Jack in the Box Inc. (JACK) Q1 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. First Quarter Fiscal 2011 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, 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 Executive Vice President and Chief Operating Officer, Lenny Comma. During this morning session, we'll review the company's operating results for the first quarter of fiscal 2011 and update our guidance for 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 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 participating in RBC Capital Markets' Restaurant and Leisure Investor Day in Park City, Utah, on March 3, the Bank of America and Merrill Lynch Consumer Conference in New York on March 10, the JPMorgan Gaming and Lodging and Restaurant & Leisure Management Access Forum in Las Vegas on March 29 and the Morgan Stanley Retail Field Trip in Phoenix on March 30. Our second quarter ends on April the 17th, and we tentatively expect to announce results the week of May 16. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning, everyone. Our number one priority this year is to drive sales and traffic at Jack in the Box by improving the guest experience, and our results are beginning to reflect our efforts. The sequential improvement in sales trends that we saw in our fourth quarter continued through the first quarter of 2011, with same store sales at Jack in the Box company restaurants increasing 1.5%. This increase was driven primarily by transaction growth as the entire 550 basis point improvement in sales versus the fourth quarter was driven by traffic. Our two biggest markets, California and Texas, both had positive same-store sales. And California was again our best performing market during the quarter. It's also worth noting that same-store sales in Arizona turned positive for the quarter. Same-store sales at Jack in the Box franchised restaurants were also positive, up 0.9% in the quarter. We believe the investments we've made to improve the overall guest experience at our restaurants are beginning to resonate with our guests. According to NPD data since July of last year, the gap between our system same-store sales performance versus the QSR sandwich segment has steadily narrowed, and in recent weeks, has nearly closed. Let me review what we've been doing internally to drive this improvement. We continue to execute a comprehensive system-wide program that we began in the fourth quarter to improve the service we provide our guests. As we've said previously, along with evaluating restaurant performance through our Voice of the Guest surveys, additional resources are being committed to more closely measure how restaurants are executing the key drivers of guest satisfaction. As for enhancing our restaurant facilities, we're on pace to substantially complete our restaurant reimage program system-wide by the end of this year. At quarter end, 73% of company restaurants and more than 61% of the Jack in the Box system featured all interior and exterior elements of the reimage program. Concurrent with the execution of these initiatives, our R&D and menu marketing teams have been making noticeable quality improvements to several of our core products to re-engage lapsed customers and create an even broader appeal for these guest favorites. We've talked about the improvements we've made over the last several months to our coffee, French fries, bacon and tacos. And order incidents has increased on all of these core items since the improvements were made. There are still more improvements to come, and we'll be communicating these enhancements in our promotional messaging to make our guests aware of the changes. In addition to improving our core menu items, we're continuing to execute a marketing strategy that emphasizes both premium products and value messages. The first quarter featured the conclusion of a limited time promotion, the Pastrami Grilled Sandwich on Artisan bread. Our premium grilled sandwich platform will continue to be used to launch other new products. In early October, we introduced a value promotion that offered guests two croissant sandwiches for just $3. This promotion was very effective for us and helped drive sales and traffic growth at breakfast, which was our strongest day part. In fact, it was such a successful event that we're bringing back the two for $3 croissant sandwich promotion, beginning next week. In November, we reintroduced the popular double patty burger called the Bonus Jack and promoted it in a value-priced combo meal for $3.99. And in late December, we launched the Jumbo Deal, which featured a Jumbo Jack hamburger, two tacos, small order of fries and a small drink, all for just $3.99. We also have a couple of value promotions currently underway, including a limited time $4.99 combo meal featuring our new all-American Jack Burger, which is made with two jumbo beef patties piled high with cheese and produce. All of these bundled value meals are designed to offer our guests something unique and affordable yet do not significantly erode margins. Rounding out our promotional calendar for the quarter, earlier this month, we expanded our line of real ice cream shakes to include a new mint OREO cookie version. One of the key components of our strategic plan is re-franchising, which remains an important element in transforming our business model. We re-franchised 88 company restaurants in the first quarter and crossed the 60% franchise threshold. We're ahead of our goal to increase franchise ownership to 70% to 80% of the Jack in the Box system by the end of fiscal year 2013. Moving on to Qdoba. We're pleased that the same-store sales momentum we saw building last year continued in the first quarter, with an increase of 6.4%. This improvement was driven largely by transaction growth, as well as higher catering sales. Qdoba's customer base continues to fare better than other segments of the restaurant industry, but we're also leveraging our brand strength to drive sales. Our promotional calendar featured two of our most popular products, Grilled Quesadillas and 3-cheese Queso, and our guests responded very favorably to those featured items. We also launched a fully integrated marketing plan during the holiday season that included e-mail, social media, in-restaurant signage and broadcast advertising in select markets. Before turning the call over to Jerry, I'd like to reiterate that our number one priority this year is to drive sales and traffic at Jack in the Box through investments we're making to enhance our food, service and facilities. We recognize that these investments may depress margins in the near term, but should build sales and brand loyalty over the longer term. To recap the steps we're taking, we're investing resources to improve many of our top-selling core products and continuing to emphasize both premium products and value promotions in our marketing calendar. We're investing resources to improve guest service by delivering a more consistent dining experience. We've implemented Phase 1 of this comprehensive system-wide program, and are now working on Phase 2. We're on track to substantially complete our restaurant reimage program system-wide by the end of the year. We're expanding the Jack in the Box and Qdoba brands in both existing and new markets, and we're ahead of our goal to increase franchise ownership to 70% to 80% of the Jack in the Box system by the end of fiscal 2013. And now, let me turn the call over to Jerry.

