Jack in the Box Inc (JACK) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. second-quarter fiscal 2014 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, Christina, and good morning, everyone.

Joining me on the call today are Chairman and CEO, Lenny Comma, and Executive Vice President and CFO, Jerry Rebel. During this morning's session we will review the Company's operating results for the second quarter FY14, as well as some of the guidance we issued yesterday for the third quarter and full fiscal year.

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 or losses 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 related to Company operations, are detailed on 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 Jefferies Consumer Conference in Nantucket on June 18, and at the Oppenheimer Consumer Conference in Boston on June 24. Our third quarter ends on July 6. We tentatively plan to announce results on August 6 after market close and our conference call is tentatively scheduled to be held at 8:30 AM Pacific time on August 7.

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

Thank you, Carol, and good morning.

Yesterday, Jack in the Box reported a 38% increase in operating earnings in the second quarter. Our results were driven largely by better-than-expected same-store sales growth at Qdoba, margin expansion at both brands and lower G&A. While our sales -- our same-store sales performance at Jack in the Box was lower than our expectations, the system outperformed the QSR sandwich segment by 120 basis points.

Sales softened in the second half of the quarter as some of our major competitors began discounting and aggressively promoting value messages. On our sales to date, the third-quarter have rebounded, which is reflected in our guidance of 2% to 3% same-store sales growth in the third quarter. Breakfast and late-night, again, drove the overall same-store sales growth in quarter two, and we continue to see an acceleration in breakfast sales through the first four weeks of the current quarter.

Restaurant operating margin for our Jack in the Box brand improved 150 basis points in the second quarter, even with the modest same-store sales growth. Strategically, we have chosen not to pursue deep discounting at the expense of margin, as we don't believe it's the way for us to effectively compete in this segment.

Our broad and innovative menu remains a differentiation for the Jack in the Box brand. Our focus in this area continues in the second quarter, as we introduced the Bacon Insider Burger, as a premium LTL and extended our line of Monster Tacos with two new flavors.

We also launched several new products at the beginning of the third quarter, including Jack's Blazing Chicken Sandwich, which features a hot Ghost Pepper Ranch sauce. In addition, we added two new flavors of iced coffees and a Reese's Peanut Butter Cup Pie, both of which are great check builders. Speed of service remains a key priority of ours and we continue to make progress during the second quarter, with both Company and franchise restaurants gaining traction.

As for refranchising, in the second quarter we sold 14 restaurants in one market that is now completely franchised. In addition to this transaction, we signed letters of intent to sell two of our three remaining Southeast markets. As we wind down our refranchising initiative, we expect to see higher AUVs at our Company-operated locations. We also expect to see the kinds of benefits that favorably interest our second-quarter performance, such as higher margins, reduced overhead and lower advertising cost.

Turning to Qdoba, same-store sales at Company restaurants increased 7.2% in the second quarter. We grew transactions in the quarter while substantially reducing discounting in our restaurant. Qdoba's strong sales performance, which included double-digit growth in catering sales, helped drive 110 basis points of improvement in that brand's restaurant operating margin.

Our messaging in the quarter centered around our Queso Bliss promotion that featured two limited-time offers, Queso Diablo and Queso Verde. This promotion leveraged the popularity of our most craveable menu item, our Three Cheese Queso.

Looking ahead, we will be increasing our focus on menu innovation to drive traffic and sales. As an example, last week we began promoting Mango Mojo as a limited-time offer in our restaurant. In addition to giving guests the opportunity to customize any product with the new flavors, we are offering three new summer items, the Mango Mojo burrito, Mango Mojo Salad and a sampler we call the Mango Mojo Trio, which features our signature mango salsa, 3-cheese queso and hand-smashed guacamole, served with handmade chips.

In addition to menu innovation and creating more new product news, we are also testing additional initiatives resulting from our brand-positioning work. We announced yesterday that we are initiating a dividend. With the transformation of our business model nearing completion, our brands are generating more stable and predictable cash flows, which gives us the confidence to pay quarterly dividends in addition to our ongoing stock repurchase program, while simultaneously investing in the growth of our -- of both brands.

All in all, it was a solid quarter for the Company. Midway through the fiscal year, we are pleased with our overall results and execution of the strategies we've put in place to drive long-term performance and success. And now, I'd like to turn the call over to Jerry for a more detailed look at our second-quarter results and outlook for the remainder of the year.

