Jack in the Box Inc. (JACK) Q1 2020 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. First Quarter Fiscal 2020 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Rachel Webb, VP of Investor Relations and Strategic Analysis for Jack in the Box. Please go ahead.

Thanks, Misty, 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. We will refer to non-GAAP items throughout today's call, including operating earnings per share, adjusted EBITDA as well as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliation provided in yesterday's earnings release. Following today's presentation, we will 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 documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com. Our second quarter ends on Sunday, April 12. We tentatively plan to announce results on Wednesday, May 13, after market close. Our conference call is tentatively scheduled to be held at 08:30 AM Pacific Time on Thursday, May 14. With that, I will turn the call over to Lenny.

Thank you, Rachel, and good morning. Before Lance recaps some of the first quarter highlights, I'd like to take a moment to articulate my confidence in the trajectory of the company and some of the progress that's already been made on our 2020 and long-term goals. First, the team has completed yet another chapter. We exited the transition services agreement associated with Qdoba, we completed the securitization, and we closed on the sale of one of our corporate buildings. We are now a single-branded company in one building focused entirely on the success and growth of our iconic Jack in the Box brand, and it's wonderful to see the positive energy and early momentum. Second, we've made progress in reestablishing equity in everyday value. After conducting consumer research a few years ago, we found our core customers associated Jack in the Box with craveable products, with approximately half being more value-oriented and half looking for indulgence. We've historically been able to capitalize on both leveraging our iconic tacos. But after raising the price ceiling on our Two Tacos deal back in 2016, we lost a lot of value-oriented guests, specifically through transactions under $5. Our product marketing, operations and supply chain teams collaborated to restore some of our lost equity and leveraging the success of our snackable craveable sides, launched our new Tiny Tacos platform as a permanent addition to our menu just last month. We are pleased with the initial consumer response, and guest sentiment has been extremely positive, with guests describing them as a great value for the price, and to quote one consumer, all they think about when they're hungry. It is only four weeks in, so we won't give too many details on what we're seeing, but we are optimistic so far on the ability to restore some of the lost value-related equity. I'd like to take a moment to thank our teams for the collaborative nature in which they worked to bring this product to market. As we've seen in sales results in Q1 and the past few quarters, innovative new products and price-pointed bundles continue to help drive momentum in the business. Looking to the remainder of 2020 and into 2021, the marketing calendar incorporates both innovation and price pointed promotions, leveraging some recent consumer and culinary trends we see in the industry. Third, I see the upside for 2020 and future years. I believe we have identified and begun to capitalize on untapped potential in our restaurant operations. As I mentioned last quarter, this is our single-largest focus for the year. two years ago, we hired Marcus Tom as Chief Operating Officer. He's built a team that has changed operational paradigms and processes and brought new expertise to restaurant operations. The partnership and new processes for operations, product marketing and supply chain has laid the foundation for our brand to continue to launch innovative new products and reduce wait times while also ensuring the guest experience is not compromised. We are pleased with the progress we are making toward reducing system speed of service by one minute by 2021. We continue to see improvements in the locations where we are testing the back-of-house equipment and process changes. We are in the early stages of rolling out training and new processes to system with modest equipment modifications not far behind. So far, all indications are that we are on the right track. Looking longer term, we continue to believe digital and delivery are important pieces of the consumer journey for quick-serve restaurants, and we remain committed to appropriate investments in these channels. As mentioned earlier, for 2020, our biggest priorities are operations improvements and product innovation, but our mobile app and delivery channels continue to receive modest investments and the resources necessary to meet the current expectations of our guests. Our mobile app addresses most consumer needs, including order ahead, mobile pay, in-app offers and menu and location information. While still a relatively low percentage of our overall sales, we continue to see the number of users and transactions grow each quarter. And almost our entire system now has delivery in the sales channel with over 95% of our restaurant service by at least one of the four major delivery providers. We've completed integration with Grubhub into our POS system, and we are currently working through integration with the other providers as well. Lastly, we remain committed to returning cash to shareholders, and we are well on our way to returning over $1 billion to shareholders in the form of share repurchases and dividends by 2022. With that, I'll turn the call over to Lance for a more detailed look at the first quarter. Lance?

