Q3 2019 Earnings Call
Good day, everyone and welcome to the Jack in the box incorporated third quarter fiscal 2018 earnings Conference call today's call is being broadcast live over the Internet.
A replay of the call will be available on the Jack in the box.
Corporate website, starting today during the question and answer period. Please use your handset.
The question you didn't ask already speaker phone at this time for opening remarks, and introduction I would like to turn the call over to Carlisle, <unk>, Chief Investor Relations and corporate Communications Officer, we're checking the box. Please go ahead.
Thank you and good morning, everyone.
Joining Rachel and me on the call today are chairman and CEO Lenny comma.
Executive Vice President and CFO Lance Tucker.
In our comments this morning per share amounts reported diluted earnings per share.
Operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis.
Excluding gains or losses on the sale of company operated restaurants.
Structuring charges.
The loss on early termination of interest rate swaps.
And the impact sometimes you form other companies deferred tax assets as well as the excess tax benefits from share based compensation arrangement.
We are now recorded as a component of income tax expense versus equity previously.
Adjusted EBITDA represents net earnings on a GAAP basis, excluding discontinued operations.
Income taxes interest expense.
Gains or losses lets say one company operated restaurant impairment other charges depreciation and amortization and the amortization franchise tenant improvement allowance.
Our comments May also include other non-GAAP measures such as restaurant level margin in franchise level margin.
Please refer to the non-GAAP reconciliations included in the earnings release as well the fiery results recast for the adoption of the revenue recognition accounting.
Following today's presentation, we'll take questions.
Please be advised that during the course of our presentation or question.
Okay are considered as part of this conference call.
Material risk factors as well as information relating to company operations are detailed in our most recent 10-K 10-Q and other public documents filed with the SEC.
These documents are available on the investors section of our website at Www Dot Jack in the box dotcom.
A few calendar items to note this morning.
Our fourth quarter and fiscal 2019 ends on Sunday September 29, and we tentatively plan to announce results on Wednesday November the 20th after market close.
Our conference call is tentatively scheduled to be held at 830 am Pacific time on Thursday November 21.
And on a personal note after more than 30 years in the restaurant industry, including 11, a wonderful years with Jack in the box. This will be my last earnings call before I retire this month due in great hands with Rachel plants, and Lenny and with that I'll turn the call over to Lenny.
Thanks, Darryl let me just take a moment to congratulate you on your retirement.
There really is no one more deserving when you.
For the year to be one of the most talented professionals I've ever had the pleasure and honor to work with.
Corporate ethics care for people and commitments business.
That's been second to none.
Complete except my heartfelt thank you.
Yeah for the business I want to start by sharing a little bit about what fueled our third quarter results and why I'm, so bullish about future.
System same store sales for the quarter increased to their highest level since Q1 of 2017.
With all Dayparts positively contributing to sales growth.
And year over year transactions were the strongest weve seen in nearly four years.
This sales and traffic momentum has accelerated into Q4.
More than three quarters of fiscal 2019 now in the books.
We're on track to achieve our ninth consecutive year of system same store sales growth.
Driving sales growth in Q3 was the right mix of product innovation value and operational execution.
Quarter, we targeted our marketing spend towards three bundled deals that offered a little something for everyone at compelling price points.
Our primary promotion for most of Q3 was a 499 combo featuring Jack's new spicy chicken strips, which is on trend and a great example of culinary innovation.
Most markets also featured a 499 triple bonus Jack combo, including our signature currently for us.
And we brought back a guest favorites with our two for $4 breakfast Christoph.
Emphasis on value is not adversely affecting our average check in fact, the average check for value Prime Campbell's in Q3 was significantly higher and other orders due to up sell and add ons.
It's important to note that our approach to value is not negatively impacting restaurant level profitability.
Our margins remain among the highest in the industry.
Generally refrained from deep discounting tactics, especially on our core products, which we believe would not be in the best interest of the long term health of our brands.
Many of our value oriented promotions like Jack's spicy chicken strips.
Our either new menu items or limited time offers which minimizes the risk, including the equity for products that are loyal customers Grace.
We also strategically build in up sell opportunities with motion that can generate a higher check while preserving margins.
Looking ahead, it's important that we continue evolving in all areas of our business to meet the ever changing needs consumers and drive sustainable sales growth.
Let me share some of the initiatives that are underway to do that.
First.
We will simplify the Jack in the box restaurant operations to the guest experience will be more consistent at about a minute faster on average phase one of this initiative rolled out across the system in July .
But this phase really just scratching the surface when it comes to making meaningful improvements and benefits speed of service.
Throughput.
Did you that we need to change the way we operate in fact, the house and that's exactly what we'll be targeting in the next phase of the program.
As changes are implemented we expect to provide faster and more consistent service for our guests and ultimately deliver more sales and profits for our operators.
Second Jack in the box has rebellious personality that differentiates us from other brands.
