Jack in the Box Inc. (JACK) Q1 2019 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Jack in the Box Incorporated First Quarter 2019 Fiscal 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 Web site 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, Amber, 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 or losses on the sale of 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 from the sale of company-operated 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-level EBITDA and franchise EBITDA. Please refer to the non-GAAP reconciliations included in the earnings release as well as the prior year results recast for the adoption of the revenue recognition accounting standard. 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 Web site at www.jackinthebox.com. A few calendar items to note this morning. Our second quarter of fiscal 2019 ends on April 14 and we tentatively plan to announce results on Wednesday, May 15, after market close. Our conference call is tentatively scheduled to be held at 8.30 AM Pacific Time on Thursday, May 16. And with that, I’ll turn the call over to Lenny.

Thanks, Carol, and good morning. Before reviewing our first quarter performance and providing some perspective on the future, I want to briefly address our December announcement that our Board of Directors and management team with the support of legal and financial advisors are exploring a range of strategic and financing alternatives to maximize shareholder value. These alternatives could, among other things, include a sale of the company or executing on our previously announced plans to increase leverage. Our Board has not set a timetable including this process nor has it made any decision related to any strategic or financing alternative at this time and we do not intend to comment further on this until it is appropriate to do so. Now, let’s move on to our first quarter performance. All-in-all, it was a pretty solid quarter for us and we’re pleased with how we’re positioning the brand to execute on our long-term strategy. As I mentioned during our call in November, the quarter got off to a slow start with system same-store sales tracking down 1% to 2% after the first seven weeks. After the majority of our system pivoted to a more value-oriented approach, same-store sales turned positive the remainder of the quarter. Historically, our primary marketing event at the beginning of Q1 is a premium product. So we chose to go with the formula that’s worked for us in the past and the strategy that our franchisees have grown accustomed to. The 100% Ribeye Burger was a great product, continue that tradition. But we’ve learned that in the current environment, we must promote our premium products along with competitive bundled price points in order to be successful. Value for us is different than what others are selling. Unlike many competitors, we continue to avoid deep discounting, which we believe is not in the best interest of long-term health of the brand, particularly in the face of rising labor cost. At Jack in the Box, value includes items on our permanent value menu like Two Tacos, the Breakfast Jack and Junior Bacon Cheeseburger, as well as margin-friendly combos and bundled products priced below $5. Even a $6 Munchie Meal is value priced considering everything that comes with it, non-tray fries, drink and tacos. Last year, half our marketing calendar featured promotions that we would define as value priced. For fiscal 2019, more than 80% of our marketing calendar features value-priced promotions. Along with our marketing calendar, it’s imperative that we evolve our brand in other areas to meet the ever-changing needs and behaviors of consumers. Earlier this month, we chose not to place an ad during the Super Bowl and instead invested in a social media campaign that still made us part of the conversation before, during and after the big game, while generating a lot of attention for our Super Jack’d Monday box and our partnership with a leading delivery service DoorDash. Expect us to continue bucking convention and targeting advertising dollars in non-traditional media to reach our core customers, wherever they may be focusing their attention. Speaking of DoorDash, delivery continues to generate an incremental lift in sales in Q1 with sales growing an additional 30 basis points in the fourth quarter. The average check for delivery order is consistently higher than other dining modes with nearly two-thirds of all delivery orders placed during the dinner and late-night dayparts. More restaurants began working with delivery services in Q1, including a new delivery partner we added in December Uber Eats. At the end of the quarter, over 85% of our system was served by at least one delivery service. Guests can also now place orders to pickup through our new app, which we launched in the first quarter. Already more than 100,000 unique users have placed at least one order via the app, and we’ve begun partnering with Apple Pay to enable guests to securely pay for their in-restaurant orders using their iPhone or Apple Watch. Our marketing outreach and use of technology are great examples of how we’re investing in areas that can grow sales, improve operations consistency and maximize our returns. This mindset is at the core of our long-term strategic plan, which balances the interests of all our stakeholders including franchisees, employees, shareholders and our guests. To improve operations accuracies via service and consistency in our restaurants, we’re simplifying operations by reducing redundant SKUs and streamlining operating procedures. We’ve been testing menu deletion and modified operating procedures at about 180 company and franchise restaurants with no detrimental impact on sales from the deletions or changes. Based on test results, we plan to roll out the final program across the system beginning this summer. We believe that our expanded use of technology and efforts to simplify restaurant operations help improve efficiency and consistency and help us meet consumers’ expectations for a near zero wait time. Finally, we’re targeting investments in restaurants where we can optimize returns like remodeling many of our oldest locations and enhancing the drive-thru experience. Improving our restaurant facilities is one of the best ways to ensure repeat guest visits. More than 50 restaurants have been remodeled since beginning of last year, including 12 that were remodeled in Q1 and construction is under way at 17 additional locations, all franchise. As far as drive-thru of the future initiative, throughout most of fiscal 2019, we’ll be testing the initial elements of what we expect to be a major overhaul of the drive-thru experience. We plan to begin rolling out these enhancements across the system later this year. By the end of fiscal 2021, we believe that we can touch more than 80% of our systems. As we pursue our plans for improving sales in the current hypercompetitive environment, we intend to do so in a way that drives profitability at franchise and company restaurant. Just last week, at our most recent series of road shows, our executive team and I met with more than 80% of our operators and discussed with them how we can collectively drive success throughout the brand. As I mentioned earlier, we’re starting to see some traction in the form of increased sales. We’re hopeful that as our franchisees experience these benefits, they will increasingly participate in and reap the benefits of this strategy. With that, I’ll turn the call over to Lance for a more detailed look at the first quarter and expectations for the full fiscal year. Lance?

