Jack in the Box Inc (JACK) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. Second Quarter Fiscal 2017 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'd like to turn the call over to Carol DiRaimo, Vice President and Chief Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Thank you, Marco, 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'll review the company's operating results for the second quarter fiscal 2017 as well as some of the guidance we issued yesterday for the third quarter and fiscal 2017. 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. Our comments include non-GAAP measures, including operating EPS, restaurant operating margin, franchise margin and EBITDA. Please refer to reconciliations included in the earnings release or on our website. Following today's presentation, we'll take questions from the financial community.

Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The safe harbor statement in yesterday's news release and the cautionary statement in the company's most recent Form 10-K are considered a part of this conference call. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available 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 Baird's Consumer Conference in New York on June 7, Oppenheimer's Consumer Conference in Boston on June 20 and Jefferies' Consumer Conference in Nantucket on June 21. Our third quarter ends on July 9, and we tentatively plan to announce results on Wednesday, August 9, after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Thursday, August 10.

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

Thank you, Carol, and good morning. I'd like to start today by addressing our decision to have Morgan Stanley formally evaluate alternatives for the Qdoba business. At our Investor Day investor meeting last May, we said one of the factors that would cause us to reconsider our strategy with respect to Qdoba was valuation. It has become more apparent since then that the overall valuation of the company is being impacted by having 2 different business models. As a result, we've retained Morgan Stanley to assist the board in its evaluation of potential alternatives with respect to Qdoba as well as other ways to enhance shareholder value.

At the time the company acquired Qdoba in 2003, it had 85 locations in 16 states with $65 million in system-wide sales. Over the past 14 years, net units have grown at a compound annual growth rate of 16%. Today, Qdoba is the second-largest fast-casual Mexican food brand in the U.S., with more than 700 locations in 47 states and Canada, system-wide sales of more than $800 million and AUVs of nearly $1.2 million in fiscal 2016. So simply stated, we continue to believe in the potential for this brand. We will not be able to address or answer questions regarding this evaluation until after Morgan Stanley has completed its work and our board has determined next steps.

And now let's talk about the quarter. Jack in the Box reported a 15% increase in second quarter operating earnings, with the improvement driven by lower G&A and our efforts to return cash to shareholders, offset by a decrease in same-store sales and operating margins at both brands. On the Jack in the Box side, the decrease in system same-store sales was at the midpoint of our guidance with franchise restaurants, which now comprise 84% of our system, performing better than company locations. After a sluggish start to the quarter, which we believe was due largely to delayed tax refunds and record rainfall in California, system same-store sales turned positive as these transitory issues passed and we pivoted our advertising toward value messages. The competitive environment among QSRs has been fierce, with other chains engaged in extensive deep discounting. As a result, we lost ground to some of our competitors during the quarter, with the QSR sandwich segment outperforming our system by 150 basis points. And those sales were adversely impacted by factors beyond our control, especially during the first half of the quarter, we've seen improvement in our operations metrics, which can be a leading indicator of performance.

During the quarter, we continued to innovate our menu and bring new product news to the market. Though the impact of those new offerings was tempered by our competitor's pervasive value messages. In February, we extended our popular line of Buttery Jack burgers with a bacon-packed Triple Bacon Buttery Jack. We also expanded our Brunchfast platform with a Grilled French Toast Plate. And near quarter end, we launched a Guacamole & Bacon Chicken Sandwich.

In addition to the new premium products, we balanced our promotional calendar with value offerings, including our Jumbo Meal, which bundles a Jumbo Jack hamburger with 2 tacos, fries and a soft drink for just $3.99; and our Double Jack combo, which combine our signature double patty Double Jack burger with fries and a drink at just $4.99. Historically, we've addressed value by bundling products. But going forward, we may also value price single menu items, if necessary, to compete more effectively with all the value messages we see in the marketplace.

We're also making good progress on refranchising and third-party delivery. Initiatives extended to -- intended to expand our brands, increase company AUVs, and most importantly, grow sales and transaction. Our goal is to increase franchise ownership of the Jack in the Box brand to at least 90% of the system. During the quarter, we refranchised 60 locations in multiple markets and increased the level of franchise ownership from approximately 82% to 84%. We currently have signed letters of intent for approximately 70 additional restaurants.

As for delivery, late in the quarter, we expanded our partnership with the popular delivery service, DoorDash, which is now delivering Jack in the Box food from approximately 37% of our system. Restaurant delivery offers a significant opportunity for us to take advantage of changing consumption habits and advancements in technology to drive sales growth at both brands. At Qdoba, 25 company restaurants and 120 franchise locations are currently under contract with delivery services, and we expect to bring additional restaurants online in the near future.