Thank you, Linda, and good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. First quarter earnings were $0.61 per share compared to $0.43 last year, with refranchising gains contributing $0.23 of the increase. Operating earnings per share, which we defined as EPS on a GAAP basis less gains from refranchising were $0.27 compared with $0.32 last year. Restaurant operating margin decreased 170 basis points to 12.6% of sales for the quarter. Food and packaging costs were up 80 basis points, driven by commodity inflation of approximately 2.3% compared to 7% deflation in last year's first quarter. Rising beef costs were the biggest contributor, about 10.6% versus our expectations of 9% inflation and compared to 19% deflation in last year's first quarter. We also saw a significant increases for cheese, pork, dairy and shortening. These increases were partially offset by lower costs for poultry, bakery and produce. Labor costs were up 30 basis points, reflecting higher level of staffing designed to improve the guest experience. Higher workers' compensation and other insurance costs accounted for approximately 10 basis points of the increase versus last year. Occupancy and other costs increased 60 basis points in the first quarter. Rent expense, as a percentage of sales, was higher resulting from a greater proportion of company-operated Qdoba restaurants versus the prior year. As of the end of the first quarter, Qdoba represented 18% of our company-operated store base as compared to 12% last year. And since the average age of a Qdoba restaurant is much lower than a Jack in the Box restaurant, rents are typically higher as a percentage of sales as Jack in the Box has many legacy leases with below current market rents. In addition, the cost relating to guest service initiatives, repairs and maintenance and higher credit card fees reflecting an increase in usage were partially offset by lower utilities expense. Consolidated restaurant margins benefited by about 60 basis points in the quarter from the 40 restaurants we closed last year. However, this benefit was more than offset by higher commodity costs, the improvements we've made to some of our core products and guest service initiatives. SG&A expense decreased by $3.8 million in the quarter and with 10.1% of revenues compared with 10.4% last year. And we highlighted the key items that impacted this line in the press release. We repurchased approximately 2.35 million shares of our stock in the quarter at an average price of $21.27 per share and have $50 million available for repurchases under a Board authorization, which expires in November of this year. Subsequent to the end of the quarter, we acquired 20 franchise Qdoba restaurants in the Indianapolis area for approximately $21 million. Consistent with our strategy to opportunistically acquire franchise markets where we believe there is continued opportunity for development as a company market. And these restaurants have higher average unit volumes and margins than our existing Qdoba company average. Before I review our guidance for the second quarter and full year, I'd like to provide an update to our commodity cost outlook for the remainder of the year. Commodity costs, for most items, have risen very rapidly over the last several weeks. In November, we were forecasting commodity costs for the full year to increase by 1% to 2%. Based on the increases we've seen in most commodities since that time, we are now expecting full year commodity inflation to be 3% to 4%. Specific to our major commodity purchases, produce is having the biggest single impact on our expectations. It represents about 5% of our spend with second quarter anticipated to be up 20% to 25% as compared to last year. Adverse weather conditions have dramatically affected lettuce and tomato prices. Beef accounts for more than 20% of our spend. For the full year, we are now anticipating beef costs to be up nearly 9% versus our previous expectations of 6% to 7% inflation. We expect beef costs will be up approximately 10% in the second quarter compared to a decrease of 9% in the second quarter of 2010. We have 100% of our import 90s coverage through March at $1.61 per pound and 25% covered through April at $1.97 per pound versus approximately $1.36 last year. Current market prices for both import 90s and oppressed domestic 90s are in the $1.97 to $2 range. We expect 50s to average in the $0.85 per pound range in Q2 versus $0.78 last year. Cheese also accounts for about 6% of our spend, and is now expected to be up 13% for the year versus our forecast of 7% to 8% inflation due to higher butter prices, which are up 43% year-over-year and stronger cheddar prices overseas. Dairy costs, which are over 3% of our spend are also being impacted by the higher butter prices, and are now forecasted to be up 5% for the full year. And bakery, which is about 9% of our spend is expected to be down 1.5% for the year versus our prior estimate of a 4% decline. Although the wheat market has increased 92% since June of 2010, our wheat and flour coverage has allowed us to avoid a majority of this increase for now. We have 90% of our bakery needs covered through June 2011. There has been no change in our outlook for chicken, which is about 9% to 10% of our spend. We continue to expect costs to be down 2% for the full year, benefiting from fixed-price contracts that took effect last February and March, which are lower than previous contract by almost 6%. As a reminder, we have fixed-price contracts on chicken that run through March 2012. We also have fixed-price contracts in place for potatoes, which account for approximately 8% of our spend. 