Jack in the Box Inc.
Q2 2017 Earnings Call Transcript

Published: 12 Aug 2017

[Operator:]

Welcome to the Jack in the Box Incorporated Third Quarter Fiscal 2017 Earnings Conference Call. Today’s call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. [Operator Instructions] At this time for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Chief Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

[Carol DiRaimo:]

Thank you, Michele, and good morning everyone. Joining me on the call today are Chairman and CEO, Lenny Comma and Executive Vice President and CFO, Jerry Rebel. During this morning’s session, we will review the company’s operating results for the third quarter of fiscal 2017 as well as some of the guidance we issued yesterday for the fourth quarter and fiscal 2017. In our comments this morning, per share amounts refer to diluted earnings per share and operating earnings per share is defined as diluted EPS from continuing operations on a GAAP basis excluding restructuring charges and gains or losses from refranchising. Our comments include non-GAAP measures including operating EPS, restaurant operating margin and franchise margin. Please refer to reconciliations included in the earnings release. Following today’s presentation, we will take questions from the financial community. Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management’s expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in yesterday’s news release and the cautionary statement in the company’s most recent Form 10-K are considered a part of this conference call. 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. These documents are available on the Investors section of our website at www.jackinthebox.com. A few calendar items to note. Our fourth quarter and fiscal 2017 ends October 1 and we tentatively plan to announce results on Monday, November 20 after the market close. Our conference call is tentatively scheduled to be held at 8

[Lenny Comma:]

Thank you, Carol and good morning. As you read in yesterday’s news release, we are continuing to work with Morgan Stanley to evaluate potential alternatives with respect to Qdoba as well as other ways to enhance shareholder value. The company has not set a timetable for completion of the evaluation process and we appreciate the patience while this effort is underway. We will not be taking any questions on this matter until after Morgan Stanley has completed its work and our brand has determined – and our board has determined next steps. And now, let’s talks about the quarter. Our third quarter performance was below our expectations, particularly with respect to restaurant margins. However, we were pleased that same-store sales and traffic for both brands improved sequentially with Qdoba system same-store sales turning positive for the quarter and Jack in the Box system same-store sales coming in only slightly negative. At Jack in the Box, although we experienced some improvement from Q2 all of our transaction loss in Q3 was attributable to checks under $5. The competitive environment was dominated during the quarter by aggressive discounting throughout the industry, but after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters. Because we have traditionally approached discounting by value pricing bundled products instead of discounting single items, we should be in a good position to once again break through the noise. Our promotional strategy in the third quarter focused more on value in response to the competitive environment. We offered price pointed combos featuring either barbeque bacon burger or barbeque bacon chicken sandwich as well as a value price jumbo breakfast platter. We also continue to leverage innovation, which has long been a differentiating brand equity of ours. In addition to promoting a guacamole bacon chicken sandwich at a premium LTO, we messaged a late night Munchie Meal featuring our sriracha curly fry burger. Immediate reporting on sriracha curly fry burger in Q3 not only helped increase sale during our late-night day part, but it also promoted delivery and our partnership with DoorDash. We have seen incremental lift in sales and markets served by DoorDash, which is delivering Jack in the Box food from approximately 37% of our system. We are also negotiating with other providers to expand delivery and have already begun tests with some of these vendors. In Q4, beginning this week, the majority of the system will be to your price point of promotions for both primary and secondary messages. Most restaurants will advertise either a Smoke Jack Burger Combo or Bacon Chicken Sandwich Combo as the primary message. As the secondary message 90% of the system will advertise our new $3 Monkey Mash-ups. Our Monkey Mash-ups which are available in three unique bills are a great example of how we can engineer innovative products to a lower price point to do under $5 transactions. During the quarter, we continued to make significant progress on increasing franchise ownership of the Jack in the Box brand. At quarter end our level franchise ownership was at 85%. Increasing the level of franchise ownership and expanding delivery service are both intended to grow the Jack in the Box brand and most importantly increase sales and transactions. Moving on to Qdoba, system same-store sales turned positive for the quarter, 0.5% increase was a substantial improvement from the second quarter as guests responded very favorably to our introduction of Fire-Roasted Shrimp in early June. Our consumer research shows that customers who purchased a shrimp entree are more likely to return in subsequent weeks than those who did not. Catering continues to perform well with year-over-year growth increasing by more than 11% in Q3. Our catering team is expanding and doing a great job of generating new business. Since January of this year more than half of all catering sales is from new customers. This week we are launching a new catering menu system wide, with menu additions including our popular loaded [indiscernible] and smoked brisket. We believe we can continue to grow this side of our business. As with our Jack in the Box brand we are expanding delivery service for our Qdoba guests. And in Q3 we more than quadrupled the number of company restaurants partnering with a third-party delivery service. At quarter end 141 company restaurants were under contract with delivery services along with 123 franchise locations. We expect to bring additional restaurants online in the near future. Our key priorities for the balance of fiscal 2017 remain unchanged. Our top priority is to improve traffic and drive sales at both brands. We will maintain our focus on menu innovation and balance our promotional calendar to appeal to value seekers as well as guests craving our innovative new menu offerings and LTL. We will continue to focus on improving the guest experience at both brands. And we will continue to invest in growing catering at Qdoba and expanding third-party delivery channels at both brands. We will also focus on improving margins. At Jack in the Box that means managing labor more effectively and at Qdoba we will concentrate our efforts on controlling food costs and improving sales and margins at newer restaurant. Another key priority is to continue executions of our Jack in the Box refranchising strategy. With that, I will turn the call over to Jerry for more detailed look at the third quarter and our outlook for the balance of fiscal 2017. Jerry?

