Jack in the Box Inc (JACK) 2021 Q2 法說會逐字稿

Good day, everyone, and thank you for standing by. Welcome to the Jack in the Box, Inc. Second Quarter Fiscal 2021 Earnings Conference Call. My name is Christian, and I'll be your conference operator. (Operator Instructions)

As a reminder, this conference call is being recorded. A replay of the call will be available on the Jack in the Box corporate website starting today. I would now like to turn the call over to Mr. Ron Parham, Arbor Advisory Group. Sir, please go ahead.

Thank you, Christian, and good evening, everyone. Thanks for joining us tonight. Joining me on today's call are Chief Executive Officer, Darin Harris; and EVP, Chief Financial Officer, Tim Mullany. During our prepared remarks and the Q&A portion of today's call, we will refer to non-GAAP items, including operating earnings per share, adjusted EBITDA as well as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliations provided in today's earnings release and available in the Investor Relations section of our website at www.jackinthebox.com.

Also during today's call, we may make forward-looking statements that reflect management's current expectations for the future, which are based on current information and judgments. And while management may provide current thinking on this call around the potential impacts of COVID-19 on our business, given the rapidly changing environment, any forward-looking statements should be considered with this elevated level of uncertainty. Actual results may differ materially from these expectations based on risks to the business. The safe harbor statement in today's news release and the cautionary statement in the company's most recent 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 and are available on the Investor Relations section of our website at www.jackinthebox.com.

A couple of calendar items to note quickly: Jack in the Box management plans to host a virtual Investor Day on Tuesday, June 29, watch for more information about that event in the coming weeks. And our third quarter ends on Sunday, July 4, and we tentatively plan to announce results on Wednesday, August 4, after market close, and host a conference call at 5:00 p.m. Eastern Time that same day.

So with that, I'll turn the call over to Darin.

Thank you, Ron, and good evening, everyone. Thank you for joining us today. We are very pleased with our second quarter results announced earlier this afternoon. They reflect the power of the Jack in the Box brand, our iconic, differentiated all-day menu and our continuous product innovation. And most importantly, they are a direct result of the dedication and passion of our franchisees, store managers and staff. And all of the team members throughout the entire Jack system who have worked relentlessly to serve our guests safely and effectively through the challenges of the past year.

Tim will go into more detail on our strong second quarter results and how we currently anticipate fiscal year 2021 playing out. I'm pleased to report that we are off to a good start to the first 4 weeks of the third quarter, giving us confidence that our key strategies continue to resonate with guests and position us to maintain momentum while we work closely with our franchisees. Let me provide a brief update on the strategies, which, I believe, are driving our current performance and laying the groundwork to pursue our longer-term strategic initiative to expand Jack's reach with renewed unit growth.

All of our strategies are rooted in 2 foundational principles: The first foundational principle is shaping a caring, high-performance culture, focused on serving our people and franchisees well. If we do this, we are confident they will take care of our guests. The second foundational principle is accentuating Jack's history of innovation and leveraging technology. On top of these foundational principles sit our 4 strategic pillars: first, building brand loyalty; second, driving operational excellence; third, growing restaurant profits; and fourth, expanding Jack's reach.

Over the long run, Jack will create value by investing and serving our people and franchisees, innovating in new ways, leveraging our data, expanding our reach and scaling our infrastructure to drive operational excellence. As we've indicated, with the past 10-year refranchising process now solidly behind us, Jack's next 10 years are going to be driven by new unit growth and by emphasizing all the things that Jack guests love and trust about the Jack brand, our broad and unique menu, all-day availability, constant innovation and out-of-the-box attitude.

As part of solidifying our first foundation of principle, one of my priorities over the past year has been to revitalize our leadership team with professionals who have deep experience in expansion-oriented restaurant and franchise business models. And whose talents complement those of our current leadership team who have deep and valuable experience with Jack. So I'd like to start today by welcoming the 2 newest additions to the team: first, Steve Piano, our new Chief People Officer, joined the company on April 26. Steve brings more than 10 years of executive level HR experience from GNC Holdings, a $1.6 billion global health, wellness and supplements brand, where he served as Head of Human Resources and previously, as EVP of HR at MoneyGram.

Second, Carlson Choi, our new Chief Information Officer, joined us on May 3. He comes to us from Jollibee Foods, a $4 billion global restaurant operator with a portfolio of franchise brands, where he served as Global Chief Digital Officer and Chief Information Officer. He also served previously as Global VP in the digital initiatives group at Mattel. As a reminder, over the past 6 months, we've also welcomed Tim Linderman, as Senior Vice President of Franchise and Corporate Development; Tim Mullany as Chief Financial Officer; and Ryan Ostrom as Chief Marketing Officer.

