Q2 2021 Jack in the Box Inc Earnings Call
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Good day, everyone and thank you for standing by welcome to the Jack in the box, Inc. Second quarter fiscal 2021. The earnings Conference call. My name is constricted in there'll be a time based off where you.
At this time all participants are in a listen only mode at all.
The prepared remarks, the management from Jack in the box will conduct a question and answer session in.
The conference participants will be given the construction at that time at.
As a reminder, this conference call is being the cord.
A replay of the call will be available on the Jack in a box corporate website starting today.
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Sir Please go ahead.
Thank you Christian and good evening, everyone. Thanks for joining US Tonight. Joining me on today's call are Chief Executive Officer, Darrin Harris in EVP, Chief Financial Officer, Tim Mullany.
During our prepared remarks in the Q&A portion of today's call, we will refer to non-GAAP items, including operating earnings per share adjusted EBITDA as well as restaurant level margin in franchise level margin.
Please refer to the non-GAAP reconciliations provided in today's earnings release in available in the Investor Relations section of our website at Www Jack in the box of Dot com.
During today's call. We may make forward looking statements that reflect management's current expectations for the future, which are based on current information in judgments and while management may provide current thinking on this call around the potential impacts of COVID-19 on our business given the rapidly changing environment any forward looking statements should be considered with this elevated let.
<unk> of uncertainty.
Actual results may differ materially from these expectations based on risks to the business. The safe Harbor statement in today's news release in the cautionary statement in the company's most recent 10-K are considered a part of this conference call.
<unk> 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.
In our available on the Investor Relations section of our website at Www Jack in the box Dot com.
A couple of calendar items to note quickly Jack in the box management plans to host in in virtual Investor Day on Tuesday June 29 watch for more information about that event in the coming weeks and our third quarter ends on Sunday July 4th and we tend to the Blue plan to announce results on Wednesday August 4th after <unk>.
At close and host a conference call at <unk> PM Eastern time that same day.
So with that I'll turn the call over to Darren.
Thank you Ron.
And good evening, everyone. Thank you for joining us today.
We are very pleased with our second quarter results announced earlier this afternoon.
They reflect the power of the Jack in the box brand our iconic differentiated all day menu.
In our continuous product innovation.
And most importantly, they are a direct result of the dedication and passion of our franchisees store managers and staff.
In all of the team members throughout the entire Jack system sort of worked relentlessly to serve our guests safely and effectively through the challenges over the past year.
Tim will go into more detail on our strong second quarter results in how we currently anticipate fiscal year 2021, playing out.
I am pleased to report that we're off to a good start through the first four weeks of the third quarter, giving us confidence that our key strategies continue to resonate with guests.
In position us to maintain momentum, while we work closely with our franchisees.
Let me provide a brief update on the strategies, which I believe are driving our current performance.
In laying the groundwork to pursue our longer term strategic initiatives to expand Jack reach with renewed unit growth.
All of our strategies are rooted in two foundational principles.
The first foundational principle is shaping of carrying high performance culture focused on serving our people in franchisee as well.
If we do this we are confident they will take care of our guests.
The <unk> technology.
On top of these foundational principles set our four strategic pillars.
Building brand loyalty.
Second driving operational excellence.
Third growing restaurant profits.
And fourth expanding Jack reach.
Over the long run Jack will create value by investing in serving our people on franchisees.
Innovating in new ways the.
The leveraging our data expanding our reach in scaling our infrastructure to drive operational excellence.
As we've indicated with the past 10 year Refranchising process now solidly behind us.
The next 10 years are going to be driven by new unit growth in by emphasizing all of the things that Jack guests Love and trust about the Jack brand.
Our brought in unique menu all day availability constant innovation in out of the box attitude.
As part of solidifying our first foundational principle, one of my priorities over the past year has been to revitalize our leadership team with professionals, who have deep experience in expansion oriented restaurant and franchise business models.
In whose talents complement those of our current leadership team who have deep invaluable experience with Jack.
So I'd like to start today by welcoming the two newest additions to the team.
Steve piano, our new Chief people Officer joined the company on April 26th.
Steve brings more than 10 years of executive level HR experience from GNC Holdings, a $1 6 billion global health wellness and supplements brand.
Where he served as head of human resources in.
And previously as the EVP of HR at Moneygram.
Second Carlson Choy, our new Chief Information Officer joined US on May 3rd he comes to us from <unk> Foods, a $4 billion global restaurant, operator, with a portfolio of franchise brands, where he served as global Chief Digital Officer, and Chief Information Officer.
He also served previously as global VP of the digital initiatives group at Mattel.
As a reminder, over the past six months, we've also welcomed Tim Lenderman at senior Vice President of of franchise in corporate development, Tim will any of the Chief Financial Officer, and Ryan in those term as Chief marketing Officer.