[Jerry Rebel:]

Thank you, Lenny and good morning everyone. Operating EPS for the quarter of $0.99 per share was $0.08 lower than last year as the benefits from lower G&A and our Jack in the Box refranchising initiatives were more than offset by lower margins and cost related to the 31 formally franchised Jack in the Box restaurants we took over in the quarter. Last year’s results included a $0.05 benefit from a legal settlement. This quarter’s results were negatively impacted by about $0.10 per share relating to the 31 restaurants I just mentioned, which was partially offset by a lower tax rate versus last year benefited the quarter by about $0.04 per share. For Jack in the Box the 1.6% decrease in company same-store sales was comprised of pricing of approximately 1.7%, mix benefits of 1.1% and a decline in transactions of 4.4%. Franchise same-store sales were slightly positive for the quarter at 0.1%. Jack in the Box margins of 19.3% decreased by 320 basis points compared to last year. Margins were negatively impacted in the quarter by approximately 70 basis points related to the franchised restaurants that we took over in Q2 and Q3. Wage inflation of approximately 6% and costs – and commodity costs inflation of nearly 5% as beef cost rose 17%. We also incurred higher repairs and maintenance costs of approximately 70 basis points in the quarter. Importantly, though when you look all the noise in the quarter the stores that we intend to continue operating when we reach the 90% franchise level and restaurant margins of greater than 23% in the quarter even with the 6% wage inflation, commodity inflation of 5% and negative same-store sales. With Qdoba, same-store restaurants – same-store sales, excuse me, increased 0.5% system wide, but decreased 1.1% for company restaurants. The decrease in company same-store sales reflected a 0.7% increase in the average check, catering growth of 1% and a 2.8% decrease in transactions. The increase in average check and decrease in transactions at company restaurants was driven in part by less discounting than we did last year. Franchise same-store sales increased 2.3% in the quarter, which we view is very encouraging. Qdoba’s margin improved sequentially to 16.4% for the quarter as we made good progress in labor management during the quarter. Margins for more matured restaurants opened prior to 2015 exceeded 19% in the quarter with wage inflation of approximately 6% and while the inflation of approximately 2.5% and negative same-store sales. G&A was favorable in the quarter as our restructuring activities contributed to the decrease in SG&A costs. Although we did not repurchase any shares during the quarter, weighted average outstanding shares decreased by nearly 10% versus last year’s third quarter. Our leverage ratio was 3.2x as of the end of the quarter. As Lenny mentioned, we made good progress on our refranchising activities with the sale of 58 restaurants in Q3 and 118 year-to-date. And thus far in the fourth quarter we have completed the sale of ‘16 of the restaurants that we had letters of intent for at the end of Q3. Here is our current thinking on guidance for the fourth quarter. We expect same-store sales in the Jack in the Box system restaurants to range from flat to down 2%, sales through the first four weeks of the 12 week quarter are tracking at the low end of the guidance range, with guidance – with comparisons easing slightly over the balance of the quarter. Our Q4 sales guidance for Q4 company restaurants is flat – excuse me Q4 sales guidance for Qdoba company restaurants is flat to down 2%. Quarter-to-date sales are also tracking at the low end of the guidance range and we updated our full year guidance as follows. We lowered our full year same-store sales guidance for Jack in the Box system restaurants to up approximately 0.5% and for Qdoba restaurant to down 2.5% reflecting our year-to-date performance and our outlook for the fourth quarter. We lowered our expectations for consolidated restaurant operating margin to approximately 18% to 18.5%. We also lowered capital expenditures to $80 million to $90 million. As a result of our lower same-store sales and margin expectations, we now expect operating earnings per share to range from $4 to $4.15 in fiscal 2017. This includes approximately $0.10 per share of cost related to the 31 restaurants we took over in the third quarter. These costs were not previously reflected in our guidance. That concludes our prepared remarks. I would now like to turn the call over to the operator to open up the line for questions. Michelle?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brian Bittner of Oppenheimer. Sir, your line is now open.

[Brian Bittner:]

Thanks. Good morning, guys I have a few questions, the first question is more of a housekeeping item question as it relates to the $0.10 EPS that when you quantify this quarter, can you just help us understand are the dynamics such that this likely serves as a tailwind in the third quarter of next year or how do we think about how this flows through after this quarter?

[Carol DiRaimo:]

So the – if you want to think about these restaurants that we took back the – to the $0.10 charge these were costs that related to not operate in a restaurant as we close those restaurants for a minimum of six weeks while we were getting them ready to reopen. So the costs included and there were such things as labor and rent and costs such as that we used to carry, while we were getting these restaurants ready to reopen and then we also decided to close three of those sites in the quarter and we had charges relating to that. So if you want to refer to this as tailwind I guess that’s fair as we would not expect to have $0.10 of cost related to these restaurants in next year’s third quarter.