Thanks, Lenny, and good morning, everyone. I’ll provide an update on our first quarter operating results and our performance so far in the second quarter. But first as a reminder, effective this year, we adopted the new revenue recognition accounting standard which adjust the timing of recognition of upfront franchise fees received from our franchisees. In addition, it grosses up revenues and expenses related to marketing fees received from the franchisees and also under this standard, certain amounts previously classified as G&A are now reflected as franchise expenses. Beginning in 2019, we also adopted the new pension accounting, which moves certain costs related to pension expense out of G&A and into a separate line item on the P&L. Neither of these new standards will have an impact on cash. We will compare this quarter’s results to recast 2018 figures where appropriate given these two accounting changes. Please refer to the press release for more detail pertaining to these adjustments. And now, let’s discuss first quarter results. Operating EPS for the first quarter was $1.35 as compared to $1.23 last year. This 10% increase was driven primarily by lower G&A costs, the impact of tax reform and lower shares outstanding, which more than offset dilution from refranchising. Our system-wide comparable sales decreased 10 basis points from the first quarter. Company comparable sales increased 50 basis points comprised of pricing of approximately 2.6%, while mix increased 1.2% and transactions declined 3.3%. Franchise comparable sales decreased 10 basis points for the quarter. We were pleased with the turnaround in sales within the quarter. As Lenny mentioned in his comments, our sales got off to a bit of a slow start but by transitioning to more value-oriented offerings in the $4.99 BLT combo, our sales turned positive. Company restaurant level EBITDA increased by 20 basis points to 26.2%. This increase was primarily driven by the refranchising and was in line with our full year guidance of 26% to 27%. Franchise EBITDA increased about $6 million in the quarter when compared to last year’s recast figures, due primarily to refranchising. Rent and royalties were both 9% higher than in the prior year. G&A in the first quarter decreased to approximately 1.6% of system-wide sales as compared to 2.2% as recast for the prior year. This $8.4 million decrease was driven by $3.7 million in transition services income related to the sale of Qdoba, which is reflected as a reduction in G&A. In addition, G&A benefited from a $3.3 million decrease in incentive compensation, a reduction in share-based compensation and workforce reductions related to refranchising. These decreases were partially offset by mark-to-market adjustments and an increase in legal fees. Advertising costs which are included in SG&A were 7.2 million in the first quarter compared with 8.8 million in the prior year. The $1.6 million decrease was due to a $3.6 million decrease from refranchising, was partially offset by incremental advertising spend of $2 million in the quarter. This incremental contribution helped to support the $4.99 BLT combo message throughout the quarter. At this time, our guidance does not anticipate further incremental company contributions to the marketing fund. While our tax rate expectations for 2019 remain between 26% and 27%, our first quarter tax rate actually came in at 23.1% due to a $1 million reduction in state taxes recorded in the first quarter. Statutory federal rate for fiscal 2019 is 21% as compared to our blended statutory federal rate of 24.5% in 2018. We did not repurchase any shares of common stock in the first quarter due to the strategic alternatives process. We currently have approximately $101 million available for share repurchases. And as of the end of the quarter, our leverage ratio was approximately 4x. We opened nine new restaurants within the quarter, all of which are franchise. We remain on track to achieve our full year guidance of 25 to 35 new restaurants in 2019. Now on to second quarter performance and our full year expectations. So far through the second quarter, system same-store sales are approximately flat despite record snowfall in the Northwest. We have seen trends improve over the last couple of weeks with the introduction of our $4.99 Sourdough Patty Melt Combo and the $4 Fish Sandwich Combo, as well as the weather in the Northwest normalizing. We reaffirm our full year guidance for 2019, including same-store sales of flat to up 2%. Please refer to the detail of our full year expectations in the press release. Our adjusted EBITDA expectation remains between $260 million and $270 million. As a reminder, our EBITDA sensitivity for 2019 is as follows. We estimate that every 1% change in company same-store sales impacts EBITDA by just over $1 million and every 1% change in franchise same-store sales impacts EBITDA by just over $4.5 million. Every 50 basis point change in company restaurant margins impacts EBITDA by approximately $1.5 million and every 10 basis point change in G&A as a percentage of system-wide sales impacts EBITDA by approximately $3.5 million. As Lenny mentioned earlier, we continue to evaluate strategic alternatives. If the alternative chosen is to increase our leverage as was previously planned, we will do so as quickly as it is practical on the conclusion of the strategic alternatives process. At this time, however, we cannot say with certainty whether this will occur in the first half of fiscal 2019 as has been previously communicated. That concludes our prepared remarks. I’d now like to turn the call over to our operator to open the call up for questions. Amber?

Thank you. Due to time considerations, we ask that you please limit yourself to one question and one follow-up per turn. If you do have additional questions, you may re-queue at that time. Thank you. Our first question will be from Brian Bittner of Oppenheimer. You may proceed.