This appeals to our loyal fan base, who live online and in a world dominated by Instagram means gaming and social media influence.
We plan to capitalize on the strength of our brands to build relationships with our fans and promote our craveable products at competitive prices.
Social and digital space allows us to meet consumers, where they are so we'll continue to build up our app user base and expand in other digital avenues to further fuel our sales.
Next.
We will work with our third party delivery providers, who now cover more than 90% of our system to further expand coverage, while also making the purchase more seamless for our guests and restaurant teams.
Another area of focus will be enhancing the drive thru experience.
We are currently testing different amenities.
Intended to do just that including digital menu boards, new branding elements canopies and designated parking for pickup and delivery.
We plan to finalize the elements of this upgraded experience and to begin rolling out the program into 2020.
Now I'd like to switch gears and address some of the structural components of our business.
With our securitization completed we're planning to resume share repurchases this quarter.
Including the 150 million, we returned to shareholders in Q4 last year, we continue to expect to return more than 1 billion to shareholders through 2020, twos and former share repurchases and dividends.
In addition, we will soon complete our transition to an asset light single brand entities.
When we roll off the last of the transition services agreements App with Qdoba.
And with our Refranchising initiative concluded, we're seeing higher and more predictable levels of franchise revenues and increasing free cash flow.
It's certainly taken a lot of effort to get to this place and I'd like to thank my team for their loyalty and contributions as well as our key stakeholders their participation and patient.
With that behind Us I'm extremely bullish on Jack's future and I'm pleased to see that were already starting to experience some early wins.
Now I will turn the call over to Lance for a more detailed look at the third quarter and our expectations for the full fiscal year Lance.
Thank you lighting and Carol.
I want to reiterate how much we appreciate the time and energy devoted to Jack in the box.
And the investment community at large.
Been an honor to have one of the industry's experts here at Jack in the box.
And I've enjoyed the relatively short time, we've worked together, but wish you all the best.
Now to review third quarter operating results.
And provide an update on where we are tracking so far in the fourth quarter operating EPS for the third quarter was $1.87 as compared to one dollar last year.
The seven cents increase was driven primarily by a good comparable sales performance the gain on sale of a restaurant property favorable tax rate and fewer shares outstanding.
All of which more than offset higher DNA and dilution from last year free rent.
Adjusted EBITDA for the quarter was nearly 58 million as compared with approximately 64 million last year.
Adjusted EBITDA includes the negative $7.1 million impact of an unfavorable jury verdict, which isn't the DNA Lance.
I want to note that the gain generated by the sale of the restaurant property that I. Just mentioned is not included in adjusted EBITDA rather the gain is included in the impairment and other lines.
System wide comparable sales increased 2.7% in the quarter.
Company owned comp sales increased 2.8% as transactions improved flat, which was our best transaction performance in several years.
As Lenny mentioned strategically designing these compelling value bundles in a way that also enables upsells allows us to capitalize on incremental transactions, while positively impacting check average.
Dec increased 2.8% in the third quarter comprised of approximately.
2.3% of pricing with mix, increasing 50 basis points.
Franchise comparable sales increased 2.7% in the quarter.
Company restaurant level margins remained strong at 27% for the quarter. This is 50 basis points lower than the prior year due primarily to increases in labor and food and packaging costs.
Most of the labor increases were due to hourly wage inflation, which approximated 6.5% for the quarter.
As we anticipated commodity inflation increased in the third quarter by approximately 3%.
Given our more favorable commodity inflation.
In the first half of the year, we remain on track for our full year inflation guidance of approximately 2% as noted in the release, we are keeping our full year guidance for company restaurant level margin at 26% to 27%.
Franchise level margin.
Increased by $2.8 million in the quarter or about 5%.
When compared to last year's recast figures due primarily to strong sales performance and Refranchising.
Advertising costs, which are included in SDMA.
Decreased $1.9 million versus the prior year due to refranchising and an incremental $1.5 million in spending last year. The company did not provide any incremental contributions in the quarter.
Well, we still expect DNA for the full year to come in at the 1.8% to 2% of system sales that we've guided to.
DNA in the third quarter increased to approximately 2.5% of system wide sales.
Major components of the increase versus the prior year listed in yesterday's press release for the most notable increase is coming from the unfavorable jury verdict discussed earlier.
And an increase in incentive compensation offset by significant favorable adjustment to our workers comp and general liability insurance reserves.
Five new restaurants opened in the quarter, bringing our year to date total to 16, all of which are franchise restaurants.
We remain on track to achieve our full year guidance of 25 to 35, new restaurants in 2019.
Now, let's be a little bit about our refinancing on July eight we completed our securitization.
Bringing our leverage ratio to approximately five times EBITDA.
In line with our stated target.
As we've discussed there are numerous benefits to the securitization structure, including flexible covenants and amortization.
A good fixed interest rate and the ability to increase our leverage above what we can borrow with bank debt.
