Box, Inc. (BOX) Q4 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. Fourth 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.

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 fourth quarter of fiscal 2014, as well as some of the guidance we issued yesterday for the first quarter in fiscal 2015, as well as our long-term goals. 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 or 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 attending Wells Fargo's Retail and Restaurants Roundup in San Francisco on December 2; and our management will be presenting at the ICR XChange Conference in Orlando, Florida, the week of January 12. Our first quarter ends on January 18, and we tentatively plan to announce results on Tuesday, February 17 after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Wednesday, February 18. For modeling purposes, fiscal 2015 is a 52-week year, whereas fiscal 2016 will have 53 weeks. And with that, I'll turn the call over to Lenny.

Jack in the Box reported another solid quarter yesterday. Better-than-expected same-store sales growth, margin expansion at both Jack in the Box and Qdoba brands, and a 10% reduction in our share count drove a 20% increase in operating EPS versus the year ago quarter. This performance capped a terrific year for the company with operating EPS of 35%, over third consecutive year of growth in excess of 30%. Before taking a closer look at some of our fourth quarter accomplishments, let's review some highlights from fiscal 2014. Our business model transformation is essentially complete. We reached our targeted franchise ownership levels for the Jack in the Box brand of 80% to 85%. We refranchised 37 restaurants during the year, including 2 of our 3 remaining Southeast markets. And at year end, approximately 81% of our system was franchised. This transformation has resulted in a less capital-intensive business model with more annuity-like cash flows. The benefit of refranchising can be seen in our company, Jack in the Box AUVs, which increased more than $100,000 versus last year to over $1.7 million. As we restructured the organization to reflect changes in our Jack in the Box and Qdoba systems, we've been transitioning to a shared services approach to more efficiently support the enterprise in both brands. We were able to reduce G&A by 50 basis points from last year to 3.8% of system wide sales, reaching our targeted range of 3.5% to 4%. During the year, we completed our comprehensive review of the Qdoba brand strategy, and began implementing several initiatives to differentiate us from the competition. Although we're still in the very early stages of executing on our brand positioning work, company same-store sales increased 5.7% for the year, including same-store sales growth in excess of 7% for the last 3 quarters. Qdoba restaurant operating margin improved 40 basis points for the year to 18.3%, and system wide sales increased 13% for the year due to same-store sales growth and new openings. On the Jack in the Box side, company same-store sales increased 2% for fiscal 2014, outpacing the QSR industry each quarter. The benefit of same-store sales growth and our refranchising strategy contributed to higher Jack in the Box restaurant operating margin, which increased 170 basis points to 18.5% in 2014. During the year, 38 new Qdoba restaurants, and 12 new Jack in the Box restaurants opened system wide. We also returned a significant amount of cash to our shareholders during the year through the repurchase of nearly $320 million of common stock, well over 10% of our market cap. Over the last 5 years, we've returned more than $775 million in cash to shareholders through stock buybacks at an average price of $31.39. And in fiscal 2014, we initiated quarterly cash dividend as further evidence of our commitment to return cash to shareholders. And finally, we welcome Frances Allen as the new President of the Jack in the Box brand. Frances joined us at the end of October and brings a wealth of experience to the company, including executive-level positions at several major retail and food service brands, where she excelled in strengthening the positioning of those