Box, Inc. (BOX) Q3 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. Third Quarter Fiscal 2014 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'd 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, David, 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'll review the company's operating results for the third quarter of fiscal 2014, as well as some of the guidance we issued yesterday for the fourth quarter and full fiscal year. 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. 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 presenting at the Wells Fargo Securities Retail & Restaurants Summit in Boston on September 30 and our fourth quarter and fiscal year ends on September 28. We tentatively plan to announce results on Tuesday, November 18 after the market close, and our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Wednesday, November 19. And with that, I'll turn the call over to Lenny.

Thank you, Carol, and good morning. Jack in the Box reported strong operating results yesterday, highlighted by a 59% increase in operating EPS. Our third quarter results were driven largely by better-than-expected same-store sales growth at Qdoba, solid comparable sales growth at Jack in the Box, margin expansion, lower G&A and a 10% reduction in our share count as we continue to use our growing free cash flow to return cash to shareholders. At Jack in the Box, we continue to take share as our systemwide same-store sales increase of 2.4% outperformed the QSR sandwich segment by 240 basis points. Same-store sales at Jack in the Box company restaurants also increased 2.4%, and regionally, comparable sales increased across all of our major markets. Breakfast and late night again drove our overall same-store sales growth in Q3 as we continued to innovate in these day parts. We kept breakfast top of mind for our guests with a new LTO, the Breakfast Monster Taco. And we've added a spicy jalapeño burger to our popular late-night menu, which appeals to the other 9 to 5ers who are out and about between 9:00 p.m. and 5:00 a.m. We're continuing to generate new product news in several categories and across multiple day parts in the fourth quarter as our promotional calendar emphasizes a mix of premium products and value-priced offerings. This week, we're introducing our Spicy Chicken Club Sandwich and promoting it in a value-priced combo for $4.99. We're also enhancing our breakfast menu this week with the introduction of 2 new breakfast burritos. And for those of you on the east coast who've been asking when we're going to roll out the croissant donuts, we're adding them to our menu beginning today. In addition to menu innovation, delivering more consistent speed of service is also contributing to our sales growth. Now turning to Qdoba. Same-store sales in the third quarter increased 7.2% for company restaurants and 7.5% systemwide, our second consecutive quarter of growth in the 7% range. Qdoba's performance reflected continued menu innovation, less discounting and another quarter of double-digit growth in catering sales, which benefited from Cinco de Mayo celebrations and graduation parties. Our Mango Mojo promotion built upon the momentum generated by our Queso Bliss LTO in the second quarter. Transactions growth of 2.7% was double that of Q2. And we continue to see an increase in average check due in part to lower discounting. As summer draws to a close, the most popular choice of our 2 Queso Bliss options, Queso Diablo, returned to our menu as a permanent item this week. On the development front, among the 10 new Qdoba restaurants that opened in the third quarter were a company location in the JFK Airport Travel Plaza and a franchised location in the Pentagon. We now have 27 nontraditional Qdobas in our system and expect to open another 5 to 7 locations in the fourth quarter. Nontraditional restaurant development has been a great way for us to grow our Qdoba brand while delivering awareness. We also are leveraging our infrastructure in this area with the Jack in the Box brand, and our first nontraditional Jack in the Box restaurant is currently under construction at the San Diego International Airport. We remain pleased with Qdoba recent performance, and we're benefiting from some of the early outcomes of the brand positioning work that's been underway. This is an exciting time for Qdoba as we position the brand for continued growth in the years ahead. Overall, it was another solid quarter for the company and both our brands, which has prompted us to, again, raise our earnings guidance for the full year. We remain confident that execution of the strategies we've put in place, along with those that are under development, will continue to drive performance and success over the long term. And now I'd like to turn the call over to Jerry for a more detailed look in our third quarter results and outlook for the remainder of the year. Jerry?

