Box, Inc. (BOX) Q2 2015 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. Second Quarter Fiscal 2015 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, Hershey, and good morning, everyone. Joining me on the call today our 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 second quarter of fiscal 2015 as well as some of the guidance we updated yesterday for the remainder of the 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 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 Oppenheimer Consumer Conference in Boston on June 23, and at the Jefferies Consumer Conference in Nantucket on June 24. Our third quarter ends on July 5, and we tentatively plan to announce results on Wednesday, August 5, after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Thursday, August 6. And with that, I'll turn the call over to Lenny.

Thank you, Carol, and good morning. Jack in the Box reported another solid quarter yesterday, culminating in a 35% increase in operating EPS. We experienced continued sales momentum and margin expansion at both Jack in the Box and Qdoba and essentially completed our refranchising strategy with the sale of our last Southeast market. Same-store sales at company Jack in the Box restaurants increased 7.4% for the second quarter, with transactions driving approximately 1/3 of that growth. Systemwide, same-store sales increased 8.9%, which was our best performance since 1999. Once again, Jack in the Box outperformed the industry with systemwide same-store sales growth 760 basis points higher than the QSR sandwich segment, more than doubling the gap we experienced last quarter. Second quarter sales increased in all our major markets, and were strong across all dayparts, led by breakfast and dinner. The biggest contributor was our new premium Buttery Jack burgers, which have been the most successful product launch in recent memory. These are permanent additions to the menu, not just an LTO. We believe they're a great foreshadow of the type of craveable products and quality that we intend to introduce in coming quarters. Over the years, we've built a lot of equity in breakfast with great-tasting items featuring freshly cracked eggs, and that momentum continued during the quarter with products like our Breakfast Burritos and Loaded Breakfast Sandwich. Jack in the Box has served our full menu, including breakfast all day, for nearly 25 years, and you can expect us to continue to focus on this core competency. We showcase these new products in our advertising, where we've been placing a greater emphasis on the taste and visual appeal of the food. Another way to demonstrate the quality improvements we're making to our menu is in the presentation to our dining guests. With the launch of the Buttery Jack burgers, we also began serving all burgers and sandwiches in baskets using half-wraps. Our research told us that the guests wanted more choices when it comes to beverages, so we announced in March that we will be rolling out Coke freestyle machines across the Jack in the Box system by the end of the calendar year. Frances Allen, our Jack in the Box brand President, has been on board since October, and one of her top priorities has been to retrain our entire workforce on hospitality and friendliness. We are pleased with the progress we've made on this front, and we remain focused on delivering a more consistent experience throughout the system. Turning to Qdoba. Second quarter same-store sales increased 8.3% systemwide and 7% at company-operated restaurants. On a 2-year basis, quarter 2 company same-store sales of 14.2% were just slightly below the 14.9% we saw in Q1. We don't usually talk about the weather, but we've had several questions based on recent industry reports. We do believe that weather was more of a factor this year, and Jerry will talk about that in his comments. Qdoba's performance reflected an increase in average check, resulting from our new simplified menu pricing structure, another quarter of double-digit growth in catering sales and the benefit of continued menu innovation. During the second quarter, new product news included a new Savory Queso sauce for our Smothered Burritos, a Bacon Jalapeno Queso and Quesomole, a combination of any Queso and guacamole. Qdoba and Queso have become synonymous, and these new products further strengthen the association the brand has with that guest favorite. And with summer just around the corner, our mango loyalists know what that means. In a couple of weeks, we'll be adding spicy tequila mango smothering sauce along with our classic Mango Salad, which will feature mango cucumber salsa and cilantro lime vinaigrette. We believe unique and craveable items like these will continue to differentiate Qdoba in the fast-casual Mexican space. The new pricing structure and intensified focus on our menu innovation are the first major outcomes of Qdoba's brand strategy and positioning work. We're now beginning to incorporate the new brand strategy into the restaurant facility. Essentially, we want to marry up the brand's bold in-your-face flavors with a bold in-your-face design on both the interior and exterior. In the past few weeks, we've opened 3 new restaurant prototypes featuring some of the new elements that reflect our new brand positioning. With the exception of a few nontraditional locations, all new company units that open over the remainder of 2015 will include these and other exterior and interior trade dress elements. We'll test and thoroughly evaluate each of the new design elements before releasing the prototype to the system and determining how to incorporate those elements into remodels. Given the confidence we have in the sustainability of our results and our outlook for the future, we continued to return cash to shareholders during the quarter and announced yesterday a 50% increase in our quarterly dividend as well as an additional $100 million share buyback authorization. Before I turn the call over to Jerry, I just want to say how pleased I am with how Qdoba and Jack in the Box are performing. I'd also like to thank our entire organization, including franchisees for both brands, for their commitment and dedication. We think that the brand initiatives coming out of extensive research are just in the early innings and have both brands primed to sustain their recent success. On that note, I'd like to turn the call over to Jerry for a more detailed look at our second quarter results and outlook for the second half of the year. Jerry?

