Q2 2020 Earnings Call
Hey, everyone and welcome to the Jack in the box Inc. second quarter fiscal Twentytwenty 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 and answer period. Please use your headset when asking a question. Please do not ask over a speaker phone at this time for opening remarks, an introduction I would like to turn the call over to Rachel Web based pricing up Investor Relations and strategic analysis for Jack in the box. Please go ahead.
Thank you Sheryl and good morning, everyone. Joining me on the call today, our chairman and CEO, Lenny comma and executive Vice President and CFO Lance Tucker 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 adjusted EBITDA as well as restaurant level margin and franchise level margin. Please refer to the non-GAAP reconciliations provided in yesterdays earnings release.
Following today's presentation, we will take questions from the financial community.
Please be advised that during the course of our presentation and question answer session. Today, we may make forward looking statements that reflect management's expectations for the future, which are based on current information and well management will provide current thinking on this call around the potential impacts of cobot 19 on our business given the unprecedented nature.
That's pandemic and the rapidly changing environment any forward looking statements should be considered with this elevated level of uncertainty.
Actual results may differ materially from these expectation based on risks to the business.
Safe Harbor statement, and yesterday's news release and the cautionary statement in the company's most recent form 10-K are considered a part of this conference call material risk factors as well as information relating the company and operations are detailed in our most recent 10-K 10-Q and other public documents filed with the SBC.
These documents are available on the Investor section of our website at Www Dot Jack in the box dotcom.
A couple of calendar items to note. This morning, Jack in the box management will be attending Oppenheimer's consumer conference virtually on June 16.
Our third quarter ends on Sunday July 5th and we tentative we plan to announce results on Wednesday August fast after market close our conference call is tentatively scheduled to be held at 830 am Pacific time on Thursday August six and with that I'll turn the call a virtual Lenny.
Thank you Rachel and good morning.
I'd first like to take a moment to express my heartfelt thanks to our restaurant team members for keeping everyone safety top priority.
As we provide for the needs of our guest and first responders I'd also like thing or corporate employees franchisees and suppliers for their partnership flexibility and ingenuity. During these unprecedented times.
It is truly been remarkable to see the way the brand has rallied to meet the changing needs of our consumers.
Sales have rebounded to positive for the first four weeks. According to three improving each week to most recently positive 80 plus percent for the week ending may 10th.
Based on these results I would describe our outlook going forward I'm cautiously optimistic and we will continue with an approach that will be careful and conservative.
Next we'll hear more on this momentarily.
But as I contemplate the next chapter for Jack in the box. It gives me great piece to know that sale and cash flow remain robust. Despite the challenges brought on by the client of ours.
Taking a look at quarter to and as we outlined in our release in April our business was on a positive sales trajectory in the second quarter, averaging over 5% versus prior year.
A week's proceeding the impact of the rumor.
This is on track to be our strongest quarters since quarter three of 2015.
Driven by the strong performance, our newest menu item tiny tacos.
As I've shared on previous calls tiny tacos is intended to restore some of the value related equity. We lost when we raised the price of Orange County to for nice and tacos to $1.19 a few years back.
Although it's still too early to determine the staying power of our new Titan Taco offering we're seeing a great consumer response, not only showing up in our time talking field, but it's also helping to bring attention to the entire Taco category.
Hi, tacos, not only drilled transactions, bringing back some of our lapsed users, but also bolstered check sizes as their frequently added on to guess orders.
Good 19 had a significant impact on our operating results in the second quarter and Lance will recap. This in a moment before we get to that I'll briefly mentioned some of the changes in consumer behavior, we are seeing in our business today.
First consumers are utilizing delivery and our mobile app more than ever.
Delivery sales have more than doubled in the quarter, we're experiencing record high usage of our mobile App was active users doubling since the start of dependent.
As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers.
With 80% utilizing at least three of the major providers.
Second occasions of shifted away from the traditional breakfast daypart with consumers and no longer commuting to work with.
But since we offer anything on the menu anytime soon.
We're seeing plenty of Frac design selling later in the day and we believe this is one of the positive factors contributing to ourselves at this time.
The shift in consumer behavior, and led to a significant increase in our check sizes as consumers are now placing larger orders.
Buckley from multiple people.
I want to thank the Jack in a box team for their agility and rapid response to these changing trends.
Within the first two weeks in March restaurants swiftly moved to a new operating model to facilitate drive thru and take out only.
The corporate team shifted to working from home and our supply chain insured restaurants were all receiving math gloves and sanitizer, while also making the appropriate adjustments to reduce supply risk.
I also want to think our marketing team for pivoting our menu offerings to address current consumer needs for indulgent food travels well and meals to provide great overall value.
Our for 99, spiky popcorn chicken has hit the mark by ensuring great value portability taste in temperature in a way that lends itself to delivery takeout and driver.
Our tiny tacos are equally portable.
In a popular tick up box with high marks on value for the money and credibility.
We continue to generate success with our price pointed bundles such as the for 99 Triple bonus Jack which offered a successful upsell option to four pads.
This upsell option is not only easypark cruised execute.
It also supports the profitability of these promotions for us and our franchisees.
