Jack in the Box Inc. (JACK) Q4 2012 Earnings Report, Transcript and Summary

Carol A. DiRaimo - Vice President of Investor Relations & Corporate Communications Linda A. Lang - Chairman, Chief Executive Officer and Chairman of Executive Committee Jerry P. Rebel - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Leonard A. Comma - President and Chief Operating Officer

Joseph T. Buckley - BofA Merrill Lynch, Research Division John S. Glass - Morgan Stanley, Research Division Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division Michael Tamas - Oppenheimer & Co. Inc., Research Division Alexander Slagle - Jefferies & Company, Inc., Research Division Robert M. Derrington - Northcoast Research Conrad Lyon - B. Riley & Co., LLC, Research Division Nick Setyan - Wedbush Securities Inc., Research Division

Good day, everyone, and welcome to the Jack in the Box Inc. Fourth Quarter Fiscal 2012 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, Stacy, and good morning, everyone. Joining me on the call today are Chairman and CEO, Linda Lang; Executive Vice President and CFO, Jerry Rebel; and President and Chief Operating Officer, Lenny Comma. During this morning's session, we'll review the company's operating results for the fourth quarter of fiscal 2012 as well as some of the guidance we issued yesterday for the first quarter and fiscal 2013. And we'll also touch upon some of our key expectations for the next 3 years. 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 at the ICR XChange in Miami on January 16, and our first quarter ends on January 20. We tentatively plan to announce our earnings results on February 20 after market close and our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on February 21. Before I turn the call over to Linda, I have one housekeeping item. As many of you know, trying to determine what consensus EPS estimates include or exclude can be very difficult, if not impossible. As an example, First Call consensus for fiscal 2013 prior to our earnings release yesterday was $1.58, which included $0.07 of gains. But that $0.07 ranged from 0 to $0.28. This was not apples-to-apples as some analysts completely exclude gains, as we are doing in our EPS guidance for 2013. In order to have a meaningful consensus number and try to eliminate some of the confusion, we would ask that the models you submit to First Call or other services exclude gains to promote comparability. And with that, I'll turn the call over to Linda.

Thank you, Carol, and good morning, everyone. Quarter 4 capped off a year of substantial accomplishments despite the challenging macroeconomic environment. Let me recap some highlights on the progress we made during 2012. Operating EPS for the full year increased 41% to $1.20 per share. Consolidated restaurant operating margin improved 240 basis points to 15.1% of sales. Same-store sales at Jack in the Box company restaurants improved 4.6% for the year and importantly, traffic growth drove half of the increase. The investments we've made over the past few years to enhance our food, service and restaurant facilities continued to drive sales and traffic at Jack in the Box. This was our best year of sales performance since 2007, and we believe we have strategies in place to continue to drive sustainable sales and market share growth at the Jack in the Box brand. One of the areas of opportunity we've been intently focused on is speed of service at Jack in the Box. We've now seen 7 quarters of sequential improvement in speed of service. We believe this improvement is building trust with our guests and driving additional visits. As a reminder, it only takes 6 guests per day to drive 1% same-store sales growth at a typical Jack in the Box restaurant. Our Jack in the Box franchisees completed the systemwide reimaging of their restaurants during the year. We achieved significantly higher guest satisfaction scores at Jack in the Box, which is tangible evidence that our guests are noticing the holistic approach we've taken to enhancing the overall experience. With the refranchising of 97 Jack in the Box restaurants, we are now 76% franchised. We opened a total of 95 restaurants systemwide, including 37 Jack in the Box and 58 Qdoba restaurants. We also acquired 46 Qdoba restaurants and are now more than 50% company owned. Qdoba now represents 37% of our company-owned restaurants as compared to only 6% 5 years ago. We engaged in a comprehensive review of our organizational structure during 2012, and as a result of this process, have created a more efficient company while moving toward our goal of G&A expense in the range of 3.5% to 4% of systemwide sales. In addition, we have completed the outsourcing of our distribution business, which should free up substantial amounts of working capital. And in early November, we enhanced our financial flexibility with the refinancing of our long-term debt, which Jerry will elaborate on during his remarks. Turning to our quarter 4 results at Jack in the Box. We're pleased with the 3.1% increase in same-store sales at our company locations. This represented our eighth consecutive quarter of same-store sales growth. Traffic increased 1.2% and average check was up 1.9% despite difficult sales and traffic comparisons. On a 2-year cumulative basis, same-store sales were up nearly 9% and traffic was up nearly 10% at company restaurants. As a result, we continued to gain market share with our sales growth in the fourth quarter nearly double that of the NPD industry average. The improvement in same-store sales was seen across all dayparts, including continued strength at breakfast, even as we lapped the introduction of a very successful Breakfast Platter, with a compelling new Waffle Breakfast Sandwich. Our franchisees also saw higher sales growth in the quarter as they nearly closed the gap to company results. 7 weeks into the first quarter of fiscal 2013, we're continuing to see positive same-store sales growth at both Jack in the Box and Qdoba. Turning to Qdoba. Same-store sales for the fourth quarter increased 0.8% at our company locations and 0.4% systemwide, which was slightly below our guidance. Several brand activation initiatives are in development, including a new brand campaign to drive traffic and sales. The new campaign will focus on clearly articulating Qdoba's innovative menu and unique brand positioning. The Qdoba system opened 24 restaurants in the fourth quarter, half of which were company locations and we have a solid pipeline of sites to support our growth plan. We announced last month the hiring of Jeff Wood in the new position of Vice President and Chief Development Officer. Jeff's hiring reflects our intense focus on executing Qdoba's growth. We're extremely pleased to have someone of Jeff's high caliber and experience joining our Qdoba team. In October, we also announced that Gary Beisler was planning to retire as Qdoba's President and CEO. I'd like to commend Gary for his leadership and passion he's infused into Qdoba over the last 14 years. Gary will continue in his current role until a successor is identified and onboard. A search is underway for a strong leader who can build upon Qdoba's success and distinct brand equity. We're very excited about what the future holds for Jack in the Box and Qdoba. But we wouldn't be where we are today if not for the hard work, support and commitment of our employees and franchisees. I want to personally thank each of them for their outstanding contributions in driving our results. Our long-term outlook reflects the balance of growth from all segments of our business model, including Jack in the Box company operations, Jack in the Box franchise operations, which drive annuity-like cash flows through both royalties and rents, and Qdoba. We have transformed our company in recent years and positioned our brands for significant earnings growth and cash flow generation. And now I'd like to turn the call over to Jerry for a more detailed look at our fourth quarter results and outlook for the future. Jerry?