[Brian Bittner:]

Okay. And then Lenny on the re-franchising environment for Jack in the Box question I have on this is can you just kind of talk about that environment in general if you wanted to move more towards the 95% franchise end of the range, would this be something that would be executable, is the demand such that you would be able to get there if you wanted to?

[Lenny Comma:]

Yes. I think it’s fair to say that demand hasn’t waned. We anticipate landing somewhere between the 90%, 95% range we haven’t pinpointed a specific number in there because some of it is going to be associated with the deal that will be available and how that might attach to development which has played out pretty well for us. But yes the demand is definitely there and it’s really just a matter of what makes financial sense for the company.

[Brian Bittner:]

Okay. And then last question I will hand it off, as you exit 2017 shortly what are your thoughts on what it’s going to take the turn Jack in the Box comps back in the positive territory and what strategies should we be expecting out of you as you attempt to achieve this?

[Lenny Comma:]

Yes. So I will answer that question for both brands, I think they are both in the same situation as far as looking forward and what 2017 in the rearview mirror so for Jack in the Box brand I think first and foremost digital platform is being tested now in the form of mobile app provides lot of functionality, it really helps to expand the convenience factor of the brand. We expect that with a single platform POS we will be able to move relatively quickly once that test is out to get it into the hands of our consumers and throughout the entire system. So digital is a big piece of what should be launched in 2018. Also the expansion of our premise or delivery is important because the consumer is demanding it again that also relates to the mobile app and the digital platform because that will make it easier to use delivery. In addition to that when we look at innovation one other things that you will see next year is of course we will continue to innovate premium products, but one of the shifts that we will be making is we are actually going to innovate some value oriented products which is something we don’t traditionally do. You see a few bundles and sometimes will discount individual items, but don’t typically put our innovation behind those types of products, the value items. Although we think the marketplace is going to change a little bit next year and that some of the aggressive discounting will wane, we still do anticipate that a certain level of it’s going to be necessary. We want to make sure that we do it the Jack way which is really around innovation versus copying what others are doing and/or just targeting a single existing item and discounting it. In addition to that you will see us continue focus on remodels and then lastly on service improvement. So it’s a pretty wide range of things that we will be focusing on for Jack in the Box brand all of which are well underway. I have been really excited at the time of expanding innovation kitchen recently eating all the items that we expect to launch next year. And I can tell you both on the value and the premium side, reasons for the brand to be excited. As we look at the Qdoba brand, it’s a similar story, but little different in the way they will execute it. On the innovation side you will see Qdoba really just bring new news to the menu, the way they have done with shrimp. I think it’s going to be a fantastic way to continue to differentiate that brand through food. In addition what you will see is do is really addressing everyday value component of the menu. And one of the things that occurred when we went to sort of the single price across the protein is that some of the perception of everyday value was lost on the menu. And when you look at the current environment where value is playing so strongly, we need to address that, so the teams are actually testing several ways to bring everyday value back to the menu as well. In addition to that we have got some great remodels out there that are showing really find the success reasons to be excited about continued to be remodel our sites and have our franchisees ramp up their remodels. Everything I said about digital and delivery for the Jack brand exists for the Qdoba brand as well, but they have a head start there. They have already launched their platform and they continue to expand on it and build the customer base that are currently using it. Of course catering is a huge piece of the growth story for Qdoba, we continue to grow and as I said in my prepared remarks we are doing it primarily due to the addition of a lot of new customers and as also said we are updating the menu and bringing some of the other great proteins and offerings to the catering menu which I think is going to play really well. And then lastly although it’s the early stages or the alcohol offering, the team is really dialing in on you both the limited and expanded offering just based on the demographics and psychographics of each area. More to come on that, we still have a lot of testing to do the play that one out, but our dream [ph] is to be optimistic about what we will be doing in 2018 and beyond for both brands. So hopefully that answers the question, I know it was somewhat long winded, but I think it was necessary to folks to know what we will be focusing on the future.

[Brian Bittner:]

No it does. Thanks Lenny.

[Operator:]

Thank you. Our next question comes from the line of David Tarantino of Robert W. Baird. Sir, your line is now open.

[David Tarantino:]

Good morning, just a couple questions on the comps for Jack in the Box, so the first one is really how are you thinking about the trend you are quarter-to-date, you mentioned at the low end of your guidance, has that been a slowdown in the business in your mind or is it more of a function of the comparison that you are cycling?

[Lenny Comma:]

Yes, it’s more of a function of the comparison as we said also Jerry’s – in his prepared remarks talk about the comparisons get a little bit easier. And then this week we launched some new items into the marketplace that we think will fuel the back half of the quarter.

[David Tarantino:]

Great. So just to be clear on that Lenny, is the 2 year trend or however you look at it similar to what you saw in the third quarter so far in the fourth quarter?

[Carol DiRaimo:]

Yes. What I would say in our guidance for the first quarter at the midpoint would imply stable to your trends between Q3 and Q4.