With major sporting events and concerts cancelled and consumers commuting less the team quickly shifted advertising both in placement and in messaging.
We shifted media from events and Billboards to streaming entertainment and digital content to help me consumers where they are.
The team also launched campaigns such as hashtag stay in a box.
To promote sheltering in place.
And to build adds to communicate our dedication to seek weve being open to serve the community through delivery drive thru and our mobile app.
I believe all of these changes have allowed us to fair much better than we initially expected.
We are feeling bullish about our current trajectory, especially in light of lapping our strongest quarter from last year.
I'll now turn the call over the last for a closer look at our second quarter results and current trends Lance.
Thank you Lenny and good morning, everyone.
Before getting into the detail as your undoubtedly aware operating performance for the second quarter was largely negative versus prior year.
Driven by the weeks impacted brother Kobin 19 pandemic.
Rather than Mitcham. This for every Arden must be too I wanted to just take this upfront.
Operating if you asked for the second quarter, what 50 cents as compared to 99 cents last year.
40, my sense was primarily driven by lower sales versus the prior year and higher DNA cost during the quarter.
Our system wide comparable sales decreased 4.2 personnel and the second quarter EPS, we preannounced.
Okay cool sales decreased 4.1% comprised of check increases of 6.4% and transactions declined 10%.
Each of its called trail decreased 4.1% third quarter.
Oh system was off to a great start to the first doesn't reach a quarter. It should also increased 5.2%.
At this time transactions were also positive for the entire system.
As we felt the impact of the coated my team pandemic later in the quarter sales for that's five week period declined by 17%.
Mellow me to give an update on what we've seen thus far in the third quarter for the four weeks ending may temper same store sales have been positive up around 1.6%.
You mentioned the sales have been accelerating with sales the weekend being made to up over 8%.
This is versus the start of our strongest quarter last year and its testament to the branch nimbleness during this time.
During the second quarter.
Okay restaurant level margin decreased to 20.6%, yeah from 27.6% last year.
Most of this decline was driven by labor wage inflation was between six and 7% in the quarter of California moved to $13 per hour in January.
Also maintained higher staffing in the restaurants during the weeks of a pandemic impacted sales.
To ensure a positive experience for our guests and consistency in employment for our employees.
Additionally.
Food and packaging packaging costs increased 1.6% the quarter driven by commodity inflation of approximately 4.4%.
Also the company acquired eight restaurants in January or to any impacts from the pandemic.
Just had an unfavorable impact of approximately 70 basis points, our company restaurant level margin.
Franchise level margin decreased $2.7 billion compared with the prior year quarter, primarily driven by the decrease in franchise same store sales.
That's a person or total franchise revenues franchise level margin for the quarter was 38.6%.
I felt the changes from a new lease accounting standard franchise level margin percent working 41.4% very comparable to the 41.3% from the prior year.
To help ensure the financial stability of our franchisees during this unprecedented.
We provided reps marketing and capital requirement release.
I guess some color on our franchise page prior to the pandemic Forever train Turkey owns and operates approximately 15 to 20 restaurants were strong unit volumes, averaging approximately one and a half a billion dollars.
Hello franchisees preserve their liquidity, we first postpone the portion rather rent payments.
As we previously disclosed we postponed collection of approximately 40% of our franchisees equal rent payments. This told was roughly $9 million that will be collected beginning in July 2020.
This does not impact our rental revenues on the income statement, but does in fact, our balance sheet and cash flows.
Similarly, wherever she really from some of our landlords and a pass through over $10 million savings to our franchise for the month of April May and June collectively.
Second we provided marketing really through marketing fee reductions in payment deferrals in.
In addition to the fee reduction for March from five per sub 4%.
Announced yesterday.
We will also be reducing April marketing the percentage to a range of 2% to 4% based on sales volumes.
Feeds are typically collected at least subsequent month, but we have postponed collection. Another remains gauge as described in our press releases.
Third we delayed all 2020 development agreements by at least six months in suspended any other capital investment requirements.
Second quarter franchisees opened five new units, bringing us to 16 opens through Q2.
We anticipate much of the new unit development previously expected in the second half the 2020 will push into 2021.
Given the sales performance since the start of the paid they're making a relief our franchisees seed liquidity of our franchisees generally remain strong.
As a reminder.
We've had a temporary or minimal temporary closure see real quarter.
We're blessed and 1% of our restaurants closed on any given day again in a testament to the health of our restaurants.
That's the primary nature of a franchise relief.
Through the extension of payment terms. These relief efforts, you're not have a material effort or material impact rather on our franchise level margin.
Moving onto the rest of our PML.
Advertising costs, which are included in estuary.
Were $3.5 million on the second quarter compared with $3.9 million in the prior year.
This decrease of point 4 million was due to the reduction in marketing piece for lots of March and April within the quarter.
In addition, the company did not make any incremental marketing contributions during the quarter [noise].
[noise] DNA increased $7 million during the quarter.
Driven primarily by Mark to market adjustments related to company owned life insurance policies.
Whereas we refer to them coli policies. These policies are sensitive to swings in the stock market and the losses associated with these coli policies were $4.4 million in the second quarter, given the stock market declines.
