Jack in the Box Inc. (JACK) Q2 2018 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Jack in the Box Inc., Second Quarter Fiscal 2018 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, Chief Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Thank you, Chris, and good morning everyone. Joining me on the call today are Chairman and CEO, Lenny Comma; and Executive Vice President and CFO, Lance Tucker. In our comments this morning per share amounts refer to diluted earnings per share and operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis, excluding gains and losses on the sale company-operated restaurants, restructuring charges, and the impact of tax reform on the Company's deferred tax assets as well as the excess tax benefits from share-based compensation arrangements, which are now reported as a component of income tax expense versus equity previously. Adjusted EBITDA represents net earnings on a GAAP basis excluding discontinued operations, income taxes, interest expense, gains or losses on the sale of company-owned restaurants, impairment and other charges, depreciation and amortization, and the amortization of franchise tenant improvement allowances. Our comments may also include other non-GAAP measures such as restaurant-operating margins, restaurant-level EBITDA, franchise margin, and franchise EBITDA. Please refer to non-GAAP reconciliations included in the earnings release. 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 those expectations based on risks to the business. The Safe Harbor statement in the 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 plans to attend Baird's Global Consumer Technology & Services Conference in New York on June 6th, Oppenheimer's Annual Consumer Conference in Boston on June 19th, and Jefferies' Consumer Conference in Nantucket on June 20th. Our third quarter ends on July 8th, and we tentatively plan to announce results on Wednesday August 8th after market close. Our conference call is tentatively scheduled to be held at 8:30 AM Pacific Time on Thursday August 9th. And with that, I'll turn the call over to Lenny.

