Jack in the Box Inc (JACK) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to Jack in the Box Inc. Fourth 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 would like to turn the call over to Carol DiRaimo, Chief Investors Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Thank you, Natalie, and good morning, everyone. Joining me on the call today are Chairman, CEO, Lenny Comma; and Executive Vice President and CFO, Jerry Rebel.

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 and franchise margin. Please refer to the reconciliations included in our earnings release. 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 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 related 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 plans to attend the ICR Conference in Orlando in January. And our first quarter ends on January 1, and we tentatively plan to announce results on Wednesday, February 21, after the market close. Our conference call is tentatively scheduled to be held at 8:30 a.m., Pacific Time, on Thursday, February 22.

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

Thank you, Carol, and good morning. As we noted in yesterday's news release, our Board of Directors with the assistance of Morgan Stanley has made substantial progress in its evaluation of potential alternatives with respect to Qdoba as well as other ways to enhance shareholder value. There can be no assurance that the evaluation process will result in any transaction or other specific course of action. We will not be taking any questions on this matter today, and I appreciate your continued patience.

With that backdrop, I'd like to use my time this morning to talk about the initiatives now underway or planned for fiscal '18 to regain momentum in a highly competitive environment, while Jerry will add a little color around the fourth quarter results we reported yesterday.

Let's start with Jack in the Box. We're acutely aware that our competitors will remain extremely focused on value, with a focus on price points below $5. When it comes to product promotions, expect us to deliver a consistent message on everyday value that leverages our unique capability of offering our entire menu throughout the day.

To that end, in January, we'll launch an LTO featuring single and bundled products with multiple price points ranging from $1 to $5. We won't completely stray from our higher quality positioning like the 100% ribeye burger, which was introduced in October, but our value promotion will be our primary message on media.

Although our performance for the coming year will be influenced by external factors, there are plenty of things within our control that can contribute to improving our results.

At the beginning of fiscal '18, we launched a holistic plan to transform our business by addressing key strategic imperatives to accelerate service improvements, leverage innovation to further differentiate Jack in the Box, elevate our brand image and enhance our digital experience. We work closely with our franchise community to identify and prioritize the areas of critical importance and we plan to focus resources on those with the highest impacts.

We continue to make steady progress on our refranchising initiatives. We sold 178 Jack in the Box restaurants to franchisees during the year, bringing the system to 88% franchised at fiscal year-end. We currently have nonbinding letters of intent with franchisees to sell 32 restaurants and now anticipate the Jack in the Box franchise mix will approach the high end of our previous expected range of 90% to 95% by the end of fiscal 2018.

On the digital front, Jack in the Box has a mobile application that supports order ahead functionality and payment. We are currently testing this app in a few markets and anticipate rolling out mobile and web ordering across our system in 2018. We're also continuing to expand delivery, which has generated an incremental sales lift in markets where it's offered. Including more than 100 additional restaurants that came online in Q4, we're now delivering Jack in the Box food from approximately 42% of our system. By the end of January, we expect to further expand delivery to about 58% of our system. That's more than 1,300 restaurants.

Moving on to Qdoba. Our Q4 sales trends were consistent with what we saw across the fast casual dining segment. To help drive transactions and sales, we know we need to increase awareness of our flavorful food and use of high-quality ingredients. So we recently launched an integrated campaign called United by Flavor that promotes unity over division and celebrates the flavors that make the brand unique. You'll see this tagline on digital media, social media, e-mail as well as in-store merchandising. The first product promotion to incorporate the new flavor's messaging is our quesadillas. It's been several years since we promoted quesadillas on a systemwide basis. With the new campaign celebrating our mission to bring flavor to people's lives, we thought quesadillas were a great way for guests to express themselves by adding ingredients they love, including guac and queso at no extra charge. We'll continue to invest in catering and delivery to drive incremental sales for Qdoba.

In Q4, we expanded third-party delivery to 62 additional company restaurants and increased the total number of company locations offering third party delivery to more than 200. Including franchise locations, nearly 45% of our system was under contract with UberEATS, Grubhub or DoorDash at fiscal year-end. And we expect to bring even more restaurants online in the near future.

We'll also leverage our loyalty program, which now has over 1 million active members. Development of nontraditional restaurants will continue to be a great way to generate brand awareness for Qdoba, particularly in underpenetrated markets. Qdoba opened 14 new nontraditional sites in fiscal '17 and now has more than 50 restaurants operating in airports, college campuses, medical facilities, shopping malls, military installations and travel classes.

