Jack in the Box Inc (JACK) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. first quarter fiscal 2012 earnings conference call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Thank you, Stacy, and good morning, everyone. Joining me on the call today are Chairman, CEO, and President Linda Lang, Executive Vice President and CFO, Jerry Rebel, and Executive Vice President and COO, Lenny Comma. During this morning's session, we will review the Company's operating results for the first quarter of fiscal 2012 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 in the Company's 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 documents are available on the Investor section of our website at www.JackintheBox.com.

A few calendar items to note, next week on February 28, Jack in the Box management is hosting an investor meeting in San Diego which will be webcast live beginning at 9.00 AM Pacific Time. Jack in the Box management will also be participating in RBC Capital Markets Restaurant and Leisure Conference in Deer Valley, Utah on March 1, the Bank of America Merrill Lynch Consumer and Retail Conference in New York on March 8, and the JPMorgan Gaming, Lodging, Restaurant and Leisure Management Access Forum in Las Vegas on March 20. Our second quarter fiscal 2012 ends on April 15, and we plan to announce results on May 16 after the market close with our conference call to be held at 8.30 AM Pacific Time on May 17. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning, everyone. We believe our results for the first quarter reflect the success of our strategic initiatives and the related investments we have made over the last few years. The strong sales trends that we experienced during fiscal 2011 continued in the first quarter of 2012, with same store sales at Company Jack in the Box restaurants increasing 5.3%. The increase was driven by traffic growth of 2.8%, combined with a 2.5% increase in average check. On a two-year cumulative basis, first quarter sales were 500 basis points higher than the fourth quarter of 2011 and represented our sixth consecutive quarter of sequentially improving Company same store sales. The strength was broad-based with each of our major markets posting increases in sales, traffic, and average check. And sales were positive across all day parts, with breakfast remaining the strongest. Four weeks into the second quarter, we are continuing to see strong same store sales growth.

The quality improvements we are making to our core products continue to resonate with our guests. Our latest initiative in this area, which we introduced during the first quarter, focuses on several enhancements to our classic burgers, which were supported with advertising, merchandising, and social media. We believe the sustained improvements in our results have been largely driven by investments the Company and our franchisees have made to the entire guest experience at Jack in the Box. This includes our restaurant re-imaging program, which was substantially completed system-wide during the first quarter.

Our continued focus on delivering a more consistent experience has resulted in improved speed of service. We believe reducing the variability and delivering faster service will build trust with our guests and drive additional visits. This holistic approach has contributed to meaningful improvements in our overall satisfaction ratings as measured by our Voice of Guest Surveys and brand loyalty studies. The same store sales increase in the first quarter, along with the benefits of our re-franchising strategy, helped drive a 90 basis point increase in consolidated restaurant operating margins versus the year-ago quarter, despite significant headwinds from commodities. Jerry will provide further comments on our margin expansion and other operating highlights during his remarks.

Moving on to Qdoba, same store sales increased 3.8% system-wide during the first quarter, representing the fourth consecutive quarter that two-year, cumulative same store sales have been greater than 9%. Since Qdoba competes in the fastest growing segment of the restaurant industry and has, on average, higher cash on cash returns than a typical QSR restaurant, we have been increasing our Company store base through unit growth and acquisitions. In addition to opening six Company restaurants during the quarter, we acquired 11 franchise locations in two markets. At quarter-end, 44% of the Qdoba system was Company-owned compared to 36% at the end of the year-ago quarter. Subsequent to the end of the first quarter, we acquired 25 additional franchise restaurants in two other markets. The acquisitions we have made to date in fiscal 2012 are expected to be accretive to our full-year margins and earnings.

As we said last quarter, we plan to more aggressively build out the number of Company Qdoba locations over the next several years through new unit growth and additional acquisitions of franchise locations. Accelerating the growth of our Qdoba brand by increasing market penetration should generate heightened brand awareness and higher AUVs. We look forward to discussing Qdoba's growth plan, as well as our key strategies and initiatives, next week at our investor meeting in San Diego. Now, I will turn the call over to Jerry. Jerry?