Jerry?

Thank you, Lenny, and good morning everyone.

I'm just going to touch on the highlights for the quarter, as I know everyone is pressed for time this morning. Operating earnings per share, excluding gains from refranchising and restructuring charges, were $0.51 in the quarter, versus $0.37 last year, up 38% even with the $0.01 charge write-off for the deferred financing costs in this year's second quarter.

Our results for the quarter continue to reflect the transformation of our business model for the Jack in the Box brand and the annuity line cash flows that refranchising -- that franchising produces. With positive same-store sales growth at both brands and the benefit of refranchising, we were able to leverage margins and SG&A.

Jack in the Box margins improved 150 basis points to 18.6% as we explained in the release, and benefited from pricing of about 2.5% in the quarter. Qdoba restaurant operating margin increased 110 basis points to 18.3% of sales. Qdoba price increases during the quarter averaged 0.8%. The increase in beverage equipment rental cost mentioned in the press release relates to the Coke freestyle machines that were recently installed in all Company restaurants.

SG&A decreased by $3.8 million as compared to last year, as we described in the press release, even with an increase in advertising costs at Qdoba due to timing, a legal settlement of $1 million, and a year-over-year increase in SG&A related to mark-to-market adjustments. We continued to make good progress on refranchising and have now reached the 80% franchise level for the Jack in the Box brand.

The net gain for the quarter includes a gain on the sale of 14 restaurants in one market, and the expected loss on the sale of two markets in the Southeast, for which we have signed letters of intent. We expect the sale of one of these markets to be completed during the fourth quarter and the other market to be completed by the end of the calendar year.

In the second quarter, we bought back $125 million of stock, or approximately 2.1 million shares. Year to date, through the second quarter, we've returned over $200 million to shareholders through the repurchase of nearly 3.7 million shares, which leaves just under $135 million remaining under the $200 million stock buyback program that expires in November of 2015. It was a transformation of our business model, the confidence we have in the sustainability of our cash flow generation, and the greater flexibility of our new credit facility, we decided to initiate a dividend as part of our commitment to return cash to shareholders.

Here's our current thinking on guidance for the balance of the year. For the third quarter, we are expecting same-store sales growth at Company restaurants of 2% to 3% for the Jack in the Box and 3% to 4% at Qdoba. Qdoba sales to the first four weeks of this quarter are trending above this level, even with the negative impact of the Easter shift.

The only changes we've made to our full-year guidance were as follows. Same-store sales are now expected to increase approximately 3% to 4% at Qdoba Company restaurants, reflecting the results we've seen through the first two quarters. Overall commodity costs are now expected to increase by approximately 1% to 2% for the full year, with roughly 3% inflation expected in Q3.

Beef has been extremely volatile and we now expect beef costs to increase approximately 4% to 5% for the full year. Most of our other major commodities are locked for a good portion of the year, including chicken, cheese and bakery, which is helping to mitigate some of what we are seeing in the spot markets.

In addition, our supply chain team continues to leverage the purchasing power of our combined brands to lessen the impact of inflation. Operating earnings per share from continuing operations are now expected to range from $2.25 to $2.35 in fiscal 2014, compared to $1.82 in fiscal 2013. We've raised the lower end of our full-year operating EPS guidance from $2.20 to $2.25, but maintain the high end, given the higher expected commodity inflation as well is the deferred financing costs, write-off and the legal settlement incurred in our two -- included in our second-quarter results.

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

(Operator Instructions)

Joseph Buckley from Bank of America, Merrill Lynch.

I wonder if you could elaborate a little bit more on the Jack in the Box sales trend in the latter part of the second quarter and then in the third quarter. Were there actions that were Company-specific behind the slowdown and reacceleration, or was it more just changes in the competitive environment? Any color you can give on what caused the slowdown and then what led to the reacceleration would be helpful.

This is Lenny, Joe. Thanks for the question. I'll maybe add even a little more color than that. We were featuring the Bacon Insider Burger. We were also featuring the Monster Tacos throughout most of the second quarter.

