Jack in the Box Inc (JACK) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. third-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, David, 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 third quarter of fiscal 2014 as well as some of the guidance we issued yesterday for the fourth 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 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 statements 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 Retail and Restaurant Summit in Boston on September 30. And our fourth quarter and fiscal year ends on September 28. We tentatively plan to announce results on Tuesday, November 18, after the market close and our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific time on Wednesday, November 19.

And with that, I will turn the call over to Lenny.

Thank you, Carol, and good morning.

Jack in the Box reported strong operating results yesterday, highlighted by a 59% increase in operating EPS. Our third-quarter results were driven largely by better-than-expected same-store sales growth at Qdoba, solid comparable sales growth at Jack in the Box, margin expansion, lower G&A, and a 10% reduction in our share count as we continue to use our growing free cash flow to return cash to shareholders.

At Jack in the Box we continue to take share as our systemwide same-store sales increase of 2.4% outperformed the QSR sandwich segment by 240 basis points. Same-store sales at Jack in the Box Company restaurants also increased 2.4% and, regionally, comparable sales increased across all of our major markets.

Breakfast and late-night again drove our overall same-store sales growth in Q3 as we continue to innovate in these dayparts. We kept breakfast top of mind for our guests with a new LTL, the Breakfast Monster Taco. And we added a spicy jalapeno burger to our popular late-night menu which appeals to the other nine to fivers who are out and about between 9 PM and 5 AM.

We are continuing to generate new product news in several categories and across multiple dayparts in the fourth quarter as our promotional calendar emphasizes a mix of premium products and value priced offerings. This week we are introducing our Spicy Chicken Club Sandwich and promoting it in a value priced combo for $4.99.

We are also enhancing our breakfast menu this week with the introduction of two new breakfast burritos. And for those of you on the East Coast who have been asking when we are going to roll out the Croissant Donuts, we are adding them to our menu beginning today. In addition to menu innovation, delivering more consistent speed of service is also contributing to our sales growth.

Now turning to Qdoba, same-store sales in the third quarter increased 7.2% for Company restaurants and 7.5% systemwide, our second consecutive quarter of growth in the 7% range. Qdoba's performance reflected continued menu innovation, less discounting, and another quarter of double-digit growth in catering sales which benefited from Cinco de Mayo celebrations and graduation parties. Our Mango Mojo promotion built upon the momentum generated by our Queso Bliss LTL in the second quarter. Transactions growth of 2.7% was double that of Q2. And we continued to see an increase in average check, due in part to lower discounting.

As summer draws to a close, the most popular choice of our two Queso Bliss options, Queso Diablo, returned to our menu as a permanent item this week.

On the development front, among the 10 new Qdoba restaurants that opens in the third quarter were a Company location in the JFK Airport Travel Plaza and a franchise location in the Pentagon. We now have 27 nontraditional Qdobas in our system and expect to open another five to seven locations in the fourth quarter. Nontraditional restaurant development has been a great way for us to grow our Qdoba brand while delivering awareness.

We also are leveraging our infrastructure in this area with the Jack in the Box brand and our first nontraditional Jack-in-the-Box restaurant is currently under construction at the San Diego International Airport. We remain pleased with the Qdoba recent performance and we are benefiting from some of the early outcomes of the brand positioning work that has been underway.

This is an exciting time for Qdoba as we position the brand for continued growth in the years ahead.

Overall, it was another solid quarter for the Company and both our brands which has prompted us to again raise our earnings guidance for the full year. We remain confident that execution of the strategies we put in place, along with those that are under development, will continue to drive performance and success over the long term.

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

Thank you, Lenny, and good morning, everyone. Our 59% growth in operating EPS for the quarter continued to reflect the transformation of our business model. 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 18.4% as we explained in the release and benefited from pricing of about 2.9% in the quarter. Commodity cost inflation of 2.6% at both brands was in line with our expectations, but negatively impacted sales leverage as did rising utility costs.

Qdoba restaurant operating margin of 20.6% was equal to last year. The benefit of pricing of about 1.3% in the quarter, sales leverage and lower discounting were offset primarily by higher commodity costs, restaurant level bonuses, new beverage equipment costs, and utilities. SG&A decreased by $4.7 million as compared to last year as we described in the press release. The mark-to-market benefit we saw in the quarter was largely offset by higher incentive compensation.