Thank you, Linda, and good morning. I will cover our financial highlights for the quarter before reviewing our updated fiscal year 2012 outlook. All of my comments this morning regarding per share amounts refer to diluted earnings per share. First quarter earnings were $0.27 per share compared to $0.61 last year. Operating earnings per share, which we define as EPS on a GAAP basis less gains from re-franchising, were $0.25 in the quarter versus $0.27 last year. Our franchisees completed a significant number of re-images during the quarter, and are now about 95% complete with their re-imaging efforts. As a result, re-image incentives of approximately $0.08 per share were $0.06 higher than last year. Refranchising gains were approximately $0.02 per share in the quarter, which represented additional proceeds received as a result of the extension of the underlying franchise and lease agreements for a previously sold restaurant. This compared to gains of approximately $0.34 per share in last year's first quarter.

Average weekly sales for Jack in the Box Company restaurants of $29,200 were up 12.6% in the quarter, resulting in part from the 5.3% increase in same store sales that Linda discussed, as well as the benefit of refranchising activities last year. Consolidated restaurant operating margin of 13.5% of sales for the quarter was 90 basis points better than last year's first quarter. Jack in the Box margins improved 110 basis points to 13.9%, and Qdoba margins improved 60 basis points to 12% in the quarter, despite significant commodity cost headwinds for both brands. As we discussed last year, Qdoba is generally dilutive to consolidated margins in Q1, as their business is more seasonal than Jack in the Box. But we expect Qdoba to be accretive to consolidated margins in quarters three and four as well as for the full year, as it was last year.

The 90 basis point improvement in consolidated margins as compared to last year included approximately 110 basis points of higher food and packaging costs and 20 basis points of higher debit card fees resulting from the Durbin Amendment to the Dodd-Frank Act. This was more than offset by 200 basis points of other improvements, about half of which was driven by the benefit from refranchising over the last 12 months and the other half primarily from same store sales leverage. Additionally, prior Qdoba acquisitions, net of new restaurants, added about 20 basis points of margin improvement. The increase in food and packaging costs was due primarily to commodity inflation of approximately 8%, which was in line with our expectations, driven by higher costs for most commodities other than produce, including beef inflation of 15%. The increase was partially offset by pricing, which was 3.3% higher in the quarter at our Company Jack in the Box restaurants.

Before I review guidance for the second quarter and full year, I'd like to provide an update to our commodity cost outlook for the remainder of the year. Overall, we expect commodity costs for the full year to increase by approximately 5%. Some key points with respect to our major commodity purchases and where we have coverage. Beef accounts for approximately 20% of our spend and remains the biggest challenge we have in forecasting commodity costs. For the full year, we still expect beef costs to be up in the high single-digit range.

Chicken is about 9% of our spend. Our current contracts, which have been in place for the last two years, expire at the end of March. We have recently entered into new contracts fixing the costs through December of 2012. Cheese accounts for about 6% of our spend. We have 100% coverage on cheese through the end of March and 50% coverage through the end of fiscal year 2012. Bakery accounts for about 8% of our spend. We now have 100% of our bakery needs covered through June of 2012, and approximately 30% coverage for the July to September 2012 timeframe.

Now, let's move on to the rest of our guidance for the balance of the year. For the second quarter, we expect same store sales for Jack in the Box Company restaurants to increase 4% to 5%, lapping a 0.8% increase last year. System-wide, same store sales for Qdoba are expected to increase 4% to 5% versus a 6% increase in the year-ago quarter. I won't repeat all of the full-year guidance included in the press release, but here is our current thinking on some of the line items that have changed since our November guidance. Same store sales are now expected to increase 3% to 4% at Jack in the Box Company restaurants and 4% to 5% for the Qdoba system, reflecting our performance in Q1 and our expectations for Q2. Restaurant operating margin for the full year is now expected to be approximately 14%, depending on same store sales, commodity inflation, and refranchising transactions.

Our guidance reflects the impact of the acquisition of 25 franchised Qdoba restaurants earlier this week. These restaurants have higher than system average unit volumes and margins and are expected to be accretive to both margins and operating EPS this year. Diluted earnings per share are now expected to range from $1.15 to $1.43, with the range reflecting uncertainty in the timing of anticipated refranchising transactions as well as same store sales results and commodity inflation. Operating earnings per share, which we define as diluted earnings per share on a GAAP basis less gains from refranchising, are now expected to range from $0.95 to $1.10. Operating EPS includes approximately $0.09 to $0.10 of re-image incentive payments to franchisees in fiscal 2012, of which approximately $0.08 occurred in the first quarter. Re-image incentive payments in fiscal 2011 were $8.2 million, or approximately $0.11 per share.