Thank you, Carol, and good morning. As we reported yesterday, our second quarter results were in line with our expectations and we made significant progress towards creating an asset-light business model that is less capital expenses. Through the quarter, we completed the sale of our Qdoba business and began shifting our strategic focus solely to the Jack in the Box brand. Among reported other renewable highlights, our restaurant system surpassed the 90% mark of franchise ownership. We amended our credit facility to increase our borrowing capacity and we redeemed our stock buyback program which had a boost last week and our board reaffirmed its commitment to return cash to shareholders by authorizing an additional 200 million to stock repurchases. In addition, we added two key executives to my leadership team in Q2 including Chief Operating Officer, Marcus Tom; and Chief Financial Officer, Lance Tucker who you'll hear from in a few minutes. It was a very productive quarter which should position us well for the future. This morning, I'd like to review our top line performance during the quarter and what we're doing to drive traffic and sales in the back half of the year. I'd also like to share our priorities for the remainder of the year including some activities. Markets have identified strengthens our restaurant operation. Q2 system same-store sales decreased slightly while company same-store sales grew nearly 1%. Greater emphasis on value contributed to a sequential improvement in traffic during the quarter and an incremental improvement in under $5 transactions. The incremental improvement in those transactions was driven by two promotions in the quarter. The first was second iteration of our value Jack's way LTO that featured four items at the $1 through $4 price point. Later in the quarter, we shifted to a $3 bundle featuring three tacos and a drink that we're continuing to promote in Q3. We continue to see the impact of the value award which has been negatively impacted margins at many of our major competitors. At increasing the level of discounting, we chose to spend an incremental 1.5 million additional advertising in Q2. This protected our company and franchised restaurant level margins while avoiding the potential long-term consequences of training our customers to only come to us when we're offering aggressive deal. We were also able to protect margins in the quarter by balancing our value offers with premium products, including a new food truck series of sandwiches and our current LTO Cholula Buttery Jack, a line extension of our Buttery Jack burgers. Looking ahead, over the back half of the year, we have a couple of innovative products planned for the menu including a new offering that we've tested with great results. It's a snack item that will come in at a lower price point, but deliver a lot of food for the money. We will follow this up by promoting some of the differentiated items that we believe only Jack in the Box, which is a unique QSR player has the liking to promote. Major priorities for the remainder of the year include remodel, completing our refranchising initiative, expanding delivery in our mobile app, improving the consistency of restaurant operations, and updating our long-term strategic plan. As for delivery, it continues to generate an incremental lift in sales and we'll continue to expand that part of our business. We're now offering delivery in all of our major markets with two-thirds of our system being served by one or more delivery companies including DoorDash, Grubhub and as of the second quarter Postmates. We expect to continue to grow our footprint as our delivery partnerships expand their coverage in each of the markets including more rural areas. Moving onto our mobile app, we're expanding the test as it has been performing well. On average, we're seeing a higher ticket with mobile orders, and we continue believe we'll be in a position to begin rolling it out by the end of the year. One of our long-term initiatives is elevating the brand image in the restaurant remodel. Investment required will largely be tiered depending on sales level, meaning locations of lower AUVs will get less investment than those with higher AUVs. We believe these investments are critical to maintaining and improving our brand relevant. You'll see us in partnership with our franchises to implement this over the next four years. Moving on to refranchising, we're rapidly nearing completion of this important initiative. We sold 53 Jack in the Box restaurants to franchisees in the second quarter and 29 thus far in Q3. Our franchise mix now stands at 93% and we currently have signed non-binding letters of intent to franchisees to sell 17 additional restaurants, which will bring the Jack in the Box franchise mix to approximately 94%. I would like to share some observations and opportunities identified by our new Chief Operating Officer, Marcus Tom. Although, he's only been with us for about 90 days he has spent his time not only gaining an understanding of our operations, but evaluating the opportunity to accelerate performance going forward. Looking at the positive, he's been most impressed by our strong culture, the private employees displayed throughout all levels of the organization, our ability to deliver a very sensitive menu and our commitments to food safety. As for key opportunities, it's identified meanings to elevate and improve the consistency of training and brand standard and it needs simplify kitchen operation. We believe we can achieve simplification due to rationalization of redundant skews, replacing the single used equipment with faster and more versatile equipment, and by modifying or eliminating certain press step. The net effect to simplification will be a faster and more consistent guest experience. As we sought out our new COO, we were looking for someone with great leadership and operational experience combined with an owner's mentality. I believe we found this in Marcus and I'm very excited to see him hit the ground running. Lastly, we recognized the need to update you on our long-term guidance including the cadence of G&A reductions as well as EBITDA, CapEx, and free cash flow target. Let me start by sharing some light on how we plan to adjust G&A. Our desire to get our company in line with more asset-like companies and we expect to move quickly to this position as we roll off the transition services agreements we currently have in place with Qdoba. While in sale of Qdoba, Apollo has begun compensating us for the shared services that we're providing. There you'll begin to see a reduction in SG&A in the back half of the year, which is reflected in our lower G&A guidance. We understand the some functions are expected to transition within the next few months while others could extend through next year. As that happens, we will begin putting our go forward structure in place. To assist us in building a right structure to score our long-term strategic plans, we've engaged an outside consulting firm. We passed them with finding significant cost savings and efficiencies while also maintaining support necessary to drive growth. We're also in negotiations to sell one of our corporate support centers and consolidate our corporate offices in San Diego from two buildings into one, resulting in a reduction in utility and upkeep costs. We expect to be in a position to share our long-term guidance with you in connection with our earnings release in August. Before turning the call over to Lance, I'd like to take this opportunity to introduce him to you and share what I was really looking for in a CFO. I wanted someone who would come in with franchise mindset, curious about the ways that we could drive growth for our franchises, both in same-store sales and in new units. From my conversations with Lance, I really felt like he was the type of person which will approach the business with that level of curiosity. He was also the Chief Administrative Officer of a major public pizza chain, so he had a lot of experience beyond finance, and I wanted a person who can break those folks from various departments and have a great perspective on their part of the business. I think he is the great addition to team and I'm happy he chose to join us. With that, I'll turn the call over to Lance for more detailed look in the second quarter and an update on guidance for the year. Lance?