100% of our potato needs for the full year are contracted with prices essentially flat versus last year. And now I'll move on to the rest of our guidance for the balance of the year. For the second quarter, we expect same-store sales for Jack in the Box company restaurants to range from flat to down 2% and system-wide same-store sales for Qdoba to increase 3% to 5%. Our guidance reflects the sales trends we've seen thus far in the quarter, which has included some unfavorable weather in many of our markets, particularly Texas, where we have 27% of our Jack in the Box company restaurants. Commodity costs for the quarter are currently expected to increase by approximately 5% driven the recent increases for several items, including produce costs, which have spiked as a result of harsh weather in many growing regions. Due to the greater-than-expected number of transactions completed in the first quarter of 2011, refranchising gains are expected to be lower than the second quarter of 2010. But we continue to expect full year gains on the sale of approximately 175 to 225 Jack in the Box restaurants to total between $55 million and $65 million with total proceeds resulting from the sales of $85 million to $95 million. I won't repeat all of the full year guidance included in the press release, but here is our current thinking on some of the line items that have changed since our November guidance. Same-store sales are expected to increase approximately 3% to 5% at Qdoba's system restaurants, reflecting the strong first quarter results we experienced. Overall, commodity costs are now expected to increase 3% to 4% for the full year. Restaurant operating margin for the full year is expected to range from 13% to 14%, depending on same-store sales and commodity inflation. And while the closure of the 40 restaurants last year will have a positive impact on margins, we expect this to be more than offset by commodity inflation, improvements to our core products and guest service initiatives. The full year tax rate is now expected to be approximately 35% to 36%, reflecting the actual rate in the first quarter. We have assumed no additional mark-to-market adjustments in our guidance. And while we still expect 30 to 35 new Jack in the Box restaurants to open system-wide, the number of company openings has been reduced to 19 as franchisees in a required markets that include six sites under development. As a result, capital expenditures for the year are now expected to be between $130 million and $140 million. Diluted earnings per share are now expected to range from $1.40 to $1.65, with the decrease due primarily to higher commodity costs. Gains from refranchising are expected to contribute $0.70 to $0.82 to EPS, with the increase due to the lower expected tax rate for the full year. Operating earnings per share, which we define as diluted EPS on a GAAP basis less gains from refranchising, are expected to range from $0.70 to $0.83 per share and EPS includes approximately $0.10 to $0.12 of incremental reimage incentive payments to franchisees in fiscal 2011 as compared to fiscal 2010. And the incremental reimage incentive payments for Q1 were $0.01 versus last year. As Linda mentioned, we continue to expect the Jack in the Box reimage program to be substantially completed by the end of 2011. To help facilitate the completion of the reimage program, in January, we entered into a franchise financing program, along with a third-party lender who will provide up to a $100 million in financing to our franchisees. As is common in the industry, we used our balance sheet to provide a credit enhancement for this facility and feel the risk is appropriate to our size. Our exposure is limited to between $10 million and $20 million, depending on the amount that has been funded under the facility. And lastly, we crossed the 60% franchise threshold in the quarter. We continue to benefit from the transition in the business model, which is replacing lower margin company-operated revenue with two high margin revenue streams: franchise royalty and rental income. In addition, we are benefiting from lower SG&A costs and capital expenditure requirements to maintain and refresh our company restaurants and the impact of rising costs such as commodities is reduced. We have used the proceeds from refranchising, as well as cash from operations to continue to return cash to shareholders and maintain reasonable leverage while investing and growing both of our brands. And that concludes our prepared remarks. I'd now like to turn the call over to Stacey to open it up for questions.