Now let's take a more in-depth look at what's going on with our Qdoba brand. The same-store sales decrease of 5.9% for company restaurants was below our guidance and 560 basis points below same-store sales at franchise restaurants. Although our company locations were lapping aggressive discounting in the year-ago quarter, the delta between company and franchise restaurants tells us that the underperformance is not systemic and in no way indicative of the quality experience the brand can deliver. And that gap has narrowed substantially through the first 4 weeks of the current quarter. We saw margin improve over the course of Q2 as we managed labor and food costs more effectively. Same-store sales trends have also improved thus far in Q3.

Our guests have responded favorably to our recent menu enhancement, especially the return of Smoked Brisket and Queso Diablo and the introduction of Primetime Nachos, which includes 3 options made with different protein and heat levels: chicken fajita, spicy chicken and habanero barbecue brisket. Guests continue to give high ratings to the quality of our food according to an independent qualitative study.

So to summarize the key priorities for the enterprise over the balance of the year. We'll continue to focus on improving the guest experience at both brands and to more effectively manage food and labor costs and improve restaurant operations. In addition to providing nice sales layer and expanding margins, there's no greater driver of near-term EPS and EBITDA growth than operations excellence. We'll continue to execute our Jack in the Box refranchising strategy. We'll maintain our focus on menu innovation for both brands and address the QSR industry's deep discounting by emphasizing more value offering for our Jack in the Box brand. And we'll invest in growing catering at Qdoba and to expand third-party delivery channels at both brands to increase transaction and sales.

With that, I'll turn the call over to Jerry for a more detailed look at the second quarter and our outlook for the remainder of fiscal 2017. Jerry?

Thank you, Lenny, and good morning. As Lenny mentioned, operating EPS for the quarter was up 15%, driven by lower G&A as sales and margins were below our expectations. And importantly, adjusted EBITDA, excluding franchise gains and restructuring charges, increased by $7.6 million to $81.2 million in the quarter and has increased by more than $20 million to $184.3 million year-to-date.

For Jack in the Box, the 2.4% decrease in company same-store sales was comprised of mix benefits of 2.1%, pricing of approximately 2.6% and a decline in transactions of 7.1%. Franchise same-store sales decreased by 0.4% in the quarter. Franchise fees relating to the sale of 60 company Jack in the Box restaurants was the biggest driver of the 60-basis-point increase in consolidated franchise margins, which expanded to 54.4% in the second quarter. Jack in the Box restaurant margins decreased by 100 basis points compared to last year, with sales deleverage and approximately 6% wage inflation being the primary drivers. Commodity costs were slightly favorable in the quarter.

For Qdoba, Q2 same-store sales have decreased 3.2% system-wide and 5.9% for company restaurants. The decrease in company same-store sales reflected a 1.8% increase in the average check, including pricing of 0.3%, catering growth of 0.5% and an 8.2% decrease in transactions. The decrease in transactions at company restaurants was driven in part by substantially lower discounting than we did last year. Franchise same-store sales decreased 0.3% in the quarter.

The labor staffing and food cost control issues we talked about last quarter improved throughout this quarter, as did margins. But the decline in same-store sales and wage inflation of approximately 6% weighed on Qdoba company margins, which decreased 480 basis points in the quarter. New restaurants opened over the last 12 months negatively affected margins by about 150 basis points. G&A was favorable in the quarter as our restructuring activity contributed to an $11 million or nearly 24% decrease in SG&A costs. We repurchased $219 million of stock during the quarter and have $181 million available under current board authorizations. Average outstanding shares decreased by nearly 9% versus last year's second quarter, which will continue to contribute to our EPS growth. Our leverage ratio was 3.2x as of the end of the quarter.

As Lenny mentioned, we've made some good progress on our refranchising activities with the sale of 60 restaurants in Q2. Had these stores been franchised at the beginning of the year, Jack in the Box margin for the second quarter would have been approximately 130 basis points higher than the 19.7% we reported. In addition, we have another approximately 7 -- approximately 70 stores currently under letters of intent for refranchising.

Here's our guidance. Here's our thinking on guidance for the third quarter. We expect same-store sales at Jack in the Box system restaurants to range from up 1% to down 1% in the third quarter. Sales through the first 4 weeks of the 12-week quarter are tracking approximately flat. Our Q3 sales guidance for Qdoba company restaurants is up 1% to down 1%. Sales trends are tracking slightly negative through the first 4 weeks of the third quarter.

We updated our full year guidance as follows: We lowered our full year same-store sales guidance for Jack in the Box system restaurants to up approximately 1% and for Qdoba company restaurants to down 1% to 2%, reflecting our year-to-date performance and our outlook for the remainder of the year. Reflecting the recent increase in spot prices for beef 50's, we now expect commodity costs to be approximately flat for the full year with inflation in Q3 and Q4.

