Q3 2022 Jack in the Box Inc Earnings Call
Good morning, and welcome to the Q3 2022 Jack in the box earnings Conference call.
<unk> have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time press star one on your telephone keypad. If you would like to withdraw your question Christopher Olin again, Thank you, Chris Braden, Vice President Investor Relations you may begin.
Thanks, operator, and good morning, everyone. We appreciate you joining today's conference call highlighting our third quarter 2022 results with me today are Chief Executive Officer, Darrin, Harris, and Chief Financial Officer, Tim M'lady.
Following their prepared remarks, we will be happy to take some questions from our covering sell side analysts.
Note that during both our discussion and Q&A, we may refer to non-GAAP items.
Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available on our Investor Relations website at Jack in the box Dot com.
We will also be making forward looking statements based on current information and judgments that reflect managements outlook for the future.
However, actual results may differ materially from these expectations because of business risks.
We therefore consider the safe Harbor statement in today's earnings release.
The cautionary statements in our most recent 10-K to be part of our discussion material.
Material risk factors as well as information relating to company operations are detailed in our most recent 10-K 10-Q and other public documents filed with the SEC and are available on our Investor Relations website.
And with that I would like to turn the call over to our Chief Executive Officer Darrin Harris.
Thank you, Chris and good morning, everyone.
Wanted to start by recognizing the hard work of our operators team members and franchisees.
Despite a tough environment, our strategy is continuing to take hold and prepare us for growth.
We look forward to closing out 2022, with the energy and passion that helps make both Jack and del Taco brand. So special.
Now, let's begin with our Q3 performance.
Our first full quarter with del Taco as part of the Jack family.
And a solid quarter for top line results across the entire company.
Both brands delivered excellent two year same store sales performance rolling over strong comps.
<unk> setting.
And the remaining lift provided by stimulus from a year ago.
With the steady improvement of operating hours open data here.
Continued focus on marketing and product innovation we.
We saw a ramp up of sales performance exiting Q3, which gives us a favorable sales trajectory heading into the fourth quarter.
Of course, we faced challenges to including the hefty inflation headwinds.
<unk> per share customers dining out and the risk of recession.
These macro issues affect the entire industry.
What truly matters is how we are addressing these headwinds.
Which I'll review as part of our strategic four pillars and our people Foundation.
Turning to flow through and margin.
<unk> staffing and operating hours continue to create pressure on our restaurant level performance.
However.
<unk> pricing improved training and focused restaurant level execution is helping franchisees deliver a better guest experience and assisting with financial fundamentals.
All in all I am encouraged that the progress against our strategy over the last few years is being reflected in our sales performance.
And that momentum is continuing.
With that let's review, our four strategic pillars within the lens of our Q3 performance.
Execution plans for the remainder of the year.
Starting with building brand loyalty.
Our creative marketing strategy continues to guide our advertising innovation and digital initiatives.
Our up and running with our new AD agencies shy day.
And just debuted our first creative work with Mark Campbell, that's been very well received on a national scale.
This is just another step in our progress to make Jack a more culturally relevant brand that provides a strong value offering with innovative and craveable products that our guests will seek out no matter what time of day.
Our focus on innovation continued in Q3.
Which featured the launch of our new grilled chicken sandwich and the debut of the Girl Scout Adventure post Cookie shake.
<unk> brought back some of our fan favorites, popcorn chicken and <unk> and both classic and spicy flavors.
Our Burger platforms performed well, particularly our ultimate Cheeseburger Sourdough, Jack which are also fan favorites that contributed nicely to sales.
Our famous tacos drove strong mixed and heavy sales contribution within sight.
A menu category, where we certainly see some additional pricing power.
Rolls and tiny tacos also contributed nicely to our improving sequential trend of items per check.
We'll keep innovating around new and exciting snacking products that have attracted up sales and add ons.
As our hook and build strategy remains key to growing check without relying solely on price.
We are attacking the breakfast day part in Q4.
Utilizing newly debut Mark Hamill creative to announce the return of French toast sticks.
Which are available as a standalone item.
Or is part of our breakfast platter.
French toast sticks are an effective way to increase check while offering guests more food at a good value.
We believe this promotion will help boost the breakfast day part as we close the year.
While still pressured by traffic our late night business continued to improve in terms of staffing in fact, our company owned core markets are back to pre pandemic staffing levels.
And it shows in our topline results.
Plus an ongoing emphasis on value enables us to continue adapting to guests' behaviors.
While ensuring we can deliver on a Jack trademark.
Operating guest everything on the menu all day everyday.
A good example of this value offering as our late night <unk> Mills.
A platform, where we were able to take price and are now testing our solution that will provide better ordering and operational simplicity.
This has to be more encouraged than ever that we can differentiate ourselves versus the competition and dominate this late night day part.
We also continue making strides in reaching our digital and loyalty potential.
Our digital sales grew over 30% versus last year, while the jetpack rewards program still in its infancy achieved a milestone of over 2 million members. After we recently rolled the program out to our drive thru and in store guests in Q3.
Looking ahead, we're excited about launching our new enhanced digital platform that includes mobile web ordering in quarter four.
We believe this platform will help us not only attract incremental e-commerce guests.
But also help us create a more seamless personalized relationship with our loyal guests, while re targeting our lapsed users to reengage across both our App and mobile web solution.
I continue to see digital as an area, where the scale and resources of two brands will help us move faster and more efficiently as we evolve and flex our digital and tech opportunities as a new company.
Now shifting to our second pillar.
Driving operational excellence.
In terms of aggressively recruiting and training new restaurant team members.