Thank you, Lenny, and good morning, everyone. With strong same-store sales growth at both brands and the benefit from refranchising at Jack in the Box, we were able to drive significant margin improvement and continue to return a substantial amount of cash to shareholders during the quarter. For Jack in the Box, the 7.4% increase in company same-store sales was comprised of transaction growth of 2.4%, mix benefits of 2.9% and pricing of approximately 2.1%. For Qdoba, the 7% increase in company same-store sales was comprised of a 7.4% increase in the average check, which was driven primarily by the new simplified pricing structure, catering growth of 0.9% and a decline in transactions of 1.3%. As Lenny mentioned, weather was a factor for Qdoba in the quarter. There were 3 weeks negatively impacted. And in 1 week alone, where 90% of our company restaurants were affected, same-store sales were down nearly 8% and transactions were down nearly 15%. For the second quarter, consolidated restaurant operating margins top the 20% level of 210 basis points to 20.6% of sales as same-store sales growth translated into nice margin expansion at both brands despite headwinds from commodities and minimum wage increases. Jack in the Box company restaurant margins expanded 280 basis points to 21.4%, including the benefit of approximately 170 basis points resulting from our refranchising strategy. Average weekly sales for Jack in the Box Company restaurants top $36,000 in the quarter, up 11%, resulting from both refranchising and strong same-store sales growth. Year-to-date, our company AUVs are above $1.8 million. Qdoba company restaurant margins grew 50 basis points to 18.8% as leverage from the new pricing structure was partially offset by commodity inflation and increase in labor staffing and higher credit card fees. Franchise margins expanded by 220 basis points in the quarter as rental income for Jack in the Box restaurants and royalties from both brands benefited from higher average unit volumes as well as an increase in the number of franchise restaurants. SG&A was negatively impacted by pension expense, as we expected, as well as higher incentive compensation as our year-to-date performance and full year expectations are significantly higher than originally anticipated. Given the annuity-like cash flows our business model generates and the flexibility of our credit facility, we remain committed to returning cash to shareholders. We repurchased $75 million of stock during the quarter and have an approximately $140 million available under current board authorizations, including an additional $100 million authorized last week. Our outstanding shares decreased by 9.5% versus last year's second quarter, which will continue to contribute to our EPS growth. As far as commodities are concerned, overall, we now expect commodity costs for the full year to increase by approximately 2% versus our previous expectations of approximately 3% as we've seen some easing in beef prices. Here's our current thinking on guidance for other key items for the balance of the year. Same-store sales growth at company restaurants in the third quarter of 4% to 6% for Jack in the Box and 6% to 8% for Qdoba. The only significant changes we made to our full year guidance were as follows: We raised our full year same-store sales guidance for Jack in the Box company restaurants to 4.5% to 5.5%; and from 3.5% to 4.5% -- from 3.5% to 4.5%, reflecting our performance in the first 2 quarters and our outlook for Q3. We increased our consolidated restaurant operating margin guidance for the full year from a range of 19.1% to 19.9% to approximately 20% based on the higher same-store sales guidance. Operating EPS is now anticipated to range from $2.90 to $3 in fiscal 2015 compared to our prior guidance of $2.85 to $2.97. Our guidance now includes the expected $0.06 charge relating to the removal of the existing beverage equipment as we install new Coke freestyle equipment in Q3 and Q4. This charge was not included in our prior guidance. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. Hershey?