Legal reserves were also higher in the quarter by roughly $1.8 million.
Both the coli in legal reserve amount art non cash items.
Our tax rate in the second quarter, which elevated 42.3% with the biggest regions being reduced income and up to call. We losses are not tax deductible, we anticipate the tax rate to remain elevated for the remainder of year. Our 10-Q contains additional details on the tax rate.
Now the turned to our business outlook and comments on our liquidity and Beth.
Like many in our industry.
I've seen business performance change significantly and sales volatility increase and we do not know how long these trends will sustain because of its I'm certainly we're withdrawal in both our 2020 and our long term guidance.
Further while our performance has held up relatively well given the uncertainty around the magnitude in duration of the financial impacts caused by the pandemic. We continue to believe it it's prudent to take actions that will maintain bolster our current healthy liquidity position.
To provide a quick update on cash the company ended the second quarter with 160 members using cash on the balance sheet.
Which 132 million was our restricted.
As of Monday, This week that number is unchanged.
We temporarily caused our share repurchase program.
122 million or share repurchase authorization remaining.
Similarly, we are temporary pause or quarterly dividend, which is typically paid in June.
While we remain committed to returning cash to shareholders, we are prioritizing maintaining financial.
Flexibility in the near term.
We will continue to monitor monitor our capital allocation policy each quarter with the goal of reinstating the dividend and returning to share repurchase as soon as we have more clarity around the scope and duration of the disruption to the business cost by covered by team.
In an abundance of caution we also drew down $108 million of our variable funding notes, which is effectively our line of credit.
This combined with even though the comps.
Creases, our debt to EBITDA leverage ratio to slightly higher than the top targeted.
Because not put us at risk with any covenants associated with our debt structure.
As a reminder.
Our primary debt covenants as our debt service coverage ratio or D.S., CR and that must remain above 1.75 times.
Well, we do not typically disclose or actual ratio at the you know the second quarter.
Yes, CR was roughly two times the called minimal we had a significant amount of cushion.
Lastly, we have scaled back capital spending for the year.
And our spending only on central and sales driving projects at this time.
That concludes our prepared remarks, I'd now like turn call over to the operator open up a lot of questions Cheryl.
I'll ask a question. Please press star one due to time considerations. We ask that you. Please limit yourself to one question and one follow up per term. If you have any additional questions humane freak you at that time. Thank you. Our first question is from Brian Brickner of Oppenheimer. Please go ahead. Your line is open.
Hi, Good morning, Thank you for the question.
To be trending with your same store sales up 8% currently and I think you said positive quarter to date. It is very impressive in and it is outperforming the industry I think so you seem to be doing something right, but it also begs. The question of do you think theres now a tailwind in your business from this new environment role.
Living in and in other words as states reopened and things start to normalize or how do you now think about how that will impact your business from here.
Yeah, Brian This is Lenny I think a couple of things one.
When you look at some of the guest related feedback about our service, we're actually seeing that.
The sentiment around our services improving.
I think that combined with the food that we're executing that seems to be.
Working on all levels family bundles, the craveable sides and snacks that or add ons and then also the LTL shows that are driving great value.
It just seems like a all of those things.
Our working exceptionally well at this time and I can't imagine that as the dining rooms open.
And we have an opportunity for even more capacity that we would lose momentum I would expect that we'd be able to maintain what we've been able to achieve and so where we said in my plan remarks cautiously optimistic.
Moving forward, we think the teams done a great job I'm sort of setting us up to non we get through this time of come out of it stronger.
Yes, I think a lot of it really comes down to use.
A safe transaction for the consumer in the employee.
It's an efficient sort of convenience oriented transaction right now.
And I think the team is executing really well and those friends and then most importantly, the food that we're putting in the marketplace right now is exceptional and I think that he travels really well so for the takeout and drive through portion, which I would expect and delivery, which I would expect would continued to be a growing trend.
Having things that travel well I seem to be playing playing well into our hands at this time. So yeah, we feel good about maybe a little bit when in the sales felt like you said earlier, we'll just we'll remain cautiously optimistic going forward.
Thank you Lenny.
Your next question comes from Gregory from Port of Bank of America. Please go ahead. Your line is open.
Yeah. Thanks for the question just maybe can you talk a little bit about operationally I would guess that the drive through right. Now is up 30, 40% sales to kind of be doing break, even and I'm curious where where you're seeing.
That is that that in who's to chat is that in more shoulder period sales.
And I guess because of that more of the business going to drive through are you able to manage labor a little bit more efficiently than than you were in the past just because you don't have the dining and does that change how you think about the timing of went to open died and thanks.
Yeah. Good good question at the actually as we meet with our franchise Advisory Council. Those are the exact kind of conversations that we're having this really.
Two fold conversation first is about.
Making sure that as we opened dining rooms, we do it safely for the public and also for the employees.
And then the second is theres lot of efficiency right now through the drive through for multiple reasons.
One is a lot of what we're seeing ourselves being driven by much larger orders and a higher average check.
As I said in my remarks earlier, you know the easier. These your entire families that that people are purchasing four and typically when you have.
