Q4 2020 Jack in the Box Inc Earnings Call
[music].
Good day, everyone and welcome to the Jack in the box, Inc. First quarter fiscal 2020, <unk> 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 when asking a question. Please do not ask over a speakerphone.
At this time for opening remarks, and introductions I would like the turn the call over to Carol Diraimo for Jack in the box. Please go ahead.
Thank you Mary on my end good morning, everyone. Joining me in the call today are Chief Executive Officer day, our inherent.
Interim principal financial Officer, Don number and treasurer of VP of financial planning in analysis on both.
In our comments this morning per share amounts reported diluted earnings per share we.
We will of course in non-GAAP items throughout today's call Inc.
Operating earnings per share.
Adjusted EBITDA as low as restaurant level margin in franchise level margin. Please.
Please refer to the non-GAAP reconciliations provided in Yesterdays earnings release.
In today's presentation, we'll take questions from the financial community.
Please be advised the during the course of our presentation in our question and answer session. Today, we may make forward looking statements that reflect management's expectations from the future, which are based on current information and while it may not that may provide current thinking on this call around the potential impacts of cope in 19 on our business.
Given the unprecedented nature of the pandemic and the rapidly changing environment any forward looking statements should be considered at this elevated level of uncertainty.
Actual results may differ materially from these expectations based on the risks to the business.
The Safe Harbor statement in yesterday's news release, and the cautionary statement in the company's most recent form 10-K filed yesterday are considered a part of this conference call material risk factors as well in information relating to the company operations are detailed in the most recent 10 day 10-Q at other public documents filed with the FCC.
These documents are available in the investors section of our website at Www Dot Jack in the box Dot com.
A couple of calendar items to note Jack in the box management will be participating in the Morgan Stanley Virtual global consumer in retail conference on December the first.
Our first quarter ends on Sunday in January 17, 2021, and we kind of the plants when the house results on Wednesday February 17 after market close.
Our caucus call is tentatively scheduled to be held at 830 am Pacific time on Thursday February at the 18th.
And with that I'll turn the call over there in.
Thank you Carol and good morning.
The first one to pick a little bit of express my continued heartfelt thanks to our restaurant team members for keeping everyone safety of top priority.
As we provide for the needs of our guests in the first responders.
I'd also like to thank our corporate employees franchisees come from.
Wires for their partnership.
Flexibility and ingenuity during these unprecedented times.
I'm excited to discuss our strong fourth quarter results. The first I would like to provide a quick update on work from with Onboarding Jack.
Our strategy of some key leadership positions, we are in the process of filling.
I can tell you we have talked of several of great Kennedy kind of.
At made tremendous progress on our CFO search.
This role will be pivotable pivotal to our long term strategy not only of the CFO, but also in terms of development of growth of the company.
[noise] outgrew the goal in the we have recently hired some one of them as senior Vice President franchise in the corporate development.
He will report directly in to me.
He will be responsible for leading the development in execution of franchise sales in real estate strategies and initiatives.
With his extensive background in the restaurant industry, including.
The including some of the terms most recent experience as Chief development officer at how helps in prior to that global franchise group.
Tim and I have also worked together before when I recruited him from both RV and promote schools.
You have in impressive track record of accelerating growth through innovative approaches in fostering exceptional relationships with existing and potential franchisees.
We did not previously having dedicated franchise sales leader of Jack. So we are very excited to bring them on board getting started to grow the pipeline of new units with our franchisees both existing and future.
We have also initiated at the CMO search but the.
In addition to has been vacant for the last few years.
While our two marketing SVP use of done a fantastic job of splitting the role of putting the customer first through this uncertain time, we're looking for in leader to come in in focus on three core areas for the long term success of the brand.
Overall brand strategy the evolution to a more digitally enabled experience in continued strength in product innovation.
I'm very pleased to report the we have made significant progress with strengthening our relationship with our franchisees in.
Including the resolution of the two year lawsuit with the National franchise Association.
Jack cannot succeed in less our franchisees succeed.
I'd like to think of this of the rates at historically, we path of the tons the franchisees at the fourth leg in the rates.
