Jack in the Box Inc (JACK) 2013 Q3 法說會逐字稿

Good day and welcome to the Jack in the Box, Incorporated third-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, Tonya, and good morning, everyone. Joining me on the call today are 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 third quarter of fiscal 2013 as well as some of the guidance we issued yesterday for the fourth quarter and fiscal 2013.

All of our comments this morning regarding per-share amounts will refer to diluted earnings per share. And 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 presenting at the Wells Fargo Securities 2013 Retail and Restaurant Summit in Boston on October 1. And our fourth quarter and fiscal year ends on September 29, and we tentatively have planned to announce results on November 20 after the market close. Our conference call is tentatively scheduled to be held at 8.30 AM Pacific time on November 21.

With that, I will turn the call over to Linda.

Thank you, Carol, and good morning. Jack in the Box reported another solid quarter, and we continued to make good progress on refranchising and other key strategic initiatives, including taking actions to strengthen our Qdoba brand. During the third quarter, same-store sales increased 1.2% at Company Jack in the Box restaurants. On a two-year cumulative basis, Company same-store sales were up 4.6%.

Company restaurant same-store sales growth for the quarter exceeded that of the QSR sandwich segment by 1% for the comparable period, with systemwide same-store sales growth just slightly below the segment, according to NPD data. Breakfast and late-night were again our strongest day parts, posting the largest year-over-year increases. Traffic for the quarter improved sequentially from the second quarter, with transaction growth essentially flat compared with a year ago.

We introduced a number of new products across multiple platforms during the quarter, including blueberry muffin oatmeal, a chipotle chicken club sandwich, and a pina colada smoothie. Late in the quarter, we launched several limited-time offers that we're promoting during our summertime Go Big campaign, including Jack's Big Stack burger and an extension of our distinctive waffle breakfast sandwiches, the Big Waffle Stack.

During the quarter, we also expanded our beverage platform with iced coffees which feature a unique blend of ingredients and have been popular additions to our permanent menu.

We attribute our ability to grow 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 the foundation and catalysts in place to continue driving same-store sales and traffic growth over the long run.

The restaurant industry has seen some softness in sales in June and July, and our fourth-quarter guidance reflects the recent broader industry trends. Company Jack in the Box same-store sales were down in July, which was our toughest compare of the quarter. We've made some adjustments to our promotional calendar to emphasize value bundles in this environment, like the $3.99 Really Big Chicken Sandwich Combo that we launched last week. And we expect Company Jack in the Box same-store sales to be slightly positive in the fourth quarter.

Turning to Qdoba, our Company-operated restaurants reported a same-store sales increase of 0.5% in the third quarter. On a two-year basis, same-store sales accelerated more than 200 basis points, increasing 4.3%, with 100 basis points of lower pricing.

During the quarter, our catering business increased 7.5% versus last year, and average check increased 10.5% over Quarter 2. In June, we announced plans to close 67 Company-operated restaurants following a comprehensive review of market performance. We closed 62 of those locations prior to the end of the third quarter. We transferred 3 Qdoba's to a franchisee in the fourth quarter, and 2 locations will close when their leases expire. We expect these closures will have a positive impact on the performance of our Qdoba brand. By optimizing our Company footprint, we believe we can be more effective in focusing our advertising and marketing resources to support existing and planned restaurant in markets where we have high levels of brand awareness, and we expect to provide an even better dining experience for our guests as our operations teams concentrate their efforts on supporting these markets.

Concurrent with our review of market performance, we are also in the middle of a comprehensive brand review. This will help us determine how to best position Qdoba and develop a strategy to implement key initiatives to further differentiate the brand and strengthen our customers' connection to the brand. We expect to have the consumer research and brand strategy and positioning work completed by the end of the calendar year and have engaged Boston Consulting Group to assist in these efforts.

The results of our brand strategy and positioning work will inform us on initiatives ranging from restaurant design and menu innovations to our loyalty and catering programs.

In closing, we are holding our own in a challenging environment. We have effectively transformed our Jack in the Box in recent years and believe the investments we have made will help us weather the current consumer slowdown. We believe the steps taken in the third quarter to strengthen Qdoba, coupled with the brand strategy and positioning work currently underway, will result in higher future earnings, average unit volumes, restaurant operating margins, cash flow and return on invested capital.

Now I would like to turn the call over to Jerry for a more detailed look at our third-quarter results and outlook for quarter four. Jerry?

Thank you, Linda, and good morning. Third-quarter earnings from continuing operations on a GAAP basis were $0.38 per share, including $0.02 of losses related to refranchising, compared with $0.28 last year, which included $0.05 of refranchising gains and $0.16 of restructuring charges.

Operating earnings per share, which we define as EPS on a GAAP basis, excluding gains or losses from refranchising and restructuring charges, were $0.41 in the quarter versus $0.39 last year.