That type of transaction you'd actually puts a toll on that on the driver employees to meet the speed requirements, because just so much more food going through with each.
Transaction.
But I applaud the team for doing a great job in adjusting to this type of demand and as you mentioned the labor efficiency associated with these transactions is rather high. So we would expect that our franchisees, we'd be able to flow lot of cash flow to the bottom line.
As we think about dining rooms reopening.
Yes, it's a less efficient.
Transaction, but my anticipation is that.
With jacking Abbas being only 15% dine in we won't lose too much of our efficiency as we start to reopen dining rooms, essentially when you look at our trend prior to the pandemic.
70% go into the drive doing another 15% take out.
I would expect that even as dining rooms open up the 15% remaining for dine in would be much lower than that.
Within historic levels, and we will likely maintain a lot of the current efficiencies that we gain.
Thanks, Thanks, Larry.
Your next question comes from John Glass of Morgan Stanley. Please go ahead. Your line is open.
Thank you very much for first just a follow up can you just unpack the quarter to date or the most recent trends between.
Jack and traffic and also just by Daypart, you mentioned people pivoted away from breakfast breakfast still actually at a negative that you're actually achieving this despite that drag.
More broadly Lenny I know the companies in a very different position that was no wait no die, but when unemployment spikes back then you know your traffic did suffer do you think you now have or do you need to make further adjustments to value going forward just cognizant. The fact that employment will be nearly 20% probably by the end of this quarter.
Yeah, So a couple of things Oh.
The things that we have typically disclosed and stay away from ones, we haven't but I'll address the last part of your question first we actually are seeing.
In the trends.
The first four weeks this quarter.
Most recent trends are actually showing transaction improvements, although obviously most of our sales for coming from Jack we're actually seeing.
A sequential improvement in week over week.
In a traffic so feeling pretty good about about that and as you talked about the unemployment.
Trend, we've got massive unemployment right now and Jack in the box I think the isn't it isn't a great position just based on the offering.
And that we have two to drive a significant amount of sales and traffic I'm going forward and I think the business.
The business May shift during this period of time to higher check average and lower than historic transactions, but.
What we've been able to see over the last nine years is year over year same store sales growth. Despite some of the transaction erosion that we've experienced so we feel like we are well suited to pivot the offering in a way that maintains the sales and flows through the profit even if we have to.
Sacrifice some of the traffic, but I don't believe that the traffic will be sacrifice because of a lack of value. When you look at what we're providing today both in the bundled deals and also in the size and snacks is actually a tremendous amount of value and that's just looking at into traditional sense, where values. It is equated to price.
And quantity of food that you get for the price, but if you look beyond that what we're seeing from consumer information is that the consumer is starting to see value in a much broader way, they're looking at the digital component that drive through component the delivery component as also component.
Value and they're looking at the safety.
The transaction as a component of values. When you look at family bundled deals that can be delivered through a drive through takeout.
Or delivery in a safe manner at an overall reasonable price.
That all seems to be on the table right now in the consumers evaluation of value and based on what we're seeing from our promotions and also our overall mix in sales.
It does seem to be proving out in the way people are using.
Using the brand right now so just I think it's going to be important that.
We not only look at some of the historic.
Drivers of our business, but we're gonna have to pivot the way, we think about the brand and the way we present product to the consumer to meet their current set of needs, which has evolved quite rapidly.
Got it thank you.
Your next question is from Alex Slagle of Jefferies. Please go ahead. Your line is open.
Thank you good to hear from everyone. It's why if you could talk about the speed initiatives will target of getting a minute faster.
I'd like to any one just how how this has impacted given the franchisees tighter belt on capital spending and how much can be accomplished just due process changes and other.
The changes.
Absolutely so a couple of really good things.
The operations team did a great job identifying short term relatively low cost process changes minor equipment equipment adjustments.
That could be made to significantly improve throughput in the drive through.
And all of those things not only were identified but also tested and sourced prior to the pandemic. What the pandemic has done is obviously not allowed to just based on social distancing for folks to actually come together for some of the installation and project project rollout.
Throughout the field, but we do have 300 plus locations that have already received.
Those adjustments to their operation and we have created some optionality for franchisees to work.
Exactly with the suppliers to continue to move forward with that at their own pace, even during the pandemic, but the main take away is we are sort of standing at the starting line very much ready to execute that the first minute that.
Some of the restrictions are lifted and we can safely get folks into restaurants to make those adjustments to equipment.
And then on a long term basis. The team has already started to identify.
Much sort of broader reaching a changes that could happen operationally and to some of the equipment and procedures that would allow us to go the next step in reducing the complexity and taking out many second from the drive your transaction so feeling good both.
On a short term and long term basis that we've actually identified the path forward. The biggest impact is that in some of the longer term things that we've identified the pandemic disrupted our ability to go into restaurants and test those adjustments and new pieces of equipment I'm at this time, so when we.
Them out of the restrictions, we will start to be able to test some of the longer term things.
Going forward, but main thing I would want the shareholders to now is that as we look at some of those short term low cost adjustments and we couple that with some of the operating.
Procedural.
Adjustment and just more accountability and training that has been all identified that whole part of this system is actually would generate that first minute.
