Q1 2023 Jack in the Box Inc Earnings Call
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Ladies and gentlemen, thank you for standing by my name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Jacks first quarter 2023 earnings webcast. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question you can press star one on your telephone keypad to remove yourself from the queue that is star one again.
It is now my pleasure to turn today's call over to Chris Brandon Vice President of Investor Relations.
Thanks, operator, and good morning, everyone. We appreciate you joining today's conference call highlighting results from our first quarter 2023.
With me today are Chief Executive Officer, Dan Harris <unk>.
Interim Chief Financial Officer Don.
Following their prepared remarks, we will be happy to take questions from our covering sell side analysts.
No 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 reflects 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, and the cautionary statements in our most recent 10-K to be part of our discussion.
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.
And with that I would like to turn the call over to our Chief Executive Officer Darrin Harris.
Thanks, Chris and good morning, everyone.
Before I review, our first quarter results and provide updates to our four strategic pillars.
Now, let me discuss some key takeaways from our first quarter of 2023.
We delivered outstanding performance with respect to same store sales improved restaurant and franchise level margin and adjusted EBITDA or.
Our restaurant operators franchisees and team members are doing a phenomenal job of serving our guests and creating a better experience.
I would never want to Miss an opportunity to publicly say thank you for their efforts.
Im grateful for you and I am proud of how well you are focused on executing the basics of the business.
Which has led to a strong start to the year.
We continue to build momentum by driving operational excellence.
Our focus on staffing our restaurants.
Training team members.
Expanding operating hours, improving speed of service and reducing alerts.
Including the initiatives that support them.
Are directly linked to our top line sales performance.
When combined with launching successful promotions innovative products and evolving into a more relevant digital brand. It gives me confidence we can price effectively and improved transactions.
Among many other highlights.
We returned to positive net restaurant growth in Q1.
Five net openings for Jack and one for del Taco.
Which is a good start toward delivering positive net restaurant growth for the full year.
I am pleased with the start to 2023.
Which only enhances our belief that this will be a big year for our company and the investments we are making needs to challenger brands are taking shape and leading to greater results.
Let's now provide some updates on our four strategic pillars.
We begin with building brand loyalty and our efforts to grow sales and accelerate transactions.
Led by our creative marketing strategy, ensuring that Jack is cultural relevant.
Visible and distinctive across all our customer touch points.
Our new advertising agency shy of the day.
Continues to help push the brand forward and more effectively connect with our core audience.
In addition, along with our media partner Kara.
We continue to optimize our media spend and maximize our reach.
We have set this in motion with Jack and soon.
We will start seeing similar benefit for del Taco in the upcoming quarters.
Entering 2023, we established a strong 12 month calendar that will provide a balance between innovation.
Core and iconic favorites.
Utilizing guest insights to ensure we are offering guests what they want when they want it and how they want to get it.
The end result, led by our hook and build strategy has been a material boost to same store sales growth.
And equally as notable continued sequential improvement in traffic and transaction trends.
In Q1, we benefited from both a substantial innovation pipeline and an extensive product heritage.
That can be leveraged to energize, our fan base and encourage frequency.
We promoted core products.
Introduced new offerings, and Opportunistically bought back past favorites, and this combination resonated by increasing frequency with our loyal guests and.
It accelerated sales at all income reasons of our existing consumer base.
During the quarter, we demonstrated this by bringing back our ethylene name Monster Tacos for Halloween.
Followed by promoting our core with the iconic Bacon ultimate cheeseburger.
And then the introduction of the new $10 fan base platform.
Kicking off the new calendar year, we focused on promoting value.
The debut of the JAK pack combo, starting at $5.
And marketing a healthier option with the relaunch of our new and improved grilled chicken sandwich.
We went beyond just food in Q1 and.
And focused on another opportunity as delivered by our guest incentives.
Enhancing our beverage offerings, including the basic which shaped in October followed by the frozen Hot cocoa shake in November .
The biggest beverage news of the quarter was the January launch of our Red Bull infusion line.
Jack in the box and Red Bull or a perfect collaboration while expanding our variety of caffeine based derivatives.
We see exciting news throughout the year in the beverage space project. In fact, you might have seen this week.
Our latest mobile shape launch in partnership with after Ryan Reynolds.
These shapes and beverages are designed to build average check as part of our strategy along with trial with new guest acquisition.
Of course building brand loyalty is not limited to our craveable menu items.
It includes enhancing other touch points with a more modern Jack view updated menu boards team member uniforms.
Packaging and of course scaling our restaurant <unk> program, which I will discuss shortly.
The final key aspects of building brand loyalty through our digital channels and our digital transformation efforts.
Q1 was our first full quarter with our new mobile App and web ordering.
We leveraged this new digital platform in Q1 with 24 days of Jack Mintz.
Featuring the epic deal lineup of exclusive offers for our <unk> rewards loyalty members.
And driving a 16% lift in loyalty sales during the program and leading to our largest digital sales week ever.
On an annual basis, we now generate $500 million in digital sales across Jack in desktop.
And digital sales represent over 10% of our business at both brands.
Up from less than 1% in 2019.
What encourages me most is that this is only the beginning.
And our new platforms and eventual PFS deployment will strengthen the foundation towards making Jackie formidable and long term digital competitor where.
Where we can leverage our scale and resources to better use data and personalization across both brands.
Now, let's move to our second pillar <unk>.
Driving operational excellence.
Which is based on our restaurants, delivering an elevated guest experience on a consistent basis.