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

I had a question on sales, I guess, for each brand, if I may. It's the first time in a while that you've mentioned dinner for Jack in the Box, along with breakfast. Usually, we're hearing late-night and breakfast as the strongest dayparts. So can you talk a little bit about what's driving the dinner daypart at Jack?

Sure, Joe, this is Lenny. When we were out in New York and Boston back in January, I guess, it was, we talked about the research that we had been conducting with the Jack in the Box brand and that we were disappointed in some of the results that we got. Essentially, what the consumers said was that they were not pleased with state of our hamburgers and several other core products, and so I mentioned that we were going to start investing in improving those products and using LTOs this year to sort of foreshadow what those improvements would be. And we expected that and I think I talked about during those conferences, that we expected that, that would start to drive the lunch and dinner dayparts, 2 day parts that for the last couple of years haven't been the drivers of our success. So I think what you're seeing is, with the launch of the new products, the consumer is responding right in line with what the research said they would do. And essentially, the success we've experienced with that product started to drive the dinner daypart. So that's really what it is and we would anticipate, as we move further into the initiatives, is that across the menu, we'd be able to make permanent improvements similar to what we've been able to foreshadow with these new additions to the menu. And we would expect that they would drive strong results as well.

Okay. And then a question on Qdoba. How do you think about a sustained level of same-store sales growth? You have a couple more quarters where you benefit from the simplified pricing structure. And then I would suspect the comp will be a little bit more traffic-dependent and -- even though weather-impacted it this quarter, the traffic component has been relatively small. So how do you think about that going forward? How can you elevate the traffic portion? Or is that the overall game plan when you lap the simplified pricing structure?

Yes. So first, let me answer the last part of your question. Yes, we do think it will be traffic-dependent, so you can expect a focus there. When you look at the building blocks to Qdoba's success, you can go back to the prior strategy, where you had a core menu that hadn't changed essentially in over 10 years. You had introduced a whole wheat tortilla and brown rice within 10 years. So it was certainly not an innovation strategy. Coming out of the research, what we realized is that we would have to incorporate product innovation into our strategy going forward. And so the first thing we did was we capitalized on existing equities, which were essentially Queso and mango. And when we did that, you saw significant growth not only in sales, but in transactions. And on the heels of that, we changed the pricing structure, which essentially took some of the annoyance factor out of the transaction and generated a new sort of value proposition for the consumer. And although we've realized that primarily in price, we also see favorable response from the guests from the standpoint of loyalty and their satisfaction with the experience. And so what you can expect to be the next phase will be additional product innovation going into next year as well as reading the results of some of the investments we have in the interior and exteriors of the facilities and then starting to incorporate that into remodels and new builds. And we believe that, that product innovation and focusing on place will drive additional transactions, which will help us to lap what we've done with price and transactions thus far.

The next question is from Mr. Alex Slagle from Jefferies.

A question on Jack in the Box, and if you could talk to what's driving the increase in the unit growth outlook for that brand this year.

Yes, this is Jerry. I think what we're seeing is, and I guess not too surprising, when franchisees get a sense for the higher sales and the believability that they're more sustainable than they are one trick pony, they begin to get a little more excited about investing in the brand. Also, we've changed a few things structurally for -- with the company investing in some real estate broker-type services that we're looking for new units without regard if whether they're going to be company or franchise units. In fact, we have a bias to looking for units and then offering them up to franchisees. So I think it's a combination of the sales improvement, the excitement about where we're going long term, and then also some of the things that we're doing structurally with respect to new unit opportunities.