Lastly, as we approach completion of our Jack in the Box refranchising strategy, we are seeing the results of our business model transformation, including a higher AUV, higher margin Company operative footprint, growing annuity like loyalty and rental income streams as we now sublease approximately 90% of our franchise locations, and lower CapEx with more capital deployed towards growth versus maintenance. At the same time, Qdoba has become a more significant part of our business, now 28% of our Company-operated store base, and will continue to be larger still as we more aggressively grow our brand in the fastest growing segment of the restaurant industry. That concludes our prepared remarks. I would now like to turn the call over to the operator to open it up for questions. Stacy?

(Operator Instructions) Jeffrey Bernstein, Barclays.

One question and one follow-up. The question is specific to the comp side of things -- specific to Jack in the Box. You talk about the significant jump in the two-year. I'm just wondering if you could talk about perhaps the competitive environment? Promotional activity? Whether you think that you're taking share? Or, whether you think this is just broader category growth? And perhaps just address what still seems to be the gap between the Company and the franchise? Then, I just had a quick follow-up.

Okay. There's a few parts there. In terms of the competitive environment, I'd say it is probably not as price promotion-driven as it was perhaps a year ago. There's a little more rational behavior in the industry, but I can tell you that we believe that we are taking share, especially in the California market with the regional players in California. We do look at the competitive set. We do track their sales. We do look at MPD data, and it's clear that we are taking share.

And then, in terms of the gap between the Company and franchise. It hasn't widened in the quarter. On a two-year basis, it is slightly wider, and we believe, I think as we said earlier, that the Company is a little further along on some of the initiatives, especially the re-image program. We are very focused on that. The franchisees are very focused on continuing to focus on the entire experience, though, addressing speed of service and some of the other tactics that we have in place to improve the guest experience at the locations.

Okay. Just with a follow-up on the Qdoba side, you mentioned being 44% Company-operated, which was an eight point jump from a year ago. It seems like you are aggressively making acquisitions. I'm just wondering whether you can give us an update, perhaps -- one, where that goes from here? Whether you have any limitation or hesitancy? Or, where you could see that going? And perhaps, more broadly on just the portfolio and whether there is thought of any other acquisition? Or, what your thoughts are on the portfolio beyond Qdoba? Thanks.

Right. Jeff, we will cover a lot more of the Qdoba long-term growth plan next Tuesday during our investor day. I can tell you that we have been doing strategic acquisitions now for a couple of years. We look for markets that have high AUVs, that have solid restaurant operating margins, and there is opportunity for growth. So, we will continue with that acquisition strategy with Qdoba. We will cover more of that next week.

Great. Looking forward to it. Thanks.

Matthew DiFrisco, Lazard Capital Markets.

Thank you. Just to follow up on that, can you just tell us where those 25 stores were acquired?

We haven't typically done that, primarily for competitive reasons, particularly when there is a shift in the -- from franchise operator into Company operations. We typically don't talk about that. It is, as with the other acquisitions, in markets that have ample room for us to add additional locations where we think that we'll do that more quickly than the franchisees will. It also has substantially higher AUVs and restaurant operating margins than what the system average has.

Earlier in the call, you also said -- I thought you said something about Qdoba being dilutive to earnings in this quarter as it was last year. I was lost there.

That was dilutive to restaurant operating margin.

Okay, so it was just lower margin than the mix.

Just lower margin. And, if I could just address that a bit more. The Qdoba business is more seasonal than the Jack In The Box business. They close two days in the quarter for Christmas and for Thanksgiving, and of course, all those fixed costs continue. But when you look at the weekly average per store sales in Q1 versus what that weekly average looks like for the full year -- it is about 80% in Q1 versus the average for the whole year. It's substantially lower AUVs in the quarter which drives that lower restaurant operating margin in the quarter.

Okay.

You just don't see that kind of seasonality within Jack in the Box.

And then, can you just comment on how much accretion you are getting on an annual basis from the 36 stores that you acquired?

Sure. On a restaurant operating margin basis, or an EPS?

Whichever is -- both would be great.

Let me tell you, the 25 restaurants that we just acquired is the new news to the guidance. Those we expect on a full-year basis to be about $0.05 to $0.07 per share accretive, and we are estimating about $0.03 this year accretive. The restaurant operating margin -- those restaurants had north of 20% restaurant operating margin, and we will expect that to have most of the improvement in our restaurant operating margin guidance from the end of the last quarter to now is driven primarily by those additional 25 restaurants, along with some improvement in the bottom end of our same store sales guidance.