In closing, we plan to provide guidance for fiscal 2018 following the completion of the Qdoba evaluation process. We know that you have specific questions around G&A, leverage and CapEx targets that we intend to update once this process has concluded.

With that, I'll turn the call over to Jerry for a more detailed look at the fourth quarter. Jerry?

Thank you, Lenny, and good morning. Operating EPS for the quarter of $0.73 was $0.30 lower than last year or $0.21 lower if you exclude the $0.09 benefit in the 53rd week in 2016. The benefits from lower G&A and our Jack in the Box refranchising initiatives were more than offset by lower-than-expected sales and margins, particularly at Qdoba. Q4 results were negatively impacted by about $0.07 per share related to Qdoba impairment costs and a higher tax rate versus last year that hurt the quarter by about $0.02 per share.

We estimate the impact from Hurricane Harvey was about $0.01, with lost sales days negatively impacting system same-store sales by approximately 30 basis points and company restaurant margins by an estimated 25 basis points.

For Jack in the Box, the 2% decrease in company same-store sales was comprised of pricing of approximately 1.5%, mixed benefits of 1.9% and a decline in transactions of 5.4%. Franchise same-store sales declined 0.7% for the quarter.

Jack in the Box system same-store sales declined 1% in Q4, which was at the midpoint of our guidance. Through the first 8 weeks of our first quarter, Jack in the Box system same-store sales are running approximately flat to slightly positive despite lapping year ago same-store sales growth of 4.7% for the comparable 8 weeks and our competitors' ongoing focus on extreme value.

Jack in the Box restaurant margins of 19.2% increased -- or excuse me, decreased by 180 basis points compared to last year, including the 25 basis point impact I just mentioned related to Hurricane Harvey. Margins were negatively impacted in the quarter by approximately 100 basis points related to the franchise restaurants that we took over earlier in the year, wage inflation of nearly 7%, commodity cost inflation of over 3%, sales deleverage and higher repairs and maintenance costs in the quarter. These factors were partially offset by the benefit of refranchising during the year.

Moving on to Qdoba. System same-store sales decreased 2.1% in the fourth quarter with franchise restaurants flat versus last year. The 4% decrease in company same-store sales reflected a 1.6% increase in the average check. We took no pricing during the quarter, catering growth of 0.8% and a 6.4% decrease in transactions. For the quarter, catering same-store sales grew 10.1%, and for the full year, catering mix increased to 8.7% of sales.

Through the first 8 weeks of our first quarter, Qdoba system same-store sales are running similar to the Q4 results. Qdoba restaurant margin declined 610 basis points in the quarter to 11.2% of sales. In addition to the impact of deleverage resulting from the 4% same-store sales decrease, the following factors contributed to the decline in margins: Food cost increased 220 basis points, including approximately 100 basis points from the over 50% spike in avocado prices in the quarter; labor costs were up 170 basis points and included roughly 6.5% wage inflation; and new restaurants opened over the last 3 years also negatively impacted margins.

G&A was lower in the quarter and declined to approximately 2.5% of systemwide sales in the quarter and the fiscal year as compared to 3.3% in both periods last year. Our restructuring activities, lower incentive compensation and pension costs contributed to the decrease.

Although we did not repurchase any shares during the quarter, weighted average shares outstanding decreased by 10% versus last year's fourth quarter. Our leverage ratio was 3.2x as of the end of the year.

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

(Operator Instructions) Our first question is from Dennis Geiger of UBS.

Definitely some interesting commentary on the value side of things. Can you comment at all on the performance during the quarter, the transactions under the $5 price point with the -- some of the adjustments that it looked like you made already during the quarter? Did you see an improvement under that price point? And then just looking ahead, it sounds like it will be a mix of kind of the single low price point and the bundled products. Anything more you can say as far as thinking about that balance as kind of we go throughout the year on value?

Yes. So let me look forward first and then I'll look back. If you go back to some of the major promotions that the larger competitors in our space have run around value or when they've run promotions that were directly, sort of in our face or against our equities like breakfast all day, when we see those major competitors putting the lion's share of their marketing strength behind those promotions, we tend to see a negative impact within that particular quarter and then bounce back shortly thereafter. As we look at January going forward, we don't want to be in a position where we're reacting after the fact. So you will see us have similar price points in the marketplace in January in anticipation of what's to come from some of our major competitors, and we will put the value-oriented messaging as the primary messaging, which means it will be getting the lion's share of the advertising during that time. As far as looking back, we have gotten some traction on the items that we've priced below the $5 price point, particularly the Munchie Mash-Ups as well as the Breakfast Platter have done well and also the Really Big Chicken Sandwich. So we have seen some traction, which gives us the confidence to be more aggressive here coming into January. So I think we feel like we'll fare pretty well in the coming environment.