As to refranchising, we completed the sale of one of the Southeast markets this week and have signed letters of intent on the remaining two Southeast markets. Following the completion of the sale of these three markets, we estimate that the annualized restaurant operating margin for our Jack in the Box brand should increase by more than 100 basis points and our AUVs should increase by approximately $100,000 or roughly 5% higher.

Given the annuity-like cash flows our business model generates and the greater flexibility of our new credit facility, we continue to remain committed to returning cash to shareholders. We repurchased $75 million of stock during the quarter and $277 million year-to-date and paid our first quarterly dividend in June.

Following last week's additional $100 million authorization by our Board, we currently have approximately $160 million available until November 2015 for stock repurchases. Since the beginning of the fiscal year, our outstanding shares have decreased by more than 8% which has contributed to our EPS growth.

Here is our current thinking on guidance for the balance of the year. For the fourth quarter, we are expecting same-store sales growth at Company restaurants of 1.5% to 2.5% for Jack in the Box and 5% to 6% for Qdoba. As a reminder, an increase in the California minimum wage went into effect on July 1, which will negatively impact our Q4 margins for the Jack in the Box brand by approximately 80 basis points.

We expect our Q4 tax rate to be similar to our full-year guidance of 35.5% to 36.5% as compared to 28% in last year's fourth quarter.

Overall commodity costs are now expected to increase by approximately 1.5% to 2% for the full year with inflation of roughly 2% expected for Jack and 4% for Qdoba in Q4. Beef has been extremely volatile and we now expect beef costs to increase approximately 5% to 6% for the full year.

Operating earnings per share from continuing operations are now expected to range from $2.38 to $2.45 in fiscal 2014 compared to $1.82 in fiscal 2013. Our EPS guidance includes the deferred financing cost writeoff and the legal settlement incurred in our Q2 results.

As we move towards the end of the fiscal year, here's some of our initial thoughts on a few items related to fiscal 2015. Our preliminary outlook on commodities is for 2% to 3% inflation with higher inflation in the first half of the year as we roll over deflationary periods in the prior year. We currently expect approximately 60 Qdoba restaurant to open systemwide in 2015 of which about half will be Company restaurants. Company openings will likely be weighted to the back half of the year as we plan to incorporate a new prototype design. And the majority of franchise openings are expected to be nontraditional locations.

Capital expenditures look to be in the $90 million to $100 million range with the increase due to a greater number of openings and remodels for Qdoba as well as equipment costs for Jack in the Box, which are expected to improve speed of service and food quality. As a reminder, Qdoba remodels were put on hold over the last 18 months while we completed brand positioning work.

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

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

Hey, this is Greg on for Joe. I know you talked about investing in equipment next year for speed of service. What sort of equipment are you going to be putting into the stores and also what else are you doing on the speed of service side? What initiatives do you have in place?

Greg, this is Lenny. Let me tackle that in two ways. First, initiatives that are in place are primarily focused on bringing our outlier performers in line with the rest of the system. We have certain markets and certain restaurants that are performing at a much slower speed of service than the rest of the system and when we break down the reasons for that, it essentially falls into a couple of categories.

One, they don't have proper staffing during the heaviest traffic periods of the day. Two, they are not doing the continuous cooking that is required under our assemble to order system. Or three, they are not following the basic workstation position systems that we put in place to make sure that we have the proper talent in the proper stations for the product mix and sales levels of that particular daypart.

So, I am oversimplifying it, but essentially when we look at the lack of performance in those locations, it is basic blocking and tackling. But we do need to put quite a bit of work into bringing these restaurants up to par.

As far as the equipment, we are really looking at a couple of different things in general. One is, we are looking at cooking platforms that allow us to speed up the cook times and then we are also looking at holding equipment that does a better job of maintaining the quality of product over a longer period of time. So with the assemble to order philosophy that we have in place, we need to make sure that we are not moving to a cook to order platform on all of our products because that essentially slows us down. And when we do the assemble to order, the requirement of the just-in-time continuous cooking creates a stress on the organization if the product is not held to a high quality standard.

So that is essentially what we are looking at. It is everything from toaster ovens to fryers to grills to microwaves. And it is essentially similar equipment to what we have in the facility today, but equipment that does a better job than what we are currently using.

Okay that is great and that is very helpful. Thank you. If I could ask one more.