Thank you, Lenny, and good morning, everyone. Our 59% growth in operating EPS for the quarter continued to reflect the transformation of our business model. With positive same-store sales growth at both brands and the benefit of refranchising, we were able to leverage margins and SG&A. Jack in the Box margins improved 150 basis points to 18.4%, as we explained in the release and benefited from pricing of about 2.9% in the quarter. Commodity cost inflation of 2.6% at both brands was in line with our expectations, but negatively impacted sales leverage, as did rising utility costs. Qdoba restaurant operating margin of 20.6% was equal to last year the benefit -- the benefit of pricing of about 1.3% in the quarter. Sales leverage and lower discounting were offset primarily by higher commodity costs, restaurant-level bonuses, new beverage equipment costs and utilities. SG&A decreased by $4.7 million as compared to last year, as we described in the press release. The mark-to-market benefit we saw in the quarter was largely offset by higher incentive compensation. After refranchising, we completed the sale of one of the Southeast markets this week and have signed letters of intent on the remaining 2 Southeast markets. Following the completion of the sale of these 3 markets, we estimate that the annualized restaurant operating margin for our Jack in the Box brand should increase by more than 100 basis points, and our AUVs should increase by approximately $100,000 or roughly 5% higher. Given the annuity-like cash flows our business model generates and the greater flexibility of our new credit facility, we continue to remain committed to returning cash to shareholders. We repurchased $75 million of stock during the quarter and $277 million year-to-date and paid our first quarterly dividend in June. Following last week's additional $100 million authorization by our board, we currently have approximately $160 million available until November 2015 for stock repurchases. Since the beginning of the fiscal year, our outstanding shares have decreased by more than 8%, which has contributed to our EPS growth. Here's our current thinking on guidance for the balance of the year. For the fourth quarter, we are expecting same-store sales growth at company restaurants of 1.5% to 2.5% for Jack in the Box and 5% to 6% for Qdoba. As a reminder, an increase in the Californian minimum wage went into effect on July 1, which will negatively impact our Q4 margins for the Jack in the Box brand by approximately 80 basis points. We expect our Q4 tax rate to be similar to our full year guidance of 35.5% to 36.5% as compared to 28% in last year's fourth quarter. Overall commodity costs are now expected to increase by approximately 1.5% to 2% for the full year with inflation of roughly 2% expected for Jack and 4% for Qdoba in Q4. Beef has been extremely volatile, and we now expect beef cost to increase approximately 5% to 6% for the full year. Operating earnings per share from continuing operations are now expected to range from $2.38 to $2.45 in fiscal 2014 compared to $1.82 in fiscal 2013. Our EPS guidance includes the deferred financing cost writeoff and the legal settlement incurred in our Q2 results. As we move towards the end of the fiscal year, here's some of our initial thoughts on a few items relating to fiscal 2015. Our preliminary outlook on commodities is for 2% to 3% inflation, with higher inflation in the first half of the year as we roll over deflationary periods in the prior year. We currently expect approximately 60 Qdoba restaurants to open systemwide in 2015, of which about half will be company restaurants. Company openings will likely be weighted to the back half of the year as we plan to incorporate a new prototype design. And the majority of franchise openings are expected to be nontraditional locations. Capital expenditures look to be in the $90 million to $100 million range, with the increase due to a greater number of openings and remodels for Qdoba, as well as equipments cost for Jack in the Box, which are expected to improve speed of service and food quality. As a reminder, Qdoba remodels were put on hold over the last 18 months while we completed the brand positioning work. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. David?

[Operator Instructions] And our first question today comes from Joe Buckley of Bank of America.

This is Greg on for Joe. Just I know you guys talked about investing in equipment next year for speed of service. What sort of equipment are you guys going to be putting into the stores? And also, what else are you doing on the speed of service side? What initiatives do you have in place?