The results of operations, impairment charges and lease obligations for the 62 restaurants we closed during the quarter are included in discontinued operations for all periods presented. Three of the restaurants have been sold to an existing franchisee in the fourth quarter and the remaining two restaurants are expected to close when their leases expire prior to the end of the calendar year. The results of operations and impairment charges related to these five restaurants are included in continuing operations.

Our 10-Q, which we expect to file this week, will include a summary of the unaudited quarterly results related to the closures for this year and all of last year, but I thought it might be helpful to summarize the pro forma impact of the 62 closed restaurants on our reported results.

There is minimal impact to our reported same-store sales, but all historical Company and system same-store sales have been adjusted to reflect the closures. Company AUVs improved by about 10%, from roughly $1 million to $1.1 million. Total sales related to the 62 restaurants were approximately $37 million on a trailing 12-month basis, and $28 million year to date through Q3 this year versus approximately $27 million year to date through Q3 last year.

Qdoba restaurant operating margins improved by an estimated 410 basis points in the quarter and 470 basis points year to date as a result of their closures. This compares to last year's impact of 460 basis points and 490 basis points in the quarter and year-to-date periods, respectively.

On a consolidated basis, restaurant operating margins improved by an estimated 110 basis points in the quarter and 120 basis points year to date versus 100 basis points in both periods last year.

EPS from continuing operations improved by about $0.035 in the quarter, resulting from the closures again, and $0.12 year to date as compared to $0.02 and $0.08 in last year's quarter and year-to-date periods, respectively.

Our adjusted operating EPS for fiscal 2012 improved from $1.20 to $1.31, and Q4 2012 operating EPS improved from $0.27 to $0.31. Adjusted operating EPS for Q1 and Q2 of 2013 was $0.59 and $0.37, respectively. Adjusted operating EPS for Q1 and Q2 of 2012 was $0.29 and $0.33, respectively.

Losses from discontinued operations for the third quarter of fiscal 2013 included pretax charges related to the Qdoba closures of approximately $36.7 million, including approximately $22.7 million in non-cash impairment charges and approximately $11.4 million in charges related to future lease obligations, net of reversals for deferred rent and tenant improvement allowances and employee severance costs.

The pretax loss from operations related to these restaurants of approximately $2.6 million in the third quarter of fiscal 2013 and $8.8 million in the year-to-date 2013 period is also included in discontinued operations. We estimate the cash portion of the exit cost to be about $9.5 million, net of tax.

Losses on the sale of Company-operated restaurants in the third quarter of fiscal 2013 totaled $1.5 million or approximately $0.02 per diluted share, including a pretax loss of $1.1 million related to the sale of the three Qdoba restaurants that was completed in the fourth quarter. Hopefully, that gives you a good recap of the impact of the Qdoba closures on the P&L. I know there was a lot to cover there, so please don't hesitate to ask questions on that, and I will be happy to go through that again if you need me to.

Moving on to our Jack in the Box refranchising strategy, we sold 18 stores in Beaumont, Texas, during the quarter. Thus far in the fourth quarter, we have completed the sale of 27 restaurants for approximately $14 million in cash, and we expect to sell approximately 29 restaurants by the end of the fiscal year, including 16 restaurants in one of our 4 southeast markets. This would leave us with roughly 60 restaurants that we have targeted to refranchise by the end of fiscal 2014, including the remainder of the southeast. When we have completed our refranchising strategy, 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 refranchising strategy to have a positive effect on average sales volumes, restaurant operating margins, earnings per share, cash flow and returns. So let's take a look at the impact that refranchising should have on our margins going forward.

We estimate our pro forma restaurant operating margin for the Jack in the Box brand for the third quarter year to date, when excluding the restaurants we refranchised in the second and third quarters and the approximately 56 restaurants that we plan to sell in Q4, would have been approximately 17.9% or about 80 basis points higher than our reported Jack in the Box margin, and our Company average unit volumes would have been about $1.7 million. Consolidated restaurant operating margin of 17.9% of sales in the quarter was 40 basis points higher than last year's adjusted third-quarter results.

We were pleased with the Jack in the Box margins, which improved 110 basis points to 16.9% in Q3, despite commodity inflation of about 3%. While same-store sales growth is obviously important to driving margin expansion, we get higher flowthrough on the incremental sales growth when our average weekly volumes are near $31,000, as they were throughout the quarter.

Qdoba margins decreased 270 basis points to 20.6% in the quarter, primarily due to sales deleverage as we had very little pricing in the quarter, commodity inflation of approximately 1.9% and product mix changes, as well as increased staffing levels. As we said previously, given our growing free cash flow, we would expect to more consistently repurchase shares on an ongoing basis. To that end, in the quarter, we bought back nearly $51 million of stock, and year to date through the third quarter, we have returned over $92 million to shareholders. This leaves $84.7 million remaining under the $100 million stock buyback program authorized by our Board that expires in November 2014. And also, last week, our Board authorized an additional $100 million for share buybacks that expires in November 2015.