[Operator Instructions] Our first question is from Keith Siegner of Crédit Suisse. Keith Siegner - Crédit Suisse AG: When looking at the guidance and how that relates to pricing, guidance implies a significant improvement in that year-over-year company restaurant margin trend, from down $1.70 in first quarter to get to -- in the next three quarters in order to get to the midpoint of the margin guidance. How do you do that, given that COGS inflation is picking up? Have you put in pricing? Are you about to put in pricing? There must be some from a pricing in here? And in thinking about that, can you talk about testing it? What impact does it have on traffic? How has the test gone?

Keith, I'll talk about pricing. But let me talk about the key element to your question here. And first, let me start by saying that we're not anticipating any significant change in our restaurant operating margin in Q2 from what it was in Q1 of this year. And that's due primarily to the fact that a good portion of the commodity cost increases for the year is due to produce, and we are feeling that most of that impact is going to be felt by us the second quarter. So really what we're really looking at here is the improvement versus prior year for this third and fourth quarter combined. And here's how I think about that. If you go back to the third and fourth quarter of last year, we had two items that negatively impacted margin that we would not expect to recur this year: The first, you may recall that we had actuarial adjustment to our workers' comp accruals last year in third and fourth quarter. That was roughly worth 45 basis points negatively impacting margin last year. Again, we don't expect that to continue. Also you may recall, in that same timeframe, we talked about accelerating some maintenance and repairs that we were taking on our restaurants also to improve the appearance of these locations to our guests, and that was worth roughly about 40 basis points. So we have, in round numbers, 85 basis points that were negatively impacting last year's margin in the third and fourth quarter that we do not expect to continue. Then, impacting positively this year versus last year is we are now contracted on a 100% of our natural gas needs through 2012. And additionally, we're contracted on 100% of our electricity needs in Texas, and 80% of our electricity needs in California also through the 2012 timeframe. And we estimate that that's going to have about a 45 basis points improvement year-over-year in utilities in the third and fourth quarter. And then, as we continue to refranchise and we're looking at refranchising 175 to 225 restaurants, that the improvement in restaurant operating margin by selling those restaurants in the back half of the year, along with some accretion from Qdoba, including the restaurants that we purchased in Indianapolis this year, that with some pricing that Linda will talk about, we expect to offset the impact of commodities year-over-year in the back half.

So, Keith, on the pricing front, let me make kind of a general comment about pricing. I would say our approach to pricing will be cautious this year. And while we don't disclose details on pricing, especially in advance of any pricing action, whatever pricing that we do take will be modest and targeted.

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

Jerry, my question relates to the rental agreements with the franchisees, the subleases. Given the decline in sales volume, I'm assuming there are several franchisees that are paying I guess a base rental amount rather than the variable percentage amount. Is this true? And if so, what percentage of the franchise stores are in this situation at this point?

Yes, Chris. That is true. What we have is we have an arrangement where the franchisees will pay us a percent of sales, which we don't disclose or our underlying rent, whatever is greater. And so, we do have some locations where the franchisees are paying equal of our underlying rent, which means it's going to be a little higher than what their state of percent to sales are. In total though, it's not a significant number and doesn’t substantially impact our rent spread of that 3.5% range.

Our next question comes from John Glass of Morgan Stanley.

Linda, you had mentioned two phases of a service initiative, and you completed the first and you were embarking on the second. What are those? And can you maybe just quantify what you think those are in the near term meant doing to the impact on the margins?