About midway through the quarter, just prior to the launch of Taco Bell's breakfast, we started to see competitive discounting and free offerings that started to impact our sales. We kept a close eye on that and decided toward the last couple of weeks of the quarter to switch off of the Monster Tacos as the secondary message to breakfast items as a secondary message. Although, we are not necessarily seeing the Taco Bell launch of breakfast negatively impacting our breakfast daypart, we felt that the offering that we could put in place was more of a value bundle and we'd get some attention in the marketplace to compete against some of the other messages that were out there.

Keep in mind, Jack in the Box serves breakfast 24 hours a day. So, when you put those messages out there, they're not necessarily just daypart-specific sales that we are driving. That was, essentially, the adjustment that we made, and then going into the third quarter, we have planned promotions that are in place that we did not change. Those included the Jack's Blazing Chicken Sandwich, as well as some new breakfast griller items. A few slight adjustments that we made, to just make sure that we were putting some messages out there that were value bundle oriented, so that we could make sure that our voice was being heard on the value side of the scale, so to speak.

But ultimately, what we didn't want to do, is create so much focus and primary messaging around deep discounting that we sacrificed our margin. We think we balanced the quarter pretty well. We weathered what we thought would be a temporary storm, turned out to be a temporary storm of discounting. As we go into the third quarter here, we are seeing a nice rebound in sales.

In addition to that, what I would mention is, what I think folks need to keep in mind is that when the competition puts out new items or heavily discounted items, it's always going to generate some trial. We know there's going to be some energy at that time that we have to pay attention to. We make a conscious decision at that time how much of a response we want to have. We think we managed this one appropriately. But we don't see ourselves as vulnerable to that type of discounting. We are making a choice to manage margins and manage sales.

If we feel at any time that the competitive set is doing things that is sustainable and will, essentially, take our business away over the long term, we know that we can pull that lever of more aggressively promoting value items and we do know that it will favorably impact our sales, but we know that it will come at the expense of margins. It's a balancing act. We think we are in the right place. I think that kind of sums up our approach.

Okay. Thank you.

Brian Bittner from Oppenheimer.

Can you hear me?

Yes, Brian.

Okay. Sorry. The Qdoba sales acceleration in the quarter, can you talk a little bit more about that and the bucket that drove that? How much of it was truly just product driven and the trial of that product and how much of it is more strategic in what you are doing with the brand?

Maybe, Brian, I will speak a little bit about the strategic nature of what we're doing and then let Jerry give a little bit of color on what we can share about the numbers. What essentially we did is, we took our strongest equity in that brand from a product perspective, being the 3-cheese queso, and we brought attention to the brand by leveraging that equity. That part of it is what is strategic.

What we saw within that promotion is that we had a much higher percentage of our transactions, including one of the quesos or the sampler, so we know that, that equity was driving traffic, because we saw it in the attachment rate to all of the transactions. That gives you the very simplified view on strategically how we approached it.

Okay. And just want to ask another question on the G&A opportunity. As we start to peering at fiscal 2015, and I know it's still a ways a way, but just simply thinking about the G&A, you are going to have another market that you are going to refranchise by the end of this calendar year. Can you just talk to what your initial thinking on maybe how much swap there is under the hood on the G&A opportunity, and maybe start to make us think a little bit more about how fiscal 2015 can start to look from G&A? Could it be another down year?

Brian, this is Jerry. Let me tell you what I can tell you about G&A. It probably won't be everything that you'd like to tell me about G&A.

With the sale of the 14 restaurants in the one market and also in the sale of the Southeast, we would expect the field-level G&A to be reduced as it has been when we have sold other markets. I would expect that to be down. I would expect that to be down on a permanent basis, there. Also, with the sale of those markets, the advertising load then shifts from the Company to the franchise operator, also. So, that will be a reduction of the SG&A within that -- within those transactions.

Then I will talk to you little about is where I think we have some room under the hood, if you would, or what's left under the hood for some of the G&A. We talked about, at the end of 2013, that we had completed the integration of the Jack in the Box and the Qdoba offices and support and created a shared-service model, such that we have one accounting department, one HR group, one IT department, as an example, and obviously, others. We also described that what that integration created was the organizational structure and the people element of that. It didn't necessarily integrate systems, particularly restaurant-level systems.

So while that people and organizational change had a significant impact on G&A, what you're seeing here in fiscal 2014 -- the opportunities exist, and which is really related to our restructure charge this quarter is, as we look at the IT systems that we have within the restaurants, while the Jack in the Box brand and the Qdoba brand each have a single platform suite of restaurant-level technology within each brand, they're different across the brand. So what that means is that we are deporting, say, two POS systems, two back office systems, two other items, all of which that we have in the restaurant level or two. That obviously creates some additional IT and infrastructure required to support and maintain all those systems.