As far as commodities are concerned, overall, we now expect commodity costs for the full year to increase by approximately 2%, and we now expect these costs to be up approximately 2% for the year, with expected Q4 inflation to be about 4%.

And here is our current thinking on guidance for the fourth quarter and full year. We are expecting same-store sales growth at Jack in the Box Company restaurants in the fourth quarter to be slightly positive compared to a 3.1% increase last year, and as Linda mentioned, comparisons ease as we move throughout the quarter.

Same-store sales at Qdoba Company restaurants in the fourth quarter are expected to increase approximately 1% versus a 1.1% increase last year, with substantially less pricing.

As to our full-year guidance, we have raised our guidance for restaurant operating margin for the full year to approximately 17% to 17.5%, reflecting the benefit of the Qdoba closures. We expect to open 65 to 70 new Qdoba restaurants, of which approximately 35 are expected to be Company locations. The decrease from our prior guidance reflects a delay in some restaurant openings until early 2014.

Operating earnings per share, which we define as EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains from refranchising, are now expected to range from $1.72 to $1.78 in fiscal 2013, compared to operating earnings per share of $1.31 in fiscal 2012. This implies a $0.35 to $0.41 per share Q4 operating EPS (technical difficulty)

Please stand by. Your conference call will resume momentarily. Please stand by, your conference call will resume momentarily.

Your line is back in conference. You may resume.

Apologize for the call dropping. We're going to have Jerry reread the full-year guidance, because we're not exactly sure where the line dropped. So sorry if that is repetitive for some folks, but he is going to reread the full-year guidance, please.

We apologize for that. We may have cut our IT costs a little too much here in the quarter. We apologize for the technical difficulties here.

Let me start back over again with our full-year guidance. We've raised our guidance for restaurant operating margins for the full year to approximately 17% to 17.5%, reflecting the benefit of the Qdoba closures. We expect to open 65 to 70 new Qdoba restaurants, of which approximately 35 are expected to be Company locations. The decrease from our prior (technical difficulty)

Please stand by, your call will resume momentarily. Please stand by, your call will resume momentarily.

Sir, your line is open. Please resume.

Tonya, can you hear me now?

I sure can.

Okay, we're going to go back to Jerry. We truly apologize for the delay here. Jerry is going to go back to the EPS guidance for the full year.

Okay, thank you, and again, our apologies. Operating earnings per share, which we define as diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains from refranchising, are now expected to range from $1.72 to $1.78 in fiscal 2013, compared to operating earnings per share of $1.31 in fiscal 2012. And this implies a $0.35 to $0.41 Q4 operating EPS versus $0.31 last year.

As I mentioned earlier, the full-year impact of the Qdoba closures added $0.11 to our previously reported results for last year.

The increase in our guidance for operating earnings per share is due primarily to the Qdoba closures. 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.

This concludes our prepared remarks, but before we open it up to questions, I would like to turn the call back over to Linda Lang. Linda?

Thank you, Jerry, and thank you, everyone, for your extreme patience. I really just wanted to make my parting comment very memorable.

Before opening up the call to Q&A, I would like to briefly address the other announcement we made yesterday, the transition of my Chairman and CEO role to Lenny Comma. I have been so fortunate to have had a nearly 30-year career here at Jack in the Box. I am proud of my accomplishments and I am grateful to my executive team, our franchisees, business partners and the thousands of employees who have worked so hard to achieve the transformation of our business.

I am also grateful to the prior leadership, who provided me with many opportunities to grow personally and professionally as I rose through the ranks to become CEO. My decision to leave is eased knowing that we have a strong, experienced leadership team in place at Jack in the Box and Qdoba. I have been especially impressed by Tim Casey's leadership of Qdoba and have every confidence in his ability to reinvigorate that brand.

Finally, let me congratulate Lenny on a very well-deserved promotion and let you know that he is fully prepared and capable of leading this Company to even greater success in the future. Lenny and I have worked together for many years. He is an extraordinary leader who has demonstrated his ability to lead with passion, courage and commitment. Again, congratulations, Lenny.

Thank you, Linda.

And now, let me open up the call, finally, to your questions. Tonya?

(Operator Instructions) Joe Buckley, Bank of America.

Thank you, and as far as Linda and Lenny, congratulations to both of you. It just seems like the perfect time to make this transition, which I know has probably been planned for a long, long time. And, Linda, I wish you the best, and Lenny, wish you the best going forward.

Thank you very much, Joe. Appreciate it.

Thanks, Joe.

I wanted to ask kind of a big picture question. All the recent changes, the Qdoba closures and the additional refranchising at Jack in the Box, first from a big picture standpoint, how does this all fit into the context of the $2.00 operating EPS target that you laid out a couple years ago?

