Box, Inc. (BOX) Q3 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Jack in the Box Inc. Third Quarter Fiscal 2013 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, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Thank you, Tanya, and good morning, everyone. Joining me on the call today are Chairman and CEO, Linda Lang; Executive Vice President and CFO, Jerry Rebel; and President and Chief Operating Officer, Lenny Comma. During this morning's session, we'll review the company's operating results for the third quarter of fiscal 2013, as well as some of the guidance we issued yesterday for the fourth quarter and fiscal 2013. All of our comments this morning regarding per share amounts will refer to diluted earnings per share. And following today's presentation, we'll 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. Jack in the Box management will be at presenting at the Wells Fargo Securities 2013 Retail and Restaurant Summit in Boston on October 1, and our fourth quarter and fiscal year ends on September 29, and we tentatively have planned to announce results on November 20 after the markets close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on November 21. And with that, I'll turn the call over to Linda.

Thank you, Carol, and good morning. Jack in the Box recorded another solid quarter and we continue to make good progress on refranchising and other key strategic initiatives, including taking action to strengthen our Qdoba brand. During the third quarter, same-store sales increased 1.2% at company Jack-in-the-Box restaurants. On a 2-year cumulative basis, company same-store sales were up 4.6%. Company restaurant same-store sales growth for the quarter exceeded that of the QSR sandwich segment by 1% for the comparable period, with systemwide same-store sales growth just slightly below the segment, according to NPD data. Breakfast and late-night were again our strongest day parts posting the largest year-over-year increases. Traffic for the quarter improved sequentially from the second quarter with transaction growth potentially flat compared with a year ago. We introduced a number of new products across multiple platforms during the quarter, including Blueberry Muffin Oatmeal a Chipotle Chicken Club sandwich and a Piña Colada smoothie. Late in the quarter, we launched several limited time offers that we're promoting during our summertime Go Big campaign, including Jack's Big Stack Burger and an extension of our distinctive waffle breakfast sandwiches, the Big Waffle Stack. During the quarter, we also expanded our beverage platform with iced coffees, which feature a unique blend of ingredients and have been popular additions to our permanent menu. We attribute our ability to grow market share in this challenging environment to the investments we've made over the past few years to enhance our food, service and restaurant facilities, and we believe the foundation and catalyst in place to continue driving same-store sales and traffic growth over the long run. The restaurant industry has seen some softness in sales in June and July and our fourth quarter guidance reflects the recent water industry trends. Company Jack in the Box same-store sales were down in July, which was our toughest compare of the quarter. We've made some adjustments to our promotional calendar to emphasize value bundles in this environment, like the $3.99 Really Big Chicken Sandwich combo that we launched last week. And we expect company Jack in the Box same-store sales to be slightly positive in the fourth quarter. Turning to Qdoba. Our company-operated restaurant reported same-store sales increase of 0.5% in the third quarter. On a 2-year basis, same-store sales accelerated more than 200 basis points, increasing 4.3% with 100 basis points of lower pricing. During the quarter, our catering business increased 7.5% versus last year and average check increased 10.5% over quarter 2. In June we announced plans to close 67 company-operated restaurants following a comprehensive review of market performance. We closed 52 of those locations prior to the end of the third quarter. We transferred 3 Qdobas to a franchisee in the fourth quarter and 2 locations were closed when their leases expired. We expect these closures will have a positive impact on the performance of our Qdoba brand. By optimizing our company footprint, we believe we can be more effective in focusing our advertising and marketing resources to support existing and planned restaurants and markets where we have high levels of brand awareness. And we expect to provide an even better dining experience for our guests as our operations team concentrate their efforts on supporting these markets. Concurrent with our review of market performance, we're also in the middle of a comprehensive brand review. This will help us determine how to best position Qdoba and develop a strategy to implement key initiatives to further differentiate the brand and strengthen our customers' connection to the brand. We expect to have the consumer research and brand strategy and positioning work completed by the end of the calendar year and have engaged Boston Consulting Group to assist in these efforts. The results of our brand strategy and positioning work will inform us on initiatives ranging from restaurant design and menu innovations to our loyalty and catering program. In closing, we are holding our own in a challenging environment. We have effectively transformed our Jack in the Box in recent years and believe the investments we've made will help us weather the current consumer slowdown. We believe the steps taken in the third quarter to strengthen Qdoba, coupled with a brand strategy and positioning works currently underway, will result in higher future earnings, average unit volume, restaurant operating margins, cash flow and return on invested capital. And now I'd like to turn the call over to Jerry for a more detailed look at our third quarter results and outlook for quarter 4. Jerry?