Great. Then just one clarification on guidance and what the share repurchase now is assumed in the current earnings guidance. Is that just already what's been completed? Or does it exclude potential execution of the remaining -- a piece of the remaining $140 million authorization?

No, we would expect to be active in Q3 and Q4 as well. Remember that we've -- and it's in the guidance. It hasn't -- the share buyback piece in the guidance, Alex, hasn't really changed at all from what we described in the guidance back in November. So we're not expecting buybacks to drive the increase in our EPS guidance. It's just operational. So we had said we expect to be regular and opportunistic. And as we're looking at the way things are trending this morning, we may have an opportunity to be a bit more opportunistic this quarter as well.

Next question is from Mr. Chris O'Cull from KeyBanc.

Jerry, since your initial guidance for '15, the company has raised the Jack comp assumption by roughly 3 points and Qdoba by 1 to 2 points, which based on the earnings sensitivity you've given us in the past would indicate roughly $0.35 of additional earnings. But your earnings guidance x the impairment increases has only been increased by roughly $0.20. And you also lowered the commodity outlook. So I guess I'm trying to understand is there -- is this just conservatism? Or has the flow-through assumptions -- or what you've been experiencing, has that changed?

No, I don't think it's the flow-through assumptions, Chris. But if you look at our incentive compensation plans, they are driven almost exclusively on improvement in operating EPS and an improvement in restaurant level margins. And so what we've seen, is as we have continued to perform better than our original expectations we've also seen an increase in our incentive comp accruals so far for the first half of the year than also that we expect to see going forward for the balance of the year, which is included now in the guidance. So I think that's partially offsetting that. I would say the good news is as far as the G&A load on this is, is this does not add any dollars to our structural G&A cost. This is all variable cost based upon improved performance. So I don't think that you'll see this be baked into the baseline G&A cost going forward, although we'd love to have a similar problem, if you will, next year with improved EPS growth and improved margin growth as well.

Okay. And then one last one. Did you still expect Qdoba's margin to be higher than Jack's for the year?

That's a good question. I would say it's going to be a close call and maybe a photo finish here, but I would say that that's more due to the Jack in the Box improving margins and I think it's [indiscernible] by 21.4% margin that we saw in Q2. It won't be because Qdoba margin is performing lower than what our expectations were, though.

Next question is from Mr. Robert Derrington from Wunderlich Securities.

Two questions. One, first off, Lenny, when you look at the competitive environment out there as you see it, obviously, there's a lot of noise. The company, Jack's been very successful with some of the innovation that you brought to bear there. Given the noise that some of the competition is doing to try and steal some of that specialness, are -- do you anticipate any changing of your plan versus what you have been doing? Or should we consider you all to zig with the brand as opposed to one of your competitors doing something more similar to you? How should we think about that?

Yes. So Bob, if you think about some of the conversations we've had in the past, we've said long ago that, essentially, Jack in the Box has to be a differentiated, quality-driven brand because we're not big enough to play in the space of the value driver in the industry. And I think that the good thing is that the consumer wants and believes that we are more of a quality-driven brand differentiation. Our quirkiness of our advertising, the weirdness of our menu. I mean, keep in mind, tacos is still a huge seller, and we're a burger company. So we've had a history of being able to put things out there that are just a little different than everyone else, and the consumer has come to expect it. When you look at what some of our competitors are doing, they're trying to play in a space that is probably not an equity that they currently have and will take, I believe, a very long time for them to establish that equity. So I'm not saying whether it's right or wrong. Those are things that the competitors have to figure out for themselves. But what I can say is our strategy won't change because we know the space that we play in. And essentially, we've been finding success there, and there's no reason for us to believe that that's going to change. One of the things we've also done as a brand historically is we're very responsive to what the competition does. So we'll stick to our strategy. But as folks try to encroach on our space, we will certainly have a response, and that's something that you can anticipate as well. So no strategy change. And if we're going to throw some punches back in the other direction, it's going to be from the basis of what our strengths are, and you'll see us complete that way going forward.

