Jack in the Box Inc. (JACK) Q3 2019 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Incorporated Third Quarter Fiscal 2019 Earnings Conference Call. Today’s call is being broadcast live over the Internet. A replay of the call will be available on Jack in the Box corporate website starting following 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, Anne, and good morning, everyone. Joining Rachel and 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, loss on lease termination of interest rate swaps 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-level margin. 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 new 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 website at www.jackinthebox.com. A few calendar items to note this morning. Our fourth quarter and fiscal 2019 ends on Sunday, September 29, and we tentatively plan to announce results on Wednesday, November the 20, after market close. Our conference call is tentatively scheduled to be held at 8.30 AM Pacific Time on Thursday, November the 21. On a personal note, after more than 30 years in the restaurant industry, including eleven wonderful years with Jack in the Box this will be my last earnings call before I retire this month. You're in great hands with Rachel, Lance and Lenny. And with that, I'll turn the call over to Lenny.

Thank you, Carol. Let me just take a moment to congratulate you on your retirement. There really is no one more deserving than you, continue to be one of the most talented professionals I've ever had the pleasure and honor to work with. Your code of ethics, care for people and commitment to business has been second to none. You truly are a role model. So please accept my heartfelt thank you and know that we all [Audio Gap] Moving on to the business. I want to start by sharing a little bit about what fueled our third quarter results and why I am so bullish about the future. System same-store sales for the quarter increased to their highest level since Q1, 2017, with all day products positively contributing to sales growth and year-over-year transactions with the strongest we've seen in nearly four years. With sales the Jack's momentum has accelerated into Q4. More than three quarters of fiscal 2019 now on the books, we're on track to achieve our ninth consecutive year of system same store sales growth, driving sales growth in Q3 was direct mix of product innovation, value and operational execution nor we targeted our marketing spend towards three bundled deals that offered a little something for everyone at compelling price point. Our primary promotion for most of Q3 was at 4.99 combo, featuring Jack's new spicy chicken strips which is on trend and a great example of culinary innovation. Most markets also featured a 4.99 triple bonus Jack combo including our signature curly product and we brought back a guest favorite with our two for $4 breakfast croissants. Emphasis on value is not adversely affecting our average check. In fact, the average check for value prime combos in Q3 was significantly higher than other orders due to upsell add on. It's important to note that our approach to value is not negatively impacting restaurant level profitability. Our margins remain among the highest in the industry. Generally refrain from deep discounting tactics, especially on our core products, which we believe would not be in the best interests of the long term health of our brand. Many of our value oriented promotion like check; chicken strips are either new menu items or limited time offers which minimizes the risk of eluding the equity core products that are loyal customers great. We also strategically build in upsell opportunities with the promotion that can generate a higher check while preserving margins. Looking ahead, it's important that we continue evolving in all areas of our business to meet the ever changing needs, consumers and drive sustainable growth. Let me share some of the initiatives that are underway to do that. First, we will simplify the Jack in the Box restaurant operation, so that guest experience will be more consistent and about a minute faster on average. Phase one of this initiative rolled out across the system in July. But this is really just scratching the surface when it comes to making meaningful improvements the benefits of service and increased throughput. To do that, we need to change the way we operate in the back half and that’s exactly what we'll be targeting in the next phase of the program. As changes are implemented, we expect to provide faster and more consistent service for our guest and ultimately deliver more sales and profits for our operators. Second, Jack in the Box has a rebellious personality that differentiates us from other brand. This deal to our loyal fanbase who live online and in a world dominated by Instagram means gaming and social media influence. We plan to capitalize on the strength of our brand to build relationships with our fans and promote our favorable products at competitive prices. Social and digital space allows us to meet consumers where they are. So we'll continue to build up our app user base and expanded other digital avenues to further fuel our sales. Next, we'll work with our third party delivery providers who now cover more than 90 percent of our system to further expand coverage, while also making the purchase more seamless for our guest and restaurant team. Another area of focus will be enhancing the drive through experience. We’re currently testing different amenities intended to do just that, including digital menu boards, new branding elements, canopies and designated parking for pickup and delivery. We plan to finalize the elements of this upgraded experience and to begin rolling out program in 2020. Now I'd like to switch gears and address some of the structural components of our business. With our securitization completed, we're planning to resume share repurchases this quarter. Including $150 million we return to shareholders in Q4 last year, we continue to expect to return more than $1 billion to shareholders through 2022 in form of share repurchases and dividend. In addition we will soon complete our transition to an asset light single brand entity when we roll off the last of the transition service agreements with Qdoba. With our franchising initiative conclude, we're seeing higher and more predictable levels of franchise revenues and increasing free cash flow. It's certainly taken a lot of effort to get into this place and I'd like to thank my team for their loyalty and contribution as well as our key stakeholders, their participation and patience. With that behind us, I am extremely bullish on Jack's future and I'm pleased to see that we're already starting to experience some early wins. Now, I'll turn the call over to Lance for a more detailed look at the third quarter and our expectations for the full fiscal year. Lance?