We're also in the final stages of recruiting of new Chief operating officer, who will be responsible for leading both company and franchise operations focused on driving operational excellence and growing restaurant profitability across the system.
Two of the four key pillars of our long term strategic plan.
Our executive leadership team is already working closely with our corporate team members in our franchisees to drive Jack long term growth initiatives.
In addition to instill in installing on new leadership team.
Working collaboratively with our franchisees to develop and execute our new strategy has been in continues to be a top priority.
As many of you know Jack in the box of celebrating its 70 <unk> anniversary this year.
Over that time, Jack is carved out of distinctive position in the <unk> industry in our committed franchisees have been a key part of this achievement.
Jack future success will be a function of building strong relationships with our franchisees in enabling them to deliver exceptional guest experiences at enhanced brand loyalty and grow their business.
Their success is our success.
I am very encouraged by the progress that we continue to make on that front. We held our first quarterly leadership Advisory Council meeting in January and have another scheduled in San Diego on less in two weeks.
In between these quarterly meetings. We've also held virtual monthly business meetings that are helping to accelerate the exchange of ideas in activation of our strategies in partnership with our franchisees.
We are openly sharing with our franchisees our corporate aspirations to expand <unk> reach and they in return are sharing their own aspirations to capitalize on the strong Jack brand and on the substantial expansion opportunities available to us together to build on operate new restaurants.
Although we're still in the early stages, we're very encouraged by the initial enthusiasm expressed by our franchisees.
To date more than two thirds of our existing franchisees have expressed interest in expanding in the coming years.
We've recently signed development agreements with eight existing franchisees, our first such agreement in recent years.
That calls for them to at a total of 2023 new stores over the next several years representing of greater than 6% expansion of their current combined 358 units.
In addition to our plans to expand with the majority of our existing franchisees, we launched several new franchise recruitment initiatives in late March including filing our updated franchise disclosure document store.
Handing up of new franchise development website, Jack in the box franchising Dot com.
And in late April initiating our first paid AD campaign to solicit new franchisee leads.
These steps are also beginning to bear fruit.
Through the first four months of 2021, we've received double the number of inbound franchise leads.
<unk> with last year at this time.
In our store development team has been finalizing work on a modular Jack in the box restaurant of the future design.
That will provide franchisees greater access to a wider variety of store sites Inc.
<unk> drive through only in caps smaller in streamline narrow site in non traditional such as airports convenience stores in college campuses.
As part of that work, we developed the new efficient kitchen for our smaller drive through only stores that is incorporated into our future modular restaurant design.
The initial construction costs for the drive thru only store prototype are approximately 20% lower than our current stores, making our category leading store economics, even more compelling as an investment for new and existing franchisees.
We recently finalized an agreement with the National partner <unk> kitchens to open in an initial group of up to eight ghost kitchens in three states. This summer.
As of the latest additions to our strategy of accelerating both of our restaurant growth.
In growth through digital channels.
Yes.
This also builds upon our system wide rollout of in App ordering.
In the launch of Jack first of all of our loyalty program over the past few weeks.
All of these initiatives have accelerated our acquisition of customer data to expand our database, which has grown by more than 60% over the past 18 months. This.
This represents a significant opportunity for Jack.
Combined with our newly implemented digital marketing technology platform are growing guest database will enable us to support our strategic pillar to build brand loyalty by communicating through more personalized messages and timely offers.
Over the past year, our customer data indicate that we have been attracting and retaining more higher income consumers, even as dining restrictions have been relaxed.
As you can see.
We're working on all fronts, putting the building blocks in place to drive brand loyalty in franchise opportunities that will fuel future growth when category leading performance.
We're pleased with the progress, we're making in with enthusiasm of existing and prospective franchisees.
At the same time I want to carefully manage expectations, taking into account normal and COVID-19 impacted.
Lead times from site selection financing permitting in build out.
We anticipate it will be at least 18 to 24 months before we begin to show meaningful net new store growth.
In the meantime, we will continue to focus on driving operating performance across our existing store base building.
Building brand loyalty by working closely with our franchisees to delight guests with our all day menu continually introduce new craveable menu innovations in.
And introduced new technologies in procedures to ensure consistent speed of service. So guests enjoy every visit to Jack in the box across our 21 state geography.
We look forward to providing additional details about our long term strategies in our three year financial framework at our June 29th virtual Investor Day.
Watch for in email soon inviting you to register in advance.
Before I turn the call over to Tim to review, our second quarter financial results.
In elements of our full year expectations I'd like to again sincerely. Thank our restaurant team members for keeping everyone's safety a top priority as we provide for the needs of our guests.
I'd also linked to like to thank our corporate employees franchisees and suppliers for their partnership flexibility and ingenuity. During these unprecedented times.
At this time I will turn it over to Tim.
Thank you Darren and good afternoon, everyone. Thank you for joining us on the call today.