Greg, this is Lenny. Let me tackle that in 2 ways. First, initiatives that are in place are primarily focused on bringing our outlier performers in line with the rest of the system. So we have certain markets and certain restaurants that are performing at a much slower speed of service than the rest of the system. And when we break down the reasons for that, it essentially falls into a couple of categories. One, they don't have proper staffing during the heaviest traffic periods of the day. Two, they're not doing the continuous cooking that is required under our assemble-to-order system. Or three, they're not following the basic workstation position systems that we've put in place to make sure that we have the proper talent in the proper stations for the product mix and sales levels of that particular day part. So I'm oversimplifying it, but essentially, when we look at the lack of performance in those locations, it is basic blocking and tackling, but we do need to put quite a bit of work into bringing these restaurants up to par. As far as the equipment, we're really looking at a couple different things in general. One is we're looking at cooking platforms that allow us to speed up the cook times. And then we're also looking at holding equipment that does a better job of maintaining the quality of product over a longer period of time. So with the assemble-to-order philosophy that we have in place, we need to make sure that we're not moving to a cook-to-order platform on all of our products because that essentially slows us down. And when we do the assemble-to-order, the requirement of the sort of just-in-time continuous cooking creates a stress on the organization if the product is not held to a high quality standard. So that's essentially what we're looking at. It's everything from toaster ovens to friers to grills to microwaves. And it's essentially similar equipment to what we have in the facility today, but equipment that does a better job than what we're currently using.

Okay. That's great, and it's very helpful. And if I could just ask one more, on the more than 100 basis points of refranchising benefits from the sale of the Southeast, where, I guess, should we expect that to primarily be coming? Is that going to be more on the payroll side? On the occupancy side? Do -- will you see any food cost benefit from that?

You'll see less food cost benefit than the others. You're primarily labor and occupancy.

Next question comes from Brian Bittner from Oppenheimer.

Following up on that question about the refranchising, have you guys been able to peg what you know what to meet for operating EPS post the refranchising of these 3 markets? Will it be accretive? And if so, by how much?

Yes. Brian, it will be accretive. We haven't disclosed what that is yet, but we will be able to provide the information for you on the November call when we give full year guidance. Keep in mind, we sold one of those markets thus far just this week. The other 2 have letters of intent, so -- and we currently plan to have those sold by the end of the calendar year. But I think as we get closer to those sales times, which will give a better perspective on exactly how accretive that's going to be in the next year's numbers.

Okay. And on the Jack in the Box same-store sales, can you just, one, tell us what you expect to have as far as pricing in 2015 in the model? And then secondly, you are going to be rolling over 2015 against some pretty good same-store sales in 2014 from a number of initiatives, including late night. Can you just talk about how you think you can continue to drive low-single-digit same-store sales in 2015 against what's been a pretty good year?

Brian, let me address pricing, and Lenny will take the other part of the question. The pricing -- we never telegraph exactly what we're going to do on pricing. I would suspect, though, that we'll continue to be fairly cautious on pricing, keeping in mind that we'll have to also balance that out with what our competitors are doing with respect to minimum wage within California. So we'll be keeping an eye on that, but we aren't really going to share what the pricing targets are for next year.

Brian, I'll address your question on what we intend to do next year to roll over some pretty decent product innovation and also late night initiatives this year. A couple of things to note. First off, although we have had some new news most recently with the breakfast category, the breakfast category has, we believe, a lot of room for additional new product innovation and product improvements that we think will continue to drive that day part. The big catalyst is going to be menu innovation, and you're going to see that across all day parts, as I mentioned in my opening comments. And we'll continue that into next year, but we're also not going to lose focus on late night. We have a commitment to continue to promote late night with new products entering into that day part, as well as putting promotional dollars behind those efforts. So it's more of what we're doing today, but with maybe a little bit more emphasis on lunch, dinner and new product news to breakfast. But essentially, the way to look at it across the board is product innovation is going to drive our success next year, along with some of the continued blocking and tackling that we need to experience in the speed-of-service area.

