Q1 2021 Jack in the Box Inc Earnings Call
First quarter of fiscal 'twenty and 'twenty One earnings conference call today's call is being broadcast live over the Internet.
A replay of the call will be available of the Jack in the box of corporate website starting today.
The question and answer period. Please use your handset when asking a question. Please do not ask over of speaker phone.
At this time for opening remarks, and introductions I would like to turn the call over to Carol day, Raimo with Investor Relations for Jack in the box. Please go ahead.
Thank you Mary Alma and good morning, everyone. Joining me on the call today are Chief Executive Officer, Darren and Sarah <unk>.
The financial Officer, Tim Laney, Vice President Controller, Dawn, Hooper, and Treasurer, and VP of financial planning and analysis, Sean both.
In our comments this morning per share amounts refer to diluted earnings per share the will refer to non-GAAP items throughout today's call included in 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 yesterday's earnings release.
So in today's presentation, we will take questions from the financial and commodity.
Please be advised that during the course of our presentation and our question and answer session. Today, We may make forward looking statements that reflect management's expectations for the future share based on current information and well.
Management May provide current thinking on this call around the potential impacts of COVID-19 on our business given the unprecedented nature of this pandemic and the rapidly changing environment any forward looking statements should be considered with the elevated level of uncertainty.
Actual results may differ materially from these expectations based on risks to the business the safe Harbor statement in yesterday's news release and the cautionary statement in the company as most recent form 10-K are considered part of this conference call.
Cereal 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 Dot com.
A couple of calendar items to note Jack in the box management will be participating in the bank of America Securities 2021, consumer and retail technology Virtual conference on March the 11th.
Our second quarter ends on Sunday April 11th 2021, and we tentatively plan to announce results on Wednesday may the <unk> after market close.
Our conference call is tentatively scheduled to be held at 830, a M Pacific time on Thursday may the 13th and.
And with that I'll turn the call over to Darren.
Thank you Carol and good morning, I'm excited and discuss our strong first quarter results. The first we'd like to provide and update on some key leadership positions.
As you know Tim will any joined us as CFO for weeks ago.
And this role will be pivotal to our long term strategy not only of CFO, but also in terms of development and growth of the company.
He has quickly immersed himself in all things, Jack including spending time, working in our restaurants and Onboarding with the leadership team.
And those are well founded or well rounded finance leader with more than 20 years of experience, leading multi unit operations.
Most recently, Tim served as Chief Financial Officer at Vasa fitness, where he was responsible for leading the finance and accounting team plus developing and executing the company growth strategies in.
Including site acquisition and market entry development.
And Tim has demonstrated strong financial leadership, while supporting and growing businesses in the restaurant industry.
We're confident in his executive leadership ability to help continue the momentum being experienced in at Jack in the box.
Previously Tim was Chief Financial Officer at Rave restaurant group incorporated.
Prior to that he held chief financial officer roles at restaurants unlimited and consumer capital partners for.
<unk> and operator of the Smash Burger and quick in those brands hits.
And his career began with positions in.
Private equity and investment banking at Jpmorgan and bank of America as well as KPMG.
Yes.
Brian <unk> joined US earlier this month at CMO, a position that has been vacant for the last few years.
Ryan joins the company with over 15 years of marketing and branding experience with a passion for driving innovation through creative consumer strategies.
Most recently he served as Chief brand Officer for General Nutrition centers, where he helped lead the transformation of GNC from the traditional retailer to a global digital brand by modernizing their marketing E Commerce innovation and product development.
Previously, Brian sort of roles at Yum brands.
And more craftsman and diehard.
At Sears holding corporation as well as Reebok during.
During his time at Yum brands Ryan help.
<unk> enhanced our global store and E commerce customer experience through new digital delivery curbside and loyalty solutions, while also partnering with global markets to modernize their marketing tactics.
We're very excited to have Brian join the team is experienced and leadership demonstrated a proven track record of transforming brands through unique campaigns, all while leveraging digital platforms to modernize how consumers engage with brands and he.
And he will be and integral part of helping evolve the future of how the Jack in the box build lasting relationships with customers.
Brian will be focused on three core areas for the long term success of the brand overall brand strategy the evolution to a more digitally enabled experience and continued strength in product innovation.
We are currently in the midst of the CFO search and have met with a number of folks who will be responsible for leading both company and franchise operations and.
And driving key initiatives to improve both operational excellence and restaurant profitability across the system.
And lastly, I can tell you we've talked for several great candidates and are getting close to concluding our search for a permanent Investor Relations officer, So that Carol can return to enjoying retirement.
We appreciate her willingness to come back and help us out over the past few months.
I am very pleased to report that we continue to make significant process with strengthening our relationship with our franchisees.
And we held our first leadership Advisory Council meeting a few weeks ago.