Thank you, Lenny and Carol. I too want to reiterate how much we appreciate the time and energy you devoted to Jack in the Box in the investment community at large. It's been an honor to have one of the industry's experts here at Jack in the Box and I've enjoyed the relatively short time we've worked together. I wish you all the best at retirement. Now onto review third quarter operating results and provide an update on where we're tracking so far in the fourth quarter. Operating EPS for the third quarter was $1.07, as compared to $1 last year. The $0.07 increase was driven primarily by our good comparable sales performance, the gain on sale of restaurant properties, favorable tax rates, and fewer shares outstanding, all of which more than offset higher G&A and dilution from last year's refranchising. Adjusted EBITDA for the quarter with nearly $58 million as compared with approximately $64 million last year. Adjusted EBITDA includes the negative $7.1 million impact of an unfavorable jury verdict which is in the G&A line and I want to note that the gain generated by the sale of the restaurant properties that I just mentioned is not included in adjusted EBITDA, rather the gain is included in the impairment and other loss. System-wide comparable sales increased to 2.7% in the quarter. Company-owned comp sales increased to 2.8% as transactions improved flat which is our best transaction performance in several years. As Lenny mentioned, strategically designing these compelling value bundles in a way that also enables up-sales allows us to capitalize on incremental transactions positively impacting check average. Check increase 2.8% from the third quarter comprised of approximately 2.3% of pricing. This makes increasing 50 basis points. Franchise comparable sales increased 2.3% in the quarter. Company restaurant-level margins remained strong at 27% for the quarter; this is 50 basis points lower than the prior year due primarily to increases in labor and food and packaging costs. Most of the labor increases were due to hourly wage inflation which approximated 6.5% for the quarter as we anticipated commodity inflation increased in the third quarter by approximately 3%. Given our more favorable commodity inflation in the first half of the year, we remain on track for our full year inflation guidance of approximately 2%. As noted in the release, we are keeping our full year guidance for company restaurant-level margin at 26% to 27%. Franchise-level margins increased by $2.8 million in the quarter or about 5% when compared with last year's recast figures due primarily to strong sales performance and refranchising. Advertising costs which are included in SG&A decreased $1.9 million versus the prior year due to refranchising and an incremental $1.5 million in spending last year. The company did not provide any incremental contributions this quarter. While we still expect G&A for the full year to come in at 1.8% to 2% of system sales that we’ve got to do G&A in the third quarter increased to approximate 2.5% of system-wide sales. Major components of the increase versus the prior year was listed in yesterday's press release, but the most notable increase is coming from the unfavorable jury verdict discussed earlier and an increase in incentive compensation offset by significant favorable adjustment or worker's comp in general liability insurance reserves. Five new restaurants opened in the quarter, bringing our year-to-date total to 16, all of which are franchised restaurants. We remain on track to achieve our full year guidance of 25 to 35 new restaurants in 2019. ,: As we discussed, there are numerous benefits to the securitization structure including flexible covenants and amortization, a good fixed interest rate and the ability to increase our leverage above what we can borrow with bank debts. The details of the securitization can be found in our filings. So I won't go into more details here, but as you can imagine we're excited to have this re-franchising behind us so we can focus fully on driving the business day to day. We received numerous questions about how to model interest expense moving forward. With an interest rate on $1.3 billion of senior secured notes is just over 4.4%. Interest expense will also include an additional $8 million to $10 million in 2020 for the amortization of transaction fees, as well as fees for letter of credit rating agency fees and other miscellaneous items. On a related note, our board has authorized an additional $200 million in share repurchases, bringing our total share repurchase authorization to roughly $300 million. We did not repurchase any shares of common stock in the third quarter, but as Lenny mentioned we do intend to resume share repurchases forth. In anticipation of securitization closing, we terminated our existing interest rate swaps from the third quarter, which resulted in a pre-tax charge of 23.6 million. This was reflected in interest expense, the termination of these swaps also impacting our tax rate, which was a benefit of 17.9% for the quarter of first in my career anyway. Excluding this impact, our tax rate was approximately 20% in the third quarter. For the year, we now expect our tax rate to approximate 20% including the termination of the interest rate swaps for 23% to 24% excluding the swaps -- the impact of the swaps. Moving on to our performance so far in the fourth quarter, in the first four weeks of the fourth quarter system, same-store sales have accelerated from Q3 results and we currently have positive system traffic growth. Given the strong performance so far in Q4 and our good Q3 comps, we have increased our full year system same-store sales guidance to up at least 1%. We've also updated our guidance for tenant improvement allowances to $15 million to $20 million for 2019. This change is mainly due to the timing of the projects. To wrap-up our remarks, our operating performance in the third quarter was strong driven by good sales and business fundamentals Q4 is starting out even better. We also completed our securitization and have now achieved our target leverage ratio of approximately 5 times EBITDA, significant milestone, it’s been a long time coming. We look forward to 2019 being our ninth straight year system same-store sales growth and to continuing the momentum into 2020. With that, and I'd now like to turn the call over to the operator to open-up the call for questions. Operator, we are ready for questions, please.

