Jack in the Box Inc (JACK) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to Jack in the Box fourth-quarter fiscal 2016 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, Vince, 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 fourth quarter of fiscal 2016 as well as some of the guidance we issued yesterday for the first quarter in fiscal 2017. In our comments this morning, the 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 and losses from re-franchising.

Our comments include non-GAAP measures including operating EPS and EBITDA. Please refer to the reconciliations on our website.

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 in the business. The Safe Harbor statement in yesterday's news release and the cautionary statement in the Company's most recent Form 10-K are considered a part of this conference call.

Material risk factors as well as information relating to Company operations are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com.

A few calendar items to note: Jack in the Box management will be attending Barclays' Eat, Sleep, Play conference in New York on December 6 and KeyBanc Capital Markets consumer conference in New York on December 7, and the ICR conference in Orlando on January 10. Our first quarter ends on January 22, and we tentatively plan to announce results on Wednesday, February 22, after market close. Our conference call is tentatively scheduled to be held at 8:30 AM Pacific Time on Thursday, February 23.

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

Thank you, Carol, and good morning. Operating earnings per share for the fourth quarter exceeded our expectations, capping a year where we were able to protect margins and grow EPS, despite sales growth that was lower than we anticipated when the year began.

Before taking a closer look at some of our fourth-quarter results, I'd like to review some of the accomplishments we are proud to have achieved in fiscal 2016. We are happy with the progress we made on our key strategic initiatives as we made significant headway on reducing G&A, increased our borrowing capacity to support our capital structure goals, and began implementing plans to increase the franchise mix at Jack in the Box to over 90% of the system. Operating earnings per share for the year grew more than 25%, representing our fifth consecutive year of growth in excess of 20%.

We stepped up menu innovation at Qdoba to further differentiate the brand and improve the quality of nearly 30 core products on the Jack in the Box menu in Q2. All the menu-related innovation and improvements are designed to drive long-term customer loyalty.

Despite wage inflation and lower-than-expected same-store sales for the year, we maintained healthy Company restaurant operating margins, which exceeded 20% on a consolidated basis. Protecting our restaurant-level margin is one of our key metrics, as it is critical to franchise health and their willingness to invest in and grow both brands. We returned more than $330 million of cash to the shareholders through stock repurchases and dividends, and yesterday announced a 33% increase in our quarterly dividend.

Now let's take a look at some of our fourth-quarter results. We had system same-store sales growth of 2% in Q4. Jack in the Box exceeded the QSR sandwich segment by 130 basis points. We outperformed the category in 11 of the 13 weeks in the quarter, and on a two-year basis we had a positive GAAP of 480 basis points. Our 2% same-store sales growth was also better than each of our major competitors in the burger category. Company same-store sales were modestly below our expectations.

Since Q1 of 2016 we've seen same-store sales improve sequentially each quarter, which we attribute to our strategy of balancing premium products with compelling value messages. On the premium side we introduced Jack's Brewhouse Bacon Burger in July. And on the value front, our fourth-quarter promotions included a $2.99 Jumbo Breakfast Platter that helped drive the increase we saw in breakfast sales, which was our strongest daypart.

We've seen a nice uptick in Jack in the Box sales trends during the first of seven weeks of the quarter, as our promotional calendar has been designed to combat heightened competitive activity around breakfast and continued aggressive value deals across the industry.

Guests have responded favorably to the introduction of our Brunchfast menu in late September, which features indulgent new menu items like a bacon and egg chicken sandwich on an English muffin, a brunch burger, and a Southwest Scramble Plate. As with our entire menu, guests can choose these items anytime of the day or night.

But we are not putting all of our freshly cracked eggs into one basket. We are balancing our Q1 marketing calendar with value-conscious product promotions, including the BLT cheeseburger combo, priced at $4.99, which features many of the ingredient improvements we made earlier in the year.

We are getting credit for quality improvements we've made to our menu, with top box ratings on the taste of burgers, fries, and drinks up several percentage points versus a year ago. For those of you in markets where we advertise, you are seeing a familiar face and voice back on television. Jack himself never really left, but the return of his distinctive voice has had a positive impact over the last two quarters.

One of the primary goals we discussed in our investor day in May was increasing franchise ownership of the Jack in the Box brand to over 90%. Over the latter half of fiscal 2016, we refined the process for selling restaurants and established specific criteria we will evaluate before selling those units. This initiative is designed to fuel unit growth for the brand over the long-term as we tie development commitments to these deals, including growth in less penetrated markets.

We believe we are taking a well thought-out, prudent approach to re-franchising that generates the most long-term value for the Company and our system. The process has commenced on the first phase of stores we plan to sell, and we should know more about the expected pace of re-franchising when we speak to you on our Q1 earnings call in February.

Now let's take a look at the Qdoba brand. The increase in fourth-quarter same-store sales at Company-operated restaurants was driven primarily by transaction growth. For the full year transactions at Qdoba Company restaurants increased 1.5% and were positive in all four quarters.

During the quarter we introduced smoked brisket and featured it in a new Knockout Taco, our first extension of that popular platform since it launched at the beginning of fiscal 2016. Our consumer research shows that guests are giving Qdoba more credit for several key points of differentiation, including menu variety and craveability.