[David Tarantino:]

Understood. And then Lenny I guess all the sales drivers you mentioned which just sound like you have a lot going on, I guess one of the things that has been missing is sort of aggressive value message at the entry level price point, I know you have got a few things in the $3 range, but just wondering know what your thoughts are on either promoting or highlighting some of the even lower price point items you have on the menu, but just Tacos and other items, so I am wondering why the reluctance to get more aggressive at that end of the continuum?

[Lenny Comma:]

Yes. I guess couple things I would say. One is that we have done some things that are a little more aggressive price points. And I think what you have is our voice is just getting drowned out by how much value is currently in the system, arguably we get to the lower price points we might cut through some of that noise. But what we have made a decision to do that instead of taking items like Tacos or any other single price items that can get closer to $1 to $2 price range that already exists on the menu and discounting it which we believe is going to lead to a lot of trades. Instead of doing that what we have asked our team to do is innovate some new products that bring new news to the value side of Jack in the Box menu, so that when we are promoting something we are not just trying to cut through the noise with a price point, but we also are trying to cut with the noise with the featured new item that the consumer hasn’t eaten before and is not a copycat of what any of the other competitors are doing. So that will take a little longer to put in effect, but you should anticipate that that will be in full effect in FY 2018. One additional thing I would just say just for those who are as familiar with our brand Taco pricing which traditionally was two for $0.99 now ranges two for $1.19 to $1.29, so we still have everyday value for that Taco bundle which two Tacos at that price points that we compete nicely with any of the other brands.

[David Tarantino:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of John Glass of Morgan Stanley. Sir, your line is now open.

[John Glass:]

Thanks. First, Lenny you had mentioned that commodity is – commodities are now starting to re-inflate and that’s a good thing for you, historically from a competitive standpoint, historically what’s the lag between the commodity re-inflation and the reduction in competitor discounting is it instant, is it a quarter, is it two quarters, how do you think about how long it takes for competitors to respond?

[LennyComma:]

I think we are already seeing certain competitors respond particularly those who use only fresh beef. And so I think it’s going to be the individual competitors, the mix of products that will determine that, but it will be hard to predict what I would say is that because we can’t predict it, we are going to make sure that we have innovative, value oriented products, featured on the menu next year at the lower price points, that way regardless of how long it takes we are going after it. And then the benefit that will get maybe above and beyond just the innovation and the price points will be that competition will be doing less of it, which would give us even a higher take rate on what we are doing.

[John Glass:]

And you said something about that all of your transaction losses were at the low end, I can’t remember you said $3 or $4, but there is some special that you said that was below which you lost your transaction, so are you saying that your comps at the check average is above that level or positive and that everything else in the lower end is negative or you seem just a more of a mix shift to those lower, can you maybe just explain what that dynamic is and if you stripped out the low end is your business actually positive both in transactions as well as total comp?

[LennyComma:]

Yes. So if you look at the traffic below the $5 price point is negative. And when you look at the traffic above the $5 price point it’s essentially flat. So yes, we are seeing a much healthier business above the $5 price point and it becomes very obvious to that all the pressure is on the bottom side of the menu. In addition to that we also see the brands with positive same-store sales are starting to see margin pressures. So if you think about the, the way that we have sort of navigated through 2017, we would try to protect the equities of both of these brands, which although they exist on the lower price point side of the industry they have a much higher take rate of premium items. And we don’t want to erode those brands over the long-term as we respond just to some short-term pressures. At the same time we understand that we have got to generate results. So at both brands as I mentioned one is innovating to bring some products to the menu that’s the Jack brand at lower price points. And the other Qdoba is looking at how to bring everyday value back to menu. So we are going to be responsive, but again we are doing it in a way that protects the long-term brand equity, essentially when you look at some of the margin pressures from some of our competitors, if we are able to maintain a higher take rate of mid-tier and top-tier products that can protect our margins over the long-term and make our brands more resilient. In addition to that our franchisees and keep in mind that a large percentage of the industry is essentially run by franchisees, who are paying royalties, rents and other fees, so we would expect that they would not be able to keep their financial positions healthy over the long-term if we continue to discount even when commodities are more normalized and then keeping. We also need to be ready for the additional pressures that certain regulatory costs will bring to us like the increase in healthcare costs as well as increase in minimum wage. So there is a lot of pressure on the business and I think it’s going to be important for us that we manage our margins appropriately and not just chase the competition in the short-term.

[John Glass:]

Got it, okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Dennis Geiger of UBS. Sir, your line is now open.

[Dennis Geiger:]

You have highlighted the operational improvement opportunities at both brands, so could you just comment on how close you are to where you want to be on each and then how long it may take to get there. And then I guess as a follow-up to that anyway to think about what kind of drag at least high level, what kind of drag operations and service may have been in recent quarters and how much of a driver that can be of comps as we look into in ‘18? Thank you.