Having now been with Jack in the box for one full quarter I want to start by expressing how energized at about the strength of the Jack in the box brand in the opportunity to work alongside the other members of the leadership team all of our team members in our franchisees as we embark on a new long term expansion phase.
As Darin noted our strong second quarter results announced earlier this afternoon, our testament to the ability of our team members across the entire system to respond to the unprecedented circumstances of the past year with innovation and nimbleness to continue serving our guests safely and effectively.
Youll find the thorough discussion and analysis of our second quarter results in our 10-Q filed this afternoon at <unk>.
The use my time on today's call to focus your attention and provide additional context on a few key areas.
Let's start with a quick overview of our strong second quarter sales in profitability.
Same store sales increased 26% compared with the year ago period.
System, the transactions increased year over year for the first time since the fourth quarter of 2019.
Earnings from operations nearly doubled to $64 9 million from $32 8 million net.
Net income more than tripled to $35 9 million from 11 5 billion.
Adjusted EBITDA of $75 8 million was up 63, 7% from $46 3 million.
Recall during the final five weeks of last year's second quarter, we began the suffer the most extreme effects of the onset of the pandemic. This.
This year stimulus checks and boost to the final four weeks. So naturally those two factors amplify at the year over year comparisons.
To eliminate that noise I think it's informative to compare second quarter of 2021 against the second quarter of 2019 as the normalized base.
In those comparisons also show very strong performance.
On a two year stack basis, Q2 system same store sales were up 16%, reflecting a 27% increase in average check.
Weekly system per store average sales were up 17% of approximately 35000 versus approximately 30000.
Company store level margins declined slightly to 25, 9% versus 27, 6%, primarily primarily reflect in commodity and labor cost inflation.
Jack.
<unk> as a percentage of sales improved to one 6%, including coli gains of $1 5 million 10.
10 basis points lower than the second quarter of 2019, which included $2 9 million of coli gains.
Including call of gains second quarter, G&A was one 7% of sales compared with two 1% in the second quarter of 2019.
Operating earnings of $64 9 million increased 37, 7% compared to 40 $47 1 million.
Net income of $35 9 million increased 43, 2% compared to $25 1 million.
And adjusted EBITDA of $75 8 million was up 23, 9% compared to $61 2 million.
Sales performance was strong across all regions in remains strong even in the regions that reopened for indoor dining during the quarter in fact in Texas. We saw the strongest transaction trend improvement following the lifting at the end of our dining restrictions in our Texas stores have continued to post solid sales during the <unk>.
First four weeks of the third quarter, even as the pandemic restrictions have been further relaxed.
Clearly Jack has met the challenge and the opportunity presented by the pandemic driven changes in consumer behavior.
Some of the changes will end or others will likely dissipate over time.
What won't change of the pillars of the Jack in the box brand at a solidified our distinctive in resilient position in the U S quick serve restaurant in industry over the past 70 years.
One key element of Jack brand is our continual menu innovation our.
Our strong second quarter was driven by a continued mix shift towards core premium menu items, including chicken strips the bacon in Swiss buttery Jack in Supreme per song.
That mix shift was also boosted by our limited time offers including the club chicken sandwich during the first half of the quarter in the return of the Triple bonus Jack during the latter part of the quarter, which success successfully lap at strong prior year performance.
Combined these premium offerings. In addition to strong attachment of size in add on outperformed last year's second quarter, which included at the very successful launch of tiny tacos.
Another key element of Jack brand is our all day menu during the second quarter. The late night day part showed the strongest year over year improvement accounting for two thirds of the contribution to the year over year improvement in transactions.
The new element of the Jack brand is our digital accessibility.
Digital off premise sales accounted for more than 7% of total second quarter sales up 150% over last year's second quarter and they've continued decline during the first four weeks of the third quarter.
As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers, the 80% utilizing at least three of the nature of providers.
We also added <unk>, the leading mobile app delivery platform to our digital order in delivery platform during the quarter in have been pleased with the initial sales volume in average check that is coming in through the service.
Earlier Darrin in I E alluded to the 2021 being Jack's 70 at the anniversary I am pleased to be able to announce another significant milestone that we expect to reach during the third quarter.
On a trailing 12 month basis, we expect Jack system sales to cross $4 billion for the first time in Jack 70 year history.
At the great milestone to achieve at the same time that we are laying the groundwork to launch the multi year unit growth initiatives that Darren covered in his remarks.
We are entering this new chapter of Jack story with a strong balance sheet to support our plants. We ended the second quarter with approximately $109 million in cash on the balance sheet, including restricted cash of approximately $18 1 million.
During the second quarter, we repaid $107 9 million in our variable funding notes and now have $110 5 million of borrowing capacity under that facility.
Our leverage ratio as defined in our agreements was four one times at the end of the second quarter in we remain in a strong position with respect to our debt covenants in liquidity.
Also during the quarter, we repurchased 640709 shares of our common stock at an aggregate cost of approximately $65 million.