We are pleased with how guests are responding to our offerings, and we see innovation that brings bold new flavors to our menu as a continued opportunity. We have a full pipeline of products queued up for 2017, and we believe the transition of Qdoba's brand headquarters to San Diego will enable us to better leverage the culinary expertise at our Innovation Center.

The key component of our brand evolution has centered on our restaurant design and remodel program. With both, the key objective was to create a place to be, not just a place to eat. And we think we have achieved that with our improved new restaurant design, which we released to the system in Q3.

In some new restaurants we have been testing an expanded alcohol offering that we are also incorporating into some remodels. The bottom line is that a new design is scalable. The Company or franchisee can determine the investment level based on a specific location.

In fiscal 2017 we expect approximately 70 Company Qdoba restaurants and a similar number of franchise locations to be remodeled. In addition to menu innovation and remodels, other drivers for same-store sales growth in 2017 include catering, marketing initiatives, and delivery.

Despite increased competition, catering remains a significant opportunity. We plan to continue growing this part of our business, which exceeded 8% of our Company's sales in 2016. As for marketing, in addition to clear messaging, we are planning to launch our mobile app and affinity program in December by focusing our communications on our 1.6 million active loyalty members.

And finally, the delivery channel, which is a growing area for the industry, driven by convenience and accessibility: we have been testing delivery at both brands. It's too early to extrapolate the results from these tests, but customers are clearly demonstrating demand for these services.

In closing, we have made significant progress on the strategic initiatives we discussed at our investor day in May, which are intended to drive growth in shareholder value. And we believe both brands are well positioned for the long-term.

With that I'll turn the call over to Jerry for a more detailed look at the fourth-quarter and full-year results and our outlook for fiscal 2017. Jerry?

Thank you, Lenny. Good morning, everyone. Before taking a closer look at some of our fourth-quarter results, I wanted to take a few minutes to review some highlights for fiscal year 2016.

Operating EPS for the year was $3.86 as compared to $3 last year. Excluding $0.09 benefit from the 53rd week, operating EPS grew more than 25%. Adjusted operating EBITDA, excluding franchise gains and restructuring charges, increased to approximately $332 million from $290 million last year.

Systemwide, same-store sales at Qdoba increased 1.4% on top of a 9.3% increase last year. Jack in the Box system same-store sales grew 1.2% on top of the 6.5% increase we saw in 2015.

Consolidated restaurant operating margin exceeded 20%, with margins at the Jack in the Box brand improving by 50 basis points despite flat Company same-store sales, as lower commodity costs helped to offset wage inflation. Franchise margin improved 140 basis points to 52.9% due to higher franchise same-store sales.

EBITDA from our revenue stream of approximately $95 million represented over 28% of our consolidated EBITDA. We returned more than $330 million in cash to shareholders during the year, including $292 million in share buybacks at an average price of $75.29 per share. Weighted average shares decreased by approximately 11% for the full year, which will continue to contribute to our future EPS growth.

As of the end of the fiscal year, we had $408 million available under current Board authorizations for stock repurchases. In September we amended our credit facility, which increased our borrowing capacity by $400 million to $1.6 billion. The amendment raised the maximum leverage ratio covenant from 3.5 to 4 times and allows unlimited cash dividends and share repurchases if pro forma leverage is less than 3.5 times. At the end of the fiscal year our leverage ratio per our debt covenants was 2.9 times as compared to 2.3 times at end of fiscal 2015.

Let's move on to the fourth-quarter results. Operating EPS of $1.03 was $0.41 higher than last year. Approximately $0.09 of the increase resulted from the 53rd week. Jack in the Box Company margins were up 70 basis points versus last year, while Qdoba Company margins were hampered by the impact of a greater number of new restaurant openings. We opened 35 Company Qdoba restaurants in 2016 versus 17 restaurants in 2015.

For Jack in the Box the 0.5% increase in Company same-store sales was comprised of mix benefits of 0.6% and pricing of approximately 2.9%, offset in part by a 3% decline in transactions. For Qdoba Q4 same-store sales increased 0.8% systemwide. The 1.2% increase in Company same-store sales included a 0.3% increase in the average check, catering growth of 0.2%, and an increase in transactions of 0.7%.

Turning to guidance for Q1, our sales guidance going forward for Jack in the Box will be for system same-store sales, as we believe it's a better indicator of overall brand performance and to avoid trying to predict the timing and impact of re-franchising specific markets on the Company's results. There is no change in our guidance for Qdoba same-store sales, as the brand is more than 50% Company-operated. We will continue to report Company, franchise, and same-store sales and system same-store sales for both brands.

We expect same-store sales at Jack in the Box system restaurants to increase approximately 2% to 4% for the first quarter. Sales trends through the first 7 weeks of the 16-week quarter are tracking nearly 1% above the high end of the guidance range. We expect same-store sales at Qdoba Company restaurants of approximately flat to up 1%. Sales trends through the first seven weeks of the quarter are tracking slightly below the low end of the guidance range.

