Q1 2020 Earnings Call
Good day, everyone and welcome to the Jack in the box incorporated first quarter fiscal 2020 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. During the question answer period. Please use your handset when as.
Justin Please do not ask over a speaker phone at this time for opening remarks, an introduction I would like to turn the call overture, Rachel wed VP of Investor Relations and strategic analysis for Jack in the box. Please go ahead.
Thanks, messy and good morning, everyone. Joining me on the call today, our chairman and CEO, Lenny comma and executive Vice President and CFO Landstar and our comments. This morning per share amounts refer to diluted earnings per share, we will refer to non-GAAP items throughout today's call, including operating earnings per share.
Our adjusted EBITDA, as well and restaurant level margin and franchise level margin.
Please refer to the non-GAAP reconciliations provided in Yesterdays earnings release.
Oh in today's presentation, we will take questions from the financial community. Please be advised that during the course of our presentation in our question and answer session. Today, We may make forward looking statements that reflects management's expectations for the future which are based on current information actual results may differ materially from these expectation based on risk.
To that business.
Safe Harbor statement yesterday's news release, and the cautionary statement in the company. Most recent form 10-K are considered a part of this conference call material risk factor as well the information relating to company operations are detailed in our most recent <unk> 10-Q, one other documents filed with the SBC. These documents are available.
Investors section of our website at Www Dot Jack in the box Dot com.
Second quarter ends on Sunday April well, we kinda, we plan to announce results on Wednesday may 13th after market close our conference call. Its tentatively scheduled to be held at 830 am Pacific time on Thursday May 14, with that I will turn the call over collection.
Thank you Rachel and good morning.
Before last recap some of the first quarter highlights I'd like to take a moment to articulate my confidence in the trajectory of the company and some of the progress that's already been made our 2020 add long term goal.
First the team is completed yet another chapter we exited the transition services agreement associated with Qdoba.
We completed the securitization and we closed on the sale of one of our corporate buildings.
Sure No single branded company in one building focused entirely on the success and growth of our iconic Jack in the box brand and it's wonderful to see the positive energy and early momentum.
Second we made progress in reestablishing equity in everyday value.
After conducting consumer research a few years ago, we found our core customers associated Jack in the box with credible products with approximately half being more value oriented and have looking for indulgence.
We have historically been able to capitalize on both leveraging our iconic tacos.
But after raising the price ceiling on our two tacos deal back in 2016, we lost a lot of value oriented yes.
Specifically through transaction under $5.
Oh product marketing operations and supply chain teams collaborated to restore some of our loss equity and leveraging the success of our Snackable craveable side launched our new tiny tacos platform as a permanent additions to our menu just last month.
We're pleased with the initial consumer response and guest sentiment has been extremely positive guest describing them as a great value for the price co. One consumer all they think about when they're hungry.
The only four weeks in so we won't give too many details on what we're seeing well we are optimistic so far on the ability to restore some lost value related equity.
I'd like to take a moment to thank our teams for the collaborative nature in which they worked to bring this product to market.
As we've seen in sales results in Q1, and past few quarters innovative new products and price pointed bundles continue to help drive momentum in the business.
Looking to the remainder of 2020 and into 2021.
Marketing calendar incorporates both innovation and price pointed promotions leveraging some recent consumer and culinary trends, we see in the industry.
Third.
See upside for 2020 in future years, I believe we have identified and begun to capitalize on untapped potential in a restaurant operations.
As I mentioned last quarter. This is our single largest focus for the year.
Two years ago, we hired markets, Tom as Chief operating officer. He's built a team that has changed operational paradigms processes and brought new expertise to restaurant operations, the partnership and new processes for operations product marketing and supply chain has laid the foundation for our brand to continue to launch innovate.
<unk>, new products and reduce wait times, while also ensuring the guest experience is not compromised.
We're pleased with the progress were making toward reducing system speed of service by one minute by 2021.
We continue to see improvements in locations, where you're testing the back of house equipment and process changes.
We're in the early stages of rolling out training and new processes to system with modest equipment modifications not far behind so far all indications are that we are on the right truck.
Looking longer term, we continue to believe digital and delivery are important pieces of the consumer journey, a quick serve restaurants, and we remain committed to appropriate investments in these channels.
As mentioned earlier for 2020, our biggest parties are operations improvements and product innovation.
But our mobile app and delivery channels continue to receive modest investments and the resources necessary to meet the current expectations of our guests.
Our mobile App addresses most consumer needs, including order ahead mobile pay in App or offers and menu and location information.
Well still a relatively low percentage of our overall sales we continue to see the number of users and transactions grow each quarter.