Executing on operational basis through our new guest experience review and enhanced brand standards.
Our staffing initiatives are yielding positive results, particularly on the company owned side.
As we are increasing total employment per store.
And we're training those store team members better than ever.
And continued to increase our completion of training certification.
This is enabling us to better execute our day parts opened more dining rooms, and meet our high expectations for serving guests.
Our guest experience review and focus on process and implementation of new brand standards helps.
Speed of service improve our alerts fell throughout the quarter.
Consistency in our guest experience drove top line growth.
And those who executed our brand standards saw the highest sales growth within the system.
By quarter end and year over year gap in service times actually narrowed something we haven't seen since the onset of the pandemic.
We are already working closely with our franchisees to implement the staffing initiatives that are clearly working on the company side as well as getting more dining rooms open.
In Q3, we gained on our objective of opening more dining rooms now at around 55%.
We're getting better by the day.
These restaurants continue to average a low single digit sales lift.
Upon reopening.
Now, let's discuss our evolving market.
We are pleased to report a completed letter of intent to re franchised <unk> stores in Oregon by year's end.
With plans to close the remainder of company owned stores in the market.
The transaction also includes $6 in southern California, and a development agreement advancing our commitment to an asset light model and demonstrating our refranchising capability that will ultimately lead to growth.
We're excited and encouraged to be placing Oregon, a territory that I'm confident can grow over time in the hands of a top operator within our system.
We are working on LOI to re franchise to other evolving markets.
Upon completion, we will also include development agreements.
The bottom line our ownership in these markets was always designed to be temporary and we intend to get them in the hands of capable operators, who want to invest in operations, we images and growth.
The net impact will be better performing markets more consistency in our restaurant level margin trends as we enter into 2023.
And the further simplification of our business model towards asset light.
Our third pillar.
Growing restaurant profit.
Involves executing our financial fundamentals roadmap.
This is an area in which we remain extremely focused now more than ever considering the inflationary headwinds.
Although we have a disciplined designed to find ways to improve our economic model.
Restaurant level EBITDA will always be a top priority for our team.
Our operations services team and franchisee margin task force, while working to improve margins by 200 basis points.
Through new restaurant level processing equipment and technology.
We regularly explore the appropriate balance between efficiency and cost savings.
Without jeopardizing the guest experience.
We're making good progress on some of the opportunities we've identified.
A few highlights include testing simplified build logic and packaging that will improve processes and throughput.
A hydro rents machine that standardizes, the cleaning and sanitizing process with over 1000 units either shipped or on order.
Chiefs pumps are currently in test with over 20, restaurants, and albeit longer term.
Our prior automation test with MISO is underway at a restaurant in San Diego.
We look forward to continuing to share learnings from these.
And our future margin driving initiatives along the way.
When complemented with improvements in the inflationary environment over time, we are confident that they can be extremely effective toward improving our restaurant level bottom line.
We were able to mitigate some inflationary impacts by leveraging our pricing power across key categories and core items.
We will see opportunities to increase price across some of our core items.
But also believe we need to reinforce our value position in some of our day parts and across key consumer segments in the fourth quarter.
We still see it is imperative to sustainably build check beyond just price tape.
Our hook and build strategy.
This add on approach will continue to be part of our plan to deliver solid top line performance.
As Jack has achieved reliably over time.
And lastly.
Our all important fourth pillar expanding jacks reach.
Let's start with a quick update on our re image program, which continues to garner interest and early participation from our franchisees during its first full quarter since the official launch.
We now have ramage form submitted four 373 franchise restaurants.
Isn't that 173 restaurants approved to receive our incentive offer.
We also have four company owned images to be construction in Q4 with another eight company locations can be completed in 2023.
These company locations will all be tested a new creative image, which reflects a step up from the most recent industrial image version.
We continue to see traffic led sales gains with re image openings and.
And we look forward to updating you on the future success of this new image.
Along with the significant process, we begin to make with our remodel program in 2023.
We continue to see an increase in the number of development agreements.
And we're now at 62 233 restaurants since the program launched last summer.
Under these agreements.
13 restaurants have already opened.
<unk> 220 remaining for future development.
We have more site approvals in the past six quarters than the previous three years combined.
With more site approvals on the way in the fourth quarter.
In addition, we are getting closer to two key market openings, which will likely begin in 2023 sorry.
Salt Lake City.
Which is an example of a wagon wheel territory with proximity to core markets and high demand for the brand.
And next is Louisville, a white space territory.
We're excited to enter.
Our improved approach to new market openings consist of both franchise and company owned build in an effort to maximize still support resources.
Plus position the markets for greater penetration and awareness that will lead to success.
We look forward to providing more detail as we are closer to the cutting the ribbon on these restaurants in 2023 and updating you on their performance.
Let's shift to del Taco.
We are very pleased with results from our first full quarter with this outstanding brand as part of a new company.
Tim will take you through the specifics.
But here are a few high level highlights from our results.
It was a very good quarter for sales performance, reflecting the underlying brand loyalty and demand for del Tacos Craveable menu.
Notably with $202 menu continues to perform well.
Despite it being a substantial price increase within the value platform.
We actually saw increased mix in some areas of the menu.
Took price increases.
We will seek to capitalize on items per check opportunities much like we are doing with <unk> and build on the Jack side.
The del Taco team demonstrated two notable things this quarter.
First the ability to execute record levels of price increase and just under 12%.
Franchisees have seen improved transactions along with the price taken many instances, which is fairly rare within the industry.
And second effective labor management within restaurant level margin during a difficult time.
