Jack in the Box Inc (JACK) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. second-quarter fiscal 2013 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, Kathy, and good morning, everyone. Joining me on our call today are our Chairman and CEO, Linda Lang; Executive Vice President and CFO, Jerry Rebel; and President and Chief Operating Officer, Lenny Comma.

During this morning's session, we will review the Company's operating results for the second quarter of fiscal 2013 as well as some of the guidance we issued yesterday for the third quarter and the balance of the year. Following today's presentation we will 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. Jack in the Box management will be attending the annual B. Riley & Co. Investor Conference in Santa Monica on May 21 and presenting at the Jefferies 2013 Global Consumer Conference in Nantucket on June 18 and Oppenheimer's Annual Consumer Conference in Boston on June 26.

Our third quarter ends on July 7 and we tentatively plan to announce results on August 7 after the market close. And our conference call is tentatively scheduled to be held at 8.30 a.m. Pacific Time on August 8.

With that I will turn the call over to Linda.

Thank you, Carol, and good morning, everyone. Jack in the Box reported another strong quarter despite the economic headwinds that pressured consumers in January and February. Same-store sales increased 0.9% at Company Jack in the Box restaurants representing our 10th consecutive quarter of year-over-year sales growth. On a two-year cumulative basis, Company same-store sales were up 6.5% and improved by roughly 300 basis points in the last two months of the quarter versus the first month.

We saw sales begin improving after mid-February as gas prices dropped, tax refunds were processed and wage earners adjusted to higher payroll taxes. We continue to take market share according to NPD data. Our quarter two system same-store sales increase of 0.1% at Jack in the Box exceeded that of the QSR sandwich segment by 190 basis points with the Company gap even wider. In fact on a weekly basis Jack in the Box outperformed this segment for 11 out of the 12 weeks.

We continued to outperform the industry in the month of April and so far in this quarter sales are trending about the same as the last two months of quarter two. Same-store sales in the quarter were positive in all of our major markets with breakfast and late night again our strongest dayparts with the largest year-over-year increases.

Looking at our promotional calendar in the second quarter, we launched our Hot Mess campaign in early February, featuring a trio of limited-time offerings that leverage social media and the strength of Jack's personality to engage our guests. The campaign was centered on our Hot Mess Burger and also included Hot Mess potato wedges and a Hot Cinnamon Shake. Looking ahead we will continue to promote a mix of new products and value offerings, along with multifaceted promotional campaigns like Hot Mess.

During the quarter we enhanced our Voice of the Guest program at Jack in the Box. The new program provides significantly more diagnostic information and actionable feedback that will further enhance our ability to improve overall guest satisfaction. We attribute our ability to continue growing market share in this challenging environment to the investments we have made over the past few years to enhance our food, service and restaurant facilities. And we believe we have the foundation and catalysts in place to continue driving same-store sales and traffic growth.

Turning to Qdoba, same-store sales at Company restaurants were down 2%, in line with our guidance. While we don't usually like to blame weather, winter storms in many of our major markets negatively impacted sales by approximately 150 basis points as our Company restaurants saw nearly three times as many operating days impacted by snowfall than they did in the year-ago quarter.

Catering sales were a bright spot in the second quarter, up 11.5% on a comparable basis. With a focus on growing this part of our business, which accounts for approximately 6.5% of total sales at Qdoba, we believe we can leverage major calendar events like Memorial Day and the Fourth of July, as well as family celebrations like high school and college graduations, to boost sales in the third quarter. As a reminder it takes on average one catering order per restaurant per week to increase same-store sales by 1%.

Last week, we brought back our popular Mango Salad. We are currently promoting this seasonal favorite on radio as part of a new Qdoba brand radio campaign that began airing in several core markets near the end of the second quarter.

As we announced previously, Tim Casey was hired as Qdoba's President in March. Tim is passionate about the Qdoba brand and brings a wealth of experience and creativity to this position. He has been onboarding for the past seven weeks and has begun a comprehensive review of Qdoba's brand and growth strategies, structure and performance in various markets. He will be focused on developing a brand strategy and initiatives that will strengthen the connection between Qdoba and our core customers and leverage the equities that are unique to the brand.

We also recently promoted John Dowaschinski to Chief Development Officer at Qdoba. With his strategic and analytical capabilities and strong background in real estate and finance including many years at Jack in the Box and previous experience at The Gap, John is a key addition to Tim's team. The two will work closely together to execute Qdoba's growth strategy, focusing on high-quality, high-return new sites. John replaces Jeff Wood who left Qdoba to pursue an opportunity with another company.

On the subject of development, through the first half of fiscal 2013, Qdoba added 32 new restaurants, including 12 Company locations. We are encouraged by the performance of these new restaurants which are generating annualized sales volumes above our system average.

