Jack in the Box Inc (JACK) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc.'s Third Quarter Fiscal 2018 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 Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Thank you, Iris, and good morning, everyone. Joining me on the call today are Chairman and CEO, Lenny Comma; and executive Vice President and CFO, Lance Tucker. In our comments this morning, per share amounts refer to diluted earnings per share. And the operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis, excluding gains or losses on the sale of company-operated restaurants. Restructuring charges and the impact of tax reform on the company's [per tax] assets as well as the excess tax benefits from share-based compensation arrangements are now recorded as a component of income tax expense versus equity previously.

Adjusted EBITDA represents net earnings on a GAAP basis, excluding discontinued operations, income taxes, interest expense, gains or losses on the sale of company-operated restaurants, impairment and other charges, depreciation and amortization, and the amortization of franchise tenant improvement allowances. Free cash flow is defined as cash flow from operations, including tenant improvement allowances less capital expenditures. Our comments may include other non-GAAP measures such as restaurant operating margin, restaurant-level EBITDA, franchise margin and franchise EBITDA. Please refer to the non-GAAP reconciliations included in the 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 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 this morning, our fourth quarter and fiscal year ends on September 30, and we tentatively plan to announce results on Monday, November 19, after the market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific time on Tuesday, November 20.

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

Thank you, Carol. This morning, I'd like to address some of the key highlights from our third quarter and then share with you, the outcomes of our strategic planning process.

For the quarter, our operating results were in line with expectations. System same-store sales returned to positive territory. We're pleased this momentum has continued into the fourth quarter without resorting to deep discounting that we believe is not in the best interests of the long-term health of our brand. Contributing to the sales increase in Q3, was a new product we launched in June, sauced and loaded fries, which had a $3 price point and featured ingredients like carne asada, chorizo, chipotle chicken and guacamole. Product drove an increase in average check and customers added it to their orders. It was a great LTO that exemplified the long-term product strategy that I'll be speaking about shortly.

During the quarter, we also featured a premium Cholula Buttery Jack, which featured one of the most recognized brands of hot sauce to create a spicy limited-time addition to our popular Buttery Jack burger line. And we offered a couple of value promotions: a $3 bundle featuring 3 tacos and a drink; and a $4.99 combo, featuring Jack's Spicy Chicken Club Sandwich. We're still seeing aggressive value offerings in the marketplace, and we've chosen to address it by deploying additional advertising, combined with margin-friendly value offers. In this way, we believe we remain competitive today while protecting the brand's equity over the long term.

As we did in Q2, we chose to spend an incremental $1.5 million for advertising in Q3. This additional media spend and our balanced promotional calendar help protect our margins, which were among the highest in the industry. While avoiding the potential longer-term consequences of training customers to only come to us when we are offering an aggressive deal.

Delivery continues to generate an incremental lift in sales in Q3 and is proving to be a popular option for both our dinner and late-night guests. We're now offering delivery in all of our major markets with more than 3/4 of our system being served by 1 or more delivery companies, including DoorDash, Postmates and Grubhub. As for our mobile app, it continues to perform well in our expanded tests. On average, we're seeing a higher ticket with mobile orders, and we expect to begin rolling it out across the system by year-end.

Moving on to refranchising, our franchise mix now stands at approximately 94%. And we continue to make significant progress towards creating an asset-light business model. With the sale of 1 additional restaurant in the fourth quarter, we will complete our refranchising initiative.

We remain committed to returning cash to shareholders. We purchased $100 million of stock in the quarter and $200 million thus far this year.

Let me share a quick update on where we are with the transition services agreements with Qdoba. We've already rolled off a few TSAs and other business functions are expected to transition over the next few months. While 2 of the larger functions, IP and accounting, are expected to extend through 2019.

Finally, during our last call I mentioned that we had engaged an outside consulting firm to assist us in building the right structure to support our long-term strategic plans. Their work was an important data point in the development for our long-term guidance. That wraps up my comments related to Q3 and fiscal '18.

I'd like to spend the remainder of my time this morning addressing the outcome of our strategic planning process. Our plans are focused on meeting evolving consumer needs for more diverse flavors on our menu, for food that is delivered in a perceived near 0 wait time, and on-targeted investments designed to enhance the guest experience and maximize returns.

Let's start with our menu. We'll continue to innovate around burgers and sandwiches, which comprise the core of our menu. And to meet the evolving taste of consumers, we'll innovate around uniquely flavorful, culturally relevant and affordable food. Over the years, we've built a lot of equity around products unheard of at most burger chains. Like Teriyaki bowls, jalapeno poppers and tacos. We expect to see more of those kinds of nontraditional items as we target an increasingly diverse population that creates a greater variety of foods and flavors. Sauced and loaded fries and Cholula Buttery Jack featured last quarter and the Munchie Mash-Ups and Teriyaki bowls running in Q4 are great examples of where we're headed with our menu strategy. And we'll be unashamedly us when it comes to promoting those products. Our guests love our brand's irreverent humor and they want us to push the envelope when it comes to creatively messaging our offerings. Humor is just one way we differentiate ourselves, but expect us to promote other differentiating equities as well. You'll see this reflected throughout various media, TV, digital, indoor signage and elsewhere.