Thank you.

John Glass, Morgan Stanley.

First, could you just talk about your -- at the Jack business -- the traffic and check? Last quarter, there was an unusual shift with very high traffic and lower check because of the breakfast promotion. Can you roughly give us the breakout in traffic and check this quarter?

Yes. Traffic was up 2.8%. Check was up 2.5%. So, a very nice balance between traffic and check. And you are right; we did come off of a fairly aggressive promotion with the jumbo breakfast platter last quarter. If you look at the promotional events that we had in this quarter, it really is a nice balance between the premium -- more premium, top-tier or mid-tier products like Outlaw Burger and Outlaw Chicken. And then, we did have a bundled deal which still offers compelling value to those that are seeking value, and we continued with the jumbo breakfast platter that grew our breakfast deal. And then, of course, early in the second quarter, we introduced the bacon -- BLT Cheeseburger, which is more of a premium price. So, we did come off of some of the discounting that we had last quarter, and that is reflected in the average check move.

Great. Jerry, on the guidance and maybe the restaurant margins, it feels like it is conservative in the sense that -- let's say, the 14% guidance. You're lapping now the peak inflation -- I assume this is the peak inflation quarter, so that should get better. You made an accretive acquisition, both to margin and to EPS. Comp store sales momentum is strong. It seems like everything is going in your favor. So, why wouldn't 14% seem a little conservative based on that? And, by the way, you're getting rid of all of your upfront remodel expenses, which I know isn't a margin issue at restaurant level, but still helps earnings. So, could you address conservatism -- both -- what is going on in the rest of the year? On a margin perspective, it's negative. It wouldn't allow you to get above 14%, and maybe also address only raising the bottom of the range of EPS for the same reasons?

John, other than the debit card -- the increase -- which is going to cost us about 20 basis points in margin. Again, that was related to some new regulations that went in after our first quarter -- after our year-end call. We are not seeing anything on the horizon that would cause us to be concerned about restaurant operating margin that we can control. So, you're right. We're very happy with where the same store sales performance is. And we're happy with everything that we are doing from a cost and a sales-building perspective.

The challenge, I guess, or perhaps the largest concern going forward would be what happens with beef? I think we have a pretty good handle on the remaining part of our commodity spend. And then, the other piece is, how high do gas prices go, and how long do they stay there? So, those would be the two cautionary pieces that I would say, but I would hope that our margin is conservative. But, given those other external factors I just mentioned might cause some conservatism within the margin numbers.

If I could just clarify, are you assuming any more refranchising benefit to margin in that 14%? Or, is that just the existing portfolio, and it could be upside if you refranchise on margins?

It depends on timing, but our refranchising transactions were included in our margin guidance that we issued in November. It is still in the margin guidance that we are expecting now, and that has not changed.

Thank you.

Joe Buckley, Bank of America.

Thank you. Just a follow-up on the guidance. You took $0.05 off the low end of the guidance, but it sounds like $0.03 of that comes from the acquisition this week. We are calculating maybe $0.01 from the tax rate coming down a little bit. Are those the primary drivers of the guidance increase at this point?

What I would say, Joe, is to look at the $0.03 that I just described on the acquisition. You're right. The tax rate we are anticipating is going to be in the 36% to 37% range, off a little bit of where we were prior. We also increased the re-image payments from $0.07 to $0.09, to $0.09 to $0.10. That's a little bit of a drag. And then, the additional improvement is the raising of the bottom end of the same store sales guidance for both the Jack in the Box and the Qdoba brand, reflecting what we expect to be continued strong performance.

And then, just a question on food costs. What are you thinking for the second quarter, and can we look forward to a -- if the 5% full-year number comes through, can we look forward to a more manageable rate of food cost inflation in the second half?

Yes. Clearly, with 8% forecast -- excuse me, with 8% actual for the first quarter, we are expecting in the 3% range for Q2.

Okay. And then, that would imply 4% to 5% in the second half of the year?

We would say, Q3 and Q4 is still inflationary, but in a 3% to 4% range. Remember, Q1 is 16 weeks, and the remaining quarters are only 12 weeks each.

Right. Of course. Okay. One last question on the commodities. The new chicken contract, are costs up?

Costs are up, but they are not as high as we had expected them to be. We were able to do some other creative things with combining the Qdoba chicken contract also. It worked out in our favor.

Keith Siegner, Credit Suisse.