In closing, we are pleased with the solid results Jack in the Box reported for the second quarter and the strategies we are executing to continue taking market share from our QSR competitors and to grow free cash flow, earnings, and return on invested capital.

And while change will not occur overnight at Qdoba, we are confident in Tim's ability to reinvigorate the brand.

And now I would like to turn the call over to Jerry for a more detailed look at our second-quarter results and the outlook for the balance of the year. Jerry?

Thank you, Linda, and good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. Second-quarter earnings from continuing operations on a GAAP basis are $0.30 per share including $0.03 of losses related to re-franchising compared with $0.48 last year which included $0.21 of re-franchising gains and $0.02 of restructuring charges.

Operating earnings per share which we define as EPS on a GAAP basis excluding gains or losses from re-franchising and restructuring charges were $0.33 in the quarter versus $0.30 last year. Consolidated restaurant operating margin of 15.8% of sales for the quarter was 30 basis points better than last year's second quarter.

We were extremely pleased with Jack in the Box margins which improved 160 basis points to 17.1% in Q2 despite commodity inflation of 2.6% and negative same-store sales from the first month of the quarter. While same-store sales growth is obviously important to driving margin expansion, we get higher flow through on the incremental sales growth when our average weekly sales volumes are near $31,000 or roughly $1.6 million annualized as they were in the quarter. As same-store sales and volumes improved throughout the quarter, margins followed.

Let me give you an update on our Jack in the Box re-franchising strategy. During the second quarter we sold four Company restaurants in one of our seed markets and entered into a letter of intent to sell 16 restaurants in one of our four Southeast markets. We expect this sale to be completed by the end of the fourth quarter. Thus far in Q3 we have completed the sale of 18 restaurants in one market in Texas.

We have also recently decided to re-franchise more than 50 at additional locations and expect to sell approximately 40 of these restaurants by the end of the fiscal year. When we have completed our re-franchising we expect to operate roughly 400 Company Jack in the Box restaurants and the brand to ultimately be between 80% and 85% franchised.

We continue to expect our re-franchising strategy to have a positive effect on average sales volumes, restaurant operating margins, earnings per share, cash flow, and returns.

Our results continue to reflect the transformation of our business model and the annuity-like cash flows that franchising produces. In the first two quarters of this year we generated $14.4 million more in franchise revenues than last year and our rental stream contributed more than 35% of our consolidated EBITDA. Qdoba margins decreased 340 basis points to 12.2% in the quarter, primarily due to sales de-leverage which was largely weather-driven as well as commodity inflation and greater promotional activity.

In the second quarter, we bought back $14 million of stock at an average price of $34.28. As we said last quarter, given our growing free cash flow we would expect to be more consistently repurchasing shares on an ongoing basis. We plan to repurchase at least the $35 million remaining under the Board authorization that expires in November 2013 over the balance of the fiscal year.

As a reminder, we also have $100 million available for additional repurchases under the authorization expiring in November of 2014.

As far as commodities are concerned, overall, we now expect commodity costs for the full year to increase by approximately 2% to 2.5% compared with our prior guidance of 2% to 3% primarily due to lower expected inflation for beef and chicken. We now expect beef cost to be up approximately 3% for the year versus our prior guidance of 4%, but with higher expected inflation in Q3 and Q4 that we have experienced thus far this year.

As to chicken, we have contracted our price through the end of calendar year 2013 and are now expecting poultry prices to be 2% higher versus our prior forecast of 6% inflation.

Here is our current thinking on guidance for the balance of the year. We are expecting same-store sales growth at Jack in the Box Company restaurants in the third quarter to increase approximately 1% to 3% compared to a 3.4% increase last year and same-store sales at Qdoba Company restaurants in the third quarter are expected to be approximately flat versus a 3.3% increase last year.

On our full-year guidance, we continue to expect same-store sales for the full year to increase approximately 1.5% to 2.5% at Jack in the Box Company restaurants, but have lowered our expectations for same-store sales at Qdoba Company restaurants to be approximately flat to up 1% reflecting our year-to-date results.

We have raised our guidance for restaurant operating margin for the full year to approximately 16%, the high end of our prior guidance, reflecting lower commodity inflation and higher Jack in the Box margins partially offset by lower Qdoba margins.

SG&A as a percentage of revenue is expected to be in the high 14% range versus the mid 14% range. The increase is due primarily to greater anticipated incentive compensation resulting from higher expectations for full-year earnings per share and margins at the Jack in the Box brand. Impairment and other charges as a percent of revenue are expected to be approximately 70 basis points, consistent with our year-to-date results.

As to our weighted average shares outstanding, the increase in the share price has resulted in all outstanding options now being in the money. As a result, we currently expect our diluted share count for the full year to be roughly the same as last year depending, of course, on the share price.

Operating earnings per share, which we define as diluted earnings per share from continuing operations on a GAAP basis, excluding restructuring charges and gains from re-franchising, are now expected to range from $1.55 to $1.65 in fiscal 2013 compared to operating EPS of $1.20 in fiscal 2012.