<unk> labor margin percent improved in Q3, despite higher wage rate inflation.
Snacking better performed well helped by delivery and improved staffing.
We also saw a nice contribution from diamond due to an increase in company and franchise dining room openings.
Hours of operation now in line with 2021 with.
With a target to return most stores to pre COVID-19 hours as the summer progresses.
On the unit growth front.
We attracted new fresh flex prototype continues to energize franchisee.
We signed 11 new development agreements.
Bringing the total of signed agreement through 2021% to 79 restaurants across 11 states.
We continue to be very excited about this progress and the brands growth potential.
I want to especially thank del Taco franchisees and team members for a great quarter performance.
Inclusive of our ongoing integration and synergy efforts, we look forward to working together to finish the year in strong fashion.
To close I am extremely pleased with how our corporate team members and franchisees continue to fight through the elements control what we can.
And remain focused on the end goal of growth.
We believe our long term fundamentals are stronger than they have been in our company history.
Look forward to using the remainder of 2022 to position ourselves to deliver unit growth in the near future.
Thank you again for joining the call today.
And now I'll turn it over to Tim.
Thanks, Darren and good morning, everyone.
Quarterly review, we will begin with financial results for both of our brands before closing with remarks on guidance and capital allocation.
Note that Q3 marked the first full quarter of del Taco within our consolidated results.
Starting with Jack in the box system wide sales fell one 4% while same store sales declined <unk>, 6% in the quarter consisting of positive companywide same store sales up three 5% and our franchise same store sales decline of 1%.
When removing the impact of our four evolving markets. Our company same store sales would've been approximately 200 basis points higher during the quarter system wide sales declined relative to same store sales due to a one week shift affecting the calculation of same store sales related to the 50 <unk> week in 2021.
This one week shift at a more positive impact on same store sales due to lapping less of the stimulus benefit and its calculation when compared to the fiscal quarter comparison.
The decline in system same store sales was largely attributable to fewer transactions and reduced operating hours, particularly during the late night day part as well as unfavorable mix and lower units per transaction compared to last year. These were mostly offset by price increases.
The Jack in the box brand continued to experienced staffing challenges that resulted in lost operating hours compared to the prior year period, Although we showed consistent improvement within the company portfolio, helping mitigate its impact on third quarter sales performance.
Furthermore, we experienced improvements in speed of service trends, which darin touched on earlier as the quarter progressed.
For the first time in several quarters, we were pleased to not experience any meaningful product supply disruptions or shortages during Q3.
The quarter began with negative same store sales trends as we lapsed stimulus checks from last year, but is that impact faded the trend turned positive.
The snack and dinner day parts drove most of our quarterly sales improvement seen.
Seeing the least amount of traffic pressure of all day parts and.
And benefiting from fan favorite menu items, notably popcorn chicken and a double bacon cheesy Jack.
Transactions for both the breakfast and late night day parts declined and address this in Q4, we will run our popular breakfast <unk> along with improvement in staffing during the late night day part.
Same store sales increased sequentially on a three year basis by 70 basis points in company owned same store sales were also 70 basis points higher than our 2019 performance at the same period.
Okay.
Our premium menu items, driven by the club chicken Sandwich Ultimate cheeseburger in sourdough, Jack and value items, driven by the chicken sandwich and sides, such as tacos and tiny tacos contributed positively to Q3 sales.
As we have long stated, we will continue to innovate and seek to benefit from the return of a fan favorites as well as employer successful barbell strategy to balance value and premium offerings.
Hi.
Notably restaurants will open dining rooms at quarter end were at about 55% of the system and experienced higher sales gains year over year than stores with closed dining rooms as in store activity continued to increase.
Regarding store count during the quarter, there were three openings and three closings, maintaining our JAK restaurant count at 20207.
Inclusive of del Taco there are now over 2800 units across the entire company.
Okay.
Jack restaurant level margin for the quarter was 15, 8% inclusive of our temporary evolving markets portfolio.
As a reminder, the evolving markets are comprised of Oklahoma, Kansas City, Oregon, and Nashville, which are required for the purpose of Refranchising.
Excluding these four evolving markets restaurant level margin would've been 19, 3%. Additionally, we are pleased to enter into an LOI for the Oregon market and as Darren mentioned, we are nearing agreement on two of the remaining three markets.
In addition to the impacts from these markets restaurant level margin was pressured by unprecedented commodity and wage inflation at levels consistent with industry trends.
Pricing of nine 7% helped us manage the cost environment, and we will continue to take a disciplined and measured approach to pricing strategies as a means of mitigating the impact on our margin and bottom line.
Food and packaging as a percentage of company owned sales in the period was up three 6% versus the prior year, primarily due to commodity inflation of 16, 8% as well as unfavorable sales mix, partially offset by menu price increases.
The inflation, we have experienced is across all categories with the greatest impact seen in proteins sauces oils in beverages.
Excluding evolving markets this impact decreases to three 3%.
Labor as a percentage of company owned sales in the period was up three 6% due largely to wage inflation of 13, 2% compared to prior year as well as the impact of our evolving markets.
These two cost pressures were partially offset by price increases and by lower incentive compensation.
As you all know the labor market remains tight and we are selectively increased wages in key markets to attract and retain talent.
Excluding evolving markets labor as a percentage of company owned sales was up two 2%.
Occupancy and other costs as a percentage of the company's sales in the period was up two 5% due largely to 29 restaurants within our evolving markets portfolio with lower than average sales volumes and higher costs for maintenance repair and utilities.
Franchise level margin in the quarter came in at 41, 4% or $70 8 million, a $6 million decrease compared to the prior year with just over $2 7 million due to the St. Louis area of franchisee bankruptcy.