And all of that is what I'm, saying we quickly.
We continue with once the restrictions are lifted.
Great. Thank you.
Got it.
Your next question is from Dennis Geiger of U.P.S. Please go ahead. Your line is open.
Great. Thanks, and thanks, Lenny best of luck and of course.
Just just wanted to ask another one looking into the recent sales trends and kind of the learnings.
Specifically, just thinking about the customer segmentation anything more on kind of new customers, you're seeing how you're thinking about that if so.
Related kind of on the new product value bundle mix.
Any comments on kind of whats been most impactful there and how that might shape.
The mix of those two going forward and then I'd just be curious on the geographic split if you guys care to provide any commentary. Thank you.
Yes, a lot a lot there I'd say a couple of things when we look at the trend in general I think.
The agility the.
Marketing team operations team supply chain.
As far as the impact to the consumer entity operation those were the things that.
Clearly.
Put us in a position of strength as we entered into demand dynamic when I look at for example, and working with delivery providers our team very quickly.
Even even though we prior to some of the social distancing really starting to sweep the nation they started to.
Create family bundles and also delivery.
Third party delivery.
Emotions that that would allow us to attract.
New consumers, particularly when you look at the purchase occasions shifting dramatically during a during a pandemic right folks aren't drive and works or they're not going through the drive through for breakfast, but those same folks are looking for an opportunity to order in or take out for lunch and dinner and even earlier.
Turning it into late night. So when you look at some of the family bundles I think that sort of hit the mark there, but also what we're seeing is that.
During times like this folks are looking for craveable items that they can trust they want to know that when the food is taken home were brought home through a delivery provider. The products are still going to be hot they're gonna be crunchy, they're going to be fresh whatever they need to be when you look at the popcorn chicken and the tiny.
Tacos for example.
Those products hold really well many minutes after their cooked and I think using the packaging that our team put together and also selecting those products to be featured is a big deal and even when they looked at the Burger promotions that they were going to promote they tried to focus on products that traveled well that didn't have an abundance.
And produce on them because those are the types of things that watered down the product and make the bread soggy and don't meet the experience. So great. Once the consumer actually indulges. So I think all of this sort of fore sight going into the pandemic answered insight about what the consumer Whitney.
Is really what's.
Sort of paying off for us.
I think when you know to your question around how the product sort of lineup and drive the.
The outcome you kind of goes back to what I'm, saying before I think convenience and the definition of it as being expanded and although in value. The definition of that is being expanded and you've got to bring all of these things together around affordability and the way the food is going to taste, whether is eating immediately or 20.
Minutes later, you have to bring all of that along with price into into your sort of.
Position when you presented to the consumer or else I don't think I don't think they're going to be repeat customers.
And then from a from a daypart perspective.
I think it is important.
Today more than ever that jakone boxes offering the entire menu 24, seven because the consumer is buying a lot of breakfast items sort of later in the morning and early afternoon.
Because they're they're patterns have changed right there, they're not commuting to work, but folks still at times want to go out and grab some breakfast, but they're not doing that at 630 in the morning to doing it more like 10 o'clock in the morning or 11 o'clock in the morning early afternoon those types of things so.
We're seeing that the 24 seven menu is really helping and when you look at the post sort of nine P.M. timeframe. So many restaurant companies are struggling right now financially and with cash flows that they're cutting cutting their hours, Sweden, even offerings that would typically be open until 10 o'clock at night or shutting down.
In early and often times just drive through businesses, particularly Jack antibodies that are available so lot of things playing into into our hands right now that are helping.
From a regional perspective.
Maybe I'll, let lance sheer view.
Sort of tidbits on that [laughter].
Thank you letters.
Yeah, we traditionally have answered a lot of on the regional saw what I can tell you are looking back at this last week.
We really seem very similar.
Types regional performance and every every region. This past week was up at least mid single digits. So we're seeing.
It's pretty consistent performance across those regions and thankfully no region looks like is necessarily being left behind us as we continue to drive good results.
Thank you.
Your next question is from Jeff Bernstein of Barclays. Please go ahead. Your line is open.
Great. Thank you very much.
Question related to that the franchise system.
One when I'm, just wondering if youd well for any thoughts on the sentiment evolution, whether that's any feedback from franchisees on the support mantra has offered in terms of abatement that deferrals or perhaps anything on their current financial or leverage position.
And then as you think post pandemic Lenny I recognize it's probably wouldn't be under your watch, but how do you think franchisees will think about the significant geographic growth opportunity I think you mentioned lower cost maybe there's opportunity for to go only restaurants are you said changes in operations and equipment as a potential catalyst Im just wondering on the other side of this whether this opens.
Franchisees to increasing interest if you were able to bring the cost down a spike holding the sales quite well any thoughts would be great. Thank you.
[laughter].
Jeff performance I'll start with this one.
I'll turn it over to letting when I'm done, but relative to franchisee hills first of all.
As I said, it's kind of in my prepared remarks, we feel like they were in good shape going into pandemic, whether you'd be.
I'm in half on average and like all brands, we do have some units.
Struggled more than others, but but generally we felt like the system was strong.