Our full-year guidance would imply diluted earnings per share of approximately $0.67 to $0.77 in the back half of the year, which we would expect to be more weighted to the fourth quarter. Our EPS guidance excludes any restructuring charges. However, we are continuing our efforts to lower our cost structure and identify opportunities to reduce G&A as well as improve restaurant profitability across both brands.

In addition, following up on Linda's comments, we may incur additional restructuring charges resulting from Tim's review of Qdoba's market performance, overhead structure of brands and growth strategies.

As a reminder, 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 is about $0.09 per share, approximately half of which relates to Company operations depending on flow through and assuming stable cost, and the other half relates to franchise revenues, which are not subject to commodity costs or other inflation.

The impact of a 1% change in Qdoba Company same-store sales is approximately $0.02. And for every 10 basis point change in restaurant operating margin the estimated annual EPS impact is approximately $0.015 to $0.02 per share on a consolidated basis.

That concludes our prepared remarks. I would now like to turn the call over to the operator to open it up for questions. Kathy?

(Operator Instructions) Joe Buckley, Bank of America.

Thank you. Just asking the -- you to discuss just the difference between the Company-operated Jack in the Box comps and the franchise Jack in the Box comps. The compare was easier for the franchisees, but obviously the Company outperformed and just kind of curious what you think the drivers of that were -- was.

Joe, this is Lenny. Thanks for the question; couple things to think about. There's really two reasons why the compares were a little different for Company and franchise. The primary reason is really just the footprint of our remaining Company stores versus franchise. The Company is primarily located in California, Texas and the Southeast, not impacted by the weather and performing well against our internal initiatives. Franchise operations, much more impacted by weather in the Midwest primarily and so we certainly saw the impact there.

And then as we have stated on previous calls we do have a lot of internal initiatives that the Company ops tend to move much faster to initiate and then the franchisees follow suit. So, we do expect the franchisees will close the gap in those areas.

But certainly as we stated earlier we don't typically speak about weather, but we certainly saw the difference based on the footprint this time around.

Okay, and then just a question on decision to franchise more Jack in the Boxes. Could you just talk about the drivers of that and I know you mentioned it would be accretive all around, but maybe just elaborate a little bit on that if you can, too, please.

Yes, Joe, so let me just walk you through the impact of the decision. So, if we were to -- let me back up. These restaurants that we are looking at are cash flow positive and they generate reasonable AUVs and margins. However, having said that, when you look at the re-franchising of the ones that we just talked about in the second quarter, the one Southeast market and the additional locations that we just discussed that we will sell this year, on a pro forma basis if they were out of the Company footprint at the end of Q2, our Q2 margins would have been 17.9% versus 17.1%. So it's 80 basis points accretive to the restaurant operating margin but it is also accretive to operating EPS on a fully annualized basis.

So it seems to fit in with our strategy of continuing to operate the higher AUV locations across our footprint.

Okay, thank you.

Brian Bittner, Oppenheimer.

Thank you very much. So as far as you just kind of talked about [increasing] the EPS from this additional re-franchising. Is there any way you can put some numbers around that by any chance?

Well, we have indicated that all of our re-franchising activities over the last couple of years have been accretive. If you look at this depending on what you would expect to see with flow-through and reduction of G&A you are probably looking at somewhere in the neighborhood of $0.02 accretive to operating EPS, annualized.

And then you also touched on the discrepancy between the franchisee and the Company-owned comps, but the guidance for same-store sales for the June or for the fiscal third quarter, I think it was just for Company-owned. Is it fair to think that that is probably a good guidance range for the franchise piece as well?

No, I think when we talked about the Company stores and the guidance there we spoke about the continuing trends in the last two periods of the quarter into this quarter and that is really where we want to focus our energy. On the franchise side there may be some upside potential, but I think we should expect that to trend along the same lines as Company which will be following the last two periods of quarter two.

Then, Brian, just one addition to my response is when we sell the remaining three markets in the Southeast we would expect those to have much more benefit to our operating EPS going forward.

Okay, so this is kind of $0.02 above what that initial range was back when you originally talked about the Southeast market?

Yes, you can -- that is a pretty fair way to look at it, yes.

Okay. And lastly and I realize it has been seven weeks since Tim has been on the job, but at the same time it has been seven weeks. So clearly he has had an opportunity to take a look at the brand and maybe see -- take a step back and reevaluate.

Is there any initial glimpse or peek you can give us into the way that he is thinking or potential strategies going on there? We saw some more de-leverage in the margins this quarter. I understand the comps had a lot of weather problems, but the margins were pretty weak and just trying to get an understanding if there's additional strategy you can convey to us on Qdoba now or is it something that you would just rather wait and have Tim take a little more time?