Jack in the Box has always played by different rules and has always recognized that what made us different is what makes each of us valuable. We plan to emphasize this wonderful part of our company's history and values, both internally and externally, going forward. While we've historically done a good job of creating clever breakthrough commercials that leverage Jack's unique persona, it's time to up our game when it comes to other areas like technology and providing consistent guest service. Technology has changed the definition of convenience to a perceived near 0 wait time by providing significantly more options for consumers, especially for the tech savvy and time-starved. Rolling out our app later this year is definitely a step in the right direction. But beyond improved technology, we must simplify operations and significantly reduce complexity to drastically reduce wait times. We believe that by reducing redundant SKUs, simplifying operating procedures and upgrading kitchen equipment to more efficient and faster options, we can make it easier for our crews to deliver consistently fast, friendly and accurate service, and drastically reduce the amount of variability in the overall guest experience. As an example, focusing on drive-thru speed of service as just 1 critical component of the overall guest experience, we see that our bottom quartile of restaurants is over a minute slower than our system average and generates year-over-year sales that are 2% less than the top quartile. We see a sliding scale of opportunity in the second and third quartiles as well. This is a top priority. We will begin testing initiatives in this area in early 2019 and expect to roll out these changes in the back half of 2019 and into 2020.

And let me share some details on several targeted investments we will make to the drive-thru and some of our older locations. First, we've made the decision to focus on enhancing our drive-thrus because they contribute over 70% of our sale, and as I showed earlier, they represent a sizable sales opportunity. We will implement digital menu boards that give us the opportunity to advertise and interact with guests more dynamically. We will install menu board canopies and utilize outside order takers to make these screens more personal and to facilitate speed and consistency. And we will dress-up the drive-thru lanes with various POP landscaping and modest improvements to make sure that we look crisp.

From our perspective, this will be a win for the entire system and all of our stakeholders for several reasons. In about 3 years, we can touch over 80% of the system at a very reasonable cost per unit. Plus, we're investing in the area where over 70% of our sales are generated for only a fraction of what we're planning to invest per unit to remodel just 25% of our system.

Speaking of the 25%, that's the second area of targeted investment. We'll offer franchisees the option to fully remodel many of the 600 oldest units in our system. This approach combined with the successful completion of our refranchising strategy and cost reduction measures, will allow us to invest where needed for the brand's long-term success while also allowing us to return over $1 billion to shareholders in the form of share repurchases and dividends over the next 4 years.

This is an exciting time for Jack in the Box. We can clearly see opportunities to evolve the brand to meet the consumer's new definition of convenience, add more diverse flavors to the menu, fix some of our long-standing inconsistencies in operations, capitalize on the personality and long-standing value system of the brand through advertising and brand positioning, invest in long-term health of the brand through targeted capital investments and return a significant amount of cash to shareholders. We'll attempt to achieve all of this by striking a healthy balance between the long and short-term needs of each of our major stakeholder groups.

I'm excited about what the future holds. I realize it will take a tremendous amount of hard work. And I'd like to thank our employees, leadership team, franchisees and other stakeholders for their loyalty and commitment to our future.

With that, I'll turn the call over to Lance for a more detailed look at the third quarter and an update on guidance for the year and additional details for some of the longer-term guidance related to our strategic plans. Lance?

Thanks, Lenny, and good morning, everyone. I'll hit a few [half] points from the third quarter, then move into a discussion of our Q4 and long-term guidance.

Operating EPS for the third quarter was $1 as compared to $0.79 last year. The increase was driven primarily by lower G&A costs, the impact of tax reform and share repurchases, which more than offset dilution from refranchising. Our systemwide comparable sales increased 50 basis points in the third quarter. A 60 basis point increase in company comparable sales was comprised of pricing of approximately 2.6% while mix remained flat and transactions declined 2%. Franchise comparable sales increased 50 basis points for the quarter. Company restaurant-level EBITDA margin increased by 430 basis points to 27.5%. Restaurant-level EBITDA margin for the 138 stores we intend to keep, now that the refranchising initiative is essentially complete, was 28% in the quarter down from 29.3% last year due mainly to higher labor costs, and repairs and maintenance. Franchise EBITDA increased by 12.3% to $60.4 million, due primarily to refranchising. G&A decreased to approximately 1.8% of system-wide sales as compared to 2.5% last year. The decrease was due primarily to $3.6 million in transition services income relating to the sale of Qdoba, which is reflected as a reduction of G&A. As well as higher costs in the prior year quarter related to 31 franchised restaurants that the company took back. In addition, G&A benefited from lower share-based compensation and pension costs, these decreases were partially offset by mark-to-market adjustments.

Tax Act reduced our federal statutory tax rate from 35% to 21%, effective January 1, resulting in a blended statutory federal rate of 24.5% for the fiscal year. Including state taxes, our adjusted Q3 effective tax rate was 27.1%, which excludes a $0.03 unfavorable impact related to the Tax Act and a $0.04 favorable impact from the accounting change for excess tax benefits from share-based compensation.

Our estimated effective tax rate for the full fiscal year is approximately 28% to 29%. Again, excluding the impact of the onetime adjustments from the Tax Act and the accounting change.