Thank you, Linda, and good morning. Third quarter earnings from continuing operations on a GAAP basis were $0.38 per share, including $0.02 for losses related to refranchising compared with $0.28 last year, which included $0.05 of refranchising gains and $0.16 of restructuring charges. Operating earnings per share, which we defined as EPS on a GAAP basis excluding gains or losses from refranchising and restructuring charges, were $0.41 in the quarter versus $0.39 last year. The results of operations, impairment charges and lease obligations for the 62 restaurants we closed during the quarter are included in discontinued operations for all periods presented. 3 of the restaurants have been sold to an existing franchisee in the fourth quarter and the remaining 2 restaurants were expected to close when their leases expire prior to the end of the calendar year. The results of operations and impairment charges related to these 5 restaurants are included in continuing operations. Our 10-Q, which we expect to file this week, will include a summary of the unaudited quarterly results related to the closures for this year and all of last year. But I thought it might be helpful to summarize the pro forma impact of the 62 closed restaurants on our reported results. There is minimal impact to our reported same-store sales, but all historical company and system same-store sales have been adjusted to reflect closures. Company AUVs improved by about 10% from roughly $1 million to $1.1 million. Total sales related to these 62 restaurants were approximately $37 million on a trailing 12-month basis, and $28 million year-to-date through Q3 this year versus approximately $27 million year-to-date through Q3 last year. Qdoba restaurant operating margins improved by an estimated 410 basis points in the quarter and 470 basis points year-to-date as the result of the closures. This compares to last year's impact of 460 basis points and 490 basis points in the quarter and year-to-date period, respectively. On a consolidated basis, restaurant operating margins improved by an estimated 110 basis points in the quarter and 120 basis points year-to-date versus 100 basis points in both periods last year. EPS from continuing operations improved by about $0.035 in the quarter resulting from the closures again and $0.12 year-to-date as compared to $0.02 and $0.08 at last year's quarter and year-to-date periods, respectively. Our adjusted operating EPS for fiscal 2012 improved from $1.20 to $1.31 and Q4 2012 operating EPS improved from $0.27 to $0.31. Adjusted operating EPS for Q1 and Q2 of 2013 was $0.59 and $0.37, respectively. And adjusted operating EPS for Q1 and Q2 of 2012 was $0.29 and $0.33, respectively. Losses from discontinued operations for the third quarter of fiscal 2013 included pretax charges related to the Qdoba closures of approximately $36.7 million, including approximately $22.7 million in non-cash impairment charges and approximately $11.4 million in charges related to future lease obligations, net of reversals for deferred rent and tenant improvement allowances and employee severance costs. The pretax loss from operations related to these restaurants of approximately $2.6 million in the third quarter of fiscal 2013 and $8.8 million in the year-to-date 2013 period is also included in discontinued operations. We estimate the cash portion of the exit cost to be about $9.5 million net of tax. Losses on the sale of company-operated restaurants in the third quarter of fiscal 2013 totaled $1.5 million or approximately $0.02 per diluted share, including a pretax loss of $1.1 million related to the sale of the 3 Qdoba restaurants that was completed in the fourth quarter. Hopefully that gives you a good recap of the impact of the Qdoba closures on the P&L. I know there is a lot to cover there, so please don't hesitate to ask questions on that. I'll be happy to go through that again if you need me to. Moving onto our Jack in the Box refranchising strategy, we sold 18 stores in Beaumont, Texas during the quarter. Thus far, in the fourth quarter, we've completed the sale of 27 restaurants for approximately $14 million in cash, and we expect to sell approximately 29 restaurants by the end of the fiscal year, including 16 restaurants in 1 of our 4 Southeast markets. This would leave us with roughly 60 restaurants that we have targeted to refranchise by the end of fiscal 2014, including the remainder of the Southeast. When we've completed our refranchising strategy, we expect to operate roughly 400 company Jack in the Box restaurants and the brand to be ultimately be between 80% and 85% franchised. We continue to expect our refranchising strategy to have a positive effect on average sales volumes, restaurant operating margins, earnings per share, cash flow and returns. So let's take a look at the impact that refranchising should have on our margins going forward. We estimate our pro forma restaurant operating margin for the Jack in the Box brand for the third quarter year-to-date, when excluding the restaurants we refranchised in the second and third quarters and the approximately 56 restaurants that we plan to sell in Q4, would have been approximately 17.9% or about 80 basis points higher than our reported Jack in the Box margin, and our company average unit volumes would have been about $1.7 million. Consolidated restaurant operating margin of 17.9% of sales to the quarter was 40 basis points higher than last year's adjusted third quarter results. We were pleased with the Jack in the Box margins, which improved 110 basis points to 16.9% in Q3, despite commodity inflation of about 3%. While same-store sales growth is obviously important to driving margin expansion, we get higher flow through on the incremental sales growth and our average weekly volumes are near $31,000 as they were throughout the quarter. Qdoba margins decreased 270 basis points to 20.6% in the quarter, primarily due to sales deleveraged as we had very little pricing in the quarter, commodity inflation of approximately 1.9% and product mix changes, as well as increased staffing level. As we said previously, given our growing free cash flow, we would expect to more consistently repurchase shares on an ongoing basis. To that end, in the quarter, we bought back nearly $51 million of stock and year-to-date through the third quarter, we have returned over $92 million to shareholders. This leaves $84.7 million remaining under the $100 million stock buyback program authorized by our board that expires in November 2014. And also last week, our board authorized an additional $100 million for share buybacks that expires in November 2015. As far as commodities are concerned, overall, we now expect commodity costs for the full year to increase by approximately 2%, and we now expect these costs to be approximately 2% for the year with expected Q4 inflation to be about 4%. And here's our current thinking on guidance for the fourth quarter and full year. We're expecting same-store sales growth at Jack in the Box company restaurants in the fourth quarter to be slightly positive compared to a 3.1% increase last year, and as Linda mentioned, comparison fees [ph] have been moved throughout the quarter. And same-store sales at Qdoba company restaurants in the fourth quarter are expected to increase approximately 1% versus a 1.1% increase last year with substantially less price. As to our full year guidance, we've raised our guidance for restaurant operating margins for the full year to approximately 17% to 17.5%, reflecting the benefit of the Qdoba closures. We expect to open 65 to 70 new Qdoba restaurants, of which approximately 35 are expected to be company locations, the decrease from our prior guide reflects a delay in some restaurant openings until early 2014. Operating earnings per share, which we define as EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains from refranchising, are now expected to range from $1.72 to $1.78 in fiscal 2013 compared to operating earnings per share of $1.31 in fiscal 2012. And this implies a $0.35 to $0.41 per share Q4 operating EPS...