Yes, Brian. Thanks for the question. And if you don't mind, I would like to address the question a little more broadly. So I won't give you specifics, that will come later, but I did indicate that -- and as you said he has been in position for, what, two months now, eight weeks or so. And so --- however, he clearly has a sense of urgency around the need to improve the performance at Qdoba. So he right away began a comprehensive review of the business and that includes, like we said, brand positioning work, consumer analytic work, organizational structure and looking at market performance.

And so we will have more to share with you later in the year, but we haven't stopped making improvements. So in the meantime we reengaged the field ops team. We have gone out with the roadshow and retrained everyone to enhance the interaction between our guest service employees and the guests that come into Qdoba and we are beginning to see that traction. We are beginning to see positive VOG results.

And then we have also reworked the marketing calendar, the marketing plan to reduce the level of discounting in those markets. So some of those initiatives have already begun and are underway and others are -- will follow based on Tim's review of the business and the brand.

Then just to follow up on the margin impact on weather and on discounting, Linda mentioned the discounting activities in the second quarter. The impact on margin for that we estimate to be about 190 basis points. So were it not for that it would've been just a skosh above 14% on the restaurant operating margin.

And that's the discount -- the discounting is 190?

Discounting and weather combined. And they were about even on that.

Thanks. Appreciate it. Thanks, everyone.

Jeff Bernstein, Barclays.

Great. Thank you very much. Two questions as well. Just first in terms of the shorter term with the re-franchising that you are doing. I'm just wondering whether there is any push from the franchisees. Do they have to do a certain amount of remodels on these stores or remodel their existing stores? Or is there any sort of incentive for them to grow incremental new units? I am just kind of thinking about the unit count for Jack and the mix of recently remodeled or whatnot. Kind of what the franchisees who are taking these new stores, what kind of promises they make going forward?

So these restaurants have all been reimaged and they have all new signage also. So there is no unusual capital requirements for the franchisees going forward. We typically do package up some development opportunities for the franchisees in those locations. This particular market, we've subdivided into four territories if you will, and we have -- we would expect to sell three out of those four territories this year with potentially for some new units going forward.

Are there incentives for them to maybe remodel their own stores, not the ones they are buying from you or to grow new units? Do you guys see that as an opportunity?

Yes. These are by and large new franchisees to the system. So it is not like they have additional locations that haven't been reimaged. And plus all of our system-wide units have already been reimaged.

Got it. Just longer-term you have talked about $2.00 in EPS by fiscal '14. So, one, has not been discussed today, but I am assuming that is still intact or whether there's upside to that with the most recent discussion on re-franchising and as it pertains to that, obviously, that would still be outsized earnings growth next year being that fiscal '14 is next year. It will be another 25% earnings growth.

So I was wondering as you look past that can you size up what you think the steady-state, the long-term earnings growth rate would be post all the kinds of re-franchising initiatives, how you think about the long-term growth for the business?

Yes, we will update the -- our long-term outlook as we get closer to the end of the year or, perhaps, in November as we typically do. I would say the re-franchising that we just announced and the improvement on the restaurant margins for the Jack in the Box brand, I would say just provides additional confidence in terms of the $2.00 particularly with what we are seeing with some underperformance on Qdoba now. That just gives some additional confidence going forward.

Got it. And lastly, Jerry, you mentioned, I think, the second-half guidance $0.67 to $0.77 and I thought you said it would be skewed to the fourth quarter. Did you mean the growth rate would be larger in the fourth quarter than the third quarter or the absolute earnings as well would be larger?

Yes. The absolute would be larger. And the only reason that we gave that clarity was we just noticed that the consensus had it skewed the other way. And so this is just a directional tip. Nothing unusual one quarter versus the other. We just wanted to give you what we were thinking in terms of that split.

So this third quarter wouldn't really have any earnings growth and the fourth quarter would seem to be huge year-over-year percentage growth.

Again, the only thing that we are trying to do is just give you some directional split about how we would see it, as the consensus had it pretty highly skewed the other way. I'm not saying that there is one -- I'm not saying that Q4 substantially outperforms Q3. I am just saying that we have it a little more heavily weighted in Q4.

Understood. Thank you.

Versus what you guys did.

Matthew DiFrisco, Lazard Capital Markets.

Thank you. Actually I have a follow-up while we are fresh on the EPS guidance. I guess can you go into that, what would be the drivers for that greater growth? I looked at your commodity guidance. You suggest that it gets increasingly harder against you in the back half of the year and then the comp comparisons a year ago doesn't look too different. I wouldn't assume that your comps are different.

Is it just purely share repurchase having a greater impact on the fourth quarter within your internal models that would drive the greater aggregate EPS dollars in 4Q?