Thank you, Lenny, and good morning everyone. Let me start by expressing how very excited and grateful I am for the opportunity towards alongside such a strong management team to help grow the Jack in the Box brand for many years to come. Now, moving onto our operating results for the second quarter. Operating EPS was $0.80 as compared to $0.86 since last year. The decrease was driven primarily by the effect of refranchising, higher impairment charges and SG&A costs as well as our interest expense. These were partially offset by lower tax rate and reduction in the share count. Jack in the Box system-wide comparable sales declined $0.10 points for the second quarter to 90 basis points increase in company comparable sales was comprised of pricing of approximately 2.5%, slightly positive mix of 10 basis points and the decline in transactions of 1.7%. Franchise comparable sales declined 20 basis points in the quarter. Company restaurant level EBITDA margins increased by 250 basis points to 26.4%, the increase was due primarily to the benefit of refranchising which was partially offset by wage and commodity inflation in the quarter as well as higher maintenance and repair expense. Restaurant level EBITDA margin for the 138 stores, we currently intend to keep after refranchising initiative is complete, was 28.3% in the quarter. Franchise EBITDA increased by 9.4% to 57.3 million due primarily to the refranchising. G&A increased to approximately 2.5% of system-wide sales as compared to 2.1% last year. The increase was due primarily to a negative mark-to-market adjustment and higher incentive compensation. Qdoba results are shown as discontinued operations for all periods presented, including the Qdoba direct level G&A. However, shared service G&A which supports both the Jack in the Box brand and the Qdoba brand remained in continuing operations until the transaction closed on March 21st. Following the close, we have a transition services agreement in place with the buyer at which we are now being reimbursed for the costs related to Qdoba. In addition SG&A as a percent of revenue was higher by or due primarily to 1.5 million of incremental spending for advertising as Lenny has already discussed. Tax Act reduced our federal statutory rate from 35% to 21% effective January 1st, resulting in a blended statutory federal rate of 24.5% for the fiscal year. Including state taxes, our adjusted Q2 effective tax rate was 29.8%, which excludes the $0.02 impact from one-time adjustments related to the Tax Act. Our estimated tax rate for the full fiscal year will be approximately 29%, again excluding the impact of the one-time adjustments from the Tax Act. We repurchased 1.1 million shares of stock for around $100 million during the quarter and weighted average shares outstanding decreased by nearly 6% versus last year. With the additional 200 million authorization approved by our Board last week, we now have approximately $280 million available for share repurchases. In March, we announced an amendment to our credit facility which extended the maturity date by one year to March 2020. The amendment permits an extra half churn of leverage to 4.5 times. We view this is an interim step while we work with our advisors to evaluate longer term financing alternatives following the completion of our long-term strategic plan. Our leverage ratio was approximately 3.4 times at the end of the quarter. I'd like to reiterate that we're comfortable taking the leverage up to five times EBITDA and once we're at the critical steps of completing the long-term strategic plan and evaluating the various financing alternatives with our advisors, we'd expect to move quickly towards this new capital structure. In the second quarter, we refranchised 63 units bringing our full year number to 85. The year-to-date proceeds of $48.3 million with subs 31.5 million of short-term note receivable of which we've already collected 9 million. As of today, we are now 93% franchised. So moving onto guidance, as Lenny mentioned, we will provide updated long-term guidance along with our Q3 earnings release in early August. Our system-wide comparable sales guidance range for the third quarter is flat to up 1% through the first four weeks of the third quarter we are tracking within this range. Our fiscal year guidance in the press release is unchanged except for the following items which I'll point out. Based on our results for the first two quarters and taking our Q3 guidance into account, we've lowered our system full year comparable sales expectations to flat to a 1%. We expect G&A for the year to now be in the range of 2.3% to 2.5% of system sales with the lower run-rate in the back half of the year due primarily to the reimbursement of Qdoba-related support costs under the transition services agreements and partially offsetting our lower G&A expectations is incremental advertising spend in the last two quarters of the year, resulting in expected SG&A of 12% to 12.5% of revenues. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. Chris.

Thank you. And now we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Bittner from Oppenheimer. Your line is now open.

I understand you don't want to rush the long-term financial guidance, I get that. But it seems like you kind of have by this time a pretty good handle on the really important moving piece the ultimately drive. How you do think about the long-term earnings and free cash flow goals? So, can you just first just help us understand, what maybe holding you back at this point from giving us those targets sooner as opposed to waiting another three months?

Yes, Brian. This is Lenny. Keep in mind, the pace at which we roll off the TSAs will largely impact our ability to put the G&A and the structure in place there that we believe will drive the strategy going forward. So, we don't want to jump again on that. We also want to be in a position where we are fitted with the refranchise and also have an updated 5-year financial plan before we go out to look at debt going forward and how we would service that. So, there is some the pretty big moving pieces that we're not in a rush because we're not going to raise it up their target that at this point in time. We're not able to narrow to the point that really will make sense to investment community. I think as folks are looking at their model they certainly have an idea of some wide ranges as do we, but we're going to be really responsible about bringing the pieces together for the strategic plans before we go out with those details. So -- but we've got an outside advisor that we're bringing in to look at our structure, I will say that our company has been very good at reducing G&A and cost, and I'm confident we can do that going forward. I just want to be in a place where as we look at our business as compared to other asset-like businesses that we don't met opportunities to find efficiencies because we're caught in all paradigms. So I'd like to hear what they have to say before we move forward. And then my two newest executives, both my COO and CFO really just come out of training here in the last 30 days. I want them to influence this plan. I don't want to hand them a plan that they couldn't improve upon had they been the part of process. So, it's we're talking about one quarter that could set the stage for the long-term liabilities of the Company. Although, I know folks are anxious for that. I'm not going to be responsible enough to have two new recruits and outside partner to help about G&A, refranchising to complete, and rolling off the TSAs. All of that will be a largely settled or at least well understood over the next 90 days and put us in a much better position to give you better targets for the long-term and I think this is the right thing to do.