We currently at $135 million available on our board authorized share buyback programs of which $35 million expires in November 2021 in a $100 million expires in November 2022.
And last week as an expression of confidence in the company's future. The board of directors of period with a 10% increase in the regular quarterly cash dividend to <unk> 44 per share.
For 2021, we feel we're once again in a position to provide a full year of 2021 outlook.
Subject to all of the risks and uncertainties that Youll find described in our SEC filings as well as continuing effects from the pandemic. We currently expect high.
The high single digit same store sales growth.
G&A as a percentage of system wide sales of approximately one 7%, excluding net coli gains or losses.
Commodity cost inflation of approximately 3%.
Labor cost inflation of 5% to 6%.
And adjusted EBITDA of between $320 million in $330 million, including approximately $6 million.
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We also want to reiterate EBITDA sensitivities for the year, which have not changed from our previous disclosures at.
Every 1% change in company in same store sales results in just over $1 million impact to EBITDA.
Every 1% change in franchise same store sales results in approximately $5 million in EBITDA.
Every 30 basis points in restaurant level margin equates to roughly $1 million impact on EBITDA, while every 10 basis points of G&A equates to approximately $4 million in EBITDA.
I'll close by echoing Dan's the optimism about the progress we're making in light of the foundations to begin in new growth chapter for Jack in the box or.
Our financial results over the past year, clearly demonstrate that we have a strong brand strengthening brand loyalty in a sound operating model.
We're focused on making what we believe to be the right investments to lean into the consumer trends in place that will persist well beyond COVID-19.
That combination of brand operating model in targeted investment will help drive performance in bridge. The 18 of 24 month lead time before we began to show meaningful unit growth acceleration beginning in 2023.
In summary, we are very pleased with the continued momentum in the business in our looking forward to sharing more about our long term growth strategies at our June 29th virtual Investor Day.
I would now like to turn the call over to the operator to open the line for questions.
Okay.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session. We do ask that you. Please limit your question to one at one follow up.
In order to conduct a question. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key possibly give us a moment to compile the roster.
Your first question is from Brian Bittner from Oppenheimer <unk> Company. Your line is open.
Yes.
Thank you thanks for taking the question and congratulations on such strong business results here.
My first question is related to the same store sales guidance guidance that you issued issued for the year around high single digits.
What it does is I guess it implies same store sales in the second half since we already have the first half in suggest anywhere from negative three to plus three just based on the math.
The average weekly sales trends, particularly in the last quarter are actually trending at levels higher.
Higher than you were executing in the second half of last year, suggesting I guess the sales could stay positive. If you retain them how would you want to set expectations here related to the full year guidance in what it implies for your business in the second half should we assume some of the stimulus benefits roll off of the.
<unk> trends as we model out your second half any tidbits would be helpful.
Yes, I think a few things one youll note in the prior fiscal year. The first half of the year. We did of negative 80 basis points same store sales and then in the second half of prior year, we meaningfully strength end to a positive nine 4% same store sales. So as you look at the current fiscal year.
First half was positive 15, 9% so overlapping very strongly in the second half of the year, we're looking at a positive two 7% so.
We're continuing to anticipate.
Continued strength in our in our overall performance similar to what we've seen in recent periods.
Periods.
Thank you. That's that's helpful. In my follow up question is on unit growth Theres, obviously, some excitement building.
Around your ability Darrin the spearhead better long term unit growth you outlined some of the tools you're putting in place to drive this.
You also talked about the lag in the desire to grow first actually displaying that growth, which which I appreciate but this quarter. In particular, you had nine net closure closures, which is the most we've seen in quite a long time. The question is are we going to go through a short term period of elevated closures.
<unk> like we did this quarter is weak units of pruned.
In any other tidbits you can provide on how that closure line should book moving forward. Thanks sure, Yes, I'll, let Tim answer this question.
Yes, so we did see some elevated closures in the quarter Youll notice in the Q filing that we released earlier today, we had 19 total closures in the quarter.
So we.
We are seeing some of it's on elevated levels. There are a lot of that is due to the improved relationship frankly with the the franchise system in corporate where we're dialogue in very frequently with them in allowing them to exit out of underperforming locations in anticipation of our expansion into new offsetting units within existing markets.
It's really a way for us to cultivate our portfolio in in the long run improve the overall quality and in many instances.
We are gaining in offsite are in offset.
Location in addition to the.
On the Remodels in.
In trade.
Great. Thank you.
Your next question is from the Jeremy carbon from Goldman Sachs.
Thanks for taking the question kind of following up on the last question there.
Just wanted to get a sense of you talked about the 18 to 24 month timeframe I think we've heard that a.
A couple of quarters now so just wanted to get a sense of exactly how we should be thinking about the pace of acceleration in.
In the development in when we should start thinking about that actually flowing into the model.