And here's some thinking on some key items for our fiscal year 2017 guidance: same-store sales increase of approximately 2% to 3% at Jack in the Box system restaurants, same-store sales increase of approximately 2% to 3% at Qdoba Company restaurants, consolidated restaurant operating margin of approximately 20% to 21%. This includes the estimated impact of the January 1 minimum wage increase in California from $10 an hour to $10.50, which we estimate to be about 70 basis points on the Jack in the Box brand for the full year or roughly 50 basis points on a consolidated basis.

SG&A as a percentage of revenue of approximately 11% to 11.5% as compared to 12.7% in fiscal 2016. Since we've received some questions about how to translate that into the G&A portion, we anticipate that to be approximately $120 million to $125 million for 2017.

We also don't normally provide guidance for interest and share repurchases. But given the wide range of numbers we see in analysts' estimates, I wanted to provide some indication of what is baked into our guidance. We are assuming $40 million to $45 million of interest expense in 2017. Our guidance for operating EPS of $4.55 to $4.75 assumes share repurchases of approximately $408 million during the year, representing the amount remaining under current Board authorization.

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

(Operator Instructions) Joseph Buckley, Bank of America.

Jerry, a big-picture question on the guidance: what you're giving us for 2017 in the way of guidance -- is that still consistent with thinking in fiscal 2018 you can reach your $400 million of EBITDA target?

Yes, Joe, it is. One of the reasons that we wanted to provide in this release our EBITDA from operations -- our operating EBITDA -- was to give you some sense what that pathway could look like. And when you tie that into our G&A reductions, which is another reason why we gave you a specific G&A target for 2017, which we normally don't do, is to help give everybody a pathway there.

So we increased EBITDA in 2016 by about $42 million. I'm estimating around $7 million of that to be from the 53rd week, so absent that it's up $35 million. And that's on fairly modest same-store sales growth. So when you consider now two years of operating results, plus additional G&A reductions in the amounts that we've targeted, I think that that points to a pretty clear pathway to the $400 million by the end of 2018.

Okay, that's helpful. And then just a question on Qdoba -- obviously, you plan to open about 40 Company units this year. Have you fine-tuned? You mentioned the new design being released in the system. Have you fine-tuned what we can expect or you expect from new unit economics at Qdoba?

Yes. Joe, this is Lenny. And Jerry may have a few things to add to this as well. I think what you should know is that when we finalized the designs for the Qdoba remodel, which also are the same design elements that go into the newly constructed sites, and then put in place the extensive program for new unit growth for franchisees, what we saw was an uptick in demand from our franchise community to be involved in both of those programs -- both the remodel and growth. And particularly some of our franchisees that have been on the sidelines for quite some time have actually approached us to sign new development agreements.

So what we're happy about is that that demand, which was at a higher level than we expected this early on, has shifted some of the resources here in the near term toward the franchise community to make sure that their needs are met. So our growth targets, around 40 for Company operations, really just reflect a shift in our priorities here in the near term and needing to satisfy the franchise needs.

But we still have the same five-year plan targets that we discussed with you in May and don't really see any adjustments there, just maybe some slight shifting from year to year. We are happy with more than doubling the growth from 2015 to 2016.

And what gives us a lot of confidence over the long-term is when we look at our AUVs for the sites that were most recently built, those sites -- those 2015 fiscal year builds -- those sites on an annualized basis are at $1.1 million AUVs, which is -- and that includes also 2016 new openings as well, Joe. But annualized from 2015 forward would be at $1.1 million in AUVs, which is really healthy, very close to our system same-store sales average.

And what we need to focus on now is the operating efficiency. And that's very typical for new restaurant openings, that you are going to open up less efficient. And you need to drive those restaurant operating margins back up.

But if you recall back in 2012 when we shared with the system what our new store openings were, they were ranging around $700,000 on an annualized basis. It took about three years to get them even close to the system same-store sales average. So we're real confident in the growth vehicle based on the sales that we are seeing, and also based on confidence the franchise community has in the Qdoba offering and some of the new demands for growth in that space. So long answer, but hopefully gives you a complete picture.

Joe, let me just add a little bit to the length of that answer with just a couple other points here. With where the sales are that Lenny mentioned, about $1.1 million on an annualized basis for these new units, we targeted something at or better than a 1-to-1 sales-to-investment ratio.

I think it's important to note that the 2016 units, most of which were in the new prototype, were not cost engineered. And we are making great progress on cost engineering those things down.

Now we would expect that sales-to-investment ratio actually to improve in most units to better than a 1-to-1 sales-to-investment ratio. So we're pretty happy with the progress made there. We still have some more work to do, but we would expect the newer units for 2017 and going forward to be at a lower overall investment cost to help with those returns.

Can you share any sense of how quickly the inefficiencies are weeded out? When do new units get to an average profitability level?

Joe, I guess a lot of that is going to depend on the competitive environment that we are in. So if we are moving into new markets where we are second to market, it's probably going to take a little bit longer, because we are probably going to over-invest in those facilities upfront so that we can be extremely competitive.