[Lenny Comma:]

So I would say this, I wouldn’t put the operational issues in the category of a drag – as a drag on the quarter and here is why the operation has been consistently inconsistent for the last couple of years. And so you we would just sort of do a comparison prior years versus 2017, it would be hard to say that operations have changed so drastically that that’s what the drag in the quarter. What we are seeing is that in order for operations to be a driver of performance. We are going to have to eliminate the inconsistencies. Both brands have this issue I would say Jack in the Box has more of the issue than the Qdoba brand. I think Qdoba is closer to where they want to be long-term, but they are going to continue entrust some of the inconsistencies they would see. And I would also say that Qdoba situation is not only flushing out those inconsistencies, but also making sure that as they innovate new products, the operations team is ready for that because that’s not the type of muscle that team has had in the past because we haven’t really had new products. So there is work to be done to flush out the inconsistencies, but also to make sure that we execute new product appropriately so that we don’t disrupt the utilization. But the Jack in the Box, the brand it really is a function of inconsistencies by restaurant or by operator. We have some operators that just need to improve the level of not only consistently, but overall give service in their operation and those are things that just changed year-over-year but our brand president has really started to address those issues aggressively and we will be ramping up the focus on those inconsistent restaurants and markets and/or operators going forward. So some of it’s going to be more positive actions like training and preparing folks simply to do a better job and then quite frankly some of that will be holding whether it would be franchise or company operations accountable for performance and making critical changes along the way to drive that performance.

[Dennis Geiger:]

Great. Thanks. And then if I could just sneak one quick one and just for Jack in the Box, anything you can share on regional or market performance differences during the quarter? Thanks.

[Jerry Rebel:]

Yes. I would say California still remains our better performer versus Texas and that’s bit of phenomenon that’s occurred for in several quarters here.

[Dennis Geiger:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeff Palmer of Wells Fargo. Sir, your line is now open.

[Jeff Palmer:]

Great. Thanks. You guys acquired it, I think a total of 50 underperforming franchise units over the last two quarters, it looks like, so my question is why is this happening now, could we see more and how quickly could you sell these units or can you sell these units?

[Lenny Comma:]

Yes. This is a good question is that sort of segue from my answer to the last question. So I had mentioned that our President, Frances Allen is really trying to drive out some of inconsistencies in the various marketplaces or with specific operators. And this is really an example of operators that weren’t able to meet the brand standards and that had led to some problems, there was a period of time to make corrective action and unfortunately some of the actions weren’t taken in the way that that would allow the operation to continue in the franchisees hands, so we did have to take those restaurants back as part of their ability to sell those restaurants there is demand for the restaurants as I entered. And I think the first question and we do expect to be able to turn those restaurants over. But one of the things that we want to make sure that we do as a franchise is set the next franchisee for success and that sort of ties into Jerry’s answer or description of the downtime associated with these restaurants. So you guys think about this as restaurants that weren’t operated properly that means you have got training and facilities related issues, people related issues that all need to be addressed. We shut them down so that we could sort of hyper focus on those issues, get the restaurants in good shape both on the facilities and people side and then open them back up under our care and now we are in a position to start the market in those restaurants and turn them over.

[Jeff Palmer:]

Okay. And then unrelated, but following-up on one of John’s earlier questions, so did you see transaction stability with that below $4 or $5 average check level, wherever the check level is that you guys have been referencing in the third quarter, the quarter you just finished over the transaction declines in the quarter actually a little bit greater than we saw in the fiscal second quarter. So just trying to figure out if some of your early stage efforts to win back some of that lower average check business are successful or if the declines mounted as you moved throughout the current quarter?

[Lenny Comma:]

Yes, good question. That’s exactly the way we are looking at it. I think on the last call – conference call I mentioned that we are losing traffic on the lower side of the menu. We got a little more specific on this call to explain that it’s below the $5 price point and what we see is that we have actually improved quarter-on-quarter below the $5 price point. So the efforts to bring value messaging to the menu are working and as we go into the next year as I said, we will do even more of that and it will be more than just price, next year it will be price and new news, new products. So reasons for us to be bullish on our activities, it’s sort of is what it is right now, when we are muscling through the environment, but lots of reasons first to be bullish, because even with our current ammunition we saw improving quarter-on-quarter and we will have new ammunition going into next year.

[Jeff Palmer:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Andrew Charles of Cowen & Company. Sir, your line is now open.

[Andrew Charles:]

Great. Thanks. Lenny, just following up on that last question, you mentioned the need to better enhance value and even though the value efforts did intensify in 3Q, the underperformance relative to the NPD QSR Sandwich index widen, so I guess, what gives you the confidence that value is the right strategy for the brand and especially I respect for the brands aspiration become QSR plus?