Thank you. [Operator Instructions] Thank you. Our first question is from Brian Bittner. Your line is now open.

Thank you. Good morning. Wow, Carol, congratulations on your retirement. You're just a true professional full of accomplishments that I think are all very well known. Just an incredible human being, true friend, personally, I'm going to miss you in this industry. But I'm sure our paths will continue to cross in the future. But you'll obviously be missed. Lenny, you saw a clear inflection in traffic this quarter from what you've been running at for several quarters now, a clear traffic inflection relative to your peer set. Can you just dive a little deeper into what really drove this now? Why this happen now? What's shifted in your business or in the environment that really drove this improved performance?

Yeah. So I'll share a little bit about it, what's fueling it today and sort of how I see that progressing into tomorrow. So if you look at today, it's really a couple of things, one is new product introductions that have been placed into the market in the form of these bundles and very strategically placed in a way that allows for the add-ons and up-sells. That price point is very attractive at the below $5 mark, but the ability to either add proteins or additional add-on exciting snacks has worked very well for our operation. So I think we have essentially found our way to compete in the QSR phase effectively on value. And I think that we're missing that for quite some time. But do you anticipate that will continue to do that into the future. But what's also fueling the sales is that our operations have been making ongoing improvements in service. We've been able to reduce the number of customer complaints and the types of complaints – essentially, to have people walk away from the Jack in the Box business. As we have looked at in the past, those sort of disappointments are very strongly correlated to our sales and transaction on growth and or a decline. So happy to see that we're making improvements there and these are just sort of the early phases now that we’re experiencing. So at this point, it's really those two basic things they're driving it. As we look at what we'll be live for tomorrow, we'll continue with the limited time offer bundled deals at competitive prices and we'll continue with the strategy that allows pretty up-sells and add on. But the second thing that we'll do is we'll have a permanent new menu item that we'll be intended to restore some of the everyday value that we lost when we increased our taco pricing. So there'll be some permanent additions coming in the future as well. And then we'll be focusing on faster and more consistent service, simplifying our operation, and we believe that's a decent sized sales player. We do have a new Vice President of Operations Services who has worked in this area for other major brands and has been very successful. And he's already identified what we believe to be pretty big opportunities for us to simplify the operation for our crew and do it in a way that really does drive more consistent. We'll have an all.

Thanks for that. Just a follow-up. You talked about accelerating trends in the fourth quarter. It's happening at the same time that a very large player is doing dollar tacos. Can you just confirm, I guess you're not seeing a negative impact from that. And can you also confirm that comparisons for the quarter get easier for the next two months?

Yes, so Brian the last period of our quarter, we talked about last year was the softest. If you remember, we started out kind of in a 1% to 2% range a year ago and we let up the quarter at 0.5%. So the comparison it's actually easier in the last month of the quarter.

And as far as the taco sales from our competitor, it really speaks to how they are doing, but our taco sales are currently up. So I don't know that there's any correlation between what they're doing and how we're currently performing. But certainly, we're happy to see our taco sales increasing.

Okay. I'll pass it on. Thanks guys.

Thank you. The next question is from Gregory Francfort. Your line is now open.

Hey thanks for the question. Just going back to maybe the proceeds from the refinancing and how you thought about the uses of that cash. I guess two questions. The first is how should we think about the timing of which you maybe going to deploy that cash to shareholders? And then as you went through the process of evaluating kind of best uses for the cash, did you consider maybe making a bigger investment in the business that you're making today and sort of how do you go through that process of evaluating that. And then maybe possible uses of it rather than share returns?

Hey, Greg this is Lance, I'll take that. So first of all without getting into the exact timing, obviously we can get into the market pretty quickly once all the information is out there, which yesterday's release and all are designed to do. So we'll be in the market quickly. Relative to the use of proceeds, our free cash flow more than funds what we need in order to be able to fund the growth and reinvest back in the business. So from a standpoint of how we intend to use the securitization funds, we do expect that that will be all used pretty much for returning to shareholders, because we've got plenty of cash to make the investments we need to make.