We are focused on three areas.
Building the capability of our people and franchisees through training.
Second elevating their requirements and standards of execution at the restaurant level.
And last week.
Simplifying our operations and menu through equipment technology and process enhancements.
Our staffing initiatives have proven to be highly effective and correlate the same store sales in Q1.
With most of the company restaurant staff only.
And outpacing pre pandemic levels.
Our franchisees now are within one hour of pre COVID-19 hours of operation.
Once we staff our restaurants.
It is just as important that our people have a great experience.
And our training.
So that in turn they provide the same experience to our guests.
We're seeing record levels of engagement and certification in our restaurants and have implemented manager and team member requirement that has now reached 93% certification.
As of Q1.
This is translating to an improved guest experience that's our service alerts Jack have been trending downward for the past five quarters and are currently at the lowest level in five years.
Speed of service has also been improving steadily for the past three quarters.
And so the first year over year improvement in separate quarters during quarter one.
We have now reduced sequentially in back to back quarters.
These service level improvements continue to support our topline results.
Turning to simplification, we continue to implement our test restaurant level initiatives.
To reduce complexity, we're changing product builds that can meaningfully improve efficiencies or cost pressures.
While also benefiting both guest and team member experiences.
We continue to explore prior and automation and will be adding a second location later this year.
We have seen encouraging results and look forward to exploring further others can enhance our operational capability.
Particularly as the new Pos rollout at.
And initiatives like this can become a reality.
We're also leveraging our del Taco acquisition and learnings from their automated voice AI ordering initiative that is yielding better up sell rates.
Technology innovations, such as automation and voice AI.
A small part of our multiyear technology roadmap.
That is also focused on stabilizing our core platforms and modernizing outdated legacy applications.
Unlocking restaurant opportunities to drive cost out.
Improved labor or service and.
And grow profitability is predicated on having a modern cloud based Pos.
We continue to implement our plan to replace our current systems over the next year. So we can turn our attention to more innovative solutions.
Our third pillar <unk>.
Growing restaurant profits is centered on the financial fundamentals necessary to improve our overall economic model.
As we have shared in the past, we now have a clear line of sight to 200 basis points of Jack margin reduction.
With potential savings of about 50% to $55000 per restaurant.
Yeah equipment process improvement and supply chain synergies.
All of which will positively impact the guest experience and quality of our fleet.
We're also making meaningful progress on implementing the store level equipment, you have heard me discuss related to simpler operations and improve margins.
Notably our three in one poster cheese pumps and hydrants machine as of today, 50% of the system has been installed the chiefs pump.
50% of the system will have the hydrants installed by mid April .
Pricing discipline is critical to mitigating inflationary impacts.
And this is an area we are significantly advanced in the last year under the new management team.
Our investment in people and more sophisticated analytical tools are helping us to be more strategic and surgical and competitive in our pricing.
We have identified pricing opportunity by store channel and market.
Product relationships that our franchisees can now utilize.
We're smarter decision.
Financial fundamentals pricing opportunities and acquisition synergies are in place to keep enhancing the economic model.
So that it's more compelling for franchisees to open restaurants, and thereby grow and expand our reach the all important fourth and final pillar.
Starting essentially from scratch, we have built our new restaurant pipeline by.
By accelerating existing and new development commitments and are proving more sites over the past year than we did in the prior three years.
Both brands have also leaned in heavily on new flexible restaurant prototypes.
For example, <unk>.
To briefly discuss some preliminary results at our newest Jack prototype.
The drive through only location that opened in Tulsa, Oklahoma in the fourth quarter.
This restaurant is outperforming our expectations at approximately $50000 per week and have sustained over 85% of its opening sales performance four months later.
This is also generating 20% of its sales through digital channels.
This restaurant benefits from a new more efficient kitchen configuration.
As well as the equipment upgrades as mentioned earlier.
It also employs the widely in drive thru and will soon have food pickup lockers.
Assist with carrier digital and third party delivery orders.
In quarter, one Jack in the box executed for new development agreements for a total of 36 future restaurant commitments.
Recent signings include St. Louis expansion.
Double digit commitments for both Hawaii and Nashville.
And I am thrilled to announce today.
Completed agreements for Jack to enter a Florida and Arkansas.
Three of these deals include new franchisees to our system, which make up the first new franchisees in the Jack in the box system in over a decade.
The brand has never been in Arkansas, and a 70 year history and has been over 30 years since our brief and relatively small presence in Florida and the 70 patients.
This was a significant development and milestone for our business and we are excited for the first stores to eventually open in these new markets.
All said.
As of the first quarter.
And since the launch of the development program in mid 2021.
The company has signed 72 agreements for a total of 303 restaurants.
These development agreements are now beginning to translate into openings as our growth engine starts to gain momentum.
We will be entering two new markets and see a project through a combination of company and franchise resources.
Franchisees will open in Salt Lake City this summer.
And company owned restaurants in this market will follow shortly thereafter.
We will then into Louisville, which will begin as a company owned market.
Our re imaging program is garnering great participation from our franchisees since the official launch last summer.
There are currently 589 restaurants submitted by franchise owners to participate.
And 47 of these are now in the design and permitting stage.
For company owned restaurants, we have approved 12 stores to test the brand new crave for image and we will have three completed by the end of the fiscal year across Dallas and Los Angeles.
We look forward to updating you on the progress and performance of these restaurants.
In evaluating our recent remodel performance.