Great. Lenny, if I could sneak one quick one and just wanted to focus on the greater than $5 price point and knowing this environment that's been challenging. But just anything you could say on performance considering the environment on the premium innovation that you've done on the upgrades as you kind of transition to QSR+? Again, factoring in the environment, are you pleased with what you've seen, with what the response has been to some of those upgrades, to some of the premium innovation that you've run?

Absolutely. We -- so as I said in the prepared remarks, we've got 100% ribeye burger out there right now, which is performing exceptionally well. Jerry shared how we're doing through the first part of this quarter, which are really the biggest rollovers we'll have all year long. And we're doing that in the face of continued value and winning with ribeye burger and supported with some of the value messages beneath it. So we feel really good with the strategy we have in place right now. The innovation's working, and we're getting traction on the value front as well.

Our next question comes from Brian Bittner of Oppenheimer.

Lenny, you exited the year with the Jack in the Box business now 88% franchised. And you've deliberately said in the release on this call that you want to move closer to that 95% range. So what drove this change in thinking, first? And then Jerry, just the 5% or so of stores you plan on keeping, can you just give us an update on what the unit economics of those stores, that batch of stores looks like? I have a follow-up as well.

We continue to see where we can create value by moving closer to the high side of the range previously communicated. So it's really in keeping with what we've always said. We -- from the time we started the refranchising strategy, we've been asked what's the endgame? Would you consider refranchising more? And we've always said if we felt that refranchising will continue to add value, we would do it. So we're in that place today, and that really drives the decision.

And Jerry, just on the...

Yes, let me answer the question for you this way as opposed to the restaurants that we would have at the 95% level. If you look at the restaurants in the fourth quarter that we had all year long, these were restaurants that were not impacted by refranchising during the year. These are restaurants that we did not take back from a franchisee. There was just under 250 of those locations, and their margins were greater than 22% in the fourth quarter. And then keep in mind also that we had the highest commodity inflation of the year, I think about 3.3% commodity inflation in the quarter there. We also had wage inflation of 7%, almost 7% in the quarter. And that was driven by another minimum wage increase in LA, which went from $10.50 an hour up to $12 an hour on July 1. So even with all of that and the sales deleverage from down 2% comp, we were still above 22%. I think as we would go from a 90% to closer to a 95% franchise level, you would also see then the margin rates tick up also.

Okay. And just, again, on the comp for Jack in the Box, so you're lapping a 5 so far this quarter. You're saying things are flat to slightly positive. I mean, could you have very specific things you can point to that's driving that 2-year improvement? And obviously, comparisons ease a lot from here finally. Does that matter moving forward? Do you think that matters at all?

Well, I would say right now, we've got the ribeye burger, which is arguably one of the better products we'll launch this year. And one of the reasons we positioned it during this time of the year is because we knew we had these rollovers. And then it's supported with a value item, the $2 breakfast pockets. So I'd say we came out of the gate strong knowing that we needed to have some of our best products in place this quarter. The remainder of the year, we have additional innovation that I think will be quite exciting. And I think the marketing approach is going to be pretty refreshing and maybe a little edgy as well. And so I would anticipate continuing to get that traction going forward. But I would just say that as we lined up the products going into this year knowing that burgers, when we have innovation around a burger just like we did with Buttery Jack it sort of rings true for the consumer, we tend to do well. We wanted to make sure that we came out of the gates with a strong burger product. Throughout the year, what you'll see is we will have emphasis on burgers and other sandwiches but we'll also brings some new news to the marketplace, new food that Jack in the Box has not offered in the past. Hope that answers the question.

Our next question comes from John Glass of Morgan Stanley.

First, just following up on the improvement you saw both during the quarter and the fourth quarter as well as quarter-to-date. How much of that is the industry improving? I know you may not want to speak to specific industry numbers, but is your GAAP narrowing or maybe exceeding the industry? Or is this just the industry improving and you're just getting that benefit?

Yes, John, unfortunately, we can't share the industry data without prior approval. So we can't comment on that one.