Great, thank you. Appreciate it.

Thank you. The next question is from John Glass. Your line is now open.

Thanks. Wow. Carol, we're going to miss you from the early days at Applebee's to the President's. It's been a real pleasure. My question is first on comps you talked about bundled value in some of the things you've done to stimulate growth. You've been at that for a while, so I guess maybe what's more recently changed and specifically do you think the competitive environment has really played a role in that. I think when deep discounting was more prevalent, you had been hurt by that. So is this sort of a signal you're seeing less of that or is that not changed and what's really changed has been what you've been doing?

We're still seeing a significant amount of value in the marketplace. So we don't necessarily see it as waning. We do see that with one of our competitors is focusing some of their advertising dollars and some other positioning of products, but the deals that are in the marketplace are still aggressive and pretty prevalent. So we feel that it's still a competitive environment and likely remains a competitive environment in the QSR space going forward. Whereas, what we did in the past, we would typically take core items and discount them and we bundle them. But unfortunately, what that would lead to is trade down and that would not fuel the sale. In addition, we didn't create the type of products that allowed more protein add-ons and/or buy some snacks nor did we innovate size and snacks that were compelling add-ons through this LTOs a day the bundles that we're putting out there are primarily LTOs, typically a new item or line extensions that also are coupled with a complimentary add on or up-sell. So it is very different from what we've done in the past. It's easy to execute for the crews both on the up-sell side and also back of house. And I think that the combination -- the positioning of that, as well as the execution through the operation is what's driving it. I'd say on the advertising front, I think we're doing a much better job of directing our advertising, particularly through the social and digital space. And we're also making sure that that advertising is being spread across multiple day parts and our offerings that we can balance out things like breakfast versus dinner or lunch offering, and I think that that's a more balanced approach as well. So, lots of tweaks that have happened since we started this. I think much more effective today than we have been at.

That's helpful. And then just -- my follow-up is on unit development. This quarter is also notice -- notable that you had flat growth year-on-year and you had seen modest declines in prior quarters. How do you think the development pipeline is shaping up when we look in 2020, I know the long-term plans are getting back to unit development, has -- the combination labor market and some of the franchise frictions in the recent past are they taken a toll on that pipeline? Or how do you think about unit development over the next 12 to 18 months as you see it today?

John, it’s Lance, I'll start with that one. We'll be given our 2020 unit guidance in November, so I'm not going to go into a lot of detail. But what I can tell you is the pipeline right now is as strong as we've seen in some time, 2019 we will be in our 25 to 35 new restaurants down as a result in a net number of unit openings. And I would expect 2020 to look at least like this year without getting too far ahead of Muskie's and frankly should be better next year. I just don't want to get too far out on numbers. So I think from a looking forward standpoint, particularly now that we have some of these other things behind this us as well. We're going to really be focused on growth and we think the pipeline such a sudden likely to get off to a good start with that next year. It's the last thing I'll say then and Lenny, can I add anything if you'd like to is that good results tend to fuel the unit growth. And so some of the other frictions aside, as we continue to have a sustainable plan for columns and grow the business, that should naturally lead to more interest in opening unit.

Great. Thank you.

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

Great. Thank you. And Carol congratulations, thanks as always for all your help and assistance and best of luck for sure in the future. Lenny, wanted to just ask another on value and just kind of how you're thinking about the go forward. Couple parts to it, I guess, just is it fair to assume, given the success that you've had with the three value messages simultaneously, that that generally is going to be how you're thinking about it going forward versus doing two at times in the past? And the other piece or two, there is just franchisee adoption on the value promos, how generally high is that now? If you could speak to that and you have good visibility that it's going to remain high given the results that you've seen. And then maybe you touched on it just now, but just the last point on the value, variety of price points, day parts, menu items, just based on the learnings you've seen so far, that's going to continue to be the strategy. Is that fair? Thanks.

So a lot there. I'll try not to miss any of that, but as far as the three versus two messages. I think that really comes down to how big we're going on any particular thing. So if we have the launch of something that we think is pretty major, we may do only two messages at that time, that we can create more media weight or the area of focus. But outside of that we're likely to have significantly more windows -- marketing windows, we’ll have three items marketed. We do have a pretty high participation rate from our franchisees, but I think that is conditioned on performance, right? So at the end of the day, if we're putting the right stuff into the marketplace that allows franchisees to grow their sales and profitability, then I would anticipate that that participation rate will stay high. And certainly would respect it reducing if we weren't able to do so. So I do think that what you're seeing from us today will be a part of our strategy going forward. I do think that it's important that we don't just believe that we can live on LTOs and marketing promotion. I think we have to also restore some of the equity that we lost in everyday value. And so you'll see us do that and I think that that creates more of a permanent sales layer or restoration of a lost sales layer that allows us to sort of bring back or bring up the base of sales altogether. And then everything else will latter on top of that.