Which we define as those restaurants have had remodeling activity over the course of the last two years.
We're seeing an absolute average net sales lift from pre to post remodel of nearly 14%.
Which is over 8% higher than non remodel control locations during the same timeframe.
We believe that remodeling will continue to build and have even more impact as consumer traffic and commute patterns returned to more pre COVID-19 norms.
One quick comment on St. Louis.
A challenged market, where 17 franchised restaurants closed last year.
In quarter, one the 47 remaining locations experienced a 10, 1% increase in total sales despite being down in unit count.
And on a per store basis comp sales rose 25, 5% and transactions rose nine 8% versus the prior year.
The bottom line in our.
Our market optimization strategy is working here the franchise business is healthier.
And now we have commitment to build new restaurants in the area.
In summary, the progress we're making on all four pillars of our strategy.
Helped by a great financial start in Q1.
A big part of why we are excited about 2023 being a truly transformational year for our business.
Turning to del Taco.
The brand's highly relevant positioning and barbell menu strategy provides compelling value and affordability across the menu the.
The category, leading $202 platform.
Designed to help achieve additional price on high velocity value items, while maintaining value and affordability perceptions.
The center of the plate items, such as Taco Burrito cases, and beverages to name a few provide.
Provide tremendous value options for guests that look to either trade down or add on to their orders.
$202 continues to be well received at roughly 16% mix during non promotional periods and north of 18% on primary message.
On the other side of the barbell, we seek to reduce the amount of potential check impact by promoting premium items, such as our epic fresh guacamole Brito.
It delivers quality and value to meet both consumer needs.
In Q1, we promoted a new towards the platform that launched in Q4 last year, then shifted to a tamale adults with tortoise of a secondary message.
And the new <unk> rewards program launched in fall 2021.
And it now has one 2 million members.
This is a points driven loyalty program with four elite tiers, including the ability to order through the App.
Throughout Q1, we also improved our App offers and drove additional visits.
Use and engagement from our users.
As membership continues to grow in these programs del Taco will leverage the ability to target guests.
An increased spend and frequency.
Operationally, we're heavily focused on recruitment as well as expansion of operating outlets to help meet top line potential.
We're seeing labor availability increase in most of our geographies, but.
But it also increased wages in order to ensure staffing for our graveyard shifts.
Reinstated operating hours are now above 2021 levels with some additional initiatives in place designed to return us to pre COVID-19 hours as soon as possible.
Del Tacos fresh flex prototype, which initially opened more than a year ago in Orlando is similarly exceeded our sales projections at $50000 in sales per week.
We're getting excellent feedback from both customers and store team members.
I have visited a dislocation this past January during ICR.
It was not only incredibly impressed with the look food and service, but as important the enthusiasm from store team members and guests.
This attractive new fresh flex building.
It's helping us drive interest and momentum for franchisee growth.
We have signed 13 development agreements with new franchisees since 2021, delivering 89 restaurant commitments across 12 total states.
Providing a starting point for future system growth.
And in this quarter del Taco executed two new development agreements for a total of 10 future restaurant commitments continuing its expansion within Florida.
With signings in Tampa, and the Palm Beach areas.
In addition to the Orlando location mentioned earlier are.
Our second fresh flex location.
In the Tampa market.
And it's doing $45000 of weekend sales.
Additionally, we have a drive through only version of the prototype currently under construction in New Mexico, which is expected to open around April .
And lastly.
On the Refranchising front.
We completed the transaction for 16 del Taco units in California to an existing Jack in the box franchise.
Heavy demand in highly accretive transactions to increase our previously stated share repurchase potential.
We anticipate refranchising transactions to be fairly active in 2023. Since we are seeing several viable offers to purchase existing restaurants as well as build new del Taco locations in existing and new markets.
We will continue to update on this regularly throughout the year.
And we anticipate a heavier number of completed deals in 2023 and in early 2024 within the overall three year targets we provided in January .
In closing.
I am very pleased with the start to the year and I look forward to continuing to update you along the way in 2023, as our strategy investments and growth objectives deliver real results.
Before taking some questions.
I'd like to turn the call over to our interim CFO Don Hooper.
John .
Yes.
Thanks, Darren My commentary today will begin with a discussion of our key brands individually followed by details on our consolidated performance and capital allocation.
Beginning with Jack in the box.
Same store sales growth in Q1, with seven 8% consisting of company owned comp of 12, 6% and franchise comps at seven 4%.
On a two year basis same store sales growth for the quarter with 9%.
Our same store sales breakdown.
Pricing is 10% a sequential decrease of 40 basis points compared to Q4 last year.
One 1% decrease in transactions.
380 basis point improvement compared to Q4.
One 1% decrease in tax.
50 basis point improvement compared to Q4 last year.
Systemwide transactions, where both groups.
Relevant to you Andrew.
Strong marketing and improved operation.
We especially saw strong results coming from locations that have significantly increased their average operating hour well.
Company owned transaction were resoundingly positive.
Four 9%.
Despite the inflationary environment are hooking up strategy combined with our ability to leverage our variety of products in a culturally relevant margo strategy at <unk>.
Giving effect that with improving sequential transaction and mix.
For the second quarter in a row.
In fact, Jack in the box not two year sales strength at both the top and bottom decile of our household income demographic.
Adjusting success in servicing both value and non value customer.
During the quarter, nearly all product categories and day parts generated positive sales.
Over dinner and late night were the real standout with late night posting positive transaction.