I don't want to comment on what we think they're doing near term to the margins, other than that we are investing in two markets to understand how we might change our labor allocations to better drive sales. And in other markets, we're allowing through our weekly forecasting of sales, which generates our labor. We're allowing the restaurants to anticipate higher sales. So that's where the labor piece of this may have a short term impact on margins. However, when you look at the phases, Phase 1 and Phase 2, they're really kind of holistic in nature. I wouldn't want to comment on the details of what we're doing in Phase 1 and Phase 2, other than to say this is basic blocking and tackling. Phase 1 is really about building a strong foundation and then Phase 2 is really about accelerating what we're doing. So it's more about I think the pace of which we move about the initiatives are very similar, both in Phase 1 and Phase 2.

Are these tests, or are these actually -- is Phase 1 implemented system-wide already?

Phase 1 is implemented system-wide already. And as of this week, Phase 2 has been communicated. And there are several steps in the process that will take place over the next two to three months that will have Phase 2 very active in the field.

And, John, Phase 2 really builds on the work that we did in Phase 1, Plan 1, we call it the Plan. And if you think about it, we really have taken a comprehensive approach when you combine the operational plan that we have in place system-wide that really is about a better experience for our guests from a service standpoint. When you think about the investments we're making on the reimages both inside and out and then the food quality enhancements. And we are really beginning to see some traction. Anecdotally, we're hearing from our customers that they're noticing the difference in our restaurants and they're noticing the difference with our food. So it's very positive.

And just, on your overall target operating margins or at the restaurant level over time, given, I understand your goal is to drive traffic first and foremost, but do you see these initiatives, the food initiatives, the service initiatives as permanently limiting the upside to margins relative to prior peaks? In other words, why would they be higher if you got to reinvest this? I understand your volumes are going to recover. They’ll get better from here. But do you see this as a permanent lowering of margins in the business or not and why?

I would say it's actually quite the opposite. When you look at what our model does, with respect to restaurant operating margin expansion. As the average unit volumes expand, we get significant leverage on the upside of sales. And actually, I would kind of direct you to our franchise disclosure document. And you can see in the most recent one that we just published about a month ago, you can see how franchisee margins expand dramatically as average unit volumes go up. And so, I would look at this as much more as a unit volume play as I would about thinking about improving product and spending margin to maintain current average unit volumes. And then, additionally as we said in the past is that as we continue to sell the company restaurants that are in our target locations to sell, we would expect that we would continue, and that we would have margin expansion on the remaining company fleet as well. And we talked about that being about 60 basis points in the first quarter. Now unfortunately, that was more than offset by rising commodity costs in some of the investments that we're making. But I would not expect those refranchising benefits to be fully offset in the future at all.

Our next question comes from Matt DiFrisco of Oppenheimer. Matthew DiFrisco - Oppenheimer & Co. Inc.: I wonder if you could just quantify the weather impact that it was in the quarter-to-date trends, because it does look like even washing that out, there might be a slowdown on the same-store sales on the momentum side? And then into that question as well, the lift that you might be seeing at the reimaged stores, is it meeting your mark? Are you satisfied with that? And then, I have a follow-up on Qdoba.

On the sale -- on the weather impact. The first quarter is not a significant impact. There was some weather in December in California. And with regard to the second quarter, the four weeks to date, there was really significant weather impact, especially in the Southeast in Texas, if you recall, the Super Bowl week. So that had a significant impact on the Dallas market both for Jack in the Box and Qdoba if you think about the Northeast as well. So that second quarter guidance reflects that weather impact in that first four weeks. Matthew DiFrisco - Oppenheimer & Co. Inc.: Can you quantify that in percentage as what you would have been that had it not happened?

Yes, just for the second quarter, it's in the guidance range. So we reflected that, and it’s embedded in that range. So we're not providing quantitative detail on that. Matthew DiFrisco - Oppenheimer & Co. Inc.: How about the lift from the re-imaging?

It was significant enough for us to talk about though. And particularly [ph] (0:36:41) we don't typically talk about weather impact. And John, if I could just correct myself on something I said earlier. I did mention a 60 basis points was due to the refranchising, that was 40 basis points. And then, the first quarter, the 60 basis points that I said [indiscernible] correct that misstatement.

And maybe this will help on the weather. We would not have expected a slow down on the two-year accumulated in quarter two had it not been for the weather. Matthew DiFrisco - Oppenheimer & Co. Inc.: How about the comment on reimaging? And are you satisfied with the lift or it seems like there is a...