We repurchased 1.2 million shares of stock for $100 million during the quarter and weighted average shares outstanding decreased by nearly 5% versus last year. We currently have approximately $181 million available for share repurchases and our leverage ratio is approximately 3.6x at the end of the quarter.

In the third quarter, we refranchised 42 units, bringing our year-to-date number to 127, year-to-date proceeds of $88 million include $64 million of short-term notes receivable, of which we've already collected $33 million. As of today, we are now approximately 94% franchised.

Now moving on to guidance. We will provide our Q4 and fiscal year 2018 guidance followed by our long-term goals, separately. Starting with comp sales, we expect systemwide comparable sales in Q4 be up 1% to 2%. Through the first 4 weeks of our fourth quarter, we are tracking within this range. Our fiscal year guidance in the press release is unchanged, except for the following items. Based on our year-to-date results and considering our new fourth quarter guidance, we've lowered our system full year comparable sales expectations flat to up 0.5%. We now expect G&A for the year to approximate 2.2% of system sales with reduction due primarily to the reimbursement of Qdoba-related support costs under our transition services agreements, partially offsetting our lower G&A expectations in incremental advertising spend in the fourth quarter resulting in expected SG&A of approximately 12% of revenues. We lowered our guidance for tenant improvements to $15 million to $20 million based on expected payments for the balance of the year. And lastly, we reduced the number of expected unit openings to a range of 15 to 20 as the opening of more than a half dozen restaurants has been pushed back into the first part of 2019.

Now moving on to our long-term guidance. I won't repeat everything that's in the press release, but I will provide some additional color on some of the key drivers. We took the guidance out to fiscal 2022 in order to reflect a more steady state following the completion of our drive-thru enhancement and remodel initiatives. We expect system restaurant sales to reach $4 billion in 2022, driven by low single-digit same-store sales and low single-digit unit growth annually over the next 4 years. Our company restaurant-level EBITDA margins are expected to be in the 25% to 27% range, down from the current run rate as nearly 80% of our stores are in California and impacted by scheduled minimum wage increases annually through 2022. We expect the G&A as a percentage of system-wide sales to steadily decline to approximately 1.9% beginning in fiscal 2021. We actually expect to hit the return rate of 1.9% during 2020, but do not expect to be at the level for the entire year. TSA agreement related to Qdoba will continue for certain functions through 2019. And as Lenny mentioned, after a thorough review of our organizational structure with an outside consultant, we believe this is a prudent level of G&A to support our long-term goals given our size.

We expect normalized capital expenditures to approximate $20 million to $25 million annually over the next 4 years, which includes technology and equipment investments. In addition, we expect to spend an incremental $10 million to $15 million in each of 2019 through 2021 or a total of approximately $30 million to $45 million on company restaurant drive-thru enhancements and remodels.

Tenant improvement allowances totaling approximately $90 million to $100 million are included in the plan or roughly $25 million to $35 million per year, again, through fiscal 2021. As Lenny mentioned, we believe these investments are targeted to drive the highest return while improving our brand perception and relevance. In total, our drive-thru enhancement remodel programs will now touch over 80% of our system versus the 25% or so, previously communicated.

Importantly, this also answers a question we know many of you have had, regarding future capital requirements beyond the 600-or-so restaurants we've spoken about over the last few years. We believe this plan satisfies the major investments that are needed to maintain and improve the brand's image for a number of years to come, allowing us to reach our steady-state, asset-light model beginning in 2022. We expect to have a new capital structure in place in the first half of fiscal 2019, which should enable us to increase our leverage to approximately 5x EBITDA by the end of the 2019 fiscal year, depending on market conditions.

Taking all these assumptions into account, our fiscal 2022 key targets include systemwide sales of $4 billion, adjusted EBITDA of approximately $300 million and free cash flow of approximately $175 million. And as Lenny noted, we expect to return over $1 billion to shareholders over the next 4 years under this plan. That concludes our prepared remarks.

I'd now like to turn the call over to the operator to open it up for questions. Iris?

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

Can I just ask about the capital plan as you think about the next 4 years? And I appreciate now you've sort of expanded it to include some drive-thru remodels, for example. But you still have I think -- maybe just review what form the asset base will be in at the end of this? It sounds like there are 600 stores in the franchise base that are going to get touched. The oldest stores, then you're going to enhance the drive-thrus in a number of stores. But that still leaves about 1,600 stores that maybe are somewhat older in the face of the industry that's upgrading their assets fully. Where does the rest of this system stand? And do think this is comprehensive enough or that you have to come back at some point and say that you do need to remodel more of those stores that weren't touched, the stores themselves versus the drive-thru?

John, a couple of things that we want to consider as we look at how we invest money in the future. One, as you look at the stores that are just going to be investing in the drive-thrus at this point, we do think that with the lion's share of the business going to the drive-thru, that's the most prudent place to invest and as we evaluate how the consumer's behavior is changing, particularly around delivery and app-related purchases, which are essentially order-ahead and pick up, we want to make sure that whatever investments we make in the future are actually fulfilling that consumer need. We're not so sure that major investments in the newer of our building styles outside of those spaces is going to be the most prudent thing to do in the future. So we want to have some time to evaluate that. But in the event that we do anything to those buildings, it would be way more modest in nature as compared to what we did to the older facilities.