Thank you, Linda, and good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. Fourth quarter earnings from continuing operations on a GAAP basis were $0.39 per share compared with $0.50 last year. For the full year, GAAP EPS from continuing operations was $1.40 versus $1.63 last year. Operating earnings per share, which we define as EPS on a GAAP basis excluding gains from refranchising and restructuring charges, were $0.27 in the quarter versus $0.20 last year. And for the full year, operating EPS was $1.20 versus $0.85 last year, up 41%. Our results for the year reflect the transformation of our business model and the annuity-like cash flows from -- that franchising produces. As an example, we generated cash flow of $75 million from rental income on the over 1,500 properties that we lease to franchisees. Refranchising gains of $0.16 in Q4 and $0.44 for the full year also exceeded our expectations as we completed the sale of 42 restaurants in the quarter including our first seed market in Oklahoma City. We refranchised 97 restaurants in 2012. Jack in the Box company average unit volumes for the full year were $1,557,000, up 10.8% from last year due to same-store sales growth and 4.6% -- same-store sales growth of 4.6% and the benefit of refranchising. Restructuring charges of approximately $0.04 per share in Q4 and $0.23 per share for the full year are included in impairment and other charges. We have established a target of our G&A as a percent of systemwide sales of 3.5% to 4%. With our restructuring activities, we have identified approximately $12 million of annualized reductions in G&A and we expect about $7.5 million of this -- to benefit our cost structure in fiscal 2013. Additional restructuring activities continue and we expect to incur incremental restructuring charges in fiscal 2013 as we complete the process, although not to the magnitude of those in 2012. Consolidated restaurant operating margin of 15.1% of sales for the quarter was 160 basis points better than last year's fourth quarter. Margins were lower than our internal expectations due primarily to higher utilities and repairs and maintenance cost resulting from the extreme summer heat in many company markets. Jack in the Box margins improved 150 basis points to 14.9% in Q4 and Qdoba margins improved 160 basis points to 15.5% in the quarter. The 150 basis point decrease in food and packaging cost resulted from the benefit of price increases as well as a greater proportion of Qdoba company restaurants, which more than offset commodity inflation. Commodity inflation moderated to less than 1% in Q4, driven by lower beef, cheese, dairy, pork and bakery costs. As you can see, we reported the distribution business along with the associated exit costs for asset write-offs and continuing lease obligations as discontinued operations beginning in the fourth quarter. The outsourcing of distribution will free up approximately $60 million in working capital tied up in franchise receivables and distribution center inventories that we can deploy to further enhance shareholder value. In the fourth quarter, we resumed stock repurchases, buying back more than $23 million in Q4 and an additional $27 million to date through our first quarter, leaving $50 million available under an authorization that expires in November 2013. And lastly, our board authorized an additional $100 million share buyback, which expires in 2014. In early November, we completed the refranchising of our existing debt, extending the maturity of our long-term loan and revolving credit facility until November 2017. The refinancing lowers our effective borrowing rate by 50 basis points and provides for up to $500 million of return of cash to shareholders. Before I review our guidance for fiscal 2013, let's talk about our commodity cost outlook for the upcoming year. Overall, we expect commodity cost for the full year to increase by approximately 2% to 3%. Beef and corn have the potential to be the most volatile, and we currently expect beef cost to be up 4% to 5% and chicken prices to be up approximately 6% for the full year. And here's our current thinking for fiscal 2013 guidance. We are expecting same-store sales growth at company restaurants in the first quarter of 1% to 2% for both brands. We are lapping a 5.3% increase last year at Jack in the Box and a 3.5% increase at Qdoba. As to our full year guidance, same-store sales are expected to increase approximately 2% to 3% at Jack in the Box and Qdoba company restaurants. Restaurant operating margin for the full year is expected to range from approximately 15.5% to 16% depending on same-store sales and commodity inflation. SG&A as a percent of revenue is expected to be in the mid-14% range. On a dollar basis, we expect SG&A to be relatively flat compared to 2012. While we expect roughly $7.5 million of G&A savings on our restructuring activities we undertook in 2012, we expect higher pension expense of approximately $4.5 million resulting from lower discount rates. In addition, 2012 SG&A benefited by $6.2 million in favorable mark-to-market adjustments. And we do not model mark-to-market adjustments for our guidance. G&A as a percent of systemwide sales is expected to decline to approximately 4.3% in fiscal 2013 from 4.6% in fiscal 2012. 70 to 85 new Qdoba restaurants are expected to open, of which 40 to 45 are expected to be company locations. We expect approximately half of the company development to occur in more mature or acquired markets. Operating earnings per share, which we define as diluted earnings per share from continuing operations on a GAAP basis, excluding restructuring charges and gains from refranchising, are expected to range from $1.45 to $1.60 in fiscal 2013 as compared to operating earnings per share of $1.20 in fiscal 2012. Diluted earnings per share includes approximately $0.04 of incentive payments to Jack in the Box franchisees in fiscal 2013 to complete the installation of new signage as compared to $0.11 in fiscal 2012 to complete the reimage program. We now estimate EPS sensitivity as follows. For every 1% change in Jack in the Box system same-store sales, we estimate the annual impact to earnings is about $0.09 per share, approximately half of which relates to company operations depending on flowthrough and assuming stable cost, and the other half relates to franchise revenues, which are not subject to commodity cost or other inflation. The impact of a 1% change in Qdoba company same-store sales is approximately $0.02. And for every 10-basis point change in restaurant operating margin, the estimated annual EPS impact is approximately $0.01 to $0.02 per share on a consolidated basis. We also updated our long-term goals. We expect to -- we continue to expect same-store sales growth of 2% to 3% annually at Jack in the Box company restaurants and 3% to 4% annually at Qdoba company restaurants. We've raised our outlook for restaurant operating margin to 16% to 16.5% beginning in fiscal 2014. We maintained our G&A guidance of 3.5% to 4% of consolidated systemwide sales beginning in 2014, and we now expect operating earnings per share of approximately $2 beginning in fiscal 2014, a year earlier than we previously discussed. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. Stacy?