We've talked about the lift in the past that it has met our targets. And that those restaurants, which we controlled in markets where there was some restaurants that were reimaged, some of that were not reimaged. The reimaged restaurants, their sales were higher, meaning less negative at that time when we did the analysis than the non-reimaged restaurants. So yes, we are moving forward with that. We're very happy with the program. Matthew DiFrisco - Oppenheimer & Co. Inc.: And then just the Qdoba question. Can you give us some color on what the average weekly sales have been of the stores sort of outside? Your newer ones? And then the 35 stores you have planned, how many franchisees stand behind those 35 stores? How many are developing franchisees currently right now for Qdoba?

Let me talk to the first part of the question more in that annual average unit volume piece. So we look at our average unit volumes for company units for fiscal 2010. It was the $960,000 range and the restaurants that we acquired are north of there. I don't want to give away what that market average unit volume is. But they are the north of there, they're also north of the restaurant operating margin that we have as for the company units that we currently operate also.

And in terms of the pipeline, we're seeing real strength and very bullish approach to growth on the franchise side for Qdoba. If you recall, we slowed down a bit the last year given that the challenging development markets though, we're seeing very positive with that. In regards to the Indianapolis purchase, the great news about that purchase is it provides us an opportunity to grow that market, it's a very healthy market on the company side. But the operator, who is a very solid operator stayed in the system and is using some of that liquidity to reinvest in the brand and grow in another market where he has a development agreement. So we're seeing very positive growth momentum on the Qdoba side. Matthew DiFrisco - Oppenheimer & Co. Inc.: I guess the root to my question is I'm just wondering when you look at plus 30 for 2011, how many franchisees are behind that? Is that comparable to sort of what was behind '08 when you open 56?

Yes, there are several franchise developers behind that.

Our next question comes from Jeffrey Bernstein of Barclays Capital.

In terms of the franchising. As we’ve now heard for a while and it seems like it's the right long-term strategy, and now it seems like you're going to complete earlier or the potential to complete earlier than fiscal '13, so maybe fiscal '12, which is not that far way. Just wondering whether you can kind of thematically talk about if you look at fiscal '11 as an example, roughly half of your earnings in this year, pretty much exactly half is coming from the underlying operations and half are coming from the refranchising gains? And whether if a year or two from now, when those refranchising gains, are for the most part, gone. I'm just wondering whether you can kind of walk through your comfort that you can replace those gains. I know you talk about the operations improvements and cost saves and the rental income and whatnot. Do you think the combination of all those things can openly replace the loss with franchising gains by your earnings base can stabilize versus where it is today or accelerate from here? Just trying to size up what you're getting rid of and what you're going to replace that with?

Jeff, it kind of seems like we're looking at some long-term EPS guidance that we just haven't provided at this time. So –- but maybe you asked it a little differently and when it might help you to answer this.

I know the base of earnings a few years ago was a lot higher, it's come down due to a tougher macro. And now, obviously, the gains have somewhat accelerated at least in the short term. So it is representing roughly 50-50. I just know when you guys first embarked on this journey, which is a while ago were you envisioning then or has things changed between then and now that you still feel comfortable that the benefits of refranchising all of these stores will be reaped in the earnings number? Or whether or not valuations are all of a sudden is going to be skewed by the fact that 18 months from now, it is purely that underlying operations number, which maybe there aren't enough benefits to replace those lost gains?

Why don't we maybe looking at 2011 might be helpful and kind of helping you to look at this beyond that. So we looked at some of the things that we talked about that are impacting 2011 numbers that you may or may not consider to be one time, but they certainly would not be recurring in our minds. Is we talked about having about $0.10 to $0.12 a share coming out of our franchise operations because of our incentive payments of franchisees to complete their reimages this year. We've also talked about 70 to 80 basis points worth of accelerated depreciation and write-offs associated with the company continuing to reimaging their locations also. And we wouldn't -- and we've talked about that -- we wouldn't expect it to continue at those levels and beyond 2011. And then, we also talk about some of these investments that we're making this year to drive margin and to drive sales up. And we said that was worth about 50 basis points in the quarter. So we've also talk about the critical factor here for us to be able to continue to drive the earnings is to drive the average unit volumes back up to where they were before we had our sales decline a couple of years ago, and in fact higher still. So this is about driving AUV and we’re taking some short-term hits in the process this year.