And we continue to feel that way, we have not closed any units permanently due to the pandemic.
As we said we've had less than 1% even temporarily closed and those were due to low sales at the time that was up four.
Anything related to pandemic other than just reduced sales.
And then when you look at the performance.
The report that we provided support landlords provided.
And the fact that many of our franchisees, we believe that received PPP loans, either receive them or waiting on them, we feel like they're cash position.
Remains quite strong.
So overall, we feel very good about the health of the franchisees I know some of the questions I've seen some announcer around.
Franchisee debt levels and that's something.
But we haven't disclosed and we're not going to do so much as Tom but I think it's fair to say.
Liquidity standpoint.
Our franchisees are in good shape.
Some of that probably taken all the little more debt due to the PPP loans for lot of that's going to ultimately be forgive them. So we feel like we're going to emerge from this some pretty good shape, which which leads to your developed a question.
No from a development standpoint.
Thanks.
There are likely to be some opportunities we've got to get a little further along in this and make sure.
Your strategy balance sheets look the way, we expect some hope they'll look coming out.
Of the situation, but with that said, we do have a lot of work underway to make sure we're providing.
A really affect of affordable cheaper unit.
To franchisees.
Consideration or that would include very minimal seating and walk up windows and some of those things. So I don't want to get too far ahead of that.
That is that at some stuff that is in process, Maryland, frankly wasn't process. Prior to this now we think we could hopefully have some some ability for franchisees to get out and want to grow units and then effectively Lenny anything you'd add there.
I think you pretty much summed it up plans.
That's the book let me.
Thank you appreciate that.
Your next question from Chris Ocull of Stifel. Please go ahead. Your line is open.
Thank you good morning, and I also wish you the best of luck Lenny.
The and linear I apologize if I missed this but has consumer behavior changed in markets, where restaurants have been allowed to reopen like let's say, Texas over the past couple of weeks or even Tennessee.
Just curious if you've seen any kind of change in daypart usage or any other changing behavior in those markets.
Yeah, it's really too soon to tell we.
We still have the majority of our restaurants working in the format that we had to move to when social distancing started and so vast majority are.
Drive through with takeout and delivery being the primary.
Drivers of the business just this past week, we we started working with the franchise community and company operations.
On procedural things that they need to put in place and signage packages that we prepared for them for sort of eventuality of dining room openings, but even in states like Texas, where.
They have allowed sort of loosening of those restrictions.
There are certain cities or.
Market areas, where the franchise community decided not to immediately open those dining rooms, as they want to sort of be cautious about the phased approach.
Getting those dining rooms back open and mainly what what they're concerned about is health and safety first and foremost and then keeping me operation efficient with some of the changes that we've all experience. So.
Definitely too soon to tell but it's something that we're looking at almost daily and we meet with our franchise Advisory Council via conference call every week to talk to them about these types of things and to make sure that we're gathering sort of their feedback and sentiment about it and in the last call.
On a lot of great feedback and as you can imagine.
Various opinions, but the dominant opinion was less sort of slow walk that reopening of these dining rooms, and we're going to give our franchisees. Some optionality on the pace in which they move so they can ensure they do think safely.
Okay.
Great. Thank you.
Welcome.
Next question is from Eric Gonzalez of Keybanc. Please go ahead. Your line is open.
Hey, Thanks, So it seems like you know the national chains that they're a little bit more focused on core menu items and value. It's clear that jacketed big when were tiny tacos, and new popcorn chicken, but I'm just wondering how the the pandemic has has changed your ability to test new products and what your views on LTL is going forward, whether there's been any changes to your.
Innovation pipeline and maybe you can comment on beef costs as well that would be helpful. Thanks.
Yes, good question so.
Frankly, the pandemic are.
Product marketing teams it created a pipeline of products that was almost a couple of years long and they had tested many of those products already so we.
We don't believe that the pandemic is actually going to impact our ability to rollout successful LTV of just based on the fact that most of what we'd be rolling out was already tested in sourced prior to the pandemic.
But what would you did mention about core products and focusing in on that.
Judgments, we've made which was based on what we believe the consumer would be looking for ways to make sure that whether it was an LTL or it was a court product, we're focusing on things that were familiar and things that traveled well and I think that's what we'll continue to do until we're in a place where some of the pandemic related consumer.
Sort of changes start to wane a bit and so at this time I think we've got a great pipeline. We are not concerned about our ability to utilize that pipeline going forward successfully but we'll likely.
Lean more into the products that are in that pipeline like I said it would travel well and then are more familiar so popcorn chicken is a perfect example of that if we were going to do something that was.
Less familiar like a you know maybe a new Italian inspired chicken sandwich that had.
Been for ever since we've done anything like that Jack probably not the right time to do that right, but popcorn chicken right down the middle of fairway, the consumer really knows what to expect before they get the product and then they're pleasantly surprised to know that we have a spicy option as well as irregular option and when you look at the quantity of food.
And the packaging and portability and the way that keeps it hot.
It really all works quite well, but again focusing on the familiar.
Thanks, Eric as Lance I'll jump in on the on the Beast Us real quick.
Just to give up here feel obviously before our guidance, but our initial guidance this year relative to commodities.