Our potential to dominate this day part is progressing helped by expanding operating hours.
Amplified operation.
Kelly menu platforms that appeal, particularly to consumers during these timeframe normally our <unk> platform.
Restaurants with dining rooms open and in use at quarter end with just over 65% of the total system.
From 60% last quarter.
In addition, the average hours per day with open dining rooms.
<unk> to increase with Q1, gaining approximately 30 minutes on average compared to Q4 last year.
As of Q1, approximately 70% of locations systemwide had their dining rooms open 12 hours or more a day not just over 96% and dining rooms open for at least five hours a day.
On average dining room system wide, we're open nearly 13 hour per day.
Our company owned stores continue to outpace franchise stores that franchisees are catching up as they recognize and appreciate the notable sales lift that open dining rooms to provide to their restaurants.
Turning to restaurant count.
Jack in the box franchise opening in Arizona, Texas, California, and Nevada, and wine company clearly in San Diego.
Starting in a quarter in restaurant count of 2186 restaurants.
As Gary has already discussed we have a strong development pipeline and our anticipated return to positive net unit growth. This year for the first time.
19.
Regarding our tax restaurant margin the impact of our two remaining evolving markets and commodity inflation remain headwinds to performance.
But we were still able to expand margin performance in the first quarter.
Q1 margin increased 150 basis points to 19, 8% compared to 18, 3% in the same period a year ago.
When excluding the two remaining evolving market our restaurant level margin would have been 21, 1%.
Food and packaging costs as a percent of company owned sales rose 150 basis points to 32, 8%.
This was due primarily to commodity inflation of 15, 5%, which was up from 14, 9% in Q4 last year.
Increases were experienced across nearly all categories, except for park with the greatest impact seen in protein.
Got it.
Boy I'll cheat and bakery.
Most of the cost with offset by price increases and to a lesser extent more favorable way.
Labor as a percentage of company owned sales was down 180 basis points.
<unk> increases and the benefit of Refranchising, Oregon in Q4 last year and was partially offset by wage inflation of nine 9% compared to the prior year.
Recall that due to the tight labor market and in order to attract and retain team members.
Executed a substantial wage increase beginning in Q2 last year.
About 70% of Jack in the box restaurants system wide operated at reduced operating hours at a slight improvement from the previous quarter.
Occupancy and other operating costs decreased 120 basis points to 16, 2% of restaurant sales due to leverage from higher sales and the Oregon Refranchising benefit.
Partially offset by higher cost for utilities delivery fees.
Other operating expenses.
Restaurant level margin was 44, 4%.
Our $106 8 million.
$13 $4 million increased compared to the prior year.
By higher royalty and rent contribution.
About half of the $13 4 million increase was due to the Hawaii transaction with the balance related to flow through from higher sales and lower cost for bad debt expense.
When backing out the impact of the Hawaii transaction franchise level margin would have still been 42, 8% for the quarter was 120 basis points higher than the prior year at 41, 6%.
Turning now to del Taco.
Same store sales rose, 3% consisting of company owned comp of three 1% and franchise comps of two 8%.
There were positive sales results across all major geographies with particular strength across the non California franchise footprint.
All day parts were positive in comp growth was led by the late night day part boosted by the expansion of operating hours and delivery or area, which over indexed at late night.
Staffing improvements have led to operating hours now running about 2021 level with continued opportunity to return to pre COVID-19 hours as we move forward.
Del Taco same store sales breakdown included pricing of 11, 9% down 30 basis points sequentially from Q4 of 2022.
A decline in transactions of five 8% equal to Q4.
And the mix decline of two 7% down 230 basis points sequentially from Q4 2022.
They may end mixed shift and sequential decrease was largely driven by smaller party sizes.
Substantially all dining rooms are open and have experienced increased demand and dining room sales represented over five 7% of total sales in Q1 up from five 5% in Q4 last year.
Drive thru sales mix is now in the low 70% range down from the mid to high 80% range during the height of Covid.
Total deliveries novel are now mixing at nearly 11% of sales.
There were two don't HOKA openings during Q1 in Florida, and New Mexico, and one closure in Nevada.
In December we re franchised 16 restaurants in California to an existing Jack in the box franchisee.
The del Taco restaurant count at quarter end was 591 restaurant.
Del Taco restaurant level margin was 16, 1% compared to 17, 3% in the prior year.
Food and Opex inflation, outpacing menu price and sales growth.
Despite the decline in restaurant level margin.
P&L has been well managed in light of the food labor and utility inflation.
Total labor and related cost reflected modest leverage during Q1, helping to limit the amount of overall margin contraction.
Looking ahead, we see continued food and opex inflation with labor continuing to post modest leverage due to the elevated pricing and slowing wage inflation.
Food and packaging cost rose 140 basis points to 28, 2%.
Food inflation was approximately 17% in Q1 outpacing recent menu price increases.
Labor as a percent of restaurant sales decreased 100 basis points to 34, 2% of restaurant sales.
Average wage inflation was approximately four 7% in Q1.
Worse than recent menu price increases.
This along with strong labor controls inefficiencies drove modest leverage on the labor line.
Turning to occupancy and other operating expenses. These costs increased 90 basis points to 21, 6% driven by utility inflation continued growth in delivery, resulting in higher delivery fees as a percentage of sale as well as an increase in may.
And repair costs.
Franchise level margin was $6 4 million or 39, 6% of franchise revenue and virtually unchanged from the prior year as the benefit from higher sales.