Thank you. I hope you guys can hear me okay. My question is, as the Board evaluates whether to create value by either sale or create value by staying public and executing against the long-term plan, how do your sales trends play in this evaluation process? Based on Lance’s comments, it sounds like sales are positive currently. If there’s anything you can say on that point, I’d appreciate it?

Hi, Brian, not too much we can say about that. But we’ve obviously been through a similar process with evaluating strategic alternatives for the Qdoba business at one time. And what I can tell you is that the Board will be very careful to not only compare the alternatives outside of what we’re currently doing in the publicly traded markets and what our current performance is, but they’ll also evaluate execution risk as one of the things that they’re going to need to dig into to figure out what the best option is. And then make what they believe is the overall best decision for the brand. So I know that process will follow, but ultimately beyond that couldn’t comment on how they’ll actually weigh out those risks and options at this point in time.

Okay. Just the follow-up question is what are the top two things Lenny you think you need to change or initiatives that need to take hold to start narrowing your sales gap versus the industry, or should we all just assume it’s unlikely to narrow in this – until this value environment eventually softens at some point?

I think if you take a look at the remainder of the year calendar and the fact that now we’ve got over 80% of our remaining calendar targeted towards value-oriented promotions; that is probably one of the key things that we executed this time. And what we’re seeing is when we do bundled value along with the sort of indulgent sides and snacks that hover around $3, we’re actually finding a fair amount of success doing those things. And so I think between finding the smart way to participate in value and then also improving the consistency of our operations, which I think can be fueled by some of the simplification and efficiency measures that our new COO has put in place, I think those are the top two things we can do right now. I believe that the organization is not only doing some of those things today, but the plan that we would be implementing throughout the remainder of the year I think will only make that stronger.

Okay. Thank you.

Thank you.

Thank you. The next question will be from Jeffrey Bernstein of Barclays.

Great. Thank you. Lenny, you mentioned that I guess at some point over the past couple of months, you met with I think greater than 80% of your operators. I took that to mean I guess kind of your entire franchise community. So I’m just wondering bigger picture kind of how you think about those relations? Obviously your success and the team’s success is based on theirs. And I’m just wondering what you see as the, maybe the biggest new initiatives to improve those relations obviously beyond comps, which tend to help?

Yes, I think – look, I’ll address the last part you stated first, Jeff, and that is that comps help to build a lot of great relationships in this business. So I think our number one priority is comp and it’s also driving profitability for our franchisees, because more so than anything that’s what they need right now. And we’re sensitive to some of the business pressures that they are experiencing, some of the pressures we’re also experiencing in our company, our business. So our focus will essentially be twofold. One, it will be to drive sales and profitability for our franchisees; and two, to spend as much face time with our franchisees as possible, helping them to understand what’s going on in the industry, how specifically our business can respond to industry and other pressures positively. And I’m hoping that they will take those interactions and the facts that we’re sharing along with those interactions to heart and use those things to make rational decisions going forward. I don’t think that when you have strained relationship, you can fix it overnight. But I do think that profitability, sales and an open dialogue and face time are going to be key to our success. So our management team is committed to that. We’ve already done three of these road shows this year. We expect to do several more. And so I think with the success that we’re experiencing right now and with the open dialogue, I can only anticipate and hope that things will continue to get better.

And on that front, presumably in talking to those franchisees, remodels clearly help and obviously that requires investing back in the business. I think you mentioned you did maybe 50 remodels over the past year. I’m just wondering what the franchise acceptivity is to something like that, whether there is acknowledgment that that would help or whether maybe it requires some incentive on your part or how we should we think about the timeframe of the rollout of these remodels? Thank you.

Yes. So today, we have a remodel program in place that really targets the oldest 600 locations in our chain. There’s about 150, maybe just north of 150 of those that for sure will be touched with some type of capital investment that will improve the sites. The remainder of the sites have some optionality as to what level of investment the franchisee would like to put into those businesses or not. But I think the way that I would look at this holistically is that the business for us is primarily through the drive-thru, with 70% of our business flowing through that channel. And then when you look at the remainder of our business, there is a dining room, about half of it is takeout. So if I were to look at our strategic priorities, I’d say the drive-thru enhancement is probably the number one area of focus for capital investments. And then a more holistic approach to investing in the entire facility I think is met with a mixed bag from the franchise community. Some are anxious to remodel their entire sites and they’re experiencing a significant amount of success in driving sales and profitability and getting a nice return on those investments. And now they’re a little more hesitant to make that type of investment or a place a bet that big. And so I think we’ll be really careful to target their investments first in the drive-thru where we believe will be the most efficient investment. But then secondly, as we look at the remainder of the facility, we’ll need to make sure that the size of the investment and the targeted areas of the facility that we invest in are things that our franchise community is largely bought into. So again, right now, we have a drive-thru initiative that addresses the entire system that is currently being tested and we would expect to finalize that test later this year and start to move into a rollout mode. But for any more significant investment in the entire facility at this point, we only have a program in place for the oldest 600.

Understood. Thank you.

Thank you. And our next question will be from Jeff Farmer of Gordon Haskett.

Thank you. The promotional pivot to a greater value in the mid first quarter did drive that improved same-store sales. But was that improvement driven by increased traffic? Did the check go up or was it a combination of both?