[Lenny Comma:]

Yes, good question. I think couple of things to think about. One, we don’t believe that value would be only thing necessary to actually drive the performance. We actually think that all the other things I mentioned in my long winded answer earlier are going to be necessary. The consumer is really redefining convenience and we are in the convenience business. So we are going to need to do some things to respond to that which we have already either done or at least begun to test. The consumer is also demanding lower price points in the current – in the current environment. So we need to do some things to respond to that. And then long-term, we just think that our brand is going to lose its relevance, if we don’t remodel our sites and improve our service that leads to this place where it’s sort of frictionless, which is again becoming sort of one of the redefinitions of service going forward. So I think, we need to actually invest in all of those things, not just value. And I think that value is something that we will have to double down on in this current environment and into 2018. But if you look at what our long-term plans would be the QSR plus it would make a lot more sense for us to focus on a QSR plus positioning and try to get it close as possible because it makes the brand more resilient. We can still play in the value space to the degree that’s necessary for QSR plus. But we get the benefit of the higher side of the menu having a higher take rate which makes the margin stronger and makes a more financially viable business for our franchisees as well. So I think that’s what the focus will be. And when you look at NPD the 2 year NPD improved 220 basis points. So if you just – if you look at it over that longer period of time I think you get a better indication of the brand health.

[Andrew Charles:]

That’s helpful. And then Jerry, just on the – given the later CapEx guidance for 2017, within the context of the multi-year capital plans you laid out at last year’s Analyst Day, do you have any updated thoughts we think about CapEx in 2018 and beyond and particularly thinking for the Jack brand which is to be tracking a little higher than originally planned in 2017?

[Jerry Rebel:]

So no specific comments, with respect to an update on what we talked about last year at the Analyst Day, obviously a portion of CapEx, a great portion of that CapEX related to Qdoba, so we can’t make any comments related to Qdoba going forward. And any increase in what Jack is doing, I wouldn’t read too much into that, it’s not as if we expanded any additional program this year, although going forward, Lenny didn’t talk about remodel. So we do plan to do that going forward, but with respect to Jack remodels were in that capital plan that we laid out for you last year. So for Jack related I am not seeing anything significant changing, there may be some changes within the timing of those expenditures, but not with regard to the expenditures.

[Andrew Charles:]

Helpful and so last one if I could sneak it in, just Jerry how is the search for the successor going, I mean obviously big shoes to fill, but would you say you are still conducting first-run interviews or are you guys done with short list?

[Lenny Comma:]

Yes. This is – I will answer that one on behalf of Jerry since I would put him in that position to answer that question and so well, you said it will be big shoes to fill, we are at the early stages. So the list is still going to be rather large, it has not narrowed down at this point.

[Andrew Charles:]

Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Gregory Francfort of Bank of America. Sir, your line is now open.

[Gregory Francfort:]

Hi, I have two questions, the first is on cash uses and if this review goes on for an extended period of time without the ability repurchase shares would you consider doing a special dividend or what the cash balance build, how are you treating that?

[Lenny Comma:]

So we are – let me comment about it this way. The company still is very constructive with respect to returning cash to shareholders. While we have a pause currently, I will remind you that we did repurchase $327 million of our stock already in the year which was adding accelerated pace on what have originally planned. So there was not a significant difference from what our annual plans were for 2017 and because we repurchased those shares earlier than what we had anticipated if you look at the average shares outstanding this year from what we had expected that we would see we are actually tracking at or a little under what we have expected the average shares outstanding to be. But I think in the environment that we are right now while the review continues we don’t think it would be appropriate to be in a market and so we will continue with that, but the Board continued to be supportive of returning cash to shareholders, it might just point to the evidence in May when the Board authorized an additional $100 million of share repurchases and we still have $181 remaining under our authorization which expires in November of ‘18. So I would look at this as a temporary pause, not a change in strategy.

[Gregory Francfort:]

Okay. Thank you. And then just one question on the business, can you help us understand the lift you are seeing from the door-delivery tests and then also I guess as McDonald rolled out delivery, have you seen any impact to your delivery efforts has there been any change kind of post their move into the space?

[Lenny Comma:]

Yes. We haven’t shared specifics, so I will just speak generally about it, a couple of things that really need to be considered as we move into delivery. One, we like the lift in average check that we see from delivery purchases. Two, this works really well, particularly for the Jack brand with late night business that is probably one of the key areas where we would see a positive impact. Based on the early results, the transactions that we are getting to delivery are largely incremental. When we look at our late night day part versus our competitors, it has a higher share of the sales at 17% of our sales, so these things all tie together really those sort of reasons to be optimistic about delivery and to continue to evolve what we do to meet the consumers demand. At the same time when you look at some of the construct associated with these delivery service, they aren’t necessarily at a place where I think they will eventually end up. I actually think delivery services will get more competitive over time and we think will need to see that for this to make sense once we get to a place where everyone is doing it and it just becomes the way restaurants do business when those when those transactions are not largely incremental, we will need to see the service fees be significantly more competitive than they are right now to make sense for us over the long-term. So as much as delivery is one of the things that we have to do to respond to the consumer, we also think that the providers will have to also respond over time to how that business models need to evolve?

[Gregory Francfort:]

Thank you for the perspective.

[Operator:]

Thank you. Our next question comes from the line of Alex Slagle of Jefferies. Sir, your line is now open.

[Alex Slagle:]

Great. Thank you. The question on the Jack in the Box sales weakness in the lower income markets that you highlighted earlier in the year and that’s still a contributing factor your same-store sales performance or what degree has that changed?