The details of the securitization can be found in our filings. So I won't go into more details here.
But as you can imagine we're excited to have this refranchising behind us. So we can focus fully on driving the business day to day.
We are.
These numerous questions about how to model interest expense moving forward.
Blended interest rate on the $1.3 billion of senior secured notes is just over 4.4%.
Interest expense will also include an additional $8 million to $10 million in 2020.
For the amortization of transaction fees as well as fees for letter of credit.
Rating agency fees and other miscellaneous items.
On a related note our board has authorized an additional $200 million in share repurchases, bringing our total share repurchase authorization to roughly $300 million.
We did not repurchase any shares of common stock in the third quarter, but as Larry mentioned, we do intend to resume share repurchases in the fourth.
In anticipation of the securitization closing, we terminated our existing interest rate swaps from the third quarter, which resulted in a pretax charge of $23.6 million.
This is reflected in interest expense the termination of these swaps.
Also impacted our tax rate.
Which was a benefit of 17.9% for the quarter at first in my career anyway.
Excluding this impact our tax rate was approximately 20% per quarter for the year, we now expect our tax rate to approximate 20%, including the termination of the interest rate swaps.
Or 23%, 24%, excluding the swaps.
But the impact of the spots.
Hey onto our performance so far in the fourth quarter.
Through the first four weeks of the fourth quarter system same store sales have accelerated from Q3 results and we currently have positive system traffic growth.
Given the strong performance so far in Q4, and our good Q3 comps we have increased our full year system same store sales guidance, who up at least 1%.
We've also updated our guidance for tenant improvement allowances do $15 million to $20 million for 2019. This change is mainly due to the timing of the projects.
To wrap up our remarks, our operating performance in the third quarter was strong driven by good sales and business fundamentals.
Before starting out even better.
We also completed our securitization and have now achieved our target leverage ratio of approximately five times EBITDA significant milestone has been a long time coming.
We look forward to 2019 being our ninth straight year system same store sales growth into continuing the momentum into 2020.
With that I'd now like to turn the call over to the operator to open up the call for questions and answers.
Operator, we're ready for questions. Please.
Thank you.
Due to time considerations, we ask that you please limit your.
Thank you good morning, Oh, Wow Carol congratulations on your retirement.
Just a true professional full of accomplishments that I think are all very well known.
Just an incredible human being true friend personally im going to Miss you in this industry, but I'm sure our pads will continue to cross in the future, but you'll.
Finally be missed.
Lenny.
You saw clear inflection in traffic this quarter from what you've been running at for several quarters now a clear traffic inflection relative to your peer set.
Can you just dive a little deeper into what really drove this now why this happened now what's shifted in your business or in the environment.
They really drove this improved performance.
Yeah, so given all share a little bit about it.
What's fueling it today and sort of how I see that progressing into tomorrow. So.
You look at today, it's really a couple of things one is new product introductions that have been placed into the market.
In the form of these bundles and very strategically placed.
In a way that allows for the add ons and Upsells.
At a price point is very attractive.
At the below $5 Mark.
But the ability to either add proteins or additional add on sides and snacks has worked very well for operation.
So I think we have essentially found.
Our way to compete.
In the QSR base effectively.
On value and I think that we're missing that for quite some time.
But do you anticipate that we will continue to do that into the future.
But whats also viewing the sales is that our operations have been making ongoing improvement in service.
They've been able to reduce the number of customer complaints and Isis complaints.
Okay.
Centrally half people walk away from the Jack in the box business.
Yes, we have looked at in the past those sort of disappointments are very strongly correlated to our sales and transactions.
Growth and order.
Happy to see that we're making improvements there and these are just sort of the early phases.
Hi, there.
Okay.
At this point, it's really those two basic things that are driving it.
As we look at what will be a little bit tomorrow will continue with the limited time offer bundled deals at competitive prices and we'll continue with the strategy that allows for the Upsells and add ons.
But the second thing that we'll do is we'll have a permanent a new menu items that would be intended to restore some of the everyday value that we lost when we increased our taco pricing now there will be some.
Permanent additions coming in the future as well.
And then we'll be focusing on faster and more consistent service simplifying our operation, we believe thats a decent sized sales layer.
We do have a new vice president of operations services, who has worked in this area for other major brands has been very successful.
And he's already identified what we believe.
Pretty big opportunities for us to simplify the operation for our crew and do it in a way that really does drive more consistent.
We will have an all new data thanks for that and just a follow up you know you talked about accelerating trends in the fourth quarter.
You know it is happening at the same time that a very large players doing dollar tacos can you just confirm I guess, you're not seeing a negative impact from that and.
Can you also confirm that comparisons for the quarter get easier for the next two months.
Yes, Brian the last period of our quarters, we talked about last year was the softness if you remember we started out kind of in a 1% to 2% range a year ago, and we might have a quarter at a 25%. So the comparison, it's actually easier in the last month of the quarter.
But as far as the Taco sales from our competitor.