Even directionally, you can't just talk about whether it's gotten narrower or wider?

No, because some people will know where versus where we're tracking since we're tracking flat to slightly positive.

And can you talk about the development pipeline for the Jack business as you refranchise? Do you put some hooks in there to get development going again? Is that something we'll see in 2018? Or is there a digestion period as franchisees are acquiring these units, not something more like '19 and '20? What do you know now you have development commitments for in the future?

There were -- with the restaurants that were sold in 2017, there were development commitments for 65 new restaurants. I don't think you'll see anything in 2018 because of lead time and permitting process and so forth and so on. But 2019 and '20 would be the time frame which you would begin to see some of those restaurants go online.

Okay. And Jerry, just since in that first one, you weren't able to answer. You talked about the last 5% of restaurants being dilutive to earnings. Can you give -- and you gave a very specific number about that, and obviously, margins are lower, EVs are lower today. Can you give a renewed view on the dilution you'd experience going to 95 versus 90?

Yes. So I won't be able to tell you what that dilution is other than I can tell you that it is lower today than it would have been 1.5 years ago for a number of reasons. I just described that roughly 250 restaurants were at margin rates of above 22% in the fourth quarter. But they, too, were down from where they were in the same quarter last year. And so I think as you get the wage pressure, and particularly in some of the markets that we have, that it does make that dilution a little less noticeable. The other thing I would mention is that while EBITDA is a consideration, it's not the only consideration. I think that getting closer to 95% helps us to become even more asset-light than we otherwise would at, say, a 90% level and it also should help with the higher free cash flow yield going forward also. And then when we do guidance, John, we can provide some updates on what's 95% going to look like.

Our next question comes from Chris O'Cull of Stifel.

Jerry, how should we think about the margin impact and the check average impact of the new value menu? And then I have a follow-up.

Well, I think the value products are specifically engineered to generate a reasonable margin. That's why what you're not all the things that Lenny talked about were not core products that we happen to be discounting. These were all innovative new products that were designed with a reasonable margin in mind. So I would not look at these sales being dilutive to that margin rate. The other thing, too, is if -- as sales are negative, you start to get some dilution with respect to fixed cost deleverage on those items here, too. So I think these sales, while I don't expect them to be margin dilutive, will also help to offset fixed costs as you continue to keep people coming through the restaurants.

Chris, I'd just add to that. Our goal is to drive transactions. We've experienced some transaction loss that we would like to mitigate and at the same time, do it in a way, as Jerry mentioned, that balances out our margins. And so as I mentioned in the prepared remarks, what we'll be doing in January at the price points, from $1 through $5, will be a combination of both single and bundled products and offerings so that we can achieve that appropriate margin balance.

Okay. And then Lenny, in the past, you've indicated Jack has had difficulty breaking through kind of the advertising clutter out there with regards to value messages. Are you concerned this could happen again in January when you roll this out?

I think what we're putting on the table is so different from what we've done in the past, but I think we will break through. And I also think that in many ways, the message goes right along with what's going on in the marketplace and we'd like to ride that wave.

That's fair. And the weight will be much heavier?

The weight will be much heavier. We don't typically put our value items as the primary weighting for advertising. They're typically the secondary message. These will be primary this time.

Our next question comes from Gregory Frankfurt of Bank of America.

I just have 2 quick questions. The first is do you think the industry shift to focusing on chicken that sort of happened a couple of months ago had any benefit to your sales? Were you able to notice that impact? And I guess, the second question I have is are Jack franchisees able to compete with some of the bigger bands on value? I guess, maybe you can update us on where franchisee cash flows are as of kind of the most recent time you've calculated them or time you've kind of put them out?

Let me address the chicken comment. I don't know that the focus on chicken, that we've seen something in our business that would tell us the tides are shifting and we're getting some new benefit associated with the focus on chicken. I will say that our product marketing teams are very focused on what we can do to bring new chicken products into the marketplace and improve our current line of chicken sandwiches that we will see a focus there. Because I think we all see that chicken is becoming more and more popular and several new concepts are popping up that are exclusively focused on chicken, so we want to make sure that as that opportunity grows, that we are also taking advantage of it. But I don't know that we're seeing something today that I could comment on. And the second part of your question?