[Lenny Comma:]

We – I am not prepared to comment on the lower income markets this time around not because I wouldn’t want to share it, but mainly because we didn’t look at it through that lens, because we are seeing broadly that the lower than $5 transactions is really the biggest driver, the erosion in transaction for any markets. We know that’s the bigger news. And obviously, we could make an assumption that the lower income markets continue to be the most challenged based on what we are seeing there. But once we are able to see that trend across all markets that we can it became evident that we not only needed to address it with more value oriented price points and promotions, but also with some innovation. And I think that’s sort of the biggest takeaway related to this at this point.

[Alex Slagle:]

Okay. And then on Qdoba, if you could just provide a little bit more of an update on the new store performance, the sales trends you are seeing and how teams are ramping up the curve operationally to get to the efficiency levels that you are hoping to see?

[Lenny Comma:]

Yes. So in general and maybe Jerry, Carol want to share some additional details, but in general what we are seeing is which makes us very happy is that the new stores are coming out of the gates with a higher overall sales performance than previous generations of stores. We have a couple of factors that negatively impact the results of the most recent build over the more recent builds and that is that a lot of these were built as we were testing the remodel program they were in value engineered. So the cost basis with some of the more recent stores is higher which makes the returns or the breakeven sales levels a little bit higher. But when we look at the reengineered versions of these stores and what we have done in the preopening cycle both in the training of the employee as well as the execution of the marketing lots of reasons there to get very bullish. So I think if I could eliminate some of the costs said simply, if I could eliminate some of the costs associated with through the testing cycle of these remodels and move on to go forward cost basis and I couple that with what we are seeing in sales coming out of the gate stronger there is lot to be optimistic growing Qdoba.

[Alex Slagle:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Jeffrey Bernstein of Barclays. Sir, your line is now open.

[Jeffrey Bernstein:]

Great. Thank you. Two questions, just first Lenny maybe on the burger category and it does seem your bigger three national burger competitors will have momentum all comping up 3% to 4% you mentioned a little too early, but just maybe talk about what you see is the biggest one or two pros and cons of being one of the kind of small players I know you mentioned you share of voice gets ground up, but I would have to imagine there are some positives in terms of nimbleness or otherwise, I am just wondering how you think about yourselves relative to that group where there maybe a force to play defense or offense or maybe even have historically Jack has performed when the other three big players will have momentum if they list a whole category or maybe they are taking share from you, but still like a big picture on the big three players momentum?

[Lenny Comma:]

Yes. I think today we are in an environment that makes, that gives the big three an advantage in that the consumer particularly the lower income consumer is struggling to stretch their dollars and they are seeking value. You then have historical – historically high gap between food at home with food away from home prices if lower commodity costs and it is putting wins behind the sales of any larger value oriented brands that wants to put a lot of value to the marketplace. And so certainly that becomes challenging to us and we see it in the transaction base below the $5 price point. What I would say on the flipside of that that all of you have experienced from brands like Jack in the Box, but particularly Jack in the Box over the last 3 years, 4 years is that some of the strength in our menu and our ability to historically drive higher margin has made our brand extremely resilient and even when we are not comping to the degree that some of these other brands are comping, the strength of our margin has actually sustained our earnings and our earnings – and driven some of our earnings growth in recent years. The size of our brand as you stated makes us very resilient and although our comps are not matching those of the bigger players today when you look at how we have been able to respond on the value side and as I said quarter-on-quarter, we have been able to mitigate some of the transaction loss below the $5 price point. I think that speaks largely to our ability to pivot when necessary. And based on what we expect to be the environment going into the next year, we are prepared to pivot even greater through the use of one of our best equities which is product innovation. So we I think have some equities that ultimately if you look over the long-term we are not going to do anything to a road. We serve breakfast all day. We would continue to do that is a great day-part for us but beyond the day-part, it provides access to those products throughout the day. But furthermore, what most don’t think about is it’s not just breakfast all day, it’s anything all day and we actually serve quite a bit of lunch or traditionally dinner items as a breakfast day-part. Late-night is very strong for us. When you look at what some of fast casual has taken from our segment, when you combine both breakfast and late-night that allows us to play in this space that they are not playing. So we feel really good about that. And then historically when we innovated new premium items such as the Buttery Jack or platforms like crunch fest, we win. So you will continue to see us do those sorts of things and I think the take rate for those things will be higher when the value oriented messaging in the marketplace is not as prevalent. So from our standpoint, we look at this as how do you protect the brand and navigate through the business environment and consumer environment like this, you know that a smaller brand not going to sort of drive during this time, but how do you navigate and survive through this time and keep the business healthy and how do you protect the brand equities, so that over the long-term you don’t end up being a brand that is known for example a $5 position that then becomes very difficult to get off of, so that’s the type of thing that we are going to guard against long-term. And I do think that although the value players are winning today, I am very interested in seeing over the long-term when they are not able to discount as aggressively whether the take rate will be as high, what we typically see from the consumer that is value oriented, is there also the least loyal consumer. And so those are all reasons why I think staying the course while just making some adjustments along the way to better navigate is the curse of action that’s for Jack in the Box.