You are -- again, let me go back to what I said earlier. The only thing we were trying to do with that language was to be helpful from how the Street had the split between Q3 and Q4. The Street consensus is not significantly different from where our full-year guidance is. We are just trying to give you some directional between Q3 and Q4 split. There's nothing magic about that. It is just how we are seeing it. So you can take that for what you think it is worth.

Understand. I don't mean to be pressing you on -- I'm just curious of -- it doesn't seem to correspond though with your margin guidance so I am missing the other side of the equation that would offset the rising commodity costs in the back half of the year to a greater EPS contribution in 4Q.

Sure. Let me give you a couple of things on that then. So you are correct about the share buybacks. We announced that we would --- that we were going to buy back the stock and we would expect to be in the market. Because of just the math on the weighted averaging of that, you would expect stock buyback we would enter into in the third quarter to be more beneficial into the fourth quarter of weighted average share. That is a piece of it.

However, if you just look at the restaurant operating margin I just want to go back to Q1 versus Q2 sequential. And to reiterate what I had said in my prepared remarks about this notion of weekly store average sales that are $31,000 or above. So we had -- in the first quarter, we had 17.1% margin, Q2, 17.1% margin on the Jack in the Box brand. Q2 only had a 0.9% comp. Q1's comp was higher than that. And even with a 2.6% inflation in Q2 versus modest deflation in Q1, we achieved the same level of margin. The reason for that is the weekly average PSAs were up about $550 per restaurant.

So when you think about that level of improvement store to store, virtually everything except for the food and packaging cost is fixed. So even at $550 extra a week, you are not adding a ton of labor into that. That would be the other thing that might be somewhat variable but it is not completely variable. Everything else flows right through. So that's what -- that also gives us confidence for the improving restaurant operating margin assuming that those average weekly volumes at Jack in the Box stay above the level that I just described.

Excellent. That's very helpful. I appreciate that. My original question was with respect to expansion for the Jack in the Box concept and I guess when we look at reimaging and re-franchising coming to a conclusion at the end of this fiscal year and looking into 2014, I realize you haven't gone through yet or don't want to disclose your long-term growth plans, but would it be correct to presume that we would see a meaningful step up most likely, given what you're seeing in the pipeline for franchise development versus say the sub 20 store openings that we have had for the last couple of years? Could we see that get back into a more meaningful 30 or 40 store opening schedule from the franchise side?

So a couple things there. Let me just give you some pluses and some minuses on that. So on the plus side, the fact that we have announced a sale of restaurants in one market in the Southeast, another market that we sold earlier this quarter in Texas and then the other 50 plus units we have identified for sale, there could be some opportunities in one or more of those markets for additional franchisee growth going forward. Also as we continue to sell our seed markets, this also provides additional opportunity for growth which is part of that strategy. So those are the pluses.

On the negative and is -- or I would say maybe not so much negative, but on the delay of that while the remodels and the signage are complete, franchisees are working through the additional leverage that many of them took on to affect those reimages and those signage improvements. Plus they were also not paying full cash when they buy a particular market or a group of restaurants. So as we get a little more seasoned beyond the re-franchising strategy we would expect them to have more capital to grow, but I would not expect that necessarily in 2014.

Okay. As just a last follow-up to that, is there any change to your -- is there a large swath of franchisees that might be coming up to a new royalty rate that could give you a little bit of earnings pop or rent or royalty rate given their vintage of yours?

No. The -- we generally do not have variable royalties. We do in some instances but it is a minor piece of that. I would not expect to have increasing royalty rates as franchisees renew.

Got it. Thank you.

Andy Barish, Jefferies.

It is actually Alex. A question on the Jack in the Box same-store sales. Seems like the outperformance versus your peers has accelerated a little bit. Do you have any of the details going back on that gap versus in recent quarters?

I think the way to look at the outperformance is really just based on what we are doing in the marketplace versus what we see our peers doing. Our peers are sort of screaming from the rooftops value and $0.99 and Jack in the Box continues to do bundles as a way of promoting value and then we also promote our interesting sometimes a little different products and promote it a little differently than our peer group does similar to what you saw with the Hot Mess.

So I think it is really just a reflection of us getting maybe an above average share of voice out there based on the way we are promoting and the type of items that we are promoting and I think it is paying off for us.

And I will say, Alex, that gap has widened. This was I think the widest gap we've seen in the last five quarters.

Thanks. And, Jerry, I had a clarification on the existing long-term outlook regarding G&A just whether you are still looking at that 3.5% to 4% range for fiscal '14 and it is a pretty big -- I guess it implied a pretty meaningful decline in the G&A dollars. It just seems like a big contributor to hitting that $2.00 mark in fiscal '14. If you had any thoughts on that.

Yes, I would say it is a contributor. I am not sure that it is the key contributor to that. So if you were to -- if we didn't improve -- if we didn't generate any additional sales from where we are today, you are probably looking at a $10 million to $15 million reduction in the overall cost on the G&A line. However we are anticipating we will continue to grow sales volumes.