Was to be about 4% up per year.
And commodity markets are showing a lot about volatility.
But I don't know overall protein markets go crazy that we would expect to.
Be really any worse than that kind of 4% specific beach.
We're in constant contact with our suppliers as of right now we're not expecting the have supply issue.
Formulation does use a little lower half non beach.
The remainder express fifties camel, our supply chain team.
Usually has done a wonderful job of buying forward on them, which kinda protects against cost pressures on the 50 cents.
So I'm not sure exactly how much we have four contracts that we do feel like we're having good strong condition.
Certainly for the rest of 2020 on the contract out as well.
Very helpful. Thank you.
Your next question is from Lauren Silberman of Credit Suisse. Please go ahead. Your line is open.
Thanks, I'm asking how bald while you mentioned delivery the driver a recent trend you want to quantified at current delivery next and then a large competitor of yours recently announced that make a sizable incremental advertising investment. So how are you thinking about any incremental corporate contributions to supplement the advertising Ben Thank you.
Yeah. Thank you. So we haven't commented on the delivery mix, so I'm going to stay away from that one we don't feel like we need to incrementally invest in marketing at this time, we think that the most important thing that we did was to adjust the marketing to target the offerings that consumers will more likely to purchase.
So for example, we're not spending a whole lot of time advertising breakfast items right now.
And then also we adjusted away from the channels that would be sort of irrelevant. For example, we do a lot of advertising on live sporting events that doesn't exist for us today, but people are streaming video more so than they ever had they're playing video games more so than they ever had and they are spending a ton of time on social.
Media, so we pivoted the advertising to those spaces, and we think that it wasn't necessarily an incremental investment that was needed but it was more so make sure you know where the consumers are and go go attract them in those spaces. So when you look at our sales results, which is far outpacing the competition they've just done.
Didn't seem to be a compelling reason why we would throw more marketing dollars. It at this time, but certainly in the future we were to see some volatile trends and keep our minds open right now we feel like we got the formula rate.
Great. Thank you.
Your next question is from Robert Derrington Telsey Advisory Group. Please go ahead. Your line is open.
Yeah. Thank you Lenny listen, we're going to really Miss via the transparency and all the color you've provided overtime and helping us understand the business. So best of luck to you.
In the future.
My question a couple of things one.
I'm just wondering what the company's view is on the need for additional funding.
We've seen a number of other companies essentially look towards outside sources to provide additional liquidity and good I'm just wondering does the perspective of.
Management and the board about the need for that and then I have a quick follow.
I'll, let lance address that one as you can imagine and spending a lot of time paying attention to it.
Good morning, Bob.
Couple of things first of all were not actively racing doesn't mean will roll that out.
But given our current performance.
Correct that our cash flow has actually been positive.
It's not something that that we have have needed to pursue.
Any kind of aggressive fashion, so won't rule it out but.
I don't think is something we need to be doing at this time.
Thank you Mark.
Okay, and then my follow up Lance.
For you I'm just wondering about.
Your perspective on the other quit bonus depreciation opportunity and how.
How much additional liquidity cash flow that could ultimately provide the company.
In a recapture of.
Pass taxes paid.
About that's out in the team is still working up so I'm not prepared to give us a number on this today.
But when we have on.
Certainly make it down to the entire investment community.
Gotcha, Okay again best of luck and thanks, Lenny for everything you've helped us with over the years.
Thank you that's what you too.
Your next question is from David Tarantino of Robert W. Baird. Please go ahead, Sir your line is open.
Hi.
Good morning, Hooker, both are doing well I.
I had a question just philosophically about.
Kind of how you're thinking about investments in the business and.
I definitely appreciate the uncertainty of the current environment, but.
Just curious about the citizens to pull back on dividends and pull back on capital spending and and actually lower the advertising fund contributions.
In light of the recent turn positive sales momentum it seems like.
Those two are a little bit disconnected are those decisions are a little disconnected. So I'm just curious why those decisions now is there that you're questioning the sustainability of the trend nursing or is it.
Some other reason and then I guess secondly, when would you be comfortable starting to lean and.
On investments in bringing back the dividend et cetera. Thanks.
Yes. Good question. So I'll start and then I'll hand over to land to provide more color, but what I would shares as and when you look at the volatility that we've experienced in the business in essentially six to seven weeks.
To us it seemed prudent to take a very conservative approach at this time, obviously with our performance.
It could be very easily justified to go ahead and loosen up the rate at this time and certainly if the trend continues and as I said earlier, we're cautiously optimistic about it.
Then I would anticipate the range, we'll certainly loosen, but the last thing that we want to have happened, particularly when we want to be in a position of strength to support our franchise community as well as to make sure. The employees are supported through this time to come out on the other end even stronger the last thing we would want is to make some money.
Thats it moves are losing the.
The purse strings that this time only to find ourselves you know six weeks eight weeks later being in a position where we're now having to raise.
Cash and we can't we don't foresee that.
But this is probably the most unprecedented time that we've ever had to manage through in our history and it just seemed like with the amount of volatility and sort of unknowns about this thing. The last thing. We should do is too is to loosen that range with only six weeks or so under our belt. So.