And almost our entire system now has delivery sales channel with over 95% of a restaurant surface by at least one of the four major delivery providers, we've completed integration with grubhub into our Pos system and we're currently working through integration with the other providers as well.
Lastly, we remain committed to returning cash to shareholders and we're well on our way to returning over 1 billion to shareholders and their former share repurchases and dividends by 2022.
With that I'll turn the call over the last for more detailed look at the first quarter Lance.
Thanks, Lenny and good morning, everyone operating EPS for the first quarter was $1.17 cents as compared with $1.35 cents last year.
18 cents decline was primarily driven by elevated DNA caused our interest and lower franchise level margin versus prior year.
These were partially offset by favorable impairment and reduced advertising versus 2000 lighting.
Our system wide comparable sales increased 1.7% in the first quarter company called sales increased 2.9% comprised of check increases of 2.6% and transaction increases of 30 basis points.
Franchise called sales increased 1.6% for the quarter.
Sales increases in the first quarter were driven primarily by the continued offering of compelling bundles as well as innovation I guess craze. We continue to offer price pointed burger and chicken bolus throughout the quarter. We also featured craveable sites, such as our indulgent $3 soft unloaded froze and our new Threed all are many machines, which helped bolster check.
We also launched breakfast innovation, we are one dollar cereal no donut hole and value offers like the two for three dollar breakfast products, featuring a new chicken buckets Jack.
Company restaurant level margin decreased by 140 basis points to 24.8% down from 26.2% last year.
This decrease was due to the impacts from commodities and wage inflation.
Food and packaging costs increased 1% driven by commodity inflation of approximately 4.9 person on the quarter, most of which came from beef and cheese.
Wage inflation was between seven and 8% in the quarter driven by both minimum wage increases and competitive market pressures.
Franchise level margin decreased $2.2 million when compared with the prior quarter, primarily driven by an increase in franchise support costs of just under $2 million attributable to an increase in bad debt expense.
Bad debt expenses were related to specific franchise situations that occurred in the first quarter and are not expected to be material in future quarters.
We also saw net negative impact of around $500000 on the implementation of the new lease accounting standard.
We would expect the impact to be slightly lower than this mill in future quarters.
Actually offsetting the higher costs were increases in franchise revenues, including increases in both royalties and franchise contributions for advertising and other services.
Despite the first quarter decline, we do expect franchise margin dollars to increase for the full year.
As a percentage of total franchise revenues franchise level margin percentage for the quarter was 38.5%.
Without the changes from a new lease accounting standard and type level margin would've been a 41.4%.
Well in more detail about the impact of this standard and our form 10-Q.
Advertising costs, which are included in SDMA were 5.3 million in the first quarter compared with 7.2 million in the prior year.
This decrease of $1.9 million was due to an incremental contribution funded by the company and the first quarter last year. The company did not make any incremental contributions this quarter.
As we reaffirmed in yesterday's press release, we anticipate our DNA to stay within the guidance range of 1.7% to 1.9% systemwide sales.
In the first quarter. However, DNA was outside this range at 2.1% driven by legal settlement and higher incentive compensation as outlined in yesterday's press release.
In addition transition services income received in the prior year from Qdoba.
Was not fully offset by cost reductions this year, resulting in higher DNA.
Again all of these items are built into our full year guidance range of 1.7% to 1.9%.
As Larry mentioned, we remain committed to returning cash to shareholders. The first quarter, we repurchased approximately 1.9 million shares for roughly $154 million and we're on track to hit the goal communicated in Q4 of 2018 to return over $1 billion to shareholders about 2022.
There were a couple of discrete items in the first quarter, you'll see in our financial statements that had been excluded from operating you'd be S.
The first as a pension settlement charge, which was a noncash charge.
As part of our plan to de risk. The overall pension plan, we offered vested participants a lump sum option as opposed to monthly annuity payments, reducing the plans future liabilities again. This transaction had no cash impact, but did result in an all cash settlement charge, a slightly less than $39 million in the first quarter.
The second item is the sale of one of our corporate buildings, which we've previously discussed as we consolidate our corporate offices here in San Diego.
This resulted in a 10.8 million dollar game that is included in impairment and other service chart and other charges net.
We've excluded from operating U.P.S. due to the discrete nature of the sale.
11, new restaurants opened during the quarter all of which four franchise.
Well. This is one of the strongest quarters for new restaurant openings. We've had in a few years 10 restaurants also closed during the quarter.
As we said last quarter, we'd like to update you on the new unit incentives, we had planned for the year after gathering feedback from our operators, we've decided on incentive with two options.
The first option includes a fairly significant royalty reduction similar to our current instead of offering.