concepts. Now turning to our fourth quarter results. Same-store sales at Jack in the Box company restaurants increased 3.1%. System wide, we continue to outperform the industry with same-store sales growth of 330 basis points higher than the QSR sandwich segment. Breakfast and late night remained our strongest dayparts in the quarter, driven by products like our new breakfast burritos and jalapeño burger, that we added to our late-night menu in June. We also promoted 2 extensions of our signature ultimate cheeseburger, along with an affordable $4.99 combo meal featuring Jack's spicy chicken club sandwich, fries and a drink. Our menu marketing strategy continues to emphasize a mix of premium products and limited time offers as well as value-priced combos. Strategically, we've chosen not to pursue deep discounting at the expense of margins. We don't believe that's the way for us to effectively compete in this segment, and we're willing to sacrifice some of that low-margin traffic to others. Turning to Qdoba, same-store sales in the fourth quarter increased 7.1% for the company-operated restaurants and 7.7% system wide. Our third consecutive quarter of sales growth above 7%. Qdoba's performance reflected solid transaction growth that benefit a continued menu innovation, less discounting in another quarter of double-digit growth in catering sales. Midway into the quarter, just as our popular Mango Mojo promotion was coming to an end, we brought back Queso Diablo as a permanent menu item. This helped maintain the sales, traffic and check-building momentum that we've seen throughout the year. Our guests love the new products we launched in 2014, which represented the first real new menu news we've had in several years. Going forward, we'll continue to use menu innovations to help differentiate the Qdoba brand through craveable new entrées, sauces, sides and desserts, including some exciting new items we're launching in a few weeks that we think will be instantly Instagramable. As the quarter ended, we began rolling out a new simplified menu pricing structure at Qdoba, that allows a guests to pay a single price for any entrée offered. A price that's based on the protein chosen and includes as many additional flavors as the guest would like to add, including: our hand-smashed guacamole, 3-cheese Queso, Queso Diablo and more. Our guests told us that they hated being nickeled-and-dimed for add-ons and upgrades, and they've responded favorably to the new pricing structure, which we tested at company and franchise restaurants in 3 large markets. We're marketing the new pricing structure primarily through digital and social media using the free your flavor hash tag. Our same store sales guidance for the first quarter and full year includes the impact of the new pricing structure. Quarter-to-date sales for the first 7 weeks are tracking above our Q1 guidance for Qdoba. The new pricing structure and intensified focus on menu innovation are really the first major outcomes of Qdoba's brand strategy and positioning work. We've also been addressing how to incorporate various elements of the brand strategy into the restaurant facility. With the exception of a few nontraditional locations, all new company units over the remainder of 2015, will be opened in existing markets and will be dedicated to testing new restaurant prototypes that feature those elements. We expect to accelerate new growth in 2016, and beyond, depending on the outcome of these sets. In closing, I want to reiterate how pleased we are with the organization's performance in 2014. From the sales growth and margin expansion at Jack in the Box and Qdoba; to the support of our franchise communities in executing the strategies that drove those results; to the efforts of our brand services team in managing overhead costs, while delivering exceptional service and support to both brands; as well as the overall enterprise. A lot of people put forth exceptional effort this past year, and it's rewarding to see the quality of results they were able to achieve. And now I'd like to turn the call over to Jerry for a more detailed look at our fourth quarter results and outlook for the future. Jerry?