Based on our year-to-date results, lower sales guidance for the year and the change in our commodity outlook, we've lowered our expectation for consolidated restaurant operating margin to approximately 19%. We now expect interest expense for the year to be approximately $49 million versus our prior guidance of approximately $47 million as a result of the $219 million in stock repurchases made during Q2 and slightly higher interest rates. As a result of our lower same-store sales expectations and Q2 performance, combined with higher commodity and interest costs, we now expect operating earnings per share to range from $4.10 to $4.30 in fiscal 2017. At the midpoint of our guidance range, this represents about a 3.5% reduction in our guidance.

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

(Operator Instructions) Our first question is from John Glass from Morgan Stanley.

Lenny, maybe just first addressing the sales weakness in Jack in the Box. One, I think your guidance still improves some improvement – implies some improvement in the fourth quarter on a 1-year basis and on a tougher comparison on a 2-year basis. So why do think that will be the case? And maybe can you talk about -- you're talking about single item value now, is that something you're putting in place now? Or is that just a maybe just in case later kind of statement that you made?

Yes, I think that you'll see us pivot to at least some single item promotions in the back half of the year simply because we're sort of being dragged into that space by all the competitors, including those that have a higher average check in our space and tend to focus on mid-tier and premium product. Even they are delving into the single item discounts. So I think we're not going to be able to prevent that from happening, but we really are looking at a couple of things as we make these decisions. First off, although I wouldn't say that the aggressive environment is simply transitory, I do think it is a business cycle that will eventually come to an end as commodity costs go up. And when we see the impact to our business, essentially, when we look at the percentage of transactions that happen lower than an average check of $4, that's really where we see the transaction erosion. And when we look at the investments we've made in innovation, which essentially is mid-tier and top-tier product, we are not seeing that erosion. We see a steady state, feel good about the investments we made there. So we know that what's driving the down cycle in sales and transactions right now really is the lower-priced items, and we're going to have to play some more in that space. But we're going to be really careful about doing what's right for the long term for our brand. We don't want to put ourselves in a position where we essentially devalue our brand by essentially turning ourselves into a perpetual discounter and training the consumer that they no longer should come to us for the mid-tier and top-tier products. That's been our bread-and-butter over the long term. So we're going to continue to invest there, but just have to swing the pendulum a little bit more toward discounting in the short term. So that's the way we see this sort of taking shape and we'll balance it. We've been here before. And we've -- I said these very same things on the conference call before. But ultimately, don't believe that the environment can last. And when we come out of it, I think we'll be positioned well if we don't erode our brand in the process.

And then, Jerry, just for you. One, how do you think about the old $400 million in EBITDA in this context? Is it as simple as reducing the Qdoba contribution to that? Or do you suspend it because you don't know kind of what the outcomes are going to be? And in the release, you talked about other corporate actions to enhance shareholder value. So in your mind, what are those items on that list besides the Qdoba actions you announced?

On the second part of your question, John, I'm not going to be able to answer those because I think Lenny mentioned earlier on, we're not going to be able to answer the questions around the work that we're doing around what those alternatives look like. But with respect to the EBITDA, we're up about 12.5% EBITDA year-to-date versus same period last year. And while we -- and that was with sales and margins for both brands that are below our expectations. So even with that, we've been able to grow EBITDA in large part through the G&A reductions that we've had. And I would expect that we would continue to grow EBITDA between now and the end of '18. But what I would say though is if we continue with the current trends that we've seen with sales and margins, I think that would pull the $400 million EBITDA target into question by the end of 2018. It's not that I don't think we'll ever get the $400 million EBITDA target, but it does put a question in my mind now related to the end of 2018.

The next question is from David Tarantino from Robert Baird.

Jerry, I guess, just following up on that last comment. I guess, one thing that would be helpful is to talk about that $400 million target in terms of what you expect or originally expected the Jack in the Box brand to deliver versus the Qdoba business. And if you do fall short of that target, would it be because of both businesses? Or more so concentrated in the Qdoba side of the equation?

Well, I -- look, there's a few paths that you could take to hit that $400 million target. And I think better trends from -- on the Jack in the Box brand is probably worth more in terms of dollars than better trends on the Qdoba brand. However, having said that, better trends on the Qdoba brand would also help substantially there also. And other than that, I'm really not able to dissect why each brand is going to contribute towards the EBITDA target at this time.

And Jerry, just a follow-up. So I guess qualitatively for Jack in the Box to hit their original target with whatever component you were assuming there in the $400 million target, what type of system comps do you think you'll need over the next 6 quarters or so to achieve the plan on the Jack in the Box side?