Can't really speak to how they're doing but our taco sales are currently up.
So I don't know that there's any correlation between what they're doing and how we're currently performing but certainly.
Oh, we're happy to see our Taco sales are increasing.
<unk>.
Okay I'll pass it on thanks, guys.
Thank you the next.
No [laughter] hey, thanks, Thanks for the question.
I, just just going back to maybe the proceeds from the refinancing and how you thought about the uses of that cash and.
I guess two questions. The first is how should we think about the timing of which.
Your may begin to deploy that cash to shareholders and then as you went through the process of evaluating.
Kind of best uses for the cash did you consider maybe making a bigger investment in the business and you're making today and.
And sort of how did you go through that process of evaluating that and maybe possible uses of it rather than share returns.
Greg This is lance I'll take that one so first of all.
Without getting into the exact timing, obviously, we can get into the market pretty quickly once all the information is out there with yesterday's release.
Color on Saturdays.
So we'll be in the market quickly.
Relative to the use of proceeds.
Our free cash flow more than in terms of what we need.
In order to be able to fund the growth.
And reinvest back in the business.
So from a standpoint of how we intend to use the securitization funds, we do expect that that will be.
Oh used pretty much for for returning to shareholders, because we've got plenty of cash otherwise to make investments we need to make.
Great. Thank you appreciate it.
Okay. Thanks, Wow, Carol we're going to Miss you from the early days at Applebee's to the present, it's been a it's been a real pleasure.
And my question. My question is on first on comps when you talked about bundled value in some of the things you've done to stimulate growth you've been you've been at that for a while so I guess.
Maybe whats more recently changed and specifically do you think the competitive environment has really played a role in that you know I think when deep discounting was more prevalent you had been hurt by that so is this sort of a signal you're seeing less of that or is that not changed and what's really changed has been what you've been doing.
So being a significant amount of value in the marketplace.
So we don't necessarily.
Yes, we do see that whenever that occurs.
Okay, so their advertising dollars.
Positioning products, but the deals that are in the marketplace are still aggressive.
Prevalence so.
We feel that it's still a competitive environment and likely remain.
Forward.
Whereas what we did in the past, we would typically take core items and discounting.
And and we bundle them, but unfortunately, what that would lead to a straight down and that would not fuel sale. In addition, we didn't create the type of products that allow for protein add ons and door.
Alright, and snacks, nor did we innovate <unk> snacks.
Yeah were compelling add on to these LTL.
Okay.
Bundles that we're putting out there primarily ltos.
Typically a new item or a line extension that also were a couple of.
Complementary add on or up sell so it is very different from what we've done in the past easy to execute for the crews both on the upside and also back out.
The positioning of that as well as the execution through the operation is what's driving it.
And then I'd say on the advertising front I think we're doing a much better job.
Directing our advertising, particularly his social and digital space and we're also making sure that that advertising is being spread across multiple dayparts and offerings that we can balance out things like.
Breakfast versus a dinner or lunch offering and I think that that's a a more balanced approach as well so lots of tweaks that sort of happened since.
We started this I think much more effective today than we have been path.
That's helpful. And then just my follow up is on unit development. This quarter was also noticed notable in that you had flat growth year on year and had seen modest declines in prior quarters. How do you think the development pipeline is shaping up when we look in 2020 and other long term plans for getting getting back to unit development has combination labor market in some of the franchise frictions in the recent past they.
Taken a toll on that pipeline or how do you think about unit development over the next 12 to 18 months as you see it today.
John It's Lance I'll start with that one.
Obviously, given our 2020 unit guidance in November so I'm not going to go into a lot of detail, but what I can tell you is the pipeline right now is as strong as we've seen in <unk>.
2019, we will be in our 25 to 35 new restaurants.
I don't result.
In a in a net number.
And I would expect 2020 to.
At least like this year, we're going to get too far ahead of my skis.
Frankly should be better next year I, just don't want to get too far out on numbers.
So I think from a from a looking forward standpoint.
Particularly now that we have some of these other things behind us as well, we're going to really be focused on growth and we think the pipeline sets us up nicely to get off to a good start with that next year.
The last thing I'll say and then I'll, let he can add anything if you'd like to.
Is that.
Good results tend to fuel unit growth.
And so some of the other frictions side.
As we continue to to have a sustainable plan for calm some group business.
That should naturally lead to more interest in opening units.
Great. Thank you.
Thank you. The next question is from Dennis Geiger. Your line is now open.
Great. Thank you and Carol congratulations and thanks as always for for all your help and assistance and best of luck for sure in the future.
Lenny.
Lenny wanted to just ask another on on value and just kind of how you're thinking about the go forward a couple parts to it I guess just is it fair to assume given the success that you've had.
With the three value messages simultaneously that that generally is going to be how you're thinking about it going forward versus doing too.
At times in the past.
And then the other piece or two there is just a franchisee adoption on the value promos.
