Jack in the Box Inc (JACK) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. fourth-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, 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 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'll review the Company's operating results for the fourth quarter of fiscal 2013, as well as some of the guidance we issued yesterday for the first quarter and fiscal 2014, and provide an update on some of our long-term goals. In our comments this morning, per-share amounts refer to diluted earnings per share, and operating earnings per share is defined as diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains from refranchising. Following today's presentation, we'll take questions from the financial community.

Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business.

The Safe Harbor statement in yesterday's news release and the cautionary statement in the Company's most recent Form 10-K are considered a part of this conference call. Material risk factors, as well as information relating to Company operations, are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC. These documents are available in the Investors section of our website at www.jackinthebox.com.

A few calendar items to note, Jack in the Box management will be presenting at the ICR Xchange Conference in Orlando, Florida on January the 13th, and our first-quarter ends on January the 19th. We tentatively plan to announce results on February the 19th after the market close, and our conference call is tentatively scheduled to be held at 8.30 a.m. Pacific Time on February the 20th. And with that, I'll turn the call over to Linda.

Thank you, Carol, and good morning, everyone. Jack in the Box posted another solid quarter, highlighted by a 45% increase in operating EPS versus the year-ago period.

This helped to drive a 39% increase in operating EPS for the full year on top of last year's 41% operating EPS growth. Before reviewing some of our other fourth-quarter accomplishments, let's look at some highlights from fiscal 2013.

Our business model transformation is nearly complete. During the year, we raised our ultimate target for franchise ownership of the Jack in the Box brand to 80% to 85%, and we reached 79% at year-end. This transformation has resulted in a less capital-intensive business model with more annuity-like cash flows, as well as higher AUVs and margins for the remaining Company restaurants that we operate.

During the year, we took steps to strengthen our Qdoba brand. Most importantly, in March, we hired Tim Casey as Qdoba's brand President. Tim took swift action to identify and close underperforming restaurants, and began a comprehensive review of Qdoba's brand strategy.

As a result of our Jack in the Box refranchising and the closure of underperforming Qdoba locations, our consolidated restaurant operating margin improved to 17.1% of sales for the full year. As we've restructured the organization to reflect changes in our Jack in the Box and Qdoba systems, we've been transitioning to a shared services approach to support the enterprise and both brands. This process is creating a more efficient organization while moving the Company toward our goal of G&A expense in the range of 3.5% to 4% of systemwide sales, which we now expect to achieve in fiscal 2014.

One of the biggest benefits of our business model transformation has been the Company's conversion into a free cash flow generator. During the year, we continued to return a significant amount of cash to our shareholders through the repurchase of over $140 million of common stock.

And over the last eight years, we've returned nearly $1.1 billion in cash to shareholders. Lastly, a total of 85 restaurants were opened systemwide, including 17 Jack in the Box and 68 Qdoba locations.

Turning to our fourth-quarter results, same-store sales at Jack in the Box Company restaurants were down slightly for the quarter, 0.2%, due primarily to softness in the first half of the quarter. Sales improved and were positive for the last six weeks of the quarter, and have strengthened even further in the first seven weeks of the current quarter. Franchise same-store sales have also improved, and have performed on par with the Company thus far in quarter one.

Breakfast and late-night have been our strongest dayparts over the last several quarters. To leverage our late-night brand equity, in mid-September, we rolled out a systemwide initiative to drive traffic and sales.

In addition to all of our regular menu items, guests can now order from a special late-night menu. This has been a positive contributor to sales thus far in the quarter.

We achieved significantly higher guest satisfaction scores at Jack in the Box over the course of the year, which is tangible evidence that our guests are noticing the holistic approach we've taken over the past few years to enhance our food, service, and restaurant facilities. And we remain focused on driving same-store sales through speed of service, which we've improved by nearly a minute since March 2011.

We believe there is additional opportunity to improve speed of service, but will do this in a way that protects our order accuracy, our friendliness, and food quality. We believe we have the foundation and catalysts in place to continue driving Jack in the Box same-store sales and traffic growth over the long-term.

Turning to Qdoba, our company-operated restaurants reported a 1.3% increase in same-store sales in the fourth quarter. For the quarter, our catering business increased nearly 8% versus last year; and for the year, catering represented just over 7% of sales.