I can get that. So as far as the franchisee cash, so I'll just point to a couple of things, Chris. One is franchise -- I'm sorry, Greg, sorry. So anyway, the franchisees did buy 178 restaurants during the year, and so I think that's probably the best sign of the health of their cash flow. Secondarily, and this is from our intelligence that we have from our franchisee cash flow, is that it is their margin levels are similar to the company margin levels for the Jack in the Box brand and similarly down versus what they were last year also. So they appear to be trending similarly to what the overall brand is but it would appear to us to be very, very healthy cash flow.

Yes. I'll just comment on that further to say, as I've spent some time with the franchisees and our Brand President, Frances Allen, what we see is that the franchisees are concerned about how the future minimum wage increases will impact their business. I think they're seeing some impact today, and certainly, that will bring a level of anxiety. But their biggest concern is how do we work together as a team to make sure that we mitigate those negative influences on our margin going forward. And I believe that in cooperation with our franchisees, we can find efficiencies in the business that'll help to mitigate that and we look forward to spending some time with them. So I think we're all focused on the right things.

Our next question comes from David Tarantino of Robert W. Baird.

Just a couple of quick questions. First, on the franchise margins. I know there's a lot of noise going on in that line, and they were down this quarter. Can you maybe explain why that was the case given the mix of franchising was higher year-over-year? And then Jerry, could you maybe help us think about how that line should trend as you move towards 95% franchise?

Let me speak about the first question first here. So the franchise margin, Dave, I would point to 2 items there. One is the franchise support costs were higher. Most of the increase in the franchise support costs was due to Qdoba increased support costs around franchisee signs and remodel support. And that was about $1 million of the increase in the franchise support cost. And then on the rent line, a couple of things to consider there, one if which is that last year's numbers had the 53rd week in there. I assume everybody's adjusted out for that as best as you can based on the quarterly data. Beyond that, I'd really point to the difference in sales performance for the franchisees last year versus this year than I would the increase in the cost of the -- of rent on those lines. So the rental cost is up, you'd expect it to be so with the 178 restaurants that we sold. The revenue did not grow commensurate with that increase, and that's really related to -- if you look at last year, franchisee same-store sales were up 2.4%. This year, they were down 0.7%. If you adjust for that and normalize that, you'd be about $1.7 million higher in rental revenue and also in rental margin on that. And then when you calculate the margin rate on the rent, you get very close to what it would have been last year. So what appears to be a cost issue, I really look at it as being a revenue issue because of the same-store sales decline versus last year.

Got it. And the part about how that might trend as you get towards 95% on the franchise, I know it depends on the same-store sales, but if you could just isolate how that mechanic might would work.

I think that we can provide more color on that when we're updating guidance for '18.

Okay. And then Lenny, I have a question. I think in your prepared remarks, you mentioned 3 or 4 factors that you're focusing on in terms of transforming Jack in the Box, and one of which was brand image. And I was just wondering if you could elaborate on what you meant by that? And how that all plays into the premium QSR position and the value programs you have going on.

Yes, I think the first thing to recognize is that if you look at our buildings, they're old, they're tired and they're probably in more need of a remodel than many of the brands we compete against every day. So these are not -- these are roof lines that are 40-year-old roof lines. So it's not like we even have buildings that architecturally are in the right place or in the right generation. Maybe we can paint them and move on. We're really in a place where we need to invest significant dollars in these sites to change the roof line, change the look and feel of the location and bring them to a more current state. And so our franchisees are all signed on for a remodel program. Obviously, we've made the same commitment for our company locations and we will talk about the specifics of the investment levels and how this impacts our model when we update our guidance. But essentially, we're going to have to remodel our chain in order to compete and so you're going to see a commitment from us in the coming years to do so. And this will be more than what we've done last round, which was more cosmetic in nature. This will be structural. So that's probably the broadest sort of high level direction that I'll give you. And we're contributing to that both in the franchise and company ops with our own investment dollars.

Our next question comes from Andrew Charles of Cowen & Company.

Lenny, I obviously recognize the sensitivity behind sharing plans, behind what the value efforts are going to look like, but can you talk more about the results from test markets, around how widely it was tested and the confidence you have behind what you saw in the results of the test markets?

Yes, I can't comment too much on that. What I would say is this. What we're putting in the marketplace, what makes it differernt is the fact that we will have multiple price points being promoted at the same time. And we think we need to do that in the face of what's to come in January. But if you look at the individual offers at each price point, those are things that we've done in the past. So it's the way we're pulling the whole thing together that's different and messaging it. Some of the bundles are a little different than what we've done in the past, even the single items might be a little different than what we've done in the past. But they're all close in to what our marketing department would have done to emphasize value in the past. We've now just put it all together in a menu of options unlike what we've done in the past. So hopefully that makes some sense to you. It's probably a little cryptic but necessarily so.