When we move into markets where we already have a presence, and we have established infrastructure and brand awareness, we tend to be able to do that a little faster. So I think it's going to be a mixed bag. I wouldn't want to peg a specific number on that, but certainly a lot of focus in this area as we'd like to make the growth vehicle as strong as possible.

And then, Joe, one last thing -- when we talk about restaurant inefficiencies, we've heard that phrase quite a bit here recently from other restaurant brands. We might as well use it here. That can really come in two forms, one being lower sales or higher cost structure.

What we are seeing is the latter. And it's much easier for us to control the pacing of when those costs are reduced, to Lenny's point, than it is trying to build up sales from a very low base when you start.

That's helpful, thank you.

John Glass, Morgan Stanley.

First, Jerry, on the timing of the re-franchising, you said you'd get a better idea after the first quarter. Is that to assume, then, that you are not going to be able to re-franchise -- it's going to happen later in the year? Or you think you will get transactions done throughout the year, and you just don't know until after the first quarter the pacing?

Yes, that is the $64,000 question, John. And it's probably the most difficult one that we have, and one that we have the least amount of certainty around. But let me tell you what we have assumed within our numbers -- and this isn't to say that we won't move faster than this; it's just what we have assumed in the numbers, so you get a sense what we have included in there.

To Lenny's point, the primary goal with this is to drive additional new unit growth. That's not to say that pace is not important, but pace is playing a supporting role to the new unit growth at this time.

That said, what we've assumed in our numbers is 90 restaurants being refranchised to franchisees during the year. We probably don't expect anything to be closed in terms of transactions in Q1. I think that was Lenny's point -- that we will give a better update on where we are at the end of Q1.

But within -- what we said back in the May meeting, the investor day, is that at least at the 90% level of re-franchising, we didn't expect to have those transactions in total to have a significant impact on operating EPS, EBIT, and EBITDA. And we still think that that's true, and I think that's what's included in our targets and our guidance so far today, with the exception of the following.

We have included in there the franchise fees on these 90 units, which is about $4.5 million of franchise fees, probably incremental to what that was in 2016. And that's worth about $0.08 a share in round numbers. So that's what we have in there. That could be less; that could be more. But that's how we've thought about it thus far.

And just to be clear, at the analyst meeting I think you had said you thought most of the re-franchising would be done in 2017, but now it sounds like it's going to be more split between 2017 and 2018, right? You still have to do more than that to get to 90%. Right?

No, I think that's right, John. What we said also, though, was -- and I think it was at the analyst day and certainly after the analyst day, in any webcast meeting that we've had, was that we were going to err on the side of growth. If it took a little longer to do that, we were willing to do that for the long-term growth strategy of the brand.

And then just one other, on the -- go ahead.

This is Lenny. One added comment I'd give to the refranchising effort is this: if we simply wanted to focus on re-franchising the locations with no growth associated with those transactions, we could sell all those sites in probably less than six months. Certainly we could sell them all by the end of the fiscal year.

The demand is there. We don't have an issue with being able to sell the sites. The only thing that is determining the timing outside of the pace for this fiscal year to get it all done would be growth deals associated with it -- just so that you know where that lies.

That's very helpful. And then, Jerry, just on the guidance, on the leverage targets assumed in the -- you were explicit about the buyback activity. How do you fund that? And what's the leverage target associated with the buyback activity?

We would expect to be somewhere north of 3 but south of 3.5.

Got it. Okay, thank you.

Brian Bittner, Oppenheimer.

You provided us with some G&A numbers, and I think on a percent of systemwide sales basis for 2017, that assumes 2.6% to 2.7%. And that's a little bit above your 2.0% to 2.5% long-term range. So does that suggest that after 2017, there's still opportunity to get more leverage out of G&A? Is that how we should be thinking about it? That's my first question. And then I have a follow-up.

Sure, Brian. That's a great question. And you are right; we had talked about, at the investor day in May, a larger G&A targeted reduction than that. But we also broke it up into three phases, with the first phase being $25 million to $30 million, which we do plan to fully recognize between what we saw, the reductions in 2016, and then the further reductions that I've just described into 2017.

Then we had additional reductions related to our refranchising activities. And then the third tranche would have been G&A related to the normalization or the consolidation of our IT -- of our restaurant-level IT systems, that we have some additional G&A reduction there. The vast majority, though, happens through the phase 1 approach, which is what is included in the guidance, and part of which we achieved in fiscal 2016.

Okay. And operationally, with Jack in the Box seemingly very solid, I did want to ask on the Qdoba side -- you know, your comp guidance for the year does assume that same-store sales accelerate very nicely from where the trends are now. But your comparisons don't really ease or anything like that.

So it's really hard for us to understand what you are seeing and why you are guiding us to a plus 2% to 3% on the Qdoba side, given where trends are right now. Can you walk us through what you are thinking there?

Sure. Most of what we see -- this is Lenny -- is a much stronger new product pipeline in fiscal 2017, starting in Q2 and beyond. And that's really what builds the confidence.

So if you go back to just a couple years back when we started to execute this strategy that was now going to innovate -- and this was after many years of having no new product introductions -- we saw 7%-plus sales increases by doing things like expanding our queso line or bringing out Mango Mojo and various other salad options. And then we followed that up with completely new items that were not attached to prior sort of menu equities, things like Knockout Tacos and brisket, and some other burritos.