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

I just need you to elaborate a little bit on the speed of service initiatives. I know sequentially you're seeing improvement quarter-after-quarter. Is that a rolling market focus or on a specific initiative that you're implementing each subsequent quarter to achieve those gains? And where do you think you stand in terms of the potential on speed of service?

Joe, this is Lenny Comma. Thanks for the question. We've mentioned just about a year ago that we could improve speed of service almost a minute and still be slower than other QSRs that we compete directly with. We continue to see about that amount of opportunity for us with speed of service. And so we'll continue to do what I mentioned to folks earlier, which is focus on improving speed of service while not doing anything that would negatively impact food quality. So we're going to move slowly but we think that over the course of the next couple of years, we could improve speed of service to the same degree that we have improved it in the last 2 years. And so we think the opportunity is big. It's not a rolling situation market-by-market. We're focusing on the entire country. And each of the local markets has the same focus and the same toolkit that they're using to make these improvements. So we do think that there's still a lot of fruit left on the vine and we intend to go after it. But like I said, it won't be all in one fell swoop.

Okay. And then just a follow-up for Jerry. The more aggressive share buyback the last 4 months, does that reflect a greater commitment to share buybacks? Or is it more based around the distribution center and the freeing up of that $60 million of capital?

Joe, I don't know that I'd call it a more aggressive focus on share buyback. We did purchase last year almost $200 million worth of stock in 2011. We did slow it down somewhat earlier in the beginning of this -- in the beginning of '12 as we were buying back Qdoba restaurants from franchisees. I would say that what we did late in the fourth quarter and early into this quarter was to just continue with our focus of returning cash to shareholders. One thing I want to mention also is that the new credit facility also reloaded our share repurchase basket, so we now have $500 million worth of availability under that new facility. And the $50 million that we purchased back late in the fourth quarter and early in the first quarter were under the prior credit facility. So we still have the entire $500 million basket available under the new credit facility. Also, I'll mention that our changed business model generates a significant amount of free cash flow. So I would expect that we would continue to be constructive with respect to returning cash to shareholders going forward.