This is Lance, Jeff. So I’ll start with it. Both traffic and check did increase when we made that pivot.

Okay. And then unrelated, any additional opportunities or opportunities as it relates to regional menu pricing structures, given that growing spread in wage rate levels from state-to-state, any opportunity there to price a little bit more specifically state-by-state?

What I would tell you is when we evaluate pricing state-by-state today, particularly in a mode where we’re largely franchised, we already see that the franchisees have made adjustments to price that are regionally based. So if you look at California pricing versus, for example, pricing in the Midwest or Southeast, you’re going to see some pretty big disparities. But those disparities are largely in alignment with what we see from the competitive set where their franchise bases are also taking similar price increases. Labor is probably the biggest driver. With average wage going up, it’s not a biggest driver of that increase in check.

Okay. Thank you.

Thank you. Next question is from Gregory Francfort of BAML. Your line is open.

Hi, guys. I just had two quick ones. One is, is there any weather or calendar shifts in that quarter-to-date number that makes sense to call out? And then the other question I had was, I think one of the maybe issues with the franchisees was around the Chief Marketing Officer position and the leadership there. And any update on a search or sort of – I think the last time you had spoken, the plan was to kind of split the responsibilities across the two individuals in that role right now. And I guess I’m curious what the plan is on that position?

Greg, it’s Lance. I’ll take the first part of your question and then pitch it over to Lenny for part two. So as it relates to quarter-to-date sales, there has been unusually high snowfall in the Northwest that has had an impact on us. That’s just under 10% of our franchise sales. And so while I’m not going to put an exact number on what that impact has been, certainly we would have been positive without that snowfall. And now that the snowfall and the weather has eased a bit, our trends have improved in conjunctions with the offers that we put out there. There have also been heavy rains in California as you’re aware. That’s such a big part of our system. We are not calling that out separately other than to tell you that it’s probably slowed things down a little bit. Again, I’m not going to try to put a number on that though.

Greg, just to comment on the CMO search, we’ve been active with the search. Let me give you a little bit of feedback on how we’re addressing it and what we think is important. First off, from the standpoint of just evaluating leadership within the company today and whether or not I have a solid base of leadership to drive the marketing front, I have that already. So there’s zero desperation or anxiety around a need to bring a CMO in at this point in time. In fact, I would say that the two leaders I have in place that are running marketing today are equivalent to just about everyone that I’ve bought in here to interview for the CMO position. They sort of match up with a more traditional CMO within our space. And I’d say what I have today that the individuals who are leading have a little bit more of a progressive knowledge base, particularly when we look at the activities around social and digital media and the need for a greater emphasis in that space and also a need to be significantly more agile around not only product – new product development, but also within the quarter potentially pivoting to new promotional activities. So what I have today is two leaders who are probably more agile and more knowledgeable of what I need than what I’ve been seeing in the marketplace. So when I look at who should join our team as a Chief Marketing Officer, they’re going to need to bring an incremental set of skills to the team that largely is going to be around communication, digitally and socially, and that’s not prevalent in the industry today. What I’m seeing is a lot of folks who have a lot of traditional knowledge. So I’m going to hold out for someone who can be additive. And until I can find that, I’ve got more than enough talent to lead this organization right now. So we’ll approach it that way. We’re not in rush. We want the right person versus just a figure head. I know there’s been lots of questions around that, maybe an assumption that in some way, shape or form we’re lacking. But I would just say when we look at our sales performance and the adjustments we’ve made in our strategy and the way we approach the business, I think it’s more than clear that I have confident leadership in place.

Thanks. I really appreciate the thoughts.

Thank you. Our next question is from Alex Slagle of Jefferies. Your line is open.

Thanks. I wonder if you guys could talk a bit more about your underperformance versus peer group and why you think it’s getting wider. Clearly, there’s a good bit of discounting across the industry. But is there something else also driving the share loss, perhaps competitors more focused on certain dayparts like breakfast or late night or something else you can put your fingers on?

Yes, Alex, good question. I think and you probably heard this from, or read about it as others are assessing this. I think value is probably the number one situation that we’re dealing with. There may be small increments of impacts in other places in our business. But the most significant thing that we’re dealing right now is the amount of value in the marketplace. When you look at who’s winning, they’re essentially doing one of two things. They are selling a lot of à la carte items very cheaply and they have a lot of brand equity in that space where the consumers come to know them for those value-oriented offers where the consumer can stretch their buck, or they’re selling abundant value where it is a significant amount of food for the dollar. And when we look at the value consumer, those are the two places that they play. And I think oftentimes, we look at the business sort of in categories, how is QSR versus fast casual versus casual dining. But when you look at it as just one industry, what you’ll see is that abundant value and cheap à la carte items are actually prevalent across all segments of our industry. And when it comes to the value consumer, we’re all actually competing against each other. So where the share is being lost, it’s being lost to those players who I think are speaking loudly and playing well to the value-oriented customer. That’s who’s winning today. And those of us who are trying to sort of walk the fine then, not going too far into the value space, but at the same time not losing too much ground, we’re giving out some transactions right now as those value consumers are going elsewhere. But I think Jack in the Box is making the right decision long term to attract some of those customers back with our abundant value and add-on strategy, while at the same time not eroding the brand’s equity. So I think that’s probably the right space for us, but certainly would expect those who have a significant amount of equity in the value space to continue to push on that while it’s proving to be successful for them.