We're also in the final stages of recruiting a new Chief Operating Officer, who will be responsible for leading both company and franchise operations, focused on driving operational excellence and growing restaurant profitability across the system, 2 of the 4 key pillars of our long-term strategic plan.

Our executive leadership team is already working closely with our corporate team members and our franchisees to drive Jack's long-term growth initiatives. In addition to installing a new leadership team, working collaboratively with our franchisees to develop and execute our new strategy has been and continues to be a top priority. As many of you know, Jack in the Box is celebrating its 70th anniversary this year. Over that time, Jack has carved out a distinctive position in the QSR industry, and our committed franchisees have been a key part of this achievement.

Jack's future success will be a function of building strong relationships with our franchisees and enabling them to deliver exceptional guest experiences that enhance brand loyalty and grow their business. Their success is our success. I'm very encouraged by the progress that we continue to make on that front. We held our first quarterly Leadership Advisory Council meeting in January, and have another scheduled in San Diego in less than 2 weeks. In between these quarterly meetings, we've also held virtual monthly business meetings that are helping to accelerate the exchange of ideas and activation of our strategies in partnership with our franchisees.

We're openly sharing with our franchisees, our corporate aspirations to expand Jack's reach and they, in return, are sharing their own aspirations to capitalize on the strong Jack brand and on the substantial expansion opportunities available to us together to build and operate new restaurants. Although we're still in the early stages, we're very encouraged by the initial enthusiasm expressed by our franchisees. To date, more than 2/3 of our existing franchisees have expressed interest in expanding in the coming years. We've recently signed development agreements with 8 existing franchisees, our first such agreement in recent years. That calls for them to add a total of 23 new stores over the next several years, representing a greater than 6% expansion of their current combined 358 units.

In addition to our plans to expand with the majority of our existing franchisees, we launched several new franchise recruitment initiatives in late March, including filing our updated franchise disclosure document, standing up a new franchise development website, jackintheboxfranchising.com; and in late April, initiating our first paid ad campaign to solicit new franchisee leads. These steps are also beginning to bear fruit.

Through the first 4 months of 2021, we received double the number of inbound franchise leads compared with last year at this time. And our store development team has been finalizing work on a modular Jack in the Box restaurant of the future design, that will provide franchisees greater access to a wider variety of store sites, including drive-thru-only end caps, smaller and streamlined narrow sites and nontraditional such as airports, convenience stores and college campuses. As part of that work, we developed a new efficient kitchen for our smaller drive-thru-only stores that is incorporated into our future modular restaurant design. Initial construction costs for the drive-thru-only store prototype are approximately 20% lower than our current stores, making our category-leading store economics even more compelling as an investment for new and existing franchisees.

We recently finalized an agreement with a national partner, REEF Kitchens, to open an initial group of up to 8 ghost kitchens in 3 states this summer. These are the latest additions to our strategy of accelerating both our restaurant growth and growth through digital channels. This also builds upon our systemwide role of an in-app ordering and the launch of Jack's first ever loyalty program over the past few weeks. All of these initiatives have accelerated our acquisition of customer data to expand our database, which has grown by more than 60% over the past 18 months. This represents a significant opportunity for Jack. Combined with our newly implemented digital marketing technology platform, our growing guest database will enable us to support our strategic pillar to build brand loyalty by communicating through more personalized messages and timely offers.

Over the past year, our customer data indicate that we have been attracting and retaining more higher income consumers even as dining restrictions have been relaxed. As you can see, we're working on all fronts, putting the building blocks in place to drive brand loyalty and franchise opportunities that will fuel future growth and category-leading performance. We're pleased with the progress we're making and with enthusiasm of existing and prospective franchisees. At the same time, I want to carefully manage expectations, taking into account normal and COVID-impacted lead times for site selection, financing, permitting and build-out.

We anticipate it will be at least 18 to 24 months before we begin to show meaningful net new store growth. In the meantime, we will continue to focus on driving operating performance across our existing store base, building brand loyalty by working closely with our franchisees to delight guests with our all-day menu, continually introduced new craveable menu innovation and introduce new technologies and procedures to ensure consistent speed of service, so guests enjoy every visit to Jack in the Box across our 21-state geography.

We look forward to providing additional details about our long-term strategies and our 3-year financial framework at our June 29 Virtual Investor Day. Watch for an e-mail soon inviting you to register in advance. Before I turn the call over to Tim to review our second quarter financial results and elements of our full year expectations, I'd like to again sincerely thank our restaurant team members for keeping everyone's safety a top priority as we provide for the needs of our guests. I'd also like to thank our corporate employees, franchisees and suppliers for their partnership, flexibility and ingenuity during these unprecedented times.

At this time, I'll turn it over to Tim.