Now, we're bringing them from the starting line with us and by doing so we of Reenergize the relationship and the.
Look forward seeing this transpire in the further growth of the Jack in the box brand.
Lastly, I have met with the my leadership team extensively over the past five months to get a better handle on where the brand has been in just how far we can take Jack in the box at play.
In the share more of the details next year. After the CFO is onboard but I'm excited about the strategy that is being formalized.
Today's focus will be primarily on court quarter for outstanding performance, which has continued through the first seven weeks of the first quarter.
We have certainly learned a lot about where consumers are head of during the spend in the.
The continue the importance of digital the consolidation of transactions to drive higher check of game of the desire for more in Belgium.
As mentioned last quarter, Jack pivoted early in the pandemic to capitalize on changing consumer trends.
The including changing media placements many of the deliveries in offering in dolgin flavorful in portable menu items.
Many of these consumer trends held strong through our fourth quarter.
Same store sales in the fourth quarter were the direct result of the us increasing 12.2%.
We are very pleased with the sequential improvement from our third quarter is in full sales of 6.6%.
This improvement was primarily driven by transactions although.
Although the remain negative those consumers are using brands differently transaction consolidation in more premium product purchases drove strong check growth throughout the quarter.
Sales in cash flow remain robust robust in the company is in a very strong position of Mips, the net condemning Don.
Don will share more detail in this in a minute.
As we look at the results for the fourth quarter same store sales were the strongest in over 25 years since 1994.
I will take the minutes outlined some of the key success drivers.
Over the past few years the team has been dialing in the right value equations to drive overall sales.
In 2019 in in 2020, we experienced success with our 499 bundles in up sell in add on strategies.
We continue to see these price pointed offers appealing to our core consumers during this time.
We also continue to benefit from our innovation.
Since their launch in mid January timed tacos of remained highly incremental to our overall performance of the permanent menu item comes.
The consumer response remains strong.
Tiny tacos drove transactions and bolstered check sizes of the.
The frequently added onto the guest workers.
We relaunched many months she's in quarter four feature in the return of materials six of the $3 add on.
Moving our guest needs for craveable Snackable in Shareable size enabled us to further bolster check sizes in the quarter.
We brought back our popular spicy chicken strips in mid August we.
We found success in promotions with a thoughtful up sales strategy of spicy strips were no different as we offered to more chicken strips for $2 more.
We're also focused on digitally enabled consumer trends operating in Tempe, spicy chicken strips option available only at your delivery.
These upsell strategies are not on the easy for our crews to execute the.
In April the guest to get what the one at a great value.
Support profitability of these promotions for us in our franchisees.
Operationally, we improved our procedures related to the spicy chicken strips.
Leading the better quality, while reducing the brining sign to ensure guests to get their favorite spicy strips faster.
Thats the speed of service customer perception of the proved again in the fourth quarter.
During the quarter, we restart of the rollout of our holdings in enhancements to restaurants.
At this initiative will also enable higher quality products faster speed of service.
And it continues our focus on giving the guest in experience that is consistent and the quick.
Aside from these continued strategies, we're also seeing shifts in our business as a result of changes from consumer behavior in Mis code.
First consumers are utilizing delivering in our mobile at more than ever.
The other in mobile apps sales remain approximately double what they were prior to the endemic.
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.
We continue to integrate our Pos systems with the third party per.
Purveyors, allowing for simpler procedures for the restaurants.
Second while we have significant shifts away from breakfast and late night day parts earlier in the pandemic.
All five of our day parts were positive in the fourth quarter.
While traffic remains negative across day parts, we have seen significant rebound across all of them, including both breakfast and late night.
Third Weve experienced continued increased sales are more premium in indulgent items at.
Items, such as our home style chicken sandwich in classic Buttery Jack.
Consumers are now quick in large larger orders as well typically from multiple people.
These shifts in consumer behavior have led to a sustained significant increase in our check sizes during the pandemic.
As our sales continue to improve in the fourth quarter, we shipped at some of our marketing spend.
The media team has remained extremely nimble in any of the shifts in consumer consumption trends around gaming in video content to really meet the consumer where they are during this time.