Great. Thank you.

Thank you. The next question is from Chris O'Cull. Your line is now open.

I have learned a lot from you over the past 20 years. So I just want to follow-up on unit development. Lenny, could you talk a little bit about whether you're testing a new prototype. If so, how is it performed? And when franchisees might be able to use it for development?

Not too much to say on that at this time, what I will say is that some of our franchisees who have been very strong developers throughout the years actually contributed to the ideas around prototypes in the next generation prototypes. And our Chief Development Officer is currently working on what a good prototype would look like if signed to be more cost efficient to build. And it is also designed to – forget the investment toward what the consumer is going to shaped the most, convenience is growing. It's growing through both delivery and order ahead and pick up, also, a huge focus throughout the industry on drive through consistency and speed. So you can anticipate that whatever we do with a prototype would really try to address the basic needs. We're not far enough along to comment beyond that. But just know that it's an area of focus and one that do appreciate the contributions that our franchisees.

Okay. And then could you provide some more detail on what you hope to accomplish with the digital menu boards. Obviously, we've heard a lot of competitors talk about different levels of technology that they plan to use in digital menu boards through the drive through. Can you kind of help us understand what Jack's expecting from those?

Yeah. So what I would say about digital menu boards is a couple of things. One, it's a great platform that is more dynamic than our static menu boards today. We have a pretty complex menu in the last 15 orders to essentially advertise and presents to the consumer, all of the day parts that are available to them 24/7. It means that the menu board is pretty cluttered throughout each day consumer. If we can go to digital menu boards than what we can potentially do, it's flex what is presented to the consumer. So that's what they're more likely to buy during that day or it takes up more space. That would be a huge thing for our consumers and simplifying what they're reading on those menu boards. And it would be potentially a contributor to not only ourselves, but also our throughput as it eases the ordering for the consumer. The other thing that you can do with a menu board is advertise directly to that consumer. The products that you're trying to sell, the promotional item that you're trying to sell. So there's an opportunity to do that. And then also, as you start to have a relationship with those consumers into the future, you can evolve that platform to a place where you are communicating with consumers on a one-to-one basis based on their history of purchases with the brands. We're not a 100% sure that the investment in the digital menu boards is going to pay off in all of the areas that I mentioned. But we do believe that it's worth testing along with the other components and if we see a return on the investment then we'll go for it. But we also would note that there are other brands in the industry that have decided not to use digital menu boards. And they are growing to the highest NAVs that we see in the industry today. So I think it's really just a matter how we can capitalize on this from our individual brand. We're going to attempt to do so, but we're not going to work with it, if it doesn’t pay off. Chris O’Cull: Great. Thanks.

Thank you. The next question is from David Tarantino. Your line is now open.

Hi. Good morning. Lenny just a question, I think you've -- you referenced on the operations improvement there, and I was wondering if you could elaborate on what you're doing there in addition to this Phase 1 you just rolled out related to simplification? And then secondly, I guess, if you look back at the last couple of years, there's been a lot of change inside the company that likely has led to some level of distraction. And I'm wondering your thoughts on whether that has been the case and as you've exited that period of uncertainty. Do you think maybe a little bit more operational focus is what's helping drive some of the recent sales momentum you would had? Thanks.

Yes. So, on the operations side couple things are happening. First, at the end of Q3, we rolled out the first phases of an off simplification test that was successfully completed earlier in the year. And it essentially removes some skew and simplify some procedures and back-of-the-house. The feedback that we received from the operation, that it made it easier for the crews to be trained. And it also reduced some of the food waste and it had a marginal improvement in the service. So all good things and none of those things negatively impacted the guests. So we felt like it was the right thing to get moving with some of those early wins. What we are seeing now is that, when we study our whole times for our proteins and we start to figure out what are the biggest detractors from consistency and speed of service? Our new VP of Operations Services have identified a handful of products that are essentially causing our bottleneck. And we do think that if we can change some of the procedures in back-of-the-house specific to these items, we'll be able to make it a lot easier for our crews to meet the speed objectives that we have. There is some testing going on in that area today. And we're pretty encouraged by what we've discovered. And pretty encouraged by what we think the size of the opportunity is. So more to come on that, but we're going to allow our new VP to do his job and to solidify a plan before I say too much about it. As far as the changes that we've experienced, as a company, yeah, they certainly been distracting. And although we'd all like to imagine that, we can drive above average results during a period of significant change. That's difficult to do. So I can say that look, despite those changes, I'm happy that, we're tracking to have our ninth straight year of same store sales growth. So certainly the distractions haven't taken the company down. But at the same time, I think, there's way more upside. And maybe what the additional focus will give us is that additional upside that we've been wanting.