Great, that's really helpful. Jerry, and if I could pursue or follow up on the Qdoba difference between the company comps and the franchise comps. I think it was about 260 basis points. Can you give us some color how much of that specifically, have you broken out in basis points what the weather's impact may have been or could have been based on store closures or anything like that?

What we know is that the company restaurants were generally, and perhaps more substantially, impacted by weather than what the franchisees were. As an example, our -- the Upper Midwest saw a very mild winter versus, say, Colorado and Nashville from where you are, as an example. And our largest franchisee is in Milwaukee and they saw virtually no weather impact at all throughout the quarter. So I think part of this is, without being able to quantify exactly how much, I think part of that 260-basis-point differential is due to the company restaurant being more heavily impacted by weather, particularly in those 3 weeks that I described earlier.

Next question is from Mr. Jeff Farmer of Wells Fargo.

I know you're reluctant to focus too much on any one product, but can you put the success of the Buttery Jack burger launch into context relative to some of the other new products you're seeing recently? I guess the best way to do that would be percent of sales. Or any other method or measure you think would be helpful for us.

So Jeff, we don't typically share those details, but let me just try to give you some color in another way. I've been here for 14 years and in that time frame, we've never had a product as successful as Buttery Jack. So it's by far the most successful thing that most of the folks working in the brand today have experienced. And when you look at the work that went into it, what's nice about what we're experiencing is we expect similar quality cues and changes across the core menu coming into next year. And we think that that's going to be met with a very similar response from the consumer.

And Jeff, just let me add to that is the Buttery Jack, in terms of the food and packaging cost, one of the things that contributed to the margin in the quarter was the Buttery Jack actually had a lower food and packaging cost than what the LTO that we promoted in last year's second quarter, which was the Bacon Insider Burger. And then also, it's replacing the #1 and #2 position on the menu board. It is just replacing the sirloin burger that also has a lower food and packaging cost -- that the sirloin burger has also. So it helped generate some nice mix benefit on our food and packaging cost in the quarter as well.

That is helpful. Just one follow-up. It looks like last quarter or your first fiscal quarter, Jack's franchise same-store sales at least modestly outperformed the company number. That franchise outperformance looks like it jumped pretty nicely here in the fiscal second quarter, it looks like, 2 points. I'm just curious in terms of what's driving that, where the franchise are in terms of initiating some of these top line drivers that perhaps you introduced a couple of quarters ago. But again, any color in understanding that accelerating relative performance versus the company source from the franchise stores.

So Jeff, a couple of things to think about there. First off, the company operations have historically been 24-hour operations. And our -- as we started focusing on late night, our franchise locations, many more of them went to 24/7 locations. In addition, on the franchise side, you have a bit more pricing than what you see us take on the company side in recent quarters. And then also, traffic for the franchise side was even better than traffic for the company ops side. And keep in mind, part of what you see there is just in the base case the benefit that the franchisees get from a percentage standpoint on a lower AUV base compared to the company ops.

Jeff, this is Jerry. Just one other thing to add on to that. With now 80-plus percent franchise-operated, we get -- so we are in slightly more operating EPS on a 1% change in franchise same-store sales than we do in -- with company same-store sales. So that adds nicely to our earnings growth.

Next one is from Mr. Nick Setyan, Wedbush Securities.

Let me -- I kind of want to focus a bit more on the profitability of Jack in the Box. I mean, over 21% level of margins here. That's better than a lot of the fastest-growth names out there. I mean, the cash and cash returns over the last 2 years have increased dramatically at Jack in the Box, too. So why aren't we seeing above 1% unit growth? Or why can't we see the franchisees accelerate to above a 1% unit growth going forward?