Thanks, Lenny, and good morning, everyone. Operating EPS for the first quarter was $1.17 as compared with $1.35 last year. The 18% decline was primarily driven by elevated G&A costs, higher interest and lower franchise-level margin versus the prior year. These were partially offset by favorable impairment and reduced advertising versus 2019. Our systemwide comparable sales increased 1.7% in the first quarter. Company comp sales increased 2.9% comprised of check increases of 2.6% and transaction increases of 30 basis points. Franchise comp sales increased 1.6% for the quarter. Sales increases in the first quarter were driven primarily by the continued offering of compelling bundles as well as innovation our guests crave. We continue to offer price point in burger and chicken bundles throughout the quarter. We also featured craveable sides such as our indulgent $3 soft and loaded fries and our new $3 mini munchies, which helped to bolster check. We also launched breakfast innovation via our $1 serial milk donut holes and value offers like the two for $3 Breakfast Jacks, featuring a new Chicken Breakfast Jack. Company restaurant level margin decreased by 140 basis points to 24.8%, down from 26.2% last year. This decrease was due to the impacts from commodities and wage inflation. Food and packaging costs increased 1%, driven by commodity inflation of approximately 4.9% in the quarter, most of which came from beef and cheese. Wage inflation was between 7% and 8% in the quarter, driven by both minimum wage increases and competitive market pressures. Franchise level margin decreased $2.2 million when compared to the prior quarter, primarily driven by an increase in franchise support costs of just under $2 million attributable to an increase in bad debt expense. The bad debt expenses were related to specific franchise situations that occurred in the first quarter and are not expected to be material in future quarters. We also saw a net negative impact of around $500,000 from the implementation of the new lease accounting standard, so we would expect the impact to be slightly lower than this amount in future quarters. Partially offsetting the higher costs were increases in franchise revenues, including increases in both royalties and franchise contributions for advertising and other services. Despite the first quarter decline, we do expect franchise margin dollars to increase for the full year. As a percentage of total franchise revenues, franchise level margin percentage for the quarter was 38.5%. Without the changes from the new lease accounting standard, franchise level margin would have been 41.4%. You'll find more detail about the impact of this standard in our Form 10-Q. Advertising costs, which are included in SG&A, were $5.3 million in the first quarter compared with $7.2 million in the prior year. This decrease of $1.9 million was due to an incremental contribution funded by the company in the first quarter of last year. The company did not make any incremental contributions this quarter. As we reaffirmed in yesterday's press release, we anticipate our G&A to stay within the guidance range of 1.7% to 1.9% of systemwide sales. In the first quarter, however, G&A was outside this range at 2.1%, driven by a legal settlement and higher incentive compensation, as outlined in yesterday's press release. In addition, transition services income received in the prior year from Qdoba was not fully offset by cost reductions this year, resulting in higher G&A. Again, all of these items are built into our full year guidance range of 1.7% to 1.9%. As Lenny mentioned, we remain committed to returning cash to shareholders. In the first quarter, we repurchased approximately 1.9 million shares for roughly $154 million, and we are on track to hit the goal communicated in Q4 of 2018 to return over $1 billion to shareholders by 2022. There were a couple of discrete items in the first quarter you will see in our financial statements that have been excluded from operating EPS. The first is a pension settlement charge, which was a noncash charge. As part of our plan to derisk the overall pension plan, we offer invested participants a lump sum option as opposed to monthly annuity payments, reducing the plan's future liabilities. Again, this transaction had no cash impact, but did result in a noncash settlement charge of slightly less than $39 million in the first quarter. The second item is the sale of one of our corporate buildings, which we've previously discussed, as we consolidate our corporate offices here in San Diego. This resulted in a $10.8 million gain that is included in impairment and other service chart and other charges net that we've excluded from operating EPS due to the discrete nature of the sale. 11 new restaurants opened during the quarter, all of which were franchised. While this was one of the strongest quarters for new restaurant openings we've had in a few years, 10 restaurants also closed during the quarter. As we said last quarter, we'd like to update you on the new unit incentives we have planned for the year. After gathering feedback from our operators, we've decided on an incentive with two options. The first option includes a fairly significant royalty reduction similar to our current incentive offering. The second includes a meaningful cash contribution combined with a more modest royalty reduction, which we think will incentivize growth in our less-developed markets. The amount of cash contributions under this plan are included in our annual guidance for capex and tenant improvement allowances. Finally, we are reiterating our guidance for 2020, as you saw in yesterday's release. Given the progress we've made and the initiatives we have in place for the remainder of the year, we feel confident reaffirming the expectations we shared a quarter ago to specifically address our adjusted EBITDA guidance. While Q1 came in below the prior year, we do expect improvements in franchise level margins and G&A in the remainder of 2020, giving us confidence that we'll be in the guidance range provided. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open the line for questions. Missy?