Great, thank you, and Carol, my congratulations to your terrific career. Well, we'll certainly miss you. Thanks.

Thanks David.

Thank you. The next question is from Jeff Farmer. Your line is now open.

Great, thanks. Just to echo, some of the earlier comments. We will miss you, Carol. I think I've worked with you for almost 20 years. We just figured that out. And you are definitely the best. So moving on to my questions, you guys touched on it. But what is the franchise appetite to pursue the drive thru remodels? And can you provide an updated timeline? And when you expect to that remodel initiative to more aggressively begin or get started?

Yeah, I'll answer the second part of your question, first. We have essentially finished Phase 1 of this test, which is -- which was really just testing the stability of the various components. So we've put some new branding elements out there. Some of those things are internally lit. We also have some digital components out there. As you know, some canopies. And all of those things, we just needed to make sure that the hardware and software actually worked properly and held up to the elements. So, we're testing it in some of the most extreme weather, whether it would be rain and or significantly high temperatures. And we're discovering a lot about what components will hold up and which ones have not need to be adjusted. So, that was really the intent to Phase 1. What now we will do is, put it in the hands of the marketers and operators. And those individuals will take those platforms and essentially present them to the guest in a compelling way, that we believe has an opportunity to drive sales. We are only at the beginning phases of that. In fact, I think the team had its first meeting, this past week. So, we've got to give them a little bit of time, to sort of get everything lined up. And to officially kick off that phase 2 part of the test. And then once we can get a read on that, we can start to hone in on timing. And then lastly, as far as franchise participation, for franchisees it's very simple. If there is a return on the investment and you can help me grow, my sales and profitability at a reasonable investment size. Then I'm all in. And if you can't do that, I'm probably not all in. So from our standpoint, we will keep the sides of the investment, very reasonable for our franchise operators. And we will also target a reasonable return. So that franchisees will be encouraged. That's really all I can say about it, at this time. We think it can really enhance the overall guest experience. But we do need to do a little bit more work before I can start to really share a specific.

All right, that's helpful. And as a follow up, you mentioned the add-ons with the 499 combo meals, but where are you seeing the average shack move to for those combo meal orders? And have you been surprised by the customer response in terms of pushing out average -- higher than potentially you thought it might go?

Yeah. So I wouldn't say that we're surprised. Our marketers actually designed the promotions to generate this result. So I would say we're pleased that we actually generated the results that we were able to. One of the things that we've said consistently, you've heard me say this many times. We do not want to erode our brand in the process of trying to drive value or to compete quarter by quarter. And I think we've done a good job of preserving our brand equity around credible food. And what we then try to do is with that in mind, presents some credible options to the consumer, so that they can come in at a reasonable price point, if all they're looking for is value. But if they are one of our sort of tried and true loyal customers that's looking for those credible items, they're going to typically bundle more than what we presented to them, within that bundled deal. And that's exactly what we're seeing. So, for example, the Donut Holes that we currently have out in the marketplace for $1. It's a convenient add-on for the consumer. It's an easy up-sell for the crew. It's a reasonable price. It's also a very credible item. They're really high quality Donut Holes. So -- and we sell it throughout the day, not just at breakfast. So, again, I think all this is sort of by design because, we know that we can't take it all in cart single item. Price is low and go into the marketplace and beat some of the national competitors who can compete at that -- in that space. So for us, you've got to find that sweet spot with combos and credible items that attract a guest that maybe isn't just looking for value, while at the same time, we're presenting something at value price for those who are.

All right. Thank you.

Thank you. The next question is from Jon Tower. Your line is now open.

Great. Thanks. And echo sentiment earlier on the call. Carol it's been great working with you, learned a lot from you and best of luck on future endeavours.

Yes.

Now just turning to questions. First on the digital side of the equation, can you provide some insights into either customer adoption of delivery maybe as a percentage of mix or perhaps some numbers around the mobile app ordering and registered users and where you sit today? And then the next question is just on the permanent menu item on the value side for everyday value money that you mentioned earlier. Can you kind of give us some color as to what you're thinking there? Would there be something kind of new to Jack, with respect to innovation or would it be something within Jack's kind of consistent or Jack's current menu just perhaps presented a little bit differently to consumers? And then sorry -- last piece, curious on the quarter to-date trends, any discrepancies in the different markets that you're present in. We heard one of your casual dining competitors talk about California starting off the quarter on some weaker footing? So thank you.