Yes, Joe, so let me take that. We will provide our 2014 outlook guidance as well as our longer-term outlook in November, like we usually do. But I think given all that is going on, let me give you some thinking here about how we view the catalysts to improving operating earnings and the confidence that we have in being able to hit targets.

So, first, the Qdoba closures are expected to add $0.15 to $0.16 in operating EPS, given the guidance that we just provided, in '13. Also, looking out at Qdoba, the Qdoba leadership change, as well as the ongoing work on our brand positioning and strategy, I think provide us confidence on better operating performance for Qdoba going forward into 2014.

Also, the amount and pace of the Jack in the Box refranchising activities, which will help with average unit volumes, restaurant operating margin, operating EPS and also cash flow. The current Jack in the Box restaurant operating margins, which has expanded very, very nicely; I think it was more than 100 basis points in this quarter, on fairly modest same-store sales growth, as the AUVs and the weekly sales stay at or above that $31,000 level.

Also, we talked about the impact of the -- on a pro forma basis, of what the Jack in the Box brand restaurant operating margin would have been had we completed the sale of the fourth-quarter closures earlier. And that would add about 80 basis points to the reported 17.1% number year to date.

Also, if you look into 2014, I think everybody is seeing and we are seeing a fairly benign commodity inflation number thus far. We will clearly have a better look at that when November rolls around. But as of now, we're pretty happy with what we are seeing.

And then also the Company and our Board have been very constructive with respect to returning cash to shareholders in the form of share repurchases. We've bought back $92 million thus far this year, including almost $51 million in the third quarter. And the Board just authorized another $100 million worth of share buyback authorization, giving us just under $185 million worth of current authorizations going forward. So I think those are -- probably summarize the earnings catalysts pretty well.

I would say the greatest uncertainty, which would temper any of those positives, is whether or not the current industrywide slowdown is going to be long or short in duration.

Fair enough. I think everybody is asking the same question on the recent sales performance, which seems to be across all sectors, as I am sure you are aware.

Yes, we looked at that. Obviously, we had the same issue impacting the industry back in the January timeframe. Nobody knew exactly how long or short that was going to be. It turned out to be short. Clearly, we will all know whether this is a long or a short duration well before the November call.

Maybe just one follow-up. Will these changes lead to further G&A declines, do you think, for 2014/2015?

Yes, so let me talk a little bit about G&A. So we have -- we went through a pretty complete restructuring activity during fiscal 2012. We continued some of that into 2013. We have effectively changed from two operating brands with infrastructure to a shared service platform. And most of that work has been completed, although we still have some additional integration of the two brands, which I would expect would be completed in 2014 and would also reduce G&A.

The other opportunities are in the refranchising world; as we continue to sell restaurants to franchisees, we would expect reduction in field-related G&A associated with those locations sold, also.

And then the other item that I wanted -- and then we also have, notwithstanding the telephone issues, we also have some opportunities going forward with our IT costs, particularly as we look for opportunities to get more synergies between Qdoba and Jack in the Box there.

And then, Joe, I want to mention also -- I think this has been in a couple people's reports in the past -- but our pension plan, which we have both sunset effective in 2015 as well as closed to any new entrants a couple of years ago, has been driving over the past couple of years, and including this year, higher G&A costs resulting from falling discount rates. So it generated about $4 million of a higher G&A cost this year and $7.5 million higher than what it was back in 2011.

As we start to see some improvement in discount rates, we would expect to see reductions in G&A. And what we have in our 10-K is 25 basis points worth of an increase in the discount rate would reduce our pension costs, everything else being equal, by about $2 million. And we are seeing discount rates improve, i.e., raising a little bit now, but we will have much more visibility on that as of the end of the fiscal year, as the measurement date on that -- not to get too technical -- there is only once a year; it's the last day of the fiscal year. So we will have better visibility on that. But the trend right now is for improving discount rates, on the higher side.

Brian Bittner, Oppenheimer.

Great, thanks. This is Mike Tamas on for Brian. I was wondering if you can talk about any sequential trends since the quarter's end and given the weakness in the industry. And then kind of related to that, if you could talk about the spread between the Company-owned Jack in the Box units and the franchise, just wondering how you are looking to continue to drive out performance in the Company side and outperform the industry. Thank you.

Mike, this is Lenny. Let me try to address that for you, and if you need a follow-up, if I don't quite give you enough color, please let me know.

What we experienced in July is what most of the industry has been talking about, just it has been soft month for us, where we saw some negative trends. But we have sequentially, week by week, seen our average unit volume grow throughout the month of July and into August. So it gives us some optimism on the remainder of the month. And what we have done to make adjustments to what we have seen in that trend and to push ourselves to what we think will be slightly positive is we have come off of some of our premium promotions to more bundled value deals to allow us to move forward.

So that is essentially where we are today. And does that give you enough color, or would you like a little bit more?