Thanks. First question, Jerry. Just wondering, you often talk about G&A in terms of long-term targets as a percent of system sales. I was wondering if you could maybe talk about what rate are you running as a percent of system sales now? How does this compare to last year? And, for the guidance of mid-10% for SG&A for this year, what does that imply as a percent of system sales?

Let me talk about that a bit. First of all, we will have perhaps a bit more information on all of our long-term outlooks, including G&A, at the Tuesday investor day. But let me speak as best as I can to the rest of your question. So, if you go back to fiscal 2011, we were at 4.4% of system-wide sales and 10.2% of revenue. That 4.4% is down about 140 basis points from our percent of system-wide sales that we experienced in fiscal 2006. Most of that has been as a result of our refranchising strategies. Our 2010 guidance reflected in the mid-10% range was including three key items that we talked about in our November call. One was an increase in our pension cost of about $3 million. We described it as being non-cash and just related to accounting requirements on pension cost, primarily because of discount rates.

We also talked about $3.5 million worth of incremental G&A cost in the '12 plan for the implementation and rollout of some restaurant technology. We also described about another $3.5 million of higher cost to support the anticipated ramp-up and the planned ramp-up in Qdoba growth. So, that $10 million was about 45 basis points in terms of increase in percent of revenue and roughly 30 basis points as a percent of system-wide sales. If you look at where we are thus far in first quarter -- those costs that I just described for the IT, the Qdoba, and the pension created about 30 basis points worth of increase in our cost as a percent of sales in Q1. And, if you look at where we are in terms of the system-wide sales run rate in Q1, it is pretty similar to what it was in fiscal 2011. Remember, however, that we did have the benefit of some mark-to-market adjustments in Q1 of this year which helped that out a bit.

One quick follow-up. Often -- in a lot of the recent quarters, there have been some one-time moving pieces in the margins for Jack in the Box -- the restaurant level margins. Either Workers' Comp, maintenance and utilities adjustments, uniform purchases. Were there any items that you'd like to call out in the first quarter results?

Not only would I not like them to call them out, there weren't any to call out. This was a remarkably clean restaurant operating margin quarter. The unusual item, I would say, would be the debit card fee, but that is not one-time. That will hit us until the regulation is changed. So, I think they're with us forever.

Thank you very much.

Chris O'Cull, SunTrust.

Thanks. Jerry, I wanted to follow up on earlier question. What is the margin benefit you are assuming in 2012 for refranchising more stores this year?

I think we said on the call last -- .

What we said on the last call is, if you look at what we sold in 2011, our margins going forward in this year would have been about 100 basis points higher. But we didn't call out the benefit of what we expect to sell this year, because it depends on the timing of those markets.

Exactly.

Just as a follow-up, how would you recommend we model the expected refranchising activity for this year?

Chris, that is a great question. Over the last two years, we have sold about 550 locations. We had deals in the works at all times. And because of the nature of those transactions, some would fall out of a quarter, some would fall into the quarter, but overall, they were reasonably easy to predict. With the 150 to 200 restaurants that we have remaining to sell, most all of which is in full markets, they become much more difficult to predict. So, the way that we look at it is, we look at it in terms of what do we think we are going to hit for the year? And not within the quarter. I think the -- trying to estimate what it's going to do quarter to quarter just creates a lot of extra noise. I think what our focus is on is on the operating EPS, because in what we expect to be two years, that will be what GAAP EPS will be also -- will be effectively what the operating EPS is. That is where our focus is. But again, for a full-year basis, we are comfortable with where our guidance is for our refranchising transactions.

Okay. One more here. Linda, would you provide us a little more color on the service improvements that really helped build the sales -- or recover sales? And then, maybe, what are the biggest service issues Jack still needs to address?

Sure. I'm going to let Lenny speak to that, since he is really leading the effort, Chris. So, he will speak to that.

Chris, I think probably the best way to describe it is that our speed of service is the place where we've improved the most. We also implemented, which we spoke about last year, a program that creates some urgency around fixing our service issues, mainly around friendliness, accuracy -- the basic transactional things that happen in the drive-thru and at the counter. What we have seen is -- and, we'll talk about this more next week -- what we've seen is an improvement from the time we started and even more accelerated improvement from about period 12 which are the end of our fourth quarter last year through today. So, we know speed of service is a big contributor, but we also know that the consistency around the way people are executing in the transaction is really driving the improvement that we are experiencing. We know that that is, along with the investments we've made in the re-images, contributing to the overall improvements that we are seeing.