Our next question comes from John Glass of Morgan Stanley.

Jerry, just first on your guidance for 2013, does that include the selling of the Southeastern stores that you've talked about? And just remind us, are you still on track to do that this year and what the benefits to the P&L and to earnings would be? Any updates or thoughts on that as well.

Yes. Sure, John. The Southeast, we do plan on selling the Southeast more close to the end of the year, rather than in the beginning. And as a result of that, I wouldn't expect it to have a meaningful impact on this year's earnings. And as a result, there really is no benefit included in our guidance for this year on that. To the extent that we are able to move up one or more of those individual markets in the Southeast to sell earlier in the year, I'd expect that to have a positive impact on our earnings. I think at our February Investor Day, we talked about a $0.10 to $0.12 benefit if we were able to sell the Southeast markets. And we're still comfortable with that kind of range.

Okay. And then just as a follow-up, one, that is that in the assumption of the $2 to '14? Or is that just sort of a kind of a new run rate? And then secondly, can you talk about the 15.5% to 16% store margin goal for this year? How much of that -- just in broad strokes, how much of that is brand mix? How much of that is refranchising-driven? And how much of that is just individual improvement in the underlying margins of the respective businesses?

Yes. Given the fact that we are at 76% franchise-operated today, absent selling the Southeast, I wouldn't expect a meaningful appreciation in margin from refranchising activities going forward. So the 15.5% to 16% is primarily due to improvement in operations of both brands with the same-store sales assumptions that we have at 2% to 3%. The $2 per share for 2014, the Southeast is assumed to be in there, although I'm not certain that we actually need it to be at the number.

Our next question comes from Matthew DiFrisco of Lazard Capital Markets.

I was just curious with respect to the comps and Qdoba. If you could give us some color on any regional disparities you may have seen. Or as far as vintage of the stores, I'm curious if some of the recent open markets, has there been any sort of cannibalization from some of the backfill strategy of growth in those markets and the older stores may be contributing to a little bit of a slowdown in the comp?

Yes. There is a little bit of regional difference, not significant. If I break down the deceleration in the comps from quarter 4 to -- or quarter 3 to quarter 4, 140, almost 150 basis points of that deceleration was rolling off of price. So that was some of it. Actually, traffic was up slightly, and then the remainder was a little bit lower on mix and a little lower on catering. So that's what it looked like. Let me just comment on the Qdoba sales though in general in terms of our comfort with the guidance both for the fiscal year and the long-term guidance of 3% to 4%. We are taking the same holistic approach to improving sales and traffic at Qdoba as we did at Jack in the Box. So we're looking at everything from the communication and brand strategy to operational execution and even our Catering business. And so I'm not going to go into a lot of details on this call, but let me just give you a couple of examples of things to note that we're doing. In mid-August, we engaged with a new advertising agency called Goodness Works out of Denver. And so they've been working diligently on putting together a new brand campaign that will showcase in what I think is a very compelling and creative way, the variety and innovative menu that differentiates Qdoba from its competitors. We also have a search out for a national catering director because that we believe that's a strong point of difference, and we can leverage catering more fully. And just -- we've also invested resources in menu innovations. So an example of that is the recent launch of our whole wheat tortilla. So we're ramping up the efforts in menu innovation. So to size that 3% to 4% long-term sales target, it only takes about 2.5 guests per day to drive 1% of comps at Qdoba. So we think that goal of 3% to 4% is very achievable. So I wanted to just kind of not just address our next quarter but really the long-term opportunity at Qdoba.

I'm sorry. Can you just clarify? Did you say then that Catering took a step back? Or are you saying that it grew slower?

No, actually it grew slower. It grew slower. It didn't contribute as much to the comp in the quarter as it did in the previous quarter or the previous year. So we think we have an opportunity to kind of get the growth ramped up on the Catering business.

But should we be correct to assume that it's still outpacing what was your comp?

The growth?

The growth in Catering.

No, actually -- no, I don't believe so. No. No, it was slightly below the comp. So we know we have an opportunity there with Catering.

Okay. And then when you replied that there was some regional disparity, was it in correlation with also where you open stores or it's a defined region that perhaps is economically sensitive? Or what was the correlation there with the region?

Yes. What we've indicated previously is the higher the market, the brand awareness and market penetration, generally, we see a higher comp. It just is taking -- it's a little bit slower in those undeveloped markets, where we don't have high brand awareness. So that's where we really have to invest on a local basis in terms of local store marketing to get the brand awareness up in those markets. So there are a few challenged markets, which I would call developing.

Okay. So your more saturated markets comped -- were on the stronger side of the comp then, so there was no cannibalization.

Definitely. Yes.