On the more than 100 basis points of refranchising benefits from the sale of the Southeast, where should we expect that to primarily become? Is that going to be one of the payroll side or the occupancy side? Will you see any food cost benefits from that?

You will see less food cost benefit than the others. You are primarily labor and occupancy.

Okay. Thank you.

Brian Bittner, Oppenheimer.

Thank you. Congratulations on another awesome quarter.

Following up on that question about the refranchising, have you been able to peg what it could mean for operating EPS post the refranchising of these three markets? Will it be accretive? And if so, by how much?

Yes, Brian, it will be accretive. We haven't disclosed what that is yet, but we will be able to provide that information for you on the November call when we give full year guidance.

Keep in mind we sold one of those markets thus far just this week. The other two have letters of intent. So -- and we currently plan to have those sold by the end of the calendar year. But I think as we get closer to those sales times we will have a better perspective on exactly how accretive that is going to be in the next year's numbers.

Okay. And on the Jack in the Box same-store sales, can you just, one, tell us what you expect to have as far as pricing in 2015 in the model? And then, secondly, you are going to be rolling over in 2015 -- again, some pretty good same-store sales in 2014 from a number of initiatives including late-night. Can you talk about how you think you can continue to drive low single-digit same-store sales in 2015 against what has been a pretty good year?

Brian, let me address pricing and Lenny will take the other part of the question.

The pricing, we never telegraph exactly what we are going to do on pricing. I would suspect, though, that we will continue to be fairly cautious on pricing keeping in mind that we will have to also balance that out with what our competitors are doing with respect to minimum wage within California. So we will be keeping an eye on that. But we are not really going to share what the pricing targets are for next year.

Brian, I will address your question on what we intend to do next year to roll over some pretty decent product innovation and also late-night initiatives this year.

A couple of things to note. First off, although we have had some new news most recently with the breakfast category, the breakfast category has, we believe, a lot of room for additional new product innovation and product improvements that we think will continue to drive that daypart.

The big catalyst is going to be menu innovation and you are going to see that across all dayparts as I mentioned in my opening comments. And we will continue that into next year. But we are also not going to lose focus on late night. We have a commitment to continue to promote late night with new products, entering into that daypart as well as putting promotional dollars behind those efforts.

So it is more of what we are doing today, but with maybe a little bit more emphasis on lunch, dinner and new product news to breakfast. But essentially the way to look at it across the board is product innovation is going to drive our success next year, along with some of the continued blocking and tackling that we need to experience in the speed of service area.

Thank you. Congratulations.

John Glass, Morgan Stanley.

Thank you. Given the success Qdoba is having and given that its EBITDA is reaching a critical mass, certainly will in 2015, and then given obviously the valuations that best casual companies get, how crazy is it an idea that you would look at separating that business?

If you could dream a dream it could be have your valuation potentially just thinking about comparable companies. So how do you think about that and the right time and also, philosophically, I think in the past it has always been viewed as core to the growth strategy of the combined businesses.

John, this is Jerry. I will take the first shot at this. So -- and read your note yesterday where you talked about some of the parts valuation. I find a hard time being able to poke any holes in terms of some of the price valuation here.

I think the way that we look at it, though, within that construct is that Qdoba is becoming a much more visible part of the overall Jack in the Box entity and is an increasingly growing part of that Jack in the Box entity. And we believe with that and the brand positioning work that we should be able to get the multiple benefit on that EBITDA that you just described with it being part of the overall Jack in the Box entity, and we are pretty confident that we should be able to do that as we continue to see sales improvements at the brand margin expansion and then also begin to ramp up growth.

So I think it is way too soon to talk about anything other than what we have our focus on right now.

I appreciate that. And just as a follow-up and maybe this is a minor detail, but when you talk about a 100 basis point improvement in restaurant level EBITDA, I assume it is at the Jack in the Box level versus a trailing 12 month EBIT margin or is it the current quarter run rate or how do you think about the 100 basis points is, plus what base number?

Yes, if you look at where we are year to date, John, on the Jack in the Box brand restaurant level margins, we would look at about a 100 basis point benefit from where we are year to date on the Jack in the Box margins.

Okay. Thank you very much.

Andy Barish, Jefferies.

It's Alex. A question on SG&A and wanted to get your high-level thoughts on some of the moving pieces for 2015 and how we should think about the major components like ad spend for each brand and pension expense. Any remaining impacts from early retirements or shared services initiatives?