Without this impact franchise level margin would have been 42, 2% for the quarter, only 110 basis points lower than the prior year of 43, 3%.
Jack SG&A in the quarter was $26 9 million.
Excluding advertising G&A was $21 8 million $4 $7 million higher than the prior year the.
The driver of the increase was net <unk> losses in the period versus a gain in the prior year.
This increase was partially offset by lower litigation matters incentive compensation and other.
Adjusted EBITDA was $73 2 million down from 79 million in the prior year due primarily to lower restaurant and franchise level margin as well as net <unk> losses.
Yes.
Consolidated GAAP EPS for the third quarter came in at $1 eight.
Compared to $1 79 in the prior year.
Operating earnings per share, which includes certain adjustments came in at $1 38 for the quarter versus $1 64 in the prior year.
The decline in operating earnings per share was primarily attributable to lower company restaurant level margin and franchise level margins at Jack as well as the higher interest expense connected with increased borrowings to fund the acquisition.
Okay.
Turning now to the del Taco segment.
Systemwide sales were up three 3% while same store sales rose three 5% consisting of a company same store sales increase of two 3% and our franchise same store sales increase of four 8%.
Difference in same store sales performance was primarily due to pricing.
As well as a number of non California markets posting outsized same store sales performance as these franchise markets continue to demonstrate considerable brand loyalty.
Notably the brand outperformed the fast food industry during the quarter for 11 out of 12 weeks and exceeded the quarterly industry benchmark by more than 200 basis points.
Similar to Jack del Taco look towards price and helping combat inflationary headwinds related to food and labor.
Average check rose as a result in spite of modest transaction declines.
The impact of reduced operating hours on a quarter was immaterial to the system wide same store sales result in the trend line was stable.
The snack and dinner day parts drove the majority of the sales improvement versus the prior year in 2019 and was aided by delivery growth that over indexes at late night.
Compared to 2019 same store sales growth was mid single digits for the company in double digits for franchise with positive results across all major geographies.
During the quarter two for quick combo meal platform had the greatest contribution to sales through higher pricing from the $5 and $5 50 to $6, while the 'twenty under $2 menu, which launched in Q2 to help preserve and drive value contributed a notable sales lift from the chicken rollers refresh.
There were five closings of which two were company in three of our franchise and our quarter end del Taco restaurant Count was 594.
Since the beginning of the fiscal year, which includes both before and after the acquisition there have been three del Taco openings in 11 closings.
Yes.
Del Taco restaurant level margin was 17, 6% compared to 21, 2% in the prior year.
The variance was due primarily to pressure from commodities wage inflation and the impact from purchase accounting.
Company owned pricing for the quarter was just over 11%.
Food and packaging as a percentage of company owned sales in the period was up two 7% versus the prior year, primarily due to commodity inflation of 25% that was only partially offset by menu price increases.
While commodity inflation was pervasive across all categories. The greatest headwinds, we're seeing in proteins oil avocados cheese, and tortilla shells, which collectively represent 70% of the overall impact.
Labor as a percentage of company owned sales in that period was down 0.4% versus the prior year.
The rate per hour inflation was 10, 8%, but same store sales increases in well control labor hours resulted in an improved labor margin percentage.
Finally occupancy and operating costs as a percentage of company owned sales in the period were up one 3% due to higher utility costs and delivery fees.
Franchise level margin in the quarter came in at $5 1 million or <unk> 42, 7% a decrease of one 6% from a year ago.
This modest decrease was mostly due to the impact of increased lease hold interest amortization and franchise support costs, while favorable same store sales and royalties as well as lower support and other costs contributed positively.
We are focused on successfully integrating del Taco and realizing our target synergies, which will be a continued priority as we close out 2022 and head into 2023.
Moving on to guidance.
We are updating our restaurant level margin guidance as well as our capex and other investments for full year 2022.
Jack restaurant level margin is now expected to be around 16%, which includes high single digit price increases our previous guidance was around 17%.
Restaurant level margin when removing the temporary volume markets is expected to be around 19% also 1% lower than our previous guidance of around 20%.
And lastly, our companywide Capex and other investments guidance is now at $50 to $55 million for full year 2022, due primarily to lower franchise incentive capital deployment towards restaurant re images.
Our previous guidance was $75 million to $80 million.
Okay.
All guidance measures not mentioned remain the same as previously disclosed.
And as we said in May our intention remains to provide specific del Taco guidance beginning in November for full year 2023.
Turning now to our capital allocation strategy. We have previously discussed that our primary goal is investing in growth while being disciplined in returning cash to shareholders via share repurchases and quarterly dividends.
This combination in our view is the surest means to unlock shareholder value over the long term.
Our strategy also entails operating an asset light business model, which would involve refranchising del Taco along with our Jack in the box evolving markets.
However, identifying appropriate partners as part of this effort is critical both in.
Terms of strengthening our franchisee base across both brands. So that we can deliver attractive annualized net unit growth by 2025 as well as maximize proceeds.
Okay.
We continue to pursue sale leasebacks for our own Jack in the box properties in consultation with our advisors, who are evaluating optimal structures within the securitization.
This program is underway and we look forward to providing more updates in the future as further details are finalized.
Shifting the share repurchases.
As I said on our Q2 call, we will be resuming share repurchases in the back half of this year and stand by that commitment.
While we did not repurchase any shares during Q3 as part of our $200 million share repurchase authorization, we intend to execute $25 million in share repurchases in the fiscal fourth quarter.