How generally high is that now if you could speak to that and and do you have good visibility that it's going to remain high given the results that you've seen and then maybe you touched on it just now but just the last point on the value.
Variety of price points Dayparts menu items.
Just based on the learnings you've seen so far that's going to continue to be the strategy is that fair. Thanks.
So a lot there I'm trying not to miss anything.
As far as the three versus two messages I think that really comes down to how big were going on any particular thing. So we have the launch of something that we think is pretty major you may you only two messages.
The area of focus but outside of that we're likely to have.
Significantly more windows marketing Windows, we will have three items marketed.
We do have a pretty high participation rate from our franchisees, but I think that.
That is conditioned on performance right. So at the end of the day, if we're putting the right stuff into the marketplace that allows franchisees to grow their sales and profitability than I would anticipate that that participate.
Stay high and certainly would respected it reducing if we weren't able to do so.
So I do think that or what you're seeing from us today will be a part of our strategy going forward, but I do think that it's important that we don't just believe that we can live on LTL those and.
Marketing.
I think we have to also restore some of the equity that we lost in everyday value.
And so you'll see us do that and I think that that creates more of a permanent.
Sales layer or restoration of a lost sales layer that allows us to sort of bring back we're bringing up the base of sales altogether and then everything else will ladder on top of that.
Great. Thank you.
I have learned a lot from you over the past 20 years.
So I just wanted to follow up on unit development Lenny could you talk a little bit about whether you are testing a new prototype if so how's it performed.
And when franchisees might be able to use it for development.
Not too much to say on that at this time, what I will say is that some of our franchisees who have been very strong developers throughout the years.
Actually contributed to the ideas around prototypes.
Prototypes and arch development Officer is currently working on a new prototype.
Yeah and it is also <unk> designed to.
Target the investments what with the consumer is going to.
Appreciate the most.
<unk> expense is growing it's growing through both delivery and order ahead and pick up also a huge focus throughout the industry on.
That whatever we do with the prototype wouldn't really try to address that.
It's a need we're not far enough along the comment beyond that but just know that it's an area of focus and one that.
Yeah.
Okay, and then could you provide some more detail on what you hope to accomplish with the digital menu boards. Obviously, we've heard a lot of competitors talk about different levels of technology that they plan to use in digital menu boards through the drive through can you kind of help us understand what Jack's expecting from those.
So what I'd say about digital menu boards is couple of things one it's a great platform.
It is more dynamic than our static newport's today, we have a pretty complex menu.
In order to essentially advertiser presented to the consumer all of the day parts that are available to them 24, seven it means that the menu board is pretty clutter.
Ah throughout throughout each day, where we can go to digital menu boards than what we can actually do is flex what is presented to the consumer so that what they're more likely to buy during that Daypart takes up more of the space that would be a huge thing for consumers and simplifying.
What they're reading on those menu boards and it would be potentially a contributor to not only ourselves, but also our throughput.
Eases the the ordering.
The other thing that you can do with the menu board.
Advertised directly to that consumer products that you're trying to sell some promotional items that you're trying to sell so there's an opportunity to do that and then also as you start to have a relationship with those consumers into the future.
If all of that platform to a place where you communicating with consumers on a one to one basis based on their history of purchases with the brand.
We're not 100% sure of that.
You know the.
Investment in the digital menu boards is you know go to pay off in all the areas that I mentioned, but we do believe that its worth testing along with the other components in it.
But we also would note that there are other brands in the industry that have decided not to use digital menu boards and they are growing so the highest you. Besides that we see in the industry today. So.
I think it's really just a matter of how we can capitalize on this for our individual brands, we're going to attempt to do so, but we're not going to we're not going to important when and if it doesn't pay off.
Great. Thanks.
Thanks.
Hi, Good morning, Lenny just a question I think you you referenced on on the operations.
Improvement there and I I was wondering if you could elaborate on what you're doing there. In addition to this business phase one you just rolled out.
Related to simplification and then and then secondly, I guess if you if you look back at the last couple of years.
Theres been a lot of change inside the company that.
Likely has led to some level of distraction and I'm wondering.
Your thoughts on.
Whether that has been the case and as Youve exited that period those.
Uncertainty do you think maybe a little bit more operational focus is what's helping drive some of the recent sales momentum you've had.
Thanks.
Yes, so on the operation side couple of things are happening first.
We ended Q3.
We rolled out the first phase is.
And often vacation.
Definitely.
Completed earlier in the year.
And it essentially reducing skews.
And simplified some procedures and back of house.
The feedback that we received from the operation It made it easier.
The crews to be trained.
And it also reduced some of the food waste.
And it had a marginal improvement.
You service, so all good things and none of those things negatively impacted the gas we felt like it was the right thing to get moving with some of those early wins.
What we see now is that when we study.
Our whole time.
For our protein and we start to figure out what are the what are the biggest detractors.
Consistency and speed of service.