[Technical Difficulty] Your line is back in conference, you may resume.

I apologize for the call dropping we're going to have Jerry re-read the full-year guidance because we're not exactly sure where the line dropped. So sorry if that's repetitive for some folks but he's going to re-read the full-year guidance.

We apologize for that. We may have cut our IT costs a little too much here and before, we apologize for the technical difficulties here. Let me start back over again with our full year guidance. We've raised our guidance for restaurant operating margins for the full year to approximately 17% to 17.5%, reflecting the benefit of the Qdoba closures. We expect to open 65 to 70 new Qdoba restaurants, of which approximately 35 are expected to be company locations, the decrease, more prior...

[Technical Difficulty] Jerry you're line is in, please resume.

Tanya, can you hear me now?

I sure can.

Okay. We're going back to Jerry. We truly apologize for the delay here. Jerry's going to go back to the EPS guidance for the full year.

Okay, thank you. And again, our apologies. Operating earnings per share, which we define as EPS, diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains from refranchising, are now expected to range from $1.72 to $1.78 in fiscal 2013 compared to operating earnings per share of $1.31 in fiscal 2012 and this implies a $0.35 to $0.41 Q4 operating EPS versus $0.31 last year. As I mentioned earlier, the full year impact of the Qdoba closures added $0.11 to our previously reported results for last year. The increase in our guidance for operating earnings per share is due primarily to the Qdoba closures. Our EPS guidance excludes any restructuring charges. However, we are continuing our efforts to lower our cost structure and identify opportunities to reduce G&A, as well as improve restaurant profitability across both brands. This concludes our prepared remarks, but before we open it up to questions, I'd like to turn the call back over to Linda Lang. Linda?

Thank you, Jerry, and thank you, everyone for your extreme patience. I really just wanted to make my parting comments very memorable. Before opening up the call to Q&A, I'd like to briefly address the other announcement we made yesterday, the transition of my Chairman and CEO role to Lenny Comma. I've been so fortunate to have had a nearly 30-year career here at Jack in the Box. I'm proud of my accomplishments and I'm grateful to my executive team, our franchisees, business partners and the thousands of employees who have worked so hard to achieve the transformation of our business. I'm also grateful to the prior leadership who provided me with many opportunities to grow personally and professionally as I rose through the ranks to become CEO. By decision to leave is eased knowing that we have a strong experienced leadership team in place at Jack in the Box and Qdoba. I've been especially impressed by Tim Casey's leadership of Qdoba and have every confidence in his ability to reinvigorate that brand. Finally, let me congratulate Lenny on a very well-deserved promotion, and let you know that he is fully prepared and capable of leading this company to even greater success in the future. Lenny and I have worked together for many years. He is an extraordinary leader who has demonstrated his ability to lead with passion, courage and commitment. Again, congratulations, Lenny.

Thank you, Linda.

And now, let me open up the call, finally, to your questions. Tanya?

[Operator Instructions] Our first question is from Joe Buckley of Bank of America.

For starters, Linda and Lenny, congratulations to both of you. It just seems like the perfect time to make this transition, which I know has probably been planned for a long, long time. And Linda, I wish you the best. And Lenny, wish you the best going forward.