[Operator Instructions] Our first question comes from Brian Bittner. Your line is open, sir.

Brian, are you there?

I think he might have left the queue. We can go to the next person, Gregory Francfort from Bank of America.

Yes. Thank you very much. Can you hear me?

Yes, we can hear you.

Yeah. Can you guys talk a little bit about I know you guys have rolled out some new products recently. Can you talk about how you're thinking about the cadence of new products going forward? And then I know operations is a big focus, but how are you balancing the breadth of the menu and removing new products as you add or removing products as you add new ones?

Yes, Greg, the I will say that the focus is not necessarily to remove products as we add new ones, not sort of a one-to-one relationship there, but we are looking at removing complexity as we add new products. So part of what I've spoken about or shared in my prepared remarks really referred to that. We look at what's happening with some of the new folks that have joined our organization, who've really sort of helped us to reevaluate our kitchen operation. We've learned that there are ways to speed things up and make it far easier for our crews to deliver their food. And then we also have reduced some of the SKU counts, with some of the redundant SKUS, multiple sauces, cheeses, things like that, that add complexity in the kitchen and don't necessarily get recognized by the guests. So I wouldn't necessarily think of it as a removal of one product for the addition of another, but likely, in aggregate, when you look at the removal of SKUs and also some of the time and motion required for operations, when we reduce that, it does make it easier to bring new things to the menu. And then as far as the sort of marketing cadence and operations cadence for the launch of new products, we generally break the year up into four to six windows. And within each window, we're typically launching somewhere between two to three offers. And within that mix, there may be one new product or a line extension. And so when you think about it from a kitchen operation perspective, even at a time where we may have three different offers in the marketplace, you're likely only experiencing one new product or potentially even just a couple of new ingredients that allow for a line extension. So that's the way that we balance the complexity. And then lastly, I've spoken about the collaborative nature in which marketing and operations and supply chain work together, and that includes training and even folks that are in the field, giving feedback within these processes. We're really able to make sure that we have an ops-first culture for the products that are created and the procedures that are required of the crew are all within a reasonable set of expectations so that we're not putting undue pressure on the operation. So probably more than you wanted to know, but hopefully, it gives you a feel for how committed we are to doing this the right way.

No, that's great. And may I sneak one more in? Lance, you touched on the bad debt expense for this quarter. Can you maybe give a little bit more clarity on kind of that situation and why it's one-time?

Yes. So typically, we don't have a lot of bad debt. In this particular situation, we had two very specific instances with discrete franchisees, where we needed to resolve some issues. So we've done that. So it's not like you're seeing a general increase in the bad debt reserve across the company. It really was just two discrete issues that needed to be resolved. Those have now been resolved and but don't expect it to be material going forward.

Thank you. Next question comes from Brian Bittner from Jack in the Box.

All right. I work at Jack in the Box now.

Yes. You must be in the next room, Brian.

Welcome aboard.

Well, it's kind of interesting because the question I have, Lenny, for you is talking about the announcement that the Board is initiating the process of identifying a successor. Why do you believe now is the appropriate time for you to leave the company and for someone else to lead? You're finally out of this restructuring. It feels like you have the organization set to grow. Any color you can provide would be great.

Yes, I think as I started to reflect on really my personal desires, what I started to see is that what I was likely going to end up doing is within the next three, four years or so at a maximum, I was going to end up exiting the company likely more like a couple of years within a couple of years. And that would have happened right in the middle of launching really what I believe to be will be Jack in the Box's next run through our new strategic plan. And I felt like it was inappropriate for me to sort of go halfway and then step out right in the middle when we could put a leader in place today that could carry us through that entire next run. I had the opportunity to do that with the prior CEO, and I really respected her for selecting the period of time that she did because we were just about to launch our next bunch of initiatives, and I was able to carry those all the way through. And for me, it's been a business model transformation primarily. But the entire time I felt unencumbered by a prior leader's plans that then I had to step in the middle of and potentially be misaligned with. In my case, I was able to establish the plan and then execute the plan, and I thought it was the right thing to do for the next leader to be able to do the same. On a personal note, as I turned 50, I just took some time to reflect on and ask myself a very serious question, "What would my 20-year-old self say to my 50-year-old self?" And as I reflected on that, the answer was pretty clear. And it was that I would take some time in this next chapter of my life to pursue some of the other dreams that I've had. I've always wanted to teach at the university level. It's something that's been a passion of mine since I graduated from college. My entire organization knows that that's a future dream of mine because I talk about it all the time. And at some point, it was going to happen. And so with those dreams in place, and with the company on firm footing, it just felt like the right time for everything to align.