Jack cannot succeed in less our franchisees succeed and I'd like to think of it as the race and historically, we pass the baton to the franchisees at the fourth leg and the race and ask them the cross the finish line.
Now, we're bringing them to the starting line with us.
By doing so we have reenergized the relationship and look forward to seeing the transpire into further growth of the Jack in the box brand.
With the majority of my leadership team now in place we plan to share our update the strategic plan and vision in the next few months and are looking to lock down the date for an investor and analyst meeting in May or June.
Now to talk about Q1, the outstanding performance.
We have certainly learned a lot about where consumers are headed during this pandemic the continued.
The importance of digital the consolidation of transaction to drive higher check gains and the desire for craveable and snack of items as.
As mentioned over the last couple of quarters, Jack pivoted early in the pandemic to capitalize on changing consumer trends Inc.
<unk> changing media placements leaning into delivery and <unk>.
<unk>, new flavor full and portable menu items.
Many of these consumer trends held strong through our first quarter.
Same store sales for the first quarter were the direct result of this increasing 12, 5% for the system. This was our best performance since 1994 and significantly outperformed our direct competitors Tim will go into more details of the consumers have continued to drive check through more premium product purchases.
We also saw the benefit of the stimulus payments in the last few weeks of our quarter.
I'll take a minute to outline some of the key success drivers.
We continue to see price pointed offers appealing to our core customers. During this time.
We also continue to benefit from our innovation since their launch last January tiny tacos have remained highly incremental to our overall performance as the permanent menu items consumer response remains strong tie.
Tiny tacos drove transactions and bolstered check sizes as they're frequently added onto our guest orders.
In Q1, we introduced the number of products, including our new chicken sandwich and improved chicken strips, which contributed significantly to our same store sales performance.
We remain focused on delivering a more consistent experience for our guests and initiatives that focus on the consistency of speed of service.
While remaining at the top of our priorities for driving throughput and sales growth.
Aside from these continued strategies, we're also seeing shifts in our business because of changes from consumer behavior amidst COVID-19.
The first consumers are utilizing delivery and our mobile app more than ever with digital sales more than doubling year over year to nearly 7% of system sales.
As a reminder, over 95% of our restaurant are covered by at least one of the for major delivery providers with 80% utilizing at least three of the major providers.
We continue to integrate our Pos systems with these third party vendors, allowing for simpler procedures for the restaurants.
Second while we had seen significant shifts away from breakfast and late night and day parts earlier in the pandemic all five of our day parts were positive in the first quarter.
And while traffic remains negative across all five day parts, we have seen a significant rebound across each including breakfast and late night.
Third we've experienced continued increased sales of our more premium core menu items, such as our jumbo breakfast platter Ultimate Bacon cheeseburger and chicken strips consumers are now, placing larger orders as well typically for multiple people more.
More than half of our same store sales increase was driven by premium items.
These shifts in consumer behavior of led to a sustained significant increase in our check sizes during the pandemic.
The media team has remained extremely nimble capitalizing on shifts in the consumer consumption trends around gaming and video content to really meet the consumer where they are during this time.
We have increased our social media presence and converted all sports sponsorships and the digital formats.
To celebrate the launch of our new chicken Sandwich, Jack in the box partnered with singer and actress Becky G to create a brand new chicken dance for fans to learn and share on social platforms like Instagram and ticked up.
Lastly, as to unit growth franchisees opened three new restaurants in the quarter and we currently expect to open 20 to 25 restaurants this year.
With the addition of Tim Lenderman and the continued work on the new prototype we are ironing out the development strategy to invigorate long term growth for us and our franchisees.
And we'll begin actively marketing the potential new franchisees in the next Mark in the next few months.
We look forward to sharing more about the strategy in our upcoming Investor day.
Lastly, I'd like to take a moment to express my continued heartfelt thanks to our restaurant team members for keeping everyone's safety a top priority as we provide for the needs of our guests and first responders and I'd also like to thank our corporate employees franchisees and suppliers for their partnership flexibility and ingenuity. During these unprecedented times.
Jack in the box will celebrates its 70 <unk> anniversary on February 21, and we look forward to continuing to enhance the brand's relevance for decades to come.
I'll now turn the call over to Tim <unk>, Our Chief Financial Officer for a closer look at the first quarter results welcome aboard Tim.
Thank you for the warm welcome Darren its and honored to join Jack in the box at such a transformational stage in its journey and good morning, everyone and I look forward to getting to know all of you.
Operating EPS for the first quarter was $2 16, as compared with $1 17 last year. The roughly 85% increase was primarily driven by strong sales growth across the system, which flowed through to the company and franchise margins, coupled with lower G&A in the quarter.
Adjusted EBITDA increased by nearly $26 million for 34% two of $102 4 million in the quarter.
