what burdens are you going to -- do you foresee right now that you are causing on your restaurant margins, not commodities, not sales impact.

No, understand. The way that I would look at that is, perhaps we might want to look at what the impact is on operating EPS and not just what it looks like on restaurant operating margin. Because some of the items that we described, particularly with respect to the reimage contribution which is, we've said $0.09 t0 $0.11 this year. But in terms of a total contribution the franchisees, it's actually $0.11 to $0.13 impact in the year with $0.09 to $0.11 being incremental to the prior year.

We've also talked about the increase in our impairment and other line, which we've talked about being roughly 70 to 80 basis points this year, which represents roughly $0.20 a share. Now, all of that won't go away, John, but we would expect a good portion of that to go away as we complete our reimage strategy. So, those are clearly impacting not just restaurant operating margins, those are impacting the operating EPS line. What I will say in terms of the products, what we do know is on the product improvements, that we are selling more than enough incremental of those new products to more than offset the investment in them. I really don't look at that, as we sit here today through Q3, as being a drain on restaurant operating margins. What I would look at is some of the other items that we have invested in, which is some additional deployment of labor, paying more attention to some maintenance and repair items in the restaurant, restaurant cleanliness and so forth. We've talked about that roughly offsetting the benefit of the closed stores that we did in the fourth quarter last year, and that's worth roughly 60 basis points. That also includes in the incremental spend this year some of the inspections that we have talked about with respect to earns the next visit that we're doing with the realtime feedback to our restaurant management out in the field.

In that last piece, that labor, that incremental labor and maintenance repair, does that recur again at the same rate in 2012, do you think?

I would expect, I would not expect there to be a decline in that, but the rollover should be comparable to what it is this year, so I wouldn't expect it to be a drain on comparative restaurant operating margins. What I will say though is that in addition to what we just described with the higher unit volumes that we are driving and with the refranchising strategy, we will begin fiscal 2012 with a Company operated footprint that has higher average unit volumes and higher restaurant operating margins than what we began the year with.

Our next question is from Joe Buckley, Banc of America Merrill Lynch.

Thank you. Kind of in a way of follow-up to John's question, the restaurant level margins, I realize you've got these one-time influences that you just walked us through, but presumably there's a portfolio effect in those margins already. Is that a fair assumption? And what is the comparable base of stores look like on a restaurant level margin so far in fiscal '11?

Joe, what I will tell you is that the improvement in the portfolio is being more than offset by the increase in commodities. I think that would be the way to look at it. So, if you look at on -- and maybe the best way to look at this year is Q3 to Q4 where we're not expecting significantly different commodity inflation. We are expecting the refranchising activities that we had to improve margins by about 50 basis points. And I think earlier in the year, Q1, Q2 and Q3 with significantly rising commodity costs on a sequential quarter, the quarter basis was eating away all of the benefit from the refranchising activities and then some.

Let me ask another question to try to put it in perspective. Do you have many more markets like this 70 unit market to sell where the margins are obviously very, very low?

Yes, what I would say here is we have -- what we have left, Joe, in our portfolio, we have roughly 200 to 300 restaurants left to sell over the next couple of years to get to the completion of our refranchising strategy. And overall, we would expect that those -- the selling of those restaurants would be accretive to operating EPS and therefore, we would expect the benefit on both average unit volumes on the Company portfolio, as well as a commensurate increase in restaurant operating margins. So, short answer to that question, yes, we do have more like we just talked about in the third quarter. In fact, that is primarily what we have left are restaurants such as that.

Our next question is from Jeff Omohundro, Wells Fargo.

Thanks, and thanks for the color on the regional trends that you provided. I'm wondering though if you look within the menu, if you could maybe touch on consumer behavior, both within the quarter and if you don't mind, more recently in terms of their value seeking preferences. And also, are you still seeing the strength in the breakfast products? Thanks.

Sure. Yes, I can tell you that what's really working well for us, Jeff, is the fact that we have a combination of both value promotions, and that's really through our bundled meals. So, it's anywhere from the $2.49 to the $4.99 bundled meal where we have differentiated products whether it's tacos or seasoned curly fries we can bundle with a beverage and a sandwich. And that combination, that two tier strategy of having those value bundled meals along with average check builders, whether it's desserts, shakes, sides and the premium product introduction like the barbecue grilled steak sandwich works very well for us. We're seeing all categories up, mostly mid tier sides, some beverage improvement, and breakfast has remained strong for us.

And then as a follow-up, could you -- you mentioned the menu board, but could you touch on whether you're seeing the expected benefits? I know it's probably difficult to quantify, but there are several areas around check and throughput that you're hoping to achieve with the menu boards.