Our new VP of operations services has identified a handful of products.
Essentially causing our bottleneck.
And we do think that if we can change some of the procedures and back of house specific to these items will be able to make it a lot easier for us to meet the speed objectives.
Now that we have some testing going on in that area today, and we're pretty encouraged by what we've discovered in pretty encouraged by what we think the size of the opportunity is so more to come on that but we're going to allow our new VP to do his job in to solidify a plan before I say too much about it.
As far as the the changes that we've experienced as a company yeah, they've certainly been distracting and although we'd all like to imagine that.
We can drive.
Above average results during a period of significant change.
You know that's difficult to do so I can say that look despite those changes I'm happy that.
We're tracking to have our ninth straight year of same store sales growth. So certainly the distractions haven't.
You know, taking the company down but at the same time I think there's way more upside and maybe what the additional focus will give us that additional upside that we've been wanting.
Great. Thank you and Carol my congratulations to your terrific Courier oil will certainly Miss you.
Thanks, David.
Thanks, just to echo some of the earlier comments, we will Miss you Carol I think I've worked with you for.
Almost 20 years, which just figuring that out and you are definitely the best.
So moving onto to my questions.
You guys touched on it but what is the franchise appetite to pursue the drive through Remodels.
And can you provide an updated timeline and when you expect to that remodel initiative to more aggressively began or get started.
Yeah I'll answer the second part of your question first we have essentially finished phase one.
Yeah, which is which was really just testing the stability.
Other components that we put some new branding elements out there.
And some of those things are you know internally lit. We also have digital components out there as you know some canopies.
And all of those things, we just needed to make sure that the hardware and software actually worked properly and held up to the elements. So we're testing it in some of the most extreme weather, whether it be rain and or see significantly high temperatures.
And we're discovering a lot about.
What components.
We'll hold off and which ones have not need to be adjusted so that was really the intent to phase one what now we will do is put in the hands of the marketers and operators.
And those individuals will take those platforms and essentially present them to the gas in a compelling way that we believe has an opportunity to drive sales.
We are only at the beginning phases of that in fact, I think the team had its first meeting this past week.
So we've got to give them a little bit of time to sort of get everything lined up and to officially kick off that phase two.
Part of the test and then once we can get a read on that we can start to hone in on timing.
And then lastly, as far as franchise participation for franchisees, it's very simple if theres a return on the investment and you can help me grow.
My sales and profitability at a reasonable investment size, then I'm all in and if you can't do that I'm, probably not all in so from our standpoint, we will keep the size of the investment.
Very reasonable.
Our franchise operators and we will also target a reasonable return so that franchisees will be encouraged.
That's really all I can say about it at this time, we think it can.
Really enhance the overall guest experience, but we do need to do a little bit more work before I can start to really share specific.
All right that's helpful and as a follow up you mentioned the add ons with the Florida, only nine combo meals, but where are you seeing the average check move too.
For those combo meal orders and have you been surprised by the customer response in terms of pushing that average check higher than potentially you thought it might go.
Yeah, So I wouldn't say that were surprised our marketers actually design.
The promotions to generate this result, so I would say we're pleased that we actually generated the result that we were able to one of the things that.
We've said consistently you've heard me say this many times you know, we do not want to erode.
Our brand.
In the in the process of trying to drive value or to compete quarter by quarter.
And I think we've done a good job of preserving our brand equity around craveable food and what Weve. What we then try to do is with that in mind present, some craveable options to the consumer so that they can come in at a reasonable price point. It all they're looking for is value, but if they are one of our sort of tried and true loyal.
Customers, that's looking for those craveable items, they're going to typically bundle more than what we presented to them.
Within that bundle deal and that's exactly what we're seeing so for example, the donut hole that we currently have out in the marketplace.
For a dollar it's a it's a convenient add on for the consumer it's an easy upsells for the crew.
It's a reasonable price. It's also a very craveable item, there really high quality donut holes.
So when we sell in throughout the day not just at breakfast so.
No again I think all this is sort of by design, because we know that we can't take an hour card single item.
Price is low and go into the marketplace and beat some of the national competitors, who compete in that in that space.
So for us you've got to find that sweet spot with.
Combos and craveable items that attracts you know a guess that maybe isn't just looking for value while at the same time, we're presenting something at value price for those who are.
All right. Thank you.
Thank you.
Question is from John Your line is now open.
Great Thanks, and to Echo sentiment earlier on the call Carol its been great working with you.
I learned a lot from you and best of luck on future endeavors.
[noise] not just turning to the questions first day on the digital side of the equation can you provide some insights into either customer adoption of delivery, maybe as a percentage of mix or perhaps some numbers around the mobile app ordering and registered users and where you sit today and then.
Next question is just on the permanent menu item on the value side for everyday value money that you mentioned earlier can you kind of give us some color as to what you're thinking here would that be something kind of new to Jack with respect to innovation or would it be something within.
Jack's kind of consistent.