Qdoba recently signed a master license agreement for nontraditional locations and venues across the US with Sodexo and Aramark, which are two of the world's largest food service and facilities management companies. Qdoba is positioning itself as a fast casual option for airports, universities, travel plazas, and military and healthcare facilities. These locations help drive awareness and can generate high sales volumes.

We expect to have Qdoba's brand strategy work completed by the end of the calendar year. This will guide us on initiatives ranging from menu innovation and restaurant design to our loyalty and catering programs.

In closing, I'd like to thank our franchisees and employees for the exceptional effort they put forth throughout 2013 in support of our ongoing restructuring, as well as our other major strategic initiatives. As a result of their dedication and hard work, we continue to more than hold our own in a very challenging environment.

As I hand over the reins of the Company to Lenny, I'm confident that the transformation of the business model that we have completed over the last eight years sets a solid foundation, and has our Jack in the Box and Qdoba brands well-positioned for higher future earnings, average unit volumes, restaurant operating margins, cash flow, and return on invested capital. Now I'd like to turn the call over to Jerry for a more detailed look at our fourth-quarter results and outlook for the future. Jerry?

Thank you, Linda, and good morning. Fourth-quarter earnings from continuing operations on a GAAP basis were $0.54 per share, including $0.13 in gains related to refranchising and $0.03 of restructuring charges. This compares with GAAP EPS of $0.42 last year, which included $0.16 of refranchising gains and $0.04 of restructuring charges.

A lower tax rate of 28% benefited the quarter versus Street expectations by about $0.05, but similar to last year's 29.4%. The full-year tax rate was 32.8% versus 33.2% in 2013. And a legal judgment of $1 million negatively impacted the quarter by $0.02.

Operating earnings per share, which we define as EPS on a GAAP basis excluding gains or losses from refranchising and restructuring charges, were $0.45 in the quarter versus $0.31 last year, and for the full year, increased 39% to $1.82 from $1.31 last year. Our results for the year reflect a transformation of our business model and the annuity-like cash flows that franchising produces. As an example, we generated EBITDA of $79 million from rental income on the nearly 1600 properties, or 89% that we lease to franchisees.

We refranchised 16 Jack in the Box restaurants in one of our four Southeast markets during the fourth quarter, and 40 restaurants in one other market, as well as three Qdoba locations. The gain from the sale of these restaurants totaled $7.8 million or approximately $0.13 per diluted share. This leaves us with roughly 60 Jack in the Box restaurants that we have targeted to refranchise by the end of 2014, including the remainder of the Southeast, which is roughly 50 locations.

When we've 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.

We estimate our pro forma restaurant operating margin for the Jack in the Box brand for fiscal 2013, when excluding the restaurants we refranchised during the year, would have been approximately 17.5% or about 70 basis points higher than our reported Jack in the Box brand margin of 16.8%. Our company average unit volumes would have been about $1.66 million versus $1.6 million.

Looking forward, we estimate that restaurant operating margins for our Jack in the Box brand should increase by more than 100 basis points beginning in 2015, due to the refranchising of the remaining 60 restaurants we plan to sell by the end of 2014. And the AUVs, we would expect to increase by another $100,000 to $1.76 million.

Consolidated restaurant operating margin of 16.1% of sales for the quarter was 10 basis points lower than last year's adjusted fourth-quarter results. Jack in the Box margins improved 80 basis points to 15.7% in Q4, despite slightly negative same-store sales and higher commodity inflation of approximately 4.6%. Beef was up 9%, pork was up 19%, and produce was up 10% in the quarter. In addition to greater commodity inflation than we expected, margins were also lower than our internal expectations, due primarily to higher utilities and restaurant expenses relating to the launch of our late-night initiative.

Canola margins decreased 310 basis points to 17.2% in the quarter. In addition to the factors noted in the press release, we had essentially no pricing in the quarter versus 2.8% last year.

In the fourth quarter, we bought back $48 million of stock; and for the full year, we returned $140 million to shareholders, and repurchased approximately 9% of our outstanding shares as of the beginning of the year. This leaves $136.8 million remaining under two stock buyback authorizations by our Board.

Before I review our guidance for fiscal 2014, I'm going to talk about our commodity cost outlook for the upcoming year. Overall, we expect commodity costs for the full year to increase approximately 1%, with inflation of approximately 2% in the first quarter. We currently expect these costs to be up approximately 5% for Q1.