The second includes a meaningful cash contribution combined with a more modest royalty reduction, which we think will incentivize growth in our less developed markets.
Cash contributions under this plan are included in our annual guidance for Capex and tenant improvement allowances.
Finally, we are reiterating our guidance for Tony Tony as you saw in Yesterdays release.
Given the progress we've made any initiatives we have in place for the remainder of the year, we feel confident reaffirming the expectations, we share the quarter ago to specifically address our adjusted EBITDA guidance, while Q1 came in below the prior year.
We do expect improvements and franchise level margins Mgninety and the remainder of 2020, giving us confidence that will be in the guidance range provided.
That concludes our prepared remarks, I'd now like turn the call or what's the operator to open a lot of questions Missy.
Yes.
That's a question answer session of today's call. If you would like to ask a question over the phone. Please press star one and please make sure that your phone is.
Record your name Unprompted.
Two time considerations, we ask you please limit yourself to one question and one follow up per turn.
You have additional questions you may recall at that time. Thank you. Our first question comes from Brian.
Your line is open Sir.
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Brian are you there.
Thank you might have left.
The next person.
Great.
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Huh.
Yes, thank you very much.
Well you hear me.
Yes, we can hear you did you guys talk a little bit about.
I know you guys.
All that some new products recently can you talk about how you're thinking about the cadence of new products going forward.
And then I know operations is a big focus but.
You're balancing the breadth of the menu and and we're moving new products as you I'd add to removing prices you had new ones. Thank you.
Yeah, Greg the I will say that the focus is not necessarily to remove products as we add new ones not sort of a one to one relationship there, but we are looking at removing complexity as we add new products. So part of what I spoke spoken about or shared in my you know.
Paired remarks really referred to that we look at what's happening with some of the new folks that have joined the organization.
We have really sort of helped us to reevaluate our kitchen operation.
We've learned that there are ways to speed things up and make it far easier for our crews to deliver the food and then we also have reduced some of the SKU counts a with some of the redundant skews multiple sauces cheeses things like that that add complexity in the kitchen and don't necessarily get recognized by the yes. So.
Wouldn't necessarily think it to think of it as the removal of one product for the addition of another but likely in aggregate. When you look at the removal of skews and also some of the time in motion.
Required for operations, when we reduce that it does make it easier to bring new things to the menu, but as far as the sort of marketing cadence and operations cadence for the launch of new products. We generally break the you're up into four to six windows and within each window, we're typically launching.
Somewhere between two to three offers and within that mix there may be one new product or a line extension and so when you think about it from a kitchen operation perspective, even at a time, where we may have three different offers in the marketplace, you're likely only experiencing you know one new product or potentially even just a couple of new.
Ingredients that allow for at line extensions. So that's the way that we'd balance.
Complexity, and then lastly had spoken about the collaborative nature in which marketing and operations.
And supply chain work together that includes training and even folks that are in the field, giving feedback.
In these processes, we're really able to make sure that we havent ops first culture, where the products that are created and the procedures that are required of the crew are all within a reasonable a set of expectations. So that we're not putting undue pressure on the operation. So probably more than you wanted to know, but hopefully gives you a feel for how committed we are.
So doing this the right way no. That's that's great and <unk> and I may sneak one more in but lands <unk> you touched on the bad debt expense for this quarter can you maybe give a little bit more clarity on on kind of that situation and and why it's one time.
Yeah. So so typically we don't have a lot of bad debt and this particular situation. We had two very specific instances with a discrete franchisees, where we needed to resolve some issues. So we've done that so it's it's not like you're seeing a general increase and the bad debt reserve across the company.
It really was just two discrete issues that needed to be resolved those have now been resolved.
I don't expect it to be material going forward.
Thank you.
Next question comes from Brian.
And the box.
And Sir.
All right I work a checking the box now can you hear me.
[laughter], Yeah, and you must be the next room right welcome aboard.
Well, it's kind of interesting because the question I have when he for you is I'm talking about the announcement that the board is initiating the process of identifying successor.
Why do you believe now is the appropriate time for you to leave the company in for someone else to lead.
You know you're finally out of this restructuring it feels like you have the organization set to grow any color you can provide would be great.
Yeah, I think as I started to reflect on really my personal desires when I started to seize that.
What I was likely going to end up doing is within the next three four years or so.
At a at a maximum I was going to end up exiting the company a likely more like a couple of years within a couple of years and that would've happened right in the middle of launching you know really what I believe to be it will be Jack in the boxes next run.
Through our new strategic plan and I felt like it was inappropriate for me to sort of go half way and then step out right in the middle when we could put a leader in place today that could carry us through that entire next Ron I had the opportunity to do that with the prior CEO and I really respected her for.
