Jack in the Box Inc. (JACK) Q3 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. Third Quarter Fiscal 2010 Earnings Conference Call. [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, Stacy, and good morning, everyone. Joining me on the call today are our Chairman, CEO and President, Linda Lang; Executive Vice President and CFO, Jerry Rebel; and Senior Vice President and Chief Operating Officer, Lenny Comma. During this morning’s session, we'll review the company’s operating results for the third quarter of fiscal 2010 and update guidance for the remainder of the year. 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 Form 10-Q that will be filed later this week 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 Bank of America Merrill Lynch Investment Conference in San Francisco on September 14; and the Wells Fargo Consumer Conference in New York on September 29. Our fourth quarter ends on October 3, and we tentatively expect to announce results the week of November 22. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning. For the third quarter, the 9.4% decrease in same-store sales at Jack in the Box fell below our guidance range, and our margins suffered from the sales deleverage. Our Jack in the Box restaurants continue to be negatively impacted by high unemployment and other economic issues, especially in California and Texas where we have our largest concentration of restaurants. Unemployment among our key customer demographics also remained high. For example, 34.5% of California teenagers were unemployed in June. This was up from 28.6% a year ago and compares to a national rate of 25.7%. And while discretionary spending among affluent segments of the population appears to be benefiting higher-end retailers, declining consumer confidence, especially among lower-wage earners, negatively impacted our sales. Although our sales outlook remains cautious and largely reliant upon improvement in the economy, we believe we can capitalize on opportunities to differentiate our core brand and further enhance the guest experience at our restaurants through immediate improvements to our menu, service and restaurant environment. In this environment, consumers are very selective about where they spend their dining dollars, so we really need to deliver the best possible experience to every guest every time. To this end, we have intensified our focus throughout the entire system on delivering a more consistent guest experience. Along with our Voice of Guest surveys, we are committing additional resources to more closely measure how we're delivering on the key drivers of guest satisfaction. In addition to this increased focus on service, we're investing in making noticeable quality improvements to some of our signature products. You'll recall we launched new French fries in March and introduced our new Kona Classic coffee blend early in the third quarter. We are further expanding this initiative to other top-selling guest favorites. And lastly, we know that completing restaurant reimages will enhance the overall perception of our brand. Accordingly, we're accelerating our plans and now expect completion at all company locations by the end of fiscal year 2011. Concurrent with these actions to improve sales, we're continuing to execute a marketing strategy that focuses on both premium products and value promotion. During the quarter, we successfully launched our Grilled Breakfast Sandwich, which extended our Grilled Sandwich platform to include three varieties of sandwiches. Breakfast continued to be our strongest daypart in the third quarter, even though we did not have an explicit value message. In addition to enhancing our coffee platform with a new premium blend of coffee made with real Kona beans, we also expanded other beverage platforms during the quarter with a raspberry-flavored Real Fruit Smoothie and a Raspberry Shake. Balancing our new premium products with value promotions, Jack in the Box launched two limited time offers in the third quarter. The first event provided guests a unique way to create their own value meals by combining three of eight popular menu items for just $3. The second event launched late in the quarter and features a new margin-friendly product, the Really Big Chicken Sandwich. For $3.99, guests can order a combo meal featuring the new sandwich, a small drink and a small order of seasoned curly fries. At the higher price point, this limited time offer does not have the same negative impact on check average as our Pick 3 for $3 event. We continue to maintain a full pipeline of new products in various stages of development and tests. Earlier this week, we added another distinctive product to our breakfast menu, a Breakfast Pita Pocket. And later this month, we'll roll out a fourth Grilled Sandwich, which is very unique to our category and tested well for us. Moving on to Qdoba. We're pleased with the 4.6% increase we saw in system same-store sales, and we attribute the improvement in Qdoba sales to the spending patterns of fast-casual customers who have higher levels of consumer confidence, as well as the effectiveness of our marketing strategies. During the quarter, we reintroduced a seasonal favorite, the Mango Salad, as an LTO [limited time offer] and continued promoting our new menu option called Craft 2, which lets guests mix and match smaller portions of some of Qdoba's most popular items. We were also effective in leveraging the Qdoba loyalty card program, as well as growing our Catering business. And now I'll turn the call over to Jerry.