These repurchases demonstrate our commitment to deploying capital to drive shareholder return when we have excess liquidity available and can do so at an attractive price.
In closing, we are making progress on simplifying our business model through Refranchising del Taco addressing evolving markets at Jack in the box and continuing to provide short term visibility where it would be most helpful.
On behalf of myself and this leadership team I would like to thank all of our team members and franchisees across Jack and del Taco for their efforts and perseverance.
As we navigate through the near term we are looking confidently towards our future of harnessing the combined power of our two brands.
We have great optimism for what lies ahead for Jack in the box.
And with that we'd be happy to take some questions. Operator, please feel free to open the line for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question press star one on your telephone keypad.
Your first question comes from Brian Bittner from Oppenheimer and company. Please go ahead.
Okay.
Just a clarification and then a question just a clarification.
Just so we're all on the same page the EPS guidance and the brand level same store sales guidance that was given last quarter that simply remains unchanged and intact correct.
Yes, Thats correct, Brian Okay.
Okay.
And just during the sales trends for the third quarter, they outperformed our expectations the accelerated on a three year basis.
On this call Youre, saying Youre seeing a continued ramp up in sales exiting <unk>. So I just think generally speaking investors are somewhat worried about jack's exposure to the lower end consumer. So based on these updated trends is it safe to say, you're not seeing a degradation in consumer spending patterns and theres just a lot of.
Mixed messages out there so would love your thoughts there and what just makes you incrementally confident that these two brands are better positioned in an environment, where your core customer is feeling more pressure than normal.
Thank you Brian for the question.
Yes, we're really confident with both brands and what we're seeing with our strategy working.
We've been very.
Careful in the pricing process that we've taken.
And how we promoted our items.
And as we look forward, we'll continue in our hook and build strategy that continues to work.
I think what gives me the most confidence beyond the execution of our strategy and our innovation strategy is that we still have upside from a standpoint of improving our staffing.
Continuing to open dining rooms, and <unk> and then what I'm seeing across both brands is this really strong execution at the restaurant level that gives me a lot of confidence that the marketing approach that we're taking is resonating the execution is happening and then the last piece both brand continue both brands continue to build.
One is digital and so it Jack as an example.
Pulling out E Commerce and now we're starting to take advantage of the database for building on loyalty to continue to grow same store sales. So we feel good about executing on our current strategy, but also some of the other new things we have in the works as far as the income the different income levels levels of the consumer I think the whole industry is facing.
Headwinds as it relates to the lower income consumer what's interesting about our approaches.
As we went into our strategy, we did some segmentation work and really understood.
The higher income consumer is one that we could reach a Jack and we did a good job of communicating our message to them and growing sales there.
Where we saw a little bit of the weakness just like the industry is on the lower end consumer below 50000, but what's interesting about that is as you go further down on that decile. Even further income levels. We actually grew during the quarter at the lowest income level. So we definitely see the opportunity in the middle band.
Of our of our income best aisles, and we'll continue to find ways to drive value.
And and how that value equates to the consumer.
Yes.
Can mean a lot of different things.
I'll say, one more thing about value.
The way, we think about it is our pricing team has done a lot of work looking at where we have opportunity of where their sensitivity.
We look at what is the value and value means a lot of things currently it is at in the promo offer is it in pricing do we package it and combos family packs are a cart.
How are we communicating through a different channel, whether it's digital app and dine in.
And then we also get a segment by guest or income level. So there's a lot of different ways for us to approached us and we've done a lot of work and research with pricing and understanding how do we get better at communicating to our consumer.
Great. Thank you.
Your next question comes from Lauren Silberman from Credit Suisse. Please go ahead.
Thanks, So much just a quick follow up.
Are you seeing any differences across the regions as it really relates to comp performance and then my question is actually on value how are you.
Thinking about everyday value balancing elevated cost.
Sort of what's the franchisee appetite for value in a more challenging environment are you starting to see the industry more broadly you get more aggressive on that.
Thank you.
Okay.
Yes.
Let's start with the value question.
We definitely are seeing the industry get more aggressive across promoting value.
And as I mentioned in the last statement value is going to mean different things for different income levels and product types and channels and so that's where we see the opportunity both for Jack and del Taco is looking for those opportunities both with our premium items and value added.
I'll use the example from del Taco.
Within their 'twenty under $2 menu, which has been very successful.
They were able to drive substantial price increase and still be seen as a value product.
And we have opportunities like that at Jack as well that we pushed at the same time during the quarter. They promoted the del Taco, which is more of their premium line of tacos and it did extremely well. So it's really dependent upon the consumer is depending on how we communicate it and its depending on what means value for each individual segment.
The consumer base.
As far as regionally on the Jack in the box side of the business, we definitely saw strength in California, and Texas, our largest markets.
And we definitely saw some challenges in the northwest in the Midwest as.
As far as.
On our sales side and a lot of that goes back to that key challenge that we've all been faced with us.
Staffing those are the areas that have been most impacted by staffing.
And so if we get our dining rooms open we see about it.
8% improvement in sales.
And so we know that those markets are good.
Perform even better if they can staff and get their dining rooms open.
Yeah, and just to underscore Jon's point.
Lot of that Midwest market is our evolving market basket, excluding those markets. Our same store sales on the company portfolio would have been roughly 200 basis points higher or somewhere around five 5%.
Thank you very much.
Your next question comes from Brian Mullan from Deutsche Bank. Please go ahead.
Thank you.
Question on the potential to re franchise company owned del Taco units over time.
Just talking about this high level it would be helpful to hear what you hope to look like on the del Taco side when that process is fully behind you.