For the full year, beef, pork, and produce have the potential to be the most volatile, and we currently expect these costs to be up 3% to 4%, and pork prices to be up approximately 3%. Most of our other major commodities are locked for a good portion of the year, including chicken, cheese, and bakery.

And here is our current thinking for fiscal 2014 guidance. We're expecting same-store sales growth at company restaurants for the first quarter of 1.5% to 2.5% for both brands, reflecting trends we've seen in the first seven weeks of our first quarter.

For our full-year guidance, same-store sales are expected to increase approximately 1.5% to 2.5% at Jack in the Box company restaurants, and 2% to 3% at Qdoba company restaurants. Restaurant operating margins for the full year is expected to range from approximately 17.7% to 18.1%, depending on same-store sales and commodity inflation, compared to 17.1% in 2013. The increase reflects the benefit of Jack in the Box restaurants that were refranchised in 2013, and same-store sales leverage at both brands, offset in part by the minimum wage increase in California that will go into effect in our fiscal fourth-quarter.

We expect Q1 margins to be lower than our full-year guidance due to higher commodity inflation in that quarter. SG&A as a percentage of revenue, is expected to be in the 13.5% to 14% range compared to 14.8% in 2013.

The decrease in G&A on both a dollar and percentage basis reflects lower pension expense, G&A savings from the restructuring activities we have completed over the last two years, and refranchising. Partially offsetting these decreases in our guidance is the impact of mark-to-market adjustments, which benefited 2013 SG&A by $4.6 million; and G&A, as a percentage of systemwide sales, is expected to decline to approximately 3.8% in fiscal 2014 from 4.3% in fiscal 2013.

The tax rate is currently expected to increase to 37% to 38% from 32.8% in 2013, and we don't model the impact of mark-to-market adjustments, if any. 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 refranchising, are expected to range from $2.15 to $2.30 in fiscal 2014 compared with operating earnings per share of $1.82 in fiscal 2013.

We now estimate EPS sensitivity as follows. For every 1% change in Jack in the Box system's same-store sales, we estimate the annual impact to earnings is about $0.09 per share, approximately $0.04 of which relates to Company operations depending on flowthrough and assuming stable costs, and the other $0.05 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. For every 10 basis point change in restaurant operating margin, the estimated annual EPS impact is approximately $0.015 per share on a consolidated basis.

We also updated our long-term goals fiscal 2015 through 2017. We continue to expect same-store sales growth of 2% to 3% annually at Jack in the Box company restaurants, and 3% to 4% annually at Qdoba company restaurants.

We've raised our outlook for restaurant operating margin to 18.5% to 19.5%, and G&A is expected to be 3.5% to 4% of consolidated systemwide sales beginning in 2014. We've nearly completed the transformation of our business model, and our outlook reflects a balance of growth from all segments of our business model, including Jack in the Box franchise operations, which drive annuity-like cash flows through both rents and royalties to Qdoba and Jack in the Box company operations.

That concludes our prepared remarks. I'd 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, and Linda, congratulations to you on winding up a great career at Jack in the Box and finishing on a strong note here with this earnings release. I have a question on the franchisee sales versus the Company sales.

Can you talk about that gap in the quarter? And then I think the comment was made that franchisee sales have improved on par with Company sales.

What does that mean? Are they comping up at the same rate as the Company sales? Or is there improvement from the fourth quarter decline the same amounts?

Joe, this is Lenny. Let me address the second part of your question first. The answer to the second part of your question is yes.

The franchisees in the first quarter of 2014 fiscal year are comping right alongside the Company ops. And week by week, it seems pretty much on par. And what we've talked about in the last couple of years are the initiatives that we had put in place around the rollout of our improvement in speed, and some of the plan initiatives to increase our performance with guest service.

And we've consistently said that the franchisees have lagged the Company ops in executing those initiatives, mainly due to their sensitivities around margin and sort of they start off with a show-me sort of position on the things that we're doing. And then as they prove out, they tend to accelerate their engagement in those areas. And we've seen that throughout the year, the franchisees have done a great job of sort of catching up and accelerating their engagement in the things that drive both the speed initiatives, and also the great rollout of some of the guest service initiatives.