That's helpful. Got you. And then qualitatively, I was just looking for an update on the CFO search, and obviously, big shoes to fill. And I was curious if you're in the stage of still meeting with new candidates or is it down to a short list at this point?

So we have met with several candidates. We are excited about several of them. I'm optimistic that we'll turn the corner here to the short list, but these situations are fluid. So I don't want to make any predictions, but I'm optimistic that we'll get this wrapped up in a very reasonable period of time.

Our next question comes from Jeffrey Bernstein of Barclays.

Two questions. One, kind of following up on an earlier question about future unit growth of the Jack business. It would seem like the refranchising is going well with 180 or so units this year and, obviously, interest is high and franchisees have some capital to put to work. So I'm just wondering with that as a backdrop, should we think about the Jack brand taking another stab, moving beyond the West Coast over the next few years? Obviously, above and beyond just the units you already have in the pipeline from your refranchising? But maybe what would keep you from seeing an uptick, maybe a gating factor or maybe learnings from past attempts that might keep you from encouraging the franchisees to push this brand more national over time? And then I have one follow-up.

Yes. So I think the way to look at it is just sort of through a practical lens. In the short term, we're going to ask our franchisees to spend a significant amount of time and money engaging in remodels. And if you just look at their sort of bandwidth, even if they have the capital to go beyond remodels at this time, they probably don't have the bandwidth to go beyond that. So I don't necessarily think we'll see an uptick in franchise growth over the next couple of years as they engage in remodels. I don't necessarily think we'll see a decrease from what we've seen in recent years, but I don't see them growing beyond the current rate. When we get past the remodel effort, then yes, I would look forward to not only growing into new markets with our franchisees, but potentially increasing or increasing the rate of new unit growth as well.

Is there any color on the remodel cost or the early lift you've seen from some of these you might have done, especially for the most older stores?

So let me tell you the way we've approached this is we have targeted a return on invested capital for each one of the restaurants we intend to remodel. It's based upon a sales lift, which I won't describe what that is right now but it's based upon a reasonable sales lift. One that you may have seen others report in the industry. We're not going around talking about 20% of sales lift by any stretch of the imagination. It's all talking about return on invested capital. So a lower volume store is likely to get a heavier remodel than, say, a low volume store because each one of these remodels are based upon a tiered approach, based upon what we think the cash flow return is going to be for each of these restaurants. So I think it's a very capital responsible way to approach the remodels and then the franchisee contributions that we will be providing for them are really around the restaurants that we control the leases and since we're the landlord to them, we're able to offer what really appears to be -- or what is a tenant improvement allowance and for that contribution for them, we're extending the franchise agreement and also the lease term in there. So we're getting extra term committed by the franchisees upon them agreeing to remodel the restaurant and then take the contribution from the company on that.

Interesting. I didn't realize that. My other question was just on G&A, which, Lenny, I know you mentioned and you'll give an update on targets longer term when you give your new guidance. But specific to the Jack brand rather than the system, I think you gave lift guidance for the system, which was 2% to 2.5% of system sales and 35,000 per store. Can you give any directional color where you think the -- if you will just look at the Jack brand, where we should assume that could settle in, in terms of the percentage per system sales or dollars per store? Any kind of color on the Jack-specific system?

What I would say is this, we do need to sort of work through all of our current situations to get to a point where we can give you updated guidance which will, I think, fill in all the blanks for you. It's obvious to us, the areas of focus that the investment community has, and we do intend to bring enough color to each of those areas to allow folks to see how the new go forward plan shakes out. And I would just ask for some patience around that. We certainly aren't resistant to change and you've seen us continue to evolve the business model over time, but we're also pretty deliberate and careful about the way we move forward to make sure that we do retain the capabilities within the company and the 2 brands to compete. So give us just a little more time to hash that out. I just don't want folks to interpret the timing of that communication and what might be perceived to be a delay as a resistance to taking a relook at things. It's just that we do need to make sure that we approach all of these the right way.

Our next question comes from Alex Slagle of Jefferies.

Just regarding that last question. Is there any way to reflect back to the previous guidance around the 3 phases of G&A reductions and give us an idea of how much has been accomplished thus far?