Thank you, Lenny, and good morning, everyone. Our 20% growth in operating EPS for the quarter and 3 consecutive years of operating EPS growth in excess of 30% are a testament to the transformation of our business model over the last several years. With pliable same-store sales growth at both brands and the benefit of refranchising, we were able to drive significant margin improvement and return a substantial amount of cash to shareholders. We refranchised 23 Jack in the Box restaurants in 2 of the 3 remaining Southeast markets during the fourth quarter. This leaves us with roughly 20 restaurants that we expect to refranchise in the second quarter of 2015, for which we have a signed letter of intent. With the sale of those remaining Southeast restaurants, our Jack in the Box refranchising strategy will be essentially complete. When excluding the restaurants we refranchised during 2014, and the remaining 20 restaurants that we expect to refranchise in 2015, we estimate our pro forma restaurant operating margin for the Jack in the Box brand for fiscal '14 would have been more than 19.5%, or 100 basis points higher than our reported Jack in the Box brand margin of 18.5%, and our company averaging of volumes would've been just under $1.8 million. For the fourth quarter, consolidated restaurant operating margins improved 190 basis points to 18% of sales, as same-store sales growth translated into nice margin expansion at both brands. Jack in the Box margins improved 210 basis points to 17.8%, as we explained in the release, and benefited from pricing of about 2.8% in the quarter. Commodity cost inflation at Jack in the Box was higher than our expectations due primarily to beef costs and negatively impacted sales leverage. Qdoba restaurant operating margin improved by 130 basis points to 18.5% of sales. The benefit of pricing of about 1.9% in the quarter, sales leverage and lower discounting were offset primary by higher commodity costs, restaurant level bonuses and beverage equipment costs. Given the annuity-like cash flows our business model generates and a greater flexibility of our new credit facility, we remain committed to returning cash to shareholders. We repurchased $43 million of stock during the quarter and $320 million during the year as well as initiating a dividend earlier this year. Following last week's $100 million authorization by our board, we currently have approximately $117 million available until November 2015, and another $100 million available until November 2016, for stock repurchases. Our outstanding share decreased by more than 9% in 2014, which will continue to contribute to our EPS growth. Before I review our guidance for fiscal 2015, let's talk about our commodity cost outlook for the upcoming year. Commodity costs are expected to increase by approximately 3% for the full year with higher inflation in the first 2 quarters, and we roll over deflationary periods in the prior year. We currently expect inflation of approximately 4% to 5% in the first quarter, driven by substantially higher beef cost. Most of our other major commodities are locked in for a portion of the year, including chicken, cheese and bakery. In addition, our supply chain team continues to leverage the purchasing power of our combined brand to lessen the impact of inflation. And here's our current thinking for other key items for our fiscal 2015 guidance. Same-store sales are expected to increase 1.5% to 2.5% at Jack in the Box company restaurants and 6% to 8% at Qdoba company restaurants. Our guidance for Qdoba same-store sales growth reflects the expected impact of our new simplified menu pricing structure, which was implemented across the system in October. Restaurant operating margin for the full year is expected to range from 18.8% to 19.6%, depending on same-store sales and commodity inflation as compared to 18.5% in 2014. Margins for the Jack in the Box brand are expected to benefit for the refranchising of the Southeast markets but will be partially offset by the increase in the California minimum wage that went into effect on July 1. The higher minimum wage will negatively impact our consolidated Q1 through Q3 margins by approximately 50 to 60 basis points as compared to last year. As I mentioned, commodities are expected to be more of a headwind to margins for both brands in 2015 but particularly in the first half of the year. SG&A as a percentage of revenue is expected to range from 13.5% to 14%, as compared to 13.9% in fiscal 2014, and reflects $5 million of higher pension expense in fiscal 2015, or about an $0.08 impact to EPS. Impairment and other charges as a percentage of revenue are expected to be approximately 60 basis points, including costs related to expected Qdoba remodels. Approximately 10 to 15 new Jack in the Box restaurants are expected to open system wide with most being franchised. Approximately 50 to 60 new Qdoba restaurants are expected to open, of which approximately half are expected to be company locations. Company openings will 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 are expected to be in the $90 million to $100 million range. The increase from 2014 relates to a greater number of openings and remodels for Qdoba as well as equipment costs for Jack in the Box, which are expected to improve speed service and food quality, including restaurant-level technology and lighting upgrades. As a reminder, Qdoba remodels were put on hold over the last 18 months, while we completed the brand positioning work. Operating earnings per share are expected to range from $2.73 to $2.88 in fiscal 2015, compared to operating earnings per share of $2.45, in fiscal 2014. We now estimate EPS sensitivity as follows: for every 1% change in Jack in the Box system same-store sales. We estimate the annual impact to earnings is about $0.10 per share, approximately $0.04 of which relates to company operations depending on flow-through and assuming stable costs; and the other $0.06 relates to franchise revenues, which are not subject to commodity cost or other inflation. The impact of a 1% change in Qdoba company same-store sales is approximately $0.025. And for every 10-basis-point change in consolidated restaurant operating margin, the estimated annual EPS impact is approximately $0.018 per share. We also provided updated long-term goals for our fiscal 2016 through 2018, as noted in the press release, culminating in our expectations for mid-teens EPS growth. And 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] Our first question today comes from Brian Bittner of Oppenheimer.