Thank you, Darin. Good afternoon, everyone. Thank you for joining us on the call today. Having now been with Jack in the Box for 1 full quarter, I want to start by expressing how energized I am about the strength of the Jack in the Box brand and the opportunity to work alongside the other members of the leadership team, all of our team members and our franchisees, as we embark on a new long-term expansion phase.

As Darin noted, our strong second quarter results announced earlier this afternoon are a testament to the ability of our team members across the entire system to respond to the unprecedented circumstances of the past year with innovation and nimbleness to continue serving our guests safely and effectively. You'll find a thorough discussion and analysis of our second quarter results in our 10-Q filed this afternoon. I'd like to use my time on today's call to focus your attention and provide additional context on a few key areas.

Let's start with a quick overview of our strong second quarter sales and profitability. Same-store sales increased 20.6% compared with the year ago period. System transactions increased year-over-year for the first time since the fourth quarter of 2019. Earnings from operations nearly doubled to $64.9 million from $32.8 million. Net income more than tripled to $35.9 million from $11.5 million. Adjusted EBITDA of $75.8 million was up 63.7% from $46.3 million. Recall, during the final 5 weeks of last year's second quarter, we began to suffer the most extreme effects of the onset of the pandemic. This year, stimulus checks gave a boost to the final 4 weeks. So naturally, those 2 factors amplify the year-over-year comparisons.

To eliminate that noise, I think it's informative to compare second quarter of 2021 against the second quarter of 2019 as a normalized base. And those comparisons also show very strong performance. On a 2-year stack basis, Q2 system same-store sales were up 16%, reflecting a 27% increase in average check. Weekly system per store average sales were up 17% to approximately $35,000 versus approximately $30,000. Company store level margins declined slightly to 25.9% versus 27.6%, primarily reflecting commodity and labor cost inflation. G&A as a percentage of sales improved to 1.6%, including COLI gains of $1.5 million, 10 basis points lower than the second quarter of 2019, which included $2.9 million of COLI gains. Excluding COLI gains, second quarter G&A was 1.7% of sales compared with 2.1% in the second quarter of 2019.

Operating earnings of $64.9 million increased 37.7% compared to $47.1 million. Net income of $35.9 million increased 43.2% compared to $25.1 million. And adjusted EBITDA of $75.8 million was up 23.9% compared to $61.2 million. Sales performance was strong across all regions and remained strong even in regions that reopened for indoor dining during the quarter. In fact, in Texas, we saw the strongest transaction trend improvement following the lifting of the indoor dining restrictions. And our Texas stores have continued to post solid sales during the first 4 weeks of the third quarter even as the pandemic restrictions have been further relaxed.

Clearly, Jack has met the challenge and the opportunity presented by the pandemic-driven changes in consumer behavior. Some of those changes will endure, others will likely dissipate over time. What won't change are the pillars of the Jack in the Box brand that have solidified our distinctive and resilient position in the U.S. quick-serve restaurant industry over the past 70 years. One key element of Jack's brand is our continual menu innovation. Our strong second quarter was driven by a continued mix shift towards core premium menu items, including Chicken Strips, the Bacon & Swiss Buttery Jack and Supreme Croissant. That mix shift was also boosted by our limited time offers, including the Cluck Chicken Sandwich during the first half of the quarter and the return of the Triple Bonus Jack during the latter part of the quarter, which successfully lapped its strong prior year performance.

Combined, these premium offerings, in addition to strong attachment of size and add-ons, outperformed last year's second quarter, which included the very successful launch of Tiny Tacos. Another key element of Jack's brand is our all-day menu. During the second quarter, the late-night daypart showed the strongest year-over-year improvement accounting for 2/3 of the contribution to the year-over-year improvement in transactions. A new element of the Jack brand is our digital accessibility. Digital off-premise sales accounted for more than 7% of total second quarter sales, up 150% over last year's second quarter, and they've continued to decline during the first 4 weeks of the third quarter. As a reminder, over 95% of our restaurants are covered by at least 1 of the 4 major delivery providers, with 80% utilizing at least 3 of the major providers. We also added Olo, a leading mobile app delivery platform to our digital order and delivery platform during the quarter and have been pleased with the initial sales volume and average check that is coming in through that service.

Earlier, Darin and I each alluded to the 2021 being Jack's 70th anniversary. I'm pleased to be able to announce another significant milestone that we expect to reach during the third quarter. On a trailing 12-month basis, we expect Jack system sales to cross $4 billion for the first time in Jack's 70-year history. That's a great milestone to achieve at the same time that we are laying the groundwork to launch the multiyear unit growth initiatives that Darin covered in his remarks. We are entering this new chapter of Jack story with a strong balance sheet to support our plans. We ended the second quarter with approximately $109 million in cash on the balance sheet, including restricted cash of approximately $18.1 million.