The final note, really, though, that I think we've seen lots of improvement on, is how we're rolling out new products. We've been able to generate a much deeper level of engagement from the franchisee all the way down to the front-line employees, through rallies and large meetings that we've used to roll out the major initiatives throughout the year. And this past year, we've done that about three times.

But the most recent ones, which started just towards the end of the fourth quarter, which was setting us up for the launch of late-night into the first quarter, went exceptionally well. And we seem to have a very high level of engagement from that late-night crew and from the franchisees, who are spending a significant amount of time in their operations driving performance during late-night.

So, if I had to sum it up in one word, I would say it's really engagement. The franchisees are bought into what we're doing. And we've seen that, throughout the year, that buy-in has sort of paid off for us.

And we think that the results through the first seven weeks of the first quarter really do reflect that. So I think that pretty much tells the story.

Thank you.

Alex Slagle, Jefferies.

Jerry, a question on the long-term guidance, just trying to boil down the various guidance metrics for each brand in that longer-term outlook. Basically wondering what portion of the margin expansion comes from the Qdoba business versus Jack in the Box business? And I know we got some perspective on the impact from the refranchising activities, but wonder if you could boil that down further?

Yes, so what I -- let me talk about Jack in the Box first, Alex. And let me just also remind everybody that the Jack in the Box margin carries about a 75% weight to the overall consolidated margin numbers.

So, in order for us to have margin improvements such as we just described, Jack in the Box has to also improve that. But let me just walk you through what we've thought about for Jack in the Box.

So, the current-year Jack in the Box number was 16.8% for 2013. We described the pro forma effect of what it would have been of these restaurants that we sold throughout the year, many of which were in the fourth quarter. If they were gone for the entire year, that would have been an additional 70 basis points.

So now we're at 17.5%. And then I described in my talking points earlier this morning that the completion of the remaining 60 locations that we have planned to sell to franchisees by the end of 2014 would add about another 100 basis points on top of that. So we're at 18.5% there.

And then you would go forward with our comp guidance of 2% to 3% per year for Jack in the Box. We'd expect some margin expansion on that also.

And then, for Qdoba, with the comps at 3% to 4% per year, and they get a disproportionate amount of margin growth on the same kind of same-store sales growth -- because a good portion of their model has fixed costs, their food cost runs about 300 basis points below the Jack in the Box food costs, and their labor runs about 100 basis points below the Jack in the Box labor. So they're going to get a better lift on their same-store sales growth.

And Qdoba ended 2013 with a 17.9% margin. So, we would see -- and that included some extra staffing levels, particularly in the new markets, and extra staffing levels from the closures of some of those restaurants that we closed in the early part of July. So, we would expect both brands to be performing well within the range that we guided to.

Helpful. Thank you.

Brian Bittner, Oppenheimer.

Thank you and also congrats to Linda as well from here. A question about -- two questions -- one about comps, Jack in the Box comps.

The QSR industry, I think, did have a nice bump in October, I think up in the mid-2% range. And so the question here is how much of the improvement that you're seeing in the Jack in the Box comps so far in the first quarter is a rising tide theme for the industry? And how much do you believe is really bottoms-up drivers, like this new late-night menu introduction? And anything incremental you could give us on the late-night impact that you've seen so far would be helpful.

I guess the way -- this is Lenny -- and I think that the rising tide -- I'll address that first. I don't think that's the major driver for us right now.

When we look at our performance, we're looking at approximately half of the improvement that we're seeing today come from the late-night initiative. And when we look at the additional new products that we've rolled out that are hitting all dayparts, that's really where we're seeing the drivers in the other dayparts. So I would say it's not the rising tide that's necessarily moving Jack in the Box where it is today.

So I would say further that when we look at sort of our outlook for the year, we expect many of the major competitors to be very focused on their value messaging. And I think that Jack in the Box will continue to use product innovation and value bundles to compete against that.

And if you look at what we've done with late-night, it essentially attacks those two things. We do this sort of late-night munchie meal, which is essentially a combination of products in a box at a very competitive price, which hits on the sort of value bundle that Jack in the Box is known for.

In addition to that, it includes four new items which hits on the always-something-new or product innovation equity that we have on our brand. So, we think those are the major drivers for us. And based on where we're seeing the results come from, we believe that it's really the product innovation that's driving our current results.

Okay. And then second question is on just 2014 guidance.