Our next question comes from Jeffrey Bernstein of Barclays.

Great. Actually, just 2 follow-up questions. First, on the Qdoba side that you were just talking about. Especially as Jack becomes more franchised and Qdoba seemingly more company-operated, I know you kind of acknowledged you were disappointed with the decelerating comp. I'm just wondering kind of broadly how you would define the issue. How much would you attribute to the macro versus there's been a lot of talk about competitive perhaps from quick service. Or how much would you say is really brand-specific that perhaps -- you made some mistakes at Qdoba, especially now with the brand kind of more under your leadership, I'm just wondering how you assess those and what changes might be needed above and beyond kind of the tactical marketing that you discussed. And then I have a follow-up.

Yes. I would say the Qdoba business has been impacted by both -- for a brand-specific, maybe a little slowdown because we lost some time with our advertising agency as we were searching for a new agency. But also the outside, the macro environment and certainly some of the competitors that we've heard have struggled a bit more recently. And I would say we probably were a little aggressive with price in the last year. And that's impacted our traffic. So I would -- I would really focus on what we're doing about that and all of the efforts we have underway to address the sales softness. And really, we believe that the brand is very, very strong and it's just a matter of communicating the brand, articulating that unique position that Qdoba has, ramping up menu innovation, leveraging our Catering business more, and then of course, operational execution, making sure that we've got everything solid on the operating side in terms of throughput at the restaurant store level.

Got it. And then just, Jerry, the follow-up kind of on the balance sheet and cash usage side as it relates to earnings. Well, one, I know you talked about the share repo of $50 million over the past 4 months. Should we assume or -- the guidance for fiscal '14, does that assume the full $200 million? Should we assume kind of a similar pace? Or would you consider dividend as you talk about kind of returning that incremental cash? And kind of related to that, I know -- I guess, I'm splitting hairs. It looks like the guidance previously was at least $2 in fiscal '15, and now it's kind of approximately $2 but obviously moved up a year. I'm just wondering, it seems like they moved up a year, now includes the share repo. I'm just wondering how much accretion is perhaps assumed. Just try and help us align apples-to-apples with the $2 in the different time period.

Yes. What we -- John, what we said -- excuse me, Jeff, I'm sorry. Jeff, what we said on the Analyst Day or the Investor Day back in February is that we assumed in the number that we were projecting long-term to have share repurchases only offset dilution. That's still the assumption. So to the extent that we would get more aggressive with share buyback, we would expect that to be accretive to what we've talked about. The 2014 EPS assumes that there are just share buybacks going forward to offset dilution. So this is not a share buyback-driven improvement in operating EPS. Just to remind you, the $150 million in authorization that we have, $50 million of that expires in November of '13 and $100 million expires in November of '14.

Got it. So the move up of the $2 full year has no impact from incremental cash usage. Would seem to be more entirely driven by improved operations and the strength of the comp then? Is it just things are better than they were when you last spoke?

Yes.

That's great. And then the dividend, is there any contemplation of that or is share repo the primary opportunity?

I think historically, share repo has been the primary focus. We have the ability to do dividends. But it's likely as the tax rate on that may go up, I'm not sure that, that would necessarily be a good use. Well, we're going to take a pause and just see what all happens there, and in the meantime, continue to return cash to shareholders via the share buyback.

Our next question comes from David Tarantino of Baird. David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division: Just a question on the trajectory of the Jack in the Box comps. It looks like your Q1 guidance suggests you might have already seen a slowdown in the comps. And I was wondering if you could comment or give some perspective on why you think that has happened or why you expect it to happen in the first quarter. And then I have a follow-up.

David, this is Lenny. I think if you take a step back and look at Jack in the Box's performance, we're lapping eight consecutive quarters of positive comps. And as Linda had mentioned earlier in the fourth quarter NPD data, we're almost double the industry average. And we've obviously seen our performance through the first 7 weeks of this fiscal year and are projecting what we think is realistic based on the current performance. But I think most importantly is when you look at our performance versus competition, it would show that Jack in the Box is doing quite well right now, and over the long term and especially the outlook for this year, continues to be positive. So I don't know that we necessarily are looking at this through a negative lens and feeling like Jack in the Box is slowing down. I think we're looking at it more on the positive side when we compare ourselves to competition. So I think we've got a great marketing lineup this year. We've got great operational plans this year that will continue to drive positive comps. So we remain favorable. David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division: And just a follow-up to that then. The guidance for the full year seems to assume you think trends are going to get better in the second and through the fourth quarter. So just wondering given what you just talked about for Q1 and your lineup, what's giving you the confidence you'll see maybe that reacceleration in the comps when you look at the balance of the year?

Yes. I think if you look at our comparisons as the year progresses, they get easier. We ran the Breakfast Platter last year Q1. And so it's really just the comparison that drives a lot of what we're seeing right now. So Q1 is a much tougher quarter to lap, so we're seeing results that are in alignment with the 2-year trends. And if that continues throughout the year, we should expect to see the comps go up.