Yes, with our rollout, we're seeing improvement and as I think we mentioned in the last call, we actually deleted some items concurrent with the menu board rollout, and the menu board has kind of offset any impact from those deletions. We've also seen an improvement in our speed of service. Some of that could be menu board related, but we really think it's some of the efforts and initiatives we have underway to focus on improving those outlier restaurants. We're pleased with the menu board rollout. It really is helping with average check, but as you know from our results, we're getting good strong traffic growth which means that we're really not buying top line sales. It's not about aggressive discounting, so that's a real benefit. And then you asked about any color on kind of the most recent trends, and we continue to see the sales momentum, including higher traffic into this fourth quarter, the last four weeks. And that's reflective -- reflected in our guidance, that guidance of up 1% to 3% which once again, would be an improvement in the two year comps. And as Jerry mentioned, that we're rolling over negative 4% in the fourth quarter versus down 9.4% in the third quarter.

Our next question is from Bart Glenn, DA Davidson.

Hi, this is Adam for Bart today. I was wondering if you could provide any color on your strategy regarding share repurchase going forward?

Sure, Adam. What we said is we still have $60 million left under the board authorization. I'll just remind everybody on the call that our credit facility allows for up to $500 million in total repurchase or return of cash to shareholders that was the term of our credit facility, assuming certain debt to EBITDA levels, so I think we do have opportunity for that. And we've been looking at historically returning refranchising cash by and large to franchisees in the form of share -- not to franchisees, but to investors in the form of share repurchases. But I would say going forward, the priorities are going to be primarily towards free cash flow allocation priorities with respect to what we have opportunities to do with growing free cash flow as we continue to reduce CapEx going forward.

Great, thanks.

Our next question is from Keith Signer from Credit Suisse.

Thanks, one quick follow-up to the last question, and I also have a second question. If you look year-to-date in terms of the share repurchase program, you've spent much more than the, say proceeds from refranchising net of cash plus your free cash flow. So, you're kind of well ahead of that pace, and your gross and net debt have both increased, and your ratios for like net debt to EBITDA have all increased now, and you're over 2%. Just how do you think about this over the next couple years as the proceeds start to fall because you don't have that -- as many units left? Hopefully free cash flow starts to pick up, but are you comfortable with this debt level? Do you want to continue to use some leverage to buy back stock? Will share repurchases necessarily have to slow? Just a bigger picture kind of thought process on the capital management, please.

Yes, sure. We are comfortable with where our current leverage ratios are. And we benchmark that against the industry, and we're in pretty good shape in terms of the debt to EBITDA level, as well as an adjusted debt to EBITDAR. So, we feel pretty good about that. We do monitor that. Keep in mind, as we complete our business model change, we will have less needs for CapEx for our Jack in the Box chain, specifically on the maintenance CapEx. And we've talked about how that will be reduced over time, and so we are comfortable with the debt load and with the business model going forward.

Then one second question. With all these units being refranchised over the last couple years and clearly, a very nice pace year-to-date, who's buying the units now? Who bought the seven units? Just some basic information. Is this still existing franchisees? Have you brought new franchisees into the system? What's your typical franchisee profile like now, just to give us a better sense of who your partners are now in running these businesses?

Keith, this is Lenny Comma. Let me share with you that we have approximately 100 operators, and when you look at the purchases, they are happening through existing and new operators. We have newer operators that have joined us within the last three, four years that are growing and buying some of these markets. And we also have some existing operators that over the last five years have purchased the larger size deal. So, it's a mix of existing and new, and we like to have that diversity in that pool of franchisees. We have some that understand our operation is for a very long term and started off as the small operators. As we started the refranchising strategy, they have capitalized on that by purchasing many of the sites that were for sale. And then we have other operators from the outside who have come in and taken some of these big deals. So again, it's a mixture. The vast majority are existing franchisees, but some of the most recent larger deals have been operators that are newer to the system.

And these new ones, are they individuals, families, corporations, anything you can add there?

They are generally partnerships where it's not necessarily a family, but it's multiple partners that some have more of a financial background and others have more of an operations background, and they team together to put these deals together.

Our next question is from Steve West of Stifel Nicolaus.

Good morning. I wanted to kind of follow-up on the beef, the commodities, specifically the beef and the outlook there. I don't know if you said anything about contracting the beef, but as you look into 2012, Jerry, you mentioned you see more pressure coming, and it's probably not going to see any deflation there. So why not lock in now? You guys have -- that's probably been your biggest suffering point. And then to that point, can you guys get more aggressive with pricing, especially as Texas seems to be getting stronger, and you've clearly said traffic is coming back in the door. It seems like you've got opportunity there. Thanks.