No, I think that's fair. If I could just ask another follow-up on Qdoba really quickly. Just in terms of like use of cash around Qdoba. There is a strategy to buy in successful franchisee businesses. Does that get altered by anything that you have done recently or is that still on the table? Thank you.

This is Jerry. That is still on the table, although I can tell you there are fewer of those opportunities, not from our desire, but from the franchisees' lack of desire to sell.

Perfect. Thanks very much.

John Glass, Morgan Stanley.

Thanks. I wanted to go back to the -- Jerry, maybe just to the broad strokes view of 2014. What is the updated thoughts on the remaining Jack in the Boxes that you could refranchise in 2014? Is it actually earnings accretive to sell those last southeastern units? What is the margin impact? Do you have any update on the impact on the P&L?

Yes, John, the impact, first of all, 50-ish of those 60 locations are southeast locations, and we would expect that -- or we would target those for sale later in the fiscal year, probably fourth quarter. So I am not sure they would have a significant impact on '14. However, they will be accretive to operating EPS. And at this point, we are estimating an impact of at least 50 basis points' worth of margin improvement on the Jack in the Box brand resulting from those. But again, I would see that more as a '15 catalyst to earnings growth rather than a '14.

Okay, that's helpful. As -- you sort of suggested that the Board continues to be very focused on returning capital to shareholders. Your leverage ratios, or at least your absolute debt level, I should say, has come down a little bit over time, and you are more asset-light than you have been in the past. So at what point do you consider taking on leverage to enhance shareholder returns or is that not part of a '14 plan?

That is not part of the '14 plan, John. We realize that our debt-to-EBITDA has been coming down because of cash flow and also because of the earnings growth.

We have said repeatedly that we are comfortable with something in a two turns of EBITDA range. We are still comfortable with that. So any increase in debts levels would be within that range going forward. Remembering also that because of the -- us controlling 90% of our franchisee leases, we also have to pay attention to the adjusted debt-to-EBITDAR, and when you look at that, that gets you closer to a 4 times level.

So those are the levels that we are comfortable with. We think that is a good balance. And we still have capacity under the revolver to be able to fully utilize those share repurchases going forward.

Got you. All right. Thank you.

Alex Slagle, Jefferies.

Great, thank you. Question on same-store sales versus the profitability. Given the higher AUV levels at both brands and all the changes in terms of the makeup of your Company-owned stores, what is the same-store sales that you need going forward to maintain or grow margins?

Well, what I would say, Alex, is in the normal environment, commodity and that, 1% to 2% range, we would like to have about 2% annualized comp to be able to consistently grow margin in that environment.

What we have seen thus far, though, that Jack in the Box brand may need a little less than that in a fairly benign commodity environment due to the higher AUVs, as we get pretty good leverage on the nonfood and labor items on those sales growth. But we still like about a 2% number on Jack in the Box, and that number is about right for Qdoba also.

Okay, and the Qdoba labor, just wonder if you could talk to the decision to increase staffing levels and maybe reinvest some of the potential accretion from the store closure activities back into the brand.

Yes, that was really focusing on executing against a higher expectation for customer service. So it was getting mostly management-level staffing to where it needed to be. And so we had an opportunity to take some of the talent from those closed restaurants and redeploy them into open restaurants, so we took advantage of that situation. And as a result, the labor did increase. But we expect to get a return on that labor as our sales and as our guest service execution improves.

And Alex, also, we did hold on to -- to Linda's point, we hung on to some of that management in those closed locations to redeploy into expected new openings later in the quarter and early into Q1, which will reduce the training costs and hiring costs associated with those new openings going forward.

Thank you. Congrats, Linda and Lenny.

Thank you.

Thank you.

Chris O'Cull, KeyBank.

Yes, thanks and yes, congratulations, Linda and Lenny. Linda, I hope you enjoy retirement.

Thank you, I will.

Hey, just a couple follow-ups here. Jerry, thanks for providing the pro forma margin for refranchising the Jack stores. But can you tell us what the benefit of the stores that you plan to -- or that you already have refranchised this year or plan to this year -- will be to fiscal '14 margin for Jack in the Box?

Yes, Chris, that is what we estimated that 80 basis points on a pro forma basis year to date through Q3.

Okay, so we should get 80 basis point benefit from those stores being refranchised in fiscal '14?

Yes, everything else being equal, yes.

Okay. And then the labor investment -- or the labor increase at Qdoba, that should continue at this level for the next three quarters, I guess.

Probably 2 or 3 quarters. It should start to come down as we begin to kind of redeploy some of that management over into our new locations. And we have a lot of openings at the end of the fiscal year and into the first of fiscal '14.

Okay, okay. And then just, Linda, can you give us a little more color on the scope, cost and maybe timing of this Qdoba brand study?