When we look at 2017, I'd say we probably have one of our strongest lineups from the standpoint of not only continue to expand on existing equities that have played for us really well, but also bringing some new craveable proteins into the marketplace, which should bring a lot of excitement and, we think, some new guests into the facility that would not have been attracted by the offers we had heretofore. So we're pretty optimistic about what we have on the docket for the year, and that's really reflected in the guidance.

Okay. Thanks, guys.

Jeffrey Bernstein, Barclays.

A couple of questions on the Jack in the Box brand, and I guess the first one just on the market share -- if you look back, it went from leading by an average of 300-and-some-odd basis points for a couple of years, and then I know in the first half of fiscal 2016 you lagged by 250 basis points; then it was in line a quarter ago. And now you have re-accelerated to north of 100 basis points again, so pretty wide swings.

I'm just wondering your expectation for the coming quarters to maybe sustain that lead, and by what magnitude, maybe? Or maybe what you are assuming for growth in the broader QSR burger category versus yourself? Just trying to size that up, especially when you think of the fact that it sounds like you are currently running maybe a 5%-ish type system comp, and you guided the full year to more of a modest 2% to 3%. So that was my first question.

I'll share a couple of comments. I'm not sure if I'm going to be able to answer your question directly. Some of the detail I think we may not have shared in the past.

But I think the way to look at this is that what we've experienced and the choppiness you have expressed had to do with multiple factors. Some of it was competitive activity in the marketplace, and some of the timing of some of the quality improvements that we needed to make.

We made a long-term play. We learned some things in the process about the impact of some of the competitive activity out there, and we made some adjustments along the way. But ultimately, sticking to our guns and focusing on bringing more craveable premium and mid-tier products to the marketplace as compared to skewing our entire focus toward value deals has played out exceptionally well for us. You can see it in breakfast and late-night and our ability to mitigate some of the competitive threats that impacted us last year by bringing great new products to the marketplace -- again, not value-oriented products -- have worked really well for us.

So I think, at times, any business is going to experience some choppiness, particularly if you have some competitive intrusion. But I think we have a proven track record of being able to respond to those things, and we are typically ahead of those things. So we want to be ahead of it most often.

I think when you look at our two-year comparisons, they have been pretty strong. And they have substantially exceeded all other big players in Q4. I think that we would want to keep those two-year comps somewhere in the neighborhood, but at the same time, we understand that when you are sitting this high above everybody else on a two-year basis, that at times you were going to see that soften a bit, particularly if they start to respond and get more aggressive in the marketplace, try to make up for some of the market share that they have lost. So I guess in a nutshell, we are confident we can compete but certainly understand that at times we're going to see those numbers fluctuate, at least slightly.

Got it. And then my other question was just on the traffic side versus pricing. I think you mentioned that the Jack brand -- the traffic was down 300 basis points. But my guess is that's perhaps not surprising for you; if maybe you are gaining more on the premium side, then maybe you are losing some value -- maybe losing some traffic on the value side.

I am just wondering how you think about that traffic, and whether you have confidence in a re-acceleration of that traffic in the short term as you balance that with price? I didn't know if you can offer color just in terms of what your pricing thought is for fiscal 2017.

Yes. I think a couple things to note: one, overall category traffic is down. And so we, like everyone else, are experiencing some of that softness in traffic. What would make me really concerned is if we were losing that traffic to our direct competitors -- and we are not.

What would also make me very concerned is if we didn't have strategies that were connecting enough with the consumer to be able to, despite traffic declines, grow sales. And again, we are not in that position, so happy about that.

I think the food at home versus food away from home price gap is probably one of the bigger drivers where some of the traffic erosion is taking place in our space. And so it's -- you know, as I try to balance this whole thing out, and the brand presidents and teams try to balance this out, I would say their priorities would be: protect the margins; make sure you are not losing traffic to our direct competitors; and making sure that you have sales growth strategies in place that, despite traffic, keep us on a healthy trajectory with sales growth that flows through to the bottom line.

Understood, thank you very much.

David Tarantino, Robert W. Baird.

My first question is on Jack in the Box comps quarter to date, which sound like they are running very strong. Could you talk about what's driving than momentum, in your view? Is it just a function of cycling lower comparisons, or do you think some of these initiatives are really working? Secondarily, why are you assuming that might not continue in the balance of the quarter and balance of the year?

I think a couple things. What's interesting about the question is last year, Q1, we were lapping high compares based on some promotions that we had done the prior year. And although we saw softness, that was not attributed to our comparisons; it was attributed to competitive activity.

So I would say, in the spirit of that, we will attribute our growth and confidence in Q1 this year to what we are executing, which is a great new Brunchfast offering, as well as some other balancing value promotions in the marketplace as well, with the $4.99 combo. And we would give most of the credit to those initiatives.

When you look at the momentum we expect throughout the quarter -- and you asked why wouldn't we anticipate that continuing -- I think with any new products, you are going to get an initial trial from your consumers that is a little higher than what you know you will sustain. So we've simply built that into the guidance.