Or you know selecting the a period of time that she did because we were just about to launch you know our next bunch of initiatives and I was able to carry those all the way through and for me. It's been you know business model transformation, you know primarily but the entire time I felt an unencumbered by.
A prior leaders you know plans that then I had to step in the middle of and potentially.
Misaligned with in my case, I was able to establish the plant and then execute the plan and I thought it was right thing to do for the next leader to be able to do the same on a personal note you know as I turned 50 I just took some time to reflect on and ask myself a very serious question what would my 20 year old self say to my 50 year old sell.
And as I reflected on that the answer was pretty clear and it was that I would take some time in this next chapter in my life to pursue some of the other dreams that I've had.
I've always wanted to teach at the University level, it's something that's been a passion of mine since I graduated from college.
My entire organization knows that that's a future dream of mine because I talk about it all the time and at some point it was going to happen and so with those dreams in place and with the company I'm from putting it just felt like the right time after everything to alike.
Thank you for that commentary Lenny and just follow up question Lance.
On the EBITDA guidance.
Was the first quarter EBITDA decline a fully contemplated when you did originally constructed the full year EBITDA guidance and I asked that I'm in the sense, just wondering if they're incremental pressure being put on the remaining quarters of this year to perform from a profit perspective relative to your original thinking.
So.
No what I would tell you brown is that there's puts and takes that happens throughout the year, whether its sales EBITDA or any other line on the PML is kind of why we got on an annual basis.
You know specifically there there are some things we saw common there's probably a couple of things that we didnt see coming but as you as you look forward, we reaffirmed our guidance because we feel like.
Between the the initiatives that we haven't played some things that we expect to happen through the rest of year that we're gonna be fine with our guidance. So I don't want to go into much more detail than that because we're not gonna god towards one into that range or another I will just tell you that a lot of what we felt come and some other we didn't but we feel good about whether we saw it come or not we feel good about our.
And our ability to manage through it for the rest of year and land within the guidance ranges that we've given.
Okay. Thank you.
[noise]. Thank you next question comes from Jeffrey Bernstein. Your line is open.
Great. Thank you very much.
[laughter] and the commentary in your prepared remarks talking about I guess incentives for Ah for new unit growth [laughter], I guess would that kind of as a backdrop. I was just wondering you mentioned periodically about investments and targeting investments to maximize returns I'm. Just wondering one whether you give any thought to eating franchisees with specific.
Initiatives, perhaps above and beyond incentivizing, new unit growth, so whether there's any discussion around hoping franchisees with certain initiatives that you think would create value.
And then more broadly just wondering if you assess maybe the current franchise relations it sounds like kind of new product platform.
If we could start but didn't know whether that in of itself was enough.
Have a needle mover to ER to change the trajectory of sentiment or whether you think that still kind of.
Broader friction that'll take time to heal thank you.
Jeff. This is let me I will talk about investments, we have historically looked at and and actually initiated several investments.
Now that we think will enhance either the operation or the image a when we when we believed we either wanted to accelerate those initiatives and or participate in getting them done. We have made those types of investments and I think that will remain open minded, particularly when we believe that we have found.
And through test or.
Through some of the experimentation that we that we do that Oh, we can accelerate something and actually generate some sales and positive consumer sentiment. So yeah. I think will remain open to that we are working on some things right now that a you know if it's they proved to be fruitful, we certainly can consider ways.
To accelerate the a the initiative in the field and that's something that I think the brand will continue to do just like many others.
As far as the a franchise sentiment I don't think that you know one product is going to cure all of the things that we have experienced but I do think that the brand, including the entire leadership team and the board remains.
Very committed to making sure that franchisees feel like they have seen the table than that their respected I was one of the most important stake holders of our company. So I know that when we make decisions. It's all about trying to run the best brand that we can and maximize returns.
I don't think again that one product is gonna be silver bullet, but I think as the franchisees experience a improved results along with open communication overtime I can be optimistic and remain optimistic that the relationship will heal.
Great. Thank you.
Thank you next question comes from Chris.
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Good morning, a this is Patrick on for Chris I wanted to revisit product launches for just a moment and kind of looking beyond tiny tacos unit can you discuss what needs you would like to address with new products and just related to that you know you've mentioned in the past the need to improve your chicken Sandwich line and was just curious if there any plan changes to that in a this calendar year.
Well, we still remain committed to some of the work that we want to see happen around chicken I think it's.
Important but we're also looking at some of the other things that are happening throughout the industry and some of the consumer trends and making sure that we're going to capitalize on that as well just like tiny tacos, we haven't necessarily wanted to share a lot of specifics about what we're going to launch and when it's more for competitive reasons I, but I do think that to the.