First question is on Qdoba. With the new menu, the new pricing strategy, can you tell us what the -- that change in average check was from it? And can you also tell us what average check assumption you have baked into the full year guide for Qdoba's comps?

Are you referring to 2014, Brian? Or are you referring to 2015?

I'm referring to 2015 guidance, and the average check change that you've seen from the new menu.

Got it. So here's the way that we would look at the pricing strategy for Qdoba for 2015, I think, you've said it right. It is an average check lift. It's not a pricing increase, per se, as the Guac, and the Fajita Veggies, and the Queso all now -- all inclusive of that. And so -- but within the 6% to 8% comp growth, we are anticipating that there would be a combination of average check growth, as well as traffic growth in the model, Brian; although, we don't break those out, but as an example, the pricing model that we have is essentially $7.80, or $8.40 for everything depending upon what your protein is that you select. And as an example also is if you purchased a basic chicken burrito, and added guacamole, you would actually spend more for your burrito at that time than what you do today. The Guac incidents right now is about 35%. So we're seeing an increase in the Guac incidents, we're also seeing an increase in the Queso incidents, which we view as a very positive sign, as those are key flavor adds, as well as the sauces and salsas that we add, which tend to be a little broader than what you might see elsewhere in the marketplace. And those are the items that really differentiate the Qdoba profile. So we're happy to have that in there. With all of that though, while we won't see any margin flow through from food costs because of the extras that are all inclusive, we do expect to see nice flow-through on the fixed cost component, such as brand management comp and depreciation and amortization. So that is a big component of the margin move within 2015 guidance. As an example, we expect both brands to improve margins versus where they were in 2014, but we now expect the Qdoba margins to be higher than the Jack in the Box margins for fiscal 2015. That may not be the case for every individual quarter, but we expect it to be the case for the full fiscal year.

Okay, and I appreciate that. And I also appreciate that you have added EPS expectations to the long-term guidance of mid-teens. And one question on that outlook is you guys have put a 19% to 20% restaurant margin long-term goal out there, but it appears that you're going to be within that range in 2015. And if you continue to expect same-store sales growth over the long term. I'm just confused why that's kind of the endgame goal on the long-term guide? And why you wouldn't be able to continue to grow margins over the next 3 years?

Sure. Let me just give you -- clearly, in our '16 to '18 longer-term guidance, the same-store sales, mid-teens and the Jack in the Box, 2% to 3% -- excuse me, not mid-teens, but mid-single digits, and the Jack in the Box at 2%, 3% comp growth are in there. Let me just tell you what we also have included in the cost structure that may not be obvious from what we talked about within the press release. So within the long-term piece, we have cost issues or cost increase related to the Affordable Care Act, which for us, takes effect in fiscal 2016. And the employer mandate, we've estimated is a 50- to 100-basis-point cost that we do not currently have today in our system. Of course, that'll be depending upon the take rates that we have out in the restaurants. Also, the California minimum wage, which went to $9 an hour on July 1 of '14 goes to $10 an hour on January 1 of '16. And we estimate that's another 50 to 70 value basis point impact there, and then, on the commodity piece, we've talked about higher commodity cost, particularly beef in 2015. The -- our long-term model did not assume that those commodity costs trend downward for a period of time. We built some commodity inflation, albeit modest going forward. So if there is any so-called conservatism within the guidance, that's probably on the commodity piece, as we would continue to expect the beef cost to be high.

Your next question comes from Alex Slagle of Jefferies.

I just wanted to follow up on Brian's questions. I know it's been a short time since you all have the new menu, but any more comments regarding impacts you've seen on throughput? Or customer satisfaction? Or anything you're hearing from the field in terms of complications? Or pushback, or anything?

Alex, this is Lenny. A couple of things that we're seeing anecdotally that make us really happy about the way the transaction is going today, as compared to the experience that the consumer felt in the past. The -- if you can imagine going down a Qdoba line and having the -- service provider have to tell you with all the different things that you wanted to add to your meal that, that was going to be extra. What it created was this tension between the guest service person and the consumer, where there was stress from our employees as they kept having to nickel-and-dime the consumer, and it took away from their ability to really try to help the consumer build a craveable burrito or bowl. And so today, what you see is there is this looseness, I guess, you could say, it's the freedom that's taking place in the transaction where our own employees are really focusing on how to build a great meal, rather than trying to remember every item that they have to nickel-and-dime the consumer on. As a result of that, we are seeing, at least qualitatively, that the consumers are quite pleased with the guest service and the change. It's just much simpler, and it's much more focused on a quality meal. In addition to that, if you can also think about our old menu, when you got in the queue, the menu was quite complex, and it was very choppy as we tried to put together pricing for all the different items. And today, it's a really simple menu, essentially broadcasting 2 price points that's -- that are attached to the protein. And then, essentially inviting the consumer to try out all the great new flavors that we have. And that also seems to be very well received by the consumers. So as far as any impact to throughputs, the only impact has been positive, which is seen in not only a growth in our sales, but also our traffic is up. So in the test markets, we saw similar results to what we're seeing today. The simplified approach, the more food-focused and guest-service approach really helped to drive traffic, and, I think, the consumers are rewarding us for it. So overall, we're pleased with this, and just one additional thing, I would add, is that there's really no one else out there doing this. And it was really important that as we try to differentiate the brand, we didn't just differentiate it with the food, but we also differentiate it in the way that we provide the service.