Yes. So there's some -- let me answer that question maybe a little differently than what you're asking. But if you look at our Q1 performance for the Jack in the Box brand, we were pretty well spot on to slightly above where our targets were for their operating earnings performance in Q1. And that was with 0.6% company comp growth, 3.1% system comp growth. An important factor though was that we had a 5.6% commodity deflation in Q1. We did see the Jack in the Box performance disappoint in Q2, but what we saw on the sales side though is we had roughly 2.5 percentage points or more difference than what our overall comp sales were for the brand and we get some of that commodity deflation of 5.6%, so basically flat. Commodity is only about 30 basis points deflationary in that quarter. So I think that's really what that trend line looks like for the Jack in the Box brand. If we can get the Jack in the Box brand, though, to back up to that roughly 2% same-store sales growth on a system-wide basis and stable commodity costs, that would go a long way towards improving the Jack in the Box brand contribution towards that $400 million EBITDA target.

The next question is from Brian Bittner from Oppenheimer.

I know you can't answer much about what you're looking at in relation to Qdoba alternatives. But from the outside looking in, it's really hard to gauge what the actual cost basis is of that business. So just maybe so we can better understand what the options may be, are you able to tell us what the book value or cost basis of Qdoba is today?

So we were expecting this question, and I think maybe under normal circumstances, I probably would have answered that question. But I think with the -- with that being just one of the many aspects of the evaluation of the alternatives with respect to Qdoba that we've initiated with Morgan Stanley's help, I don't think I'm going to be able to comment on that one component of this at this time because of that.

No, that's fair. And just on the Jack in the Box. I mean, are you able to maybe peg a probability of how you're thinking on the 90% versus 95% at this point? Are you kind of favoring one target over the other? And what would be the reason for that?

So we've stated in our long-term plan that we'll get to at least 90%. And we were not targeting any higher than 95%. And essentially, what we're trying to accomplish in the refranchising is to do more than just to flip the restaurants to franchisees. We're looking to bundle some of our existing restaurants in core markets that are sort of fully penetrated where we have market share with more underpenetrated markets where we can have a strong operator go in and find a development [team] and build out that market. So I think it's relatively fluid once we get into that space between 90% and 95%, where if we can put together great deals with our franchisees for them to have an opportunity to grow and also to buy some of the existing cash flows, we'll take advantage of that. So I think that 90%, 95% target is sort of well stated and gives us the flexibility to negotiate those deals without pegging a high side or low side of that range. But we're going to be trailing up to -- I think we did say, though, that we could go up to as high as 95% and still create a situation where the business model overall is stronger than where we were before. So that's about as much as I think we'd want to say about how we're positioning that.

The next question is from Andrew Charles from Cowen and Company.

Lenny, I get the need to talk about the need to be more competitive with value efforts you're putting in place for Jack. But can you reconcile that with the goal you laid out at the Analyst Day to help make the brand reposition higher to QSR+? I mean, how viable and how -- what's kind of the path to get there?

Yes, well, you've heard many brands talk about this sort of barbell strategy where you've got to have some discounting going on and then you want to do some things at the top tier of your menu. For us, what that looks like is that generally, we're able to pull a higher average ticket because the percentage of transactions we get on the higher end of our menu are typically higher than our major competitors. So when we break down the behavior of the consumers today, what we see is that we're not losing transactions on the high side of our menu. And that bodes well for the more QSR+-type strategies. But in the short term, we're going to deal with some erosion at the bottom side of our menu. So we may need to swing the pendulum or rebalance the barbell, if you would, to have a little bit more weight on the bottom side. But we do not intend to swing that pendulum all the way to a place where the consumer now is trained to come to us strictly for deals and value because we think that erodes the strategy. It erodes our ability to achieve that over the long term. So I think the question is appropriate and it's exactly what we wrestle with. And it's why we've been largely reactionary to what's happening in the marketplace versus being a leader in this sort of discount or space. I don't think that this is sustainable. If you look at what's happening with the rising cost of health care and also minimum wage and you couple that with the pervasive discounting, and in some cases, a new sort of strategic direction for certain competitors to be a discounter as their go-forward strategy. I think you're going to find that in a more normalized commodities market, it can be very difficult for franchisees to make money on this level of discounting. And I think you're going to see the heels dig in a bit, particularly in the face of what has become largely an asset-light model, high franchise percentage model. So I'm anticipating that this will slow down. And when the markets stabilize -- the commodities market stabilize, we will see discounting, but we won't see the level that we're seeing today. And I think we'll be in a good position to once again sort of break through the noise with our innovative new products, like we have in the past with things like Buttery Jack or our Munchie Meals or our Brunchfast. We've had a lot of success with that. And when we don't have quite the noise in the marketplace with the pervasive discounting, it plays very well. So I am very bullish on the Jack in the Box brand going forward.