That's helpful. And just as a follow-up. Lance, how do you think about return of capital in this -- in the format the return of capital plan is going to take? What roles does dividend play versus just share buyback? And as you think about share buyback, do you immediately capitalize on an earlier or lower share price, presumably at the beginning of the plan? So it's frontloaded or is it more pro rata, as you think about the next 4 years?

So I'd say a couple of things there, I think the bulk of the return of cash will be through share repurchases. Our dividend policy has been historically to keep the yield between about 1.5% and 2%. And I don't really expect any major change to the policy nor do I expect a big onetime dividend or kind of an outsized increase to the regular dividend rate. So I think most of it would, in fact, be through share repurchases. And from a timing standpoint, the expectation, subject to market conditions and whatnot, is that it would be frontloaded as we get the leverage structure in place. And then, raise our leverage levels up to around 5x by the end of fiscal '19, most of that would go towards share repurchases.

Our next question is coming from Brian Bittner.

On the same-store sales, it's good to see you getting healthier trends without deep discounting here in this quarter. But the one area that there still looks to be tremendous opportunity reestablishing the value within your popular taco offering, you've talked about it before, most recently. Is there any update on this? And when it could be an incremental driver to the sales from here?

We're currently testing several taco-related offers and we're trying to establish a position with tacos that provides the additional value to the consumers that they have known in the past, while at the same time being very mindful of our franchisee margins. So we may not ultimately get back to à la carte tacos at $0.99, we may bundle them or do some other add-on related features to tacos to reestablish value. And that conclusion still remains to be seen as we complete the tests. But we do see a need overall to establish value in the marketplace, and I think that it's probably going to be not just a silver bullet with tacos, but more of a continuum of prices below the $5 price point, with offers similar to the Munchie Mash-Ups or the sauced and loaded, in combination with other taco-related offerings. So it will probably be a more balanced approach than just tacos, simply because if we were to just address it through tacos it wouldn't be as margin friendly to the franchisees who are experiencing a lot of concerns with the rising cost of labor at this time.

And then just as it relates to long-term targets, I think a lot of the metrics are pretty straightforward. But one question that stands out for me is just on the G&A, I'm talking about a steady decline to the 1.9%. I was thinking that, that was a metric that was achievable just simply by rolling off the TSA. So the question is, why isn't the G&A goals maybe a little bit more aggressive? And the steady decline suggests that you're going to still be above 2%, I guess, over the next 1.5 years. Is that correct? And if so, why?

Brian, it's Lance. I'll start with that and let Lenny jump in, if you'd like. But for one thing, as Lenny actually noted in his script, the TSA does not completely roll off really until the end of 2019, for a couple of very major groups which would be IT and the financing and accounting groups. And so without going into a whole lot of detail, when you reduce G&A, one of the things you do is, you do flatten the organization somewhat, and some of that flattening can't be done until those TSAs are rolled off. There is more to it than just the specific TSA rolling off themselves. In addition to that, we have initiatives that we need to accomplish for the long-term health of the business. And in order to do that, we wouldn't do any -- ourselves any favors, so to speak, making those changes all in one fell swoop and as quickly as we possibly could. We're going to hit the 1.9% or so, or under 2% in fiscal 2020. So we think that is a measured and reasonable rollout, for what we're trying to accomplish to balance, as Lenny put in his script, growth for the long-term with making sure we're hitting these cost-reduction targets.

And then, Brian, one of the things that we were very conscious of, and I was particularly concerned about as we got into this restructuring, this will be fourth or fifth time that we've kind of made a go at this. And a lot of it, in the past, was as a result of refranchising we were doing. I felt that we needed to bring someone in from the outside that wouldn't have, sort of, a biased look at the organization. But that would help us build from really a 0 base, what an organization of our size and scale should be. And what we see in the work that was produced by the outside partner is that the absolute values are very close to our targeted outcomes. And we feel really good about the landing place and the timing, as Lance said, is just a function of some of the initiatives and then a roll-off of the TSAs.

And Brian, it's Lance, I'd like to jump in and want to add more -- one more thing if I may. And I'll -- as this kind of addresses G&A for this quarter as well. We look at G&A on an annual basis, it can be choppy quarter-to-quarter. So one thing I want to caution everybody again, you're going to see quarters that spike up a little bit, you're going to see quarters spike down a little bit. But G&A tends to hit at different times throughout the year. So I just want to make sure as we're on this journey to getting below 2% over the next 18 to 24 months whatever it takes. And as you see a quarter go up a little bit or go down a little bit, don't automatically assume that there's some major change. We'll let you know if there's a major change to what we're doing, and we don't expect those. But just bear in mind, it can be choppy, and that's, in fact, why you see 1.8% this quarter, we just have some unusual things and we expect it to jump back up a little bit next quarter.

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

My question is about the system sales growth target that you laid out, $4 billion. I think that requires about 3.5% system sales growth per year, if my math is correct. And that's higher than what you've been running. So I guess, Lenny or Lance, could you provide some perspective on how to think about that target? And then, secondly, specifically, can you talk about how unit growth plays into that? Because we haven't seen much net unit growth in the system in recent years? So could you talk about kind of what you're expecting to occur over the next few years on that line?