Calendar not just for 2020, but also for 2021.
Is very strong and so we art if you know the optimism we have around.
Our guidance for this year has to do with that we spoke about that a little bit. It at the end of Q4 as folks where you know wondering about the Q1 results. We spoke about looking at the entire year and optimism around all the initiatives, including the new products. It can be rolled out that's contributing to that so.
Oh, we still feel strongly about it we will move forward with some of the things we mentioned in the past the timing is still I'd be determined as those tests conclude I, but we're pretty optimistic about what we've we've got plans.
Great. Thank send a it was just hoping to get a little bit of additional clarification on DNA. It sounded like a in your prepared remarks that you know GE. They spend was in line with your internal projections, but can you just clarify that were you surprised by any of the expenses that occurred and then just looking at how GA finished for the quarter versus the midpoint of guidance. It seems like you know genes.
I need to be relatively flat year over year at work comp sales need to be toward the higher end of your guidance in order to hit the range. So are there specific initiatives or color you can provide around you get a savings opportunities for the rest of 2020. Thanks.
This is lance you know as I as I said I just a few minutes ago. We think between actions, we can take us as well as things we expect to happen throughout the rest of year. The DNA is gonna be between 1.7 and 1.9 system sales.
I don't want to go into a lot to detail around what we expect or didnt expect or what some of those things might be going forward I'll. Just tell you that work, we're confident our ability to be in that range.
And again.
I think the other thing I wouldn't be comfortable sharing is that we knew coming into the first quarter that that there were a couple of things that could happen that may make the percentage look a little higher than its going to look the rest of year I don't mind sharing that so just.
There were couple with the full year, we knew Q1 might be a little bit.
Beyond that I don't want to add anything.
That's helpful. Thanks for the questions guest.
Sure.
Your next question comes from Dennis.
Sorry.
Great. Thanks for the question. Let me just first wanted to ask I know, it's early and you probably don't want to say much more at all and well that's funny tacos, but is there anything else to share at a very high level on on customer feedback whether its repeat.
Just attach anything else on customer satisfaction scores and then if I could just sneak a second and just related to to the value bundles and in kind of the learnings there and clearly that strategy is resonating.
Anything else you can share on kind of what you're seeing what's working better than than others across products Dayparts and any reason to think that the momentum with that strategy starts to starts to fade at any point are you keeping it relevant and no reason to delta.
Yes.
So first on tiny tacos, what I will say is that the consumer sentiment has been extremely positive.
We do you know look through social media and other consumer.
Data points on a daily basis to have an understanding of how consumers are receiving the new products and also how we're serving them. So we look at operational measures as well and it really is off to a very good start from that standpoint, we're feeling good about the ease of operation. It's it's essentially a fry answer type product we do have.
Yes.
You know some sauces and things that we provide that.
I have some minor.
As usual steps involved but its overall a very simple product to deliver yeah food cost is pretty low and it allows us to give a really decent even abundant amount of food for reasonable price and tell you talk because if you haven't tasted them you know there that the type of food that you eat like potato chips, you can't just eat Juan you're going to.
You're going to snack on many of them and I think they're very portable, which makes a which makes it a great. You know fast food you know type items, so feel really good about it but you know it's still just a handful of weeks in so we don't want to sort of bet. The farm on tiny tacos and I also think that you know if there's lessons.
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The past and even some other brands, we do understand that there's no sort of silver bullet product. This is one we're optimistic about but we'll have to continue to innovate as a brand over the long term as well as far as the value play I do think that value bundles will continue to have space in QSR and particularly at Jack.
In a box because the type of food that we offer with snacks inside a lot allows for a lot of upselling and add ons, which makes the value play you know extremely attractive but in addition to that.
And is innovating on just indulgent, you know sites and also indulgent all a card all the cart items that will be on the higher side of a pricing and from a consumer trend perspective, we believe we'll sell well so not all about value we put the prices out there.
Today oftentimes people perceived value as meeting cheap, it's not necessarily what we're saying well we are seeing value for the money is what's important and in this aggressive marketplace, having people understand what they are getting quantity and quality wise for the money is important which is why we tend to price things right now, but I can also see through some of the work.
It's been done on our calendar, but it's not.
All about that.
About putting great food, you know in front of consumers and having them experiencing in a way that they're not as concerned about price.
Great. Thank you.
Thank you next question comes from.
<unk>.
Yeah.
Good morning, especially Jarrod on for K today, I'm, just wanted to dive in a little bit to the franchise versus company on comp there's been a widening.
The the delta between those two and we thought that was kind of the white as we've seen in four or five quarters or just any commentary on the delta between company owned in the franchise comps would be helpful.