Were offset by an increase in franchise support cost.
Shifting now to our consolidated results.
Consolidated SG&A was $50 1 million, including approximately $18 million related to the addition of del Taco in the current year.
Broken down at $12 million of del Taco, G&A and $6 million of del Taco advertising.
Excluding Nikola gain G&A with two 7% of total system wide sales for two 3%, excluding a $6 4 million dollar legal verdict charts.
Consolidated adjusted EBITDA was $110 6 million up from $91 2 million in the prior year due primarily to higher JAK franchise and restaurant level margins, partially offset by higher G&A.
Del Taco contributed $12 4 million to our Q1 adjusted EBITDA results this year.
Consolidated GAAP EPS came in at $2 54.
Compared to $1 85 in the prior year.
Operating earnings per share, which includes certain adjustments came in at $2 <unk> for the quarter versus $1 97 in the prior year.
Note that the effective tax rate for Q1 was 26, 7% compared to 26, 5% a year ago.
Moving to capital allocation in Q1, we repurchased 220000 shares for $15 million, that's part of our ongoing share repurchase program.
With the additional proceeds received from the del Taco Refranchising transaction in Q1, we now plan on executing up to $60 million and share repurchases. This year.
We currently have $160 million remaining under our board authorized buyback program.
In light of our strong cash position and in consideration of increasing interest rates. During the year. We also plan to pay down the $50 million outstanding on our revolving facility.
$25 million of this will be paid in the second quarter and we will keep you updated on the payment timing of the remaining balance.
Beyond share repurchases and paying down debt. We will also continue investing in the future of our brand and returning excess cash to shareholders through dividends.
Lastly, note that all annual guidance measures for 2023 provided at our November earnings call remain the same.
As per usual any updates to these measures if needed we will.
Take place in our Q2 earnings call in May.
To conclude we thank everyone across Jack and del Taco for their contributions to our Q1 results and for what they are doing to help execute against our four strategic pillars.
We remain highly optimistic by what we can accomplish this year and we unlock the combined power of our brands.
Thanks for your time today and operator, please open the line for some questions.
Thank you if you would like to ask a question on the phone lines today that is star one on your telephone.
Our first question from Brian Bittner with Oppenheimer <unk> company.
Thanks, Good morning, and congratulations on the business update.
As it relates to net unit growth I'm, just I'm trying to understand Darren how big of a turning point the first quarter could represent for the Jack in the box.
Net unit growth moving forward, obviously, the franchise system had zero closings in the first quarter, which we haven't seen in a long time openings accelerated you announced the big news, particularly about Florida.
So was this indeed, a quarter, where there is a signal of a big turning point on the closings in the net unit adds or.
Or was there more of a.
Timing benefit.
How things ended up this quarter.
And I have a follow up too.
Sure good to hear from you Brian .
The way I think about one, let's just talk about Florida, and Arkansas, We're incredibly excited about the strategies, we put in place to expand <unk> reach and as we've shared many times our focus was getting our existing franchisees moving forward.
Optimizing the system doing the things we need to do to prepare them for growth and now we're starting to attract new franchisees as we switched our focus so.
Long story short is we think this is part of the turning point that we've been talking about for the last couple of years is focusing on how do we return to net unit growth on a consistent basis.
We continue to remind.
Our share holder community in all of our investors that development agreements are a leading indicator for preparing.
Jack has added 72 agreements for the 303 restaurants, and then now we're measuring that with Dell and <unk> done a nice job our teams theyre, adding 14 agreements for 91 restaurants and so.
I think this is part of the story that we've been saying that Theres media indicators here that appointment and pointing to the future.
Okay.
Okay and just my follow up is on the same store sales. Your 2023 same store sales guidance for Jack in the box is low single digits for the year you, obviously just bank the first quarter close to 8%.
So the question is is this still the right way to think about the year I know you have an updated guidance, but should we anticipate the same store sales trend too.
Be more at the low single digit range, starting in <unk> and beyond or where is this guidance starting to tilt a bit conservatively.
So Tim.
Typically we look to provide an update to our annual guidance sometime in may at our May update.
So our focus right now is get the first quarter in the books.
We measure our business according to the key lead indicators and at this point.
One of the lagging indicators is that same store sales momentum continues to be strong into quarter two.
Okay. Thank you so much.
Okay.
We'll take our next question from Lauren Silberman with credit Suisse.
Thank you very much and congrats on the quarter would you be willing to provide an update on franchisee profitability and 22 and just given all the work you're doing.
Doing with restaurant margins, how can we think about unit economics in 'twenty three.
Yes.
Good morning.
The way I think about our franchise level economics right now is that.
All of us and the industry has been faced with these dramatic headwinds with with commodities.
We're not able to take enough price in the near term so overcome it.
So if we look at our business.
Our franchisees are still.
The level of cash profitability not percentage that they were prior to the pandemic where prepay endemic. So now it's about time, it's recouping that through price. It's also recouping recouping some of that margin that we had record levels that we reported in 'twenty one.
We have to recoup that through price we have to continue to do it through transaction and then we've also talked about our strategy around financial fundamentals.
We think there is a bridge to 200 basis points.
We will continue to look at topline drivers with digital and then also all the things we're doing.
To staff our restaurants.
What that ultimately will lead to.
Great. Thank you if I could just ask a quick follow up on the comp side can you expand on what you're seeing across the different consumer cohorts, so low and high end and the middle income consumer. Thank you.
On a two year basis.
Seeing.