Yes, I think at the end of the day, the lion's shares of the increase in sales will be at our existing units. And we really think that that'll be driven by a combination of the enhancements and improvements to the drive-thru experience as well as the menu strategy. When we look back over this past year and evaluate the success that we've found with any of our products, they fit into what I described in my planned remarks, as our new menu strategy, and in each case when we're really featuring the favors that are becoming more and more popular throughout several segments of the restaurant business, but in large part, are changing due to the changes in our population. We feature those types of flavors, we're finding a lot of success. In the segment that we're in, we need to do that at a reasonable price so that we're providing value. But I really think the sweet spot for us is going to be using the brand equity that we have to reach beyond burgers and fries to deliver these types of products to the marketplace. We intend to do more of that, we're doing it by featuring the chicken and steak teriyaki bowls right now and, also, the Munchie Mash-ups, but we think that that will prove to be successful because that's where we've seen success in the recent past. In addition to that, when you look at the speed of service, opportunity is huge. I mean, for us, we've had, I think, these inconsistencies, but more importantly, we've allowed a large percentage of our restaurants to underperform in the throughput through the drive-thru. We think that in order to get a more consistent performance, we can't just ask our franchisees to sort of step it up and deliver. We've got to deliver on their behalf by making the operation simpler and easier to execute. We're able to do that, our new COO, Marcus Tom has come in and I think identified a lot of low hanging fruit that will allow us to reach the targets that I laid out for you earlier. And I think these are going to provide big opportunities throughout the franchise and company restaurants to grow our sales. That data is already present today as we simply evaluate from quarter-to-quarter the best versus the second and third and fourth quarters. So we know that the opportunity is there, and that's happening without any of the enhancements that Marcus Tom has laid out. So we think that if we invest in this area and make it easier for our crews, it'll be much easier for us to capture that opportunity. And then lastly, when we look at our brand voice, over the last couple of years, we really shifted our voice to be less irreverent and to focus primarily on the promotion of hamburgers. I think that the menu strategy combined with really getting back to our roots as an irreverent brand, and taking it 1 step further in the brand messages and helping people to understand who we are and what we're all about as a company. We think that those things combined are really what drives same-store sales. And the remainder would come from new unit growth driven largely by operators who have development agreements with us throughout existing and new markets. That's how we see ourselves getting there.

And then, Lenny, just a follow-up on the CapEx you're putting into the drive-thrus in a lot of your locations. Have you tested that idea? And if you have, can you maybe elaborate on what you're seeing when you make that investment?

Yes, we haven't shared details on that and we've tested components of what will end up being the full drive-thru experience. But what you will see us do in 2019 early is to take all of those components within 1 unit and execute them. So we are seeing a lift where we have remodeled locations, particularly if the lift in the drive-thru has been significant and we also see when we implement things like outside order takers, what that can generate for us is essentially -- it lengthens the stack on the drive-thru lane and allows us, with a greater sense of urgency and consistency to capture the orders of the guests that are entering into that line. So we do have proof positive of what the components individually can do for us, but what the next big step is, is to bring it all together.

Our next question comes from Dennis Geiger from UBS.

Just 2. First, just on the long-term targets. A lot of good color on the comp drivers there, Lenny. Is there an acceleration expected there as we look out over the next couple of years either on the unit growth piece or more so on the comps? Or is it just going to be up and down, et cetera? Just one, curious there. Just the second piece, just a little more on value and sort of the under $5 transactions, if you've liked what you've seen thus far, from what you rolled in the third and currently in the fourth quarter. And if any tweaks need to be made given the way that the current competitive environment is set up? Anything we could see differently or you feel you have to do different on that value price point, going forward.

Yes, good question. First of all, we do expect some acceleration in both the comps and unit growth to achieve our numbers. And I would just say that what we've been doing at the 18 months has left a lot on the table. I would use 1 example. I think one of the best advertising campaigns we had in the last year was actually rolled out over the Super Bowl campaign and it was the Food Truck Series. What we did with Martha Stewart I think was brilliant, it got a lot buzz, it was breakthrough advertising. However, what we have produced in the form of the sandwiches missed the mark. They weren't flavorful enough, it wasn't enough protein, it was way too much bread content, and as a result, the consumer after initial trial did continue to come back for those sandwiches. So clearly, we can see where we've made mistakes and we can also see where we found success. So I think the team is well aligned on where we're finding success and how to develop products in the future and how to activate those products. And I think that what we're doing right now with the chicken teriyaki and steak teriyaki bowls are great examples of what that -- what the future holds there. As far as value, what we see is, when we get under the $5 price point, we can actually find a lot of success with a continuum of prices below $5 versus just targeting $1 items. In fact, when we target $1 items, we have limited success outside of various taco features that we've had at times. When we get into that $2 to $4 price range, we're actually finding a lot of success, and that's exemplified by products like the soft and loaded, the Munchie Mash-ups, and even promotions that we've done in the past with our breakfast platters. So that's more of the sweet spot for us. I think the consumer sort of respects that they're going to get value for the money versus just $1 items. And they also expect that the food will be flavorful versus what oftentimes happens at the $1 price point across our industry is that there is a less flavorful just fill-me-up type food. So I think that's really the place for us to emphasize and the consumer certainly has been responsive when we do.