We have increased our social media presence in converting our sport sponsorship in the digital formats.
Lastly, as the unit growth franchisees opened seven new restaurants in the quarter in 27, new restaurants for the year.
With the addition of Tim in the continued work on the new prototype we are ironing out the development strategy sort of invigorated long term growth for us in our franchisees, we look forward to sharing more about the strategy in 2021.
I'll now turn the call over to Donna our principal financial officer for a closer look at our fourth quarter results.
Thank you Darin and good morning, everyone at.
Operating EPS for the fourth quarter was one dollar in 61 cents EPS compared with 95 cents last year, the roughly 70% increase was primarily driven by strong sales.
The results across the system, coupled with higher restaurant level margin in the quarter.
Our system wide comparable sales increased 12.2% in the fourth quarter cash.
In the comp sales increased 9.6% comprised of check increases of 21.9% and transaction declines of 12.3%.
Franchise comp sales increased 12.4% for the quarter end total system wide sales increased 13.7% in Q4.
The difference between company of franchise same store sales was primarily driven by a few company owned locations that are heavily dependent upon dine in traffic.
Total location has had a drag of just over eight percentage point current overall company same store sales.
The sequential improvement from Q3, the Q4 was driven primarily by an improvement in transactions.
As mentioned in yesterday's release, the strong performance has continued through the first seven weeks of the first quarter of fiscal 21.
Company restaurant level margin improved in the fourth quarter to 27%, increasing 280 basis points from 24.2% last year.
This increase was primarily due to sales leverage.
Labor costs increased by 120 basis points, which was partially offset by continued pressure from wage inflation, which was roughly 6% in the quarter.
Food in packaging costs decreased 100 basis points in the quarter driven by a favorable mix shift at more purchases at premium items increased our average check.
Commodity inflation also at decelerated to approximately 40 basis points.
Occupancy in other costs increased by 50 basis points at higher cost for delivery fees and COVID-19 related supplies were offset by lower maintenance and repair expenses.
Franchise level margin increased 11.6 million when compared with the prior year quarter, primarily driven by the increase in franchise same store sales.
As a percentage of total franchise revenues franchise, while the margin for the quarter was 41.3%.
Without the changes from the new lease accounting standard franchise level margin would have been 43.7% at 2.9 percentage point increase versus 40.8% in the prior year.
Advertising costs, which are included in SGN day were $4.4 million in the fourth quarter compared with $4 million in the prior year, but remained constant at 5.1% at the company restaurant sales.
She DNA increased approximately $4 million in the quarter, which was largely driven by a favorable reversal of the legal settlement in the prior year quarter from.
Mostly offset by a favorable settlement related to credit card fees in the current year quarter.
Mark to market adjustments related to company owned life insurance policies for coli policies as we refer to the end drove a favorable 700000 dollar reduction in Gms day versus the prior year.
As we have discussed these policies are sensitive to swings in the stock market.
For the full year DNA as a percentage of system sales came in at 1.7%.
Our effective tax rate in the fourth quarter were 23.6% with a number of puts and takes.
Now to turn to our liquidity and debt.
The performance has held up well given the uncertainty around the magnitude and duration of the financial impacts caused by the pandemic. We continue to believe it is prudent to take actions that will maintain end bolster our healthy in liquidity position.
The company ended the fourth quarter with roughly 237 million in cash on the balance sheet at.
It's just under 200 million with unrestricted.
As a reminder, we reinstated our dividend in the third quarter, we did not repurchasing the shares in the fourth quarter and we do not expect to repurchase any shares. This quarter. We do however remain committed to returning cash to shareholders you will see in yesterday's press release at the board authorized an additional 100.
Good morning in stock buyback program, bringing the total to 200 million so that as our visibility becomes clear area. We can result in repurchases.
We also scaled back capital spending for the year end spent mostly on essential projects. We spent roughly 27 million between capital spending and tenant improvement allowances for the full year.
We expect to resume our remodel program in 2021.
Our leverage ratio as defined in our debt agreement was 4.7 times at the end of the fourth quarter.
We continue to be in at strong position with respect to our debt covenants and liquidity.