So how long it takes how many transaction take place are you, hoping to close to a 5% franchise mix there similar to how you looked at Jack prior to prior to Covid or there's some reason that we should be considering where you would maybe look to retain more to del Taco units over over the long term.
We'll continue to give further guidance when we come to an investor day in Investor Conference related to that specifics on Dell talk about what I can say is we want this business to be asset light.
And to look very familiar to the Jac footprint eventually and that time, what we're going to do is we're going to do it in the right way, we're going to get the right partners and so whether that's 12 months or 24 months, we think its a relatively short period to move to asset light.
And as we've shared all along not only did we know going into this acquisition that we had Jack franchisees in existing markets that we're interested in buying del Taco. We knew there was already some pent up demand for wind del Taco executed a couple of transactions 12 months to 18 months ago, and so we felt very confident that refranchising as a part of our strategy.
That we can execute against it.
And just to provide solid.
Substantiation of that we've already had two offers on two markets with del Taco that we're still considering.
Those offers and whether we accept them and we are just about ready to launch a full scale.
Refranchising effort for del Taco.
Thank you.
Your next question comes from Gregory Frankfurt from Guggenheim Securities. Please go ahead.
Hey, Thanks for thanks for the question I think last quarter. Your system pricing was a point lower than the company stores. So I guess, just just confirming you guys running at like 9% pricing for the system.
As you talk with franchisees.
Obviously, you can't dictate where their pricing is but what's your advice to them and kind of are you comfortable with that level of pricing right now running through the system.
Yes, Gregory are pricing is high single digits for the system as we mentioned company.
Company prizes nine seven.
We caught up.
As a company port basket to the franchisees, which has historically been higher so we've sort of leveled out there as an overall system. So high single digits in the nines is a good target.
Your next question comes from Dennis Geiger. Please go ahead.
Great. Thank you.
Encouraging development updates continue as it relates to the unit growth side of things.
Erin or just kind of wondering as it relates to latest thoughts on the environment cost pressures rates et cetera.
If any of that is impacting anything with with respect to.
The cadence and the pace of signing agreements or or opened I think.
In past quarters.
It's not really so just kind of wanted to get the latest update on that front. If you could please.
Sure.
Dennis that's a great question and the way I would categorize it as this is we are making substantial progress with the JAK base of franchisees against our development.
As an example, we've approved more sites in the last six quarters than we have in the prior three years.
So we're building our pipeline we feel good about that we're signing development agreements still mostly with our existing base.
And yet we also see interest from new franchisees now what I would say on the other side of that is with this economic backdrop, we definitely see.
Yes.
New franchisees, taking their time evaluating the opportunity.
Which I think is just natural with us.
Backdrop in the environment, we're in but we continue to see a lot of interest, especially on the Refranchising deals.
As we mentioned on the call we have a couple of other evolving markets, where we've had.
LOI.
That we are deep in the process of finalizing that are both with new franchisees that also want to develop and grow. These markets. So we feel really confident about the strides we've made related to development.
The one other thing I would add is that as you've heard from many of my peers in the industry, we are definitely facing.
<unk> headwinds as it relates to cost development, we're definitely facing headwinds on availability of equipment to local market conditions, whether it's labor.
And we've done our best to set ourselves up to execute against our growth strategy by.
Spanning our vendor base.
Going out and using our balance sheet to make sure we have equipment available to us and then working hand in hand with franchisees to make sure that that pipeline stays impact and lastly, I would just say our franchisees continue to show excitement for growth because we know this.
Current environment is.
Temporary.
Great. Thanks Darren.
Your next question comes from Jon Tower from Citi. Please go ahead.
Okay.
Jon Tower from Citi. Your line is now open sorry about that I got to figure out how to use the mute button there we go.
So quick question for you on or actually two related to kind of macro in California. First there is the stimulus hitting this fall I'm curious to know how the company is planning to capture more than its fair share of.
Stimulus dollars as it hits the consumers' wallets this fall, particularly plans in place to have that carry forward are you going to do things through the App say to capture people into loyalty programs and then the second question is on the Fast Act I'm curious to get your take on what you think.
Whether or not that bill ends up making its way through the legislature in California and into law and then potentially what it means for your business.
Yeah, let's take that last question first and it's hard to speculate what will happen. Obviously, we're paying a lot of attention to it to make sure that we're prepared and so both us and our franchisees hope that the Senate and the governor see that if passed this as it's currently written that it will do more harm than good but whatever happens.
Jack and our franchisees, we will be prepared to handle it accordingly.
And so.
We understand that as far as the stimulus.
Look we think the strategy, we've been employing our hook and build innovation is what differentiates Jack and a Great example is we went back to spicy strips breakfast <unk> with.
With our French toast sticks and then we've also prepared innovation into next calendar year. So we think there is definitely an opportunity for us to take advantage of the stimulus through what's been working but also through innovation and then also what I talk about innovation I'm talking about digital as we rollout our e-commerce platform we.
Think we've seen a lot of good progress as our digital business was up 30% year over year, just in Q3 to take advantage of the advantage of the stimulus checks.
Your next question comes from David Tarantino from Baird. Please go ahead.
Hi.
Good afternoon or good morning.
Yes.
Had a clarification questions are a couple of clarification questions on your comments on the recent sales trends for for Jack in the box and I think Darren you mentioned that the growth improved as the quarter progressed, but I wanted.
To ask where you referring to growth versus last year, a growth versus 2019 or both.
Sales as the quarter continued.
No.
As the quarter continued we saw improved sales year over year.
And as the quarter continued sequentially.
Sequentially, yes.