Thank you, Linda, and good morning. Now all of my comments this morning regarding per share amount refers to diluted earnings per share. Third quarter earnings were $0.44 per share compared to $0.57 last year. As you saw in the press release, third quarter results were negatively impacted by approximately $0.06 per share by several items that were not included in our previous guidance for fiscal year 2010. We had three items that impacted our SG&A line. Impairment charges of approximately $0.03 per share, and mark-to-market adjustments on investment supporting our non-qualified retirement plans of approximately $0.02 per share were partially offset by insurance recovery related to Hurricane Ike of approximately $0.02 per share. An increase in workers' compensation reserves negatively impacted payroll and employee benefit costs by approximately $0.02 per share. Higher workers' compensation costs are expected to continue in the fourth quarter as the cost per claim is trending higher, even though our number of claims is trending down. We wrote off approximately $500,000 in deferred financing costs in connection with the refinancing of our debt during the quarter. The charges included an interest expense and negatively impacted earnings per share by approximately $0.01 in the quarter. The 9.4% decrease in same-store sales was 1.4% lower than the midpoint of our guidance, and our restaurant operating margin was approximately 200 basis points below our internal expectations. 50 basis points of that was due to the increase in workers' compensation reserves, and the remainder was due primarily to deleverage from lower same-store sales. Our average check declined approximately 2.5% during the quarter as value promotions had a negative impact, which more than offset price increases of 1.2%. Versus last year, restaurant operating margins decreased 420 basis points to 14.2% of sales. We estimate that sales deleverage negatively impacted third quarter margins by approximately 280 basis points. Adjustments to workers' compensation reserves accounted for approximately 100 basis points of decline versus last year. And commodity inflation of approximately 2% was in line with our expectations, but negatively impacted margins as compared to prior year when we experienced about a 1% deflation in commodity costs. Even though SG&A was impacted by several items discussed in the press release, our refranchising strategy and planned overhead reduction resulted in about a $3.2 million decrease in the quarter and $12.3 million year-to-date versus last year. With the sale of 58 Jack in the Box restaurants, we crossed the 50% milestone and we're 51% franchised at quarter end, and we remain on track to achieve our goal of being in the 70% to 80% franchised by the end of fiscal 2013. We do not provide any financing for the seven deals that closed during the quarter, and we are maintaining our full year guidance with respect to the number of restaurants we expect to sell, although there is one large transaction included in our guidance where the closing is less certain. During the quarter, we opportunistically acquired 16 franchised Qdoba restaurants in the Boston area, which is consistent with our strategy of company-operated growth in larger, more urban markets. At a total purchase price of approximately $8.1 million, we acquired these restaurants for less than the build-out costs. Before I review our guidance for the fourth quarter and full year, I'll provide an update to our commodity cost outlook for the remainder of the year. Overall, we expect commodity costs for the full year to decrease by approximately 1%, reflecting our fourth quarter expectations of approximately 4% inflation compared to prior year when commodity costs declined by 5.5%. The increase in the fourth quarter is being driven by higher beef costs, which account for approximately 20% of our spend and higher pork costs, which account for approximately 5% of our spend. We expect beef costs to be up approximately 15% in the fourth quarter compared to a decrease of 17% in last year's fourth quarter. We have 50% of our import 90s covered through October at $1.54 per pound, with some additional coverage spread into February of next year versus approximately $1.30 last year and current market price is in the $1.52 to $1.55 range. Pork costs are expected to be up more than 30% in the fourth quarter. The increase in beef and pork costs will be partially offset by lower chicken, shortening and bakery costs, which, combined, account for approximately 23% of our spend and are expected to be about 7% lower for the fourth quarter. Now let's move on to our guidance for the balance of the year. For the fourth quarter, we expect same-store sales for Jack in the Box company restaurants to decrease 4.5% to 5.5%, and system-wide same-store sales in Qdoba to increase from 3% to 4%. Our same-store sales guidance reflects trends we've experienced in the first four weeks of the quarter. For the full year, same-store sales for Jack in the Box company restaurants are expected to decrease approximately 9% and increase approximately 2% at Qdoba. We've reduced our full year guidance for restaurant operating margins at a low 14% range, reflecting the impact of our lower sales guidance and the corresponding deleverage of approximately 90 points, as well as higher commodities and workers' compensation. As a result of the lower sales and margin guidance and the items that impacted the third quarter, earnings per share are expected to range from $1.55 to $1.75 per share. Lastly, I want to talk for a moment about the refinancing we completed in June. Under the terms of our new agreement, we had a $400 million five-year revolving credit facility, of which, $148 million was outstanding at the end of the quarter and a $200 million five-year bank term loan. The interest rate was LIBOR plus 225 basis points to 275 basis points with no floor, and the current spread is at 250 basis points. The spread is based upon our debt to EBITDA ratio. The new agreement provides us with a longer-term capital structure to support our strategic plan. We've also increased flexibility, with a greater portion now under the revolver and substantially higher basket for returning cash to shareholders of up to $500 million. We also have substantially lower required principal amortization than our previous agreement, with only $40 million of required payments through calendar 2012. That concludes our prepared remarks. I'd now like to turn the call over to Stacy to open up for questions.