When I do the bridge of just the [182] in 2013 and then thinking about the midpoint of your guidance in 2014, the G&A alone I'm getting to be close to [one-quarter] of earnings benefit. And then when you layer on the sensitivity that Jerry went through, between comp growth at Jack in the Box, comp growth at Qdoba, and margin expansion, it just looks like there's opportunity to do a lot more than the current range.

So, is the initial guidance have a dose of conservatism in it? Or, just using the sensitivity factors you guys laid out, it seems as though there could be -- at the midpoint, it seems like it could be a little bit higher.

Yes. A couple things on that, Alex -- I think -- or excuse me, Brian. Excuse me. I was going to get a name wrong at some point here. (multiple speakers)

But same-store sales, I think, will be the key element that will drive us to higher than where the current guidance is. I also make a couple of other comments. One, we have no mark-to-market improvement or decline, for that matter, within our guidance.

And the other thing is, if you notice the tax rate is up about 500 basis points from where we currently have that, and that's probably worth in the neighborhood of $0.14 or $0.15 a share. So, with all of what we're working on, with the G&A reductions, the same-store sales growth, the tax rate change is creating a significant headwind for us.

Okay. That makes sense. And again, congratulations.

Thank you.

Jon Komp.

It's Jon Komp from Baird. Jerry, just first, a quick clarification question on the SG&A guidance for 2014.

The dollar amount, the implied reduction in the dollars is pretty substantial. So can you maybe just clarify again maybe the major buckets of what's driving the big decrease in the dollars being spent?

Yes, I'd be happy to. So, if you look at the overall dollars, it implies about a $25 million in round numbers reduction in overall SG&A expense. Let me break that down for you a little bit.

40% of that is due to the restructuring activities, the early retirement window that we had last year, the ongoing shared service integration with the Qdoba brand that we completed this year. That's as well as our refranchising activities that we've had this year, that's generating about 40% of that $25 million.

The other 60% of that is lower pension expense. And I would describe that as being two pieces to that, each worth about half of the pension expense reduction. So, we are -- we will have a higher discount rate on our pension expense this year by about 100 basis points from what we had last year.

In addition to that, our decisions that we've made to sunset the pension plan, and also the early retirement plan, and we embarked on a process this year, as well as towards the end of last year, to offer lump sum payments to individuals who are -- who have termed out of the Company but may not actually be a retiree at this point in time. And that's significantly reduced the overall liability that we have in our pension plan.

So, those items combined add up about 60% of that $25 million worth of overall savings. And then we have a couple of items going the other way.

As we mentioned earlier, well, the -- we do not anticipate a mark-to-market benefit, so we're covering that $4.6 million within our guidance. And then, based on -- and then we've -- we have higher incentive payments accrued for the Qdoba brand, as the performance this year did not have them have a -- an incentive payment.

So, we are assuming they'll have one next year. That also is included within our overall G&A guidance.

Okay. That's very helpful color. And then just a broader question on the -- Jerry, on the three-year targets that you outlined for 2015 to 2017.

First of all, thanks for the color on those targets. But secondly, the one thing that was not included, which I think maybe was last year -- or at least for one of the years -- was an EPS target included within that three-year target.

So, I'm just wondering -- I know in your prepared remarks, you said after 2014, you expect the growth to be -- come from a lot more balanced sources overall, and certainly can look a lot different in terms of the sources of growth, relative to what you've had in the last few years. So is there any perspective you can provide, maybe the type a sustainable earnings growth you might suspect? Or any thoughts you can provide relative to those targets?

Yes, let me talk about -- let me just mention what we said last year -- we said $2.00 by 2014, I think the only real reason that we mentioned that, I think there is questions out from our shareholder community. And I think also, on the sell side, about when or could we ever get back to a $2 operating EPS?

So we wanted to provide some color for where we thought that was going to be. And I think we actually might have been a little cautious on that, given our current guidance for 2014.

But I think when you take a look at all of the things that we laid out in our long-term plan with 2% to 3% comps for Jack and 3% to 4% for Qdoba, I just described that the restaurant operating margin, both brands, should be within the range. I'd also mention that I think that the G&A cost reductions that we have here are sustainable. It's not something that I would expect were going to pop back up next year.

The only caveat I would give you on that is if we see a significant decline in pension discount rates, but that would be the only item that I could foresee that would cause our G&A numbers to kick back up. So I think we're pretty committed to where we are within that 3.5% to 4% range.