Thanks. Makes sense. And then, Jerry, is there maybe any chance you'd be willing to share the range that's associated with your EPS guidance for 2017? I know you gave many of the pieces, but perhaps not all of them. So could you perhaps let us know what you are assuming for EBITDA, so we can put that in context of your $400 million target long-term?

Well, I think some of that will depend on the re-franchising. But what we tried to do, without giving you a number, is to give you as many ways as we could possibly do to get you there -- which is one of the reasons that we said exactly what the G&A targets are for 2017, which we normally don't provide that at all.

And I think the G&A for 2016 was in the $142 million range on just the G&A number. So you can look at that. I think that gives you a pretty good starting place right there. Then the rest of it is just sales and margin. But I'd really rather not start giving EBITDA ranges with our guidance. But again, I think we did a lot more to help you guys get there than what we might normally do.

Fair enough, thank you.

Chris O'Cull, KeyBanc.

Jerry, can you quantify the impact of opening new stores on the Qdoba margin for the quarter?

Yes. Let me -- I'll get you close. So if you look at the 220-basis-point decline that we saw versus the prior year, Chris, I'd really break it down in broad strokes like this: about half of that decline came from higher food costs, which -- I'll talk about some of the reasons for that. And the other half, or the approximate other half, was due to the new restaurant inefficiencies that we've talked about.

Let me first talk about the food costs first. So an obvious question is: why would that be up in a deflationary commodity environment? One of the things that I think we ought to consider is we've had virtually no pricing on the Qdoba brand over the course of the past year. And we said that we were going to be very cautious and careful on taking price this year.

We also had said, I believe, back in our first-quarter call that with at least one competitor becoming very aggressive on discounting, and promotions, and BOGOs and the like, that we were going to protect our traffic. And so we were actually quite a bit more promotional this quarter versus last year in the quarter -- in fact a little bit more than 50% more promotional there. So that impacts food costs directly.

And then we were also hit with higher avocado pricing this year versus last year because of the shortage. And the price on avocados isn't the only story; when the price goes up, then the supply goes down. You also take a little lower yield on that, which also impacts food cost there.

And then we did also launch brisket in the quarter. That has a higher food and packaging cost than do most of the other proteins that we have.

So that's what really drove food costs in the quarter. The new restaurant inefficiency really cost us about the other 100-plus basis points there. And that's just -- really, it's due to the higher cost that Lenny spoke about earlier. But I think generally, as you open up new restaurants, you are going to have higher food costs. As you are getting into your cooking routines, you are also sampling products and the like; and you also have substantially higher labor costs associated with that.

And we've certainly seen that occur. If there's any complaint on our part, it may be that some of the costs have hung around a little longer than we had liked. But to Lenny's point, we also want to make sure that we are able to sustain the higher level of sales volumes that we opened with.

And then lastly, while 35 restaurants may not sound like a lot -- and it's not when you are comparing to some folks who are growing 100 to 200 restaurants -- that is about an 11% growth on Company units from what we had last year. So those lower margins with 11% of the chain does have an impact to the margin rates that we are seeing. And that's certainly what we saw in the fourth quarter and throughout -- certainly in the latter part of the year, Chris.

That's very helpful. Just as a follow-up, do you expect Qdoba to have a similar level of promotional activity in 2017 that it had this year? And is there going to be any comparison that we need to be thinking about quarter to quarter?

Well, I think a couple things to think about is, one, we're going to be launching a lot more new items this year than we did last year. So in the base case, we are going to have to invest some marketing dollars, promotional dollars, in getting food in mouth. Because the more we can get people to try the new items, the more opportunity we have to capture those guests.

It does depend largely on what we see in our traffic. And our traffic will probably be impacted mostly by competitive activity from one of our major competitors and/or the gap in food at home from food away from home.

So it's probably going to be a little bit reactionary on the front of the competitive side of things. And then where it will be a little more proactive is in some of our new initiatives, like the new products, and launching things like our mobile app and affinity program.

Okay. And then just lastly, what assumptions did you make regarding changes in beef prices for 2017 to get to your flat to down 1% commodity guidance?

We are showing beef prices to be slightly deflationary.

Slightly deflationary?

Yes, slightly deflationary across both brands.

Okay, great. Thanks.

Andrew Charles, Cowen and Company.

Jerry, the consolidated restaurant level margin guidance represents modest improvements despite the refranchisings, benign commodities, and low single-digit same-store sales. Obviously, as Qdoba becomes a larger mix of the Company portfolio, that's naturally going to weigh on margins, while promotional dynamics could continue at the brand. Can you talk about dynamics that we should be aware of as we lump together the many moving parts of the consolidated restaurant margins?

Yes. Well, I think you hit the Qdoba margin pressure that we would expect to see as we launch more new restaurants. I think you'd also, though, begin to see new restaurants comping at higher levels than what the existing restaurants do.