Is that still the biggest service issue that needs to be addressed going forward?

Speed of service?

Right.

Yes.

Okay. Thank you.

Conrad Lyon, B. Riley.

Thanks. Also, I have a question regarding guidance. I think it was last call, Jerry, that you indicated that a 10 basis point improvement with the restaurant operating margin would benefit earnings by $0.01 to $0.02. Is that embedded in the guidance? Or, should we expect a cushion of, say, $0.05 to $0.10?

I think that is embedded in the guidance.

Okay. Follow-up. I know you relaxed the requirements for franchisees across the Jack in the Box system this year. Is that being reflected in the uptick in franchise development recently? And how has the pipeline firmed up?

I think that the incentive that you just described is reflected by the increase in franchise development. You may have noticed that we increased our total Jack in the Box opening expectations from what it was in the prior guidance while keeping firm on what the Company-developed looked like. We do believe that is having some impact. I will tell you also, just from a cautionary perspective, it is pretty soon. It's pretty early within this process. It may be too soon to draw any real conclusions from that.

Got you. Just a quick question here. How did the Jumbaco mix this year versus last year?

The Jumbaco? (laughter) You'd have to ask our customers because they are making them at home, and we don't have any control over that.

All right, fair enough.

Thanks.

Bart Glenn, D.A. Davidson & Company.

Thank you. I was just curious how price sensitive you're going to be as you wrap up the refranchising process? Would you consider waiting longer with the business recovering if you think there is an opportunity to sell the units later for even more attractive prices?

You'll see on Tuesday a much more clear picture of what we have left to sell, and how those restaurants are performing and what impact that would have to operating EPS going forward. I don't want to cover that off right now. What I will tell you is that the pricing, as it always has been, will be some multiple of cash flow. So, I would expect that we wouldn't really change the pricing philosophy on those. It will be just based upon how they are operating. But again, we will cover off on a lot more detail on that on Tuesday.

Thank you.

Larry Miller, RBC.

Hello. Speaking of price, you said -- I think you're running 3% -- just over 3% here in the first quarter with the Company stores. Is that a good number for the year?

That is what we are running right now. As we've said before, we've worked with a consultant to look for any opportunities and analyze opportunities to take additional price. So, we don't really disclose forward pricing.

Okay. Fair enough. I just want to follow up on one area and then ask a question. Back on those Qdoba stores that you bought, did you buy the whole market? I know you won't say what market. And also, can you give us a sense of what the AUVs are there? Thanks.

Sure. It was whole markets. It was actually two. And I had described that the restaurant operating margins were north of 20%, and the AUVs are north of $1 million.

Thanks. The question I had was on interest expense. Your debt balance is increasing. Can you give us some thoughts about what you plan to do with respect to your debt balance and thoughts on share buybacks? You have $100 million authorization out there. Is there any share buyback in the current guidance? Thanks.

Sure. Let me talk about the debt piece first. The debt -- you're right, it is a little higher than what we typically do, than what we typically carry. And it is reflective of the Qdoba acquisitions that we've had over the last six months or so, as well as an acceleration of our share repurchase program last year.

Last year -- between actually last year and early in the first quarter this year -- we repurchased about $200 million worth of stock, and the last $25 million to $50 million was at very attractive rates. So, that is included in the debt load right now. Debt-to-EBITDA -- we're a little north of two times debt-to-EBITDA as we sit here at the end of the first quarter. We expect that though, Larry, through refranchising transactions and other to be in the 1.5 to 1.75 times debt-to-EBITDA. More of a normalized run rate that we would have.

The share count that we are currently guiding to is reflective of share repurchases that we have made thus far, and anything else will be opportunistic. Remember what our capital deployment priorities are. It's first, growth-oriented CapEx, which would include Qdoba acquisitions, and then, of course, returning cash to shareholders. I think we have been pretty consistent with that philosophy and also pretty consistent with that execution of that philosophy.

Thanks. Perfect answer. Appreciate it.

Howard Penney, Research Edge.

I'm good. Thanks very much.

Jonathan Komp, R.W. Baird.

Thank you. I'm wondering if you could just provide a little more color on some of the various pieces that you think are really driving the improved comp trends at Jack in the Box. I know you've touched on some of these, but you've made significant investments and essentially completed the re-imaging, and also have an improving environment as a tailwind. So, maybe just qualitatively, could you help parse out the benefits from some of those various pieces?