Thank you very much, Joe. Appreciate it.

Thanks Joe.

I wanted ask kind of a big picture question. All the recent changes, the Qdoba closures and the additional refranchising at Jack in the Box, first from a big picture standpoint, how does it all fit into the context of the $2 operating EPS target that you laid out a couple of years ago?

Yes, Joe. So let me take that. We'll provide our 2014 outlook guidance, as well as our longer-term outlook in November, like we usually do. But I think given all that's going on, let me give you some thinking here about how we view the catalyst to improving operating earnings and the confidence that we have in being able to hit targets. So first, the Qdoba closures are expected to add $0.15 to $0.16 in operating EPS given the guidance that we just provided in '13. Also looking out at Qdoba, the Qdoba leadership change, as well as well as the ongoing work on our brand positioning and strategy, I think provided us confidence on better operating performance for Qdoba going forward into 2014, also the amount and pace of the Jack in the Box refranchising activities, which will help with average unit volumes, restaurant operating margin, operating EPS and also cash flow. The current Jack in the Box restaurant operating margins, which has expanded very, very nicely. I think it's more than 100 basis points in this quarter on fairly modest same-store sales growth as the AUVs and the weekly sales stay at or above that $31,000 level. And also we talked about the impact of the -- on a pro forma basis of what the Jack in the Box brand restaurant operating margin would have been had we completed the sale of the fourth quarter closures earlier and that would add about 80 basis points to reported 17.1% number year-to-date. Also if you look into 2014, I think everybody is seeing and we're seeing a fairly benign commodity inflation number thus far. We'll clearly have a better look at that when November rolls around. But as of now, we're pretty happy with what we're seeing. And then also the company and our board has been very constructive with respect to returning cash to shareholders in the form of share repurchases. We bought back $92 million, thus far, this year, including almost $51 million in the third quarter. The board just authorized another $100 million worth of, with the share buyback authorization, giving us just under $185 million worth of current authorizations going forward. So I think those are -- probably, summarize the earnings catalyst pretty well. I'd say the greatest uncertainty which would temper any of those positives is whether or not the current industry-wide slowdown is going to be long or short in duration.

Fair enough. I think everybody's asking the same question on the recent sales performance we've seen across all sectors, as I'm sure you're aware.

Yes. We looked at that. Obviously, we have the same issue impacting the industry back in the January time frame. Nobody knew exactly how long or short that was going to be. It turned out to be short. Clearly, we'll all know whether this is a long or a short duration well before the November call.

Maybe just one follow-up. Will these changes lead to further G&A declines, do you think, for 2014, 2015?

Yes. So let me talk a little bit about G&A. So we went through a pretty complete restructuring activity during fiscal 2012. We continued some of that into 2013. We've effectively changed from 2 operating brands with infrastructure to a shared service platform. And most of that work has been completed, although we still have some additional integration of the 2 brands, which I would expect will be completed in 2014 and would also reduce G&A. The other opportunities are in the refranchising world as we continue to sell restaurants to franchisees. We would expect reduction in field-related G&A associated with those locations. So also -- and then the other item that I wanted -- and then we also have, not withstanding the telephone issues, we also have some opportunities going forward with our IT cost, particularly as we look for opportunities to get more synergies between Qdoba and Jack in the Box there. And then Joe, I want to mention also, I think this has been in a couple of people's reports in the past, but our pension plan, which we have both sunset, effective in 2015, as well as closed to any new entrants a couple of years ago, has been driving, over the past couple of years and including this year, higher G&A cost resulting from falling discount rates, though it generated about $4 million of a higher G&A cost this year and $7.5 million higher than what it was back in 2011. And as we start to see some improvement in discount rates, we would expect to see reductions in G&A. And what we have in our 10-K is 25 basis points worth of an increase in the discount rate would reduce our pension cost, everything else being equal, by about $2 million. And we're seeing discount rates improve, i.e. raising a little bit now, but we'll have much more visibility on that as well as the end of the fiscal year as the measurement date on that, not to get too technical, is only once a year, it's the last day of the fiscal year. So we'll have better visibility on that. But the trend right now is for improving discount rates on the higher side.

Next question comes from Brian Bittner of Oppenheimer.

This is Mike Tamas for Brian. I was wondering if you can talk about any sequentially trends since the quarter's ending, given the weakness in the industry. And then kind of related to that, if you could talk about the spread between the company-owned Jack in the Box units and the franchise, just wondering how you will continue to drive outperformance in the company side and outperform the industry?