Dramatic expansion across all desktop from our top to our bonds.
Our two best performing we were not are the higher income and lower income.
So on a two year stack, we're seeing those to be the best performance on a one year stack.
And we see them both.
<unk> one into every single category is growing.
Like the performance of our business.
Yeah.
Thank you very much.
Yes.
We'll take our next question is from Gregory Frankfurt with Guggenheim Securities.
Hey, I just wanted to ask about some of the service improvements that.
You are seeing.
I guess, just what inning do you think we're in in terms of this playing out from a service level. What do you think are the kind of blocking and tackling biggest piece of that you've put in place there that are having an impact on service itself. Thanks.
Yes, I think.
We're probably if I was to kind of try to put an inning on it as well.
Baseball.
We'll probably its third inning and when I say that is our team over the last.
12 months to 18 months there has been focus on a few key areas first and foremost, we mentioned training and certifying our well first staffing and training.
Restaurants training our team can take care of our guests.
And that will ultimately lead to lower alerts that were seeing in speed of service improvement with.
The second thing is we.
We've enhanced the way that we engage our franchisees and our company restaurants on standards and execution of our standards and we look at root cause versus just measuring did you meet the standard or not so we're diving into what are the things we'd behaviors that caused the outcomes and working and coaching our franchisees to improve them. So we're still at any <unk>.
We think theres a lot of upside.
But the good news is we're seeing speed improve we're seeing our alerts go down our.
Our guest scores are going up from a brand experience standpoint.
And we're consulting with our franchisees on how to execute against them.
Okay.
Yeah.
And we'll take our next question from Brian Mullan with Deutsche Bank.
Thank you question on the del Taco Refranchising process.
See a transaction can get done in the quarter.
Paired remarks, it sounds like you expect.
Our activity to take place this fiscal year Darren just for clarification has something changed since ICR. When the thought was displayed take three years to sell a 120 units.
And even then you weren't going to be all the way done I'm. Just is there a scenario where this goes a little faster you get a little more done than what you might have thought a few months ago, just looking for your current thinking would be great. Yes.
Yes, so on the Refranchising strategy as you know we've been yes.
Taking our time to make sure that we can recoup some margin execute accordingly.
Robust interest in del Taco from both outside of our existing Jeff franchisees outside the del Taco system, but also within and so.
A couple of things that we've done we've upped our repurchase amount this quarter.
The one transaction as we said we would at ICR.
We used proceeds for share repurchases.
We also believe that yes.
Yes, we have offers on every single market. We are a viable accretive offers we're evaluating those we.
We will not do all of them all of the offers we have on the table, but we have some that are viable.
And we will focus on the best and most accretive.
Take advantage of that over time, and so we think it'll be heavier than spreading it equally out over three years, we think in the first year and a half it'll be heavier.
But we're not prepared to provide direct guidance related to that at.
All of these all of these are incremental come with incremental development.
And then just the recent transaction, we announced in California.
It came with an additional 16 restaurants to be developed so all the things that we've mentioned from a strategy standpoint, our refranchising are coming to fruition and we think that'll continue to evolve over the next 18 months.
Thank you.
We will take our next question from Chris <unk> with Stifel.
Thanks, I just had a follow up to that question.
Hello, Darrin I think the company is targeting the sale of 120 del Taco locations in the next three years, but with the after tax proceeds I wanted to see in the ICR presentation about $60 million, implying you kind of expect about 500000 for each unit I was just hoping you could provide some details around.
What do you expect from the buyer to sell of the stores that that kind of evaluation and what I'm. Looking for is do you have kind of a one commitment for every store you plan to sell or is there a remodeling commitments.
For the purchase locations and maybe what kind of timeline you are looking at.
Yes, we.
One at least.
101 development ratio.
We obviously in some instances want more than that.
And so.
So from a from a remodel standpoint.
We're balancing that with the priority of the business.
We want remodels to stand on their own and be compelling that there's a return there that franchisees would want to do it because it is a return not because we're going to make a demand for it. So that's the way we think about remodels of this whereas in the past with Jack we kind of stacked up with we want a high price. We want risks, we want development and we won't Remodels and guess what.
Last two of the four.
Development of Remodels. So that's not what we're trying to do here, we're trying to enhance our system might be coming asset light.
Growth and then the rest let it speak on itself because of the business warrants it.
Del Taco Hell of a lot of remodel activity left.
Yes, there are still there's still plenty of opportunity.
What I would call medium.
And what what is good about their system is.
We think a refresh program and a lower cost remodel is is really what that system needs right now boosted sales.
Great. Thanks.
We will take our next question from Alex Slagle with Jefferies.
Okay.
Hey, Thanks, good morning.
Wanted to circle back on the new Jack in the box franchise agreements to enter Arkansas, and Florida and color behind the step forward.
They've done an opening for a while but love to hear more about the demand you're seeing to get the brand into new territories and thoughts on new market expansion like this beyond the near term push in the Louisville in Salt Lake.
I want to make sure I understood. The question what was it.
The interest level and expanding.
Our market basis is that the nature of the question, yes, yes, the interest in expanding into new states and just your thoughts on.
That that push in.
Just the excitement around that.
Yes, I mean, as we mentioned in our first focus was giving our existing base of franchisees an opportunity to grow.
And we've had 65% to 70% of this system in our current base sign up for growth within our existing markets. So not a lot of our focus is turning to new the interest continues to build.
Just in the.
Recent.