Sure. Really, we focused on bringing back our customers and stealing market share a couple of years ago. It is really driving those sustainable sales by improving the overall experience. So let's talk about what that is. We talk about three pillars here at the Company. It's the environment. Our franchisees and the Company has invested in completing those re-images. Inside and out, we've also invested in new menu boards, new uniforms, and we are seeing the benefit in our dine-in business. We can absolutely see that we are getting more dine-in business as a result of our re-images.

Then when you look at service, Lenny talked about some of the service initiatives and putting in a program where we had immediate -- we provided immediate feedback to our operators to improve friendliness, order accuracy, cleanliness. And then, most recently, really focusing on speed of service, staffing levels -- especially the weekends and late night. We are seeing positive response to those service initiatives. And, we can see that from our VOG, which is Voice of the Guest, our internal surveys as well as our research -- external research.

Then, on the food category -- the menu category. It's a combination of two things. One is, improving those core products. We had coffee improvements, French fries, tacos, bacon, and then, most recently, our burger line -- reformulating the burgers to improve the juiciness, the texture, the flavor, and we had actually rolled out a new bun. We had a new saucing application as well. So, enhancing the core products. And, we are seeing a higher incidence of sales of each of those products that we have improved. Then, combined with that, we have promoted them in unique and compelling ways. So, things like the bacon shake to draw attention -- which went viral -- to draw attention to bacon at Jack in the Box. Things like our bundled deals like the Jumbo Deal that features the new, improved Jumbo Jack, the new and improved tacos, the new and improved French fries. All of that is designed to drive trial of those products that we've improved, but do it in a compelling and unique way that really provides some value.

We are really connecting with our consumers through improving our brand relevance, and that's through the social media that you saw how that bacon shake went viral. And then, you combine that with the marketing events that we have with some new products that have broad appeal, but they are unique to the category, as well as those bundled value offerings. I think the combination of all of those together is just working very well for us to bring back those customers and increase frequency. Does that help?

Thank you. That is very helpful. Just a follow-up. As you look to the balance of the year, I know one of your larger taco-based competitors has certainly at least set the stage for a rebound in trends behind some new product innovation for the year. I'm just wondering, given some of the geographic overlaps, is there any concern about competitive activity during the balance of the year and your ability to maintain the share gains that you have gotten?

This is Lenny. Let me speak to that a little bit. I think, first off, we are very confident in where we have invested in the business. That will continue to drive traffic, regardless of what the competitive set is doing. I think one way to look at what we're doing versus the competitive set is that when you look at the winners in the industry today, they're really focusing holistically in their businesses. We think Jack in the Box is reflective of one of those winners. But when you look at the individuals that are chasing one particular thing -- like potentially high capital investment in an image but nothing with the menu, or potentially new menu lines, but nothing with service. There is a disconnect for the guests, and they tend to be short-term, short-lived investments that don't really sustain sales for those competitors. That is not how we are going to compete, and we are not going to be concerned with the folks who are chasing one thing versus a holistic approach.

Thank you.

Brian Bittner, Oppenheimer.

Thank you very much. Can you just give us a sense of the variance of restaurant margins within the current Company-owned Qdoba system? The Qdoba business did about 13.5% restaurant margins in fiscal 2011, and you just said the recently acquired Qdobas generate north of 20% margin. So, I'm just trying to get sense of what percent of Company-owned Qdobas are generating those types of margins. Just trying to get a better handle on Qdoba's margin profile here.

I think you will be able to a much better handle on that after we meet on Tuesday. We're going to cover exactly that. But, just a little teaser -- higher AUVs generate substantially higher restaurant operating margin for Qdoba, and we will go through that perhaps in some level of detail for you on Tuesday.

Great. Excited for it. Thank you.

Jake Bartlett, Susquehanna.

Hello, thank you. I'm wondering how much the refranchising might be affecting Company versus franchise same store sales. Are we giving a boost to the Company because of the refranchising?

No. Jake, this is Lenny. We are not seeing a boost to Company -- other than the fact that when we refranchise, those are generally lower AUV groupings of stores. Other than that, we don't see anything that's driving that gap from the standpoint of Company experiencing something unique.

Okay. In the past, part of the equation for the refranchising was franchisees being able to operate them better. I think you had talked about, say, a 2% lift when they have gotten into the franchisees hands. Is that something that you are seeing? I'm not seeing it from the differential between the two, but maybe there are other factors that are affecting the differential between Company and franchise same store sales?