Great, that's helpful. And then, Jerry, just one follow-up on the guidance for '15 in the long term. Confirms that include any share repurchase in the assumptions?

Yes. It assumes it for '15, as well as -- for the longer-term view; we continue to expect to generate significant cash flow and return a portion of that to the shareholders. And I'll just remind the -- everybody that we'll be setting a pattern that we've yet to let a share repurchase authorization expire, and as we indicated in the long-term plan that we continue to return cash to shareholders, both through share repurchases as well as dividends.

Okay. Some portion of that $217 million available in the buybacks now, is that actually assumed to be repurchased during the year in the earnings guidance? Okay.

Yes, it is.

Your next question comes from Joe Buckley of Bank of America.

I know you gave us some pricing data by brand, and maybe you gave us the full complement of traffic and check breakdown for the fourth quarter, but, I think, I missed it, if you did. So could I ask you for that, for starters?

So the -- for Jack in the Box, the price was 2.8% in the quarter; and for Qdoba, the price was 1.9% in the quarter. And traffic for Jack was down 2.6%. Traffic for Qdoba was up 1.7%.

Okay, that's helpful. And Jerry, can you talk about the balance sheet? And how you're thinking about your leverage ratio? I know [indiscernible] sometimes to find things a little bit differently, but it looks like you could add a turn of EBITDA and stay at 3x levered, maybe a little bit less than 3x levered, and just talk about how you're thinking about it? And if that math is accurate?

No. We aren't thinking about it that way, Joe. And in fact, that thinking is included in our long-term outlook, exactly that way. We're working our way to that 2 to 3 as quickly as we can. We did repurchase $320 million during the year. So we are working our way towards there, and we do believe that, that's the right longer-term view. So you're a spot on, 2 to 3x and continue to be active with respect to share buybacks.

And do you think you're more likely to get to the higher end of that range in the long-term guidance framework as opposed to 2015?

We'll get -- we'll be more within the range than we are now, Joe.

Your next question comes from John Glass of Morgan Stanley.

This is Jake Bartlett for John. Just had a question, just to follow-up on the impact of the pricing changes at Qdoba. So I want to confirm, it is a traffic builder. A meaningful -- I mean, check builder, and it's a meaningful mix builder, is that correct?

Yes. Yes, you're correct, Jake.

Okay. And then, the next question is on Jack in the Box, and kind of looking at the 1% to 2% unit growth guidance going forward. What are the limits of that? I mean, is there -- can you see that increase going forward beyond? Maybe just the pushes and pulls as to why that's kind of more muted.

Yes. So a couple things. First off, let me mention that as we've anticipated bringing in our new brand president now, with Frances in place, one of the things that we took a look at it 2015, was just some refresh -- research on the Jack in the Box brand, to start to get an understanding of what future potential of that brand might be above and beyond what it is today. We are optimistic about the future of the Jack in the Box brand, but what we have done pretty consistently in generating any sort of forward-looking positions on growth, whether it'd be sales or unit growth, is we try to operate in a show-me state. So from our perspective, step 1 would be to prove that we can bolster the performance of the existing Jack in the Box restaurant, and then, once we started to see signs of that type of performance, very similarly to what we've seen with Qdoba, then step 2 would be to take maybe a more aggressive stance on growth going forward. So, I think, what you'll find is through 2015 and most of 2016, we will primarily be focusing on the growth of the existing locations, not due to the fact that the endgame is simply same store sales growth, but more so, in alignment with your question, to really put us in a place where we can grow more aggressively with new units. And so next 2 years, we'll focus on existing. We'll prove that out, and then, we'll look to ramp up growth 2017 and beyond, but we're not willing to take a more aggressive stance today than what we've put out there because at the end of the day, we feel like we need to prove that we can raise the sales of the existing sites first.