What we are beginning to look at now is, how we can integrate those restaurant-level technology systems that we can have, say, one of those systems and reduce not just the G&A costs, but also reduce restaurant-level operating costs going forward. I can't give you a lot more detail than that, as we are in the beginning stages of that analysis, but I think there is significant opportunity on the G&A side as a result of that.

Okay. Thank you. I just had to sneak one more in on top of that. Would this ever disallow you to separate Qdoba? Would this kind of stop you from being able to spin it off or sell it down the road? This integration of systems?

No. No, I mean, there's -- people separate divisions or other operating entities all the time and whether you're operating on the same system or not, it really doesn't have an impact on that. It's not our intent to do that, but this isn't limiting in any way.

Okay. Thank you.

Alex Slagle with Jefferies.

I had a question on the Qdoba labor leverage, about 70 basis points. Wondering how much was due to the better same-store sales growth or have you started to lap the increased staffing levels rolled out last year?

Alex, this was almost entirely due to the improvement in the same-store sales. Most of that was in the -- most of the favorable impact of the sales was in the management-level comp, so that was all leverage. But we also have -- offsetting some of that, we did pay higher restaurant-level bonuses, as a result of the restaurant driving higher restaurant-level sales and restaurant margins. That offsets some of the leverage on the production labor -- or the management labor side.

Okay. How should we think about your ability to keep leveraging that at Qdoba going into the second half? Do you need these mid-single-digit same-store sales? Or, is 3%, 4% sufficient?

I would say, look, same-store sales will obviously help with that quite a bit. I would say some of this, in terms of the leveraging on the entire restaurant operating margin side, some of this will depend on what commodities do, but I would suggest that if we are able to continue, say, mid-single digits, or actually even maybe a little bit lower than that, within the range guided, as an example, we would expect to be able to leverage labor.

Okay. Thank you.

John Glass with Morgan Stanley.

First, I want to make sure I understand and maybe clarify your comments around the competitive environment, particularly given you are at the epicenter of this breakfast launch. Did your breakfast daypart -- is that the piece that we bring the breakfast launch at Taco Bell and that's what's recovered? Or was it other parts of your business, because you just saw an [AMB] at higher competitive discounting? If you are not feeling the breakfast impact and you are next door to them, would you think Taco Bell is taking share from? It would seem like you'd be the most obvious candidate.

First, let me clarify the breakfast results. We did not see a negative impact to our breakfast daypart with the launch of the Taco Bell breakfast. In fact, late-night and breakfast continued to drive the improvement in our comps.

In addition to that, as we�ve progressed into the beginning of the quarter, we have -- we've seen an acceleration in both breakfast and late-night. So, don't think that, that's where it was coming from. But certainly, a lot of the competitive discounting that was taking place, although seemed to be in conjunction with the timing of the Taco Bell launch of breakfast, the items that were being promoted were actually across all dayparts, and so we were seeing the impact in other dayparts outside of breakfast and late-night.

And then as far as the impact that Taco Bell is having on the industry, I would just emphasize that our breakfast has always been 24 hours a day, which I think is a huge equity. We also do serve a very freshly prepared breakfast with fresh cracked eggs. Not everybody does that. We think is a differentiator and it does change the execution of that product.

Breakfast is 22% of our mix. It's a strong daypart for us that we think is driven by those differentiators. I can only assume that folks that are selling more heat-and-eat and not freshly prepared foods are getting impacted by Taco Bell, more so than the ones who are serving more freshly prepared foods. At this point, will have to wait to see how that shakes out in everyone's results, but that's sort of the assumption.

That's helpful. Jerry, as you've gotten to the end of your prescribed refranchising and you've got it all but done, have you given now incremental thought? Is 80% the right level? Others have taken it further. When do reassess that? Is that going to be dynamic from here on in, there might be one or two offs, but there will be no new goals set?

We're comfortable with 80% to 85% target. I think the real luminator, for us, would be the level of volume sales and the high margins that the restaurants that we would continue to operate generate. We always look at this as, where do we get the best cash flow bang for the buck and we also don't want to create a bunch of dilutive refranchising transactions here. We always look at that and I say that 80% to 85% range is probably the right number where we sit today.