During the second quarter, we repaid $107.9 million in our variable funding notes and now have $110.5 million of borrowing capacity under that facility. Our leverage ratio, as defined in our agreements, was 4.1x at the end of the second quarter, and we remain in a strong position with respect to our debt covenants and liquidity. Also during the quarter, we repurchased 640,709 shares of our common stock at an aggregate cost of approximately $65 million. We currently have $135 million available under Board-authorized share buyback programs, of which $35 million expires in November 2021 and $100 million expires in November 2022.

And last week, as an expression of confidence in the company's future, the Board of Directors approved 10% increase in the regular quarterly cash dividend to $0.44 per share. Looking ahead to the remainder of 2021, we feel we're once again in a position to provide a full year 2021 outlook. Subject to all the risks and uncertainties that you'll find described in our SEC filings as well as continuing effects from a pandemic. We currently expect high single-digit same-store sales growth, G&A as a percentage of system-wide sales of approximately 1.7%, excluding net COLI gains or losses; commodity cost inflation of approximately 3%; labor cost inflation of 5% to 6%; and adjusted EBITDA of between $320 million and $330 million, including approximately $6 million to $7 million benefit from the 53rd week.

We also want to reiterate EBITDA sensitivities for the year, which have not changed from our previous disclosures. Every 1% change in company's same-store sales results in just over $1 million impact to EBITDA. Every 1% change in franchise same-store sales results in approximately $5 million in EBITDA. Every 30 basis points in restaurant level margin equates to roughly $1 million impact in EBITDA. While every 10 basis points of G&A equates to approximately $4 million in EBITDA.

I'll close by echoing Darin's optimism about the progress we are making in light of the foundations to begin a new growth chapter for Jack in the Box. Our financial results over the past year clearly demonstrate that we have a strong brand, strengthening brand loyalty and a sound operating model. We're focused on making what we believe to be the right investments to lean into consumer trends and tastes that will persist well beyond COVID. That combination of brand, operating model and targeted investment will help drive performance and bridge the 18- to 24-month lead time before we begin to show meaningful unit growth acceleration beginning in 2023.

In summary, we are very pleased with the continued momentum in the business and are looking forward to sharing more about our long-term growth strategies at our June 29 Virtual Investor Day.

I'd now like to turn the call over to the operator to open the line for questions.

(Operator Instructions)

Your first question is from Brian Bittner from Oppenheimer & Co.

Congratulations on such strong business results here. My first question is related to the same-store sales guidance, guidance that you issued for the year around high single digits. What it does is, I guess, it implies same-store sales in the second half since we already have the first half and it suggests anywhere from negative 3% to plus 3% just based on the math. Your average weekly sales trends, particularly in the last quarter, are actually trending at levels higher than you were executing in the second half of last year, suggesting, I guess, that sales could stay positive if you retain them. How would you want to set expectations here related to the full year guidance and what it implies for your business in the second half? Should we assume some of the stimulus benefits roll off of the AUV trends as we model out your second half? Any tidbits would be helpful.

Yes. I think a few things. One, you'll note in prior fiscal year, the first half of the year, we did a negative 80 basis point same-store sales. And then the second half of prior year, we meaningfully strengthened to a positive 9.4% same-store sales. So as you look at the current fiscal year, our first half was positive 15.9%, so overlapping very strongly in the second half of the year, we're looking at a positive 2.7%. So we're continuing to anticipate continued strength in our overall performance similar to what we've seen in recent periods.

That's Helpful. And my follow-up question is on unit growth. There's obviously some excitement building around your ability, Darin, to spearhead better long-term unit growth. You outlined some of the tools you're putting in place to drive this. You also talked about the leg and the desire to grow versus actually displaying that growth, which I appreciate. But this quarter, in particular, you had 9 net closures, which is the most we've seen in quite a long time. The question is, are we going to go through a short-term period of elevated closures like we did this quarter as weak units are pruned? And any other tidbits you can provide on how that closure line should look moving forward?

Sure. Yes. I'll let Tim answer this question.

Yes. So we did see some elevated closures in the quarter. You'll notice in the Q filing that we released earlier today, we had 19 total closures in the quarter. So we are seeing some elevated levels there. A lot of that is due to the improved relationship, frankly, with the franchise system and corporate, where we're dialoguing very frequently with them and allowing them to exit out of underperforming locations in anticipation of our expansion into new offsetting units within existing markets. So it's really a way for us to cultivate our portfolio, and in the long run, improve the overall quality.

And in many instances, we are gaining an offsite -- or an offset location in addition to remodels in trade.

Your next question is from Jared Garber from Goldman Sachs.