When we have hired markets Tom couple of years back one of things he talked about as conceptually getting the company ops to the place where they were the tip of the severe.
And that they really were moving faster and further than our franchisees operationally in executing whatever we're putting on the table. So that we could prove it out not only for ourselves, but also for the franchise community that would follow I think some of the momentum were seeing with company operations has to do the fact that their early adopters of some of the process.
As changes within our operation that are helping them.
To operate a little faster and generate some throughput through their drive through and I think that it's given us optimists or optimism about our franchisees falling behind and making some of the same improvements. So that's what we see we think we're seeing at this point in time, just based on not only the differential in sales.
But also in the a improvements in speed in our company ops as compared to the improvements and speed from our franchisees at this point.
Great and just one more follow up a changing too in a little bit, but how are you guys, saying that competitive environment sort of play out as we start 2020.
We know that yeah.
An increase in sort of value promotions happening on the.
Ahead of a competitor launching watching breakfast, so any thoughts on the competitive environment.
Well thanks.
Yeah, we've sort of you know come to a place where we expect the environment to be like this for the foreseeable future everybody's battling it out to try to gain some market share and you know even some of the biggest brands out there I've lost a lot of transactions in recent years and so I think.
Everyone's after the very same thing and it means that we're likely going to start to encroach on each other spaces at times.
Things like breakfast or late night or other offers that competitors are currently doing well with so you know the great thing about our brand is that we haven't just been a burger player. We've been a 24 seven a player that provides a food well outside of just burgers fries and drinks and the consumer has come.
The value us for that overtime, so we would expect that.
Has the competitive set you know continues to grow their menus or their day parts.
That will have an answer.
And as far as the breakfast intrusion that we're seeing today or at some of the competitive things are happening around breakfast.
We have a calendar that's.
Ready to compete within the marketplace with some of our best.
This lineups and that's what we think is gonna be necessary at this time.
Thank you.
Thank you next question comes from Alex Slagle. Your line is open Sir.
Thank you a question on the initiatives around improving ops and speed of service and it sounds like some of that started to show up and get reflected in the company and same store sales, but if you could just add some more color on the results of the recent past the degree that the changes had drilled and gain speed and transaction improved.
And then on the flip side, if theres any disruptions in ops and need to retool.
Yeah. Good good question the great thing about what we're doing right now all the results that were seeing through the first quarter are really associated with just executing the current systems better.
And then some of what's being launched today is really one step further than that where we make some slight modifications to our equipment that actually takes a lot of pressure off the operators to meet the speed requirements essentially we have found ways to either cook protein.
Or hold protein in a better higher quality over a longer period of time way that allows the operators not to have to a rush through you know the just in time cooking and preparation process. It takes a lot of pressure off when they can have proteins ready for the preparation.
The various sandwiches and other items. So that's a big piece, what we're doing so if anything we're not seeing disruption to the operation, but we're actually seeing ease of operation that's actually leading to a the result pretty optimistic about what's happening in test right now <unk> test environment, we've got not only process.
Changes, but also the minor equipment changes and we are seeing the best results within that test environment, we're drawing from that to launch system wide. So phase ones happening now, we expect more to come toward the back half year as well.
Thank you I've a follow up for Lance on the lease accounting changes and how that impacted the franchise revenue and expense I know you talked about commodity profit and pack, but what should we expect in terms of gross revenue and expense impact as the year progressive.
I think as we as we look at how the year progress is you're probably looking kind of 35 to 40 million on both the revenue in the expense you look at it was it was 12 to 13 this quarter and this was a 16 linked quarter. The other three quarters or 12, so be little you can't just take this quarter.
His number and multiply pumps for but it'll be kind of in that range is little bit higher than what we had initially guided to when we first talked about lease accounting a quarter or two ago and I'd. Just tell you as we finalize the implementation of the new standard we had just underestimated it a couple of things so the.
He is going to its going to impact the margin percentages, a little bit higher than we thought and then as I said in my prepared remarks from a bottom line impact it was about $500000. This quarter I expect it to be play slightly below that in future quarters, but you know you're probably talking.
Made and a half ish for the year about maybe a little bit either side or another.
Thanks.
Next question comes from Robert.
Yes. Thank you can you hear me okay.
Yes, Okay, sorry, two part question one Lenny on the drive-thru Remodels you'd kind of talked about that at one point, you're doing some testing in it sounded like it potentially could hold some good benefit to improve the customer experience and you know the look up potential.
The restaurants in the service any kind of an update you can give us on that and whether or not that might be a fiscal 20 program and I'll wait.
Got you with the second one.
Sure. So what we've essentially done as we we brought in markets is new team. We started looking at a series of operations improvements that we needed to make and we thought that.