Next question comes from Chris O'Cull of KeyBanc.

This is Dave Carlson, on for Chris. I have 2 questions. The first is -- you guys are seeing AUVs, I think, in excess of $1.1 million of Qdoba, and, I think, it was 18.3% restaurant level margin this year. Can you guys speak to the margin profile? The source in AUVs of $1.3 million or higher? Just really trying to get a sense of the flow-through as the comp continues to build.

Yes. So we get -- actually, we get a pretty significant flow through on the sales vis-à-vis a fixed cost component, as we get to that $1.3 million level. So we have roughly 1/3 of our restaurants that generate about that kind of sales volume and the margins. And this isn't -- this isn't this year, Dave, but the margins are 23% or higher on those locations. So does that help?

That -- absolutely, it does. And you said that, that was from a previous year, the 23%?

That's from a previous year, yes.

My second question relates to G&A. When we really try to cobble together the components for changes in SG&A from '13 to '14, looking at the reduction in the pension expense, I think, there was a benefit from mark-to-market adjustments of around $3.2 million to have some of the -- on the pension plan investments, I think, modestly lower stock based comp expense in '14. It really appears that the G&A increased during fiscal '14 on an absolute dollar basis, and I'm coming up with something around the tune of $8 million. That said, how much higher was performance based comp during fiscal '14? And can you speak to whether there's much if any reductions in G&A expense during the year?

Yes. So there were reductions in the G&A expense, both in the pension as well as from our business model reengineering as well as the shared service integration fees. We did have higher share base and incentive compensation of about $1.2 million higher, and -- versus -- and we had higher mark-to-market than what we did in the prior year also, but the incentive comp was clearly higher than what it was in 2013. But I'm not sure I get to the same numbers that you're getting to. What I can tell you for '15, is that maybe helpful, is that, if you look at our total SG&A numbers, we've given you the rate. The dollar numbers are going to be similar to what they were in 2014, with lower incentive comp being offset by higher pension expense and advertising higher at Qdoba because of new restaurants and higher sales and refranchising driving lower advertising cost for the company numbers at the Jack in the Box brand. And we'll post the 10-K later this week. That'll -- all that detail will be in there for you.

Your next question comes from Keith Siegner of UBS.

Jerry, I was wondering if you could walk through some of the moving pieces related to the franchise cost structure, the franchise support structure and maybe those margins. With the 2 of the 3 Southeast markets done, with the other 1 coming in second quarter, with some of the other changes in the portfolio with Qdoba, et cetera, how do we think about modeling the franchise restaurant cost? Is there a change in, say, for example, property and the spread you're earning on rent? Or not earning on some of these units? How do we model out that franchise and restaurant costs given this last round in completion of the franchising program?

Sure. 2 questions. So let me talk about the margin compare to the fourth quarter this year, and then, I'll talk to you about how we're thinking about the Southeast locations going forward. So -- and by the way, we do have a new table in the press release that looks at the franchise margin component, but the change in the franchise margin this year versus last year, which was down about 50 basis points on the print, was really due to the change in the initial franchise fees, which were largely caused by selling 23 company restaurants this year in the fourth quarter versus 56 in the fourth quarter last year. So if you adjust for that, the margin on franchise -- of the franchises was actually up 50 or 60 basis points there. So this year was all related to just timing of additional franchise fees, in the quarter, did not have an adjustment for the full year. I think, going forward, with the Southeast cases, what we've said, I think, maybe in the past, but with respect to the rent, particularly, is that we're not expecting a rental income spread on the Southeast, as the sales levels that those restaurants have are not sufficient today to pay an additional rent spread on that. So they're basically paying passthrough rent. So you'd expect the rental cost to go up without a commensurate increase in the rental income. As those restaurants grow in same store sales, we will begin to see some rental income spread, which you're probably not looking for that over the next year or 2. And that is included, or I should say, we have not included any rental income spread in our guidance for the next couple of years on the Southeast.

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

My question is coming back to the Qdoba comp strength that you're seeing, and, I think, the comment was that the quarter-to-date trend is above the high end of your guidance, and it suggests that you've seen a nice acceleration from Q4 here and quarter-to-date. I was wondering if you could talk about whether that change in trajectory has been more related to the check benefit of this new pricing architecture? Or whether you're seeing increased momentum on the traffic side?