Yes, what we said on the beef is that we're not expecting any deflation opportunities on there. There were really three components to our overall beef complex, it's fresh beef 50, fresh beef 90, both domestic. There really is not an opportunity to lock in on those. If you're buying boxed beef, you can do it, if you're buying the whole cow, you can do it. If you're buying those trimming portions, you really can't lock into those. We do have an opportunity though to buy forward some import 90s from Australia, which we do from time to time. And we do have a small position on that now which will carry some into early next fiscal year. And we continue to monitor what is going on with the Australian beef, but where the dollar is at this point, we're not seeing a significant opportunity to lock in frozen Australian beef at prices that are as advantageous to where current domestic fresh 90s are.

Anything to offer on being more aggressive on pricing?

Yes, we continue to work with our consultants to evaluate opportunities to raise prices. And we're still, as I said in my comments, somewhat cautious given the kind of consumer --how fragile the consumer is and all of the uncertainty right now in the economy. We will look for opportunities and take advantage of those if we can, if it makes sense.

Okay, thanks.

Our next question is from Conrad Lyon of B. Riley.

Yes, thanks. I want to go back to the restaurant level margins. It really looks like you guys are on the inflection point of some really positive improvement going forward, assuming commodities don't go out of control. Jerry, where do you think the restaurant level margin can go, or where would you like to see it go over the next, call it two to three years? Especially since we're seeing really trough margins here.

Yes, sure, Conrad. Let me talk about where I think the catalysts are for improving the restaurant operating margin. I really see that being around the following. So, if everything that we're talking about on the plan to drive sales and traffic this year, which I think we've been pretty success at so far in terms of the getting people back into the restaurant, and seeing and experiencing all of the investments we're making in providing a more consistent, better, more sustainable higher end experience for the customer when they're coming into the restaurant. So, we're doing those investments, and we're seeing that come through with the improving sales and traffic, that will by itself over time with higher AUV, that will raise operating margins. We're also seeing continued importance in Qdoba in terms of our total portfolio of Company restaurant operations. So, Qdoba is at 24% of our total Company operations base. That will continue to grow over time.

I had mentioned in response to Joe Buckley's question that we have roughly 200 to 300 restaurants to sell in the Jack in the Box portfolio over the next couple of years, indicating that they would be -- that we would expect those deals to be accretive for future operating earnings, which means it should also be accretive to future restaurant operating margin and AUVs on the existing Jack in the Box store base. I think -- and also, we continue to grow Qdoba through just organic growth, and we continue to buy back restaurants from franchisees that have restaurants that are high performing, both in terms of sales and restaurant operating margins. So, we'll continue to see Qdoba become a bigger and more important piece of that, which should also drive restaurant operating margins.

The other thing that I want to mention is, when it look at, what does a higher AUV restaurant operating margin footprint look like for Jack in the Box, today we have a significant number of restaurants that we intend to continue to operate post refranchising that have annual sales volumes of $1.4 million per year or higher. And even with today's inflationary commodity picture with Q3 as being up 6.5%, those restaurants collectively are averaging north of 16% restaurant operating margin. We think all of the things that we just described with how we changed the business model and rising Qdoba growth is going to get us to those restaurant operating margins that are more in the historical area, that 16% to 17% that we have been operating in prior to 2009.

Got you, perfect. Thank you.

Our next question is from Jake Bartlett of Susquehanna.

Yes, I had a question on Qdoba restaurant margins. In light of how it's becoming a much larger position of Company owned restaurants, can you give us what the restaurant margins were in the fourth quarter as well as quarter to date, see how it's influencing the overall system?

No, what we said before, Jake, is that Qdoba, over the course of a year, tends to be accretive to the overall system restaurant operating margin. They tend to be a little dilutive in Q2 -- or excuse me, a little dilutive in Q1, breakeven in Q2 and accretive in Q3 and Q4. They were accretive in Q3, and we would expect that they will be accretive to the total operating margin in Q4. But we haven't said exactly what that number looks like and we haven't provided restaurant operating margin to date for Qdoba.

Okay, and then I had a question on refranchising. You pulled the 70 units into 2011. You hadn't expected those in guidance. Are those coming out of 2012? Or I'm really trying to get a sense as to whether 2012, the number goes down a bunch. And you've talked about being ahead of schedule in terms of finishing before the end of 2013, trying to get a sense as to what the likelihood of getting them done in 2012. And then continuing on a little bit, I know you've long had this goal of 70% to 80% franchised. Is that really the end point, or is that kind of, then you just slowdown, but your ultimate goal is somewhat higher than that? If you can just kind of clarify those, thank you.