Our next question comes from Jeffrey Bernstein with Barclays.

This is Pratik on for Jeff. Just wanted to touch on cash usage once you transition to an asset-light model. Beyond the $1 billion-plus that you plan to return through fiscal '22, how would you prioritize the use of cash beyond that? It seems like you're going to generate $175 million in free cash flow beginning in fiscal '22. And historically, you haven't let a lot of cash sit on the balance sheet. So should we assume virtually all of that's returned to shareholders?

This is Lance I'll start, and I'll let Lenny jump in. I certainly don't see any changes to our traditional model of not letting a lot of cash sit on the balance sheet, so I think your priorities would certainly be to invest as we need to invest to grow the business. And I think we've laid out a prudent plan for doing that over the next 3 or 4 years, and then return the balance to shareholders and we'll make sure we've got what I'll a prudent amount of cash on the balance sheet that we manage it pretty tightly here and I don't know why that would change.

I agree. I think essentially it's just competing for capital and, ultimately, if we find a place where we believe the investment drives a greater overall return, then we will make that investment. And barring that, we'll continue to use that cash to return to shareholders.

Our next question comes from Christopher O'Cull with Stifel.

Lenny, I know you're in the early stages of remodeling restaurants and doing the drive-thru enhancements but can you tell us whether the stores or drive-thrus will be closed for a period during this process? Or if you are anticipating any sales impact during the construction? And maybe, just, also your approach to prioritizing markets and stores.

Yes, so when we do the vast majority of the older locations, the drive-thrus will remain open just about the entire time. If there is a reason to close them it would be for a very brief timeframe. However, there is about 150, 160 stores or so that we will do a more major remodel where we'll change completely the roofline and in some cases, completely remove the roof and replace it. Those will have to have a complete shutdown for a longer period of time. Outside of those, we'll keep the drive-thru open.

And Chris, a note real quick. If they're going to be closed for a significant amount of time they will be removed from our comp base.

Okay. And then, just one last -- Lenny, one of the larger players recently admitted they were -- they hadn't been aggressive enough with deal promotions. They plan to be more aggressive, it sounds like the rest of the year. Do you think the company can reverse the transaction declines without being more aggressive? And at what point does it become a higher priority to address transaction declines?

I think it really comes down to this. If we look at where we've lost the transactions, there may be a small percentage of those transactions that we're never going to get back. For example, if we can't reestablish an ala carte $0.99 2-taco price, we probably won't ever completely bring back the transitions, excuse me, the transactions associated with that long-standing offer. However, if I can implement things like the soft and loaded and the Munchie Mash-ups at a higher price point that are more margin friendly and I can grow that business over time, it's probably a healthier place to be, particularly with the rising cost of labor. So I think it's really about not just looking at transactions in an absolute fashion but also, looking at healthy transactions that grow the business profitably and focusing on the 4 walls economics over the long-term by reevaluating how we actually use our comps to grow profit. So transactions are important, but I would say that we need to also think about -- particularly for Jack-in-the-Box where we're able to sell more mid-tier and top-tier products, how we use our marketing and product promotions to grow steadily and profitably.

Our next question comes from Alexander Slagle with Jefferies.

Question on the increased ad spending, if we should expect a similar level of incremental spend in the fourth quarter? And whether you expect to utilize that strategy in '19? And perhaps, if there is an incremental spending baked into the long-term guide?

Alex, it's Lance. I'll start and then let Lenny jump in if he'd like. In Q4, as I noted in my script, actually, we do expect to again have incremental dollars that the company is going to contribute towards advertising. I would say it would be at least as much as we did in the third quarter, maybe a little bit more. I don't think it would be a ton more. As you look out at into the future, we would not expect to at least plan to make those kinds of contributions. And if we need to and we think it's right for the business and it's the right way to make sure that we're driving sales, then certainly we're going to make that decision as we go. But right now, we don't have significantly higher advertising baked in than we've had in the past.

I think really what drives this is the comps. At the end of the day, when you put a lot into your advertising, and again, I'll focus on the Super Bowl campaign, you put a lot into it but you don't get the return in the form of the comps and that sets you back. And at that point, yes, we would look to sort of make up some of those gaps at times if we didn't find it through other promotional activity throughout the year. But we don't expect that to be the norm.

Okay. And Lance, another one for you. On the rental income there was a pretty big jump during the third quarter, even considering the recent refranchising. So just wondered if you could update us on the percentage of the franchise stores that you receive rental income on and if maybe some of these recently refranchised stores had higher overall rental rates per store?

Alex, we're at about 90% of the stores from whom we are getting rental income -- to be quite honest with you, that's probably give or take just a little bit because I don't know all these numbers quite yet. But the other piece of it is we have really not increased rental rates. Now some of the stores that have been refranchised are at higher levels or higher sales levels and then certainly, as you see comps go up in the quarter like you saw this quarter, that is going to contribute to higher rental income.

Our next question comes from Gregory Francfort with Bank of America.