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

Jerry, question on the margins in the quarter and the deleveraging, I realized sales were a little bit below the guidance range, but the deleveraging seemed very, very severe. You outlined a number of items that were not in the original guidance, I guess. But are you just at the point, sales-wise, where these higher cost ratios are going to continue for a while?

Yes, Joe. I think a couple of things here is if you look at the midpoint of our down 7% to down 9%, we did miss that by 140 basis points. I think also this quarter, unlike quarters one and two where we had the benefit of improving food costs, where we had commodity cost deflation. We actually had commodity cost inflation for the first time this year. It was up about 2%. So we did not get the mitigation effect against those lower sales trends in Q3 that we did in Q1 and Q2. Also, our two-year trends did decline from down 8.2% to down 10.4%, and that had a larger impact on the deleverage.

And then question on the share repurchase. There was no activity in the quarter. Were you precluded from buying stock because you were redoing the debt agreement?

Yes, that's exactly right, Joe. We were in the middle of that debt agreement and right in the middle of our open window, which precluded us from either buying in the open window or from implementing a 10b5-1.

There's reference to breakfast in the earnings release. Could you maybe talk about dayparts? And was breakfast better than other dayparts in terms of same-store sale?

Yes, Joe. Breakfast was our strongest daypart and held up pretty well actually. And that's a result of the Grilled Breakfast Sandwich introduction, the upgraded coffee. In fact, we did not have a value promotion during the breakfast daypart. So we held up very well, breakfast daypart. Our biggest loss, really, was at the dinner daypart, and two reasons for that. One is we believe, from a competitive standpoint, that we did get impacted by the aggressive discounts going on by the pizza players. And then secondly, with our 3 for $3 promotion, we just did not get enough incremental traffic to offset the average check decline because, in fact, our traffic was just slightly better than it was last quarter. So if traffic held up versus last quarter, all of our deceleration in sales was the result of the average check decline. From a regional standpoint, both California and Texas weakened, but Texas weakened more than California. So Texas is still a very challenging market for us.

Our next question comes from Jeffrey Bernstein of Barclays Capital.

Just actually a follow-up to that and then a separate question. You just mentioned, I guess, Texas and California, Texas weakening a little bit more. So I'm just wondering, I mean, I know you highlight the unemployment and the demographics. That is clearly the major factor in the slowdown. But I'm just wondering how you get comfortable that pulling out the unemployment and the demographics that perhaps, whether not Jack in the Box is losing share to competitors, not necessarily pizza but even within your own Burger segment? Perhaps losing share other than just the macro factors that maybe will not return when the macro gets better. I mean, how do you gauge something like that when there are so many headwinds?