And with the new repurchase authorization that you announced yesterday, can we expect an ASO [ratable]? Or just in general more aggressive way to return this cash through the repurchases more in the near-term just particularly in terms of where its stock prices today?

This is Lance, so I'll take that one. For right now, we are likely to step with open market repurchase here, again, much of what Lenny just talked about. We need to work through what the new financing structure is going to look like. We are working with the advisories on that. We want to make sure we are in a good place with plan overall. But again, it's just about 90 days of lag here. So, we will be in the market and I won't go any deeper into it than that, but we will certainly be in the market by [indiscernible]?.

Brian, I'd just add if you look in the 10-Q when it comes out, you can see that we bought the entire 100 million worth in a four-week spend here in this last quarter. So, we can be in the market in different ways other than perhaps going to an ASR.

Just on the comp, I guess it sounds based on your commentary constitute to positive here in this quarter. But it seems as though you are still kind of at this negative gap to the industry. What you think continuing to drive the underperformance versus the industry? And where do we go from here as far as -- I know you have talked about the innovation and a good lineup for the back half for the year, but what really is going to drive a sustained mobility back to kind of this 2% range where you used to you guys campaign on historically?

Yes, I think the simple answer that really tells us, at least explains the gap to the industry is value. I mean at the end of the day what that marketplace today is very aggressive. We chose not to be as aggressive, but we have chosen to participate. We would like to protect margins over the long-term. We see other folks taking pretty sizable hit to the margins right now. And I have been saying for the long time, it's not sustainable and it simply isn't, if you look at these facts that these are all asset-like businesses primarily that have a large franchise base. You've seen lots of commentary recently on franchise margins. You've seen a lot of commentary on franchise health. I just don't think that businesses are being responsible for the strategy in place that essentially in a short-term make the corporations look strong, but in long-term it isn't sustainable as the franchisees can also be strong alongside you. So, we are just trying to take a balanced approach to that. We have been using more advertising dollars to drive the sales at this point time than discounting. But I think it's the better move to retain our equities because at the end of the day the consumer is choosing us for more than just value today, and I don't want to train them to believe that the only way to choose us is value. So, look at the balancing act, and we can turn on the juice but I just don't think that at the end of the day it's worth the squeeze.

Our next question comes from Chris O'Cull from Stifel. Your line is now open.

On the last call, you indicated quite a bit of confidence in the comp, so accelerating in the back half of the year with the introduction of some of these new products, some you mentioned I think in the script. So I'm wondering, if your expectation for these products is changed, maybe why the guidance was lowered for the full year?

Yes, really, the confidence in the back half of the year hasn't really changed very much. It's the result in the second quarter that came in lower than I would have like to see. At the end of the day, a little performance for example of the Buttery Jack, Cholula Buttery Jack, although it did bolster sales of the overall Buttery Jack line. We didn't see enough of that out of that individual product, and although we have some pretty good hits on the value side, again not enough to essentially be on a place where the map will work out. At the end of the day, if we are little stronger in Q2, I don't feel sales are just fine keeping guidance where it was for the year. But it's a little bit too much ground to make up and although and we're confident, how we'll perform in the back half of the year. I don't want to feel like we're throwing Hail Marys.

And then I believe the Company invested in a mystery shopper program for the system. Are there any initial reads on the data that you've collected from that program?

Yes, so a couple of things, the program first of all was put in place to really help the franchises, identify inconsistencies in our business, and we're seeing this, I mean it's essentially what we see is our weekend business, our late night business, and when it comes to the guest experience are the weaker parts of our business. So, there is an extreme amount of folks that needs to be there. We think some of that's related to management scheduling, the restaurant managers and other leadership being available during the highest day part and/or days of the week. And so, we'll be working with our operations to make sure there is an extreme focus on that. But our operators also give us some feedback that they started to see in terms of the details that they like to see us, really try to simplify the operation. And so, as I stated in my prepared remarks, the market has to identify a handful of things that although that wouldn't change the quality of the food that it could potentially improvement the consistency of the guest experience quite a bit. So that's a really what mystery guest was put in place to do and like identify the opportunities. We will keep it in place and so we start to see improvement and then we also have BOG and other guest monitoring programs we can use to make sure that we're sustaining that improvement, but this gives us a little more of a micro focus than we would have had otherwise.

And then just lastly, Lance, in the past the Company has provided with AUVs work for the stores. It plans to continue to own. Could you updated on the AUVs for those stores maybe like the last 12 months average?