I'll start and then let and then turn it to Tim but basically we have been saying 18 to 24 months as we've been ramping up our development pipeline through launching our FTE through engaging franchisees to commit to.
The new units. So that's taken some time to get up in running as well as it always takes time to find sites permit and get them open.
We recently filed our FTB, which enables us to start the process of recruiting franchisees to select territories and we mentioned some of the results here, we're seeing a tremendous.
Response from our existing base and we're at the early stages. We just the SPD went live last month and so it's a period of time of ramp up that we're going through right. Now we're excited about what we're seeing in the pipeline. We're excited about giving you.
Some insight on to the into the pipeline by communicating the development agreements, we are signing in giving that as the lead measure.
Yes, I would just underscore that so we'll be getting into a lot of the details on this at our annual analyst day on June 29th.
As Darren mentioned in his comments earlier on.
<unk> strategy is really predicated in we understand that unit growth is something that is really core of Keystone to our overarching long term strategy in pipeline, but I think what.
We also communicated in the earlier remarks is that we of new leadership in the development group with Tim lender men that was recently hired we recently rolled out a new franchising website in that launch some of these early initiatives to get out and start getting interest in <unk>.
The new franchisees coming into the system as those development agreements get signed in the future of Thats sort of the Canary of that indicates.
In that 18 to 24 month clock starts so to speak for those units that are announced in each development agreements. So.
We're actively pursuing it in are really optimistic about the early results.
Thanks, that's really helpful color in just one more follow up if I may at.
Seems like you are starting to see some green shoots in those conversations with franchisees, especially after some of the things you talked about in terms of of the FTB in at.
On the new leadership, there I just wanted to get a sense of what youre seeing in terms of interest in existing markets versus new markets from some franchisees in.
If there are broader opportunities in newer markets as well thanks.
Yes, it's part of our overall strategy. It is important that we expand in our existing core where we have awareness.
And as we've laid out before we have about 950 to 200 locations that we've identified or potential trade areas. We've identified we've begun sharing that with our existing base of franchisees.
And let me just give you an idea of how that compares to the competition because I think that helps illustrate.
There's plenty of opportunity just in our existing core so in California alone. We have 945 locations, we could add another 180.
Our competition Mcdonald's has 270.
Texas as an example, we have about 600 locations today, we could add another 110.
The 12 Theres a lot of 183, Mcdonald's 943 at Sonic locations and Thats just to provide color, Colorado is another one thats underpenetrated. We of 17 locations. We could add another 90 from Mcdonald's has 200. So we know there's opportunity in our core we'll focus there first and then we will also proceed into market.
That are.
Nearby our core and one example of Salt Lake City, we are aggressively pursuing salt Lake City.
And overall, Utah, where we have three locations today in can add another 52.
The key is to focus on core where we have awareness and then build in concentric circles around that court and pursue a few new markets.
Thanks, that's great color I'll pass it on.
Your next question is from Dennis Geiger from UBS.
Great. Thanks for the question in Darren in Tim Thanks for the color on thinking about.
Rest of the year in for the guidance certainly helpful.
Just kind of ask one more on that just as we think about the go forward in maintaining in the essentially growing your sales volume is based on the strength of last year's results. Just curious how you think about some of the tailwind that you have in the back half of the fiscal year thinking about mobility day part wise, how that might help dining normalize how that <unk>.
Help in than some of the brand initiatives good color as it relates to Texas in and kind of what you're seeing there just curious anything more there as it relates to the.
Some of the drivers in the back half of the year of maybe even what you've seen in in.
In recent weeks be curious.
So the one is I think our current strategy is working and will continue to prioritize what we've been doing this first part of the year in listening to our guests providing them what they want.
That's really helping Jack stand apart, so we're providing the right product the right message in the right offer by focusing on innovation.
Value in the way our guests define at and then our guest experience in making sure that our speed is consistent.
With that being said you have some questions about how are we how are we performing end markets that have reopened like California, and Texas, Texas. We are cautiously optimistic we continue to see strong performance there with.
With the Texas results of positive sign as they reopened.
It's hard to determine how long that will continue but we've definitely seen a positive trend in Texas.
With the early reopening notices as we had stronger trends section trend growth. There. During this period of time compared to the rest of the system.
As far as California, or California markets continue to outperform the system average in quarter two.
In most of most of California was still close at this time, therefore, it's too soon to tell.
We've actually seen in greater than 90% of all markets double digit sales growth.
As far as day parts in other parts of our business I'll, let Tim discuss more about how we're thinking about our overall day part.
Yes, so we were positive across all day parts, so lot of strength coming in through dinner and late night, particularly in with late night from a transaction in traffic point of view that really led our shift to positive transactions this quarter, which again as you mentioned earlier in the comments is the first time since Q4 of 2000.
19 that we've had that so that was.
Really.
Good thing for us to see in this quarter.