Kind of following up on the last question there. Just wanted to get a sense of -- you talked about that 18- to 24-month time frame. I think we've heard that a couple of quarters now. I just want to get a sense of exactly how we should be thinking about the pace of acceleration in unit development and when we should start thinking about that actually flowing into the model?

I'll start and then turn it to Tim. But basically, we've been saying 18 to 24 months as we've been ramping up our development pipeline through launching our FDD, through engaging franchisees, to commit to new units. So that's taken some time to get up and running as well as it always takes time to find sites' permit and get them open. We recently filed our FDD, which enables us to start the process of recruiting franchisees to select territories. And we mentioned some of the results there. We're seeing a tremendous response from our existing base, and we're at the early stages. We just -- the FDD went live last month. And so it's a period of time of ramp-up that we're going through right now. We're excited about what we're seeing in the pipeline. We're excited about giving you some insight onto -- into the pipeline by communicating the development agreements we're signing and giving that as a lead measure.

Yes. I would just underscore that. So we'll be getting into a lot of the details on this at our Analyst Day on June 29. As Darin mentioned in his comments earlier, our new strategy is really predicated. We understand that unit growth is something that is really core -- a keystone to our overarching long-term strategy and pipeline. But I think what we also communicated in the earlier remarks is that we have new leadership in the development group with Tim Linderman that was recently hired. We recently rolled out a new franchising website and then launched some of these early initiatives to get out and start getting interest in -- for new franchisees coming into the system. As those development agreements get signed in the future, that's sort of the canary that indicates when that 18- to 24-month clock starts, so to speak, for those units that are announced in each development agreement. So we're actively pursuing it and are really optimistic about the early results.

That's really helpful color. And just one more follow-up, if I may. It seems like you're starting to see some green shoots in those conversations with franchisees, especially after some of the things you talked about in terms of the FDD and the new leadership there. Just wanted to get a sense of what you're seeing in terms of interest in existing markets versus new markets from some franchisees? And if there are broader opportunities in newer markets as well?

Yes. As part of our overall strategy, it's important that we expand in our existing core where we have awareness. And as we've laid out before, we have about 950 to 1,200 locations that we've identified or potential trade areas we've identified. We've begun sharing that with our existing base of franchisees. And let me just give you an idea of how that compares to the competition because I think that helps illustrate that there's plenty of opportunity just in our existing core. So in California alone, we have 945 locations, we could add another 180. Our competition, McDonald's has 1,270. Texas, as an example, we have about 600 locations today, we could add another 110. There 12 -- there's 1,183 McDonald's, 943 Sonic locations.

And that's just to provide color. Colorado is another one that's underpenetrated. We have 17 locations, we could add another 90, where McDonald's has 200. So we know there's opportunity in our core. We'll focus there first. And then we will also proceed into markets that are nearby our core. And one example is Salt Lake City. We're aggressively pursuing Salt Lake City. And overall, Utah, where we have 3 locations today and could add another 52. So the key is to focus in core where we have awareness and then building concentric circles around that core and pursue a few new markets.

Your next question is from Dennis Geiger from UBS.

Great. And Darin and Tim, thanks for the color on thinking about rest of the year and for the guidance, certainly helpful. Just to kind of ask 1 more on that. Just as we think about the go-forward and maintaining and essentially growing your sales volumes based on the strength of last year's results, just curious how you think about some of the tailwinds that you have into the back half of the fiscal year? Thinking about mobility, daypart-wise, how that might help? Dining room wise, how that might help? And then some of the brand initiatives, good color as it relates to Texas and kind of what you're seeing there? Just curious, anything more there as it relates to some of the drivers in the back half of the year or maybe even what you've seen in recent weeks precarious.

So one is I think our current strategy is working, and we'll continue to prioritize what we've been doing this first part of the year and listening to our guests, providing them what they want. That's really helping Jack stand apart. So we're providing the right product, the right message and the right offer by focusing on innovation, value and the way our guests define it and then our guest experience and making sure that our speed is consistent. With that being said, you have some questions about how are we performing in markets that have reopened, like California and Texas. Texas, we are cautiously optimistic.

We continue to see strong performance there. With the Texas results a positive sign as they reopened, it's hard to determine how long that will continue, but we've definitely seen a positive trend in Texas with the early reopening notices as we had stronger transaction trend growth there during this period of time compared to the rest of the system. As far as California, our California markets continue to outperform the system average in quarter 2. And most of California was still closed at this time. Therefore, it's too soon to tell. We've actually seen in greater than 90% of all markets, double-digit sales growth. As far as dayparts and other parts of our business, I'll let Tim discuss more about how we're thinking about our overall daypart.