Sure, let me just make a note, because I mentioned Tim Casey in my closing remarks, and I'm just thrilled with the progress that he has made in really just 5 months. So if you think about the review that he embarked on of the business, and he took swift and decisive action on closing those 62 restaurants. And you can -- you have heard the results of that in terms of improving Qdoba's financial performance.

In addition to that, he brought on a new Chief Development Officer, John Dawasinski, and him and John have been working closely to implement really significant changes in the development strategy. So they scrubbed the pipeline to improve the returns on the new store openings, they have done everything from revamp the site selection tools, bring in new talent to review -- the process was changed, and they have identified a market selection strategy and penetration strategy. So that has really been done and we're going to see the benefits of that in terms of the returns on those new Qdoba openings.

He also is well underway in this brand strategy work. So that involves some significant research that is done to really understand who the core customer is at Qdoba, as well as who should the target customer be. And then the work with BCG will include a very collaborative effort with Tim and his top management team to develop what that brand strategy should look like and how Qdoba should position itself in the marketplace to be more competitive and really drive loyalty with their target customer.

We should have that work completed at the end of the calendar year, and so you will hear a lot more about the brand strategy work and ultimately what comes out of that, which will be a series of initiatives that will really drive restaurant design, customer experience and menu development and so forth.

And then lastly, Tim is working with Lenny and his leadership team, both the folks in Denver and San Diego, working closely together to really put together an organizational structure that will enable both Jack in the Box and Qdoba to thrive going forward, but also ensuring that we are leveraging the talent and the resources of the full enterprise and taking advantages of those synergies that Jerry had mentioned previously. So that should really help with our G&A costs going forward.

So great work by Tim in just 5 months.

I would think one of the outcomes of this study would be the market share potential or the market potential for the brand. Is that fair?

Yes, I think that is fair. Once you identify sort of that target customer, you have got a market strategy, you can really size the market and size the potential for the brand.

Okay, great. Thanks.

And then, Chris, just one other thing. The cost of the BCG work for everybody is included in our 2013 G&A guidance.

Okay.

(inaudible) an add-on.

Matthew DiFrisco, Lazard Capital Markets.

Thank you. My question is with respect to the Jack in the Box development. And I am just curious as far as the franchise, an early look into or at least what you are hearing in the tone from the franchise community. It has been a couple years that we have seen any real meaningful growth from development there.

As we are nearing the any of the capital going towards refranchising Company-owned stores, I am just curious if it's -- are we at the stage where we should see a re-acceleration? Is that a correct position to have, where a re-acceleration of franchise growth could happen as early as '14? Or is the slowdown that we are seeing in the macro and the broader industry something that probably stalls this to be maybe not until '15 part of the discussion?

Yes, I don't think it is a 2014 acceleration, Matt. I would view this more in the '15 or forward level. And again, most of the growth we would expect to be in new markets with some infill within the existing markets.

But the growth in newer market, particularly with respect to franchisees, just takes a little longer to get that up and going.

Right, I guess at the Analyst Day, you focused out in San Diego about showing Midwest markets like Indianapolis. And there was, I guess, an opportunity potentially there to get into some new territories. Has that -- is that a comment more so on the broader industry than say that strategy of trying to get the brand extended into new regions?

We have been -- so you mentioned Indianapolis, and we have ceded Indianapolis and we have sold a portion of that market. We have also ceded Oklahoma City and we've sold that market. We have ceded -- and we are ceding Cincinnati and we have ceded Kansas City. We have not yet sold those, but we will continue to work towards that. But I would not expect this to be a rapid rate of growth in the 2014 or even 2015 timeframe.

And then I guess lastly, anything that we should be concerned about as far as regional differences that you are seeing? I didn't -- I heard someone ask earlier about the differential between the Company-owned versus the franchise same-store sales on the Jack in the Box brand, and I am curious if that is somewhat indicative also of maybe regional weakness that the franchisees might be greater exposed to?

This is Lenny. What we are actually seeing is the disparity in sales from Company to franchise are more related to who has chosen to compete head-to-head on the dollar drink that we have seen from some of our competitors. So as we look from market to market, it is less geographically based and sort of risk-based. And more so, really, just who has elected to compete with the dollar drinks. So that is what we are seeing currently.

And then historically, we have seen much greater sensitivity to margin management from our franchisees, as you can imagine, and so they are a little slower to adopt our initiatives, which typically has a lag on the benefits associated with those initiatives as well.

So that is probably -- those two things are probably the majority of what we are experiencing today, more so than the geographic differences.

Got it. Great. Thank you very much and congratulations to both of you again.

Thank you.

Jeffrey Bernstein, Barclays.

Great. Thank you very much, and again, congratulations. Just had a couple of questions. One just on specifically the Jack brand margin. If I understand it correctly, it seems like you're going to get 80 basis points benefit perhaps next year from the refranchising you did this year. And I think you said another 50 basis points when the final southeast markets are sold. So is that fair to assume over the next year or so, that just the refranchising alone is going to add 130 basis points?