So on the cost side you are probably looking at something just south of $10 million that we would need to get from an overall cost reduction going forward. And some of that is going to come on the restructuring that we've already completed. You may recall that we talked about a $12 million annualized reduction in G&A cost, related to our early-retirement program and our restructuring. And we said we were going to get around $7.5 million of that realized in fiscal '13 as a result of a number of the early retirees were here for much of the first quarter. So we will get that wraparound of call it $4 million anyway.

Additionally, we continue to look at the opportunities that we have continuing with the integration work and the shared services between the Jack in the Box brand and the Qdoba brand. We did a lot of that thus far. Some of that just takes a little longer but we are continuing to look at that.

And then we also mentioned the possibility of some additional restructuring charges both related to the ongoing work that we have to get down to that 3.5% to 4% G&A. I want to remind the Street that we were still working on those activities. We wanted to reiterate the restructuring charges going forward. But then also Linda mentioned what Tim is working on with the Qdoba brand, so we would expect some opportunity there also. Does that help?

Yes, that does. Thank you.

Keith Siegner, Credit Suisse.

Linda, I have a question about Qdoba. Considering -- even weather aside, right? We had sales deceleration, we had margin deceleration actually and yet you are still planning on double-digit unit growth for that concept this year. It came down actually even slightly less than it did for Jack in the Box on the Company side.

I guess what I am wondering is given some of these challenges, given what sounds like is a pretty holistic review that's about to take place under Tim, I am curious as to why maybe you don't back off a little bit more near term on the unit growth on Qdoba while you sort out what you plan to do with the brand? Any thoughts there would be helpful.

Yes, I think we mentioned that actually this year's new openings, fiscal '13, are performing above the system average. So that is above what prior year new openings for Qdoba were. And we have really refocused our efforts in that area and we are much more selective on the markets that we are going into. We have just with John Dowaschinski in the position, we have -- he has led the effort to rebuild the site selection model and that is almost operational, it's pretty close to being operational. So that will help us to even focus more on really prioritizing and making sure that we are opening only the high-quality high returns. So it is more about quality and to your point it is less about quantity.

So we will be taking a look at that and we will certainly be giving you more information about that later in the year. But that is something that we are certainly reviewing at this point.

I just wanted to add it in; we are much more focused than -- we are much more focused on generating profitable return-oriented growth than we are just generating growth. So we are clearly looking at that and that is the strong filter that we are using in terms of what locations we are opening up and in which markets.

One follow-up question then. You mentioned double-digit growth in catering for the brand at the macro level. It was interesting this quarter now in the Denver market, at least, has Chipotle's catering effort rolled out. I'm just curious if you could talk about -- I know it is one specific market but if you could talk about any trends you might have seen in that market and how they differed versus the national catering growth that would be great. Thanks.

Yes, we have not seen an impact as a result of Chipotle's catering rollout in Denver in particular.

Thanks.

Larry Miller, RBC.

I also had a couple of questions. You guys have transitioned to the asset light model and that asset light model [argues] for taking on some more debt. And we do have historically low rates. You could theoretically take on a lot more debt and do a very large buyback. What are your guys' thoughts about that?

So, Larry, if you look at where our current debt load is on a debt to EBITDA, we are pretty much in line I think where a good portion of the industry is. I saw a report that came out the other day that there was a regression line about where the optimal debt level was and we were the only ones that were touching the line there. So I think we are pretty happy with that. I think one thing though that is important to know is that while it looks low on a debt to EBITDA basis, on an adjusted debt to EBITDAR basis, it is a little greater than four turns there and so we look at not just the debt to EBITDA, but also debt to EBITDAR.

So I'm not sure we will do anything in terms of ramping up debt meaningfully.

With respect to share repurchases, let me just mention that our existing -- or our new credit facility provides a basket for up to $500 million worth of additional share repurchases. And to your point, it is asset light and we are generating a fair amount of cash flow. So we will expect to continue to be very constructive with respect to our share repurchase program and we just talked about what we had planned to do on the remainder of this year, at least on a minimal basis, at least using the remaining of the $50 million authorization expires in '13 and we are not suggesting that we may not dip into some of that that we have authorized through 2014.

Thanks, and then Linda, I just want to follow up on that question before about Qdoba growth. Maybe the future and what do you see as some of the major changes in real estate strategy that you -- you said high-quality sites with high return. What does that actually entail? Can you give us a little preview?

Well, I think we've talked, Larry, earlier about the fact that we do much better when we have brand awareness in the markets, and so in markets where we have gone in and we have penetrated the market and have decent presence we do very well. So we have been focusing on filling in those markets versus trying to enter new markets that have very, very competitive landscapes. So that is what we are looking at.

We also have a couple of other initiatives and other strategies that right now we are --- I'm not comfortable sharing for competitive reasons, but we are -- those strategies and that approach is being developed as we speak.