Your next question comes from John Glass, Morgan Stanley.

Given the success Qdoba is having and given that its EBITDA is reaching sort of a critical mass, certainly will in 2015, and then given obviously the valuations that fast casual companies get, how crazy is an idea that you would look at separating that business? If you could dream a dream, it could be half of your valuation potentially, just thinking about kind of comparable companies. So how do you think about that and the right time? And also, philosophically, I think in the past, it's always been viewed as core to the growth strategy of the combined businesses.

So, John, this is Jerry. I'll take the first shot at this. So -- and read your note yesterday, and when you were talking about a sum of the parts valuation, and I find a hard time being able to poke any holes in terms of the sum of the price valuations here. I think the way we look at it, though, within that construct is that Qdoba is becoming a much more visible part of the overall Jack in the Box entity and is an increasingly growing part of that Jack in the Box entity. And we believe, with that and the brand positioning work, that we should be able to get the multiple benefit on that EBITDA that you just described, with it being part of the overall Jack in the Box entity. And we're pretty confident that we should be able to do that if we continue to see sales improvements at the brand margin expansion and then also begin to ramp up growth. So I think it's too -- way too soon to talk about anything other than what we have our focus on right now.

Okay, I appreciate that. And then just as a follow-up, and maybe this is a minor detail, but when you talk about a 100 basis point improvement in restaurant-level EBITDA, I assume it's at the Jack in the Box level, not -- versus a trailing 12-month EBIT -- margin? Or is it the current quarter run rate? Or how do you think about the 100 basis points as plus what base number?

Yes. If you look at where we are year-to-date, John, on the Jack in the Box brand restaurant-level margins, we would look at about 100 basis point benefit from where we are year-to-date on the Jack in the Box margins.

Next question comes from Andrew Barish of Jefferies.

It's Alex. A question on SG&A. And just wanted to get your high-level thoughts on some of the moving pieces for 2015 and how we should think about the major components like ad spend for each brand and pension expense, any remaining impacts from early retirements or shared services initiatives.

So, Alex, let me take that. This is Jerry. I'll take the pension piece first. The pension piece will be driven in large part by what happens with the discount rates. And unfortunately, the way that you have to account for that is you'll get the discount rates on the last day of our fiscal year, which, I believe, is the 28th. So whatever the discount rates are that business day before then is what would impact what our pension expense is for next year. So I don't have to agree with that approach, but it is the approach that we have to follow. So I don't know how to answer that other than to tell you, well, we will give you an exact number when we get back together on the November call. With respect to other G&A options, I think, Alex, going into '15, the likelihood is that with the shared service model, that we should now begin to leverage G&A based upon the same-store sales growth, as you wouldn't expect shared service G&A to increase along with sales increases the way that you would, say, brand-level G&A. So I think we'll have some benefit just on the incremental sales growth there. And as I've mentioned before, over time, we will be able to sync up our systems in the restaurants between Jack in the Box and Qdoba and have a single-platform POS, as an example, back office, timekeeping, the list goes on. But -- and I would expect that those would reduce IT costs over time. But you don't flip the switch on an IT system as decide to integrate and put one in. So there's a lot of work that we need to do to evaluate that process, and it has to be very, very plentiful to make sure that we're going to do it properly. So we'll give you more updates on that as we go forward. But I think that's probably the biggest opportunity on the G&A cost side is that and then sales leverage on the shared service piece.

Okay, that's helpful. And then just on use of capital and where you want the balance sheet, just wanted to gauge your comfort in utilizing additional capacity on your revolver and buyback authorization, sort of how much dry powder you want to maintain for flexibility down the road in case of potential store acquisitions or seeding opportunities.