And then also, we have had a penchant for returning cash to shareholders in the form of share repurchases; oftentimes that is accretive. We would continue to do that going forward.

And we'd continue -- we would expect to do that here for 2014 also. So we didn't really give you the numbers, but I think we've given you all the pieces to calculate your own model, particularly with the EPS sensitivities that we provided earlier.

Great, thank you.

John Glass, Morgan Stanley.

First, just maybe on your longer-term guidance of 1% to 2% Jack in the Box unit development. Given that you've refranchised, franchisees are fresher in the system, and presumably, they're better capitalized now -- and I think, previously, you maybe had spoken to the higher end of that range, is there a nuance in saying 1% to 2%?

And what's the upside potential? Or why wouldn't there be upside potential to system unit growth?

Yes, John, this is Jerry. First of all, I think the only real change in -- from the about 2% to 1%-to-2% is just the reality of where we -- of what we grew this year and where our guidance is for growing next year. So I think it's just reality check.

We still think that we should be able to be a 2% growing company. But what we're seeing is it's taking a little longer for the franchisees, who have accelerated their franchise operations and their ownership percentage in the Jack in the Box brand, has taken them a little longer to absorb the operational aspects of that, as well as the overall debt reduction.

They're all well-capitalized. I would agree with what you just said there.

But they're not taking out two-year loans to buy a Jack in the Box restaurant, so the debt financing looks more in the five to seven-year time-frame. So I think our current guidance is reflective of all of those items.

That's helpful. And then, Lenny, you talked about speed of service, achieving some goals, but you don't want to sacrifice accuracy and other elements.

So are you finding that you're hitting a point in reduction where you don't want to go any more, at least in the near-term, because those things are starting to -- you're bumping up against those? Or what -- I guess, what are the short-term and long-term opportunities in speed of service?

Yes, let's talk about the short-term first. I think we've continued to work with our franchising company operations on the systems and processes that drive product out the window at a fast rate.

And that will continue to be our focus. And what we've been able to do is identify the locations in the chain that are really sort of the outliers, and we are giving them some extra resources and focus to get their operations really to sort of the average performance of the rest of the chain.

We think that will create greater consistency in the markets and across the chain. So you can call that basic blocking and tackling, but essentially, the focus for that are on the units that have struggled to reach the same level of performance as the average chain or the top quartile.

The second place that we'll be going is really looking at return-oriented equipment investments in our restaurants that simply make the operation easier. And so we're undergoing some tests right now looking at individual pieces of equipment, and then also, multivariate testing, looking at combinations of equipment in the same facility.

And we've already gotten some early learnings from that to give us a high degree of confidence that the investment in that area will pay off for us. But we want to be really careful about how we approach it. We want our franchisees to be very engaged in that type of testing, so that when we are ready to invest in the business a little bit through equipment, we've got the full community onboard.

But certainly, we think those are the two places, short-term, would be sort of the outlier approach of basic blocking and tackling. Longer-term would be find ways through equipment improvements to simply make the operation easier to execute.

Thank you.

John, just one add onto that. The equipment investments that Lenny talked about are included in our CapEx guidance that we provided for you.

In 2014?

In 2014, yes.

Okay, thank you.

Jeff Bernstein, Barclays.

Two questions as well. The first one just focused more on Qdoba.

I know this year, at least, the Company acquired close to 50 stores from franchisees, and it seems like the long-term guidance is for company-operated growth much faster than the franchisee. And I'm just wondering whether that's a demonstration of confidence in the brand that corporate has that they want to own a larger percentage, or perhaps on the other side, less franchise demand? Just wondering what the drivers are?

And kind of wondering, as you wrap up your strategic review, whether there's anything specific you can share thus far, in terms of site selection or penetration or menu changes? And then I had one follow-up.

Let me talk about the acquisitions first here. So, one, we don't have any acquisitions baked into our guidance. The acquisitions that we had in the past were opportunistic, where we had franchisees that were in some of the larger markets that had a reason for an exit plan, and we wanted to go into those markets because we felt we could grow them out more quickly than perhaps what a franchisee typically would do.

So -- and they were all accretive, in terms of average unit volumes, restaurant operating margins, and EPS. So they all made a lot of sense for us.