Also when you look at the 26% same store sales performance.
More than half of that was driven by a shift in our core premium products. So we've seen that continue through several quarters now and we anticipate that through this increase in innovation that Brian Australia in the marketing team has demonstrated.
We should be able to carry on that strength going forward in again, just I want to touch back on the same store sales forecasting. The first part of your question. So we are looking at that as a continuation of the three year stack.
So we've been at.
Through each quarter, we've been looking at a mid teen three year stack and we anticipate that that same level of SaaS will continue throughout the second half.
As far as continuing of comp Tim the the other thing I think it's important for us to point out as we've discussed in the past the launching of our digital strategy. We've always we had third party delivery is a key component, but we've enhanced that and we've enhanced it by incorporating all of the third party delivery.
Partners into our App in.
In addition to that we've launched loyalty. So we are in the very early stages of our digital strategy as we connect with our guests and enable one to one marketing, but we're seeing tremendous growth from digital we also foresee.
We're seeing some shifts in our customers we've talked about before on these calls with our new customers.
In what we're seeing at some of the higher income customers are holding steady meaning.
When we measured churn of customers compared to last year at this time in the rollover of COVID-19 impacts.
We're seeing that it implies that Jack has been able to successfully hold on to these new higher income customers.
That we acquired at the start of the pandemic.
So that's also creating some encouragement on our part on how do we continue to comp.
Great. Thanks very much on this.
Okay.
Your next question is from John Glass from Morgan Stanley.
Thanks, Good afternoon, sorry for on the comp question complemented beds.
One is I don't know when you really saw what point in the third quarter last year, you really starting to see that explicit check growth that brings in that sort of ramping in but have you begun to fully lap that the up 20 percentage that will last last year in how do you think about Jack in the back half.
And that dynamic in Canada.
Just wanted to clarify something else, even said, which is I think you said you were looking at three year geometric stacks in maintaining I think you said like mid teens.
In that light in the back half of it.
That would assume you get higher than that on a one year basis than what you've just guided touched on make sure I understood that correctly.
Yes, first one we talked about the average Jack So we hit that mid P. Eight.
We just came off this quarter with an average check of $11 in 13 that lapped at 928. So it was an increase of 20%.
So we feel good about that performance and.
And we do anticipate with the performance that we've had with our core premium products in the continuation of that in the steadiness of that we are anticipating that that average check strength is continuing.
So.
Relative to the three year stacks.
We are forecasting again at two 7%.
For the second half of this year, which put us at mid teens.
On the stack from from 2019 onwards.
And that's the continuation of the same mid teens that we've seen in previous quarters, yes. Thank you for clarifying the two points.
In.
And then you talked about the development and the drive through the drive through all of the formats in.
How do you see.
The overall when you look at developed in the future is at more going to be non traditional or non full full on Jack's in more of these non traditional units, where you see the real opportunity is there any way to sort of think about the <unk>.
Mix in stores volume forward in how that may lead differently than in the traditional base.
On the way, we're thinking about it is very similar.
It really the.
We're thinking about at in a way to give us access to more sites.
In more places, where Jack consumers are so having modular Jack in the box restaurants.
Designs that will enable us to the go to drive through only in caps.
Smaller narrow sites non traditional sites such as airports convenience stores on college campuses and then also as we mentioned we're going out there in trying ghost kitchens. So our view is more focused around how do we provide the opportunity for customers who want to experience Jack.
More opportunities to do that.
Okay. Thank you.
Your next question is from Jeffrey Bernstein from Barclays.
Great. Thank you very much at.
Two questions just one from us franchisee profitability perspective, or maybe you could opine upon interest of your company operate ownership.
Obviously sales are strong, but clearly the cost pressures are prevalent and I. Appreciate the color you provided in terms of commodity and labor cost inflation I'm just wondering how franchisees are responding to those pressures.
Whether there is a push for incremental pricing, whether there's other initiatives you've got to mitigate the cost pressures specifically around the labor side.
I'm wondering whether you're seeing or hearing of any shortages or perhaps maybe your sales are strong enough where youre at.
Don't feel the need to necessarily respond to those presumably short term pressures and then one follow up.
Yes, so I guess just to hit the labor shortage initially right now we're not seeing a material impact on our sales due to those shortages, it's under 10% of our company stores on the company side of that have been impacted in work.
We're estimating that the franchise system has some of the performance.
But we're tracking that in we will obviously know more in the quarters to come.
On the same store sales side, we're actually seeing a tremendous amount of strength.
On the franchise system and thats flowing through to the.
Franchise level margin that.
We saw in the filing that we just issued earlier today with an increase of $7 $2 million on franchise level margin with the flow through of those higher royalties in rental revenues associated with that strength. So.
Of the franchise overall margin on the franchisee side.
Has been improving over the last several quarters in.
Tim.