I got 2 questions. I think both for you, Lance. Just one is, what are your thoughts on the 5x? What are your thoughts on doing that through securitization versus some other form of financing? And the other one, I guess is either for Lance or for Lenny, just any big working capital opportunities within your free cash flow guide? Any sort of ability to draw forward either the schedule or royalty payments or kind of -- any opportunity there would be helpful?

Sure. This is Lance, I'll take both those. So as it relates to the leverage structure, we cannot get to 5x outstanding with your typical Term A, pro rata kind of debt, so we will be moving to one of the other structures that is going to be -- or going to enable us to get to that 5x. But we'll share the details of what we do when we actually implement it. So I'm not going to give the specifics around that right now other than to tell you it will have to be something other than what we have in place currently. As far as working capital, I really don't see a whole lot of opportunity to do a lot there. Certainly wouldn't bring royalties forward or something. We'll do our best to manage working capital as we always do and manage it tightly. But no initiatives as it were that would lead us to try to work on working capital in that fashion.

Our next question comes from Andrew Charles with Cowen and Company.

Lenny, in the context of trying new value angles, can you talk about the genesis of last week's daily deals promotion and the impact this drove on the quarter-to-date trends that you shared?

Yes, the daily deals is a test, and we've actually had a couple different versions of that in the marketplace. Don't know that we'd want to share any details on that at this time, because we're still sort of working through what the endgame would be. But essentially, we're evaluating a lot of things. We're evaluating everything from daily deals to add-on menu to snack menu. So we want to make sure that we address this value component of our business the right way, but the only way to truly know is to put some things in front of the consumer. Those are really early stages of a few things that we've tried. There're some piece of it that are encouraging. There're some pieces of it that quite frankly aren't working at all. So we still have to spend a little bit more time on that and I would suggest that we probably have a few more tests that'll be in place before we finalize it.

Sure, that's fair. Okay. And then Lance, now that you guys are virtually up to 95%, or really are, with 1 store franchise here in the last quarter. Relating to the long-term targets for gross openings, how many stores were cultivated under development agreements tied to the refranchising activity? And when would you expect these to start to open?

I don't know the exact numbers there, to be honest with you. But I can tell you our pipeline is very healthy. I do know the total numbers there and I think a lot of those came out of the refranchising. So we feel like we've got at least a couple of years if not more kind of in the pipeline and then beyond that, I'll have to let Lenny jump in if you have any other details.

Yes, we -- what we hear from our franchisees is that, particularly in new markets. In fact, I just met with one of our franchisees who runs the Denver market, yesterday, and as he was sharing with me what the opportunities are, he said, "Look, we've got an opportunity to grow in Denver." He has grown the sales there significantly since taking over and is excited about the opportunity to invest and grow that market. And he was also pretty honest with me that look, the way we had run that market for quite some time operationally, it was just not good enough. We weren't consistent enough, and he suspects that that turned off a lot of the guests and hampered some of the growth opportunity that he believes he can reverse. So we hear a similar story from other franchisees, not just in new markets but also, in existing markets. So there is an appetite there. And essentially, what they want is a great design at a reasonable cost. They're asking for some variability in the size of the locations that we'd allowed them to build because they're finding real estate, particularly in existing markets, that may not always be the biggest pieces of real estate, but that certainly gives them an opportunity to target our consumer. And we are open to all of that. So we're going to provide some flexibility there to allow them the growth options that they need and we suspect that the pipeline will continue to grow.

And just my last question. Looks like 2004, 2010 and 2016 were all fiscal years of 53-weeks. So if we continue that 6-year cadence, would it suggest 2022 also has an extra week for modeling?

I believe so, but if that's not correct, I'll correct that publicly.

Our next question comes from Karen Holthouse from Goldman Sachs.

Another one on the plans to accelerate unit growth on the franchisee side. With the pipeline that you have in place or expectations of continuing to build it, is there any sort of royalty where we've heard discounts built into that that we should be thinking about when we're modeling forward royalty rates? Or is incentives not really even the right word?

Yes, we do -- for new growth, we do provide royalty incentives for franchisees. That was probably one of the more competitive incentives in the marketplace and I think it's part of the reason why our franchisees are so interested in growth. So for the first couple of years, you see that relief and that sort of ramps up too with normalized rates.

And some of the other QSRs who are trying to ramp unit growth have talked about pretty compelling AUVs on new units versus the same-store base. Is your expectation that there would be any sort of positive mix shift associated with store growth? Or are there other dynamics between core new markets or things like that, that would make that not the case?

Sure, it's Lance. We have not made any of those assumptions as we've modeled things going forward at this time. The other thing, just to jump in on the previous question, if I may real quickly. We do not have any 53-week periods throughout this 4-year period we're talking about. So 2022 is not a 53-week period is what I'm being told.

Our next question comes from Robert Derrington with Telsey Advisory Group.

Lenny, when we look at the product innovation that Jack has had this year, with the Food Truck Series sandwiches that were introduced early in the year, that was a completely new product for Jack. The teriyaki bowls, which seem, I think to many, to be a dramatically different product is a new -- is a product that Jack already sold but appears to be substantially improved in the quality of the offering within that. How do we -- when we look forward at your new food pipeline, should we be thinking more re-formulations of what's on the menu, like the teriyaki bowls or should we be thinking more outside the box like the Food Truck Series sandwiches were?