Yes. I'd say virtually everything in phase 1 was accomplished. Phase 2 is in process through refranchising. And certainly, we're almost at 90%. Phase 2 was really primarily around getting us to the 90% level there. So I think most of that's been achieved as well. Phase 3 is in process, and we had indicated that most of those were around some IT, normalizing the IT systems and that was going to take a little longer and it is. But that is in process. And then also, we did reduce our G&A as a percent of systemwide sales by about 80 basis points versus what it was last year.

And then on Qdoba, just wondered if you have any more commentary on what drove the deceleration in the traffic? And how much of that was competitive intrusion, distractions from the review or reduced discounting?

Yes, so I think a couple of things. One, the performance of Qdoba was very consistent with that segment of the industry and at the same time that we recognize what's happening within the segment, I think, as a company, we've always sort of prided ourselves on not just riding the industry or segment wave but actually breaking the trend. So our expectation is that the focus that Qdoba's putting on their marketing efforts as well as product innovation and an emphasis to insert everyday value into the menu is going to play well over the long term. And as far as any distractions from what's happening, I mean, at the end of the day, we'd never use that as an excuse. They certainly are distracting, but at the end of day, we're expected to perform that's where our folks are focused on.

Our next question comes from Jeff Farmer of Wells Fargo.

What has been the historical relationship between increases and decreases in your value messaging rate and your Jack in the Box traffic in same-store sales numbers? I'm just trying to get a better understanding of how impactful these shifts and these media weights can be on your business.

Yes, I guess the way that I would describe it is that we -- the thing I would ask you to focus on is this. Because I don't know that sharing media weights is going to actually get you anywhere. And since we haven't shared specific media weight information in the past, I would hesitate to share that now without sort of further discussion internally on the facts around that. But what I would say is this, I think the most important thing to recognize is that we are going to emphasize value during a specific period of time where we expect our major competitor to emphasize value and we're going to do it in a very similar way. And that's not something that we've done in the past. So we think it will play well, right? And I think that's the biggest -- what we've typically said is we're not going to jump into the fray on some of the aggressive discounting. We're going to ride it out and when our competitors slowdown on that value emphasis, we'll bounce back. And you've seen us do that time and time again, but there's been this sort of value-oriented discount drug that has permeated the industry in the last 18 months that doesn't seem to want to go away. So we're going to go ahead and try something new, and we think it will play well. We're not sure how long we'll continue with this tact but we'll remain flexible.

I think just one quick follow-up, sort of bigger picture. So what percent of the hamburger consumer set do you see as loyal more to a price point than a given concept or brand? Meaning...

I would say when you get below the $5 price point, look at maybe a 1/3 or so of the consumers are not loyal at all to a brand. They're loyal to price points. They chase the value wherever it is, and we see that. We trade customers with all of our major competitors within and outside our segment based on value promotions. So we're essentially looking to get our fair share here. But one of the things that we're doing a little differently from our competitors is we're going to offer some products within our value offerings that are different from what you see across the industry. But I don't want to just focus on burgers and fries and how much of it I can jam into a box. I also want to have some other items out there that only Jack in the Box sell.

And then just last thing, and you've touch on it a little bit, but just franchise alignment. How quickly can you move? If you see an opportunity, how quickly can you get everyone on the same page and go for it from both a media standpoint and product standpoint?

Yes. So let me start by saying we have just a little over 100 franchisees, which means we have just a little over 100 opinions. But our franchise community, they're competitive. And although they may have different opinions on how we compete, I think when we're able to balance premium innovation with single or bundled discounting, that's where they will align. When we want to go 100% discounting or 100% premium, we typically run into issues because those varying opinions and particularly when they're looking at the geographical impacts that their competitive set is having on them, they're not all going to line up in the same space. So the sweet spot for us is to make sure we're doing a little of both. I think they can be flexible on the media weights that are going to the offerings as long as they're seeing a return on that investment in the form of transactions and sales. But I do believe we can move faster than just about any other system out there, and I think that's played well for us in the past. I think if you look at what we're doing, in January, it is a reflection of us moving at hyper speed to put something in the marketplace that had not been planned up until just the recent months.

Operator, could you prompt for any additional questions?

Will do. (Operator Instructions) Our next question comes from Matthew DiFrisco of Guggenheim Securities.

Just sort of a couple of follow-up questions there. I guess, with respect to the remodel and the Jack in the Box brand, I think it's been a while since you sort of looked at just Jack on a CapEx basis. I know about 1.5 years ago, at that Analyst Day, you had a progressively curtailed outlook for CapEx coming down. How does the remodel potentially adjust that? I think you were thinking $20 million to $25 million for the brand and a CapEx number sort of running beyond '17. Does that sort of now come off the books and that should escalate a little bit?