Nick, we're hopeful that we will see that. I can tell you that I've-- I was just sharing internally, I've spent the last 6 weeks out in the marketplace visiting with Qdoba and Jack in the Box franchisees and corporate employees, and there's certainly a lot more conversation, in fact, the primary conversation has been about growth from our operators of both brands. And where we are with it today is that the Jack in the Box brand is working on these core improvements that we're talking about and I think the franchisees are certainly geared up for growth and they're looking at it through the lens of, hey, if we can continue to make these improvements, then I want more restaurants. So our hope is, and our anticipation, is that, that growth rate will go up, and we're going to prepare for that.

Then Nick, just with respect to timing, what we're seeing, to Lenny's point, is we're seeing a significant increase in the interest from our franchise operators to building new Jack in the Box restaurants. But because there is a drive-thru and it's a free-standing, ground-up building, that process takes anywhere from, call it, 18 months in Texas to 2-plus years in California. So activity today doesn't create a new restaurant next month. That does -- it has a much longer timeline.

Got it. And I mean, basically, your longer-term guidance, I think we've already gotten to your longer-term guidance in terms of the unit level margin. Any reason why we shouldn't see that go up from here at both brands?

Well, that's a great question. We'll provide that information to you on our November call. And -- but we'll certainly have to read -- look at that given where the current trends are. One thing I want to just caution everybody for the Q3 and Q4 outlook for the Jack in the Box margins, one thing to consider is Q3 and Q4 margins are generally more significantly impacted by higher utility costs. It costs more to heat -- or excuse me, it costs more to cool our restaurants in hot weather than it costs to heat them in colder weather. So we usually see a 50-plus basis point change just in utilities seasonally.

Next question is from Mr. Sam Beres of Robert W. Baird & Co.

In terms of the Qdoba traffic, obviously, it appears that it was fairly meaningfully impacted by some unfavorable weather during the quarter. But even excluding that whether, it seems like traffic may have possibly decelerated modestly here relative to a couple of prior quarters. So if that is the case, maybe a little perspective from you on what positively could have driven that slightly softer traffic. And if you think the new pricing architecture could have -- be having an impact in any way?

Sam, just one thing to think about is, as you said, there was a weather impact and as you focus on the 1-year basis, you could see the transactions as flat to slightly negative. But when you look at a 2-year basis, even with weather, we don't have that situation. And that's why when Joe asked the question earlier, I was trying to help folks think about the stack of sales generators over the last 1.5 years because if you look at the innovation of last year, it drove sales and transactions. And then we stack on top of that the new value proposition this year, which early on drove both sales and transactions. And only recently with some weather impact do we see the transactions moderate a little bit. But when you look at the stack over a 2-year basis, you actually have a very healthy mix of both sales and transaction growth driving the performance. So when you look all things in and you think about what we've been able to do with the value proposition that has raised the average check without reducing significant traffic, all in all, it's a big win for us. And when you're able to then stack on top of that the next set of product innovation, which we anticipate happening into the beginning of next year, we're feeling really good about the outlook.

And maybe just one quick follow-up. If you could, are you able to provide any perspective on kind of what the Q3 comps guidance for Qdoba assumes for check and traffic, roughly speaking, given that I believe that traffic was pretty strong in the year-ago period?

Nick, we never break out what our expectations are -- sorry, Sam. I knew I'd get one name wrong. I apologize, Sam. And it probably won't be the last one either. But we don't typically -- in fact, we never provide a breakout on our same-store sales numbers until the end of the quarter.

Next one is from Mr. Matt DiFrisco, Guggenheim Securities.

One question and one clarification. Just you said the superior trend, that you were outpacing your peers by roughly around 700 basis points, I think it was. Is that on a national basis? Or is that on a regional basis, meaning your stores in California are beating their peers sitting across the street from them also at a 7% pace?