Yes. So we -- right now, Alex, we are -- our debt-to-EBITDA at the end of the quarter based upon our debt covenants is about 1.8. And we said before, we're comfortable with 2 to 3x. The $160 million that we have authorized by the board for future share repurchases between now and the end of September -- November 2015, I think it's safely within that 2 to 3 range that we've talked about the comfort level on. We do definitely want to have some liquidity capabilities on there for things that may happen. We can't really describe what that is, but we always model in what we want to have that we need some liquidity there. We definitely need dry powder for things, such as you said, or for other activities.

Next question comes from Jeffrey Bernstein of Barclays.

2 questions. So the first on the unit growth side, and I think, Jerry, you gave some initial color on fiscal '15. I think you said 60 Qdobas, split between company and franchise, and there was no necessarily mention of Jacks. I'm just wondering, on the Qdoba side, whether there is demand for more than that from the franchise community, and therefore, we should continue to expect that number to go up or whether that's the right number. And on the Jack side, being that you're still more of a regional brand, and the results have been as steady as they have been, how many we should expect in '15 and whether or not there's the ability to accelerate that pace in the future years. And then I had a follow-up.

So, Jeff, let me talk about the Qdoba piece first. So the Qdoba number is higher than where we expected to be for '14 going into '15. And I think that represents both demand from our nontrad businesses. We had said that a good portion of the roughly 30 franchised locations are for the nontrad. We think that is a growing piece of the business. We talked about signing 2 contracts, 1 with Sodexo and 1 with ARAMARK, about a year ago. And we're starting to see some fruit from that here. So we'd expect to see continued growth on that. I think franchisees by and large are looking for what the new prototype is going to look like, and then I would expect that there would be demand on future Qdoba franchise growth, particularly if we are having sales like we are currently having. And then I think on the company side of the equation, as we get beyond the prototype design -- and remember, we said 30 units this year mainly in the back -- 30 units into '15 mainly in the back half of the year, that would indicate that we would expect Qdoba restaurant growth to increase beyond that going into '16. But we're being -- and we want to make sure that we have the right prototype design in place first before we start building a significant number of Qdoba restaurants.

And on the Jack side?

And on the Jack side, the risk of providing a portion of the data will tee up a question on the other piece that we didn't give. We'll give more guidance on that as we go into the November call. We did increase it to about 15 this year. The vast majority of that will be franchised locations.

Got it. And then the other one, just a follow up, I think you said if we take the third quarter, year-to-date, Jack brand restaurant margin, bump it up by 100 basis points. And I'm just wondering, more broadly, if this year's blended margin is 18% to 18.5%, after assuming that close to 100 basis point improvement for next year, where do you see those numbers going? I mean, do you have a range today of your best and worst stores? Is there meaningful opportunity above the -- I guess, it will be 19% to 19.5% for next year? Or have we now reached kind of a plateau where that's a level you'd be happy to just maintain?

Yes, so a couple of things. One is the 100 basis points, you're right, it is on the Jack in the Box brand. Keep in mind that we will expect to have about a 80 basis point impact on minimum wage, of which you'll get that in Q4 this year. You'd expect that then to also have an 80 basis point impact in Q1, Q2 and Q3 next year before we begin the rollover of comparable numbers. And then we'll get same-store sales leverage on the increasing same-store sales. But again, Jeff, we can give you more information on what the -- on what that looks like if we get into the November call.

Okay. But it seems like the refranchising benefit of 100 that would be kicking in about now is conveniently, for the most part, offset by the 80 basis point California increase in the minimum wage essentially.

Yes, not quite, but yes. And we also said it was at least 100 basis points on the Southeast margin impact for us.

Next question comes from Chris O'Cull from KeyBanc.

Lenny, my question relates to Qdoba. Can you describe in more detail some of the other initiatives and maybe the new products -- the new product news planned for Qdoba to drive comps. And then I have a follow-up.