Yes. Maybe I'll take your last question first. So when we look at our quarter to-date performance, we're really seeing improvement across all markets. There are always the individual operator anomalies, but we do not see any specific market weakness to note. So I would just tell you that we're looking pretty good across our business right now. As far as permanent value, I'm not going to really share any details around that. All I can say is that we've tested some things that are working really well. We're excited to roll them out next year. And then about the digital space, we haven't really shared percentage mix on digital. The app is still a relatively small percentage of our business, but adoption continues to grow and on the delivery side, our sales per store more than doubled in Q3 versus last year. So the way I would just look at digital and delivery for Jack in the Box is that, we don't this as the main delivery point or connection point to the consumer today, but it is an area that we believe will grow significantly. Do we want to make sure that we're presenting this opportunity to the consumer? Still 70% of our consumers are going through the drive through, and of the remaining guests that go inside, half of those or take out. So from our standpoint over time, because we're mostly a convenience-oriented purchase, we think digital and delivery are going to make sense for us to play in. But again, relatively small part of our business at this point in time.

And just on that last point on the digital piece. Have you done any exclusive offers so far only through the digital to get some uptake from consumers?

Yes, we have. We've done a good number of those things, especially to drive up adoption and have people sort of opt into the app.

Thank you.

Thank you. The next question is from Robert Derrington. Your line is now open.

Yeah. Thank you. Carol 27 years, it's been a long time, and I just know that I want to be invited to the heck of a party that I'm sure you're going to have.

Thanks Bob.

Miss you. Specifically, Lenny, I guess during this past quarter, this was the first quarter that I remember you guys ever using a quote celebrity spokesman beyond Jack to market a product. Can you give us a little bit of color around that, and whether that's something that Jack -- whether you might use again in the future.

Yeah. So, Larry Pond, who is -- he’s got a huge Internet following, the social media following. We chose to do that because we thought that it would create a sort of connectivity with that set of consumers. And it's the first time that we sort of reversed the way that we approach that. Typically, we'll start with sort of a mass media play, and then we will extend it into social media. We actually started with social media in mind, and then built that up into a mass media play. And so that's why it makes sense for us to use her in the campaign. She was wonderful to work with, extremely professional, very talented individual, who seemed to have a passion not only for what she does but also for the brand. And so, we'd love to work with people like that in the future to continue to connect to our consumer bay.

That's helpful. One last -- one follow-up if I could. On the outlook for Jack, Lenny, do you believe Jack needs a plant based protein in its future or is that kind of counter to what Jack's all about.

I think it would be counter to what Jack's all about to simply copy the way everybody else is doing plant-based protein. I don't think that it would be counter to Jack to have either a plant-based protein and or some other sort of protein substitute. But we sort of pride ourselves on bringing things into the marketplace in an interesting way as we like to say in a world of French fries, we'll be the curly ones. So, I would look forward to my marketing team sort of being used to play with some ideas. I've seen some of them. I think they're pretty exciting. But at the same time, they're going to need to make sure that it is authentic to the Jack in the Box way of doing things.

Terrific. Again great quarter and congrats, Carol. We’ll miss you.

Thank you. The next question is from Andrew Charles. Your line is now open.

Great, thank you. And Carol can't be said enough, best wishes and thank you for all your help, support, and partnership. We're going to miss you, and Rachel of course congratulations to you in your new role. Can you guys talk about franchisee gross margins amid the value bundle strategy? I realized the company operated gross margins were only down 90 basis points amid to almost 3% inflation. But because these are higher volume stores that presume we have higher ticket sizes and perhaps higher order counts for franchise base, is it fair to think that franchisees might be having any different gross margin experience the value bundles, especially as 3Q commodity inflation stepped up?

Andrew, this is Lance. I’ll take that one. You're right and that we do have a higher sales base and higher AUBs [ph] . With that said, from a dollar margin standpoint, we think the franchisees are really -- were able to benefit from the way we've gone about, introducing value back into the market. So granted, we're working on a higher margin than a lot of those guys are from a percentage standpoint. But we really feel like this is going to be a benefit to franchisees. And this is kind of the right way for us to approach value in a way that the franchisees dollar margins are going to grow as well.

That's helpful. And one more just clarification. Had the quarter gauge trends been helped by an increase in mix of taco sales and bad news in the quick service hamburger category around tacos?

I can't say that I've looked at it that way. So I won't answer that question, but I would say that we're happy to see taco sales up and there's anything anyone else is doing to contribute to that.

Very good. Thanks guys.

Thank you. The next question is from Matthew DiFrisco. Your line is now open.