Maybe the way to think about that is that, in the past, when we refranchised stores -- essentially, the franchisees would take a little more price than what we would take. And they would also be a little more urgent about the operational improvements that need to be made. I think what you are seeing in the entire brand now -- not just Company or franchise -- is a sense of urgency around providing the guest with what they need.

And so, we don't see this huge gap in performance between Company and franchise when it comes to any one particular item. In general, I think what Linda said earlier is more indicative of the gap. It's just that we were able to make changes a lot faster than the franchisees. Our re-images were done sooner. We were able to make investments in the guest experience sooner than them. Which is sort of our role as a franchisor -- to sort of prove out conceptually that the investments will provide a return. And, we see that the franchisees are following suit, and in general, starting to see the same types of improvements in their businesses that we're seeing.

Great. On that front with the re-images, I think you are into year two on some of those Company-owned re-images. Can you talk about whether you are getting a lift in year two versus just in year one after re-imaging the stores?

We haven't shared a number related just to a re-image. What you're seeing in our numbers is really reflective of the investment in the entire experience. I think even if we did try to parse out what the re-images were driving in sales, the number would be so noisy that I wouldn't even be able to claim that it was accurate. The cleaner way to look at it would be just to say, image, menu, environment -- it is all adding up to what you are seeing today.

In addition just to prove that out is, I had indicated that across all of our major markets, we are seeing the kind of sales growth that we are experiencing as a system. Even in those markets that had the early re-images done more than two years ago.

Okay. Thank you very much. I appreciate it.

Operator, I think we have time for two more questions.

Peter Saleh, Telsey.

Thank you. Most of my questions have been answered. I just wanted to ask, it sounds like you're getting a more dine-in business with the remodels. Do those consumers tend to spend more of the average check higher, dine-in? And, if so, how much higher?

We don't provide specificity on exactly how much higher, but it is a higher average check, because they're getting beverages and some things that perhaps a drive-thru person -- or transaction -- doesn't include. Mind you, we still -- the vast majority of our business -- 70%, almost 70%, is still drive-thru business, but we have capacity in the dining room and we are seeing nice lift in the dine-in business.

Are you seeing it more lunch and dinner? Or is it across the board? At breakfast as well?

We are seeing breakfast and dinner.

Okay. Thank you.

Nick Setyan, Wedbush Securities.

I was hoping you could give us some more detail on the year-over-year franchise margin decline? How much of that was the lack of refranchising fees versus rent versus the higher re-image contributions?

Yes. Here is the way we look at that. If you go through quarter by quarter in fiscal '11 and also into fiscal '12, and you remove the items that tend to have the most variability with respect to timing, like the franchise fees which are related to when restaurants open from franchisees to when you have lease renewals and franchise fee renewals, and also when you sell them restaurants. When you remove that noise, and you also remove the timing of the re-image payments to franchisees over the last two years, what you see is that the franchise margins for last year actually were pretty tight. They were between 49.2% and 50.3%, so about a one point swing in any given [court], which is actually pretty tight.

What I will tell you is in Q1 of fiscal '12, the margin rate is at 49%, and while the margin rates look lower than what you might see out in the industry, that is driven by this other cash flow that most in the industry do not have, which is the rental stream. And, while that rental income stream has much lower margin rates, it generates a significant amount of EBITDA for the Company. We are going to provide a lot more clarity on that for you at our Tuesday investor meeting, and I hope that will answer whatever additional questions you may have on the franchise margin side.

Okay, thanks. Would it be possible to quantify to what extent that transactions are benefiting from the inclement weather?

We had really no weather difference at all in the first quarter. The second quarter -- early last year, second quarter, we had bad weather, primarily in Dallas. You all remember the Super Bowl activities down there and all the ice storms. We are rolling over that now. But, again, we typically don't call out weather as being a drag on sales in terms of quantifying it. It had a minor impact last year. We're getting the benefit of that this year.

Okay. Just a final question. You mentioned the accretion from the 25 Qdobas acquired after Q1. I apologize if I missed this, but what is the full year contribution to unit level margins and EPS from the 11 acquired in the quarter?

The 11 acquired in the quarter -- those were -- they were known at the time of our fourth quarter call back in mid-November. So, that was reflected in the guidance already. The update to the guidance has reflected -- is due to these additional 25 locations that we acquired earlier this week.

Got it. Thank you.

Thanks everyone for joining us, and we look forward to speaking to you next week.

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