Let me ask one more just on a near-term basis. You guys mentioned running flat Jack comps quarter-to-date. My math suggests that your comps decelerated so far in 3Q from what you're doing at the end of 2Q. And the compares do get more difficult as 3Q progresses. So can you talk about the confidence in the near term value initiatives you're implementing to help drive reacceleration over the next 8 weeks?

Yes, I don't know that we're focusing just on the next 8 weeks. I think we're focusing on the balance of the year. And we know that when we put out single item competitive pricing, we get a high take rate. And probably the best example of that is our tacos. We were historically at $0.99 2-taco price point. That has been there forever. But in the last 18 months, we came off that price point and we knew that we were going to sort of donate some of those transactions to the more value-oriented competitors. We know that if we go back to that type of price point for items on our -- on the bottom side of our menu, we should get a high take rate. And when we look at things like Breakfast Platter, which is less than $3, and we look at where the transaction erosion is happening, which is less than the $4 price point transactions for us, we know that if we play in that space, we can ramp-up the sales and transactions. The issue is, we don't want to do that to the detriment of the overall performance of the business. Another way of saying that is, we don't want to completely donate our margins and our profitability to the short-term effort. So we're going to try to balance this thing and rely on the fact that this cycle will come to an end. And when it does, we should be well positioned.

The next question is from Alex Slagle from Jefferies.

Had a question on the Qdoba labor and what you've learned in recent quarters. What you think is the best way to balance the different types of menu offerings that you promote, be it the items that are assembled based on recipes versus the simple scoop-and-serve offerings?

Yes, I've talked a little bit about this before. And the Qdoba brand really needs to innovate to pull itself out of sort of the sea of sameness. And it's done a great job of building a pipeline, but not as great a job in executing that pipeline. And a lot of that was just the fact that we haven't exercised those muscles. I think we sort of jokingly say, but accurately depict the brand that outside of brown rice and whole wheat tortillas hadn't done a lot of innovating over the last 10 years. And when we pushed the crew to introduce a little bit of complexity that comes with some of the innovation, unfortunately, we were not well prepared to execute that. And so our new brand President, Keith Guilbault, and his team have really sort of taken a few steps back in order to take a few forward. And they've retrained the field on how to execute well, not just with the execution of new products, but also how to manage the ebbs and flows of the operation in managing their labor and food costs, so more just-in-time cooking and understanding how to deal with demand surges or decline and how you need to immediately adjust the labor to appropriately manage the bottom line. And so I think the folks are well equipped today to do a better job with that going forward. We need to give them an opportunity to learn and grow. And I think we're doing that, but we're seeing some great early signs of success there and would anticipate that they'll continue to perform better in the future and improve as we move forward.

Yes, and Alex, this is Jerry. Just to add on to that with Lenny's comments about getting more comfortable with the exercise of those muscles and with the labor deployment piece. When you look at, particularly the last month of Q2, we talked about margins improving to more than 15%. But if you look at mature restaurants that we kind of loosely define as restaurants that have been open at least 3 years, we saw those restaurants in the last month of the quarter improved over 19% restaurant-level margin, which is approaching that plus 20% target that we've been looking for. And that's even with the roughly 6% wage inflation that we're seeing. So I think, overall, the Qdoba team has done a really nice job on managing the food cost and the labor component that we talked about in Q2. So we're very happy with where those mature restaurants are at this point in time.

Okay. So the inefficiencies at new store openings, I mean, is that really due to ops execution rather than seeing softer -- a softer ramp in the volumes as they -- than you expected?

Yes. I don't know that it's due to softer volumes. I think there's a -- somewhat of the ops execution people. But we're seeing new -- those newer restaurants also improve similarly to how we saw the more mature restaurants improve. But clearly, they're not in the 19% margin.

The next question is from Chris O'Cull from KeyBanc.

Jerry, just to follow up on the comments about the long-term targets. Is it safe to assume that you would rework the CapEx plan if the EBITDA was below the $400 million target?

It's possible. Here's what I would say. We look at the CapEx plan every year on a long-term base, but we're looking at the annual CapEx plan at least on a quarterly basis. So if we weren't getting the returns or the sales that we were expecting to get on these new units, we would stop or we would look elsewhere for those new locations. But we're not seeing that at this point in time. So I don't think that we have a plan now that would slow down what the growth targets look like. Having said that, though, we do have the ability to adjust our CapEx spend relatively quickly.

Okay. Okay. And then, Lenny, is the traffic at Jack's franchise locations down as much as the company locations?

No, it's not, and a couple things there. I think if you think about the disruption to a company operation when you announce you're going to refranchise a lot of location, it's palpable. And our brand president has had to sort of wrestle with keeping people engaged and motivated through those transitions. Uncertainty is, it kills engagement. So our company ops, I think, really sort of suffered a little bit of a blow when we announced the refranchising strategy because there's a lot of insecurity. And I think as folks have settled down, they've watched these transitions happen, they've seen a lot of great opportunities for those employees as they've gone from company to franchise employees, I think folks have settled down quite a bit. And I think we're in a much better place today. I think more so than anything else, the differential between the company and franchise restaurants can at least partially be attributed to that disruption.