Releases, we've had publicly is that we have three new franchisees that have signed on to grow <unk>.
Substantial number of units.
That's the first new franchisees, we've had in the JAK system in over a decade. So we feel good about where we are in the process, we believe theres more to come.
By next quarter end.
This is a this is an early indication of what's what's in front of us.
I would say also on the Dell side, we've had most of the new franchise recruitment. We've done there has been with new franchisees, so expanding in new markets.
Okay.
Well take our next question from Brian Harper with Morgan Stanley .
Okay.
Yes. Thank you good morning, guys.
I wanted to ask about del Taco sales and Youre kind of within the <unk>.
Annual outlook, you've provided at this point, but what would be needed to.
Really do better there.
Is there more price sensitivity in that business is there anything about the customer base, specifically or when do you think some of that mix drag would perhaps perhaps reverse.
Yes, I think for US what we found is we.
Had some success early with our promotion, which is a premium bill.
And so I think from that standpoint, and then we probably went pretty heavy on our.
Tamale over Christmas with heavier price than we've seen on that product. So I think this was more about the promotional window.
Probably running too long in a premium item.
And so that's really what we believe is the issue that we saw and we also pulled back on some of our marketing dollars. So that that's somewhat and then the last thing I'd say is we've got a heavy promotional activity from our major competitor in the space and the launch of their mix of diesel all those things are.
Contributing to it but overall it was still a very good quarter, we feel great about the calendar in front of US we feel really good about the value scores that we get from our consumers.
So I think this is just.
Overall.
What I would say.
Fairly good performance.
Yes.
Alright, we will take our next question from David Tarantino with Baird.
Hi.
Good morning, I had a couple of questions around.
The unit development.
First one related.
What youre seeing on development costs then Rob.
Relative to what you share maybe at the Investor Day, a few years back it seems like we've seen a lot of inflation in development costs and I'm just trying to.
Frame what level of EBITDA and now might be required to generate a similar return given the higher costs and then.
I have a second question related to the development.
Yes, I mean, the entire industry faces challenges with both the.
Inflationary challenges related to cost to build.
We have not seen our existing base of franchisees slowdown.
Because a lot of this we've been able to.
Perform through price or improved sales to overcome some of this but definitely we're seeing.
The entire industry challenge by inflation from a construction standpoint, we are seeing some relief there.
And.
As we mentioned the returns are still solid and there is solid.
Third to the competition and that's part of why we're still seeing existing and new franchisees want to build.
And Darren would you be able to share specifics I think your range that you share.
At the analyst day was for traditional unit, one seven to $1 9 million.
Where would that be today.
From a cost to build standpoint.
Correct.
Yes.
I'll provide an update on our annual Investor day, but we're seeing the same kind of inflation that the industry is seeing.
Okay, Great and then the only thing I would add to that David is.
What.
But we don't have a lot of history on right now is our new prototypes, which are reducing cost as a whole substantially combined the history and so that's sort of a little bit of why I'm trying to not be as directing the question because I think that would tell a different story than the number you just quoted because we didn't.
And the two new prototypes, we have been able to reduce costs holistically by 15% to 20%.
Great.
Thank you for that and then I guess my second question on development. As you are entering a lot of new markets and I Wonder if you would be able to elaborate on what the go to market approach might be on building the brand or brand awareness, presumably is low I know there's been challenges in our path.
When we've seen this type of kind of new market entries. So just wanted to get your perspective on what you might do differently. This time.
Yes.
Appreciate it.
A lot differently.
Think about Salt Lake City, one of the key strategies was.
Going into Salt Lake city, with multiple franchisees, including corporate and putting dollars into the market and a heavy level to get awareness built very very quickly.
In other markets, what our focus is and what's changed is from our Jack in the box and the markets in the past.
We needed to be in television.
And we needed we only would put out a general manager we built one to two locations.
Instead, we're going to say Louisville, and we're going to get to a point of expansion to where we can get to our lowest level of awareness through digital which is part of the change and then build upon that to get to some point, where we have full awareness through television and all other media metrix.
First and foremost going with franchisees around us we all build second hit different awareness level that different strategies first and foremost be digital which we can reach a lot of customers who have met that methodology.
We will take our next question from Jeff Bernstein with Barclays.
Yes.
Great. Thank you.
Uh huh.
Enough on the commentary around the industry and promotional activity.
And we're definitely hearing about a reacceleration in that trend.
I'm wondering whether there's anything that's been surprising to you I know you mentioned.
Del Tacos.
Challenge battling their largest telco competitor, but presumably for the Jack in the box brand.
Just wondering what youre seeing from your largest peers.
Or whether or not the trade down perhaps from above is more than offsetting any of those competitive discounting pressures and then I have one follow up.
Yes, I think a hole.
We're seeing some trade down from.
Casual dining and fast casual into <unk>.
We're also seeing.
Across the industry.
What I think a lot of us over the last two years thought maybe we would flatten out on the <unk>.
Digital and delivery standpoint, our business continues to accelerate.
And the digital and delivery space so.
And then the last I would say is.
No.
If you look back over history, nothing would point to our ability to continue to take price at this level and still improved transactions.
So we're finding a way to do that and a lot of that is through.
Improved operating hours.
And so those of US who can win at improving our operating hours and take care of our people are winning with our consumers.
And a perfect example of edits.
Our business.
Taking late night share both in both del Taco and Jack in the box.
We are taking share at late night.
Okay.
Understood and then my follow up is just a clarification on your unit growth comments earlier.