Quarterly four wall EBITDA at the franchise level has improved 50% year over year, which represents about a 350 basis point improvement as a percentage of sales.
In our annual franchise, the four wall EBITDA has improved 34% year over year.
Which represents about a 250 basis point improvement as a percentage of sales. So we're continuing to focus on as we mentioned in a part of our strategic pillar on growing restaurant profits for our franchisees.
Understood.
Very encouraging from a full EBITDA perspective.
And then just my follow up on the App in the loyalty program.
The pretty recent launches for you I'm just wondering whether there's any early feedback to share.
I think specific to $1, one marketing plans or just broadly what kind of goals do you have for each so we can measure success are there any milestones that youre looking for in coming quarters of years from you.
Usage or percentage of mix or anything along those lines of would be great. Thank you.
Yes, it's too early at this point to opine on what we have set per targets.
Any early feedback in terms of from franchisees in terms of customer usage patterns or anything encouraging on that front or still too early to tell.
Too early to tell obviously, we've seen a pretty substantial growth in our app downloads as.
As we've launched loyalty, but we've also as we mentioned in our database.
Guests increased pretty substantially as we mentioned in in our opening comments.
We think we're at the beginning stages of the growth of our database.
And so we're excited about what that will bring us in especially in Brian's background in leading digital but for other brands. We know the opportunity we have.
To grow that component of our business.
Great. Thank you.
Okay.
Your next question is from Brian <unk> from Deutsche Bank.
Okay. Thank you.
I think one tool in the development toolkit at maybe building company owned stores I know that would be done in the context of remaining primarily asset light overall, but I'm wondering if you might give us a sense of how many company on stores you might expect the openings either in the back half of this year of perhaps you'd be willing to talk about the pipeline from next year.
Im just asking how aggressive you might want to be on this front over the near term to kind of feed development over the longer term.
Yes, we will pursue out of.
As a strategy.
Continue to grow.
We will communicate that more in our analyst day in our Investor day thus.
As far as what we're expecting for company growth at this point.
For this year for the back end of this year outside of potentially the dark kitchen openings and we don't have exact timing of those.
We don't anticipate any other.
Company owned stores.
Okay, and then as a follow up wondering if you could just give some update on the <unk>.
Midwest franchise.
The situation any key dates we should be aware of of getting that fully resolved or any guideposts on how many locations could close or an end should we be thinking it could make sense of where the company by some of the stores just any color would be great. Thanks.
Yes, they're on R&D key dates that we can disclose at this point in time, but we'll say to date franchise on lease agreements for three locations have been rejected.
And those have been reported close closed in our Q2 filings. So theres remaining 66 restaurants in those are continuing to operate in that franchisee has remained current with respect to all of their obligations to us. So we'll be continuing to monitor the situation as includes four in throughout the process.
Thank you.
Your next question is from Andrew Charles from Cowen.
Great. Thanks, guys.
Just Tim just one question breaches of Tim just wanted to get your thoughts on leverage now that youre at four times in each pay down the variable funding notes, but historically the company chose to carry closer to five times net debt to EBITDA do you.
All of similar philosophy in and in.
Similar spirit carries the philosophical question for you.
If your first year on the job was marked by getting the right people hired and obviously how to navigate the brand through COVID-19. How are you thinking about your second year as youre about the surpassed the one year anniversary in just in terms of both the focus in on your end is going to be.
Yes, I'll start with this one so this is something that at this is going to the key to our long term strategy right and we're excited to approach the analyst day on the 29th in and really the discuss this a little bit more keep in mind that in decrease in the leverage ratio is in.
I am deeply decreasing leverage of the performance that we've had that as move that downwards in the.
There is some natural points that we could lever up but I think just as opposed to an exercise in just adding leverage for the sake of adding leverage we really want to be able to communicate.
So our investors some deliberate in its around why we want to do that in how we want to most effectively deploy that capital. So again, we'll kind of look forward to of the 29th for that.
Yeah in adding to the question.
Yes, the first year.
As I mentioned in my opening comments is really focused on getting the people in the culture right. So.
Creating the leadership team that is bought into the direction, we're taking the company aligning with our franchisees in focusing on building the relationship and really giving the team internally of direction around the strategy that we've laid out.
Youre seeing some of the results.
In our performance.
As a direct result of what we've been focused on around our strategy that we've been.
Executing on that we defined.
Mid last year, and so we're already seeing the fruits of our labor come come forth.
And then next year, what I would tell you is that it will continue to execute against the strategy that I mentioned and really focus on.
Enabling.
Operations excellence restaurant profitability in growth.
Thank you.
Your next question is from David Tarantino from Baird.
Hi, good afternoon.
All of clarification questions about your comp outlook for the second half I guess the.
First question.
Tim you mentioned that you're assuming a pretty stable three year comp is that what you're running so far in the third quarter.
So we've gotten some benefit from the stimulus checks on programs that have been rolled out we don't anticipate that that strength will continue forever. So.