Well, the way that the tenant improvement allowance works, Matt, is that is not capital. What you'll see there is there will be a cash flow impact but it's not technically capital. But we'll -- we can provide that when we get into the guidance.

Okay. And then I guess, was there any commentary about the quarter-to-date trends? Was there an influence there from Texas? Or was Texas an outlier considering what hurt you sort of in the just reported quarter, potentially, there was some rebuild activity down in the Texas market that might have been a benefit to the early start? Or are you seeing a consistent trend throughout the 8 weeks so far?

We're really seeing strength across the brand.

Okay. And then my last question. With respect to the support costs, I noticed in the segmentation reporting there, the support costs for franchises for Qdoba seemed very high on a relative basis in the third quarter -- I'm sorry, in the fiscal fourth quarter just reported. Could you give us some color on what that was or what in effect that was?

Yes. Matt, that's related to support costs that help franchisees with their new logo signage as well as some remodels. I wouldn't view that as being a permanent cost increase at those levels going forward.

Our next question comes from Jake Bartlett of SunTrust Robinson Humphrey.

I have a question about your tech initiatives, and you mentioned that you're going to be enabled with mobile order and pay. Maybe if you could just give us the time frame of that. I think you said before, by the end of the year but maybe how it kind of rolls out through the year. And then any thoughts on kiosks? I know that's something that your competitors are doing. I think you've tested it in the past. Where do you stand on that kind of -- making the experience a little bit different?

Yes. So as it pertains to tech in general, the way we will approach it is we'll really start with the most basic offering that really provides for the most basic of consumer needs and then we'll build on the tech from there. We're most concerned about rolling out stable platforms that don't disappoint the guests by failing. And so if you look at what the consumer needs now, they need mobile order and pay. They need in the future to be able to integrate things like delivery and loyalty programs. And so you can expect the layering of additional features that will support that going forward. And then as far as kiosks, we were one of the first to use kiosks in a restaurant environment. We believe that there could be a place for kiosks in our future, but what we're looking at in conjunction with our franchise base is how would we redefine the entire consumer experience before we just land on a piece of technology. There's going to be an interesting sort of interplay between the use of mobile phones and the use of kiosks and how far you should go with kiosks versus how far you should go with mobile apps particularly as a payment source. In many ways, you will start to see mobile phone as really an extension of the POS system and so the question will be sort of how much do we want to invest in, from a consumer experience standpoint, technology within the dining room. So we need to figure that out. The good thing is we have experience in that area. We've seen the impact to our business in the past, and some of the impact with kiosks certainly can lead to a higher average check. We see similar things through the mobile app so these things can potentially play well for us, but what's going to be really important is to work with our franchisees who will run the lion's share of our operation to put a service model in place that they think they can execute at a high level. So more to come on that once we have a little more time with our franchise community to work through those issues.

Great. And just to understand exactly how your mobile order and pay's going to kind of time with competitors. I mean, is this more of a fourth quarter story for you as you roll it out? I mean, should it have more of an impact by the end of the year? Or is it something that we should see maybe earlier? And then I know you're not giving guidance for '18. I'm wondering just because it doesn't seem specific to the things you're trying to figure out, but just any look on commodities would be helpful or anything on labor for the coming year would be helpful.

Let me meet you halfway on that. Let me give you commodity. So the Jack in the Box brand, we're expecting commodity inflation of around 3%. It was higher than that in the first quarter because the first quarter, we're rolling over roughly 2% deflation last year. And on the Qdoba brand, we're looking at commodity inflation of just under 1%.

As far as the timing on the rollout of the tech, we're not going to share any timing but the approach will be we'll move at a speed that marries up with the stability of the platform. So if the testing goes exceptionally well and we feel like it's sort of unbreakable, then we'll move at light speed. If we're seeing a different result, then we'll slow it down a little bit. But one of the things we're going to be really careful about is that internally, around tech, if you set very strict timeline, you can potentially compromise some of what you intend the consumer impact to be. The most important outcome here is a strong first impression with our consumers, not the timing of the rollout.

And thanks. That puts us out of time for today. Thank you for joining us, and we look forward to speaking with you soon.

Thank you. And that concludes today's conference. Thank you all for your participation. You may now disconnect.