Mike, this is Lenny. Let me try to address that for you and if you need a follow-up, if I don't quite give you enough color, please let me know. What we experienced in July is what most of the industry has been talking about, it's been a soft month for us where we saw some negative trends. But we have sequentially, week by week, seen our average unit volume grow throughout the month of July and into August. So it gives us some optimism on the remainder of the month. And what we've done to make adjustments to what we've seen in that trend and to push ourselves to what we think will be slightly positive is we have come off of some of our premium promotions to more bundled value deals to allow us to move forward. So that's essentially where we are today. And did that give you enough color or would you like a little bit more?

No. I think it's great. And if I could just ask another follow-up on Qdoba really quickly. There's some terms like use of cash around Qdoba. There's a strategy to buy in successful franchisee businesses. Did that get altered by anything that you've done recently? Or is that still on the table?

No. This is Jerry. That's still on the table. Although I can tell you, there are fewer of those opportunities, not from our desire, but from the franchisees' lack of desire to sell.

Next question comes from John Glass with Morgan Stanley.

I wanted to go back to the -- Jerry, maybe just to the broad strokes view of 2014. What's the updated thoughts on the remaining Jack in the Box's that you could refranchise in 2014. Is it actually earnings accretive to sell those last Southeastern units? What's the margin impact? Do you have any update on the impact to the P&L?

Yes, John. The impact -- first of all, 50-ish of those 60 locations are Southeast locations. And we would expect that we would target those for sale later in the fiscal year, probably fourth quarter. So I'm not sure that they would have a significant impact on '14. However, they will be accretive to operating EPS. And at this point, we're estimating an impact of least 50 basis points worth of margin improvement on the Jack in the Box brand resulting from those. But again I would see that more as a '15 catalyst earnings growth rather than '14.

That's helpful. And then as you've -- you sort of suggested that the board continues to be very focused on returning capital to shareholders, your leverage ratios, or at least your absolute debt level, I should say, has come down a little bit over time and you're more asset light than you've been in the past. So at what point do you consider taking on leverage to enhance shareholder returns? Or is that not part of a '14 plan?

That's not part of the '14 plan, John. We realized that our debt to EBITDA has been coming down because of cash flow and also because of the earnings growth. We've said repeatedly that we're comfortable with something in a 2-turns of EBITDA range. We're still comfortable with that. So any increase in debt levels would be within that range going forward. Remembering also that because of the -- us controlling 90% of our franchisee leases, we also have to pay attention to the adjusted debt to EBITDAR and when you look at that, that gets you closer to a 4x levels. So those are levels that we're comfortable with, we think that's a good balance. But -- and we still have capacity under the revolver to be able to fully utilize those share repurchases going forward.

Next question comes from Alex Slagle with Jefferies.

Question on the same-store sales versus profitability, given the higher AUV levels at both brands and all the changes that in terms of the makeup of your company-owned stores, what's the kind of same-store sales that you need, going forward, to maintain your grow margins?

Well, what I would say, Alex, is in the normal environment, commodity in that 1% to 2% range, we'd like to have about 2% annualized comp to be able to consistently grow margin in that environment. What we've seen thus far though that Jack in the Box branding need a little less than that in a fairly benign commodity environment due to the higher AUVs as we get pretty good leverage on the non-food and labor items on those sales growth. But we still like about 2% number on Jack in the Box and that number is about right for Qdoba also.

Okay. And the Qdoba labor, I just wonder if you could just talk to the decision to increase staffing levels and maybe reinvest some of the potential accretion from the store closure activities back into the brand?

Yes. That was really focusing on executing against a higher expectation for customer service. So it was getting mostly management level, staffing, to where it needed to be. And so we had an opportunity to take some of the talent from those closed restaurants and redeploy them into open restaurants. So we took advantage of that situation. And as a result, the labor did increase. But we expect to get a return on that labor as our sales and as our guest-service execution increase.

And Alex also, we did hold on to, to Linda's part, we hung on to some of that management in those closed locations to redeploy into expected new openings later in the quarter and early into Q1, which will reduce the training cost and hiring cost associated with those new openings going forward.

Your next question comes from Chris O'Cull with Keybanc.

Congratulations, Linda and Lenny. And Linda, I hope you enjoy retirement.

Thank you, I will.

Just a couple of follow-ups here. Jerry, thanks for providing the pro forma margins for refranchises in the Jack stores, but can you tell us what the benefit of the stores that you planned or that you already have refranchised this year or plan to this year will be to fiscal '14 margin for Jack in the Box?

Yes, Chris, that's what we estimated that 80 basis points on a pro forma basis, year-to-date, through Q3.

Okay. So we should get another 80 -- we should get 80 basis point benefit from those stores being refranchised in fiscal '14?

Yes. Everything else being equal, yes.

And then the labor investment or the labor increasing at Qdoba, that should continue at this level for the next 3 quarters, I guess?

Probably 2 or 3 quarters. It should start to come down as we begin to redeploy some of that management over into our new locations. And we have a lot of openings at the end of the fiscal year and into the first fiscal '14.