Thank you. Just wanted to clarify on the comp, it sounds like you guys are saying that it's pretty broad based. I just want to make sure I know you have. Two pretty big markets in Texas and California and they're relatively different as far as consumer bases. If there's anything you wanted to mention about a difference in those are they both accelerating and then Lance just a point. I just want to clarify, I think you said on the call earlier in the prepared remarks that you recommitted to or your restated again or reaffirmed the 1 billion return by 2022. Does that also infer then that 175 million target for free cash flow by 2022 remains intact? I know you've had something in there about try for 2019. I wonder if that, factors into the longer term free cash flow as well. Thank you.

So I'll go on and take your second question there Matt. Absolutely, we're going to be on track to return the billion dollars or more. Well any changes to a long term guidance. We certainly would let you guys know about and we reaffirmed as recently as a quarter ago, all of our long term guidance. So we do expect to return the cash as we've talked about. We reaffirmed 175 million last quarter. No changes that we've spoken to that. And then as it relates to the TI’s, most of the -- the reduction in the TI guidance for this year it's really related to timing as we have updates to TI’s or the money that we're putting in and contributing to franchise remodels. We'll update you on that. What I can say I said this on the last call and I'll reiterate right now, you would not expect to see that number go up from what we have already committed to in our long-term plan. And as we get more through the strategic process, we'll see if there's any opportunity to bring it down a little bit.

And just to confirm California and Texas are both trending up as our most of our markets. So just to sort of reiterate I know those are -- California and Texas account for 70%-plus of our total business. And I know there has been some news that other brands restraints some softness in either of those markets, but we are seeing both of those markets with sales growth.

Excellent. Thank you.

Thank you. The next question is from Nick Setyan. Your line is now open.

Thank you. Carol congratulations. Thank you for all of the help throughout the years. In terms of G&A, obviously, within the long-term framework that you guys just now reiterated, we're already in that sort of 1.8% to 2% range in terms of system sales. How are you thinking about that over the next year, two years, three years within the framework next

Nick, its Lance. What we've guided to in the long-term plan is we ultimately be targeting around 1.7%. So, it's still just a little bit of work to do there. But as you noted we're getting pretty close to that range now and that's what you would expect given as Lenny mentioned, the Qdoba transition services agreement is coming to an end and most of the restructuring we expected to do -- has been done still a few pieces left. So, we're kind of thinking that 1.7% of system sales.

Got it. In terms of the remodels and the drive-thru enhancements, anything that you would share on the drive-thru side in terms of what you're seeing in the tests, in terms of sales lifts and then any update on the sales lifts that you're seeing from the remodels?

This is Lance. I'll take that one as well. So as Lenny mentioned right now the phrase around with the drafters has really been about equipment testing, making sure the equipment works, that are hold up to the elements and all those things. We have not really introduced, but we would expect them be the major sales driving components. So more to come on that once we – once we've got some of the digital menu boards in place and really doing some up-selling and some other things that we would expect more of that sales. Relative to the remodels, we're making good progress on the remodels, just to reiterate what we said on the last call kind of our plan is to move forward with the 150 or so, some of the oldest units in the system that need some structural work as well. We're well over 50% of those now and we have seen good lifts on those of mid-to-high single digits sales lift that is what I'm going to trying to do there.

Thank you very much.

Anne, I think we have time for one more question.

Thank you. The next question is from Lauren Silberman. Your line is now open.

Thank you. I just want to go back to delivery, did it meaningfully contribute to comps in the quarter and then what kind of modifications are you making in the restaurant, whether that be packaging, store layout, integration in the POS? Just the delivery becomes a bigger part of the mix? And both Carol and Rachel, congratulations.

I don't think we've shared the specifics on deliveries, contribution to comps. I mean, although delivery is growing and growing fast. It's still a relatively small part of our overall business. So I would say that, really what I've mentioned about the new product introductions and the improvements to operations or guest service is the biggest driver. And then, I would say, as far as what we're doing to integrate. Our IT group is currently working with some of the major delivery or party delivery partners to integrate their system into our POS network so we're not having to use separate tablets to bring those sales in. As well as our marketing department is working with the third-party providers to negotiate down the fees and have a lot of work being done to make it just more palatable going forward, both for the crews, the guests and also our profitability. So more work to be done there, but we have taken the time to meet face to face with the leaders of all major third-party delivery companies. And they seem very open to working with us towards the service as well as to continue to work with us to grow the business. We'll see where it goes from here. And that will be largely dependent on what contribution it's making to our bottom line. So more to come on that. But we do believe it makes sense strategically to play in this space. The consumers seem to be going here. But we will remain sort of cautiously optimistic about how to get it done the right way.

Thank you.

Thanks everyone for joining us on the call today. It's been a pleasure to work with all of you over the many years. And I look forward to listening from the outside in on the next call. SO, enjoy the rest of your day.