Alex, let me take that. This is Jerry. I will take the pension piece first. The pension piece will be driven in large part by what happens with the discount rates. And unfortunately, the way that you have to account for that is you will get the discount rate on the last day of our fiscal year, which I believe is the 28th. So whatever discount rates are, that business day before then is what will impact what our pension expense is for next year.

So, I don't have to agree with that approach, but it is the approach that we have to follow.

So I don't know how to answer that other than to tell you that we will give you an exact number when we get back together on the November call.

With respect to other G&A options, I think, Alex, going into 2015, the likelihood is that with the shared service model that we should now begin to leverage G&A, based upon the same-store sales growth. Because you wouldn't expect shared service G&A to increase along with sales increases the way that you would, say, brand level G&A. So I think we will have some benefit just on the incremental sales growth there.

And then as I mentioned before, over time, we will be able to sync up our systems in the restaurant between Jack in the Box and Qdoba and have a single platform POS as an example, back office, timekeeping, the list goes on. But -- and I would expect that those would reduce IT costs over time, but you don't flip the switch on an IT system and decide to integrate and put one in.

So there's a lot of work that we need to do to evaluate that process and then it has to be very, very planful to make sure that we are going to do it properly. So we will give you more updates on that as we go forward, but I think that is probably the biggest opportunity on the G&A cost side is that and, then, sales leverage on the shared service piece.

Okay, thanks. That's helpful. And then on use of capital and where you want the balance sheet. Just wanted to gauge your comfort utilizing additional capacity on your revolver and buyback authorization, how much dry powder you want to maintain for flexibility down the road in case of potential store acquisitions or seating opportunities.

Yes. So we, right now, Alex, we are -- our debt to EBITDA at the end of the quarter, based upon our debt covenants, is that 1.8 and we said before we are comfortable with 2 to 3 times the $160 million that we have authorized by the Board for future share repurchases between now and the end of September at November 2015. I think it is safely within that 2 to 3 range that we have talked about the comfort level on.

We do definitely want to have some liquidity capabilities on there for things that may happen. We haven't really described what that is, but we always model in what we want to have that we need some liquidity there. We need dry powder for things such as you said or for other activities.

Thank you.

Jeffrey Bernstein, Barclays.

Two questions. First on the unit growth side and I think, Jerry, you gave some initial color on fiscal 2015. I think you said 60 Qdoba is split between Company and franchise and there was no necessarily mention of Jack. I am wondering on the Qdoba side whether there's demand for more than that from the franchise community and therefore we should continue to expect that number to go up, or whether that is the right number.

And on the Jack side being that you are still more of a regional brand and the results have been as steady as they have been, how many we should expect in 2015 and whether or not there's the ability to accelerate that pace in future years. And then I had a follow-up.

Let me talk about the Qdoba piece first.

So, the Qdoba number is higher than where we expect to be for 2014 going into 2015. And I think that represents both demand from our non-trad business, as we had said that a good portion of the roughly 30 franchise locations or if it could be non-trad, we think that is a growing piece of the business. And we talked about finding two contracts. One was Sodexo, and one with ARAMARK about a year ago. And we are starting to see some fruit from that here.

So we would expect to see continued growth on that. I think franchisees, by and large, are looking for what the new prototype is going to look like and then I would expect that there would be demand on future Qdoba franchise growth, particularly if we are having sales like we are currently having.

And then I think, on the Company's side of the equation, as we get beyond the prototype design and remember we said 30 units this year, roughly -- mainly in the back -- 30 units into 2015, mainly in the back half of the year. That would indicate that we would expect Qdoba restaurant growth to increase beyond that, going into 2016.

But we are being -- we want to make sure that we have the right prototype design in place first before we start building a significant number of Qdoba restaurants.

And on the Jack side.

On the Jack side, the risk of providing a portion of the data we will tee up a question on the other piece that we didn't give. We will give more guidance on that as we go into the November call. We did increase it to about 15 this year. The vast majority of that will be franchise locations.

Got it. And the other one, just a follow-up. I think you said we take the third-quarter year to date Jack brand restaurant margin, bump it up by 100 basis points. But I am just wondering more broadly if this year's blended margin is 18 to 18.5 after assuming that close to 100 basis point improvement for next year, where do you see those numbers going? Do you have a range today of your best and worst stores? Is there a meaningful opportunity above the -- I guess it would be 19 to 19.5 for next year or have we now reached a plateau where that is a level you would be happy to maintain?