Yes, it's actually a perfect question because it's a little of both. So what we've done is we've separated our year into essentially double calendar windows. I wouldn't give the specific number. I wouldn't want my team not to believe that they could slightly modify that if necessary, but there's a good number of marketing windows throughout the year and we've actually targeted how many of those windows will focus on core products, which in those cases, may just well be an enhancement in that core product, particularly if we're going to put it out on promotion. Or at least the line extension on that core product. And -- for the other windows, it'll be the new and innovative stuff like soft and loaded and Munchie Mash-ups. So if you look at things like Cholula Buttery Jack, Buttery Jacks do very well for us, but it was a great line extension and sort of enhancement to that core product. When you look at the chicken and steak teriyaki bowls, that is an enhanced product because the amount of protein that we're giving you and the sauce and vegetable and rice to protein ratio has been shifted so that it really does deliver a high-quality item to the marketplace that isn't traditional for burger chains. So to your point, I think you should expect both of those things to happen; new, innovative products that focus on some of these sort of culturally inspired flavors at times. And then also, core products that'll come out as either line extensions of new flavors and/or simply enhancements of better product coming to the marketplace.

As a quick follow-up on the teriyaki bowls, it's clearly a much better product I guess in my view. When we look at that product, how hard will it be to stimulate trial for new guests for something like that coming out of a burger chain like yours?

Yes, I think that's where I depend on our marketing communications team. What they are able to do -- and they'll place a bigger bet and they'll make a lot more noise where we know that the product's going to deliver well, and it's going to draw in or has an opportunity to retain new guests that come in for trial. So if you look at our advertising campaigns, what we doing on social media and then also what we do in digital advertising, we're going to be extremely aggressive to bring in who we know are our target market, but who may be either lapsed users or users of competitive brands.

This is Lance, if I could jump in one more time here. Let me clarify on the 53rd week, we have not modeled any 53rd week impact into any of our projections. So it looks like the 53rd week actually does fall within 2021, but it is not modeled into our projections. Sorry for the confusion. And operator, we'll take our next question.

Our next question comes from Matthew McGinley with Evercore ISI.

On the incremental CapEx guide versus the tenant reimbursements, is that incremental $10 million to $15 million you got it for only on drive-thrus and remodels on your company owned assets or does that include drive-thru investments for franchise stores? And on the company-owned side, how many of the 140 stores that you have now will require a full remodel versus just the drive-thru upgrades?

This is Lance. And so the $30 million to $45 million is strictly meant to be the corporate or the company-owned restaurants. And there are roughly 50 or so restaurants that are in need kind of a full remodel.

Okay. And on -- for I guess Lenny, probably, relative to the last time you gave long-term guidance in 2016, you assumed that the key unlock for comp growth, was going to be around improving the guest experience and then you kind of bucketed Jack and remodels as -- things that would have a smaller impact. I don't know if you want to quantify in the way that you did back then. But qualitatively, what do you think is different about the guidance that you gave today about what drives the comp over the next 4 years?

I think it's really focus. If I'm just brutally honest, I think that the organization is way more focused today than it was capable of being back then. And I think that the focus that we have today has all the resources as well as the financial resources, human resources and financial resources focused in this area. And I think it's more likely that we will be able to find the gains associated with these investments faster. And I think that bringing in some outside perspective in the form of a new COO and CFO, have been beneficial to create some of that focus for our team as well as being a single branded entity. So I think part of it is just focus and then the second piece of it is our analytics show us clearly where the opportunity is, probably more clearly than we even saw in 2016. So what we need to do and where we need to do it is just so clear to us, and with only one brand to run, I just can't see us not getting these things done.

Operator, I think we can squeeze in one more question here.

Our last question comes from Matthew DiFrisco with Guggenheim Securities.

I just have 2 follow-ups. With respect to the menu, I think in the prepared remarks Lenny, you mentioned SKU rationalization potentially. And Lance, I just wanted to sort of reconcile that with the margin guidance. Shouldn't that potentially -- or are you being consecutive? Shouldn't that potentially have a net benefit to the restaurant margin line by doing those such initiatives? And then, the other follow-up was on the capital. I missed it in the prepared remarks if any of these remodels or the drive-thru enhancements, is there going to be any sort of shared cost with the franchise community to accelerate this potentially a little faster?

Matt, this is Lance. I'll take the first part of that and then let Lenny speak to the second part. As it relates to our margins, we may get a little bit of margin benefit from the SKU reductions. However, we are in -- particularly, as we were looking at our corporate P&L, over 80% or about 80% of our restaurants are in California. There are fairly significant labor challenges here. And so what we're giving you is kind of what we believe the blended margin is going to shake out at, bearing in mind that wage inflation is 6%, 7% per year in those California restaurants.

The focus of the SKU rationalization along with the other things that I mentioned in the prepared remarks, they're really intended to create operational simplicity so that we can do more consistent in the way we execute more so than a margin enhancement type initiative.

Okay, and then the capital shared cost?

So on the TIs, we've given you kind of a total tenant improvement number. We're still working through some of those details as to what would be contributed and what would not be on certain pieces. But we've given you the number that we feel is appropriate based on what we expect to contribute in total.

Thanks everyone for joining us today, and we look forward to speaking with you soon.