Clearly net growth this year is impressive.
But as we look out a year or two youre confidence in accelerating that growth I mean, you talked a lot about increasingly as agreements, which is obviously a good leading indicator, but on the flip side. This seemingly a more challenging macro rising interest rates.
And some of the <unk>.
Franchising, you're doing is probably taking proceeds away from what otherwise could be used for new unit growth. So I'm, just wondering whether any of those concerns of whether or not you have that line of sight by year to know that that unit growth is going to continue to accelerate despite those headwinds. Thank you. Yes. The biggest thing that I can point to his first development agreements and then second sights in process, meaning sites.
Approved we don't provide that number but you know.
I think I've made comments in the past that we've already approved more sites than we did in the last few quarters than we did in the prior three years to four years.
That is my.
That is what I measure as far as are we meeting kind of what is needed to drive future growth.
Are we seeing the activity that points to future.
Our net unit growth.
Thank you.
We will take our next question from Andrew Charles with TD Cowen.
Great. Thanks, just one clarification and then my question just a clarification is the thought now that'll take more like around 18 months instead of three years through franchise 120 del Taco locations to capture that targeted $60 million of after tax proceeds.
We think there'll be a heavier base of transactions over the next 18 to 24 months for sure.
But we're going to make sure that we take care of.
Evaluating the demand, making sure that they are accretive transactions using the proceeds for.
Share repurchases. So these are.
Accretive, but yes, I think we said it is heavier on the front end.
We can accelerate at any point in time, where we can slow it down based upon the types of transactions, we're seeing in the margins that we're seeing.
Yes.
So part of this was we wanted to give direction too.
Our investment community about the number that we would do and that they.
Would be accretive.
And then evaluate the transactions on their own merit.
To say should we continue to accelerate or should we slow down based upon what's happening within the business and margin improvement.
Got it okay, yes, Macquarie because it thanks and then my other question is on that $55000 of targeted savings per restaurant and I'm trying to tie it to the improved Cogs that you guys saw in and company operated margins. So.
With the improved Cogs was that more of a function of just less inflation and in particular, I guess as I think about that $55000 target.
You've laid out obviously the cadence around the initiatives in place to really help you capture that is that more of a front end front end weighted work or is that more back half weighted or.
Later weighted if you got it guys progressed through outlier management supply chain synergies.
Thats future. We're excited that's still to come this is all about transaction improvement in price.
And then also for the Jack does it's been about also getting rid of the evolving market.
This is about transactions pricing more effective P&L management.
All of the techniques and what we call financial fundamental activity that we're doing is for future benefit.
Okay. So I guess.
The outlined the things that are kind of more than five.
5000 dollar target maybe asked differently is the outlier management supply chain synergies is that the big heavy lifting behind it or is it more of the equipment and simplification.
That'll be more of the big wave, a big lifting behind that target.
Yeah.
If I understand the question correctly, what I would say is.
This is about.
Adding up.
Incremental opportunities that eventually over time.
Breakthrough and become a big number.
So it's you know five or 10 things that we're doing that over time once you add them all up a week or 200 basis points, it's not a one or two things that.
Very quickly enhance the bottom line.
Yes.
We'll take our next question from Chris Carroll with RBC capital markets.
Hi, Thanks, so on the restaurant level margins and the outlook for the year can you update us on where you expect commodity inflation to kind of trend over the balance of the year. I think you mentioned commodity inflation above 15% for Jack and 17% for del Taco in the <unk>.
That's versus your consolidated.
Place and guide I believe it was negative 11% before so any update on what you think about the cadence of inflationary pressures from here.
Yeah.
Thanks for the question, we still are holding our December guidance.
<unk> grew 11%. However, as you would expect we do expect that to moderate.
Okay.
Okay got it.
And then on the.
Evolving market impact on Jack margins, you still expect that to be a 125 bps that you noted last quarter. It sounds like the impact and the <unk> was similar to that guidance, but curious if the outlook for the balance of the year remains the same thank you.
Yes, and 125 basis points still holds.
Pretty much what we saw in Q1.
Okay. Thanks.
We'll take our next question from John Keller with Citibank.
Great. Thanks for taking the question.
Most of the answered already.
Couple of lingering your first comp cadence during the quarter I'm, assuming probably followed the trajectory of the rest of the industry, but any reason to believe that it might not have.
Pete say in January .
Yeah.
<unk>.
We continue to see same store sales momentum in the quarter too.
And during Q1, we did see accelerate throughout the quarter.
Great. Thanks, and then just Darren I was hoping to get your input on the.
A b 12, 28 being proposed in California, It seems like that market constantly.
Constantly I'm seeing.
There's work against the fast food industry and I was curious to get your thoughts on whether or not this bill makes its way through the legislation potentially in the law, we see it kind of move down the same path as the fast act that pointed.
100 to 2024 earlier this year.
Yes.
At this point I think we're still evaluating what it means.
And to determine how we react.
Okay.
Okay. Thank you.
And that concludes the question and answer session I would like to turn the call back over to Darin Harris for any additional or closing remarks.
Okay.
Again, we truly appreciate the questions and the opportunity to have a chance to speak with you.
Again, we're excited about our performance and across both Dell and Jack.
When we focus on our people and our.
Our culture, and then have a clear strategy.
We continue to see it built into the results we want for our future. Thank you again.
And that concludes today's presentation. Thank you for your participation and you may now disconnect.
Yeah.
Yes.
Yes.
Yes.