In addition to that so when you look at year over year. So we began the quarter with negative same store sales trends right and then as we lap the stimulus checks and they fell off.
Trend turned positive as we exited and gives us optimism going into this existing quarter.
Understood.
I just want to make sure I understand it so.
You're talking relative to last year, and not necessarily relative to sort of kind of the pre pandemic level and I guess I guess.
Related to that I mean, I guess, how does the trend look.
Existing the quarter relative to 2019 levels, if you're willing to share.
Is it similar to what you did in the quarter or is it better worse, yes.
Yes. So same store sales has continued to increase sequentially on a three year stack basis. If you look at it that way by about 70 basis points. So we were pleased to see that performance and then on the company side same store sales were also 70 basis points higher versus that 2019.
Pandemic period.
Okay.
I'm sorry.
Keep asking about this but which period are you referring to as at the quarter or is that the exit rate for the quarter I guess.
It's we're looking at a three on a three year basis. So that the company portfolio is performing 70 basis points higher than our 2019 performance for that that same portfolio.
On a quarterly basis.
Okay. Thank you very much.
Your next question comes from Jared Garber from Goldman Sachs. Please go ahead.
Great. Thank you this is Ben on for Jared.
On del Taco, I guess with a full quarter plus in the books would've been some of the key early learnings from the brand along with any realized or potential further synergies.
Yes.
Yes.
So far since we've acquired del Taco, mostly what we've been impressed with is the management team that we have in place and the people within the del Taco business.
It's definitely.
Titan at family, that's clear on how they execute and how they go to business and work every day and very similar mindset to Jack which is a challenge put in front of them. It is accepted and they get excited about how are we going to solve the problem and make this business work and so I've been really encouraged by the team.
I was up there a week ago, where we had a town hall and had everybody back into the office. So it was good to connect with all the team members face to face.
And just see their level of camaraderie and how they work well together.
I also like what I've seen is how our teams are working together and sharing ideas back and forth and more than just synergies where I see the real opportunity is how do they share information and shared knowledge to create momentum and I'm definitely seeing that take place and some examples of that are some of the things they're doing with automation some of the things we're doing with auto.
Nation versus both brands, having to test it separately.
The groups on their own decided hey, we'll take something in the kitchen at Jack and Theyre going to take something on the drive thru or some AI technology and test it and they're sharing that information back and forth. So we both create momentum.
And then the last thing is I think.
Overall from a synergy standpoint, we are on target with what we expected.
To meet the $50 million.
And that we're furthest along in the merging of our supply chain.
Working together and working with the del Taco business and their franchisees and just to add to that we also get share experiences and knowledge sharing on how they're approaching the value consumer as an example, which was brought up earlier on this call. So I will talk about a very successful quarter in our sales date. The same store sales were up three 5% and we saw that they were able to penetrate.
That value consumer very successfully particularly with their Q4 quick combo meal platform, which was incredibly successful along with their 'twenty under $2 menu, which was also successful. So we're able to share those learnings on how to approach approach product development and communication to the consumer with these <unk> as well.
Your next question comes from Alex Slagle from Jefferies. Please go ahead.
Hey, Thanks, good morning.
Question on the Taco franchise development and.
And you mentioned that the building pipeline here, but you also it seems like the pace of development has paused not sure. If that's timing related to the integration and pending actions following the acquisition or if it's macro or equipment or whatnot, but any thoughts there.
It relates to that why that slowed and then a little bit of a pickup on the closures, perhaps some optimization efforts, but if you could comment.
I appreciate it.
If I understood. The question correctly, it was related to bill Taco in their openings and more than anything. It's just it's just delayed timing wise.
From where they were in previous quarters. So.
They still have they have signed some additional development agreements this year.
<unk> increased their sites in process, so it's mostly timing.
Yeah on the closures, we feel they don't talk about fairly mild closures. There were five two of those were company that we felt more comfortable.
Closing and then the range of three of our franchise. So we don't see that there is any.
We don't see that as a sizable issue inside of that brand.
Great. Thanks.
Lastly, we will provide additional guidance on bell Taco in November .
Your next.
Next question comes from Chris Carey from RBC capital markets. Please go ahead.
Hi, Thanks for the question on the updated Capex guidance, which is now $25 million lower than before is that more of a timing shift or does it in any way represented change to re image incentive strategy. Ultimately just trying to understand what normalized capex can look like following this.
Year.
Yes that is primarily a timing shift relative to remodels refreshes and <unk> programs.
The guidance that we gave out the $50 to 55% is fairly consistent with what we've historically done so having said that and as we mentioned earlier, we've got very robust interest in this remodel re image program. We have 373 applications that came in from our franchise system for that program, we had internally.
<unk> improved 172 of those so it's a matter of getting through that process. The formality of it and then getting the cash out the door so that will come.
At some point fairly shortly here, but relative to our guidance there was a little bit of a mismatch there.
We have seen so far with those units that have done. This program. So far very attractive traffic led sales in those units, which we are very encouraged by.
Yes, the only thing I'll add to what Tim had to say on that pieces, just like we're building a franchise real.
Our real estate pipeline.
Yes.
The incentives in place getting franchisees negotiations with our landlords and moving the process forward with kind of some of the delays that we see at the city level of permitting it takes a little bit of time for this to ramp up but the good news is we have a lot of franchisees that have expressed interest and as Tim just said.
We've approved 172 for the incentives.
Your next question comes from Nick <unk> from Wedbush Securities. Please go ahead.
Thanks for taking my question then.
The value menu approach on.
On the part of Jack in the box. So I guess, the lack of one for the past decade, or so has been.