So we see both. We see increased momentum in check and traffic, but check is the lion's share of what we're seeing in the game today.

Got it. Great. And then, I guess, on that, Lenny, I know you've had this pricing architecture out there in some of the locations and tests for quite some time. Could you talk about maybe how the overall customer feedback or consumer feedback has been relative to the value proposition? Because from my understanding, there's some moving parts here, the entry-level price point has gone up maybe fairly significantly, but now you get free Guacamole and Queso, which is a pretty big benefit. So I'm wondering, kind of, what you're seeing from a value proposition perception among some of the guests' feedback you've gotten so far?

Yes. So we've gotten a vast majority of feedback, very positive. In the early stages, we did get some feedback where folks were pointing out that essentially, you get to pick whatever you want, but you do, as you state, enter into it at a higher price point, but, I think, what happened was as folks started to experience the food with all of the various flavors added that, heretofore, they weren't able to get without an additional price, and most often, would reject because of the additional price. Their meal is so much better than what they were experiencing in the past, that when they look at the overall value proposition associated with it, it's been very favorable. And so as a result of, I think, the sort of finished experience the consumer is continuing to vote with their dollars and also with their footsteps as the traffic has continued to increase. So one of the reasons we test it is we knew that with this higher entry point, there would be potentially some rejection. We at least hypothesized that as folks started to experience burritos with guacamole and with Queso Diablo, and those types of things, grilled vegetables, that the finished product would bring them back, and that essentially, they would, in their minds, develop a new consumer value proposition that says essentially this food is way better, and it's worth a little bit more. In addition, what we've heard from the consumer is that they really like the predictability of the pricing. They know that when they get to the end of the line, the price doesn't change because of all things that they've added on. And what we're actually seeing is this predictability is leading to folks purchasing drinks, and it's not something that we've shared details on, but at least qualitatively, we feel good about the percentage of folks they're adding the drink at the end of that. And we think that's essentially because they go into it with a high level of predictability.

Your next question comes from Robert Derrington of Wunderlich Securities.

Lenny, can you give us a little gaze in your crystal ball? And I apologize if I missed that, I got on the call a little bit late. As we look at Qdoba continue to evolve over time, we know that there are some plans in your study with Boston Consulting to look at the trade drafts, menu evolution. Obviously, we've seen the -- one of the earlier snippets with the change in the menu pricing strategy. What can you share with us about the directional plan for the concept, as we look out over the next year or 2?

So first, I will apologize upfront for having to keep this very high level and not getting into too much of the specifics, mainly because we need to prove out some of these tests, and we also, obviously, for competitive reasons, want to keep some of this close to the vest. So speaking 50,000 feet above, what I would tell you is the trade drafts for the facilities, you should expect to be bold. You should expect it to be clearly different from any of the other fast casual Mexican concepts that are out there. We will have a very sort of in-your-face personality that will come to life through the trade drafts. In addition to that, I think, you'll see all of those descriptors reflected in the food. So this change to the menu architecture and some of the things that we put from an LTO perspective onto the menu last year, and now permanently on the menu, as we enter into this year, you'll see more of that type of food innovation. And it will be clearly different from the offerings of the other fast casual Mexican restaurants. So it's really important to us that everything we do stands out, stands apart from our main competitors because essentially, if we want the growth trajectories to meet our long-term objectives, we're going to have to be able to enter into markets where the composition already is, and the only way that we're going to do that successfully is if the consumer can see us as something clearly different. So I wish I could go into more detail than that, but, I think, your main point would be, you should expect to see a clear departure from the personality that Qdoba exudes today and that of any of our competition.

Thanks for teasing us with that. If I could follow-up for a quick second. As we look at -- obviously, franchise development this year, this fiscal year appears to be more nontraditional locations. As we look out, is it anticipated that potentially, as we see these changes reflected in the business, in the Qdoba's business and its model, that franchise development would be anticipated to pick up maybe in fiscal '16?