Yes. Chris, there are a few things that we're not talking about publicly because we're still vetting them out to see if they're going to sort of take shape systemwide. But we're looking at everything from new platforms within the menu to new ingredient selections to also new ways of presenting the value to the consumer. So it's everything from the look-and-feel menu boards and also design of the restaurant and logo to the lineup products that we have, both from an LTO standpoint and then also permanent items on the menu. So we haven't publicly shared what those platforms are. I have just, in the last month, tasted several of those new items in Denver with the Qdoba team. And I believe that the new news that they'll be bringing to the menu will be much more impactful than even what we did this year and will be much more differentiated than anything Qdoba has done compared to the competition in the past. So I think we'll be able to set ourselves apart, starting in 2015, from the competition.

Great. And then as a follow-up, Lenny, are you preparing the Qdoba system for a meaningful inflection in the rate of development in fiscal '16 once the new prototype is available?

I think you could say that's true.

Next question comes from Matt DiFrisco from Buckingham Research.

I jumped on a little in the middle of this, so I'm sorry if you already answered it. But I'm curious on the guidance for the Jack in the Box same-store sales. Given the easier year-ago comparison in the fourth quarter, it looks like you're, on a 2-year basis, assuming a slight moderation. Is there anything behind that besides just more conservativeness, I guess?

I think we're just -- we just see the competitive environment, and we're making sure that we're conscious of putting forth numbers that are realistic to achieve. We would certainly love to outperform, but I think what we've put out there is a realistic expectation based on what we're seeing in the environment right now. We are continuing to take share, and in this environment, I think that's pretty difficult to do. So we just don't want to sort of overestimate our abilities there, especially with all the dollar value messages that seem to be coming en masse here in Q4.

And then I guess also just to follow up, as far as the Qdoba comp, it's been very strong the last couple of quarters. And I think have we already begun sort of to redirect some of the strategy of growth? I -- if I'm not mistaken, it was to backfill some markets, not really go into a lot of new markets with Qdoba. So I guess is this proof that you're able to achieve that without seeing any meaningful cannibalization or an uptick in aggregate cannibalization from some new stores? And does that give you the encouragement to grow faster? It sounds like you're opening 15 more stores or so next year. Is that behind the better growth next year and that the market is accepting more stores into, I guess, a more confined space and backfill markets?

Matt, I think the way to look at it is a couple of things are happening here. One, we do feel very confident based on the early results we're getting here on the brand positioning work and the assumptions around our ability to grow without cannibalizing. Yes, we feel pretty good about that. But I think the other piece of it that we just need to be conscious of is that we are testing new prototypes going into early 2015. And so we will be conservative in 2015 about the pace at which we grow because we want that all vetted out so that franchisees and company stores that are being developed, whether in existing or new markets, can incorporate all of those new learnings.

Next question comes from Jeff Farmer of Wells Fargo.

Just following up on Chris's Qdoba question from a few questions ago, I really just had a different way to ask the question. So recognizing that you don't want to tip your hat too much, but what inning do you guys think you're in with the Qdoba turnaround? Are we really just getting this thing off the ground? Are you just sort of scratching the surface here? And then you've alluded to this but in terms of further menu innovation, digital loyalty, catering and the like. You mentioned 2015, but is this going to play out over the next 2 to 3 years? Are you looking to do this on somewhat of a staggered perspective, meaning you don't want to throw too much at the restaurant or the consumer at one time? So to sort of sum all that up, you've seen some strong results from just 2 quarters. It sounds like you guys think you have a lot more in the pipeline and that potentially we could keep this going for quite a while. So I know I'm putting words in your mouth, but what do you think about that?

Yes. So a couple of things. First, if you ask, to your original question, what inning are we in, we'd say we're still in spring training. And the reason for that is if you take a look at how we're generating the results today, it's really with essentially the same offering that we've always had, with just some incremental new product news. And the new product news is certainly in alignment with the brand position that we're going after. And so it is resonating with the guests, but there's so much more we need to do to bring this brand position to life. You'll see a change in the service model. You'll see a change in the overall menu makeup. You'll see some changes in the experience that the consumer has in purchasing the product and in the look and feel of the environment. And none of that stuff has hit the street yet. So when you look at what consumers are essentially getting today, it's really just the very beginning.