And we'd actually like to do a few other markets, but we don't have willing and ready franchisees that are willing to sell any additional markets at this time. So we think it's still a good opportunity for us, but franchisees at this point in time are not wanting to sell any of their particular restaurants. So, I wouldn't look for a lot of that going forward, but if there is something opportunistically, we'd be happy to take a look at it.

And the growth going forward, in terms of just the company-operated being faster, I don't know if that was again a demonstration of confidence or more or less franchisee growth going forward? And how that relates to early learnings from that strategic review?

Yes, in terms of the growth that we projected, it's on par with fiscal 2013, the 2014 growth, and then ramping up from there. And we have -- I think I talked in the last quarter that we've really built the infrastructure in the development organization.

So we brought on a new Chief Development Officer; we updated our site selection model; we have new real estate folks, new construction folks; new process of approval and so forth, to really pick those A locations for us. So those are in the pipeline for 2014 and beyond.

But we will probably be making some changes to the facility based on what comes out of the brand -- the strategy work, the brand positioning work. So that will be tested in some prototypes, and then incorporated into further development beyond 2014 and probably in the end of 2014. So that's the plan right now, is to incorporate and let that brand strategy work guide us on the facility.

And Jeff, just one follow-on comment there is, what we're guiding for franchise growth is consistent with what we've been guiding for franchise growth, and consistent with what they've been doing. So, I wouldn't look at this as a lack of confidence with respect to franchise growth, if they continue to grow at about the same rate that they have been.

And then also, that could ramp up, depending on what the brand strategy outcome looks like. But we all know that franchisees will probably take a wait-and-see before they would start to ramp that up. But they're still building.

Understood. And then just, Jerry, just a clarification -- you mentioned before, share repurchase has been the focus, and I think you said over time, it's been over $1 billion now.

I'm just wondering at what point do you reconsider the balance with a dividend? Or whether, for some reason or another, your shareholders or management kind of prefers kind of solo that repo focus?

No, I would say, look, we're not anti-dividend. We look at our capital deployment opportunities on a continuing basis, and we'll continue to do that. We're not ruling one out, but we don't have any current plans to offer a dividend.

Thank you.

Jeff Farmer, Wells Fargo.

I might have missed this, but did you guys provide any commentary on what you expected the menu pricing to be in 2014 at both concepts? And what's implied in that same-store sales guidance?

No, we did not. We did not.

Okay. So it sounds like you're not too looking forward to providing more color there. But is it safe to assume that it would be less than 2013?

I think it's safe to assume that we're going to be a little cautious on price, look at what our competitors are doing, but also having a keen eye to what grocery store or food-at-home pricing is, because we know we have to -- we know that, generally, bad things happen when QSR pricing gets north of grocery store pricing.

So, we keep an eye on all of those. But we're not anticipating aggressive pricing in 2014.

And with regard to Qdoba, again, the brand strategy will help kind of inform us on pricing at Qdoba.

Okay. That is helpful. And then just sticking with Qdoba for a second. And I think I know the answer to this, and it's probably not too much, but just in terms of the units that had been closed, I know a lot of them were sort of in these contained markets, but were there situations where you did see sort of neighboring Qdoba units benefit from displaced sales, that eventually found their way back into some of these still-open restaurants, neighboring Qdoba's?

What I would say, most of the restaurants that we close -- I'll use Manhattan as an example -- we just really exited the entire market, so you wouldn't expect sales transfer from that. Other markets, like Chicago or L.A., where they're very large in terms of the geographic reach, you wouldn't expect sales transfer from those either, just because of where their locations are.

And then just one more quick one. I know, based on the ongoing concept review, that the -- some of the development timeline for Qdoba is a little bit up in the air. But is there any color you can provide on the potential quarterly cadence of some of these openings for the Qdoba brand in 2014?

Yes, we really haven't disclosed that.

Okay. Thank you.

Thanks.

Dave Carlson.

I hope everyone's well. Going back to the Qdoba questions from earlier, realizing that you guys are still conducting this brand review, can you provide any early indications as to what additional investments, whether it's capital or investments that hit the P&L, that might be necessary in order to generate the sustained comp sales growth at the brand?

You know, Dave, I think we'll be in a much better position after the end of the calendar year to give you a little bit more color. But, clearly, we know that there's some menu innovation, there's some design work and so forth.

So, that will most likely include some investments in terms of building the infrastructure and the capability and the talent. But a lot of that talent is available at the enterprise level. So we'll give you more information on that when -- after the brand review is done.