And if that is the case or if you can clarify that, either way, I am wondering what are the levers from here on the remaining stores. I'm just trying to get a ballpark of maybe what the highs and lows are in the system, or whether the top quartile is pushing north of 20%, or how to think about the progression of Jack margins. And then I have a follow-up.

Yes, that is great question. So first of all, that should add -- as you go into, say, '15 -- should add 150 -- 130 basis points to the existing levels of margin, which was 17.1% year to date through Q3. That would get us north of $1.7 million of AUVs. The southeast tends to have the lowest volume, and therefore margins within the chain. However, the southeast same-store sales are growing very, very positively right now. We are very happy with that.

But, yes, so you are looking north of 18% on the Jack in the Box brand restaurant operating margin. And it is fair to assume that the restaurants that have a $2 million-plus AUV are operating above 20%.

Understood. Any particular levers to pull to achieve that, or is it really just the leverage from the AUV that is driving that differential?

The AUV, and then --

Yes, speed of service is probably the lever that we will continue to stay focused on in the coming years. That is one that obviously with the thresholds that Jerry has mentioned in the past, we start hitting certain levels of sales, that every dollar above that flows through very nicely to the bottom line. So as we improve speed of service on AUVs that are already high, we leverage the fixed costs, we should see an acceleration in our margins, so that is what we are after.

Got it. And then just a follow-up on Qdoba. Appreciate all the color you have offered already, and I know you are in the midst of, I guess, a comprehensive brand review. I'm just wondering whether that would change one of two things -- whether it will have any impact on how you think about the 50/50 Company/franchise mix, and which direction might it move in, based on your early understanding of that study. And separately, should we still be assuming kind of the same unit growth rate or might that change? I think you had said 15% to 20% annually on the Company-operated side and 30% to 40% annual franchisee. I didn't know whether maybe there is the thought to rein that in or whether you think the ultimate outcome might be to accelerate that. Or does that study have no impact on the 50/50 and the rate of growth?

Well, on the franchise mix, I don't think it would have an impact on the mix. But in terms of the growth, our goal is to accelerate growth at some point, but it is going to take a while, even once we get this study done to identify which initiatives we want to move forward, test some of those initiatives and then implement.

But the idea would be to accelerate the growth, because we are getting fantastic returns in sales on Qdoba. And I think we have guided what in '14?

About 40 Company units going into '14, which would be about a 13% growth rate on the current Company base. It is about that. So -- and then we would expect to see that be able to ramp up if all that Linda just said works, and we think that it will or we wouldn't be doing it.

Understood. Congrats again. Thank you.

Thank you.

Thank you.

I know we cut off, so we will take a few more questions here and go a little bit past the bottom of the hour.

David Tarantino, Robert W. Baird.

Hi, good morning and congratulations to Linda and Lenny. My question is a follow-up on Qdoba, and maybe a big picture question about some of the recent closings.

I was just wondering if you could maybe elaborate on what some of the issues were with the units that were closed, and whether you think that the closing of such a large number of units at this stage of the brand makes you think differently about the long-term growth opportunity.

Yes, it is making us think differently, which is why the entire brand study is underway, that we need to have a clear position that we are able to articulate in the marketplace to our customers; we need to have a target consumer that is identified; and we need to have a brand that executes against what that brand strategy and vision is.

However, when we look at the closures in those major metropolitan markets, it really is just the lack of brand awareness in such large urban markets with a lot of competition. So we went in there, we didn't -- our penetration levels were very low, and as a result, our brand awareness was very low. So there are lots and lots of other markets where we are highly successful. So we chose to really focus our growth on those markets where we are already successful and we already have brand awareness, versus trying to go head-to-head in those large urban metropolitan markets.

So, Linda, does that suggest that those large urban markets aren't a good fit for the brand or is this (multiple speakers)?

Not at this point in terms of the brand awareness, but they would be further down the road. Those would not be the markets that we would go into early in the brand's maturity. So yes, at some point, you need to enter into those markets.

Okay. And I think previously you had shared some thoughts on what the long-term unit potential could be for Qdoba. I think it was somewhere on the order of around a couple thousand units. Is that still a valid number or are you thinking something smaller, based on what you have seen today?

Yes, I think we will evaluate that and we will provide more information on that as we get through our work with BCG.

Okay, fair enough. And then maybe one quick follow-up on Jack in the Box. I think you mentioned that the balance of the quarter has softer comparisons. And I just want to understand how to think about that, given that I thought last year's results were comparing against some pretty solid or very strong results that you had a couple years ago. So I was just wondering if the comparison is truly easy, or if it is maybe just a function of prior-year comparisons, if that makes sense.

Yes, it is two -- over the two-year, it is easier. Over the three-year it is not easier, to your point.