Thank you very much.

Robert Derrington with Wunderlich Securities.

Jerry, if I could hit you with a bookkeeping question first. I'm pretty simpleminded around a lot of things, but could you help us understand the $1 million legal settlement worth about $0.01 -- roughly $0.015 to your EPS and then the charge for the deferred financing write-off? You told us on March 30 that was coming. I'm just curious why these things didn't get excluded from the EPS, the $0.51, that you reported?

Well, I think our practice is to -- if it's continuing operations, we have a definition of what we consider to be continuing operations and we like to maintain with what that level of definition is. I think it creates comparability across year to year. Our definition is that EPS from continuing operations, excluding restructure charges and gains or losses on refranchising item.

But what we also want to do is, to your point, create transparency about what's in the numbers and then allow the investors and the sell-side folks to decide what they want to include or exclude from those numbers. I would say both of those items, though, would not be considered to be recurring on an ongoing basis. I don't know whether that helps.

No. Excuse me, that does. That's tremendously helpful. Secondarily, if you could give us a little bit of color around your dividend program -- we are really encouraged to see you initiated that. Can you give us some sort of strategy around whether there is a targeted payout that's planned? Should we anticipate that it likely would grow along with net income? Free cash flow? What kind of -- what can you help us there?

Let me tell you how we thought about the dividend and why now, as an example. I think when you look at the progress that we've made on our refranchising strategy and hitting the 80% level in the quarter, also having two letters of intent signed for two of the Southeast markets, you look at that, the confidence that we have in our growing free cash flow, as well as the new credit facility, which creates a tremendously more flexible return of cash to shareholders options for us.

We felt now was the right time to implement a dividend. We would look at that as, that is just part of our strategy of returning cash to shareholders, and the dividend allows participation in that strategy for long-term holders who may not be trading in and out of the stock, so we wanted to be able to do that.

The level that we set, we looked at, was created as we looked at the folks in the restaurant industry who pay dividends. We excluded those who are paying on the high end and we also excluded some who were paying on the low end. What we saw, at least in our analysis, was that an additional dividend yield in the 1.4% to 1.5% range was a good sweet spot. That's where we landed. That's how we thought about it. It also enables us to continue to invest in growing both the Jack in the Box and the Qdoba brands.

What I would say with respect to, would we intend to raise it every time, I think it's probably a little soon to talk about that yet. We haven't written the first check. But we will have dividend news as we go forward, here.

Terrific. Again, congrats on a terrific quarter.

Thank you.

Jonathan Komp with Robert W. Baird.

Maybe just first, Jerry, a follow-up to your last answer there. As you look at the balance sheet and the pace of repurchase 12activity, I know year-to-date in the first two quarters you repurchased over $200 million of stock and also taken the debt balance up by more than $100 million.

So as you look forward with the transformed business model, what's your current thinking longer-term about the right degree of financial leverage for the business? Maybe tie that into the pace in repurchases, going forward?

Sure. On repurchases, I would expect us to have a two-pronged approach. One would be we just have a regular ongoing share repurchase program, but we would also expect to be opportunistic, given where the stock may be at any point in time. I think we will look at the share repurchases in that way.

We have, currently, at the end of second quarter, we were levered 1.71 time debt-to-EBITDA ratio, which is as defined in the bank agreement. You won't be able to calculate that from the financials. There's pluses and minuses within that. The maximum leverage ratio is 3 with any credit facility. We are very comfortable in a 2 to 3 range, which is about one turn of debt higher than what we've historically been comfortable with. That's where we are.

Okay. Great. That's very helpful. Just one other question related to pricing outlook for both brands. I know you pointed to, Jerry, expectations for little bit higher commodity inflation, especially in the third quarter, with beef inflation a bit higher. I think you also have also pointed to a potential for labor pressures in the fourth quarter tied to minimum wages. Can you talk about both Jack in the Box and Qdoba, maybe the outlook for pricing in the near-term?

John, this is Lenny. A couple of things, there. First, for competitive reasons, we don't foreshadow pricing, but what I will just point out is, for the Qdoba brand, specifically, we've spoken about the work we've done to reduce discounting. That certainly is having a favorable impact on the business, while at the same time we've been able to drive transaction growth. That's probably about as far as we could go, as far as foreshadowing price, but least it gives you an indication of the types of things we are doing to balance out sales margin.