I think the key element, though, and the wildcard here in this guidance is the level of refranchising that we do. And if you go back to the May meeting, we said post refranchising, Jack margins would be greater than 25% or about 25% post refranchising. We are only assuming in our guidance right now about 90 restaurants being refranchised for Jack in the Box. So I think you would expect to see the Jack margins more than compensating for new restaurant margin impact of Qdoba brand's post refranchising.

That's helpful. And then, Lenny, the gap between the Jack company and franchise comps -- it widened basically to the level that you saw back in 2015. So just curious about the dynamics around anything regionally that we should be aware of, or anything else to contribute?

Yes, I think what we are seeing is really the impact of outlier Company operation restaurants that are putting a drag on the Company system. There has been softness in markets like Texas, but I think that exists for both Company and franchise. So I wouldn't want to attribute too much of the weight of that gap to regional differences.

So I do think that it really comes down to higher volume locations for Company operations needing to execute a little better than they are currently executing. I think there's an opportunity to see more growth out of those sites than we currently do.

And I know that brand president is extremely focused on that, even to the point of making some changes in structure and leadership to drive some of the performance that she expects. So I think we're going to see -- and even some early signs already. With some of those changes we are starting to see that gap close, which gives me reason to feel confident in my hypothesis and also in the outcome.

Thanks, guys.

Jeff Farmer, Wells Fargo.

Jerry, you talked about Jack franchise fee expectations for FY 2017, but I wanted to focus on the franchise rental revenue profit margin. I know that's pretty granular, but it looks like it was up 200 basis points to roughly 27% in 2016.

And the question really is this: so assuming you guys control the lease or potentially own the building on a lot of those 90 restaurants that you expect to re-franchise this year, where could that franchise rental profit margin stand after you sell those 90 Company-owned stores?

Jeff, I think we will give you more color on that after we see what kind of progress that we are making in the quarter. We are expecting the rental margin and the franchise margin to go up based on the re-franchising. But until we get to know exactly which units we are going to sell, and what their sales volumes are, and what the underlying rent is, it becomes a little difficult to predict on that. So give us a quarter, and we will see if we have enough information to give you a better range of expectations for the full year.

But what we did see just in our Q4 numbers is we saw a nice uptick on the -- in margin rate for franchise margin on the 2.4% franchise same-store sales. So remembering that franchise -- excuse me, that our underlying rent does not fluctuate on sales, we get a nice flow-through on those incremental sales dollars on the rental income stream. And I think what you saw there was in Q4. So even absent refranchising, I would expect that margin rate to continue to grow, as long as franchisees are growing same-store sales.

And then just one quick follow-up. I might have missed this, Jerry, but how is the Jack in the Box system thinking about menu pricing in fiscal 2017? With everything that's going on in the backdrop of traffic declines, commodity deflation as a tailwind, and then wage rate inflations -- a lot of pushes and pulls -- how is this system -- how have the conversations gone about their plans for pricing throughout 2017?

Jeff, I'd answer that, really, for both brands with just saying that we will see any price changes through a very cautious lens as we look at both the impacts to traffic right now across the industry, and then the impact that we are seeing in the gap from food at home versus food away from home. That's probably the biggest driver that would have us move cautiously with pricing in 2017.

Thank you.

Karen Holthouse, Goldman Sachs.

Curious where you are talking about quality improvements for the Jack in the Box. Are you seeing any change in customer mix? Or is that helping attract new customers versus something that's more a driver of frequency within an existing customer?

It's probably too soon to tell whether or not we are getting a bunch of new customers that were not Jack customers beforehand. I think a couple of things we are seeing at least early signs of -- one, we know we are getting more traffic from the existing customers as we've improved quality.

And also, those individuals that were maybe a little disappointed in Jack in the Box that we needed to capture back -- we're starting to see some early signs that those folks are coming back, particularly with the quality improvements. So feeling pretty good about that long-term strategy.

Going back to the research that we did that shows that Jack in the Box is one of the few QSR players that has some brand equities in the areas of food innovation or food quality -- meaning that consumers will tend to believe that we can execute higher quality stuff as compared to -- many of our larger competitors don't really survive or play well in that space. And when they have invested in quality improvements -- you have seen it particularly in the burger category; oftentimes it's not driving the traffic and the upticks that they are looking for. And they tend to gravitate back toward the value-oriented promotions.

For Jack in the Box and, I would say, some of our direct regional competitors, we tend to be able to play pretty well in the slightly higher quality or QSR-plus space, which is really directionally where we want to go.

Thank you.

Matthew DiFrisco, Guggenheim.

Just had a couple of quick questions here, one a clarification: I think you said, during the call or during one of the Q&A responses, $0.08 accretion from the 90 stores associated with the re-franchising, and those were related to franchise fees. Is that comparable to the -- I think you originally said $0.15 accretion, so I guess -- at the analyst day. So that $0.15 is divided up now between 2017 and 2018. Is that correct?

No. Well, you were half correct. So the $0.08 is correct. And I believe at the analyst day what we were talking about was that this excluded franchise fees, because we didn't want to muddy the waters, as it were, because they were not ongoing. They will be more one-time. And I indicated that the $0.08 was there as a way to just let you know what was within the guidance, because the refranchising estimates are fluid at this point in time. I wanted to let you know what was in the guidance.