Next question comes from Robert Derrington of Wunderlich Securities.

To follow up on that, Lenny, could you -- as we're thinking about Qdoba in the future, and you've obviously learned a lot about the business, kind of your plan. As we go forward, is it reasonable to expect that as you begin to roll out the new prototype, would you also have a remodel program for your existing restaurants?

Yes, we would. And if you can recall, we had some remodel budget in place this year that we delayed and essentially expecting just what you mentioned, that as we get the prototype in place, that'll not only be the prototype for new facilities, but that we'll go back and retrofit the old ones.

So the likelihood, is it all of these will come together at the second half of late next year or early fiscal '16?

Well, I think the pace is yet to be determined. But yes, we should start to see some activity late 2015 and then a ramp-up of activity into 2016. And depending on the extent of the prototype that we land on, we'll need to work with the franchisees on a reasonable pace at which they can get there.

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

I had a -- maybe a clarification question on Qdoba. And just thinking about the strength that you're seeing in the comps from the last couple of quarters, could you maybe elaborate on what you think some of the elements of the brand positioning that are working the best with consumers are at this stage? I guess what's resonating so well that we're seeing this big uptrend in comps? And I guess the second part of that is how do you plan to build on that as you look at the next several quarters?

Yes. So I think if you take a look at the competition in the fast casual, sort of fresh Mexican space, in general, the segment does not have a lot of new news. And so I think what's resonating with the consumer right now for Qdoba is that we're one of the only players that does have new news, and we've done that by capitalizing on some of the equities that already existed on our menu that we knew the consumers believed was differentiated. And that's the case, though, on mango flavors. But we will bring new flavors to the menu that never existed before in 2015. And so we believe, not only will that be additional new news, but that it should start to attract new consumers, more so than what we are doing this year, which we think is essentially increasing the frequency of the visits from our existing customer base. We think that's what's probably driving the sales this year. So in addition to that element of the business, we do have a large focus on catering this year, and you've seen it in the results. You've seen that we've been able to grow catering double digit. We also have been able to lower the discounting while not driving down transactions. In fact, we've been able to increase transactions. So we think we're finding a sweet spot here, and we think the new news and the other elements are just going to continue to drive the model.

Great. That makes sense, and then one clarification on the margin outlook. Jerry, I think you mentioned that there are some puts and takes, one was margins going up with this refranchising event, and then you have some pressures. So as you think out to next year, I just wanted to make sure I understand that equation the right way. Are you thinking that you'll be able to get margin improvement from this year? And then what type of comp assumption might you need to have to drive improvement as you look in 2015?

Yes. David, we're going to save most of that, I would say, in -- for the November call when we give you full guidance on that. What I would say here is we would expect -- broadly speaking, we would expect same-store sales growth to contribute to margin improvement. So you expect the margin improvement coming from sales. You'd expect margin improvement coming from the refranchising piece of the business. You'd also have the headwind on the minimum wage piece, and we gave you what the commodity outlook looks like for 2015 thus far. I think also, if you look at the Qdoba flow-through, I'd say one of the items that's hurting Qdoba flow-through this year are 2 initiatives that we have, which we believe are driving significant sales growth, which is the restaurant-level bonus program, which has been changed to incentivize restaurant managers with bonus based upon sales and margin almost exclusively. That's impacting current flow-through by about 50 basis points. And also, we've put new beverage equipment in, which is also, we believe, driving better beverage volume within the restaurants. And that impacted flow-through by about 30 basis points. As we go into '15, those are now baked into the [indiscernible], so you'd expect to have better flow-through on the '15 same-store sales growth versus what we saw thus far throughout this year.

Next question comes from Keith Siegner from UBS.