Our system wide comparable sales increased 12, 5% in the first quarter company same store sales increased seven 5% comprised of the average check increases of 21, 2%, including pricing of three 1% offset by transaction declines of 13, 7%.
Franchise same store sales increased 13% for the quarter, including a sequential improvement in transactions.
Total system wide sales increased 13, 4% in Q1.
Average check continues to be driven by premium products as well as the 9% increase in the number of items per check from $3 87 last year to for two two items. This year for this quarter excuse me.
The difference between company and franchise same store sales was primarily driven by a few company owned locations that are heavily dependent upon board of traffic. In addition reduced hours at some company restaurants, resulting from Covid staffing challenges contributed to the GAAP in performance.
Despite this company <unk> exceeded $50000 per week in Q1.
As mentioned in yesterday's release. This strong performance has continued into the second quarter of 2021 with two year trends through the first four weeks of the quarter remaining consistent with the first quarter, while lapping the very successful launch of tiny tacos when same store sales were up 7% and the comparable for <unk>.
Weeks of the prior year.
As you May recall same store sales for the first seven weeks of a prior year second quarter were up five 2%, while the last five weeks of the quarter, which were impacted by Covid were down 17%.
The company restaurant level margin improved in the first quarter to 25, 5%, increasing 70 basis points from 24, 8% last year.
This increase was primarily due to sales leverage and lower food and packaging costs.
And packaging costs decreased to 150 basis points in the quarter driven by a favorable mix shift.
As more purchases of premium items increased our average check along with menu price increases, which more than offset commodity inflation of one 6%.
Labor costs increased by 30 basis points of sales leverage was offset by continued pressure from wage inflation, which was roughly <unk> five zero percent in the quarter.
Occupancy and other costs increased 50 basis points, driven primarily by higher delivery fees.
Franchise level margin increased $15 $2 million when compared with the prior year quarter, primarily driven by higher royalties and rental revenues as franchise same store sales increased 13% as well as of $1 $7 million decrease in bad debt expense.
As a percentage of total franchise revenues franchise level margin for the quarter was 41, 5% versus 38, 5% in the prior year.
Advertising costs, which are included in SG&A were $5 $8 million in the first quarter compared with $5 3 million in the prior year, but remained constant at five 1% of company restaurant sales.
G&A, excluding advertising decreased $8 2 million in the quarter, which was largely driven by a decrease of $3 9 million in costs related to litigation matters versus the prior year.
Mark to market adjustments related to company owned life insurance policies for coli policies as we refer to them drove a favorable $2 $7 million reduction in G&A versus the prior year.
As we discussed these policies are sensitive to swings in the stock market.
Excluding the $4 $8 million <unk> benefit in the current quarter G&A as a percentage of system sales was one 6%.
Depreciation and amortization dropped by $2 2 million in the quarter and we expect this trend to continue as franchise assets become fully depreciated and franchisees are responsible for ongoing improvements.
We expect full year depreciation to decrease by roughly $6 million.
Our effective tax rate in the first quarter was 25, 1% lower than the SaaS at Torrey rate due primarily to the benefit of the coli gains which are not taxable.
Now, let's turn to our liquidity and debt.
The company ended the first quarter with roughly 288 $289 million in cash in the balance sheet of which $251 million was unrestricted.
Our leverage ratio as defined in our agreement was for two times at the end of the first quarter. We continue to be in a strong position with respect to our debt covenants and liquidity.
Subsequent to the end of the quarter, we repaid $107 9 million outstanding on our variable funding notes.
We did not repurchase any shares in the first quarter, but with the <unk> and now repaid we anticipate resuming share shares repurchases in the second quarter.
We currently at $200 million available under our board authorized share buyback programs of which $100 million expires in November of 2021, and another $100 million expires in November of 2022.
We do not.
Want to provide however, EBITDA, we do excuse me want to provide however, EBITDA sensitivities for the year every 1% change in company same store sales results in just over $1 million impact on EBITDA.
And every 1% change in franchise at the same store sales results in approximately $5 million in EBITDA.
Every 30 basis points and restaurant level margin equates to roughly $1 million impact in EBITDA, while every 10 basis points of G&A equates to approximately $4 million in EBITDA.
As a reminder, fiscal 2021 is the 53 week year with 13 weeks in the fourth quarter.
Lastly, you may have seen in our 10-Q filed last night at the Midwest franchisee, a Midwest franchisee filed for bankruptcy earlier this week the.
And the franchisee currently operates 68 restaurants, including 18, where we owned the land and building.
It's too soon and to determine how many leases in franchise agreements. The franchisee may reject in bankruptcy or any impact on our future financial results, but in the event of the sale we at the right to approve any new franchisee.
In summary, we're really pleased with the continued momentum in the business and our Q1 results I'd now like to turn the call over to the operator to open the line for questions Marianna.
Yes.
Thank you.
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