Okay. And then just, Linda, can you give us a little more color on the scope, cost and maybe timing of this Qdoba brand study?

Sure. And let me just make a note, because I mentioned Tim Casey in my closing remarks, and I'm just thrilled with the progress that he's made in really just 5 months. So if you think about the review that he embarked on of the business and he took swift and decisive action on closing those 62 restaurants and you've heard the results of that in terms of improving Qdoba's financial performance. In addition to that, he brought on a new Chief Development Officer, John Dowaschinski, and Tim and John have been working closely to implement really significant changes in the development strategies. So they scrubbed the pipeline to improve the returns on the new store openings, they've done everything from revamp, the site selection, tools, bring in new talent, review, the process was changed and they've identified a market selection strategy and penetration strategy. So that's really been done and we're going to see the benefits of that in terms of the returns on those new Qdoba openings. He's also well underway in this brand strategy work. So that involves some significant research that's done to really understand who the core customer is at Qdoba, as well as who should the target customer be. And then the work with BCG will include a very collaborative effort with Tim and his top management team to develop what that brand strategy should look like and how Qdoba should position itself in the marketplace to be more competitive and really drive loyalty with their target customer. We should have that work completed at the end of the calendar year. And so you'll hear a lot more about the brand strategy work and ultimately what comes out of that, which will be a series of initiatives that will really drive restaurant design, customer experience and menu development and so forth. And then lastly, Tim is working with Lenny and his leadership team, both the folks in Denver and San Diego, working closely together to really put together an organizational structure that will enable both Jack in the Box and Qdoba to thrive going forward. But also ensuring that we're leveraging the talent and the resources of the full enterprise and taking advantage of those synergies that Jerry had mentioned previously. So that should really help with our G&A cost going forward. So great work by Tim in just 5 months.

I would think one of the outcomes of the study would be the market share potential or the market potential for the brand. Is that fair?

Yes, I think that's fair. Once you identify sort of that target customer, you've got a market strategy, you can really size the market and size the potential for the brand.

And then Chris, just one other thing, the cost of the BCG work, and for everybody, is included in our 2013 G&A guidance.

Next question comes from Matthew DiFrisco with Lazard Capital Markets.

My question is with respect to the Jack in the Box development. And I'm just curious as far as the franchise, an early look into or at least what you're hearing in the tone from the franchise community. It's been a couple of years that we've seen any real meaningful growth from development there, as we're nearing the ending of the capital going towards refranchising company-owned stores. I'm just curious if it's -- are we at the stage where we should see a reacceleration? Is that a correct position to have where a reacceleration or franchise growth could happen as early as '14? Or is the slowdown that we're seeing in the macro and the broader industry something that probably stalls this to be maybe not until '15 part of the discussion?

Yes. I don't think it's a 2014 acceleration, Matt. I would view this more in the '15 or forward level. And again most of the growth, we would expect to be in new market with some in-fill within the existing markets. But the growth in newer market, particularly with respect to franchisees, just takes a little longer to get that up and going.

Right. I guess at the Analyst Day, you focused out in San Diego about showing West Coast -- Midwest markets, like Indianapolis and there is, I guess, an opportunity potentially there to get into some new territories. Has that -- is that a comment more so on the broader industry than, say, that strategy of trying to get the brand extended into new regions?

We've been -- so you mentioned Indianapolis and we have seeded Indianapolis and we've sold a portion of that market. We've also seeded Oklahoma City and we've sold that market. We're seeding Cincinnati and we have seeded Kansas City, we have not yet sold those, but we would continue to work towards that. But I would not expect this to be a rapid rate of growth into 2014 or even 2015 timeframe.

And then, I guess, lastly anything we should be concerned about as far as regional differences that you're seeing. I didn't -- I heard someone ask earlier about the differential between the company-owned versus the franchise same-store sales on the Jack in the Box brand, and I'm curious if that is somewhat indicative also of maybe regional weakness that the franchisees might be greater exposed to?

This is Lenny. What we're actually seeing is the disparity in sales from company to franchise are more related to who's chosen to compete head-to-head on the dollar drink that we've seen from some of our competitors. So as we look from market-to-market, it's less sort of geographically-based and sort of risk-based. And more so really just who's elected to compete with the dollar drink. So that's what we're seeing currently. And then historically, we've seen a much greater sensitivity to margin management from our franchisees, as you can imagine. And so they're a little slower to adopt our initiatives, which typically has a lag on benefits associated with those initiatives, as well. So that's probably -- those 2 things are probably the majority of what we're experiencing today, more so than the geographic differences.

Next question comes from Jeffrey Bernstein with Barclays.