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

Linda, my question relates to Qdoba. The company's made significant investments in that brand the past couple of years, and it looks like they're going to the next couple of years either buying or building stores. What do you see that gives you confidence that Qdoba has significant growth potential?

Well, I look at the reaction to -- by our customers in terms of the reaction and favorability around the brand. So when you look at the Denver market, for example, where Qdoba was founded and there's a lot of Mexican fast casual, including a major competitor, and we have strong AUVs, very strong margins and strong consumer loyalty and acceptance. And as we have moved into other markets, we see the same thing. When we look at our nontraditional sites, very, very strong performance in areas like college campuses and universities and in airports. So in terms of the brand and the brand acceptance and ability to travel, I have a lot of confidence. We see it in consumer research, in terms of attribute ratings across food quality, environment, service. And it's a great operating model. We're able to generate very, very high AUVs out of a very small space. So from the unit economic standpoint, great returns.

How crucial is it to get the franchisees to really accelerate development to build that brand awareness and to get those economies of scale? And how are you going about encouraging franchisees to be more aggressive development?

Chris, this is Jerry. Let me just at least take the first part of that. So if you -- it's important to remember that when you look at the franchise model on Qdoba versus the franchise model on Jack in the Box, there's 2 key distinctions. One is at Qdoba, we do not have the benefit of the rent spread that we do at Jack in the Box. Secondly, the AUVs are lower, so the 5% royalty that we enjoy for each brand brings in lower dollar levels of royalty payments on the Qdoba franchisee. So when we indicated that a 1% change in same-store sales for Jack in the Box system is worth about $0.09 a share and for Qdoba company is about $0.02 a share, it takes 5% growth on the franchise side of Qdoba to equal 1% -- to equal $0.01 per share in earnings growth. So in terms of what is going to drive the earnings growth going forward is primarily going to be on the company side of the Qdoba model. Now if you look at the franchisee base for Qdoba, we really have 2 separate groups of franchisees. We have the larger franchisee groups that were primarily in the larger metropolitan areas that had plenty of growth rates attended to by larger development agreements when they came into the system. Many of those franchisees, we have bought back their restaurants because they developed it, they created the brand awareness through their efforts, and we knew that there is also room to continue to grow there. What is primarily left are the franchisees who may have bought into the small markets and had a 4-, 5- or 6-unit development agreement, most of which has already been built out. So I think going forward, the 30 to 40 units that we're guiding to in Qdoba will primarily be for franchisees in the smaller markets and new markets for the franchisees to open up into, and then on the company side of the ledger, more of the larger metropolitan areas. And we'll also look to see if there's opportunities to buy back from the remaining larger franchisee margins that are currently being operated.

And just to follow up, in terms of our level of confidence in achieving the growth targets for Qdoba. If you think about it, we've guided 40 to 45 on the company side versus 26 this year. But we also have a new leader in place in terms of Jeff Wood coming into place. We've also moved our Division VP of Real Estate Analysis from San Diego, he worked on Jack in the Box for several years, over to Qdoba. And he has another analyst working for him. And we've updated the site selection model that's under development right now that will be completed in February. So we have a lot of confidence that we're building the capability and investing the resources to achieve those more aggressive growth targets on the company side.

Our next question comes from Brian Bittner of Oppenheimer. Michael Tamas - Oppenheimer & Co. Inc., Research Division: This is Mike Tamas for Brian Bittner. My question is on the comps. So at Jack in the Box, comps continue to outperform. And as we look into 2013, I was wondering if you could touch on the pricing average check balance versus traffic growth. You briefly mentioned a few broad points a minute ago. I was just kind of wondering if you can touch on a little more specifics on the comp driving catalysts throughout the year.

Yes. We really don't provide an outlook on price going forward for fiscal '13. So I wouldn't be able to break down that full year guidance for you.

I think the place to focus is that Jack in the Box has several initiatives lined up going into 2013 that involves a more robust pipeline on the marketing side, as well as continued improvement in the overall guest experience that really gets activated through the local franchise and company teams. So that's kind of all we could probably say about the 2013 outlook that would be in line with what we've already stated.

Yes. I'd say, in general, both Qdoba and Jack in the Box were a little cautious on price looking forward, just given the macroeconomic environment and the consumer challenges that are uncertain at this time.

Our next question comes from Alex Slagle of Jefferies. Alexander Slagle - Jefferies & Company, Inc., Research Division: I had one more follow-up question on the fiscal '14 $2 EPS guidance and the assumptions. You mentioned it assumes maybe the modest potential benefit of selling the Southeast markets and no share repurchase benefits beyond offsetting dilution. Does it also exclude any opportunistic Qdoba franchise acquisitions?