Yes, Chris. I certainly will. Good to hear for me by the way. They are kind of in the mid-2s so 2.4 to 2.5 in that range.

Our next question comes from the line of Greg Francfort from Bank of America Merrill Lynch. Your line is now open.

It's actually John McIvor for Greg. I just wanted to ask on the cadence of refranchising and the back half, you mentioned 29 sold so far this quarter with 17 commitments. Should we assume sort of like last year where again you've been split between 3Q and 4Q?

Well, it looks like 3Q you will have more to focus. Obviously, we've got close on the deals, but we're getting close to not to these things now to feel like it will be skewed towards 3Q.

And then on a commodity side, I was just wondering where you're seeing inflation or deflation, is that impacting how your approaching value?

We think a piece of that and folks want to take some of what we're looking at as far as commodity. The commodities outlook we can add some color there, but it's really not what we tried our decision more than anything else, is the desire to balance our need to be competitive, with our need to keep the consumers having a relatively high pay rate on the premium items, on our menu. So we're going to guard against, training them to buy down while at the same time we have to have enough promotional activity in the form of discount to stay competitive and at least keep the competition within our sight.

Yes, I'll just add to that. In Q1, you remember we had inflation of over 5%, it was 3.6% this quarter. So the inflation in the back half of the year will be lower than it was in Q1 and Q2, and I think like most companies one of the biggest inflationary items has been potatoes for the entire year and that continues for most of our competitors as well as our self.

Our next question comes from Alex Slagle from Jefferies. Your line is now open.

So, a question as how we should think about the advertising strategy going forward. In terms of the creative, it looks like more about the brand and personality right from the food. And also if you can elaborate on the strategy to put more price points out there in front of consumers?

So, first, let me say, we really are still heavily emphasizing the product, but what we've done essentially is brought back some of the humor at Jack, moving into the ads, I think we had tapered that back me little bit too much, but the emphasis will still be on the foods and you'll see that going forward. And then of course the multiple price points, the multiple price points is really just it relates to what I answered in the previous question. We want to keep the competition in our sights. We'll periodically when we see what's going on the market place whether it'd be $4 or $5 bundles or multiple price points. We'll add to the noise and hopefully mute some of the effects that competitors get and also draft off of the some of those deals, but that's not our core strategy. Our core strategy is generally going to be bundling of what we believe to be items unique to the Jack in the Box menu like tacos with other items on our menu, and/or LTOs that are typically in the form either new -- completely new items or a live extension for example like the Cholula Buttery Jack. So, hopefully that give you a picture of what you can see from us going forward. And as I stated in the prepared remarks, one of other things we really want to focus on in the back half of the year, is more around new news. So we've got at least one time that'll be a line extension, so a product that's unique to Jack in the Box, it's not a sandwich and that we think that's going to be going to garner a lot of attention from the consumer. We've actually improved the product by adding even more protein to it, and we think the consumer is going to respond very favorably to it. And then the snack item is just a decadent item that is a lot of food for the money and sort of fits right into the price points that the consumer are attracted to right now, so we're doing it. Again more like Jack where they're unique, they're uniquely packaged. The price point is competitive, the quantity of food is significant, and it will -- it featured sort of a late night item, but available throughout the entire day.

Our next question comes from Andrew Charles from Cowen. Your line is now open.

Lenny, the implied guidance for 4Q same-store sales, the midpoint is around 2%, which is pretty much in line with the industry was thinking prior to today. So I'm curious what did you confidence that 4Q same-store sales improved from 3Q on a 2-year basis? You mentioned that 4Q is going to include a line extension of an item unique to Jack. Is this showing signs of stress markets and you're thinking a little bit more outside the box here, no pun intended. While balancing obviously you guys do balancing, what could be trends in headwinds from SKU rationalization?

Yes, so I don't think that the SKU rationalization is going to have a little impact fiscal '18. I think that's and even if we do inside the rationalization some of the SKUs. They will be largely not even noticed by the consumer. I mean it's, at the end of the day, when you help fresh that item of the business, one of the example that Marc has talked about the number of cheese offices we have with the number of bread SKU that we have, and you look at how many various bakery funds or cheese sauce we could have at the end of day. We can consolidate some of those without drastically changing any of the products which typically make it easier for restaurants to operate. So we're going to focus on that, we will do some test that signature, we don't ruin anything. But at the end of the day, it makes sense to do that will take a little bit of time. I don't think it will have significant impact this year. But as far as the confidence in Q4 and any type of acceleration here, the product that will expanding, a lot of time we promoted as we do get fairly high take rate on those products, and it's been quite some time since we've promoted it. And then again, how long we promoting the existing products those are line extension as well, so fairly confident it will perform well. And then also, we've got a little bit of a rollover effect associated with the hurricane last year that should also bolster the confidence to be able to leave the complements for us.