Yes. A couple of things. One is the 100 basis points. You are right, it is on the Jack in the Box brand. Keep in mind that we will expect to have about an 80 basis point impact on minimum wage of which you'll get that in Q4 this year. You'd expect that then to also have an 80 basis point impact in Q1, Q2 and Q3 next year before we begin the rollover comparable numbers. And then we will get same-store sales leverage on the increasing same-store sales.

But, again, Jeff, we can give you more information on what that looks like as we get into the November call.

Okay. But it seems like the refranchising benefit of 100 that would be kicking in about now, it is conveniently for the most part offset by the 80 basis point California increase in minimum wage, essentially.

Yes. Not quite, but yes. And we also said it was at least 100 basis points on the Southeast margin impact for us.

Understood. Thank you.

Chris O'Cull, KeyBanc.

Lenny, my question relates to Qdoba. Can you describe in more detail some of the other initiatives, maybe the new products, the new product news plan for Qdoba to drive comps? And then I have a follow-up.

Yes, Chris, there are a few things that we are not talking about publicly because we are still vetting them out to see if they are going to take shape systemwide. But we are looking at everything, from new platforms within the menu to new ingredients selections to also new ways of presenting the value to the consumers. So, it is everything, from the look and feel menu boards and also design of the restaurant and logo to the lineup products that we have both from an LTL standpoint and then, also, permanent items on the menu. So we haven't publicly shared what those platforms are.

I have just in the last month tasted several of those new items in Denver with the Qdoba team. And I believe that the new news that they will be bringing to the menu will be much more impactful than even what we did this year and will be much more differentiated than anything Qdoba has done compared to the competition in the past. So I think we will be able to set ourselves apart, starting in 2015, from the competition.

Great. Then as a follow-up, Lenny, are you preparing the Qdoba system for a meaningful inflection in the rate of development in fiscal 2016 once the new prototype is available?

I think you could say that is true.

Okay. Great. Thanks.

Matt DiFrisco, Buckingham Research.

I jumped on this a little in the middle of this so I am sorry if you already answered it, but I am curious on the guidance for the Jack in the Box same-store sales given the easier year ago comparison in the fourth quarter. It looks like you're on a two-year basis assuming a slight moderation. Is there anything behind that besides just more conservativeness, I guess?

I think we're just -- we just see the competitive environment and we are making sure that we are conscious of putting forth numbers that are realistic to achieve. We would certainly love to outperform, but I think what we put out there is a realistic expectation based on what we are seeing in the environment right now.

We are continuing to take share, and in this environment I think that is pretty difficult to do. So we just don't want to overestimate our abilities there. Especially with all the dollar value messages that seem to be coming in mass here in Q4.

Also a follow-up as far as the Qdoba comp. It has been very strong the last couple of quarters and I think -- have we already begun to redirect some of the strategy of growth? If I am not mistaken it was to backfill some markets not really going to a lot of new markets with Qdoba, so I guess, is this proof that you are able to achieve that without seeing any meaningful cannibalization or an uptick in aggregate cannibalization from some new stores? And does that give you the encouragement to grow faster? It sounds like you are opening 15 more stores or so next year. Is that behind the better growth next year in that the market is accepting more stores into a more confined space and backfill markets?

Matt, I think the way to look at it is a couple of things are happening here. One, we do feel very confident, based on the early results we are getting here, on the brand positioning work and the assumptions around our ability to grow without cannibalizing.

Yes, we feel pretty good about that. But I think the other piece of it that we just need to be conscious of is that we are testing new prototypes going into early 2015. And so, we will be conservative in 2015 about the pace at which we grow because we want to have that all that vetted out so that franchisees and Company stores that are being developed whether in existing or new markets can incorporate all of those new learning.

Thank you.

Jeff Farmer, Wells Fargo.

Following up on Chris's Qdoba question from a few questions ago. I -- really just a different way to ask the question, so recognizing that you don't want to tip your hat too much, but what inning do you think you are in with the Qdoba turnaround? Are we really just getting this thing off the ground, are you just scratching the surface here?