[Jeffrey Bernstein:]

Got it. And then just my one follow-up Jerry I think well, I know from the press release I mean the Jack margins were 19.3% and I think you mentioned you are at 85% franchise today and just to make sure I got it right if you just looked at the you just own the 10% of stores that you plan on owning at a certain point in the future and therefore 90% franchise, your company operating margin would go up from 19.3 to 23 so that’s the case of the shift of five percentage points of units being that big of a lift, just the common threat those stores are selling in it’s oldest territorial and AUV issue or are there some other of course management issues it just seems like it’s a pretty large mountain that you are climbing with the disposal I think of 5% of units?

[Jerry Rebel:]

Well, remember that we had the restaurants that we took back from franchisee in Q2 and Q3 negatively affected margins by 70 basis points in the quarter. So I would look at that as 20%, 19.3% just relating to that. And then that I would also tell about the 6% wage inflation and the 5% commodity inflation where the restaurants have the higher AUVs get a much better fixed cost leverage on that margin they look to maintain even with this higher variable costs. And those restaurants that are in that 90%, if you just annualize the Q3 AUV they would annualized in terms of sales to be about $2.14 million per year, so well above what the other restaurants are doing. So I think to your earlier point by and large it’s an AUV driver.

[Jeffrey Bernstein:]

Very helpful. Thank you.

[Operator:]

Thank you [Operator Instructions] Our next question comes from the line of Matt DiFrisco of Guggenheim Securities. Sir, your line is now open.

[Matt DiFrisco:]

Thank you. I just had a follow-up question actually on that one with respect to 70 basis points negative impact on your margins, how about the re-franchise stores, what was the benefit that you have from those done in 2Q and the portion of those done in 3Q or do you want to maybe disclose sort of how that might be on an annualized basis once they are completing the year?

[Jerry Rebel:]

Yes. I think the more important thing Matt is because there is lot of noise, we are-franchise units in Q2. We also re-franchise units in Q3, the re-franchise units in Q3 had a negative impact on the margin vis-à-vis where we plan to be at 90% level and there is so much noise in the quarter alone moving pieces that’s we are just trying to breakout, if you look at the 90% that we are going to continue operating, they were north of 23%.

[Matt DiFrisco:]

But that’s something that you are going to be able to re-franchise, the ones that you re-franchised did they have a benefit in the quarter on a net basis?

[Jerry Rebel:]

Yes.

[Matt DiFrisco:]

Thank you so much.

[Jerry Rebel:]

Yes. It’s not a big leap to assume that we are going to be able to continue the re-franchise these restaurants.

[Matt DiFrisco:]

Okay. So there wasn’t that benefit, but it’s not tangible enough or meaningful enough to disclose?

[Lenny Comma:]

We were – again, the restaurants that we are going to run 90%, greater than 23% margins.

[Matt DiFrisco:]

Okay. With delivery also you mentioned that 17% of your business is late-night, is it too early to see it or do you think that some of the comments we have heard from others that are doing deals with DoorDash and Delivery that they are seeing the greatest incremental growth in the late-night hours, which is incremental business to them, because they don’t have a great presence there right now whether that would either be Wendy’s or McDonald’s so I am curious is that – did you see that portion that 17% of your sales at late-night was that out comping the rest of the system or was that a laggard?

[Lenny Comma:]

I don’t know that we have that type of competitive intelligence by day-part on our competitors and certainly the providers would not share that with us as that would be their confidential information. But here is what I would tell you, brands are known for what they are known for that the consumer believe that Jack in the Box is a late-night destination and that’s why I think we are going to be in their primary considerations that when they are looking to use delivery during late-night it doesn’t mean that some of the other folks might not find some incremental business there, they might. But most of the competitors are not – do not have as many locations open 24/7 as we do. So the availability may not be there from all those competitors even if the consumer wants to consider them and driving that type of equity for the brand to make senses opening those additional hours is really difficult to do just like you have seen as other competitors have tried to get into the breakfast business, it’s a long-slow process to get the consumers to change those habits and to understand that you now have sort of new equities associated with your business. So I think what we are really going to see happen with delivery over the long-term and I will just compare it short-term to long-term, I think in the short-term, we are all going to drive some additional purchase occasions through delivery. We are all going to get more incrementally out of it than not. But essentially once the entire industry across all segments is delivery enabled and what’s enabled is also digitally enabled through their apps and other means. I don’t think this is going to be a competitive advantage. I think it’s just going to be another means to an end for all consumers across any segment. And at that point it will go right back to what your brand is known for is it cheaper food, is it higher quality food, is it incredible flavors, is it late-night, munchie meals, what is it and essentially this is sort of trend towards delivery to meet the consumer demand I think is somewhat of a temporary phenomenon as far as incrementality is concerned. So we don’t bank on this as a long-term driver for us as compared to our competitors. If it expands overall purchase occasions for the consumer it becomes [indiscernible] for everyone. But I don’t think that you are going to have any specific restaurant brand including Jack in the Box that will have a competitive advantage over the long-term based on delivery.

[Carol DiRaimo:]

Great. I think we are out of time. Thanks everyone for joining us today. And we will look forward to speaking to you all in November.

[Operator:]

Thank you. And that concludes today’s conference. Thank you all for participating. You may now disconnect.