Let me get the first piece first. We said we have about 200 to 300 restaurants left to sell. As I sit here today, I would expect that it would take us a couple years to complete that. So, while we're ahead of pace in terms of the total percentage, we've gotten to this point much more quickly than we had originally planned. I would still expect the completion to come some time in fiscal year 2013, so 200 to 300 will be between Q4 of this year and then six to 12 in '13. The 70 restaurants that we've sold this quarter were in fact planned to be sold. They just weren't planned to be sold in this fiscal year with our original guidance. So, that is an acceleration through this year and therefore, out of the future years.

And then with respect for the future gains, I think rather than looking at the raw number of the gains or the cash proceeds, I think -- and then the way we're looking at it is rather than replacing those dollar for dollar, it's important for us to replace the valuation effect of those gains or those proceeds. And so I think most are ascribing some kind of a discounted cash flow to what those future proceeds gains look like. And so I think it's important for us to replace that valuation level, and we would plan to do that by the answer to my question earlier, from one of the other analysts asking how did we grow operating EPS. So, I think we will be able to do that more than sufficiently to replace the valuation impact of those gains and proceeds, that naturally begin to fall off.

And we like the range of 70% to 80%. We think it's important for us to have skin in the game, to have a base of restaurants from which the Company operates.

Our next question is from Jonathan Comp of Baird.

Hi, thanks, it's Jon Comp calling in for David. Not to beat a dead horse here, but just one more question on the restaurant level margin, maybe a bit more near term focused. Just stepping back from a broad perspective, if I look at your current guidance for the year versus your prior view, you're now pointing to the high end of the comps guidance for both brands, but you're pointing to the low end of the restaurant level margin guidance for the year. I'm wondering why in a slightly more pessimistic view on the margin guidance for the near term, did you previously expect a bigger rebound in Q4 or maybe what's driving that?

I think on the impact on the restaurant level margins are primarily related to the commodity cost and then the uniforms and menu board rollout. So, if you look -- let's take a look at Q2 to Q3 sequential margins, we increase from 12.3 to 12.5 with 4.7% comp, so it doesn't look like we had a lot of appreciation in margin there. But we had 130 basis points worth of headwind that we had to overcome, 50 basis points of higher food costs in Q3 versus Q2, and then we also overcame the impact of the menu board and uniform rollout, that that was 80 basis points. So, when you look at the 20 basis point improvement, it doesn't look like we had a lot of flow through in that 4.7% increase in sales. We actually had fairly significant leverage on that, both in terms of some fixed occupancy cost, as well as the 50 basis points in labor leverage that we had spoken about. And then also with respect to Q3 to Q4, while we do expect the benefit of the refranchising of those 70 locations, which would add about 50 basis points in Q3, we are anticipating commodity inflation to be about 7% versus 6.5% in Q3, so that would create a little bit of a headwind there also.

Okay, I guess I'm just trying to reconcile maybe why you didn't take the restaurant level margin guidance towards the high end. Especially, I think you said the 70 low performing units that you refranchised in Q3 are going to provide a benefit, and those were not in the prior guidance, so I'm just trying to reconcile.

Well if you look at the -- where we are year-to-date Q3, we're at 12.5%, and we're forecasting 13% to 14% Q4, so it really just becomes a mathematical equation for how you get there. It would be very difficult mathematically to get above a 13% restaurant operating margin, but there's only 12 weeks to go in the year.

Operator, I think we have time for one more question. I know it's been a long morning for most of the folks on the call.

Our final question comes from Peter Saleh of Telsey Advisory Group.

Great, thanks. Just wondering if you could comment directionally on Qdoba unit expansion beyond fiscal 2011, how you're thinking about it and how your franchisees are thinking about it?

Yes, like what had Jerry indicated earlier, we really want to provide the guidance, the full year guidance and outlook for growth on both Jack and Qdoba at our November call. But if you look at what we're guiding in terms of growth, we're expecting to double -- almost double new unit growth for Qdoba this fiscal year, so 60 to 70 versus 36 last year and the Company size 25 versus 15. If you add all of the acquisitions that we made in Qdoba, we've really seen a nice increase in the Company restaurants for Qdoba, which is helped in terms of margin, it being more accretive. And in terms of those acquisitions, we really were looking for markets that had growth opportunities, so more room to grow for Qdoba. Had solid TSAs, had solid margins, and we know that helps with brand awareness in terms of being able to more rapidly penetrate those markets. So, as we had indicated earlier, we've selected certain Company markets or corporate markets that we would expect to build out a little more rapidly than we have in prior years, but you'll get more information on that in November.

Great. Thank you very much.

Thank you.

Thanks, everyone, for joining us, and we will speak to you on our year-end call in November.

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