Yes. So we were positive across all dayparts. So a lot of strength coming in through dinner and late night, particularly. And with late night, from a transaction and traffic point of view, that really led our shift to positive transactions this quarter, which, again, as we mentioned earlier in the comments, is the first time since Q4 of 2019 that we've had that. So that was a really good thing for us to see in this quarter. Also, when you look at the 20.6% same-store sales performance, more than half of that was driven by a shift in our core premium products.

So we've seen that continue through several quarters now, and we anticipate that through this increase in innovation that Ryan Ostrom and the marketing team has demonstrated, we should be able to carry on that strength going forward. And again, just I want to touch back on the same-store sales forecasting, the first part of your question. So we are looking at that as a continuation of a 3-year stack. So we've been -- through each quarter, we've been looking at a mid-teen 3-year stack, and we anticipate that, that same level effect will continue throughout the second half.

As far as continuing the comp, Tim, the other thing I think that's important for us to point out is, we've discussed in the past the launching of our digital strategy. We've obviously had third-party delivery as a key component. But we've enhanced that, and we've enhanced it by incorporating all the third-party delivery partners into our app. And in addition to that, we've launched loyalty. So we're in the very early stages of our digital strategy as we connect with our guests and enable one-to-one marketing, but we're seeing tremendous growth from digital.

We also are seeing some shifts in our customers, as we've talked about before on these calls with our new customers. And what we're seeing is some of the higher income customers are holding steady. Meaning, when we measure churn of customers compared to last year at this time and the rollover of COVID impacts, we're seeing that it implies that Jack has been able to successfully hold on to these new higher income customers that we acquired at the start of the pandemic. So that's also creating some encouragement on our part on how do we continue to comp.

Your next question is from John Glass from Morgan Stanley.

Sorry, for another comp question, in advance. One is, I don't know when you really saw what point in the third quarter last year, you really started to see that explosive check growth. I presume that is sort of ramping in. But have you begun to fully lap that up 20% or so last year? And how do you think about check in the back half in that dynamic. And I just want to clarify something else that you just said, which is I think you said you were looking at 3-year geometric stacks and maintaining, I think you said like mid-teens. Is that right in the back half? It would assume -- that would assume you get higher than that on a 1-year basis than what you've just guided to? I just want to make sure I understood and heard that correctly.

Yes. First, when we talk about the average check, so we hit that mid TA, we just came off this quarter with an average check of $11.13, that lapped at [9 28]. So it was an increase of 20%. So we feel good about that performance. And we do anticipate with the performance that we've had with our core premium products and the continuation of that and the steadiness of that, we are anticipating that, that average check strength is continuing. So relative to the 3-year stacks, we are forecasting, again, at 2.7% for the second half of this year, which put us at mid-teens on a stack from 2019 onwards. And that's a continuation of the same mid-teens that we've seen in previous quarters.

Thank you for clarifying the 2.7%. That's what I was missing. And then, Darin, you talked about development in the drive-thru-only format. And how do you see -- overall, when you look at development in the future, is it more going to be nontraditional or non full on Jack's and more of these nontraditional units where you see the real opportunity. Is there any way to sort of think about the mix of stores going forward and how that may link differently than the traditional base?

The way we're thinking about it is very similar, really giving -- we're thinking about it in a way to give us access to more sites and more places where Jack consumers are. So having modular Jack in the Box restaurants designs that will enable us to go to drive-thru-only end caps, smaller narrow sites, nontraditional sites such as airports, convenience stores and college campuses. And then also, as we mentioned, we're going out there and trying ghost kitchens. So our view is more focused around how do we provide the opportunity for customers who want to experience Jack, more opportunities to do that.

Your next question is from Jeffrey Bernstein from Barclays.

Two questions. Just one from a franchisee profitability perspective or maybe you can opine upon it just through your company-operated ownership. But obviously, sales are strong, but clearly, the cost pressures are prevalent, and I appreciate the color you provided in terms of commodity and labor cost inflation. I'm just wondering how franchisees are responding to those pressures whether there's a push for incremental pricing or whether there's other initiatives you've got to mitigate the cost pressures. Specifically around the labor side, wondering whether you're seeing or hearing of any shortages or perhaps maybe your sales are strong enough where you're -- don't feel the need to necessarily respond to those presumably short-term pressures? And then one follow-up.

Yes. So I guess just to hit the labor shortage initially, right now, we're not seeing a material impact on our sales due to those shortages. So under 10% of our company stores -- on the company side that have been impacted, and we're estimating that the franchise system has similar performance. But we're tracking that and we'll obviously know more in the quarters to come. On the same-store sales side, we're actually seeing a tremendous amount of strength in the franchise system, and that's flowing through to the franchise level margins that we saw in the filing that we just issued earlier today with an increase of $7.2 million on franchise level margin with the flow-through of those higher royalties and revenues associated with that strength. So the franchise overall margin on the franchisee side has been improving over the last several quarters.