I just have a couple of questions. 1 just on the, specific to the Jack brand margin, if I understand it correctly, it seems like you're going to get 80 basis points benefit, perhaps next year, from the refranchising you did this year. And I think you said another 50 basis points when the final Southeast markets are sold. So is it fair to assume over the next year or so that just the refranchising alone is going to add 130 basis points? And if that is the case or if you can clarify that -- either way, I'm wondering what are the leverage from here on the remaining stores? I'm just trying to get a ballpark of maybe what the highs and lows are in the system or whether the top quartile is pushing north of 20% or how to think about the progression of Jack margins? And then I have a follow-up.

Yes. That's a great question. So first of all, that should add -- as you go into, say '15, it should add 130 basis points to the existing levels of margin, which was 17.1% year-to-date through Q3. And that would get us north of $1.7 million of AUVs, the Southeast tends to have the lowest volume and therefore, margins within the chain. However, the Southeast same-store sales are growing very, very positively right now. We're very happy with that. But yes, so you're looking north of 18% on the Jack in the Box brand restaurant operating margin and it is fair to assume that the restaurants that have a $2 million plus AUV are operating above 20%.

Understood. And any particular levers to pull to achieve that? Or is it really just the leverage from the AUV that's driving that differential?

The AUV and then, yes, speed of service is probably the lever that we'll continue to stay focused on in the coming years. That's one that obviously with the thresholds that Jerry has mentioned in the past, we start hitting certain levels of sales that every dollar above that flows through very nicely to the bottom line. So as we improve speed of service on AUVs that are already high, we'd leverage the fixed costs. We should see an acceleration in our margin, so that's what we're after.

Got it. And then just a follow-up on Qdoba, I appreciate all the color you've offered already and I know you're in the midst of, I guess, a comprehensive brand review. Just wondering whether that would change one of 2 things, whether it will have any impact on how you think about the 50/50 kind of company franchise mix and which direction might it move in based on your really understanding of that study? And separately, should we still be assuming kind of the same unit growth rate? Or might that change? I think you had said 15% to 20% annually on the company-operated side and 30% to 40% annual franchisee, and whether maybe there's a thought to ring that in or what do you think the ultimate outcome might be to accelerate that? Or does that study have no impact on the 50/50 and the rate of growth?

Well, on the franchise mix, I don't think that it would have an impact on the mix. But in terms of the growth, our goal is to accelerate growth at some point. But it's going to take a while, even once we get the study done to identify what initiatives we move to make forward, test some of those initiatives and then implement. The idea would be to accelerate the growth because we're getting fantastic returns in sales on Qdoba. And I think we've guided '14...

About 40% company units going into '14, which would be about a 13% growth rate on the current company base, it's about that. So, and then we would expect to see that be able to ramp-up if all of Linda just said works, and we think that it will or we wouldn't be doing it.

Well, I know we got cut off, but we'll take a few more question as we go a little bit past the bottom of the hour.

Next question comes from David Tarantino from Robert W. Baird.

My question is a follow-up on Qdoba and maybe a big picture question about some of the recent closings. I was just wondering if you could maybe elaborate on what some of the issues where with the units that were closed? And whether you think that the closing of such a large number of units at the stage of brands makes you think differently about the long-term growth opportunity.

Yes, I mean, it is making us think differently, which is why the entire brand study is underway, that we need to have a clear position that we are able to articulate in the marketplace to our customers, we need to have a target consumer that's identified and we need to have a brand that executes against what that brand strategy and vision is. However, when we look at the closures in those major Metropolitan markets, it really is just the lack of brand awareness in such large urban markets with a lot of competition. So we went in there. Our penetration levels were very low and as a result, our brand awareness was very low. So there are lots and lots of other markets where we're highly successful. So we chose to really focus our growth on those markets where we are already successful and we already have brand awareness versus trying to go head-to-head in those large urban Metropolitan markets.

So Linda, does that suggest that those large urban markets aren't a good fit for the brand or is this...

Not at this point in terms of the brand awareness. But they would be -- further down the road, those would not be the markets that we would go into early in the brand's maturity. So, yes, at some point, you need to enter into those markets.

Okay. And I think previously you'd shared some thoughts on what the long-term unit potential could be for Qdoba, I think it was somewhere on the order of around a couple of thousand units. Is that still a valid number or are you thinking something smaller based on what you've seen today?

Yes. I think we'll evaluate that and we'll provide more information on that as we get through our work with BCG.

Okay, fair enough. And then maybe 1 quick follow-up on Jack in the Box, I think you mentioned that the balance of the quarter has softer comparisons and I just want to understand how to think about that. Given that I thought last year's results were comparing against some pretty solid or very strong results that you had a couple of years ago. So I was just wondering if the comparison is truly easier, if it's maybe just a function of prior year comparisons, if that makes sense.

Yes, over the 2-year, it's easier. Over the 3-year, it's not easier, to your point.

But part of the 3-year comparison, it depends on when do you cut the cycle off. So the reason that fourth quarter fiscal '11 was so positive was that fourth quarter fiscal '10 was really bad. And so it depends on how far you go back with the compare. When you compare versus last year, the comparisons get easier.