And then just separately, the follow-up on the commodities, which obviously you gave a lot of color, very helpful. But it seems like this quarter, you got it to 1% to 2%, now it's 3% to 4%, and it seems like a lot of that increase has happened very recently. And the last quarter, it seems like there were some pretty good visibility in terms of the color you had on each of the commodities. But just based on that big jump, I mean, what are you assuming for the portion that's not currently contracted for the remainder of this year as an example? What are you assuming that you're able to get those products at through this year as their potential that if commodities remain where they are now you could see that 3% to 4% go up further from here? Our Act of God clauses being implemented that you're kind of forced to buy spot on more of these items now?

So I'd say the contracts where you would typically see the Act of God at least in our area or in our business here is primarily in produce because severe weather really impacts the availability of produce. So our produce contracts are generally banded anyway with a high and a low that kind of floats within the market. And then, there are some Act of God provisions that will get us north of our contract bands but at a reduced rate from what the current market pricing is. So I hope that, that helps. And then also grain, corn, wheat and soybean impact -- they’re input costs for a number of the proteins, and that’s really what's driving up beef at this point. I wish I had a great answer on how we predict that, but I don’t.

Our next question comes from Jeff Omohundro of Wells Fargo.

It's Jason Belcher, for Jeff. I was wondering if you could expand a little bit on the catering business at Qdoba? Maybe talk about kind of opportunity you see there? What you're doing to drive those sales and if you could update us or tell us what the catering mix is currently at Qdoba?

Catering, we mentioned, I mentioned in my comments that catering significantly increased in Qdoba in this last quarter. So that's a real positive. Businesses are coming back and are willing to invest in catered lunches. Individuals and families for celebrations are investing again in the catered parties. And we put some resources behind a dedicated catering person who is making calls and doing some outreach and marketing that Qdoba catering more aggressively. So that's all very positive.

We'll move on to the next question from Jonathan Komp of Robert W. Baird.

It's Jon Komp, calling in for David. Not to beat a dead horse, but just one more question on the restaurant level margin, specifically in Q1. Just wondering, is there anything else that's more one-time in nature or specific to the quarter other than the service initiatives, investment and commodities that you'd point to that would have impacted the normal flow through rate during the quarter? I'm just trying to conceptualize that this is the first quarter in a while that you saw a positive comps at both brands and yet restaurant margins were down 170 basis points. So any more color that you could have there would be very helpful.

John, the only other color that I would add would be the Qdoba occupancy. And also Qdoba generally is a little dilutive to overall margins in Q1 as their business is a bit more seasonal. And then it gets accretive though to the overall company margins in the back half of the year. And so they were dilutive by about 20 basis points in the quarter. But as we go forward in the back half of the year, we would expect them to be accretive to the overall Jack in the Box margins.

One more question then on some of the color that you gave, Jerry, on the margin comparisons in Q3 and Q4 of this year. I think you said you expect to get some additional pickup on the margin from some of the refranchisings later in the year. I'm just wondering is there anything unique about those units that you expect to franchise that will give you an outsized gain on the margin line? Or can you quantify what type of margin benefit you might be expecting in Q3 and Q4 from those?

John, you were breaking up quite a bit. So if I don't answer this directly, please feel free to ask a follow up here. What I think, I'm going to answer what I think you were asking here. I don't think there's anything unique to these locations that we are refranchising. What we have been saying is that the restaurants that are, in fact, we were talking about this all of last year is that a lot of the restaurants that we have been refranchising had lower than average unit volumes, and therefore lower than average cash flows, which impact the overall pricing. You may recall that last year, our gains on refranchising activities were significantly lower on average than what they had been in the prior years. And part of that is there’s a notion that we are complete with our refranchising strategy in the state of California, which generally has higher average unit volumes anyway. So I think what you would expect going forward is as we continue to refranchise that you would expect to get an ongoing lift in restaurant operating margin on remaining company units. Because what's going to happen is these remaining company units will have a higher average unit volume than what the current system -- than what the current Jack in the Box company operated system has today.

Our next question comes from Larry Miller of RBC.

I just had a question on the strategy on Qdoba. It’s sort of running counter to what you're doing on Jack in the Box in terms of refranchising. And you talked about how you are big fans of the refranchising strategy yet you're actually buying back in a lot of Qdoba franchisees. Can you talk about why you're doing that? What do you think that benefits are over time?