Okay. Got it. Thank you.

Jeff Farmer with Wells Fargo.

Following up on Qdoba, I was wondering if you guys could discuss the media weights in the second quarter versus what you saw last year? And then moving forward, over the balance of 2014, what you expect your media weights to look like relative to the FQ2.

We don't really discuss media weights but, for Qdoba, one thing to think about as we don't use traditional media, television advertising. We do a lot of social, we do a lot of outdoor advertising and radio, which doesn't get measured quite the same way as television.

We've had some increases in those methods of advertising related to some of the strategic initiatives that we've launched in new product innovation. Keep in mind, it's been years that Qdoba was on a core product strategy and as part of the brand positioning, we're -- really has started to ramp up the development of new products and focus on innovations.

Just to follow up, you are getting at the heart of my question, which is you have a lot of this new product news. We see the radio, or hear the radio, see the billboard, but how are you best communicating that there is new food news, that there's a new reason to go to Qdoba, now? How are you guys making that happen for the consumer?

I would say, social media is probably one of the biggest areas where we see a push and what we're finding in some of the new initiatives that we are testing is that the activity that, that's driving with our loyalty program and then the consumer-generated voice that we see in social is really helping to spread the word on the things that are happening at Qdoba. So we are quite pleased with what we've been able to create, primarily through social media.

Okay. Thank you.

Nick Setyan from Wedbush Securities.

There's a lot of focus on the cost impact from the minimum wage increase in the second half, but not as much focus on the potential to drive some incremental comps as your potential customers have more money in their pockets. Maybe if you guys could contextualize, historically, how have minimum wage increases in California, historically, impacted or benefited your comps? Have you guys ever taken a look at that?

Nick, this is Lenny. What I would say, in general, is that when we have a minimum wage increase, and I don't know if this is just for California, but when there's a statewide situation, all of the competition are impacted by it. We will sometimes see it reflected in price, we will sometimes see it reflected in discounting or how aggressive, aggressively things are moving with promotional activities.

But we also see that there are other areas of the business that have to be balanced out in relation to minimum wage increases. That's things like commodities or utilities. So although we will experience the increase in cost, especially with labor, there are other lines that we're also going to have to look at to understand the full impact. I know that all the other competitors will do that, as well.

With that as the backdrop, we don't experience, typically, some cliff-type event that negatively impacts our comps when we have a minimum wage increase. So if I look at the third quarter and just sort of reflect back on the 2% to 3% guidance we've given on the Jack in the Box brand, it's reflective of a high degree of confidence that we have based on what we experience right now and what we anticipate happening.

Got it. Longer term, as we look at Qdoba and the momentum that we are seeing in the brand, with respect to unit growth, you guys floated down a little bit this year. What are you looking to see going forward in the second half, to potentially reaccelerate that unit growth rate in 2015 or beyond?

I think the way to look at it is a lot of the work that we've done around the brand positioning sort of exploration has gotten us to a place we've gotten some early initiatives here that are mainly product related. We are going to look at many other facets of the business in association with this brand work. Some of it may require some improvements or changes to dining room or decor, things like that, that we think will tie to the positioning that we try to establish.

All of those pieces of the puzzle haven't been finalized yet and so we don't want to accelerate growth at this time, because we know that we'd have to backtrack and make adjustments to all those locations. I think that since about half of our system is franchised, in order to drive growth through that channel of the business, we really do need to have things sort of buttoned up and well tested before we would step on the accelerator.

We've mentioned on our last call that we will have some concept tests that we will be getting very active with later this year, toward the end of this year and into the beginning of 2015. We are going to read those results. It's going to take us many months to work through what we learned and how to come to the final concept that we'd like to start evolving the brand to.

That's going to take the greater part of 2015. I think expectation should be that as we start to bring some of that learning to fruition in the middle of next fiscal year, that's when we'll be able to talk more about what we think growth and units will look like going forward.

Perfect. Thank you.

Peter Saleh of Telsey Advisory Group.

I wanted to ask about Qdoba, the strength that you saw in the catering. Can you elaborate a little bit on what drove that strength? And has that strength continued into the third quarter as well?