Those items, coupled with more of a refresh of our restaurants were going to come together in a way that would be more advantageous over the long term and it's a good example of him when I talked about earlier, when you've got leadership changes and changes in perspective.
Oftentimes, a new leaders having to adopt the old leaders plans. So in this case, we wanted to give the operators you know a little bit of room to influence the plan and I think the right call was to broaden what we're doing so we still expect to do the types of things that would enhance the overall drive through experience, but I think there's more that we can do.
Beyond just that so it's been stretched out a little bit to get all of that done. Good thing is we're seeing the results on the upside that we needed to see so we will now a couple that with the various image things and I think that result is going to be a lot better than we even initially intended.
[noise] does that you know I assume make some changes to the financial.
Considerations involved with the process.
I think at this point we're gonna.
Refrain from you know throwing out any projections, because I think that the program needs to be finalized before we do that but there's nothing that we're considering within these ranger possibilities that.
At this time throughout the company outside of its long term guidance.
Gotcha and it doesn't sound as though it's a fiscal 20 necessarily rollout.
Yeah, I mean, there's there's an opportunity I think to <unk> to get something started this year, but certainly I don't think we're gonna be in a place where what we do this years material to the to the results this year.
Gotcha, and secondarily last year and the springtime Lenny.
You used a personality Lilly ponds I believe what's the name of the individual who spoke it'd be half of the other spicy chicken meat chicken krispies strips and you don't recently I've noticed that you have what what appears to be some kind of a promotional tie in possibly with sonic the hedge hog and Tony.
Tacos, you know <unk> can you give us some thought around that and is there a movie debut and or promotional tie end to calm and you know what's happening in that regard.
Yeah, we actually were able to tie into the song Hedgehog, a movie and both through social digital and even some games that we put out a we were able to create quite a bit of engagement with consumers around the movie NR tiny tacos, we thought it was a great way, particularly around Super Bowl time.
To create quite a buzz about what was going on with tiny tacos and what what's going on with Jack in the box in lieu of a a very expensive.
Super Bowl commercial this seemed to be the right way to go about it so really happy with the way my team sort of thought out of the box to create some momentum with tiny tacos and doing it in a way that was very economical so feeling good about the the promotion, we actually gave away a bunch of price.
His throughout the Super Bowl for folks who are willing to.
Hashtag on our behalf and we got to a very favorable response and a significant number of impressions for participating in that way or more so than we had gotten in the past and even than we had gotten in some of the.
More direct media related Super Bowl events in the past so.
Sort of kudos to the team forgetting this thing Oh on the right foot I think one of the ways that we stretch our marketing dollars is through innovative approaches like this and I would expect that this play between what happens.
In social and digital and what happens on television will continue for us going forward.
Thank you next question comes from Andrew Charles.
Great. Thank you Lee I know you talked about other menu innovation in the pipeline for 2020, besides tiny tacos, but to play Devil's advocate given the encouraging start you're seeing with the product which is a permanent menu addition, what I extend the promotional window and continue to fuel advertising support and save the other innovations for me rainy day or another.
Time, rather than take a risk can change advertising focused to new menu item.
Yeah. So you know we shared the launch of this as a promotional.
And this promotional windows and also as a permanent item, but we haven't shared you know the duration of time that it will be you know promoted socially digitally and also you know through television. So I will give my marketing team the room.
To flex as they see fit to make sure that this is getting pulsed as often as it needs to and continued if necessary on air.
But I think they've got a pretty good plan laid out so that we don't have these completely dormant you know periods at the same time don't.
Can't say at this point in time that we're committed to television as a primary vehicle as the has to go forward and for 2020.
Got it Okay, and then Lance and let it be elevated number one Q store closures do you still stand by the guidance from the Fourq you called it the number of net restaurant openings should be higher in 2020, even 2019 or does require a higher take rate in the new development incentives or you know something more charges to achieve this.
Yeah first of all we've got a ton of the gross openings at 25 to 35, we remain on track for that we did we did see a few more closures in the first quarter. You know probably then we would normally see historically, we close up <unk> percent or less per year. So you know as ever.
Right now I still feel pretty good about about thinking that that number. It's gotta look better this year than last year, but beyond that I don't want to give them a lot of specifics because we just don't talk and that number very often as you're well aware.
Yes.
Okay. That's helpful. Thanks.
Thank you.
Question comes from John.
And Sir.
Great. Thanks, just a few Ah ones from me can you discuss you know you've had no a couple of quarters in a row of ER positive traffic at your company stores and it's three if you include the flat traffic and a.