We've talked about the benefits, obviously, on the Jack in the Box side for refranchising in terms of less capital intensive, reducing the volatility of our earnings, protecting us against huge spikes in labor and commodity costs and so forth. So clearly that's making a difference for us in terms of our margins and returns on the Jack in the Box side. On the Qdoba side, actually what we have said is that we are focusing on developing out some key markets, some key company markets where we believe going in and penetrating the markets more quickly and more deeply will benefit the Qdoba in terms of driving those average unit volumes, which then we get incredible sales leverage from increasing the volumes at Qdoba. So it's really about concentrating in some key markets. And the Boston acquisition, the Indianapolis acquisition and all of the company Qdoba growth have been focused on a few core markets. So some of the larger markets where it's more difficult for the franchisees to go in and penetrate those markets. Because unlike Jack in the Box, Qdoba takes about three years to mature in terms of average unit volumes versus the Jack in the Box when it's open, there's a lot of pent-up demand, There's much more brand awareness. And so, the sales start up much, much higher and then level off on the Jack in the Box side. On the Qdoba side, we go in a little bit lower in terms of volume and it takes a while to build that volume. So there are different strategies. We, in fact, will see continued increase in the percentage of company restaurants on Qdoba, it's also much less capital intensive in terms of building a Qdoba versus a Jack in the Box because of the difference in the prototype in line being a full standalone freestanding with the drive thru. So we do have different growth strategies for the two brands.

Does that mean that you would consider then refranchising after you build out those markets? Or is it kind of wait and see what happens with each market individually?

No plans right now to refranchise those markets. We'll just continue to build them out, and then we'll penetrate other markets that make sense to go in and penetrate.

Our next question comes from Paul Westra of Cowen and Company.

How much was the reimage incentive payments for the quarter?

It was about a penny higher than what it was last year.

Accelerated depreciation, is that all included in the impairments line item?

Yes, it is.

And that makes up the bulk of that $3.6 million?

Yes, it does. I don't think there is any impairment or certainly nothing significant on the impairment side in the first quarter.

And the incentive payments were $1.28 million in the quarter, Paul.

On the tax rate, can you talk about the reduction and is that -- would that be ongoing into fiscal '12, or is this current year just probably the reduction for 2011 only?

I really wish I could predict that we would have a lower tax rate going forward. What drove it were two things. And in the order of importance we had mark-to-market adjustments on the investments underlying our nonqualified retirement programs. And those investment gains or losses because they’re in life insurance policies, they're not deductible or taxable. So that drove the tax rate down as a result of that. And then also we had a higher work or opportunity tax credits that we have been generating. So those two items combined make up that difference. And, Paul, that will, if the stock market does poorly, then you would see those mark-to-market gains reverse and that tax rate go back up. So it's not as predictable as any of us would like it to be.

Our next question comes from Andrew Charles of Bank of America.

This is Joe Buckley. Two questions, both pretty specific. Just on the $0.10 to $0.12, is that the incremental year-over-year change? And if so, what would be the absolute EPS impact from the reimaging contributions to franchisees?

That is the incremental, the $0.10 to $0.12 is incremental. And you're looking for the total dollar amount of that reimage payment, the total?

Last year, Joe, just to give you –- size it for you, it was $1.455 million last year. So that $0.10 to $0.12 of incremental on top of that number.

So you're looking at roughly total then $0.12, $0.14. A $1.4 million would be worth about $0.02 last year.

And then a question on just on your share repurchase, Jerry. It seemed like you were fairly active in the first quarter. And I know in the past couple of years, it's been kind of slow and back-end loaded. Was it just a timing issue or just your thoughts around the share repurchase activity in the...

I think it was more timing, Joe. Also following our earnings release and guidance, the market, took a turn down. So just the way that we have our buyback matrix under our 10b5-1, just drives more purchases the lower the stock price is. So it's really nothing more advanced than that.

Our next question comes from Matt Van Vliet of Stifel.

I just got a couple of quick questions on the remodeling. I know you're talking about accelerating that. I was wondering where you are in terms of what your previous schedule was for the company stores on remodeling that you're about three quarters done? And then just also in terms of the franchisees side. When they take these incentive payments, does that alter the future requirements for remodeling? Or is this just kind of trying to get it to speed up here?

Yes, we accelerated the remodel program by about a year. So we were going to have it complete by the end of 2012, and now we've moved that up to 2011. We continue to look at the image of our facilities, and we would generally expect another reimage to be done in the five to seven year timeframe.

There are no further questions at this time. I'd like to turn it back for closing remarks.

Thank you very much for joining us. Appreciate your time. Thanks.