Understood. And this also could be a little bit premature, but anything that you could address as to what degree the brand itself may need to be repositioned?

Yes, I would hold off on that as well.

Understood.

Thanks.

Next question?

Nick Setyan, Wedbush Securities.

It seems like next year, the commodity environment is going to continue to be a little bit of a tailwind. And I want to understand this quarter a little bit more, just so I can project forward.

We have, I think, the right thing -- 32.7% food and packaging as a percent of sales, in a 5% inflationary environment. Last year was only 32.6% -- it was 32.6%.

So we only had about 10 bps there of delevers -- of deleverage. And I think, if I heard you correctly, you said you held pricing pretty steady; there was very minimal pricing.

And so, if we're going to -- I first want to understand sort of what were the drivers of such a, I guess, stellar performance on the food and packaging side in a 5% environment, when you guys weren't taking much pricing? And does that mean -- I mean, that kind of indicates that next year is going to be a -- have a pretty big tailwind from cost of sales.

And that could, in fact, kind of drive a lot of that improvement in the margins. So, how can I kind of interpret all that?

Yes. So, Nick, a couple things. One, the pricing comment that I mentioned no pricing, that was specific to Qdoba. So Qdoba had no price in Q4 versus 2.8% last year.

The Jack in the Box pricing was similar year-to-year. We had 2.5% of price this year; it was essentially the same number last year.

So -- and the other thing too, is it really depends upon product mix and what you're promoting in the quarter versus what you did in the prior year. So, there's more that goes into it -- a lot more that goes into it than just what the commodity inflation level and pricing look like.

Got it. So, it could change from quarter to quarter in terms of mix. There's no sort of strategy to focus on those items that would benefit the margin a little bit more going forward?

No, I think there is, but just seasonally, as an example, I think the easiest thing to do is you'll -- is to say you'll sell more salads and soft drinks in the summer months, and you'll sell more coffee in the winter months, and heavier product items, perhaps, in the winter months. So I think, just normally, what you'd see with how people buy food, you'll see the same kind of shift in product mix.

Okay. And then just another question on Qdoba.

I think you guys had previously commented that the newer openings are actually doing much better than what we've seen in sort of in the last two or three years. So, could you maybe give us another update on, now that you guys have almost 30 units that you guys already opened this year, how those sales are tracking, what kind of margins we're looking at?

And then just kind of a bigger question on Qdoba, what was sort of the big problem, I guess, over the last three years with those openings? Maybe size of development?

I mean that you guys commented that you hired the new development teams, that they're looking at different criteria of how they're going to open. I mean, are there any other drivers that, as going forward, are going to be different, that we can have 3%, 4% types of comps longer-term, and see cash on cash returns that are more in that 30% range?

Yes. Regarding the new locations, they have improved because the volumes are closer to the system average, versus low volumes in some of those very challenged markets. Those are the very markets that we ended up closing as a result of lack of brand awareness.

And I think we talked about that quite a bit over the last couple of years, that Qdoba entering those markets where they were new to the markets, that there was competition in the markets, and we had the lack of market penetration and the lack of brand awareness. So, that was the challenge.

Obviously, going forward, is two things. One is to build in those markets where we have some brand awareness, and to improve our positioning of the brand, so that we clearly become a destination brand that's differentiated from the competition in the Mexican fast casual category.

Thank you.

Operator, if you can prompt for more questions?

(Operator Instructions). Joe Buckley, Bank of America.

Jerry, I wanted to ask about your margin on the franchise revenues. You gave us a lot of breakdown between the rents and the royalties. So, if the same-store sales for the franchisees improve, should we see that margin percent, your expenses versus revenues, also show pretty good improvement?

Yes. Short answer, yes.

So we -- but while our rent that we carry does move up from time to time, it doesn't move up based upon sales. So, if you're looking at any point in time, we can get a 9.5% flowthrough on the incremental sales volume for a franchisee, as well as 5% on the royalty.

So we can get marginal flowthrough as high as 14.5%. I'm not saying it's always 14.5%, but it can be as high as 14.5% on that. So, that is -- I hope that answers your question, Joe.

Thank you.

At this time, it doesn't look like we have any further questions. We appreciate you all joining us this morning and have a happy Thanksgiving.

Thank you.

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