And just a follow-up question, Lance. On the EBITDA guidance, was the first quarter EBITDA decline fully contemplated when you did originally construct the full year EBITDA guidance? And I ask that in the sense just wondering, is there incremental pressure being put on the remaining quarters of this year to perform from a profit perspective relative to your original thinking?

So what I would tell you, Brian, is that there's puts and takes that happened throughout the year, whether it's sales EBITDA or any other line on the P&L is kind of why we guide on an annual basis. Specifically, there are some things we saw coming. There's probably a couple of things that we didn't see coming. But as you look forward, we reaffirmed our guidance because we feel like between the initiatives that we have in place and things that we expect to happen through the rest of the year that we're going to be fine with our guidance. So I don't want to go into much more detail than that because we're not going to guide toward one end of the range or another. I will just tell you that a lot of it we saw coming, some of it we didn't, but we feel good about whether we saw it coming or not, we feel good about our ability to manage through it for the rest of the year and land within the guidance ranges that we've given.

Okay, thank you.

Next question comes from Jeffrey Bernstein. Your line is open, sir.

Great, thank you very much. In the commentary in your prepared remarks talking about, I guess, incentives for new unit growth, I guess, with that kind of as a backdrop, I was just wondering you mentioned periodically about investments and targeting investments to maximize returns. I'm just wondering, one, whether you've given any thought to helping franchisees with specific initiatives, perhaps above and beyond incentivizing new unit growth? So whether there's any discussion around helping franchisees with certain initiatives that you think would create value? And then more broadly, just wondering if you'd assess maybe the current franchise relations. It sounds like new product platform is off to a good start, but then know whether that, in and of itself, was enough of a needle-mover to change the trajectory of sentiment or whether you think there's still kind of broader friction that will take time to heal.

Jeff, this is Lenny. I will talk about investments. We have historically looked at and actually initiated several investments that we think will enhance either the operation or the image when we believe we either wanted to accelerate those initiatives and/or participate in getting them done. We have made those types of investments. And I think that we'll remain open-minded, particularly when we believe that we have found through tests or through some of the experimentation that we do that we can accelerate something and actually generate some sales and positive consumer sentiment. So, yes, I think we'll remain open to that. We are working on some things right now that if they prove to be fruitful, we certainly can consider ways to accelerate the initiative in the field. And that's something that I think the brand will continue to do just like many others. As far as the franchise sentiment, I don't think that one product is going to cure all of the things that we have experienced. But I do think that the brand, including the entire leadership team and the Board, remains very committed to making sure that franchisees feel like they have a seat at the table and that they're respected as one of the most important stakeholders of our company. So I know that when we make decisions, it's all about trying to run the best brand that we can and maximize returns. I don't think again that one product is going to be a silver bullet, but I think as a franchisees experience improved results, along with open communication, over time, I can be optimistic or remain optimistic that the relationship will heal.

Thank you. Next question comes from Chris O'Cull.

Good morning. This is Patrick on for Chris. I wanted to revisit product launches for just a moment. And kind of looking beyond Tiny Tacos, can you discuss what needs you would like to address with new products? And just related to that, you've mentioned in the past the need to improve your chicken sandwich line and was just curious if there are any planned changes to that in this calendar year.

We still remain committed to some of the work that we want to see happen around chicken. I think it's important, but we're also looking at some of the other things that are happening throughout the industry and some of the consumer trends and making sure that we're going to capitalize on that as well. Just like Tiny Tacos, we haven't necessarily wanted to share a lot of specifics about what we're going to launch and when. It's more for competitive reasons. But I do think that the calendar, not just for 2020 but also for 2021, is very strong. And so we part of the optimism we have around our guidance for this year has to do with that. We spoke about that a little bit at the end of Q4 as folks were wondering about the Q1 results. We spoke about looking at the entire year and our optimism around all the initiatives, including the new products that are going to be rolled out as contributing to that. So we still feel strongly about it. We'll move forward with some of the things we mentioned in the past. The timing is still to be determined as those tests conclude, but we're pretty optimistic about what we've got planned.