While we are not providing fiscal 21 guidance at the time due to the uncertainty surrounding COVID-19, the economic impacts in the interaction of the two we will evaluate on a quarterly basis with the intent to return to providing guidance when visibility in to sprint sustained trend becomes more clear.
We do want to provide however at EBITDA sensitivities for the year end.
Every 1% increase in company same store sales results in just over a million dollar impact EBITDA.
Every 1% increase in franchise same store sales results in roughly 4.8 million in EBITDA.
Every 30 basis points in restaurant level margin equates to a roughly 1 million dollar impact in EBITDA. While every 10 basis points of DNA equates to just shy of 4 million in EBITDA.
And lastly, as a reminder, fiscal 2021 at the 50 Threerd week.
That concludes our prepared remarks, I'd now like to turn the call over to the operator to open the line for questions Mariana.
Thank you very much due to time considerations, we ask that you. Please limit yourself to one question and one follow up per turn if you do have additional questions. You may re re queue at that time. Thank you. Our first question comes from Brian Bittner.
In the Hymer your line is open.
Thanks for taking the question and congratulation.
Congratulations on a very impressive operating results here.
Darren.
In in terms of your same store sales performance I'm, just wondering if it would be possible for you the frame up your performance against the industry either.
Quantitatively or qualitatively just so we can try in maybe better understand the extent to which you're outperforming the category in I think this would help us better understand the impact of the boost.
At the self help strategies you outlined in your prepared remarks are having on the business.
The.
So we can't share of specific in PD numbers, but we're definitely seeing significant improvement compared to the competition in outperformance.
Okay.
And as you you talked about in your prepared remarks, you did settle the lawsuit with DNS day in clearly from all reports were seeing enhanced alignment between the franchisees in France in the franchise or since you've come in to your leadership role.
And again I know you arent able to share specific views on unit growth until possibly sometime in 2021, but can you maybe give us just some general flavor on why the future could be different as it relates to unit growth investors certainly aren't used to hearing unit growth in Jack in the box in the same set in so.
Maybe you can maybe touch on what the biggest drivers of this potential change are sort of.
Great question I am looking forward to answering this momentum as we think about.
Typical pipelines take a period of time the develop.
The with some of the key points of why I am so enthused about the potential thank.
Like you said the franchise lawsuit has been resolved it clears the path for our existing franchisees to grow the may have expressed the desire to grow in some of the recent surveys. We've we've completed two thirds of the in the refinancing we want to growth. So we need to find the right opportunities for them.
Beyond that our HDD the 19 in 20.
Opened at higher than the system average.
On last year of franchisees opened 27, new stores, which is more of them in the low.
Last 10 years.
In spite of pending.
We have a new head of the the open with a focus on franchise recruitment and aggressively supporting our partners in the hospice side. This is not of physician that exists in that previously so really thats focused at enhanced focus on both recruiting new brands of the and supporting our existing franchisees will be a part of our focus.
We just rolled out of new lower cost prototype, that's flexible to be able to fit on many different potential sites, where consumers want to experience Jack such as.
Drive through only in line in non traditional dark kitchen, and the opportunities for conversion as we see some restaurant chains closing the doors.
Our friends at the profitability of existing stores, we don't have the final quarter for numbers yet from our franchise system. The Q3 average profitability is up $20000 per store.
And then lastly, part of our focus will be to help them secure capital in many of the Marty how capital providers.
But we will aggressively seek out ways to partner capital with our existing franchise base to grow more rapidly lives of just some of the reasons some of them.
We have plenty of opportunity in our existing markets around the country. If you think about it if we focus on just our existing markets.
We can put another 952 1100 locations just in our existing footprint. So a lot of upside on the I'm extremely encouraged in the last point I would make of just focus of you know Jack in the box for many years focused on growing qdoba.
And and as they focused on growing qdoba.
From this change in focus will be all about Jack and how do we support our franchisees to growth and expanding the footprint.
That's great color. Thank you there.
Your next question comes from coastal call at with Stifel. Your line is open.
Thanks, Good morning in congratulations on the great quarter.