Third quarter 19, so can you discuss what you're seeing there and specifically is it higher frequency was it at existing customers are drawing in new customers and then just on that point. It sounds like you know value spend the primary driver that that under $5 price points. So is that accurate assessment or or is it brought.
Other than that and then I have another question after.
Yeah. That's a great question, so our most fickle and least loyal consumer is the consumer that's looking for a purchase is below the five dollar mark.
And I think what you're seeing is that we're we're able to capture back of some of those consumers those consumers do like Jack in the box, but their deal shoppers and if you don't have the deal out there, they're not going to a they're not going to participate.
We're also doing a lot of upselling because the way that the promotions are created where allowing the sandwiches to be upsized and we're also creating oftentimes aside or a snack that can be upsold and added to the meal and that that's worked out very favorably as well so that's sort of.
What's driving some of the improvement in track transactions versus prior year trends.
Yeah, we think that's something we're going to need to continue doing.
Okay, and then just money on on the decision for you to leave clearly it's a board decision on who comes in next but since you're on the board can you share any thoughts on the characteristics are background of the potential CEO that comes in takes on the seat.
I think first and foremost they have to be the type of individual who truly respects all the stakeholders.
Participate in this company I have historically looked at those stakeholders as our franchisees our employees our guests.
Our suppliers, our shareholders and I think it's important that whoever comes in realizes how important is that all those stakeholders are respected and have a seat at the table in the decisions that we make.
I also think they'd have to be growth oriented because the.
The whole idea behind getting the company to this place was to be able to focus on this one brand and grow it successfully and so I would look for someone who is a very growth oriented in has some prior experiences.
You know growing this type of content.
I think outside of that as you think about who we are as brand we're not a typical QSR. Although we play in this space. So I would hope that whatever comes in.
I would have an open mind to the equities that had been established for this brand over 65 years and understand how to capitalize on that versus trying to turn the brand into something that maybe it isn't as capable of being so I know that the board is a very concerned about those same thing and I would.
I expect that wherever we land on will be somebody that we feel comfortable can deliver all that on behalf of all our stakeholders.
Great. Thank you appreciate it.
One more question comes from John Glass.
A question.
Thanks, Thanks, very much fitting me in can you talk little about the instead of fetches instead of program that you've offered and what the uptake has been so far how long does it take for this to kind of roll through the system and maybe if you could just be specific about a one what how does this enhanced the returns like returns prior to incentives and post instead as <unk> what kind of deal is this.
[noise] or what theoretically if you constructed at what did you think you needed to do to Incent them.
And is there an appetite to grow given that you know the the current cost environment I know the franchisees probably a different cost structures in the company stores, but high single digit labor in a solid mid single digit body inflation, that's a difficult environment to operate in and probably there for a difficult to think about do I want to continue open stores until you know where those are headed so maybe.
What their cost pressures are and if that's weighing on their development pace as well.
[noise] John its Lance I'll take this one unless he can jump in if if he needs to her wants to from an incentive program will actually just in the process Oh Rolling This out mail and so we're actually a little further ahead with you guys. Then then having communicated and spend a lot of Thomas franchisees on this yet.
Well actually going to be spending some time on this year in a couple of weeks with the franchisees when we see a mixed but what I can tell you is we did get some input from franchisees as to what we felt like what helped drive growth.
And I'm certainly they had thoughts around both the continuation of royalty abatements, which has been our traditional plan as well as for some of the particularly some of the smaller folks and ability to put some dollars in and really reduce the cost of the upfront investment they're having to make the we've kinda landed on a two pronged.
Roche, where you can either have oh royalty incentive or abatement. If you will which is somewhat of what we do now one approach where you get a more moderate royalty abatement, but you get a fairly meaningful cash infusion up front.
That does help particularly if you want to look at it from a sales for investment ratio really helps out sales to investment ratio I'm not going to get the exact numbers until we roll it out officially the franchisees and a couple of weeks, but.
We think it will be received well we think it answers both those folks that might need a little more capital and also those folks that.
Really are are just as happy to continue getting a longer royalty break when you think about are they kind of willing to open with some of the cost pressures interestingly. What we've seen is franchisees continue to want to open restaurants, if they think they're going to be able to make good money.
And we continue to have some of the best unit economics, and the entire industry, they're still only a competitor perhaps to that that has a better percentage margin. The we have and that puts more money to the bottom line. So.
I think as long as that continues and as long as we're able to continue to provide.
Kinda good innovative products, they're going to continue to drive sales and offset some of those cost pressures. The did the franchisees will in fact, the open to building on these incentives can only help but.
Okay. Thank you.
I think that completes today's call. Thank you all for dialing in.
<unk>.
That concludes today's conference you may disconnect at this time.
Great day.
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