And you have alluded to this, but in terms of further menu innovation, digital, loyalty, catering and the like, you mentioned 2015. But is this going to play out over the next two to three years? Are you looking to do this from somewhat of a staggered perspective, meaning you don't want to throw too much at the restaurant or the consumer at one time?

So to sum all that up, you have seen some strong results from just two quarters. Sounds like you think you have a lot more in the pipeline and that, potentially, we could keep this going for quite a while. So I know I'm putting words in your mouth, but what do you think about that?

Yes, a couple of things. First if you ask the original question what inning are we in, we would say we are still in spring training. And the reason for that is if you take a look at how we are generating results today, it is really with essentially the same offering that we have always had with just some incremental new product news. And the new product news is certainly in alignment with the brand positions that we are going after. So it is resonating with the guests, but there's so much more we need to do to bring this brand position to light.

You will see a change in the service model. You'll see a change in the overall menu makeup. You'll see some changes in the experience that the consumer has in purchasing the product and in the look and feel of the environment. And none of that stuff has hit the Street yet. So when you look at what consumers are essentially getting today, it is really just the very beginning.

All right, thank you.

Robert Derrington, Wunderlich Securities.

To follow up on that, Lenny, could you -- as we are thinking about Qdoba in the future and you have obviously learned a lot about the business and your plan. As we go forward, is it reasonable to expect that as you begin to roll out the new -- the new prototype, would you also have a remodel program for your existing restaurants?

Yes we would. And if you can recall we had some remodel budget in place this year that we delayed and essentially expecting just what you mentioned. That as we get the prototype in place, that will not only be the prototype for new facilities, but that will go back and retrofit the old ones.

So the likelihood is that all of these will come together the second half of late next year, early fiscal 2016?

Well, I think the pace is yet to be determined, but yes we should start to see some activity late 2015 and, then, a ramp-up of activity into 2016. And depending on the extent of the prototype that we land on, we will need to work with the franchisees on the reasonable pace at which they can get there.

Got you. Okay, very good. Thank you.

David Tarantino, Robert W. Baird.

Good morning. I had a clarification question on Qdoba and thinking about the strength that you are seeing in the comps in the last couple of quarters, could you maybe a elaborate on what you think some of the elements of the brand positioning that are working the best with consumers are at this stage? What is resonating so well that we are seeing this big uptrend and comps and the second part of that is, how do you plan to build on that as you look at the next several quarters?

Yes. So, I think if you take a look at the competition in the fast casual, fresh Mexican space, in general the segment does not have a lot of new news. So, I think what is resonating with the consumer right now for Qdoba is that we are one of the only players that does have new news and we have done that by capitalizing on some of the equities that already existed on our menu that we knew the consumers believed was differentiated. And that is the queso and mango flavors.

But we will bring new flavors to the menu that never existed before in 2015. So, we believe not only will that be additional new news, but that it should start to attract new consumers more so than what we're doing this year, which we think is essentially increasing the frequency of the visits from our existing consumer base. We think that is primarily what is driving the sales this year.

So, in addition to that element of the business, we do have a large focus on catering this year. And you have seen it in the results. You have seen it. We have been able to grow catering double-digit. We also have been able to lower the discounting while not driving down transactions. In fact, we have been able to increase transactions. So we think we are finding a sweet spot here and we think that new news and the other elements are just going to continue to drive the model.

Great, that makes sense. Then, one clarification on the margin outlook. Jerry, I think you mentioned that there are some puts and takes along with margins going up with this refranchising event and then you have some pressure. So as you think out to next year, I just wanted make sure I understand that equation the right way.

Are you thinking that you will be able to get margin improvement from this year? And then, what type of comp assumption might you need to have to drive improvement as you look into 2015?

Yes, David, we are going to save most of that, I would say, in for the November call when we give you full guidance on that. What I would say here is we would expect -- broadly speaking -- we would expect same-store sales growth to contribute to margin improvement. So, you expect margin improvement coming from sales. You would expect margin improvement coming from the refranchising piece of the business. You would also have the headwind on the minimum wage piece. And we gave you what the commodity outlook looks like for 2015 thus far.

I think, also, if you look at the Qdoba flow-through, I would say one of the items that is hurting Qdoba flow-through this year are two initiatives that we have which we believe are driving significant sales growth, which is the restaurant level bonus program which has been changed to incentivize restaurant managers with bonus based upon sales and margin almost exclusively. That's impacting current flow-through by about 50 basis points. And also we put new beverage equipment in, which is also, we believe, driving better beverage volume within the restaurants. And that impacted the flow-through by about 30 basis points.