First, let me just take a little bit of a step back and certainly, we are not happy with the sales situation, none of us are. And we're also not happy with the economic headwinds that we're facing and the impact to our customers. But we do know there are things that we can control, and there is action that we can take now that will bring customers back and stop the erosion of the share decline. So those things that I briefly talked about are really focusing on the guest service execution being more consistent, and we know we have an opportunity to be more consistent through our own Voice of the Guest surveys that we do. So we have invested in a monitoring system that we have in place that we can take very immediate action on guest service issues. Secondly, an improvement in food quality, and we have traditionally been known as a premium-positioned QSR [quick-serve restaurant] player, and other competitors have stepped up in the food quality arena. So it's really about investing in our food quality and enhancing the food quality. And then lastly, on the environment. We've gone out, we've done all of the exterior reimages, and we are now making the commitment to complete the interior reimages. Because again, we have an opportunity to enhance the environment for our guests, and all of this, we believe, will lead to increased sales by bringing our guests back more frequently. This does require some investment, some investment spending, as I mentioned, on the monitoring of our guest service execution, as well as our food quality enhancements. And there could be somewhat of a lag between when we get the increased sales as a result of those actions and the costs. So we have reflected that additional investment in our guidance for our full year of earnings. And maybe I'll let Jerry just add a little bit more color to that, as well as the capital impact.

Yes, sure. The investments that Linda talked about in the quarter are going to cost about $0.04 a share and its roughly 15 basis points in margin for the full year and 50 basis points in margin for the quarter. And then additionally, with the acceleration of the reimage, we will not plan on spending any additional CapEx to do that. We're accelerating that this year without any additional CapEx. We've had the benefit of many of our new locations opening under purchase sale leasebacks, which has a lower cash investment for us. And then looking out into 2011, we would expect to do the exact same thing and not have a significantly different CapEx next year versus this year.

And then just, Jerry, if I could follow up on that in terms of I guess perhaps comp sensitivity. I'm wondering, in terms of a point of comp, what that might be to annual earnings in this environment? I mean, it seems like it's overly aggressive 4Q guidance reduction. I think you said it was about $0.04 from these incremental investments, but it looks like you're reducing fourth quarter guidance relative to where consensus was and whatnot by more than $0.15. Yet you only missed the third quarter x off of unusuals by a few pennies. So if comps are getting better on a relative basis, only down 4% or 5% versus 9%, 10%, why would the guidance reduction be down so significantly other than kind of an incremental investment? Is there anything unique to the quarter? Or what might drive that?

Yes, let me just kind of help walk everybody forward on the prior guidance versus new guidance. So if you look at the midpoint of each prior guidance, so this guidance had about a $0.25 reduction. And so the way that we look at that was as follows: the -- if you look of the midpoint of the prior sales guidance, it would have been down 7.5%. We're now forecasting that approximately 9%. So based on our previous expectations and previous sensitivities around the 1% same-store sales change of $0.06 to $0.08, we're estimating that that's going to cost about $0.12 per share for the year. And then if you add to that the items that we called out separately in the third quarter, which had $0.06 of additional charges, so that's $0.18 in total. And then we also have an additional $0.02 of expected workers' comp adjustments and increase in accruals going forward, that gets you to $0.20. The remaining $0.05 is from additional sales deleverage and the investments that we just spoke about.

Our next question comes from Jeff Omohundro of Wells Fargo.

Just one question. On the discussion regarding the refranchising expectations, I think Jerry made a comment about one large transaction. It sounded like the visibility was a little limited there. Is that reflected in the range of Q4 gain guidance, so that if that one slipped a quarter, you'd be at the lower end of the range? Or would you be below it? And maybe any more color on the components of their refranchising gains and the momentum there?

Sure. Actually, so the momentum is -- let's answer the last part of the question first. The momentum, we think, is very strong even in the third quarter. We sold 58 restaurants in the third quarter. We sold 111 restaurants year-to-date. If you go back a few years, we were selling far less than that in the entire year. So the demand remains strong from both existing and new franchisees. The deal-in question, so to speak, for the fourth quarter is a large deal. And because it's a large deal, it would actually take us to below the range. We do like the overall transaction. We like the franchisee. We're excited about it. But the certainty of exactly when the deal such as that closes, we do, by its nature, have a lot less visibility on that.

Can you give any kind of orders of magnitude, the size relative to the overall guidance?