Let me just speak to -- when we brought in Tim Casey as the new brand President for the Qdoba brand, we spoke a lot about the brand work that we were doing and also that we were bringing in new talent into the organization to start focusing on areas of the business that we thought we had opportunity to grow. We added resources and brought in some new talent into the catering business that we believe created a much greater focus and emphasis on that side of the business. In addition to that, we've then aligned the management restaurant-level management compensation, bonus programs, to driving sales in all areas of the business, including catering. We think that we've been able to create a greater level of focus both from a corporate infrastructure standpoint and then also at the restaurant level.

And then, keep in mind that we just went -- are experiencing a very strong catering season for us in Cinco de Mayo and also graduation. It is the highest catering month that we experience. We are tracking currently above our 3% to 4% guidance and that's probably an indication of some of the strength the we are seeing an overall sales, including the catering business.

Great. Thank you very much.

Operator, I think if we can prompt for any last questions?

(Operator Instructions)

Is there anyone additional in the queue?

Joseph Buckley from Bank of America Merrill Lynch.

I just wanted to circle back to the Southeast letters of intent. Can you share with us which of the two markets are covered by that, or (technical difficulties) maybe the number of restaurants included in the two agreements?

Joe, I won't share you the markets, because we haven't necessarily had the employee meetings, yet, so we want to do that. I can tell you it's about 30 markets -- 30 restaurants over the two markets. 30 markets would be a lot. 30 restaurants across the two markets that we have the letters of intent on.

Okay. What is the status of the third Southeast market?

Currently talking to prospective franchisees. There is interest.

Okay. Then, are you thinking that the Southeast, there is a lot of -- talked about the Southeast for a very long time, about it's actually being accretive immediately? Does it still feel and look that way to you?

Yes. We would expect all of the Southeast markets to be immediately accretive.

Okay.

And then growing over time at the same-store sales increase.

Very good. Thank you.

Jake Bartlett with Morgan Stanley.

I had a quick question on the 14 units sold in the second quarter and whether they were accretive or dilutive. Also, whether the guidance for pro forma impact over the refranchising in 2014, how they're going to impact 2015? Looks like they're a little bit later than expected.

Okay. The first part of the question is on the 14 restaurants. They are accretive. They are not as accretive as, say, the Southeast would be as they have better levels of margins, but they will be accretive. As far as the second question, Jake, I think the question was pertaining to the Southeast impact on 2015's margins?

Right. I think before you mentioned that should be incremental by about 100 basis points, or at least --

Exactly right. Jack in the Box brand margins, as we said, at least 100 basis points. I think with the -- we expect one of these two LOIs to close this fiscal year in the fourth quarter. The market that we currently have interest in, they also very well close this fiscal year. Then with the other market closing in the first quarter, the end of the calendar year of 2014, I'll expect that to be very, very close to that 100 basis point improvement number.

Okay. Sorry, just to confirm. There's one quarter in the fourth -- or, one market in the fourth quarter and one market in the first, and then the third market is some time later than that, is that correct?

No, I the third market may actually close before the second letter of intent.

Okay.

So the third market may very likely close this fiscal year.

Okay. Got it. And then a quick question on inflation in -- the 0.9% deflation you're seeing at Qdoba. Is this the pure inflation from food, or is this net of savings from your merging the purchasing group and all those efforts?

It's net. I would say that the big portion of the Qdoba savings are due to lower discounting, as an example. Also, the other piece of the Qdoba savings would be from our supply chain integration, where we are leveraging the combined purchasing power and setting up programs that allows us to, say, have lower cost inflation on avocados than what you are reading about in the industry. It's still up, but it's not nearly up what you are reading out with the spot market pricing.

Got it. Lastly, can you break it down, the 1% to 2% inflation for the different concepts? What it means for Jack versus Qdoba, for 2014?

I think what we -- what we've said on that is it's about 1% to 1.5% for a full year.

I think what Jake is asking is what the inflation of the 1% to 2% is by brand, is that what you are asking?

Yes, I am.

It's pretty similar for both.

It's right in the middle of that range, Jake, for both brands.

Okay. Thank you very much.

At this time, I would like to hand the call back to Ms. Carol DiRaimo for comments and closing remarks.

Thanks for joining us today. We'll be around all day for follow-up questions. Thanks for joining us. We will see you on the conference circuit.

This does conclude today's call. All participants may disconnect now.