Great. And is the higher mix – menu mix in the quarter, is that more a function of a focus on add-on types in that $2 to $4 range, maybe you’re seeing more frequency?

One of the things that we’re seeing – when we do the add-on strategy, which really is sort of this indulgent snack or side item, behaviorally what we see from the consumer is that they will oftentimes buy à la carte as that snack or sider or even value-oriented thing. But more often, it’s actually an add-on to some other combo or entree. And so it tends to be an average check driver when we see that behavior from the consumer. And essentially what we’re doing is, we’re giving – if you look at our brand equity, I’ve talked about this before, we are an odd company in that half of our brand equity is associated with the value-oriented consumer and the other half of our equity is associated with the more craveable, indulgent desires from consumers. And so when we put the indulgent snack or side out there, the value consumer has a high take rate, because it’s cheap, but the more crave-hunting consumer takes it as an add-on, because they’re not so price-sensitive, they’re just looking for that indulgent item that fills that need. So we kind of play in two spaces there. And again, it’s an interesting dynamic for us as a brand. We’ve been able to bring things into the marketplace that maybe others QSRs have not been able to and we’ve been able to do that successfully because of this equity around craveable food. But at the same time, half of our consumers are value-oriented and we’ve got to present something to them, or essentially it will erode that part of our business.

Thank you.

Thank you. Next question is from David Tarantino of Robert W. Baird. Your line is open.

Hi. Good morning. Lenny, just a couple of more questions on the value strategy. I know it’s helping the same-store sales, but can you comment on whether those offerings are accretive to profitability as well?

Yes. So let me start with – the answer to your question is yes, they are accretive to profitability and its profit dollars that we’re seeing flowing through to the bottom line at a greater rate when we initiate this. And so we spoke about in my prepared comments that we’ve been out speaking to over 80% of our franchise system in the recent round of road shows. And I said earlier in the Q&A that I would anticipate and hope that our franchisees would pay attention to the facts that are being presented more so than potential politicizing of agendas. And what we went out to share with the franchisees was just that. We shared the pivot that we made to the BLT combo and we shared the specific results that it drove in sales and transactions, and more importantly the incremental profitability associated with it. So I would hope that they’ll pay attention to that. I think that at the end of the day, money talks and that’s really what we’re out to share with them. So we’re – we feel like it’s the right strategy. We don’t see a huge negative impact to our margin rate, while at the same time we do see a nice positive impact to our margin dollars.

Great. Thank you for that. And then on the operation simplification tests that you’re running, I know you mentioned there hasn’t been a lot of pushback on sales. But can you elaborate on what you think the big benefits of that will be and what you’re starting to see in tests either from an execution standpoint or a sales standpoint?

Yes, so a couple of things. First to note, oftentimes when you do tests, particularly if you’re doing tests in company operations, there’s always the sort of industry question around will company operations give you the type of feedback that you really need, because they sort of oftentimes aim to please. Let me say that within the 180 stores that we’re testing, the vast majority of the stores are franchise and actually the benefits that we’re looking for there is an improvement in speed of service, accuracy and reduction in waste. And our franchisees as well as our company stores that are involved in the tests are very pleased with how much easier we’ve made it for their crews. And as a result of that ease, we’re seeing certain products sell at a higher rate. We believe that’s because the crew buy-in [ph] is there as we’ve made those product or products categories easier to implement. And then the redundant SKUs that we’ve reduced have really worked favorably to reduce our waste and make it easier for the crews to execute. Because oftentimes, they’re making mistakes and the setups or the individual sauce bottles or ingredients are still similar that they end up putting the wrong ingredient into a product. So it’s been received very favorably by the field. And back just yesterday, I met with a cross-functional team that gave the plan its blessings so that we can move forward right around the July timeframe with implementing this throughout the rest of the system. But again, speed of service, accuracy, reduction in spoilage and really just making the job easier for the crew so that we can reduce turnover, crew turnover and make their work experience more positive, those are the type of things that we’re after.

Great. And just to be clear on the speed of service side, is that translating to higher transaction growth or better transaction growth or are you not seeing that yet?

We’ll say more about that when we get closer to implementation. But what I can say is that in all the areas that we’re looking for improvement, we’re either seeing that we are improving, or at a minimum we’re not getting any worse.

Great. Thank you.

Thank you. Next question is from Chris O’Cull of Stifel. Your line is open. Chris O’Cull: Thanks. I just wanted to get some clarification on the last comment, Lenny, about the margin comment with the – regarding value. How did the store-level margin percentage change after you guys pivoted to value during the quarter?

Chris, this is Lance. Not going to put an exact number out there, but I can tell you that margin percentage change was very slight, whereas as Lenny mentioned rather, the dollar margin actually were – I’m not going to go so far as to say significant, but certainly they were nice improvements. Chris O’Cull: Okay, that’s helpful. And then, Lenny, I appreciate the improvement in the comp from offering more bundled value. But do you think the core menu or maybe categories within the menu have a value perception issue? And if so, are there any plans to maybe address that issue?