Okay. And then $0.15, though, should mirror the progression of the refranchising. So rather than $0.15 accretion in one year, it's going to be spread out; and by the end of 2018 you will have that accretion?

That's the idea, yes.

Okay. And then also, just looking at the brand and the decision that you've made with Jack in the Box going back to 2008, when you were more than a 50% Company-owned concept, your margins were in the teens then. Why isn't the Board also looking at this holistically for a long-term basis over your entire portfolio as far as the franchise skew? Why isn't the lower-margin Company operated stores of Qdoba also, at this stage, being seen as a potential -- more so -- a valid franchise investment than your balance sheet, given that it is a lower-margin store right now, and it does seem to be a highly competitive environment, with 700 stores already?

Yes, so let me give you a little bit of color on that. One of the things that makes the Jack in the Box re-franchising strategy historically so accretive on the deal was the fact that we have control of the real estate, and we get both the rental income and the royalty fees on that.

So that has enabled us to re-franchise higher performing units and either have them be accretive to earnings or certainly not dilutive. Most other brands, when they refranchise, those transactions are dilutive. And it's a balance sheet play versus more [of an] operating results and balance sheet play.

When you look at Qdoba, we don't control the real estate, other than we are on the lease as the primary lessor. But because we are paying fair market value rent for those currently, there is no real rental value to us to re-franchise to a franchisee. So you are really swapping out a fairly good cash flow for that restaurant to be only 5% of sales, which is what the royalty factor would be on that. So the math doesn't work nearly as elegantly for us as it did on the Jack in the Box brand.

Okay, that's very helpful. I guess, then, along those lines, since you are refranchising now stores that you control the real estate of, but this new refranchising effort is also built off of future growth -- those stores that will be built. And as you get more meaningful growth, you're going to have franchise royalties grow at a faster pace beyond the re-franchising than you would your rental income. Correct?

Depending on the growth rates, I think that could be a fair statement. But it would depend upon the growth rates, yes.

Okay, great.

But we are happy to have that, because we have no investment in those new restaurants. So we are happy to have the royalty rates, and we are happy to have the franchisees build quickly their new restaurants.

No, that's definitely helpful. Does the refranchising deter some of the acceleration of the existing franchisees? It sounds like you are looking for new franchisees, different than in the past, where you used to sell Company-owned stores to existing franchisees.

I think you will see primarily existing franchisees, not exclusively existing franchisees; but we would not expect that to dilute the current franchisee growth. We expect it to be accretive to that.

And then just last bookkeeping -- did you give a lift on the same-store sales front, what you expect from these remodels of the Qdoba brand?

Did not.

Thank you.

Operator, we are running out of time, but we will take one more question before we close.

Bob Derrington, Telsey Advisory Group.

Lenny, can you give us a little bit of color on -- the color of what we should expect from the newer stores that you opened, specifically regarding Qdoba? I've seen a number of the restaurants that have varied a little bit, obviously, versus the one that we all visited in Kansas City.

Should we anticipate that some percentage of these stores will open with some sort of alcohol mix? And if so, will they have a bar element like Kansas City? Or how should we think about that?

Bob, a couple things -- one, the brand team has been testing the bar concept now for probably in the neighborhood of six months. They have also brought in some outside partners who helped build bar concepts to help them analyze the results and determine a go-forward strategy. And I'm really happy with what they came up with.

It fits right alongside what I said in my prepared remarks, where the remodels as well as new builds will really be built in a way that marries up the demographics of the marketplace with the specific offering within that site. So, for example, if we are in an area like the one you visited, where we have got a lot of foot traffic, and we can support a full-sized bar, a lot of socializing happening there late into the night, then we will put in a bar offering that looks closer to what you experienced.

However, we have a lot of other sites that just have a great dinner and just post-dinner mix, where we are going to get folks there that want to have a great meal with friends, probably not a lot of foot traffic. We can have a limited bar offering in that space that works better for that consumer and doesn't have us overinvesting in the facility.

So I think the short answer is we'd like to have an alcohol presence in as many of the sites as we possibly can. And then the scale of that alcohol presence will really be determined on the local community's needs.

A quick follow-up, if I may. On the acquired restaurants, Qdoba -- I think there was 14 during this past quarter. And again, forgive me if you made some comments in your prepared remarks. Can you give us some kind of color on how those fit -- where they geographically fit within the Company's footprint, good locations? How should we think about that?

Yes. No, I did not address that in the early remarks, Bob, so I appreciate the question. So, yes, you are right: 14 restaurants. They are in Colorado. And so I think from an operational efficiency perspective, they fit well in with the heavy presence that we have on Company restaurants in both Denver and in Colorado Springs. So I think that ties in nicely there.

These units have above-system-average unit volumes and above-system-average restaurant-level margins. And we paid just under $20 million for that, around 5 times cash flow.

Outstanding, terrific. Thanks, Jerry. I appreciate it.

Thank you, everyone, for joining us today. Have a safe and happy Thanksgiving. We look forward to talking to you at some of the upcoming conferences.

Thank you. So that concludes today's conference call. Thank you all for participating. You may now disconnect at this time.