Yes, it's worth about $0.17 a share.

Our next question comes from Chris O'Cull of SunTrust.

Linda, you guys have talked about unemployment impacting the business, but do you think immigration issues may be negatively affecting Jack?

That could very well be affecting us. Yes, absolutely, especially in Arizona.

Well, how do you address a potential demographic shift in a state like Arizona where Jack has a large concentration of stores and appears to over indexed with the group?

Yes, you still have to target that consumer. You have to give them a reason to choose Jack in the Box over any other competitors. So I think the initiatives that we have in place will also capture that group as well. And with our multi-tiered marketing strategy, it really is about a relatively broad consumer base with the premium products, the value products and our innovation around the breakfast daypart.

And then, Jerry, just a follow-up or another question regarding CapEx. It looks like you guys are on track to be below the annual guidance. Is that fair? Or is there some larger investment plan for the fourth quarter?

Well, the acceleration of the reimage program, Chris, begins now. So we'll expect to have a fairly significant number of reimages completed in the fourth quarter, somewhere in the range of about 100 in the fourth quarter. So that will make that up, and we should be within the range that we've guided to.

Should we expect similar CapEx in 2011 that we're seeing this year?

Yes, what I've said earlier is that even with the acceleration on the CapEx related to the reimaging through 2011, because of our ability to do more purchase sale leasebacks and just from different priorities on the CapEx, we should be pretty close to that same range, Chris.

Our next question comes from Matthew DiFrisco of Oppenheimer. Matthew DiFrisco - Oppenheimer & Co. Inc.: I was wondering if you can give us just an update on where perhaps -- how the EBITDA breaks down between the two brands, given that there's been a pattern now of Qdoba doing substantially better than guidance, and Jack somewhat falling a little short? I guess the assumption -- is it correct to assume that even though Qdoba is smaller in scale, but it is greater than it represents as a percent of your store base?

Matt, I'll point you to in there. Our 10-Q, if filed later this week, we do disclose segment profitability. So I think you'll see those numbers when we report here later this week. But I think in general, your directional comment on the contribution is correct that I think Qdoba is a little bit higher. Matthew DiFrisco - Oppenheimer & Co. Inc.: So I'll just wait for the Q or should I wait for you to answer that right now?

Wait. 10 seconds.

It's up so far for the year, Matt, just in terms of the total EBIT basis, operating earnings basis, it's about -- it's a little bit more than the 7% versus about 5% last year on a year-to-date basis.

Contribution.

Yes.

Does that answer your question, Matt? Matthew DiFrisco - Oppenheimer & Co. Inc.: Yes.

7% of the total versus about 5% of the total last year. Matthew DiFrisco - Oppenheimer & Co. Inc.: Yes. And then also just following on to your guidance for same-store sales. If I look back at the transcript, there was some commentary last year that July picked up from June, but your quarters, fourth quarter of fiscal 4Q was substantially lower than fiscal 3Q. So would it be correct to assume that July was the strongest month of fiscal 4Q of last year, so you're lapping now your toughest lap?

Correct. That is correct. Matthew DiFrisco - Oppenheimer & Co. Inc.: And your comment with your guidance is predicated on what you've seen through the first four weeks. So we're assuming you're in that range right now, while lapping the toughest comparison, correct?

Correct.

Our next question comes from Robert Derrington of Morgan Keegan. Robert Derrington - Morgan Keegan & Company, Inc.: Linda, could you help us with a little bit of color on the development piece for both brands? Aside from the refranchising program, fiscal '09, clearly, development was ahead of the pace that we're seeing for this year for both Qdoba and Jack in the Box. And so as we think forward, given the change, the delta, should we think in terms of next year that development very likely will be also a little bit more conservative, given the operating trends?

On the Qdoba side, we've really -- the reason that development has slowed down, especially in the franchise community, is because of the lack of real estate available, as well as financing. That has been a challenge is getting financing. That is also true for the Jack in the Box franchise community where they are developing a new market. It is very tough to get access to credit for new restaurant development and new markets. And we will be giving more guidance relative to our growth targets, but you wouldn't see a substantial increase or a substantial slowdown, just as a general comment.