I think as I look across the menu, probably the chicken category is one that I think needs to be addressed. And I shared some of that with the franchise community when I sat with them as well as other folks on my team. Essentially, if I were to look at how we’ve treated chicken over the past, call it, 10 years, the truth is as we refranchised a lot of businesses and franchisees have taken these operations with now a need to pay royalties and rent, they need a way to immediately balance out that purchase and generate the type of profitability and return on investment that they would expect. And in large part, we’ve taken price pretty aggressively in the chicken category. And so how that translates for us, we’re obviously not a huge chicken player, but we do sell a lot of chicken sandwiches. But what it means is that a few offerings within the chicken category really generate the majority of the sales. I think if we were to reevaluate the chicken category and get it to sort of a right size and price and right offering, we could potentially generate a nice increase in that category. So I’ve been working with my product marketing teams to really start to investigate what we can do to overhaul the chicken category. We’ll be doing some things later this year in the form of some promotional activities that LTOs that touch on chicken. But I think that the way we will approach that will actually teach us a lot about what can be achieved in chicken. So stay tuned for that. But at the end of the day that would be my area of focus where I think we have the most significant opportunity for improvements. Chris O’Cull: Great. Thank you.

Thank you. Next question is from Andrew Charles of Cowen and Company. Your line is open.

Great. Thank you. Lenny, in your conversations at franchisee road shows, what were the most constructive takeaways the franchisees offered you to help improve relations? Certainly a profitable improvement in sales is most desirable. But did you get feedback on ways to tangibly achieve this?

Yes, I think – I would say that there’s really a couple of different camps within the franchise dialogue. There’s sort of one camp that says, hey, look, we’re just – we want things to be the way they were, we want to promote premium items and we want to innovate against premium items. That’s been a core part of the strategy. We’re concerned that we’re potentially not going to do enough of that. And I think that group is probably most vocal about what they want and the way they want it. And I don’t know that those conversations, quite frankly, are all that productive, but they’re necessary. I think there’s sort of another camp that looks at the current business environment, they look at what the competitors are doing and they look at how Jack in the Box has I think arrived at an elegant solution to sort of walk a fine line between value and premium and to get in the marketplace and compete, while at the same time protecting the long-term brand equity. And I think those individuals understand what we’re doing. And although they’re feeling business pressures, I think they’re appreciative of performance improvements that we’ve started to experience. And so they’re signing up to participate in that. What I think we need to do to make the dialogue productive regardless of what camp a franchisee falls into, is present compelling business cases around what we should be doing and helping the franchisees to be the type of performance expectations they can have with those very strategic initiatives. And as a result of that dialogue, hopefully get everybody sort of realigned to what we should be doing as a brand. So look, I’m committed to that. I’m spending the face time with the franchisees and there are times that that goes very smoothly and there are times that that is less smooth. But at the end of the day, I think it’s my responsibility to be in front of franchisees fostering an open dialogue and trying to make improvements around the relationship, which I think are largely going to be connected to performance. And so at the end of the day, performance is going to be the number one driver of this.

That’s helpful. And then you guys talked about the slight improvement in margin dollars for the value initiatives. Are you embedding a more material improvement in margin dollars to sort of help reach longer-term remodel targets?

Andrew, it’s Lance. Most of our remodel targets are based largely, if not solely, on sales increases and don’t really build in a big margin impact as some of those sales improvements may be contingent, as Lenny has spoken to, on the way we offer value and the way that we are responsible with how we go to market. But as far as margin improvements themselves, those are not required in order for us to hit the return requirements we have set.

That’s helpful. Thank you.

Thank you. The next question is from Dennis Geiger of UBS. Your line is open.

Thanks for the questions. Lenny, wondering if you could touch a bit more on the initiatives to drive comp in '19 as we think about where we consider trends moving potentially towards the midpoint of the full year range. And just what might be impactful this year beyond the bundled value and beyond the consistency of operations that you highlighted. I guess anything you’d highlight as it relates to digital and delivery expectations, any excitement you may have around premium launches, the product pipeline beyond bundled value. And then just maybe is there any way that we should think about low-priced non-bundled value items? Will there be some of that sprinkled in throughout the year? Just anything beyond the bundled value? Thanks.

Yes, good question. So Dennis, we – let’s talk about low-priced non-bundled value. Strategically, it does make a whole lot of sense for our brand to do that broadly. So when you see that, it will largely be associated with our overarching digital strategy where as we look at capturing consumers as part of our long-term plan for one-to-one digital marketing, we will have the type of offers that will entice those individuals, use our app and participate with us through that digital platform. But outside of that, you won’t see sort of a mass media effort toward low-priced single item entrees. When it comes to the bundled value, let me just give a point of clarification there. When we look at bundled value, we don’t look at it through the lens of just discounting a bunch of our existing core items and putting them into a bundle. Throughout the remainder of this year, some of the items that you’ll see within bundled value will actually be brand new items in the form of pretty exciting premium LTOs that have traditionally hit the menu. But when we marketed them, we did it in an un-priced fashion. And what we’ll do – we generally marketed them as à la carte items. And all you’ll see the shift to be is that we’ll take those very same items and we will incorporate them into bundled value versus un-priced à la carte. And so you should still see some premium stuff hit the menu like Jack in the Box would typically do. You should still see some new news. It’s just that the consumer really needs to evaluate the value of your offering upfront. And it doesn’t matter if it’s hovering around $5, $6, whatever that number is, they need to evaluate it upfront because there’s so many offers in the marketplace that they’re going to assume that without that price point, they likely will be paying a lot more than they would at a competitive set. So that’s really what this is aiming to do, but I think there’ll be a fair amount of innovation and exciting new news within those bundles that I think not only our consumers will like, but I think that our other stakeholders, franchisees as well will also appreciate those things in the menu.