And Tim, our quarterly 4-wall EBITDA at the franchise level has improved 50% year-over-year, which represents about a 350 basis point improvement as a percent of sales. And our annual franchisee 4-wall EBITDA has improved 34% year-over-year, which represents about a 250-basis point improvement as a percent of sales. So we're continuing to focus on, as we mentioned, a part of our strategic pillar on growing restaurant profits for our franchisees.

Understood. That's very encouraging from a full EBITDA perspective. And then just my follow-up on the app and loyalty program. These are pretty recent launches for you. I'm just wondering whether there's any early feedback to share? Anything specific to one-to-one marketing plans? Or just broadly, what kind of goals do you have for each so we can measure success? Are there any milestones that you're looking for incoming quarters or years from a usage or percentage mix or anything along those lines would be great.

Yes. It's too early at this point to opine on what we have set for targets.

Any early feedback in terms of -- from franchisees, in terms of customer usage patterns or anything encouraging on that front? Or is it still too early to tell?

It's too early to tell. Obviously, we've seen a pretty substantial growth in our app download as we've launched loyalty. But we've also, as we mentioned, our database guests has increased pretty substantially, as we mentioned in our opening comments. We think we're at the beginning stages of the growth of our database. And so we're excited about what that will bring us. And especially with Ryan's background in leading digital for other brands, we know the opportunity we have to grow that component of our business.

Your next question is from Brian Mullan from Deutsche Bank.

Darin, I think one tool on the development toolkit is maybe building company-owned stores. I know that would be done in the context of remaining primarily asset-light overall. But wondering if you might give us a sense of how many company-owned stores you might expect to open either in the back half of this year or perhaps if you'd be willing to talk about the pipeline for next year. Just asking how aggressive you might want to be on this front over the near term to kind of see development over the longer term?

Yes. We will pursue that as a strategy to continue to grow. We'll communicate that more at our Analyst Day and our Investor Day as far as what we're expecting for company growth. At this point, for this year -- for the back end of this year, outside of potentially the dark kitchen openings, and we don't have exact timing of those. We don't anticipate any other company-owned stores.

Okay. And then as a follow-up, I wonder if you could just give us an update on the Midwest franchisee situation. Any key dates we should be aware of, of getting that fully resolved? Or any guidepost on how many locations could close? Or -- and should we be thinking it could make sense where the company buys some of the stores? Just any color would be great.

Yes. There aren't any key dates that we can disclose at this point in time, but we'll say to date, franchise and lease agreements for 3 locations have been rejected, and those have been reported closed in our Q2 filings. So there's remaining 66 restaurants, and those are continuing to operate, and that franchisee has remained current with respect to all their obligations to us. So we'll be continuing to monitor the situation as they closes for throughout the court process.

Your next question is from Andrew Charles from Cowen.

Just, Tim, just one question for you. Tim, just wanted to get your thoughts on leverage, now that you're at 4x. I know you just paid down the variable funding notes. But historically, the company chose to carry closer to 5x net debt to EBITDA. Do you follow a similar philosophy? And in a similar spirit, Darin, a philosophical question for you. If your first year on the job was marked by getting the right people hired and, obviously, had to navigate the brand through COVID, how are you thinking about your second year as you're about to surpass your 1-year anniversary and just in terms of what the focus on your end is going to be?

Yes. I'll start with this one. So this is something that -- I think this is going to be key to our long-term strategy, right? And we're excited to approach the Analyst Day on the 29th and really discuss this a little bit more. Keep in mind that decrease in the leverage ratio isn't from decreasing leverage. It's just the performance that we've had that has moved that downwards. And there's some natural points that we could lever up. But I think just as opposed to an exercise and just adding leverage for the sake of adding leverage, we really want to be able to communicate to our investors, some deliberateness around why we want to do that and how we want to most effectively deploy that capital. So again, we'll kind of look forward to the 29th for that.

Yes. And adding to the question. Yes, the first year, as I mentioned in my opening comments, is really focused on getting the people and the culture right. So creating the leadership team that's bought into the direction we're taking the company, aligning with our franchisees and focusing on building a relationship and really giving the team internally a direction around the strategy that we've laid out. You're seeing some of the results in our performance as a direct result of what we've been focused on around our strategy that we've been executing on, that we defined mid-last year. And so we're already seeing the fruits of our labor come forth. And then next year, what I would tell you is that we'll continue to execute against the strategy that I mentioned and really focus on enabling operations excellence, restaurant profitability and growth.

Your next question is from David Tarantino from Baird.

A couple of clarification questions about your comp outlook for the second half. I guess, the first question is, I think, Tim, you mentioned that you're assuming a pretty stable 3-year comp. Is that what you're running so far in the third quarter?