Great. And I was just hoping to get a little bit of additional clarification on G&A. It sounded like in your prepared remarks that G&A spend was in line with your internal projections. But can you just clarify, like were you surprised by any of the expenses that occurred? And then just looking at how G&A finished for the quarter versus the midpoint of the guidance, it would seem like G&A needs to be relatively flat year-over-year, where comp sales need to be toward the higher end of your guidance in order to hit the range. So are there specific initiatives or color you can provide around G&A savings opportunities for the rest of 2020?

This is Lance. As I've said just a few minutes ago, we think between actions we can take as well as things we expect to happen throughout the rest of the year, the G&A is going to be between 1.7% and 1.9% of system sales. I don't want to go into a lot of detail around what we expect or didn't expect or what some of those things may be going forward, I'll just tell you that we're confident in our ability to be in that range. And again, I think the other thing I would be comfortable sharing is that we knew coming into the first quarter that there were a couple of things that could happen that may make the percentage look a little higher than it's going to look for the rest of the year. I don't mind sharing that. So just we're comfortable with the full year. We knew Q1 might be a little bit high. And beyond that, I don't want to add anything.

Thank you. Next question comes from Dennis Geiger. Your line is open.

Great, thanks for the question. Lenny, just first wanted to ask, I know it's early and you probably don't want to say much more at all on the Tiny Tacos, but is there anything else to share at a very high level on customer feedback, whether it's repeat purchase attach? Anything else on customer satisfaction scores? And then if I could just sneak a second in just related to the value bundles and kind of the learnings there, and clearly that strategy is resonating. Anything else that you can share on kind of what you're seeing, what's working better than others across products, day parts? And any reason to think that the momentum with that strategy starts to fade at any point? Or you keep it relevant and no reason to doubt that strategy continues?

So first, on Tiny Tacos, what I will say is that the consumer sentiment has been extremely positive. We do look through social media and other consumer data points on a daily basis to have an understanding of how consumers are receiving the new products and also how we're serving them. So we look at operational measures as well. And it really is off to a very good start from that standpoint. We're feeling good about the ease of operation. It's essentially a fry-and-serve-type product. We do have some sauces and things that we provide that have some minor procedural steps involved, but it's overall a very simple product to deliver. Food cost is pretty low, and it allows us to give a really decent and even abundant amount of food for a reasonable price. And Tiny Tacos, if you haven't tasted them, they're the type of food that you eat like potato chips. You can't just eat one. You're going to snack on many of them. And I think they're very portable, which makes it a great fast food-type item. So feeling really good about it, but it's still just a handful of weeks in, so we don't want to sort of bet the farm on Tiny Tacos. And I also think that if there's lessons learned from the past and even some other brands, we do understand that there's no sort of silver bullet product. This is one we're optimistic about, but we'll have to continue to innovate as a brand over the long term as well. As far as the value play, I do think that value bundles will continue to have a space in QSR, and particularly at Jack in the Box, because the types of food that we offer with snacks and sides allows for a lot of upselling and add-ons which makes the value play extremely attractive. But in addition to that, the brand is innovating on just indulgent sides and also indulgent a la carte items that will be on the higher side of pricing and, from a consumer trend perspective, we believe will sell well. So it's not all about value. We put the prices out there today. Oftentimes, people perceive value as meaning cheap. It's not necessarily what we're saying, but we are seeing value for the money is what's important. And in this aggressive marketplace, having people understand what they're getting, quantity and quality-wise, for the money is important, which is why we tend to price things right now. But I can also see through some of the work that's been done on our calendar that it's not all about that. It is about putting great food in front of consumers and having them experience it in a way that they're not as concerned about price.

Next question comes from Katherine Fogertey. Your line is open man.

Good morning. This is actually Jared on for Kate today. Just wanted to dive in a little bit to the franchise versus company-owned comps. There's been a widening of the delta between those two, and we saw that was kind of the widest we've seen in the last four or five quarters. So just any commentary on the delta between company-owned and the franchise comps would be helpful.

When we hired Marcus Tom a couple of years back, one of the things he talked about is conceptually getting the company ops to the place where they were the tip of the spear, and that they really were moving faster and further than our franchisees operationally in executing whatever we were putting on the table so that we could prove it out, not only for ourselves, but also for the franchise community that would follow. I think some of the momentum we're seeing with company operations has to do with the fact that they are early adopters of some of the process changes within our operation. They're helping them to operate a little faster and generate some throughput through their drive-thru. And I think that it's given us optimist or optimism about our franchisees following behind and making some of the same improvements. So that's what we see we think we're seeing at this point in time just based on not only the differential in sales, but also in the improvements in speed in our company ops as compared to the improvements in speed from our franchisees at this point.