And then just around the new food, beneath the new equipment. Can you just give us a sense for how expensive of kitchen refresh is needed? And what level of investment will be required from the franchises? And is this something that you plan to partner with them or is there something that will be funding themselves?

Yes, so the franchises actually were the ones who initiated the conversation. Some of our franchises run multiple franchise offerings from competitors that are not necessarily to be entering in the QSR space, but certainly are in that casual and casual dining space. And then there is a quick efficiency that takes down in other operations, they're asking us to implement at Jack in the Box. So, we actually have once they close to 20, these are the equipments in franchise stores today. They're been embedded through our franchises. Our supply chain is looking at several alternatives to those pieces of equipment to see what works the best. We generally don't contribute to equipment when we're looking to maintain within the restaurant operations. So the facility in general with the remodel there is typically a contribution for equipment. We may help with some type of planning facilities or something if folks want to little bit helping that rate typically don't have a direct impression on equipment.

Our next question comes from Mary McNellis from Evercore. Your line is now open.

One just on the model, on the franchise expense, have you needed the completion of the refranchising strategy? How are you thinking about how that franchise expense ratio should book for fiscal 2018 and longer term?

This is Lance. I think we would probably cover that all once we get there at refranchising and give our guidance in conjunction with the fourth quarter release.

Fair enough, and on the comp side looks second half you talked about couple of internal factors that are giving you confidence in that outlook, but is there a guidance for the second half contemplate on the expectations for the environment to improve as well maybe behind some of the tax cuts they were implemented earlier in the year?

No, we haven't contemplated that although I'd absolutely love to see it.

Our next question comes from Robert Derrington from Telsey Advisory Group. Your line is now open.

Lance, along the line of the last question, around the franchise margin so the EBITDA margin. Is the mystery guest program was that the principal reason why the margins were lower year-over-year? Or was there something else?

Bob, impact it was a little bit over half of the variance and then the remainder which is kind of flat to down a little bit franchise sales just a small amount of deleverage, but really the big driver was in fact mystery sale program.

Is that a program that we should be expecting that you will continue on ongoing quarterly basis/

Yes, this is Lenny. We will continue to have some type of guests tracking system in place. We have always had a guest tracking system in place. And we will continue to have something in place really for the foreseeable future. It may not be this specific program and as we look at bringing down our G&A we would largely offset these types of investments with reductions in other places.

Lenny, if I may one last. As you look at the refranchising program I think you talked about roughly 94% after you complete the upcoming refranchising with the LOIs. Should we expect that, that essentially will bring the formal program kind of to close and there maybe some 1Z, 2Z as we go forward?

I think the answer of that question is yes.

Yes, I'd say Bob if -- and Lance's remark the commented about the 138 stores that we intend to keep that's really what we have been saying all year along. So that will get you right around 94%, but 1Z, 2Z can change that as well as really franchise openings over the next several years.

Our next question comes from Jeff Farmer from Wells Fargo. Your line is now open.

Just following up on earlier question. How effective it has incremental advertising benefit you guys in the past? And I think that's my understanding that you either just recently used incremental advertising or you plan to over the balance of the year?

We have used incremental advertising already and we will continue to use some not as much as we did in Q2. And I'd say that and I'd like it to be more effective than it actually was but I think it was the better decision because we essentially contemplated doubling down on some additional discounting or easing up the advertising and trying to bring more attention to broad range of products. And we chose path number two and that generally works for us and it did certainly help in Q2, but obviously if I would have got a little more out of it in Q2, it would help me to keep long keep the annual sales guidance in place and we did have to bring that down little bit. So I was like the little bit more out of, still believe it was right decision. We won't be as aggressive with it. We don't believe we will need to be in the last two quarters of the year.

And then unrelated, you did touch on it but in terms of I think it won't be as third of the systems been working with DoorDash or I think a little bit more than a year. What can you share with us in terms of sales lift, instrumentality, demographics, day part trends, any of that information you have one of the longest views into delivery for a quick service company versus your peers out there. And it would be very interesting to hear how you guys are seeing this business evolve?