Could you maybe give us a sense of how much greater in magnitude the penetrated markets are in volume versus the less penetrated markets?

Yes, we don't provide that level of information in terms of -- but there is a dispersion. There is a variance in terms of AUVs and there has been a variance in terms of performance as well.

Larry, let me just add to that there. And we all agree here with the Company that we have a significant opportunity to profitably grow Qdoba, but I think when you look at it today Qdoba represents year-to-date through Q2 about 13% of our EBITDA. Our rental income stream on a Jack in the Box re-franchising is almost three times that.

So I just want to give some perspective about where the cash flow generation is today. I think Qdoba creates a great amount of upside. But today, rental income is almost three times higher cash flow generator.

Right, but that said, there is still opportunity. It is still a great brand. We have a lot of confidence in the brand and so there are still lots of opportunities to grow Qdoba. We just have to be very selective on those markets and those sites within those markets.

Great. Thank you. Thanks a lot.

Jeff Farmer, Wells Fargo.

Great. Good morning. I just have a handful of follow-ups for you guys.

First up would be with the additional Jack in the Box re-franchising planned over the balance of the year, where could that 16% restaurant level margin move to in FY '14 on a pro forma basis? So I guess said differently, I know it is a difficult question to answer, but what is the incremental margin tailwind from that re-franchising that you guys could see next year?

Well, we indicated that on a -- in Q2 it would've had an 80 basis point positive impact on that. I don't -- and that was on Jack in the Box, but I don't want to consolidate it by the way, so the Jack in the Box margin just for modeling is probably worth about 70% to 75% of the total. So you would look at a 50 to 60 basis point improvement on a consolidated basis, but unless there is significant commodity or other inflationary actions I would expect that to flow through.

Okay. That makes sense. And then just drilling down on Qdoba same-store sales looking at this closely at least on a two-year basis, you had a six quarter run of what looks to be something like 8% to 9% to your same-store sales. That number has fallen to about 2% to 5% over the last three quarters. Absolutely acknowledge that you saw some weather in the most recent quarter, but is that a function of new restaurants entering the comparable store base sort of underperforming greater development in less established markets, some other competitive dynamic that you guys can just give us a little bit of help on, shed more light on what you think is going on with the core Qdoba same-store sales number?

Yes, I would say this is, Jeff, I would say it is sort of all of the above. It's difference in market performance. It is some underperforming marketing events. It is weather, it's -- so it is all of the above. It is rolling off. We were more aggressive on price so we rolled off a couple of points of price that we didn't take. That's part of it.

If you -- final question. If you look out at the next two quarters of 2013 and get into 2014 and you think about the new stores, the comparable stores or the stores that are about to enter the comparable store base, the stores that are on tap, is that a pretty picture or do you expect to see some same-store sales pressure as some of these restaurants that have been opened over the last two to three years are beginning to enter the comparable store base? How are they holding up? Will they be a tailwind, headwind, neutral, how should we think about that?

You are asking about Qdoba?

Yes. I'm sorry.

Yes. It should be more of a positive because as we said the new restaurants that we've opened this year are outperforming the system so that should be a positive.

Okay. I did not know if there was a honeymoon issue or anything like that. So, okay.

No. No. We generally don't see that at Qdoba.

Thank you.

John Glass, Morgan Stanley.

(technical difficulty) Bartlett on for John Glass. I had a follow-up, first, on the incremental re-franchisings that you are expecting. Did I hear right that 40 of them are going to be in 2013? And wondering how that is affecting the restaurant margins, the 16% restaurant margin guidance.

Yes, good point. 40 should be in 2013. Fourth quarter I would say and late in the fourth quarter I would expect them to not have any impact to this year at all. We have a fairly extensive training program that franchisees have to get through when they come into the system, so it is just not possible to get the transactions done before that.

Okay. And the 16 units in the Southeast that are close to being under contract or you are nearing it, you still expect those in the fourth quarter? I ask because it sounds like you expect the others in that market in the fourth quarter as well yet they are not under contract or not as close. They are all happening in the fourth quarter to your guidance?

No. I would expect just this particular market to occur in the fourth quarter. I would not expect the remaining three markets in the Southeast to be sold this year. We still have them for sale. We are still marketing them. We like the momentum that we have now, with selling one market in the Southeast, but we don't anticipate that they would be sold by the end of fiscal 2013.

Am I right that that is a little different than what you had expected or what we had been talking about in the last quarter? Has it been maybe a little longer to sell those than you had expected?

No, I don't think it is inconsistent with what we've talked about in the past. We said that they were in the -- that we assume that they were out of the -- excuse me they would have been re-franchised in the $2.00, but I also said for 2014 -- but I also said they are in there but I don't think we need to have them sold to hit the $2.00. And we are still comfortable with that.