Just one last follow-up then. How do you prevent the Qdoba evaluation process from becoming a distraction for the operators?

I don't think we necessarily do. I think unfortunately, when you have to communicate that you're going to evaluate something, you just have to anticipate that folks are going to get a little nervous. And ultimately, we don't know the outcome of this. We need to give Morgan Stanley an opportunity to do their work. We need to give them an opportunity to consult with the Board of Directors, and we don't need to rush to conclusion. And so that's essentially my message, not only to the Street, but also to my own internal stakeholders, my franchisees and my employees is that, look, we don't know what the outcome is. But this is part of the stewardship of running a business that you're going to, during certain times, evaluate things very deeply and try to understand if there are better ways for you to do business. So we're going to go through that process, and I'm going to ask folks to try as much as possible not to jump to conclusion, to focus on running the business and trust that the folks that are leading this are going to make what they believe is the best decision, communicate to folks appropriately so that whatever those decisions are and whatever the impact of them may be, folks can wrap their minds around it and hopefully find a lot of great opportunities through it.

The next question is from Matt McGinley from Evercore.

I have a question on the conversion of your business over time to a shared service model. I know in your K you break out the unallocated shared service expense and I guess, we can make assumptions on where that would go in the future. But over time, what benefit did you get from having those 2 brands together? And to give you an example, last year you talked about the $25 million to $30 million in Phase 1 costs. It sounded like that was a lot of shared services and you had used anecdotes in the past about buying whole chickens and things like that. And curious, what was the real benefit of this over time having the Qdoba and Jack in the Box together?

Yes, I think, well, first and foremost, you're going to look at the buying efficiencies on the commodity side, I think, has helped both brands. And then just the fact that we have 1 accounting department, not 2; 1 comp and benefit department, not 2. I think all of those things enabled us to reduce the overall G&A load. And it's primarily not with what you might consider to be where all the work gets done, but it's really around where the number of leaders that you have to have if you have 2 departments versus just 1 department, I think, is really where you saw the savings, but it's really across the board, Matt.

Where I'd give you a little bit of color on the sort of strategy going forward for both brands. There are certainly places where the industry is transforming and it's sort of evolving into a new space and we're able to work on those things jointly. So if you look at, for example, delivery or some of the digital investments that we're making for the future, those are done jointly between the 2 brand teams. So that, one, we can -- if we're in a negotiation situation, negotiate with greater buying power. We're looking at 3,000 stores versus just 1 brand. And so not only the buying power, but also the efficiency in leadership in bringing some of these strategies to life. So I think delivery is probably the closest in example where we do have key leaders that are facilitating the growth of delivery for both brands and making sure that it's a coordinated effort. That's something that, if separate, we would not have been able to do. And I don't think the brands would have that opportunity to learn from each other nor negotiate at the best contracts with the various delivery services that could have been available to us.

On the rental income side, the question is, you've highlighted over time how important that was to get that EBITDA up in the future and it's based on you controlling the leases and getting a variable rate on that. Now I know there were a couple of puts and takes in this quarter that maybe aren't relevant, but how does that flow through in the future? You did the 60 units that you sold in the third quarter, does that immediately come through where you get that high rental revenue? Or do they get a rent relief period over time? I'm thinking about it for the past few years, it really hasn't gone up all that much and I'm kind of wondering when we'll see this infection.

No, generally speaking, and by generally, I mean in the vast majority of the cases, we'll get that rental income flow through right away. There -- on occasion, there are low-performing units where we may provide a little rent relief based upon current market values of those items. And we do that from time to time. But again, the large majority is that the -- with the rental income stream component of those cash flows.

The next question is from Karen Holthouse from Goldman Sachs.

Sort of another question on strategically thinking about value at Jack in the Box. Are you thinking of this as it's something that you need to kind of pulse into the market in the near term to fix sort of single item value or lower price point value versus peers? Or are you also thinking about sort of broader strategies or a more permanent solution, even news in the marketplace that McDonald's is potentially going back to a national value menu with price points as low as $1? It doesn't seem necessarily like this is a completely tertiary issue.