Yes, so I'll say a few comments on that, it's something Carol also been very curious and interested in, so she may have a view in this as well. But in general, we do see that that delivery is largely incremental, and in order for this to make transfer, it needs to be largely incremental. The contract with the third-party providers really only work financially, if these are incremental sales. So I think we can check the box on that so far and we feel pretty good about it. Second thing, the consumer in all of our research is essentially not just in restaurants but also as you can see us in retail, they are redefining can be and delivery is I think it's here to stay I think for the foreseeable future one way or another whether it would be in the future drones or drivers vehicles. We will find a way for those it gets convenience as they need through some type of delivery mechanism. And so I would like to see the financial situation improved so that you don't necessarily need all of these transactions with the incremental in order to them as it makes sense, but right now it certainly wouldn't want to give this additional sale away and so, we're going to participate in this. For us specifically the two things that we really like is that we are getting a lot of activity at late night, which is something that our brand is known for and we also see that the average check it hires. As you go to similar things that are competitors have said so as you look at where the customers trend is it's sort of late night it's sort of the bigger purchase and it's attached to this net earnings for convenience or this higher take rates on the availability it can be in the marketplace today.

And Jeff, I would just say I think none of our competitors has shed specifics on what the sales lift is, but it was a contributor to our sales in the quarter. I would also say that because of the uniqueness of our menu that we serve anything on the menu, any time of the day, I talk to someone yesterday who had ordered a breakfast burrito at 9:00 O'clock at night. So I think that sort of menu variety and availability also plays into where Jack could differentiate our sales when everybody is doing delivery.

And just final question on delivery with across the three different platforms DoorDash, Postmates, and Grubhub, at this point I know you are working on it. But how many of those orders are placed through either a Jack in the Box site or app? Or are the majority of those orders still being placed through the third party's site or app?

Majority is still through the third party.

Our next question comes from the line of Jake Bartlett from SunTrust. Your line is now open.

Lenny or maybe Lance, the question is around the G&A and the shared services or the services you're performing for Qdobo. You mentioned that there were some of those that were going to last through '19 and then that affects your ability to cut costs. So I am wondering, I believe your prior guidance had been under 2%, but does that change the math or would that prevent you from cutting costs more materially in '19?

This is Lance. I'll start with it and then I'll let Lenny or Carol jump in if needed. So a couple of our bigger groups that are providing a lot of services are the ones that are expected to last longer on the TSA. They're just going to take longer. So things like your finance group, which obviously is intimately later we're there or at least getting there. From a cost standpoint, we're really largely being reimbursed in fact being pretty much fully reimbursed by Qdoba for those costs. And so from a P&L standpoint, I think you'll start to see and this is reflected on our second half guidance. I think you'll start to see some calls coming down with it really changed the timing of this. It's more of this --if there's personal changes that need to happen. Those would come down the road. So, Lenny I'll let you jump in if anything else.

Yes, we didn't get timing on the 2% or lower, as a percent of system-wide sales, but what we did say is we expect to move very aggressively towards that number. I would say that look at the end of the day, my desire is to get the Company in its go forward state as soon as possible, so that everyone's focused on Jack and we're operating sort of in the new normal. So, we're not going to wait too long to move on these critical steps and I do not think that the TSA is necessarily hold us back, it's just a matter of managing through to make sure that we're providing to Qdoba as the contract sells out the services that they required along the way.

So, I was on the impression that the TSA if that's we're calling it that was preventing you from cutting G&A this year more than you would have otherwise, and I am just wondering whether the effect of those continue in '19 means that you're going to cut less than you would have otherwise?

Got it, understand your question. The only thing that holds us back from cutting this year is we really want to get an outside perspective on where some of the big efficiencies could be gained, but if you look at the back half of the year guidance I think it would really reflect that anything we can or should be doing now we're taking advantage of.

And then a quick question on just the competitive environment and what's working out there? I mean one message that we've heard from some of your larger competitors is that, the balanced menu approach to kind of the high end, the lower both working. So are large competitors talked about actually the more premium thing which is doing a little bit better than they had before? I am trying to square that just with your experience and I am wondering whether with the Buttery Jack whether it's just a promotion that hasn't resonated and has maybe less to do with the consumer. I mean how do you square what we're hearing in terms of a high low working at large competitor versus what you're experiencing?

Yes, so we're still getting a pretty high take rates on our premium products, so that doesn't seem to be if any of the consumers are having a lower take rate of the those products for us, isn't there. We'll reach to the lower take rate if the transaction is under $5, which is really where most of our traffic has been lost. So, I guess the question I would have is, how do you -- how do the competitors square with significant deteriorations in their margins if they're getting a much higher take rate on premium products that really doesn't, it just doesn't add up.

And then last question. The remodel program with the 600. Just looking beyond that. It's been what 7-8 years since you're last and refresh and that was not a really full refresh, it was kind of a more limited. So I'm wondering, does the system need a larger refresh aside from the 600 that you're doing that are kind of you most need? Should we expect this 600 to be at the beginning and then you're just going into what would be in normal cycle refresh going forward?