Yes. Matt, this is Carol. So we actually outpaced the NPD QSR sandwich segment by 760 basis points. That's the national numbers that include 16 of the chains. And you can see it's the biggest ones, that's all of the major peers. So we don't get the regional data, but that's the national number. I would also say keep in mind that weather really wasn't a factor for Jack in either period, so you would have to look at that more on a regional basis, too.

So I guess one would conclude then that your -- one of the benefits could be deduced from that, that you were also seeing California -- your California and Texas exposure has benefited you versus those that are national skewed, correct?

I guess -- we don't have the data to know what the peers are doing in those 2 markets.

Okay. Then my question also is just with the $0.06 charge for equipment. I just wanted to clarify also that, that is 100% company-owned stores replacing. Or are you also replacing those stores of the franchisees that maybe you still own the building to and rent them back out? Are you going to be owning the machine and retiring the existing one and bringing in the new freestyle?

No. The $0.06 charge, Matt, is just related to the company units. Franchisees will replace their own equipment and do whatever they deem appropriate with their write-off, but it won't impact the company at all.

And did you give any color on how many stores today have the freestyle? And what we should expect as far as the progression for company and then the complete system as well to adopt it?

We're just beginning to roll out, Matt. We expect to have that done by the end of the calendar year. So there is less than 100 that are out there right now, and that's just recent. And that's just recent.

Okay. In calendar year franchise and company?

Correct.

Next question then is from Mr. Joe Buckley of Bank of America.

A couple of follow-ups. Maybe first just on the $0.06 charge. Jerry, would that be evenly split between the quarters? And is that -- is it the same number, like pretax and post-tax? Or is there a tax benefit to the expense?

No, it's the same number pretax and post-tax. What I'll -- there's no additional tax benefit to that versus any other tax benefit for any other expense. But I'd say for now you can assume that that's going to be pretty evenly split. The reality will be it will depend upon the actual implementation schedule and how close we are to keeping on that actual implementation schedule, but that model is pretty even.

Okay. And then kind of more for an industry background kind of question. What are you seeing in terms of egg prices with the avian flu news seeming to spread to more markets?

Yes, we're seeing generally egg prices trending up. And fortunately for us, most of our supply are coming from yet unaffected areas by and large. It doesn't mean that we're completely unaffected, but I think our major supplies are coming from those other yet-not-affected areas. Eggs are only about 3% of our overall spend, and our assumption about increasing egg costs are included in our 2% commodity guidance for the full year.

Okay. And then one more quickly, if I can. Going back to my unit business question. So are the Buttery Jack burgers being viewed more as a dinner product? Or are you kind of merchandising them in some way to make it more of a dinner product to drive the dinner daypart?

A couple of things that are interesting, Joe. So we experienced -- and I'm going to just compare and contrast a couple of things from the past to today. In the past, when we rolled out a breakfast platter, we sold a ton of them at dinner, at lunch and late-night. And you're seeing the same thing with Buttery Jack although we do sell, obviously, the majority of them at lunch and dinner, because we serve the whole menu 24/7, there's a ton of Buttery Jacks being sold even at breakfast. So your assumption that it is primarily a lunch and dinner product is correct. I don't know that it's more of a dinner versus a lunch. I think we just -- we need a little more time to learn that, but it's certainly a lunch and dinner product. But like all of our other products that just -- they're a hit with the guest, we tend to see a more than you would imagine percentage of sales going to the other dayparts as well.

Okay. Is the Buttery Jack driving the mix up at Jack in the Box? Is that the primary factor, the check mix?

Yes, it is.

Next question is from Mr. Jeffrey Bernstein of Barclays.

Two questions. One, maybe Lenny, as we think about the Jack in the Box brand and throughput. I think you mentioned the AUVs at the company operating stores are now north of $1.8 million. I'm wondering whether you see any capacity constraints -- or better yet, maybe what's the biggest throughput opportunity? I know in the past you've often had some [ph] data that speed of service as the biggest kind of opportunity. Any color on where we stand on that? Or any other opportunity just to alleviate any pressure you might be seeing with such strong sales?