Great. Thank you.

Thank you. Next question is from John Glass of Morgan Stanley. Your line is open.

Thanks very much. Lenny, can you talk a little bit about – a little bit more about digital strategies in '19? Specifically, you’ve had delivery for a long time or you’ve had a lot of your stores on delivery now. So can you talk about what you’re seeing from incrementality and specifically what it contributes to comps? How are franchisees reacting to this? So some franchisee systems are a little bit ambivalent given that they’re paying some of the take rates and so profitability is in question. How do you share expenses with them? Do you let the delivery agents, for example, mark up the menu and therefore the burden is less on the franchisee? So do you think about the costs associated with delivery to the franchisees? And how is it contributing to comps? I thought there was always going to be an – I may have heard this wrong, but an app re-launch sometime this year. I don’t know if that’s happened or it’s going to happen. But how impactful do you think that is to the business?

Yes, a couple of things. So let’s talk about delivery first. We haven’t disclosed much specifics about how delivery is impacting our business. However, we have disclosed that the sales are largely incremental and they need to be largely incremental in order for it to make sense for us. As we work with the franchisees and with the strategic partners, third-party partners, our biggest concern is really the incrementality of the sales and the fees associated with the relationship. If we can find a nice balance between fee structure and we can maintain incrementality associated with sales, then this thing makes a whole lot of sense. But if those things stop making sense, it really at that point would be better for us to pivot our time and attention toward other ways of driving same-store sales. So we are spending a lot of time with various third-party providers to make sure that the relationship moves forward in a productive way and we’re also spending a lot of time with our franchisees, making sure that we continue to invest in making delivery part of our business more operationally efficient. And so we’re working one strategic partner at a time and incorporating them into our POS network so that it’s sort of seamless for the operation. And like I said, we’ll take that sort of one step at a time because the relationship needs to be productive in order for us to continue to invest in it. But what we’re seeing today is largely incremental sales. So it certainly makes sense for us to continue to sort of march down this road. We just are cautious not to run down the road, because like I said, it needs to substantially be productive. As far as the mobile app, we’ve already launched system-wide in Q1. And really what the effort will be behind this now will be to drive users into this platform, because long term having these loyal guests as part of our platform allows us to market to them pretty effectively. I will say though that the jury is still out in our space as to the take rate of mobile/digital type applications in driving overall sales. I think that we will need to have this. I think it will be necessary because the consumer is sort of redefining convenience and they will want these types of applications for pay and order ahead and pick up and viewing your menu and facilitating deliveries. So there’s certainly a utility associated with having it. But I think we will evaluate what we think is the right investment level based on what we think the return rate will be within our space.

Thank you very much.

Thank you. Next question is from Jon Tower of Wells Fargo. Your line is open.

Great. Thanks. Just a couple on advertising actually. Lance, I think you mentioned earlier that the company is no longer going to provide that incremental contribution to the ad fund for the balance of '19. So how are you thinking about that impacting your share of voice? And perhaps this might risk some of the same-store sales recovery that you’re seeing in the business or are you more effectively buying media so that the impact on same-store sales shouldn’t be as great? And then second, my question is on the – I think the last call, you had mentioned using the Jack character and getting a little bit more edgy with him in the advertising. Has that actually taken place in the current advertising that’s out there? Thank you.

Jon, it’s Lance. I’ll take the first part and I’ll throw it over to Lenny for part two. So first of all, how we use the $2 million contribution we made in the first quarter, we had already dedicated our marketing dollars to the promotions that we had in place. So what we really used that $2 million to do was to make sure we had sufficient funding to be able to run the promotions of the $4.99 Ribeye. We had to make sure --

BLT.

BLT, excuse me – to run the BLT because we had already committed dollars elsewhere. As far as what we’ll do going forward, what I said is this is not contemplated in our guidance as we’ve done in the past. If we make a strategic decision that we need to do that, we’ll certainly be willing and ready to do so. But don’t really think we’re going to need to as of right now, because so much of our upcoming marketing calendar already we feel like is laid out particularly with the right types of value promotions that we would not need to get in and make that kind of pivot.

Just kind of following up on the second part of question on how we use Jack. Yes, we had gotten to the point where Jack’s voice had somewhat been muted. And we had I think purposefully played other voices as we were trying to focus on the improvement in quality in our hamburgers and other parts of our menu. I think we probably swung this pendulum too far. And Jack – the use of that character, his voice has proven to be successful in really breaking through a lot of the noise and clutter that’s out there from a voice perspective. And so we needed to pivot back to him being a little more irreverent, which is what he’s typically been, but at the same time focusing on food. So I think we’re at the right place now. And I think even more important than that is that, that voice needs to translate into social and digital space and we need to meet the consumers where they are, right? Whether they’re in social media or video gaming or streaming, that’s where the consumer is and that’s where we need to meet them. So the effective ways for us to have not only Jack’s voice, but Jack in the Box’s voice in our promotions within that space are also equally important.

Next question.