It's too early for us to tell how much of any performance. We have at this point in time in the quarter as is directly attributable to the stimulus versus some of these.
More innovative products that we've launched out.
The net.
Some success as well so I think long winded way of saying that we're going to continue anticipation of demonstrable strength in sales going forward without continuing any incremental upside that we might attribute to the stimulus checks.
Got it okay. That's helpful to clarify thank you for that and then at.
Darren I wanted to ask one that likely will be covered at the analyst day, but maybe I'll ask at now anyway.
Was wondering if you could maybe talk about.
Or give us some idea of what.
Type of return on investment.
We're targeting for the new units in what.
What are your conversations with franchisees on that front have been in I guess.
Related to that what type of level.
Do you think the franchise day, it's really excited the development there yet.
Unit economics, as you know vary from market to market, depending on labor occupancy of construction costs.
But what we are at we have seen that I can comment on is that new store <unk>.
Of our new restaurants continue to outperform our system averages proper.
Profit is up year over year as I mentioned between 250 in 350 basis points.
We've outlined a prototype that we believe can reduce cost and build out cost anywhere in.
Up to 20% to 23%.
So we're targeting Unlevered returns in the neighborhood of high teens in low twenties.
And as that is at the level, you think that that franchisees would really get behind or is there more to go on that front.
Sure.
Our franchisees are excited about the opportunity to grow theyre expressing at they're showing the desire, we'll always look at ways to continue to improve performance and improve the return on investment for our franchisees and corporate stores, Yes, just to add in again. This is the other element we will get into more of in the analyst day, but those unlevered returns put us at.
At the top of the Pearce at groups.
So with typical leverage that attractiveness only increases.
Great. Thank you very much.
Your next question is from Eric <unk> from Keybanc capital markets.
Hey, Thanks for the question I appreciate all the detail around the performance of the reopened markets versus the the mortgage at the market I was wondering if you could talk about some of the shifts in consumer behavior in the Ava observed in those markets reopening are you noticing anything in terms of menu pricing sort of day parts ships at these markets open up in how are you capitalizing on any shifts in the head.
<unk>.
Okay.
Ill turn.
Turn it over to Darren.
One thing we have seen.
As we had mentioned in a little bit earlier is in Q2 late night has seen.
On a lot of strength very recently so.
Of the traffic increasing by 70 basis points.
The company was there for the system rather.
At late night is driving that almost in entirety, so by far its.
It's been on the day part that is.
As shown on the most brightness recently.
We've seen overall performance improve across all of our day parts.
As Tim mentioned breakfast and late night were certainly two of the most impacted by COVID-19, but is the overall transactions have improved sales.
All in all day parts of the positive in quarter two and.
And we've seen of general improvement in traffic and not something that's just uniquely breakfast related.
As far as other trends that we're paying attention to are mentioned in this as well in my opening comments.
With the higher income customer.
What we've seen is that the customer churn declined in the second quarter as well.
Of this higher income customer declined so what it shows us at it implies the Jack has been able to successfully hold on to those new higher income customers that we acquired at the start of the pandemic.
In the data that we have suggest that our communication strategy in our promotional and product pipeline strategy.
<unk>.
All indicators all the.
We have all indication that that will continue.
Thanks.
In the last question is from Jeff Farmer from Gordon Haskett.
Thank you guys you've been asked this four to five different ways, so I apologize from sort of adding on here, but.
I think you said Q2 system average weekly sales were 35000 are you willing to share what the AWS.
For the first four weeks of Q3.
No I don't think we would be wanting to share that at the at this point.
Okay, and then one more from you guys.
I'm curious if you have any metrics you can share that highlight the benefits you've seen from some of the operational initiatives that you've undertaken meaning the.
The kitchen equipment training platform anything that you can point to that sort of highlights.
Throughput or any other benefits that are pretty tangible for the system.
We have retrofitted protein holding cabinets now to in the 100% of our stores and we've trained a substantial number of our employees on.
How to utilize it in increased hold times.
What I would say is at this point, we've maintained our window of time reduced by.
Approximately 10 seconds.
And our alerts have went down so we're continuing to see improvement with our ops initiatives. Despite all of the later.
The labor challenges.
Okay. Thank you guys.
And ladies and gentlemen that are first of all the time, we have for the question and answer I'll now turn it back to the CEO, Mr. Daniel Harris for closing.
Thank you Christian in summary, we are very pleased with the results of our second quarter in the start of the third most important the team is very encouraged by the initial progress, we're making against our long term strategic initiatives on the <unk>.
<unk> being demonstrated by our franchisees as partners in strategy.
Look forward to sharing more detailed information about our long term strategy at our virtual Investor Day on June 29 until then stay healthy and we hope to see CNN in Jack in the box.
This concludes today's conference call. Thank you for your participation in have a wonderful day.
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