It does. It excludes that. Alexander Slagle - Jefferies & Company, Inc., Research Division: Okay. And then on the restaurant-level margins by brand, I know we'll get that with the 10-Q, but wondered if you had any of that, the components on hand.

Alex, it's actually in the press release this time. We put the margins by brand in the press release. Alexander Slagle - Jefferies & Company, Inc., Research Division: In terms of the cost of goods, labor?

Yes. Yes, it's actually in the press release this time. Alexander Slagle - Jefferies & Company, Inc., Research Division: Great. And wondering on the Jack in the Box same-store sales drivers in the fiscal fourth quarter, if you could just provide a little bit more color in terms of the food, marketing, service, sort of what improvements you're seeing and where and sort of initial thoughts on the first quarter and potential drivers for that business.

Yes. As far as drivers for the fourth quarter, I'll address that first. Really, we're looking at a couple of items that were unique. The Waffle Breakfast Sandwich and also the All-American Jack combo, we think those 2 features helped to drive sales. We also had chicken nuggets, 5-, 10- and 20-piece featured as well. So several marketing initiatives, we saw great improvement in the overall guest experience throughout the year. And it continued into the fourth quarter along with speed of service. So I'd say that those were the major contributors going into the end of the year. And starting Q1 fiscal '13, we've got our Sourdough Cheesesteak Melt out as well as our Loaded Breakfast Sandwich. And we continue to focus on speed of service and the guest experience in Q1 as well.

Our next question comes from Bob Derrington of Northcoast Research.

Jerry, could you help us understand for a minute? We're hearing a lot of concern and buzz about the whole beginning to look at the measurement period for the Affordable Care Act, otherwise known as ObamaCare. Can you give us a little bit of color on how do you manage the financial cost associated with that, both for the company as well as your advice to your franchisees, how they manage that?

Yes. Let me just make a few comments about that. One is, as I'm sure you know, there's still a lot of unknowns regarding the health care law changes that go into effect in the beginning of 2014. We know that there -- that the rules and regulations are still being drafted by the regulators. But based upon what we know or what we believe we know, let me describe for you what I think the impact could be for us. So we're looking at the impact on margin to be in the neighborhood of 50 to 100 basis points, assuming no mitigation activities. And if you just take the midpoint of that, that's about $10,000 per restaurant based upon the 2012 population. Now I know that, that's lower than what we have been hearing many talk about. So let me describe for you why we think we have a pretty good beat on this. And before I get there, while the $10,000 per store is not insignificant, that's less than a 1% price increase to fully mitigate that. So I guess, we need to keep that into perspective. So anyway, why not higher? Why not where we're hearing a lot of the other folks talk about? First is at Jack in the Box and Qdoba, our managers and assistants are already offered health care by the company. Most of our part-time employees for both brands already average less than the 30 hour per week threshold. So we don't believe that there's going to be a big impact on having part-time employees actually be classified as full-time equivalents. And then also, we currently offer -- even below management levels, we offer some level of health care plan, mini-med plan for the Jack in the Box full-time crew employees and we also offer a health care plan to the Jack in the Box team leaders. And what I can tell you is that while we offer currently and while we will certainly offer under the health care law, the employees are not required to accept it. And when you look at our current acceptance rate on what we offer today, it's less than 20% acceptance rate for those groups of folks. And we're not anticipating that we would have a meaningful appreciation in terms of the acceptance rate going forward. And then just to further substantiate that, when you kind of look at what the population of our restaurant-level employees, and I would suggest even that in the industry, certainly below the management level, you tend to get a high level of turnover. I think if you look at the industry broadly, you're looking at about a 100% turnover in that group of employee population. And we think because of that and you look at the acceptance rates that we currently have and the high levels of turnover, that we think that, that's going to lessen the impact to our brands and why we have estimated the numbers that we have.

Our next question comes from Conrad Lyon of B. Riley. Conrad Lyon - B. Riley & Co., LLC, Research Division: Just a follow-on to that. So it sounds like relative to your fiscal '14 guidance that those margins do not include any impact from the health care act?

No. They do not include any impact to margins from the health care act. And we're actually assuming that it's not going to be a huge impact and that we'll be able to mitigate. Conrad Lyon - B. Riley & Co., LLC, Research Division: Got you. Okay. A question about pricing at Jack in the Box and just some items, just more specifically, say, with the tacos. Is there ever any intent to raise the price on those? Or is that something that you continue to view as sort of somewhat as a -- I don't know if it's truly loss-leading, but I view it somewhat as that perspective. Is that something that may be something that where we might see more aggressive pricing in the future, especially from a franchise perspective?

Yes. I think if you take a look at the tacos and what it means to our brand, it's a huge piece of our brand equity. It's this iconic offering that folks see as synonymous with Jack in the Box. So we will be very cautious about changing anything associated with the tacos, including the price. But we'll continue to look at the competitive environment to look for opportunities to grow our menu offerings, not just tacos and also look at opportunities for tacos in the future. But in general, you can see as a brand equity that we'll be cautious to make any changes with it. Conrad Lyon - B. Riley & Co., LLC, Research Division: Fair enough. Got you. Okay. Last question. In terms of Qdoba leadership, who would you like to see in that spot? Someone that's more strategic, more operational? Any color on that end?