Or jacks current menu, just perhaps presented a little bit differently to consumers and then sorry last piece.
Curious on the quarter to date trends any discrepancies in the different markets that you are present, and we heard one of your casual dining competitors talk about California, starting off the quarter on some weaker footing. So thank you.
Yes, maybe I'll take your last question first so when we look at it.
Our quarterly performance, we are really seeing improvement across all markets.
There are always the individual operator anomalies, but we do not see.
Any specific market weakness.
No. So I would just tell you that we are looking pretty good across our business right now.
As far as permanent value I'm, not going to really share any details around that all I can say is that we've got some things that are working really well we're excited roll them out next year.
And then about the digital space, we haven't really sharing percentage mix on digital.
The App is still a relatively small percentage of our business, but adoption continues.
The growing on the delivery side, our sales per store more than doubled in Q3.
Versus last year. So the way I would just look at digital and delivery for Jack in the box is that we don't we don't see this as.
What are the main delivery point or connection point to the consumer today.
But it is an area that we believe will grow significantly and we want to make sure that we're presenting this opportunity to the consumer.
Still 70% of our consumers are going through the drive through and of the remaining guests that go inside half of those are take out so.
You know from our standpoint over time, because we're we're mostly a convenience oriented.
Purchase, we think digital and delivery are going to make sense for us to plan, but again relatively small part of our business at this point in time.
And just on that last point on the digital piece have you done any exclusive offers so far only through the digital to get some uptake from consumers.
Yes, we have we've done a good number of those.
Thanks, especially to drive adoption and have people.
Sort of popped into the App.
Thank you.
Thanks.
Yes. Thank you.
Carol 27 years, it's been a long time and I I, just know that I want to be invited to the heck of a party that I'm sure you're going to have.
So.
Thanks on this issue.
Specifically Lenny I guess during this past quarter. This was the first quarter, but I remember you guys ever using a quote celebrity spokesman beyond Jack.
To market a product.
Can you give us a little bit of color around that and whether thats something that Jack.
Whether you might use again in the future.
Yes, so we use.
Melee ponds.
Who.
He's got a huge internet following sort of social media following.
We.
So to do that because we thought that.
It would create a sort of connectivity with that set of consumers and it's the it's the first time that we sort of reverse the way that we approach that typically.
We'll start with sort of a mass media play and then we will extend into social media, we actually started with social media in mind.
And then built that up into a mass media play and so thats why it made sense for us to use her in the campaign. She was wonderful to work with extremely professional.
Very talented individual who seem to have a passion not only for what she does but also for the brand.
And so would love to work with people like that in the future to continue to connect to our consumer base.
Gotcha. That's helpful. One last one follow up if I could on the the outlook for Jack Lenny deed easily Jack needs, a a plant based protein and its future or is that.
Kind of counter to what Jack is all about.
[noise].
I think it would be counter to what Jack's all about to simply copy the way everybody else is doing plant based proteins.
I don't think that it would be counter to Jack to have either a plant based protein and or some other sort of protein substitutes.
But we sort of pride ourselves on bringing things into the marketplace and an interesting way.
As we like to say in a world of French Fries will be the currently one so.
You know I would look forward to my marketing team sort of.
The new into play with some ideas I've seen some of them I think they're pretty exciting but at the same time, they're going to need to make sure that it is authentic to the Jack in the box way of doing things.
Terrific again, great quarter, and congrats Carol when Michelle.
[noise]. Thank you. The next question is from Andrew Charles.
Great. Thank you and and Cal Kipp, you said enough best wishes and thank you for all your help support and partnership we're going to Miss you and ratio of course, congratulations to you and your new role.
Can you guys talk about franchisee gross margins amid the value bundle strategy.
I realize the company operated gross margins were only down 90 basis points amid almost 3% inflation, but because these are higher volume stores that presumably have higher ticket sizes, and perhaps higher order counts. The franchise base is it fair to think that franchisees might be having a different gross margin experienced the value bundles, especially as threeq you commodity inflation stepped up.
Interest Lance I'll take that one.
No you're right in that we do have a higher sales base and how are you.
With that said one dollar margin standpoint.
We think the franchisees really were able to benefit.
From the way, we've gone about introducing value back into the market.
So.
Granted we're working on higher margin than than a lot of those guys are from a percentage standpoint.
But we really feel like this is a.
Got to be a benefit to franchisees.
And.
Yes. This is kind of the right way for us to approach value in a way that the franchisees dollar margins are going to grow as well.
That's helpful and one more just a clarification have entered the quarter to date trends been helped by an increase the mix of Taco sales. Some good news in the quick service Hamburger category around tacos.
I can't say that I.
That I've looked at it that way so I want to answer that question.
But I would say that we're happy to see our Taco sale.
And is anything anyone else is doing to contribute to that how are you.
Very good thanks, guys.
Thank you just wanted to clarify on the comp it sounds like you guys are saying that it's it's pretty broad based I just want to make sure I know you have.