As we go into 2015, those are now baked into the sauce so you would expect to have better flow-through on the 2015 same-store sales growth versus what we saw thus far throughout this year.

Great. That's helpful color. Thank you.

Keith Siegner, UBS.

Jerry, a question looking at the consolidated franchise businesses, you don't have all the concept or the detail yet, I guess I was surprised given the strength of the same-store sales to see franchise margins down a little bit both sequentially and year over year. I was wondering if you could talk about are there any pieces of the puzzle in either the property business or any other expenses, maybe timing issues, that were impacting that consolidated franchise margin that we should know about? Thanks.

Sure. So, Keith, just to -- and you are right. It is more of a timing related issue, but the margin -- and you are right to call it modest decline. Look at it versus the prior year and also sequentially versus the prior quarter. It was off about a 10th in those comparisons. And that was caused in large part by the timing of our franchise fees, which are not related to sales. Franchise fees come in as we sell a restaurant to a franchisee, or a franchisee builds a new restaurant or they rewrite or we rewrite their franchise agreement.

Those are the items that draw the franchise fees into that piece. I think if you look at just compared to last year, the change in the franchise fees impacted that margin rate by about 50 basis points. So we would have been a little higher were it not for the timing of the franchise fees. Hope that helps.

Do these Southeast refranchising efforts have any impact? In other words is there say no rent spread? Is there even rent to worry about with those units? Might they have any impact?

Yes, what I would say -- yes, that's a good question. So I think going forward and we just franchised one of the Southeast markets this week. But because where their sales volumes are currently, we would not expect to get a rent flow-through on that until same-store sales start to build. But that is a fair point on the Southeast location.

Having said that, though, they will be accretive to earnings. Yes.

One last one if I could sneak it in. Thank you very much for the color about the contribution of the Qdoba pricing to the quarter.

Wondering if you could talk about in that guidance for 5% to 6% same-store sales this coming quarter, how much of that is based on price?

We had 1.3%, Keith, in the most recent quarter and we typically don't comment on what our forward pricing strategy is.

Okay, thanks.

Nick Setyan, Wedbush Securities.

Thank you very much and thanks again for the 2015 color. Just to hone in a little bit more on the Qdoba side of 2015. As we accelerate unit growth particularly on the Company-owned side, I know you have had some strength in new unit openings this year. What are some of your new unit opening target support next year? Particularly as sounds like there are some new markets plans and then how should we think about the impact on the margins? I mean the new unit opening and efficiencies on the four-wall economics and then the [pre] -- ramp-up in the growth-related G&A, the preopening costs, D&A. Can you maybe give us some more color on that?

Yes, Nick, this is Jerry. That will all maybe not exactly the way you have asked it, but all of that will be embedded in our 2015 guidance. What we did say earlier on the call is that we expect to open about 60 Qdoba locations in 2015 which is an increase from what we plan to do this year. Roughly half Company, half franchise with the most of the franchised locations being in nontraditional spaces like airports and college campuses and the like. The other, the remaining 30-ish would be company locations more weighted to the back half of the year as we test a prototype and begin building new restaurants with the new prototype later in the fiscal year.

Okay. Thanks very much.

Peter Saleh, Telsey.

Great, thank you. I wanted to ask about the trajectory of Qdoba now that you have got comps going in the right direction here. Any thoughts on making or acquiring more of your franchisees or some of those markets?

Yes, Peter, this is Jerry. We would love to acquire some additional market from franchisees. I am not sure that 7% comps makes them any more eager to sell, however.

Fair enough. All right and in terms of the -- for Qdoba, on the franchise side are there any investments, capital investments that you are asking the franchisees to make with this turnaround? Or is there anything any other capital that they need to invest in the stores?

We haven't sized that yet, but -- we haven't sized that yet, but we would expect them to remodel their own restaurants.

Okay, thank you very much.

As we do with the Jack in the Box brand.

Thanks.

Operator, if we can ask if there are any more questions online.

We currently have no additional questions.

Great. Thanks for joining us and we look forward to speaking to you and enjoy the rest of your summer.

And this does conclude today's conference. All parties may disconnect at this time.