Thank you. [Operator Instructions]. The next question is from Karen Holthouse of Goldman Sachs. Your line is open.

Just a question on the mobile order, which I’m happy to hear that that’s launched. Is that something that’s fully integrated into the POS? And what’s the franchisee feedback just operationally thus far? And then you also mentioned 85% usage, but is there any sort of initial things you can share on customer experience or repeat usage?

You said 85% usage. I’m not quite sure what you’re – what kind you’re referring to and I want to make sure that nothing was misinterpreted there.

There was a comment that was a percentage of app users I thought that had used it, which maybe I misheard. But I guess just – yes, that was indicative of a trial or something, if you could clarify that? And then anything about just sort of customer experience with the usage?

Karen, I’ll take the first one. The 85% of the system was served by at least one delivery service.

Okay.

So just to give point of clarification there, so the app has been working well within the operation and our operators have found that the app itself is not creating glitches and largely has rolled out pretty smoothly. And so from that standpoint, we feel pretty good about it. And we did take a long time trying to get this right so that we wouldn’t negatively impact our operations, knock on wood, right? We don’t want to see certainly anything pop up now, but so far so good. And the bigger piece of feedback is really around what the overarching digital strategy, how much did we want to invest in it? And as we put these discount offers through the digital space, through the app to try to attract users, there’s always going to be the question around what are the appropriate offers and how do we make sure that we’re getting return on the investment of those offers. So at the most recent road shows, we actually got some great advice, particularly from some operators in our Houston road show who talked about how we can effectively put those offers into this space and do it in a way that doesn’t negatively impact their margin, something that they could really buy into. So we’ll make those pivots. We really appreciate that feedback. I think people generally understand why it’s important to capture consumers through this vehicle. They just want to make sure that we’re doing it responsibly and we’re more than happy to make those adjustments.

Karen, I just want to add on this one real quickly. One of the other important things about any app is not only how do the operators receive it, but how are the consumers receiving it. The feedback has been good and the ratings both on the Apple and the Android app stores have been very strong as well.

And then one just quick clarification on guidance. You’ve indicated that guidance doesn’t include incremental ad spend contributions for the balance of the year. Does that mean that spending is already been turned off?

Yes, I think the way to look at it is not so much that spending has been turned off or on. I think the simple way to look at it is, we had allocated the spend in Q1 towards the Ribeye and other promotions. We wanted to make a pivot to the BLT $4.99, but we didn’t want to have to negatively impact markets that either weren’t going to make that pivot or we also didn’t want to necessarily be in a place where we’ve planned to sell these products, we’ve brought in inventory, and then essentially we turn them off cold and stop selling them. But instead of doing that, we just ran a third marketing initiative and we paid for it and it was the $4.99 BLT. And what we saw through the result is that, that’s actually what the consumers responded to. So all of the rest of the year, the primary promotions will look a lot like the $4.99 BLT in nature. And so if that’s where the consumer is going to respond, that’s where we’ll spend the money. So another way of saying it is we don’t think the performance in Q1 was generated by incremental advertising spend, it was generated by having something on air that the consumer would actually respond to. And that’s what you’ll expect to see the rest of the year.

Okay. Thank you.

Operator, I think we have time to squeeze in one more question here.

Thank you. Our last question on here will be from Robert Derrington of Telsey Advisory Group. Your line is open.

Yes. Thank you. Lenny, as we look at the company’s test of the simplification of the menu, how does the Pannido that you ran during this past quarter, how does that fit in? Is it considered – was it considered to be a premium product or was it more of a one-off? Will we see more things like that? Any kind of color would be helpful.

Yes. So what’s interesting about the Pannido, we ran that years ago. This was a new and improved Pannido. It was absolutely fantastic. The consumer response to it was very favorable. And the sales associated with it were largely incremental. So we will definitely continue to do things like Pannido. It was a relatively easy product to executive within the operations simply because of the way that we brought in the cold cuts. If we were slicing them ourselves and we were then having to create setups to facilitate the creation of the sandwiches, that would have been pretty difficult. But we didn’t do that. We actually had the suppliers do a lot of work on our behalf so that the product would show up, at least the protein portion of the product would show up in a way that was sort of ready to assemble within the sandwich. And then we set the time essentially on the bread. And so when you look at items like that, they can play really well in our operation as LTOs and some can play well over the long term. So we certainly will continue to do things like that. In addition, when we launched the Pannido, we gave operators the opportunity to put the Pannido in a bundled deal or to simply sell it à la carte, and this was again another indication of what’s working in the marketplace. Those individuals who sold this in a bundled deal saw the same type of improvements in their business compared to those who didn’t that we saw in the BLT markets compared to the ones who didn’t go BLT. And essentially, as Lance said in his comments, it did drive both sales and transactions. And when you look at the comparison of those who did the bundled deals versus those who didn’t, there was a significant difference in gap between them on sales and transactions as well. So yes, it makes sense for us to do. If we were doing it again within this environment, we would want to see folks do it as a bundled deal, simply because that helped their sales and transactions and bottom line. But then long term, as the environment changes, we’ll continue to do premium items, but less likely to do it in a bundled deal.

Terrific. Thank you.

Thanks everyone for joining us today, and we look forward to speaking to you on the next call in May.

Thank you, speakers. And that concludes today’s conference. Thank you all for participating. All parties may disconnect.