During the Jack seems to have been on the clearly a nice streak with new product introductions in promotions in I heard the reasons you outlined for the strong comps, but im wondering if there has been a more fundamental change for example has the company made any changes to the team or the processes that has helped support product development in Peru.
Emotional planning.
I think the biggest change that that we can communicate is alignment around our brand strategy and how the rolls into our focus around our menu strategy in our operational execution. So when you have.
The value focus the combination of Upsells in add ons with innovation and operational execution all working in.
In hand in hand.
You drive better results in so I think thats. The biggest thing is clarity around our brand strategy in.
And then beyond that what Weve done differently as we spent a lot of time.
Just in terms of joint intensely focused on listening to our guests and.
We have a better understanding about why the come the Jack in the box and with this clarity.
We will continue to find ways to communicate effectively.
Related to our variety or innovation of the value I mentioned, while at the same time, making sure guests at the products. They were quickly of the taste, great and then receive from friendly and well trained team members. So I think all those things working.
In conjunction are part of what's driving this outcome.
That's great and then just one other one last quarter you mentioned you the evaluating the size of the box in dining rooms, do you have any updates on.
What opportunities you see from maybe developing that smaller footprint I know you made the comment about the footprint that can fit in different locations, but what do you expect to have one of those prototypes developed in.
What's the feedback you've hearing from franchisees.
Frank the sprint of these are expressing a lot of interest in this prototype weve seen already in in one of our franchisees.
We approved the site in total so the goal of this new smaller prototype.
In were we went out in bid the prototype in we're seeing anywhere from 19 the 24%.
At this cost so definitely enhancing our economic model and we will focus of growth.
So we don't enhancing the model.
Great. Thanks, guys.
Also we have the prove the company's site in California to the.
Develop the prototype so we can lead the way for our franchisees in.
Give them.
The chance to learn from our experience as well.
Okay.
Next question.
Your next question comes from Dennis Geiger with CBS. Your line is open.
Great. Thank you Darren ask a bit more about the improvement in the actions in the quarter in a few of the.
Sense for how much of it is increased frequency from existing customers versus new customers and the where maybe they will new customers any greater sense for the stickiness going into next year, how you're thinking about that of customers of rediscovered or discovered the.
At the ability of the affordability of the many of the convenience.
Just curious of the from some thoughts around the around the.
Good day this summer.
Now I'll chime in a little bit of you're quite right.
And weigh in as well some of.
So that we can do in the team.
Customer profile changing the through the pandemic.
In particular, the with James with higher income customers.
In terms of does the $2000 will manage to attract more of them too.
In terms of customer behavior, but the other two things I'd say are really around product and where we're moving.
Like we mentioned in the prepared remarks, low we're always have the compelling value offerings.
In our preliminary data other than it is definitely intersect in wells, we're getting higher income and the.
So the railroad customers moving not only sales from us.
And with the drive thru, but well executed.
Other auto finance options, our delivery in Norway, which will increase significantly so that position us well does retain all of these customers that were tracking through the change in behavior is while most of the some confidence that the.
Number two in two areas.
At some point as the return more to dine in.
Great. Thanks in and then just wondering as it relates to the to call. The K spikes in in different areas of the country wondering if you could share any thoughts on.
Regional performance in certain areas that have been hit harder most recently by by case spikes of how those areas are performing.
I'm not sure how much exposure you have to areas that are but at the in employed are implemented curfews. If that's in the late night at all.
Just where dining room, so that closed end given your youre seemingly well positioned at two to manage through that just if there's any insights there. Thank you.
Sure. It's a great question and what we're seeing is that we continue to see strong performance across all geographies.
And thats really even with the macro factor of changes.
We continue to focus on what we can control in us.
The safety, keeping our employees and customers saves in safe. The for example, we're not in a hurry to open our dining rooms, we want to make sure that our employees are safe at the well trained in the providing the best experienced the cash to guess store concern during the spin.
And then like I said in of.
Patients the value of the execution experience all of those are key dry.
Drivers of our success and we're going to we've done a lot around execution and make sure we continue to improve.
What we're we're providing from the service standpoint to our guests. So as an example, we have just three.