Two pretty big markets in Texas, and California, and they're relatively different as far as consumer basis. If there is anything you wanted to mention about a difference in those are they both accelerating.
And then Lance just a point of I just want to clarify I think you said.
On the call earlier in the prepared remarks that you re committed or your restate it again or re reaffirmed the 1 billion returned by 2022.
Does that also infer then at the 175 million target for free cash flow by 2022.
Remains intact I know you you had something in there about Ti for 2019, I wonder if that factors into the longer term free cash flow as well. Thank you.
So I'll go on and.
Take your second question there Matt.
So absolutely we're going to be on track to return.
The billion dollars or more.
I will well.
Any changes to the long term guidance, we certainly would split let you guys know now.
And we reaffirmed as recently as a quarter ago, all of our long term guidance.
So we do expect to return the cash as we've talked about.
We reaffirmed at $175 million last quarter and no change as we've spoken to that and then as it relates to the T. Atlas that.
A reduction in the guidance for this year is really related to timing.
As we have updates to Trs or the money that we're putting in and contributing to franchise Remodels will update you on that what I can say I said this on the last call and I'll reiterate right now.
You would not expect to see that number go up from what we have already.
I'm committed to our long term plan and as we get more through the strategic process, we'll see if there's any opportunity to bring it down a little bit.
And just to confirm you have California and Texas.
Are both trending up as our most of our markets, though just to sort of reiterate I know those are California, Texas account for 70 plus percent of our total business.
And I know that there has been some news the other brands, we're experiencing softness in either of those markets, but we are seeing both of those markets with sales growth.
Excellent. Thank you.
[noise].
Thank you Carol congratulations and thank you for all of the help throughout the years.
In terms of G.N.A., obviously within the long term framework or that you guys are just now reiterated we're already in that sort of one eight to two range in terms of system sales. How are you thinking about that over the next year two years three years within the long term framework.
And Nick it's Lance well, what weve guided to in the long term plan is as we ultimately be targeting around 1.7%.
So still just a little bit of work to do there that but as you noted we are.
You know getting pretty close to that range now and that's what you would expect given as Lenny mentioned the qdoba.
Transition services agreements kind of coming to an end and most are restructuring we expected to do has been done still a few pieces left.
So so we're we're kind of thinking that 1.7.
Pretend to system sales.
Got it in terms of the Remodels and to drive thru enhancements anything that you would share a on the tractor side.
You know, what you're seeing in that and the tests.
In terms of sales lifts and then any update on the on the sales lift that you are seeing from the Remodels.
This is lance I'll take that one as well so it's already mentioned right now does the phase, Iran. With the draft, who has really been about equipment testing, making sure. The equipment works at a hold up to the elements and all those things.
We have not really introduced but we would expect them to be the major sales driving component.
So more to come on that once we once we've got.
Some of the digital menu boards.
Inflation and really doing some up selling and some other things that we would expect more drive sales.
Relative to the Remodels.
We're making good progress on the Remodels just to reiterate what we said on the last call.
Kind of our plan is to to move forward with the 150 or so.
Some of the oldest units in the system that needs some structural work as well.
We're well over 50% of those now and we have seen good lifts on those of mid to high single digits sales lifts. This is what I'm referring to there.
Thank you very much.
And I think we have time for one more question.
Thank you. The next question is from Laurence.
Thank you I just wanted to go back to delivery didn't meaningfully contribute to comps in the quarter and then what kind of modifications are you, making in the restaurant whether that be packaging store layout integration in the Pos just the delivery becomes a bigger part of the mix.
Both Carol and Rachel congratulations.
Lauren.
I don't think we've shared the specifics on deliveries contribution to comps.
I've been a little delivery is growing and growing fast it's still a relatively small part of our overall business. So I would say that.
Really what I mentioned about the new product introductions and the improvements to operations or guest service is the biggest driver.
And then I I would say as far as what we're doing to integrate our IP group is currently working with some of the major delivery third party delivery partners to integrate.
Their system into our Pos networks that were not how many different tablets.
Hi, Sabrina filter.
As well as our marketing Department is working with a third party.
Providers to negotiate down.
The the fees and so lot of work being done to make it just more palatable going for both the cruise guests and also our profitability. So more work to be done there, but we have taken the time to meet face to face with the leaders of all those major third party delivery.
Companies and they seem.
Very open to working with us for what would be.
Service.
As well as.
We continue to work with us to grow the business.
And we'll see where it goes from here and that will be largely dependent on what contribution is making to our bottom line.
So more to come on that but we do believe it makes sense strategically to play in this space since the consumer seems to be going here.
We will remain sort of cautiously optimistic about how to get it done the right way.
Thank you.
Thanks, everyone for joining us on the call today, it's been a pleasure to work with so all of you over the many years and I look forward to listening from the outside in on the next call.
Enjoy the rest of your day.