Our next question comes from Keith Siegner of Credit Suisse. Keith Siegner - Crédit Suisse AG: I just had a question to follow up on the noticeable quality improvements to some of the signature products. Is this more like just changes in specs, changes in quality? Are you going to reformulate products? Could this entail changing of pricing around them? Is it new product introductions? Just a little bit of sense of how you put higher quality to work? And how that ties into pricing, please?

Well, two examples of higher-quality products that we recently launched are the French fries is a higher quality product. And actually, it's an improvement from an operational standpoint as well. And then our Kona coffee, where we are using real Kona coffee beans. There was an investment in that. It is a higher cost that we did not pass on to our consumers. However, we have seen our coffee sales increase to offset the additional cost that goes into the product. So it will be more in that line where we're actually making changes to our specification so ingredient improvement, build improvement, recipe improvement. New products are separate. I consider that separate. We will continue to introduce premium new products that are distinctive to our category. Keith Siegner - Crédit Suisse AG: But similar to what we've seen then, there is a clear call out for where the quality investments have been made. Like customers will know?

Yes, they will know. They will be noticeable, and we will communicate what the changes are. And we'll probably put some promotions around that in terms of sampling and so forth. Keith Siegner - Crédit Suisse AG: One quick question then on Qdoba. The Craft 2 menu obviously doing quite well. How is that product mixing?

It continues to grow. I don't want to give, for competitive reasons, the exact mix number. But it continues to grow. We're very happy with the mix level, and we've added additional products to that. In fact, we have the Mango Salad and the Craft 2 as a choice, the smaller version of the half portion of the Mango Salad. So very positive, great price point, showcases the variety and for people who are concerned about portion size, it's a good option for them.

Our next question comes from Larry Miller of RBC Capital Markets.

I think you guys mentioned that there were some aggressive discounting as another factor that you might be losing share in quick-service market. And I was just curious, at least from a philosophical perspective, if you can answer this. Could you're also doing some value and you mentioned that, but maybe you shouldn't be doing value at all at this point. Is there any way or do you guys measure how effective your value promotions are? And if you weren't running them, what your comps might look like?

Yes, in fact, over the last year, we've learned a lot around the value side of the business and what works and what doesn't work. And the deep discounting of the single product, $0.99 or $1 doesn't work for our brand. One, it erodes the margins too much. It trades people down, and I think it hurts the image of the brand. So what we know works are these bundled meal deals that include maybe a new product, that reciped and designed to be offered at a value price point but doesn't erode the margin. So it has a favorable food cost, something that includes a drink, and it's at a compelling price point. So that is what we will continue to do. We do believe that there is a large percentage of consumers out there that are hurting and that do respond to value. And we carefully analyze that as we go, and then we test promotions.

And then any early look or thoughts on 2011? I mean, we are coming in the fourth quarter here on earnings or sales. I mean, is it your view, I guess, at least that sales should stabilize as you start lapping some of those very easy comparisons over the next three or so quarters?

Larry, we're still putting together our forecast and our budget and our plans. So we'll be able to talk to you about that in November. But at this point, we're not comfortable. We're still looking at the economy as being a slow recovery, so that influences our forecast for sales.

Jerry, you mentioned bakery. Did you have a percentage of just bakery rather than bakery, I think it was bakery, chicken and shortening that you mentioned, the 23%. But how much is bakery? And with wheat prices rising, are you guys contracted? And if not, when might we see higher wheat prices roll into the higher bakery costs?

Bakery is about 9% of our spend. We have a little more than half, and it's all contracted through the balance of the fiscal year. So we have a little more than half contracted through December and a little less than half contracted through March.

And is it then that the other 50% would -- is it spot market purchase, and we'll see some rising -- assume there is some pressure on that or...

We have 50% covered -- a little bit more than that covered through December. The remaining 50% is covered all the way through March of next year.

Our next question comes from Rachael Rothman of Susquehanna.

This is Jake Bartlett in for Rachael. I had a question on your debt levels and kind of where you want to peg those and whether you'd consider taking down some of your revolver to accelerate stock repurchases? Basically, your philosophy on that or whether you're comfortable with where you are?