Jerry, just a question. Looking at the consolidated franchise business, you don't have all the concept-level detail yet. I was -- I guess I was surprised, given the strength of the same-store sales, to see franchise margins down a little bit, both sequentially and year-over-year. I was wondering if you could talk about are there any pieces of the puzzle in either the property business or any other expenses, maybe timing issues, that were impacting that consolidated franchise margin that we should know about?

Sure. So, Keith, just -- and you're right, it is more of a timing-related issue. But the margin -- and you're right to call it modest decline. Look at it versus the prior year and also sequentially versus the prior quarter. It was off about 1/10 in those comparisons, and that was caused in large part by the timing of our franchise fees, which are not related to sales. Franchise fees come in if we sell a restaurant to a franchisee or a franchisee builds a new restaurant or they rewrite or we rewrite their franchisee agreement. So those are the items that draw the franchise fees into that piece. I think that if you look at just compared to last year, the change in the franchise fees impacted that margin rate by about 50 basis points. So we'd have been a little higher were it not for the timing of the franchise fees. Hope that helps.

Do the Southeast refranchising efforts have any impact? In other words, is there, say, no rent spread? Is there even rent to worry about with those units? Might they have any impact?

What I would say -- yes, that's a very good question. So I think going forward -- and we just franchised one of the Southeast markets this week. But because where their sales volumes are currently, we wouldn't expect to get a rent flow-through on that until same-store sales start to build. But that is a fair point on the Southeast locations. Having said that, though, they will be accretive to earnings.

Yes. One last one if I could sneak it in. I'm just wondering if you could talk about, in the guidance for 5% to 6% same-store sales this coming quarter, how much of that is based on price?

Yes. So we had 1.3%, Keith, in the most recent quarter, and we typically don't comment on what our forward pricing strategy is.

Next question comes from Nick Setyan from Wedbush Securities.

Just to hone in a little bit more on the Qdoba side of 2015, as we kind of accelerate unit growth, particularly on the on the company owned side, I know we've had some strength in unit openings this year. What are some of your new unit opening targets for next year, particularly as it sounds like there are some new markets planned? And then how should we think about sort of the impact on the margins? I mean, the new unit opening and efficiencies on the four-wall economics? And then the pretty good ramp-up in the growth related to G&A, the preopening costs, D&A, can you just maybe give us some color on that?

Yes. Nick, this is Jerry. That will all -- maybe not exactly the way that you've asked it, but all of that will be embedded in our 2015 guidance. What we did say earlier on the call is that we expect to open about 60 Qdoba locations in '15, which is an increase from what we planned to do this year, roughly half company, half franchise, with the most of the franchised locations being the nontraditional spaces like airports and college campuses and the like. The other -- the remaining 30-ish would be company locations more weighted to the back half of the year as we test a prototype and begin building new restaurants with the new prototype later in the fiscal year.

Your next question comes from Peter Saleh from Telsey.

I just wanted to ask about the trajectory of Qdoba. Now that you've got comps going in the right direction here, any thoughts on making or acquiring more of the -- your franchisees or some of those markets?

Yes. Peter, this is Jerry. We would love to acquire some additional market from franchisees. I'm not sure the 7% comps makes them any more eager to sell, however.

Fair enough, all right. And so in terms of the -- for Qdoba, on the franchise side, are there any investments -- capital investments that you're asking the franchisees to make with this turnaround? Or is there anything -- any other capital that they need to invest in the stores?

Yes. So, Nick, we haven't sized that yet, but -- excuse me, Pete, we haven't sized that yet, but we would expect them to remodel their own restaurants, as we do with the Jack in the Box brand.

Operator, if we can ask if there's any more questions on the line.

We currently have no additional questions.

Great. Thanks for joining us, and we look forward to speaking to you. And enjoy the rest of your summer.

And this does conclude today's conference. All parties may disconnect at this time.