Next question comes from Jeff Farmer of Wells Fargo.

Congratulations and good luck to you both. With that, sort of just following up on Jeff's Qdoba development question and understanding that the brand study is currently underway, but it does sound like if I'm a current or prospective franchisee for Qdoba, that my development opportunities are going to be probably in smaller markets with lower brand awareness levels. Assuming that's the case, how do you keep these Qdoba franchisees excited about their development prospects?

Yes. No, I wouldn't say they're in smaller markets with little growth opportunity. Yes, they're actually in markets that are midsized, but there is growth opportunities.

We also seek franchisees entering into a lot of the nontraditional locations, which works much better for a franchise organization that it does for company organizations, given a lot of the rules around who can go into the airports and the college campuses and whatnot. And those opportunities are fairly significant. We have a nice pipeline of nontraditional within the franchise community. But when you look at franchisees, they have been growing at about 30 to 35 restaurants a year and we're not getting any indication that, that would slowdown.

Okay. And yes, just the heart of that question was my understanding was, your strategy on the corporate side was to really focus on those larger markets that deliver the larger AUVs, have the greater brand awareness, which would leave the inverse of markets available to the franchisees. But I hear you, if there are some smaller market opportunities there. Then one other quick question on -- it's more on the macro side. But obviously, we've heard from your peer group over the last 3 weeks, a lot of different takes in terms of what's been driving softening same-store sales and traffic numbers. And I'm just curious what your thoughts are on the current consumer environment at both your concepts. You're in a unique position to see both fast, casual and quick service. Just how you've seen your consumers, again, have both concepts changed there, their behavior, if they have it all? And again in terms of major macro headwinds, what would you point to, if anything, that's causing this behavior right now?

Yes. Well, it definitely feels like the economy has stalled. If you look across the restaurant industry and even the retail industry, with the exception of the deep discounters, and there's been lots of ideas and thoughts around what has caused the difficulty for the consumer. I mean, some of it -- if you look at unemployment numbers, the federal government, there's been sequestration. So they're going to lay off -- that's been a sector where we've actually lost jobs. The only sectors where we've gained jobs are in hospitality, restaurant, retail and those are generally lower paying jobs. There's been talk around the lack of growth in disposable income, so people just don't have discretionary spending, like they used to. They're spending it on perhaps housing and automobile. There's been a slight increase in gas prices. This morning, I think, there was talk about teen unemployment this summer. So lots of factors that I think all coming together to put more pressure on the consumer, and we are certainly feeling that. We have mentioned that. At both brands, were feeling that. And as a result, we are seeing a shift of consumers to the more value-oriented products. And we should, to Lenny's point, that we've made some shift in our marketing plan and our promotional calendar to just balance it a little bit more on the value side of the equation. But I'm going to let Lenny talk about how we do value, which is sort of unique and different versus doing deep discounting.

Yes, Jeff, just to remind folks, it only takes us about 6 guests a day, 6 additional guests a day per location to grow at about 1%. So when we look at value, what we try to do is be responsible with how it's going to impact overall average ticket and margin by doing the bundles. So this quarter, we've seen the slowness and the sluggishness in July. But we have seen the improvement week-on-week, which gets us pretty confident in viewing the rest of the quarter, especially with the change to the value bundles going forward. So we have continued to use the strategy that's worked pretty effectively for us. And we'll continue to sort of take it week by week, like the rest of the industry, to navigate our way through the sluggish economy.

Operator we have time for 1 more question.

Next question comes from Conrad Lyon with B. Riley.

I, too, extend a high five to both Linda and Lenny. Question, Jerry, do you have the depreciation from the Qdoba stores that closed? I'm not sure if you mentioned that or...

I didn't. Here's the overall cash flow impact on those locations, I have that here. Yes, the overall cash flow from those closed locations year-to-date would have been $5.5 million better had they not been there at all for the year.

Okay, got you. Question for Lenny. Now that you have the keys to the car, any new direction strategically, tactically or pretty much the same thing as before?

Yes. I think I would say that Linda has allowed me to move to the passenger seat. So I'm no longer sitting in the backseat. But the keys don't get turned over until January 1. So I think that Linda has set us up with restructuring and creating a great foundation to move forward. I think we've got the refranchising largely done. And so it's a great opportunity for us to maybe take some time to look forward as we complete that work and just analyze whether it makes sense for us to do things differently. But certainly, not anything happening today that would have me want to communicate any sort of sharp left or sharp right turns. So that's where we are. But I think these types of changes always give us an opportunity to just sort of look forward and evaluate where we've been and where we think we can go from there.

Thanks, everyone, for joining us. Appreciate your patience during our technical difficulties and we look forward to speaking with you soon.

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