Got it. Yes, I think when we look at the 600 we're addressing, there are significant issues with those facilities and so, not only if the investment much higher, but the urgency is much higher as well. When we look at the remainder of the sites, we certainly can't leave them untouched, but we have a fair number of newer buildings within the remaining mix that may not need a significant investment and certainly we're not needed we won't do it. And so, we will address that in our long term plan and the certainly a way that we'll look to do it to make decisions that are both productive for the franchises but also productive for the shareholder and the customer too.

Operator, can we poll to see if there any additional questions in the queue?

We're showing no questions at this time. [Operator Instructions] We do have one additional question coming from Jeffrey Bernstein from Barclays. Your line is now open.

Maybe one tactical question and one strategic question, maybe Lenny, it appears that at least on the Company side pricing is at the highest level in four quarters. Just wondering if the franchises were taking similar levels of pricing, and going forward, how do you achieve the right balance given the dogfight for traffic right now and the need to protect margins against labor inflation?

Yes, we typically on an annual basis showing price increases in the mid 2 percentile. We have not exceeded that for company ops, so we don't have any type of accelerated pricing activities or increased pricing activities for company ops this year. And with the sensitivity from the consumer we don't planned to anything that will be more aggressive than we already or typically do. And then for the franchises, a lot of what we're seeing there is also regionally based. So West is much stronger right now than the East, the East is almost 100% franchised and so a little bit of a shift from the mix of the stores that are driving the difference in comps as well, the geographic difference in the stores.

And Lance, congrats on the new role. Any perspective you can share with us in your brief time with the Company? It seems like many of the biggest initiatives to become more heavily franchised, more heavily levered where already quite well underway before you got here. Just wanted to get your perspective on what you see is the biggest remaining opportunities for value creation?

So I think it's been a relatively short step so far, so I'll hedge my bets a little bit about leading that way that I think creating value in QSR almost regardless of the brand around it is about driving cost without driving units. So I think what we need to do is make sure that we got a good unit economics model out there that works. Certainly, Marcus and his team are going to be driving that alone with the rest of team and then getting ourselves into position to grow a little bit. That is the biggest single opportunity that I see we are in 21 or 22 states, I'd say we need to turnaround and be in 45 states tomorrow but it would nice to get this thing over the right amount of time as the model has proven out as we get through some of this planning to [getting just] go again. So that will be the biggest single opportunity that I see.

Our next question comes from Chris O'Cull from Stifel. Your line is now open.

I just had a couple of follow ups. One Lenny, we have seen some other change has some success with franchisees consolidating the store base so that you have a larger operation with more scale resources to invest in the stores. Is this an opportunity or an area of focus for you for the Jack system?

So, let me talk a little bit about our franchisees base and I'll start with the answer, it's a not a focus for us but let me talk about why. Although, we have some very large franchisees today with 100 plus locations and lots in the 50 plus location range as well. Our franchisees largely come from a prior Jack in the Box employee base and have been with us for 20, 30, 40 years, and so, although they might be smaller they are in a position where these are essentially cash cows. They are not carrying any debt. They are making a lot of money on relatively high AUV location. And they are able to invest in location. Obviously when you have a bigger operator they have a little bit more financial wherewithal. We just don't see weakness associated with the size in our brand. If we see weakness, it's typically associated with these either operational execution or potentially geographic or competitive threats in that area. But it isn't necessarily related to size.

And then, is the Company able to track the franchisees guest transaction changes? And if so, how does it compare with the Company's transaction performance?

Yes, we are able to track it and I don't know that we have shared details on the differences between the two. Let me just talk about what or be safe to share at this point in time just because I hadn't thought about getting that granular and I don't want to jump the gun, but essentially when we tried to get experiences, we can see the things that drive consumer loyalty and we can also see things that drive transactions. As a result inaccurate orders, slow speed of service and rude treatment or not being friendly are really big drivers of dissatisfaction. And I'd say that look whether its company or franchise, we see a similar percentage of restaurants that underperformed in those areas that I mentioned. So on the flipside, we do see that where we get the better, the higher levels of guest performance consistency of treatment of the guest and also speed of service and service times being lower, we do see higher transaction. But I would say in general when I relate transaction, this single largest impact on transactions has been the decisions that either we or franchises have made related to price. And that's really what has been the bigger driver of any disparity across our change in transaction.

Operator, I think that's all the questions that we have in the queue, so we look forward to speaking to you all here on the road in June or on our upcoming call in August.

And that concludes today's conference. Thank you for your participation. You may now all disconnect.