Yes, I think, that's our desire. I think, that as we get through the testing on the new facility, the new prototypes, we're then in a position to ask franchisees to invest. We don't want to have franchisees jumping the gun at this point, and then, a year later, asking them to invest incrementally on top of what they've already done because it's just more difficult for them to make that work economically. So some of what you're seeing this year is really just by design. The franchise growth that you'll see in nontraditional, those are facilities that are generally compromised from the onset. They're typically smaller footprints. They may have requirements for offering food during certain dayparts that we don't even offer food today. So we kind of go into those nontraditional facilities knowing that the brand will have to make a few adjustments in order to exist in those spaces. So we feel comfortable continuing to drive that type of growth today just due to the nature of it, but when we look at our more traditional sights, whether it'd be in line or standalone buildings, we want to be really careful about what we're asking our franchisees to invest and when. So yes, I would hope to see a growth in 2016, certainly, for sure, in 2017 starts to ramp up from our franchise organization. And then, just understanding the wherewithal of our balance sheet, as we start to play this out as reflected in our guidance, you would see the Jack -- excuse me, the Qdoba company stores growing and probably at a faster rate early on than the franchises.

Your next question comes from Peter Saleh of Telsey Advisory Group.

I just wanted to ask about the long-term guidance here for Jack in the Box. You're looking at -- for same-store sales of 2% to 3% longer term, yet your guidance for the first quarter and maybe more like this year is in the, call it, 1% to 2% range. So any thoughts on why you guys anticipate maybe an acceleration in same-store sales at Jack, though a little bit more pricing that you plan on taking in '16 with some of the incremental costs coming on or just a little bit more color on that would be helpful.

Yes. So a couple of things to think about with Jack in the Box. First off, we've mentioned that we don't want to play the single item discounting games to try to drive traffic because it's detrimental to our margins, and it makes the franchise business model particularly difficult. So we have focused on the quality of the food, and we focused on food innovation to really drive the sales, and that's been the model for quite some time. I think, what you can expect to see over the next couple of years is that we will focus holistically on executing the brand in a way that drives more consumer loyalty or affinity to the brand. And that will have to be done through a combination of things. One, I think, we'll really have to look at our menu very carefully to decide how we can generate greater -- a greater consumer value proposition, and, I think, when you look at the equities that we have on our existing menu, and you'll get the innovation that we've been able to achieve over the last handful of years, I think, we have a golden opportunity to up the ante with our menu and really take both taste and quality to a new level. And, I think, we also have an opportunity to simplify our menu. For those who are familiar with our brand, the menu isn't necessarily overwhelming, but for those who are new to our brand, it's completely overwhelming where, we pride ourselves on the variety. We pride ourselves on the innovation, but it's a double-edged sword because it also beats to some complexity. And so, I know that one of the things that Frances has identified early on, is that there's probably an opportunity to take a look at the consumer value proposition and make some changes to the way we detect our menu and the great items that are on it to the consumers. So, I think, you'll see a huge focus there, and I don't believe that it will stop there. As I stated earlier, we did take an opportunity to do some additional research on the Jack in the Box brand this past year. We've learned some things about our transaction, the perception of, sort of, the ease of the transaction or difficulty of it, and, I think, there are some things that we can tweak in the way we approach delivering the food, whether it'd be through the front counter or through the window. That would really make it easier for the consumer to use us. And so, we're going to start to address some of those things, and then, follow up some of those gains with really trying to bring the personality to bear within the facility, within our POP and within our commercials, in ways that will continue to drive relevance for the brand. And a way to think about that is if you look at the late night work that we did, it was a holistic approach. We didn't just add new products to the menu, we added new products and packaging that was branded holistically. It was a late-night experience. It included music. It included uniforms. It included maybe a little edgier service and packaging and voice of the brand. And, I think, that the consumer has responded very favorably to that. When you see what we've done with late night, it leaves the holistic approach associated with it. You can anticipate that we'll take a very similar approach to the entire business. And even when you look at the consumer value proposition, not to say that we would do Munchie Meals for $6 across the entire menu, but if you look at the responses that the consumer has had, some of that is associated with how easy it is for them to identify the value proposition during that daypart. And so, I think, you can expect that Jack in the Box will deploy very similar techniques across the other dayparts.

At this time, we currently have no additional questions.

Great, thanks, everyone, for joining us. And we look forward to speaking to you on the next call.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.