Got it. Got it. And then just on Qdoba, in 1Q you talked about margins were hit because promotions were a little too aggressive. It looks like when I look at COGs delevered more in 2Q suggesting that you were perhaps more aggressive in 2Q. Wondering when, how that happened, what the approach was in 2Q and maybe how it is shaping up. I'm wondering whether this is delaying the plan to put your new marketing message out in the third and fourth quarter; where you are in that iteration on the promotional balance at Qdoba.

Yes, Jake, so actually the weather is what created the additional de-leverage in Q2 versus Q1. The promotional activity was actually a little softer in Q2 than it was in Q1. Perhaps not meaningfully so, but less impactful. Weather was almost 100 basis points.

So does weather affect the food and packaging costs? I'm just looking -- I think that delevered about 130 basis points versus 100 basis points in the first quarter.

Food and packaging I believe was spot on Q1 versus Q2. And on Qdoba.

Okay. We can talk about it afterwards but I'm just talking about year over year and the change in margins, but I -- so in terms of what you have learned in the promotional -- do you think you are nearing a -- the correct balance?

Yes, I believe we are. We have pulled off there -- on the promotional we are testing different promotional messaging and a level of discounting so we have fine-tuned that.

Okay, okay. And then last question real quick. Competitors are promoting value and you've had some large competitors taking some of the higher end products off. How is your mix, how was your mix in the second quarter in terms of premium versus value? Any big shift you are seeing there and I guess how you are responding to the competitive environment.

Jake, are you -- just want to clarify are you speaking to the Jack in the Box brand not Qdoba?

Yes, I am. Sorry. Yes, I am.

Yes, so I think what you are seeing from us is a response that is pretty consistent with what you have seen from us in the past. We tend to go down the lane of bundled deals for value which tend to protect the margins a little bit and allow us to have a competitive offering out there without negatively impacting our business.

And keep in mind, we have got a base of franchisees now that's almost 80% of the base and we certainly don't want to have a strategy that is perpetually negatively impacting their margins and sales. So we will continue to go down the lane of bundled value which is really, we think, the most responsible way to do it, and probably most consistent with our brand personality because it allows us to put a lot of creativity behind the things that we put in the marketplace.

And then, on the premium side you will see us come out with new items and LTOs periodically, similar to what you saw with Hot Mess. But again we'll do that with our own flair and personality that brings a lot of attention. As I said earlier, we have seen this consistently where we do get recognized in the marketplace more so than the competitors that spend significantly more on advertising. So we think that is the right approach for us and that will be the response that you can expect from us versus all of the value messages from the competition.

Got it, got it. Makes sense. Then real quick just a little preview to the 10-Q, but if you could give price mix in traffic for the brands or I guess just check in traffic into Q4 for both brands. That would be great.

Let me find those. I think I can get that real quick here. So in terms of price it was very consistent with Q1, Jake. On Jack in the Box our pricing was 2.7 versus 2.6 year to date and our Qdoba was actually a little lower, 1.4 versus 1.8. We did have negative mix, though, at both brands.

Okay. And then what was traffic for both brands?

Traffic for Jack was slightly negative down 70 (multiple speakers) 70 basis points and we don't disclose the Qdoba traffic numbers.

Okay. Great. Thanks a lot. I appreciate it.

Grant Robinson, R.W. Baird.

Thanks. It is Grant Robinson on for David Tarantino. Maybe perhaps can you update us on speed of service initiatives at Jack in the Box? And if that is something that you guys continue to make progress on or tighten the gap or what are your expectations for that going forward from here as well?

Yes, Grant. Thanks. This is Lenny. What we have seen is continued progress with speed of service both with franchise and Company locations. We continue to focus on that at the market level because the things that need to be focused on aren't necessarily the same, market by market or restaurant by restaurant. So we tend to use a team approach by market to create focus on a lot of basic blocking and tacklings that have continued to drive the improvement. And then here at the corporate office we have our operations support group continuing to look at ways to drive efficiency into the operation whether it be the back of the house kitchen operations or potentially even the builds or formulation of the food.

So we will continue to focus in both those areas that we can continue to make progress. So we are happy with what we see because it is allowing us to maintain the improvements that we have seen in the order accuracy and quality of food while also improving speed. So we will be very careful to move at a steady rate that allows us to just maintain those equities that we have.

So we will keep you posted, we are closing the gap on the competition. We continue to meet our own internal expectations.

Operator, we have time for one more question.

Conrad Lyon, B. Riley.

Make it a quick one here. Qualitative one on Qdoba. The choppiness with same-store sales seems to coincide with Gary Beisler's retirement. Might there be any kind of disruption you think because of, if you will, turnover and new initiatives coming in?

No. I don't believe it's related to that. No.

Okay. Fair enough. Thank you.

Thanks, everyone, for joining us and we will speak to you next quarter.

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