Just wanted to share that and also with certainly anticipate that at the trends continue and we become more sort of secure in the future in our ability to sort of forecasting that we will not only loosen up the rain, but also look to do the types of things that would show our shareholders that this was just the temporary adjustment.
And that long term or certainly committed both on the share repurchase and dividend side to returning lots of cash to our shareholders then I'll pass it over to land for any additional color.
Well as well said money I really don't have anything bad there.
Yeah.
And thank you money that that was a great explanation.
On the advertising fund contribution specifically I'm curious why you chose to do that sounds like you made that decision.
Very recently, so I guess why why allow for a lower contribution at this stage.
Yeah, it's interesting I know for a lot of folks what we what we've seen it.
And heard from competitors in the way they are approaching it is simply not.
What we believed was necessary and we certainly didn't believe it was right way to utilize cash. So some folks are going out and say look we're going to invest a whole bunch of extra dollars in advertising, but the question that we really should be asking is.
What eyeballs are going to actually see all that advertising because television is still the largest driver on the advertising side for what we do so when you remove that television programming you removing those eyeballs and even though you're converting a lot of your spending and your attention to streaming and digital and gaming and all the rest.
There are not as many eyeballs in those platforms that are easy to to attract as you can do in television so from our standpoint.
It made more sense to adjust that spending for both ourselves and our franchisees and do a more targeted approach with the spend than to essentially throw money against a wall that we didn't think it was actually going to generate.
Return so that that's the reason that we looked at it that way and I.
I would say that based on the results that where we're getting that that it was the right call I truly believe that the more targeted approach.
The right call at this time and I think it's not only sort of saved our franchisees. So.
Some money, but it's also allowed us to at the same time still maximize number of eyeballs that would respond to the things that we're putting in the marketplace.
Great. Thanks, Lenny and good luck.
Thank you.
Your last week, we have time for one more question.
Certainly your last question is from John Tower of Wells Fargo. Please go ahead. Your line is open.
Great. Thanks for taking the question I appreciate it Lenny and I hope you enjoy the golf.
Just a couple ones from me first following up on the marketing piece.
How much.
Do you think of the shift that's taking place right now a away from traditional television media and towards kind of these digital channels will end up sticking after a we kind of returned to some sort of normal meeting say sports are back on television do you think theres a permanent shift that's taking place right now, especially for you guys.
Or do you think it all kind of revert back to pre crisis levels, and then I have a follow up question as well.
I have to believe that there's a certain percentage this that will stick it's hard for me to predict how much but.
I'll use my own personal behavior. It has changed dramatically during the pandemic I downloaded more apps I participated more in social media, it's really the most convenient way to get a lot of things done, particularly when you don't have access to the traditional means.
Our mode that you use and so.
I think many consumers are behaving similarly, and forming new habits, and I think there's got to be a percentage of those new habits that are that are going to stick. So I would imagine that as.
You know our marketing teams evaluate where to target the spend they'll likely continue to focus and some of the areas that are focused in now and at a higher rate than they did prior to the pandemic.
And with that do you expect potentially dollar spend to go down overtime, if it's essentially more efficient through these channels and then the additional question on top of that.
So the story pre crisis was the remodel, but the drive-thrus across the system and obviously this crisis has emphasized that channel even more so.
Your competitors have also talked about doing a lot more curbside. So it has this crisis, maybe accelerated plans to to remodel once things reopen again or even altered the way you're thinking about how the remodels are going to take place given what you've experience right now.
Yes, so I think that.
It is obvious to me that.
The drive through.
We will need to be a focus going forward and obviously, which you've heard from me in the past is that it was a huge focus for me and I believe that needed to be a huge focus for our brand in our franchisees.
I won't speak for our incoming CEO Darren but he does have a fair amount of experienced in the food industry and I think as he looks at those trends will be able to help lead the team I mean, the direction that he thinks is best but I'd imagine that in.
Some shape or form they'll be heightened focus.
On the dry through business.
Yeah.
And then you'd asked about advertising dollars and whether or not we thought the overall spend would go down I don't believe so I think that Jack in a box when when we have an opportunity to go back to television advertising and also some of the out of home Billboard and other advertising that's proven to be effective for us overtime.
We're going to want to utilize dollars in that space and likely as usual always find ourselves in a place where you know we believe it's more about balancing than it is lowering the overall spend and today just with as I said some of those channels not being available it just didn't make sense.
Just men, but certainly not a trend that we would expect to continue.
We have completed the allotted time for questions I will now turn the call also did let me call My CEO Jack in the box for closing remarks. Please go ahead.
Thank you as this will be my last earnings call I wanted to take a moment to personally thank the investment community for their time and investment over the past six plus years.
I enjoyed the candid conversations and very much appreciated. The respect you always offered to me and my team.
I have a tremendous amount of confidence in the future of the Jack in the box brand.
And all of its wonderful people.
And I will think of you often while I'm sleeping in surfing and golfing in my retirement.
All kidding aside I will Miss this place and all that it offered to me and my family.
I hope all of you and your loved ones, the safe and and wish you all have very bright future. Thanks again for joining us today and this concludes our call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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