But part of the three-year comparison -- it depends on when you cut the cycle off. So the reason that fourth-quarter fiscal '11 was so positive was that fourth-quarter fiscal '10 was really bad. And so it depends on how far you go back with the compare. When you compare versus last year, the comparisons get easier.

Okay, that's helpful. Thank you.

(inaudible)

Great. Thank you very much.

Jeff Farmer, Wells Fargo.

Good morning, and just echoing everyone else's earlier comments, congratulations and good luck to you both.

With that, sort of just following up on Jeff's Qdoba development question, and understanding that the brand study is currently underway. But it does sound like if I am a current or prospective franchisee for Qdoba that my development opportunities are going to be probably in smaller markets with lower brand awareness levels. Assuming that is the case, how do you keep these Qdoba franchisees excited about their development prospects?

Yes, no, I wouldn't say they are smaller markets with little growth opportunity. They are actually in markets that are midsize that there is growth opportunity.

We also see franchisees entering into a lot of the nontraditional locations, which works much better for a franchised organization than it does for Company organizations, giving a lot of the rules around who can go into the airports and the college campuses and whatnot. And those opportunities are fairly significant; we have a nice pipeline of nontraditional within the franchise community.

But when you look at -- franchisees have been growing at about 30 to 35 restaurants a year, and we are not getting any indication that that would slow down.

Okay, and yes, just the heart of that question was my understanding was your strategy on the corporate side was to really focus on those larger markets that deliver the larger AUVs, have the greater brand awareness, which would leave the inverse of markets available to the franchisees. But I hear you, if there are some smaller market opportunities there.

Then one other quick question on -- it's more on the macro side. But obviously, we have heard from your peer group over the last three weeks a lot of different takes in terms of what has been driving softening same-store sales and traffic numbers. And I am just curious what your thoughts are on the current consumer environment at both your concepts. You are in a unique position to see both fast casual and quick service.

Just how you have seen your consumers, again at both concepts, change their behavior, if they have at all. And again, in terms of major macro headwinds, what would you point to, if anything, that is causing this behavior right now?

Well, it definitely feels like the economy has stalled, if you look across the restaurant industry and even the retail industry, with the exception of the deep discounters. And there has been lots of ideas and thoughts around what has caused the difficulty for the consumer.

Some of it, if you look at unemployment numbers, the federal government, there has been sequestration, so there have been layoffs. That has been a sector where we have actually lost jobs. The only sectors where we have gained jobs are in hospitality, restaurant, retail, and those are generally lower paying jobs. There has been talk around the lack of growth in disposable income, so people just don't have discretionary spending like they used to. They are spending it on -- for housing and automobiles.

There has been a slight increase in gas prices. This morning I think there was talk about teen unemployment this summer. So lots of factors that I think all coming together to put more pressure on the consumer, and we are certainly feeling that. We have mentioned that at both brands we are feeling that. And as a result, we are seeing a shift of consumers to the more value-oriented products. Which is to Lenny's point, that we have made some shifts in our marketing plan and our promotional calendar to just balance it a little bit more on the value side of the equation.

But you know what? I am going to let Lenny talk about how we do value, which is sort of unique and different, versus doing deep discounting.

Yes, Jeff, just to remind folks, it only takes us about 6 guests a day, 6 additional guest a day per location, to grow at about 1%. So when we look at value, what we try to do is be responsible with how it is going to impact overall average ticket and margin by doing the bundles.

So this quarter, we have seen the slowness and the sluggishness in July, but we have seen the improvement week on week, which gets us pretty confident in viewing the rest of the quarter, especially with the change to the value bundles going forward. So we have continued to use the strategy that has worked pretty effectively for us, and we will continue to sort of take it week by week, like the rest of the industry, to navigate our way through the sluggish economy.

All right. Thank you very much.

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

Conrad Lyon, B. Riley.

Great, I, too, extend a high five to both Linda and Lenny.

Question, Jerry, do you have the depreciation from the Qdoba stores that closed? I am not sure if you mentioned that, or --.

I didn't. Here is the overall cash flow impact on those locations. I have that here. The overall cash flow from those closed locations year to date would have been $5.5 million better had they not been there at all.

Got you, okay.

For the year.

Got you. Question for Lenny. Now that you have the keys to the car, any new directions strategically, tactically, or pretty much the same thing as before?

I think I would say that Linda has allowed me to move to the passenger seat, so I am no longer sitting in the back seat. But the keys don't get turned over until January 1. So I think that Linda has set us up with restructuring and creating a great foundation to move forward. I think we have got the refranchising largely done.

And so it is a great opportunity for us to maybe take some time to look forward as we complete that work and just analyze whether it makes sense for us to do things differently. But certainly not anything happening today that would have me want to communicate any sort of sharp left or sharp right turns. So that is sort of where we are, but I think these types of changes always give us an opportunity to just sort of look forward and evaluate where we have been and where we think we can go from now.

Got you. Best of luck to the both of you.

Thank you.

Thank you.

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