Yes. Let me just say that Gary Beisler is actually still active and involved and will stay in place until we have a successor. I can say the search is well underway. And what I'm looking for is a strong leader who really can build on the Qdoba success. So it's a great brand with passionate, loyal customers, great franchise community, and of course, employees. And so for someone who's a strong executive leader with a lot of experience in restaurant or retail business, I think it's a very exciting opportunity to take the brand to the next level. So we have a lot of very interested and highly qualified candidates at this point.

Our next question comes from Nick Setyan of Wedbush Securities.

A question on Qdoba. As you guys pursue more of an infill strategy, how have the newer openings, the newer Qdoba openings been performing relative to the system average and perhaps openings in previous quarters? And also if you can comment on sort of the unit level economics as well, that would be great.

Yes. Nick, what I would say is, and consistent with what we talked about at our Investor Day back in February, the restaurants that we open in the more mature markets, including those that we have bought back from franchisees recently, they tend to open up higher to the market, higher -- or closer to the market average, I should say, and get to that market average much more quickly than you would in a new or a developing market, which is precisely -- as you may recall that we talked about an overall balanced development approach, where we want to have a good mix of existing penetrated market development as well as new market growth. And that's why if you look at our guidance for '13, the restaurants of the company, they're roughly half in the more highly penetrated markets and about half in the new or developing markets.

Got it. And on the commodity front, you gave some great color there. Can you give us maybe the coverage through at least what month on the beef 50s and the beef 90s for next year?

Yes. We have no coverage on the beef 50s, which is typical. We do have, on beef 90s imports, I think we have all of our needs covered through January, and that's about it.

Got it. And just lastly, a follow-up on the health care conversation. You said that less than 20% of the employees offered have the -- actually accept coverage. So are you just assuming that the remainder, 80%, you'll just pay the $2,000 sort of penalty? Is that how it works?

No, no. We're required to have a plan that complies with the standards set by the health care law. And we will have such a plan. And we're required to offer that at an affordable price, and we will. But if the employee decides for whatever reason not to take it, it could be because they have coverage through their parents or through their spouse or perhaps they choose not to take it at all. And if they choose not to take it, they have to -- and they don't have coverage at all, they have to pay the fine, which starts out to be pretty low at $95, and I think grows over the next few years to $695 per employee. And they may find that, that's actually less expensive for them to do than it would be to pay for health care. But that's entirely them. And if they choose not to, they won't create any issue for the company.

Got it. My understanding was that even if they choose not to participate, that there was still a penalty that the company would have to pay. They pay a $95 fee and the company has to pay a $2,000 penalty. I may be wrong. I'm definitely not a...

Yes. I don't think that's correct. There is a fine, somebody will pay. You're right about that. If we don't offer it, it is a $2,000 penalty. And if we offer something that's not conforming, and by that I mean that it would cost the employee more than 9.5% of their earnings, then we would also have to pay for that. But if we offer something that is conforming both with respect to the coverage and with respect to pricing and they decline it, we do not have to pay a fine. At least, that's our understanding.

Our final question comes from Joe Buckley of Bank of America.

All right. I just had a follow-up. I wanted to ask if the competitive environment in your view has intensified in recent weeks. And also just a question on California gasoline prices. They spiked up, they're down pretty dramatically now in the last month. Do you see your business fluctuate at all with that? Or does it just not have too much influence on sales?

Joe, this is Lenny Comma. Let me comment on the gasoline prices first. I think that folks have become more accustomed to the higher price ranges for gasoline. So the spikes that we've seen in recent months haven't had the types of impacts that we saw or experienced in years past. And I would anticipate that as those have become -- or the gas pricing's come sort of more normalized at these levels, that we won't see as much of an impact of fluctuations in gas prices unless they were to find some new ceiling that we don't anticipate. So no impact to really speak of at this time. As far as the second part of your question on outlook...

That's really on competition, whether you've seen any intensification in recent weeks.

Yes. Joe, we've heard more than we've seen. So we've heard several other competitors talk about really going after value and focusing more on that and communicating more on that. But we're not seeing that hit the streets currently and certainly not to the degree that they have recently spoken about. So Jack in the Box will continue to do value the way we do, which is bundling and looking for those competitive offers that we can put together. But we won't try to compete on $0.99 or $1 menu as our primary focus. So we'll continue to keep an eye on that and continue to respond to it in Jack's way. But we're not seeing that competitive activity ramp up currently.

I think that concludes our call for today. Happy Thanksgiving to everyone and have safe travels. And we'll look forward to speaking to you in February.

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