One of the main topics of debate Vera.
Do you think there is a need for a systemic approach to value at Jack in the box, particularly now that you have the learnings from arguably one of the better brands out there in terms of their approach to value.
Yes, I think in the past Jack was a little bit slow to approach everyday value.
If you think back to 2016 and massive value wars.
Whats a little bit different about our approach. This time as we do have del Taco that's done a lot of research around that with this new team in places we've done our segmentation where can understood our guest base better.
We've done a lot of work behind the scenes on how how do you create value with our guests.
And as I mentioned earlier Theres, a lot of different ways for value at Jack.
Both.
To the premium.
Product and what.
What we consider our value products. It also comes in how we price it how we promote it.
What channel whether it's digital.
App dine in whether it's a different day part.
Whether it's all Carter family packs, so we have a lot of thoughts.
An approach that we plan on taking.
To reach and be prepared to compete from a value standpoint.
Okay.
Your next question comes from Jeffrey Bernstein from Barclays. Please go ahead.
Great. Thank you very much.
A question on the inflation and the related pricing I think you said commodity inflation was up 17% this quarter in labor up 13.
Wondering if you can share your outlook for that as we look I guess through the current fourth quarter or any initial thoughts on 'twenty three it does seem like.
There is potentially some easing on both fronts, so trying to get your.
Simon on that.
In response to that I know, you're running 10% price just wondering.
What would that pricing be if there was no.
Incremental pricing taken just trying to assess the health of the franchisee and their profitability as we look ahead with hopefully inflation easing in the pricing outsized. Thank you.
Yes for the full year, we expect to be the high end of our guidance.
It's a little higher.
In the second quarter, it was a little higher than that in the third quarter and we expect to see moderate some moderation in the fourth quarter.
So as expected it affected company operated margins from significant commodity and wage inflation as well as the rising cost.
But we expect some of these pressures will continue to impact margins for the remainder of the year, but but he's.
Your next question comes from Jim Sanderson from Northcoast Research. Please go ahead.
Hey, Thanks for the question just wanted to talk a little bit more about the.
SG&A it seems to be del tacos numbers were a little bit higher than I had expected realm.
Relative to system sales, how should we look at that as an opportunity to.
To see some improvement in that budget as you consolidate operations going forward.
Yes.
Yes, I mean clearly there.
We have some synergies as part of <unk>.
Acquisition, which we're just at the early stages of realizing however in our view of the quarter.
We saw the G&A relatively in line there is some onetime costs that.
We don't we don't perceive as being run rate that occurred this quarter, but generally speaking.
G&A point of view.
We felt we came in in a very disciplined controlled manner for the quarter.
Okay.
As a quick follow up on the evolving markets could.
Could you run through the actual number of stores in those markets because it seems to me there could be a nice step up in store margin as you go through that Refranchising process in the next couple of quarters, just like to make sure you have the detail on <unk>.
Great.
Great point.
Glad you brought that up so as we mentioned in our prepared remarks, we have four markets inside of evolving markets.
Back around.
Around 30 units in aggregate, we have an LOI that we just announced Darren mentioned that we're very close on two more of those market. So in the near term here, we anticipate having three of the four markets resolved and Refranchising.
So we know that Thats, obviously been.
A drag on our restaurant level margin in recent quarters.
And we're looking at to have that come to a close fairly soon.
Alright, and that would only leave one market that you'd have to work with.
That's correct.
Thank you.
Yes.
And your last question for today comes from John Glass from Morgan Stanley . Please go ahead.
Thanks very much.
Did you ask about breakfast.
Once upon a time I think breakfast was like 20% of your sales I don't know if you can just level set where that day part is.
Today, and maybe talk a little bit about trends you did talk about re emphasizing its I don't know, maybe if thats not gotten the attention some of the other day parts have gotten so besides product innovation you mentioned what are the things you're doing at the breakfast day part.
Just talk about the product innovation percentage of sales.
As there is a lot of competitive pressure, obviously in that day part and what you think that opportunity is if you think there is a significant increase in opportunity there.
Yes, we haven't broken out.
Or disclosed precision around the composition of day parts.
No that it's.
There isn't a vast disparity amongst our large day parts of breakfast is meaningful also breakfast as a product category. In addition to a day part for US. So it is clearly clearly important to the business.
Darren mentioned earlier in his remarks as well, we're going to come in fairly aggressive in Q4 with a.
Breakfast promo with Mark Hamill, Thats got some national attention, introducing our French toast sticks, which has been a historical favorite for the brand. So we're excited about the upside opportunity we have in that that they mark the other thing I would say is when we.
We did some research on wire.
While our breakfast day part had slowed slightly in this quarter and we had some key learnings that we are applying in Q4 and we're already seeing the benefit one is we stopped promoting it on a tertiary message through media.
Reengage them.
Absolutely, helping and we.
Came back out with a really good offer with our French toast sticks that are loved and immediately we're seeing our breakfast day part bounce back. So that's part of our approach is to aggressively.
Communicate the right message around breakfast at the right time, and we're going back to some tried and true methods.
Yes.
And there are no further questions at this time I will turn the call back over to the presenters for closing remarks.
We appreciate the time you've taken today, we're excited about where Jack in the box is in our evolution of our strategy.
And all the different things that we're doing to do to execute against our four pillars of building brand loyalty driving ops excellence growing restaurant profits and ultimately expanding <unk> reach.
We also will look forward to seeing you for quarter four in November .
Giving you a further update.
Thank you. Thank you.
This concludes today's conference call you may now disconnect.
Okay.