We engaged rolling out new holding them that will help improve the quality of the product I mentioned that in my opening remarks, we rolled out our new training platform. So that we train our team members to be even more supportive and even the.
Additionally focused around safety during this timeframe.
And then also some new cooking procedures that we think provide a better product to the guest so all three of these things are working to enhance the execution within our restaurants.
Great Thanks and congratulations.
Okay.
Your next question comes from John Glass with Morgan Stanley. Your line is open.
Thanks. Good morning can you first just maybe try to unpack the little more in the check increase in experience in the lack of last few quarters do you think about it may be in terms of like storm, which channel or entre count versus what the add ons are providing in any way to sort of dimensionalize. What benefit you are getting from those incremental add on sales versus at the core business.
I'll call answer the first part of that and then I'll turn it over the.
Sean or Don of.
I'll turn the of non of positive items per order.
We're seeing at move from 3.8 items per order to 4.2.
And we're seeing really a big portion of the same store sales increase.
Coming from gross add ons.
Yes and.
Our sales.
On the June gives you have the yen I would just add that as that they're in noted in his prepared remarks remarks, we've seen a product mix shift.
And some of our core core premium Andre products and if you look at our overall check and we're currently tracking about $10.72 in Q4 in that compares to $8 in 68 cents a year ago.
Thats, great Thats really helpful detail in there maybe just all of the model at maybe low.
The Leidos, where you were in the three model during the prior year joining the company at I think there is an emphasis on the drive throughs for example in the new we thought how you want to think about the new in each one of the model basis going forward is the same maybe buy in to that or is that something you're also in negotiating the franchisees you should think about the total package of both growth in the modeling.
Of the assets.
At this point, what I would say without providing too much color on the trying to give you. Some insight is franchisees are excited right now about reinvesting in the restaurants in we're providing a lower cost refresh.
Of the starting point and so we're in the midst of rolling out throughout the system.
And in addition to the part of our strategy going forward and we'll talk more about this in the next in the new year is innovating around new designs that speak to the future of.
Of the dressing I guess the.
Okay. Thank you very much.
Your next question comes from Gregory Francfort with Bank of America. Your line is open.
Hey, Thanks space for the question.
My question's around DNA in it.
You've had a couple of quarters, where you've done substantially below.
The 1.7, the 1.8 I think is in the most recent target at the.
Presents the system sales, we've seen a couple of the larger players really lead in to DNA last quarter or two or DNA plan around technology in digital can you talk about is the long term targets. The 1.7 the 1.8 in.
The going to the higher lowered net worth of what you think will be the drivers of that decision. Thanks.
Yes ill take that one.
This time, we're not prepared to give guidance for 21 or long term I would suggest that you look at it on a full year basis. So on a full year. We were at 1.7% of system wide sales Q4 was low to a few discrete items.
But at 1.7 is historically.
Where we have said we want to be and just lastly during the pandemic. There's been no significant GE in a cat. However, we have seen things like travel come in lower.
Yes that they come in the maybe just a follow up on that I mean.
Can you talk a little bit about the planned to have technology in stores versus the outsourced in.
Whether or not the endemic to the changing any of any of the older coal plants. Thanks.
Our incentive to continue.
Utilizing the clears the technology roadmap, we have moved some things to the cloud.
And so during the pandemic, we made some shifts through some of our data storage.
But as far as you know in restaurant versus the other restaurant.
We're right now going through re crafting of redesigning the technology roadmap to address some of those those items.
Clearly we want to.
Fast follow in the industry.
And the up to speed with technology at the restaurant level to help our operators from.
From restaurants, more effectively and efficiently.
Thanks, Dan.
Our next question comes from Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much.
Two questions. The first just following up in terms of the franchise relations at Dan You mentioned the amending the was relations is critical to enhance the long term performance.
And it sounds like it's encouraging I'm just wondering maybe if you could share any early learnings in those discussions that you've now had with these franchisees sounds like the perhaps there all of the four reenergized.
Maybe you can show at the greatest franchisee or even corporate frustration was.
The perhaps has been the road blocks at maybe is easing now that gives you the confidence on the re acceleration of the at the unit growth in the reinvestment.