Yes, a couple of things there. We like where our debt levels are right now. And really, when we refinance, we didn't increase our debt levels, we increased our flexibility. So by moving from a larger-term loan and a smaller revolver and flipping that around to a larger revolver gives us a great deal of additional flexibility. Then also when you look at the fact that we have substantially increased the basket that can go as high as $500 million in a five-year time frame, I think, signals our belief in the importance of returning cash to shareholders, as well as our ability to be able to do so. I'll also remind you that over the last five years, we've returned a little more than $750 million of cash to shareholders.

So you're saying that you're comfortable with the level of debt? Or you consider taking that up to return cash to shareholders, just in terms of increasing the draw on your revolver?

We're comfortable with the level of debt. And again, we added flexibility to be able to return cash to shareholders, whether that means that we dip in the revolver a little bit or not will depend on overall cash flow. But again, we have $500 million worth of capacity over the next five years.

And are there any restrictions on issuing a dividend or declaring a dividend?

Yes, the $500 million basket. And again, it can go up to that level if return of cash to shareholders, but it can't be a dividend or share purchases or some combination of the two.

And then a question just on advertising. You had talked about incremental advertising of, I think, $5 million to $6 million in the back half of the year. That's being offset, I guess, by reducing your spend, given the refranchising. Can you maybe give us an idea of how much of the incremental advertising came in the third quarter here? What you're kind of, I guess, your net, kind of netting out your savings from refranchising, what you expect in the fourth quarter?

Yes, what we said, again, last quarter was that we were going to spend approximately $5 million in incremental advertising over the back half of the year. We spent a little more than half of that, $2.8 million in the third quarter, and we expect to spend the remainder of that in the fourth quarter. And you are correct, just by virtue of our refranchising strategy, we are, in fact, spending less on advertising as that cost is then shifted to the franchisees.

Our next question comes from Bart Glenn, D.A. Davidson & Co. Equity Capital Markets. Bart Glenn - D.A. Davidson & Co.: I was just curious if there are any material differences in comp store sales trends for your high-volume versus your low-volume stores?

Nothing significant. Bart Glenn - D.A. Davidson & Co.: And then just a follow-up question. Thanks for quantifying the store monitoring program. Just wondering if there are any additional labor investments that might be necessary to try and upgrade actual service levels?

At this time, we're going to continue to monitor our efforts to make sure that our service levels are consistent. If we find that there are some things that we consistently don't do on behalf of the guests, then we may look at investing some labor. But at this time, it's too early to tell. Bart Glenn - D.A. Davidson & Co.: Should we anticipate any sort of sales disruption as you ramp up the reimaging program in the next quarter?

There'll be some as a result of -- typically, when we're doing the interior, we'll have the restaurant open through the drive-thru for most of that time frame. But, obviously, the interior will be shut down for a period of time. I will remind you that 70% of our business does go through the drive-thru though.

Our final question comes from Tom Forte of Telsey Advisory.

Can you talk a little about marketing spend? Was it $2.2 million in the fourth quarter, maintain your weight versus last year? How should we think about the weight, given the same-store sales performance?

Yes, the incremental spend does not get us up to the same level as marketing weight or media weight as last year. So with the sales declines, our rates are reduced.

And then last quarter, I think you talked about your strategy on beef and your intent not to lock in prices. I wanted to know what an update was today?

Yes, beef, we had said on the call that we do have about half of our 90s locked in for the remainder of the fiscal year and then some coverage beyond that into February at below market trends right now. Market's in the $1.52 to $1.55 range, and we're in the mid-$1.50. Where we float on beef costs is on the 50s. And the 50s are just difficult to go ahead and lock in. Market prices on the 50s today are pretty close to where they were last year.

Was there a geographic concentration in the stores that were refranchised in the quarter?

No, because of our footprint of having locations between -- most of our locations in California and Texas, you're going to have some geographic concentration anyway. But we did have more in California this quarter than anywhere else.

Thanks, everyone, for your time today, and we will speak to you in November.

Thank you very much.

This concludes today's presentation. Thank you for your participation. You may now disconnect.