Yes, thanks for the question. We see the same thing. I guess the way I would put it is, today, if you look at what's being promoted in the marketplace, it is almost 100% value. And then on top of that, you have some of the major competitors looking at value-oriented menus -- menu changes. But when we come out of this period of time, we should not expect to see the majority of the promotions in the marketplace being value. There may be every day value for some of the larger competitors which, quite frankly, is the best strategy for them, but we don't anticipate that on top of that everyday value, we will see 100% of the advertising dollars or nearly 100% of the advertising dollars going towards discount-related items and promotions. So even when I look at my major competitor going to a $1, $2 and $3 price point menu, I don't anticipate that all their advertising is going to be for their $1, $2 and $3 price points. And I think that a lot of our success comes from being able to break through the advertising noise with the innovative products and/or platforms that we brought to life. I think today, some of our volume, our advertising volume gets drowned out by the pervasive discounting. So it's sort of a buyer's market out there right now. And we're just going to have to deal with that. I will say this though, Jack in the Box intends to compete. So if we feel that ultimately one of our major competitors has shifted strategy in a way that will, over the long term, erode our brand, we will compete. And if we need to change our menu to compete, that's what you should expect from us. But we're not going to do that during a time where commodities are at an all-time low. The gap from food away from home to food at home is at an all-time high. I don't think that's an environment in which you want to base your strategy. So beyond that environment, let's see what happens. Let's base the strategy on what we continue to be -- consider to be a more normalized marketplace. I think that would be the smart thing to do.

Well, and I guess tied to that, has there been any discussions about advertising strategy? And as sort of to your point that there's initiative towards value, that just as a regional QSR, do you think you have the weight that you need to be able to balance value that you need for the market right now, but still make sure that you have enough messaging out there that's brand support?

Yes, I think that, that's a challenging thing to do in this marketplace. I think we actually have to just accept the fact that we're going to have to put more messaging out there that is value-oriented than we typically would want to. And so I don't think that there's a way for us to scream from the rooftops about our innovative new products and at the same volume based on our budget, scream from the rooftops about the value. So we're just going to have to accept the fact that we're going to shout a little louder about value right now and a little less about some of the mid-tier and top-tier innovations that we're bringing to the marketplace. And that's just a compromise that we're going to have to make right now.

The next question is coming from Jeffrey Bernstein from Barclays.

Maybe 2 questions just on Qdoba. The first one, just the company operated trends worsened, I guess, the latter 2 months as you lapped your own aggressive discounting. But being that you knew, I guess, that, that was coming, I'm just wondering what else changed to lead to the deceleration and I guess, the shortfall versus the mid-quarter guidance. It just seems like volatility is quite high even in such short-term period. And then I had one follow-up.

Can I just ask you, we had a little bit of interference as you were just starting your question. I want to make sure we got it right. If you don't mind repeating that.

Sure. Yes, I mean, for Qdoba, the company operated trends worsened, as you noted, the latter 2 months as you lapped, I guess, your own aggressive discounting from a year ago. But obviously, you knew that, that was coming. So I'm just wondering what else changed to lead to the deceleration and therefore, the shortfall versus the mid-quarter guide. It just seems like volatility is quite high at the brand even in a very short term period of time.

Yes. I think the sort of blunt truth about that is that in order to lap our discounting from last year, we would have had to increase the discounting level this year. And the brand is really trying to move away from that being the driver. And so we decided not to go that route. And as a result, we took our lumps, but the brand has -- the trend has changed significantly from the second to third quarter. And I think that we probably played that the right way. I think we created an unrealistic hurdle for ourselves by last year throwing a lot of advertising dollars into the mix and essentially driving up a number through a strategy that wasn't sustainable. And really what I mean by that is, we tested some advertising last year which was very effective in driving sales, but it was very ineffective when you look at the overall cost of doing so, not something we could sustain. So we did take our lumps for that this year. I think it was just sort of a lesson learned, but I think where we are today is a better balance. We are seeing some softness in the overall fast casual segment. Our franchisees are performing a little better than us through that volatility. But I think what's happening overall is you're seeing that the marketplace in general with the gap of food away from home from food at home is creating an issue for the higher price points within, let's just call it the convenience-oriented offerings. So yes, I think fast casual is going to feel the squeeze as long as that gap is there and as long as commodity costs are low. But I think they'll get to a more normalized space as we come out of that.

Got it. And just as you mentioned kind of the softness in fast casual, and the other part of my question specific to Qdoba related more to your largest competitor in Chipotle. I mean, seemingly their sales have bottomed and not surprisingly now, positive to a large degree from their easy compares in terms of their comps. I'm just wondering, is there any change in your thoughts in terms of the potential impact on Qdoba, either when they were struggling or any impact now that maybe they are on the rebound. Has there been a kind of change in how you view in terms of how their impact has been on you either pre or post their issue?

No, not so much. I think we -- if we had a lot of overlap with them, we would have been more concerned then, and I think we'd see even a bigger impact now. And I guess, it's our own sort of self-inflicted wounds in having to overcome last year's initiative that you really think today more so than anything else. And beyond that, I think we're seeing a more broad blurring of the lines between the industry segments that would be impacting Qdoba more directly than our major competitor, Chipotle. So when I look at what's happening with both casual dining and also with QSR, I think that those competitors are more of a threat and have more of an impact to the Qdoba business short term than Chipotle.