Yes, so a couple of things to think about, Jeff. First off, keep in mind, some of our oldest facilities are in cities like Los Angeles and Houston. They happen to be our smallest footprint facilities with our small kitchens, and they also happen to do well over $2 million in sales a year. So from the standpoint of any constraints, we don't see those. Actually, the newer restaurants can facilitate even higher sales than that, and those are what we're building today. And we would expect that the $1.8 million is something we can grow on top of. And what's really going to be the driver of that, we believe, is the menu primarily and then supporting the menu would be operational efficiencies. But the big learning I think that came out of the research was that, from a prioritization standpoint, we were going to get more of a return, an early return, on investing in menu enhancements than we were on operational efficiencies. So it's not that we're forgetting operational efficiencies. It's just that from a prioritization standpoint, we're going to drive the menu to be a better menu first, followed by -- or at least paralleled by operational efficiencies.

Got it. And then just the refranchising. Jerry, I think you mentioned you're now pretty much complete. And obviously, it's been a long journey from 5, 10 years ago. Just a couple of things. Just wondering what you'd say is maybe the biggest noticeable operational difference. I mean, we understand the financial impact, but what's -- what you'd say is the biggest difference now versus then? And whether there are thoughts to pushing above the low 80s? What the positives and negatives might be to consider kind of the next tranche to take you to 90% or more?

Let me start with the last question first here. I think we're not married to a number. There's nothing magic about 81% or 82% or 85% or 75% or 90% for that matter. The real issue for us is, can it be accretive to operating earnings in a post refranchising world? And with the averaging volumes trending above $1.8 million right now, that makes that a very high hurdle to be able to refranchise and make it accretive to earnings. So I think we're pretty happy with where we are on that. It doesn't mean that we never look at one-off type transactions. But again, we're the -- at $1.8 million and -- volume and 20-ish percent margins, it makes it very difficult to justify a refranchising transaction.

And if I could just ask one last thing. In terms of the balance sheet, I think you guys -- you talked about the ongoing share repo and the very healthy dividend increase. I'm just wondering how the board thinks about, I guess, leverage in the context of returning even more cash. Or what's the right balance from that perspective?

Well, I think the board is still comfortable with this 2 to 3x leverage. I think in this quarter, with the share repurchase, we actually did a nudge above 2 for the first time, we were working pretty hard to get there. The board is still, obviously, with another $100 million share repurchase authorization, very, very bullish with respect to us continuing to return cash to shareholders. And the 50% increase in the dividend, I think, also indicates their appetite to continue to do so. And I think the ability for us to get credit and the free cash that we're generating bodes well for us to continue to be very active with respect to returning cash to shareholders.

Next one is from Mr. Keith Siegner of UBS.

This is Dennis Geiger on for Keith. With competition announcing an aggressive shift to new digital engagement tools, including mobile order pay and even delivery, where are you in that process now? And I guess more specifically, given, I believe, you've indicated you'd likely initiate broader mobile digital efforts at Qdoba first, where's Qdoba in that process right now?

So we -- everything you said is accurate. We're going to focus on Qdoba first, and the infrastructure that we're building toward the Qdoba business actually bodes well for Jack in the Box as we start to move into the same space. The Qdoba process is well underway and we would anticipate being able to, into next year, start to test and initiate the use of that new technology. And keep in mind, Qdoba has not been out of that space. We've actually been active in that space for quite some time, and we have experienced quite a bit of success with it. But we believe with the changes to the platform, we'll be able to engage consumers even better, and we believe that, that will drive even stronger results.

The last question is from Mr. Robert Derrington, Wunderlich Securities.

Most of my questions have been answered, but I have one quick one, Jerry. When does your window open on your repurchase program?

It generally opens the day after or 2 days after we file the Q, depending on how early we file the Q, so soon.

I think that is all the questions that we have for today. Thanks for joining us, and we look forward to speaking with you soon.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.