Yes. So we've gotten some benefit from the stimulus checks and programs that have been rolled out. We don't anticipate that, that strength will continue forever. So it's too early for us to tell how much of any performance we have at this point in time in the quarter is directly attributable to stimulus versus some of these more innovative products that we've launched out that have been met with some success as well. So I think a long-winded way of saying that we're going to continue in anticipation of our demonstrable strength in sales going forward without continuing any incremental upside that we might attribute to the stimulus checks.

Got it. Okay. That helps to clarify. And then, Darin, I wanted to ask one that likely will be covered at the Analyst Day, but maybe I'll ask it now anyway. I was wondering if you could maybe talk about or give us some idea of what type of return on investment you're targeting for the new units and what your conversations with franchisees on that front have been? And I guess, related to that, what type of level do you think gets the franchise base really excited to develop new units?

Unit economics, as you know, vary from market to market, depending on labor, occupancy, construction costs. But what we have seen that I can comment on is that new store AUVs of our new restaurants continue to outperform our system averages. Profit is up year-over-year, as I mentioned, between 250 and 350 basis points. We've outlined a prototype that we believe can reduce cost and build out costs anywhere up to 20% to 23%. So we're targeting unlevered returns in the neighborhood of high teens and low 20s.

And is that the level you think that franchisees would really get behind? Or is there more to go on that front?

Our franchisees are excited about the opportunity to grow. They're expressing it. They're showing the desire. We'll always look at ways to continue to improve performance and improve the return on investment for our franchisees and corporate stores.

Yes. Just to add, and again, this is another element, we'll get into more in the Analyst Day. But those unlevered returns put us at the top of the peer set group. So with typical leverage, that attractiveness only increases.

Your next question is from Eric Gonzalez from KeyBanc Capital Markets.

I appreciate all the detail around the performance of the reopened markets versus the more restricted markets. I was wondering if you could talk about some of the shifts in consumer behavior you may have observed as those markets reopen. Are you noticing anything in terms of menu preference or daypart shifts as these markets open up? And how are you capitalizing on these shifts as we move ahead?

Well, we -- I'll turn this over to Darin in a second. But one thing we have seen, as we were mentioning a little bit earlier, is in Q2, late night has seen a lot of strength very recently. So of the traffic increasing by 70 basis points for a company -- or for the system rather, late night is driving that almost in entirety. So by far, it's been the daypart that has shown the most brightness recently.

We've seen overall performance improve across all of our dayparts. And as Tim mentioned, breakfast and late night were certainly 2 of the most impacted by COVID. But as overall transactions have improved, sales in all dayparts are positive in quarter 2. And we've seen a general improvement in traffic and not something that's just uniquely breakfast-related. As far as other trends that we're paying attention to, I mentioned this as well in my opening comments, with the higher income customer, what we've seen is that the customer churn declined in the second quarter, as we -- of this higher income, customer declined. So what it shows us is that it implies that Jack has been able to successfully hold on to those new higher income customers that we acquired at the start of our pandemic. And the data that we have suggests that our communication strategy and our promotional and product pipeline strategy, all indicators -- we have all indication that, that will continue.

Your last question is from Jeff Farmer from Gordon Haskett.

You've been asked this 4 to 5 different ways, so I apologize for sort of adding on here. But I think you said Q2 system average sales were $35,000. Are you willing to share what the (inaudible) for the first 4 weeks of Q3?

No, I don't think we'd be wanting to share that at this point.

Okay. And then one more for you guys. Curious if you have any metrics you can share that highlight the benefits you've seen from some of the operational initiatives that you've undertaken, meaning the kitchen equipment training platform. Anything that you can point to that sort of highlights throughput or any other benefits that are pretty tangible for the system?

We've retrofitted protein holding cabinets. Now it's in 100% of our stores. And we've trained a substantial number of our employees on how to utilize it and increase hold times. What I would say is at this point, we've maintained our window time, reduced it by approximately 10 seconds. Our alerts have went down. So we're continuing to see improvement with our ops initiative despite all the labor challenges.

Ladies and gentlemen, that is all the time we have for question and answer. I will now turn it back to the CEO, Mr. Darin Harris, for closing.

Thank you, Christian. In summary, we are very pleased with the results of our second quarter and the start of the third. Most important, our team is very encouraged by the initial progress we're making against our long-term strategic initiatives and the enthusiasm being demonstrated by our franchisees as partners in strategy. We look forward to sharing more detailed information about our long-term strategy at our Virtual Investor Day on June 29. Until then, stay healthy. And we hope to see you soon at a Jack in the Box.

This concludes today's conference call. Thank you for your participation, and have a wonderful day.