The next question is coming from Nerses Setyan from Wedbush Securities.

Again, just kind of talking about your large competitor on the Qdoba side. Obviously, they're starting to take a little bit more pricing. Does that perhaps allow you to take a little bit more pricing at Qdoba to maybe address some of the margin pressures we're seeing there?

We don't really give a pricing forecast or guidance, but what I can say is this, for both brands, we're going to be extremely cautious about the amount of price that we might take simply because we're experiencing some transaction erosion and we wouldn't want to do anything to exacerbate that. So we'll be opportunistic with it, but it'll probably be a little more cautious than we would generally -- than we would -- with a little more caution than we would generally use.

Okay. And then in terms of the over 500-basis-point difference between the company-owned and the franchise same-store sales growth, aside from the tougher compares in the company's side in Q2 last year, I mean, are there any different marketing or promotional strategies that the franchisees didn't implement last year or so on? What are some of the differences there that's driving that big delta?

I think the biggest thing is, last year, the franchisees did not participate in the discounting. It was a company-operated -- a company operation strategy. So their sales have been way more stable than ours. They haven't essentially created the volatility for themselves. And I think they have shown what the brand is capable of doing, and they've also shown that the consumers are still very favorable to the brand. So we can feel good about overall brand health. We can chalk up some of the volatility to our self-inflicted wounds. We can also own our own baggage where it comes to operating performance and make the correction there and remain confident in our ability to grow from this point forward. And I feel confident in the leadership of the new brand president as he has, I think, in his first year in position removed a lot of the volatility from the brand by sticking true to the strategy versus creating the short-term impact to the business, like we see in this quarter that are using -- that we're using techniques that are just not sustainable. So have a lot of confidence in his leadership to stabilize the business, and I anticipate that we'll be able to continue to grow from here.

The next question is from Gregory Francfort from Bank of America.

Can you update us on where new unit returns are at Qdoba, the investment cost and maybe cash flow you've been seeing?

So maybe I'll take that one, Greg. So if you look in the 10-K, we disclosed our investment cost as ranging from $800,000 to $1.5 million, depending on the prototype, whether it includes the full alcoholic beverage offering. And the new units had been trending at around $1 million, which is obviously much better than they were 5 years ago. So depends again on that investment cost. Clearly, at a higher investment cost, you would expect higher sales to be commensurate with those higher investment cost.

Yes. And then just to add on to that, post the integration of our restaurant development team to a single leader here, we've taken significant costs out of the Qdoba new builds and the remodels that you'll see more of them trend towards the lower portion of that range versus the higher portion of that range, as again, there's been significant cost engineering out of the original prototypes that we've had.

As we look at -- this is Lenny. As we look at the reductions in the costs, oftentimes, we'll get the follow-up question, "Have you, in any way, eroded the image of the brand by pulling those costs out?" I would tell you the answer to that is no, we haven't. It's really just putting the leadership in place that has experience with remodels and new builds and taking some of the material that we would use that would be high cost that the consumer would not necessarily know the difference between one material and the next and just making that modification. And then also using the buying power of the total entity as we're negotiating those materials. So I think we've done a good job of retaining the image while bringing the costs down.

Got it. And maybe one more. Can you address the recent spike in beef 50's, particularly with respect to beef 85's, 90's? And in that flat commodity guidance, are you factoring in beef 50's staying elevated or pulling back? Or do you expect the 85 or 90's to pick up? I guess, how do you think that dynamic plays out?

So let me address the 90's, first of all. Most of our 90's are already covered and contracted through the fiscal year. So we don't have any concern around those. The 50's though are always on the spot. And we've seen significant price increases per pound on 50's. If you look at our Q1, we were buying at about $0.40 a pound. The most recent spot market has been above $1. We're not expecting that high level to continue, but we are expecting beef 50's to be well above where they were in the Q1 quarter, such that now we are expecting the beef costs overall for the full year to be about flat with where they were last year with some inflation in Q3 and Q4.

And what was your expectation for beef in your old guidance? Was it, I guess, materially lower than that?

It was -- on the 50's, it was lower than that. But what you're seeing here is, keep in mind, 50's is only a portion of the hamburger mix. It's not all of it. And so that is impacting the overall beef cost and the overall commodity cost, but not so dramatically. If you recall the last guidance was flat to down 1%, now we're saying about flat. So it's not moving it a ton, but it is moving it.

Operator, I think we have reached past the 9:30 hour time, so we are going to end the call today. Thanks for your attention, and we look forward to speaking to you on the road in the next month.

Thank you. That concludes today's conference. Thank you for joining. You may disconnect at this time.