Great. And just one more follow-up, changing tune a little bit. But how are you guys seeing the competitive environment sort of play out as we start 2020? We know that there's obviously an increase in sort of value promotions happening on the ahead of a key competitor launching breakfast. So any thoughts on the competitive environment would be helpful as well.

Yes. We've sort of come to a place where we expect the environment to be like this for the foreseeable future. Everybody is battling it out to try to gain some market share. And even some of the biggest brands out there have lost a lot of transactions in recent years. And so I think everyone's after the very same thing. And it means that we're likely going to start to encroach on each other's spaces at times with things like breakfast or late night or other offers that competitors are currently doing well with. So the great thing about our brand is that we haven't just been a burger player. We've been a 24/7 player that provides food well outside of just burgers, fries and drinks. And the consumer has come to value us for that over time, so we would expect that as the competitive set continues to sort of grow their menus or their dayparts that we will have an answer. And as far as the breakfast intrusion that we're seeing today or some of the competitive things that are happening around breakfast, we have a calendar that's ready to compete within the marketplace with some of our best breakfast lineups, and that's what we think is going to be necessary at this time.

Thank you.

Thank you. Next question comes from Alex Slagle. your line is open, sir.

Thank you. Question on the initiatives around improving ops and speed of service. And it sounds like some of that's starting to show up and get reflected in the company-owned same-store sales, but if you could just add some more color on the results of the recent tests and to the degree that the changes have driven sustained speed and transaction improvements. And then on the flip side, if there's any disruptions in ops and need to retool.

Yes, good question. The great thing about what we're doing right now, all the results that we're seeing through the first quarter are really associated with just executing the current systems better. And then some of what's being launched today is really one step further than that, where we make some slight modifications to our equipment. That actually takes a lot of pressure off the operators to meet the speed requirement. Essentially, we have found ways to either cook protein or hold protein in a better, higher-quality over-a-longer-period-of-time way that allows the operators not to have to rush through the just-in-time cooking and preparation process. And it takes a lot of pressure off when they can have proteins ready for the preparation of the various sandwiches and other items. So that's a big piece of what we're doing. So if anything, we're not seeing disruption to the operation, but we're actually seeing ease of operation that's actually leading to the results. Pretty optimistic about what's happening in test right now. In the test environment we've got, not only process changes, but also the minor equipment changes. And we are seeing the best results within that test environment, and we're drawing from that to launch systemwide. So phase one is happening now. We expect more to come toward the back half of the year as well.

And I have a follow-up for Lance on the lease accounting changes and how that impacted the franchise revenue and expense. I know you talked about the modest profit impact, but what should we expect in terms of gross revenue and expense impact as the year progresses?

I think as we look at how the year progresses, you're probably looking kind of $35 million to $40 million on both the revenue and the expense side. If you look at it, it was 12 to 13 this quarter, and this was a 16-week quarter. The other three quarters are 12. So it'd be a little you can't just take this quarter's number and multiply it times 4. But it will be kind of in that range. It's a little bit higher than what we had initially guided to when we first talked about lease accounting a quarter or two ago. And I'd just tell you, as we finalize the implementation of the new standard, we had just underestimated a couple of things. So the it's going to impact the margin percentages a little bit higher than we thought. And then as I said in my prepared remarks, from a bottom line impact, it was about $500,000 this quarter. I expect it to be probably slightly below that in future quarters, but you're probably talking $1.5 million-ish for the year, maybe a little bit either side or another.

Next question comes from Robert Derrington. Your line is open,sir.

Yeah, thank you. Two-part question. One, Lenny, on the drive-thru remodels, you'd kind of talked about that at one point you're doing some testing, and it sounded like it potentially could hold some good benefit to improve the customer experience and the look potentially to the restaurants and the service. Any kind of an update you can give us on that and whether or not that might be a fiscal 2020 program? And I'll wait and hit you with the second one.

Sure. So what we've essentially done is we've brought in Marcus' new team. We started looking at a series of operations improvements that we needed to make. And we thought that those items, coupled with more of a refresh of our restaurants, were going to come together in a way that would be more advantageous over the long term. And this is a good example of what I talked about earlier. When you've got leadership changes and changes in perspective, oftentimes, the new leaders having to adopt the old leaders' plans, so in this case, we wanted to give the operators, a little bit of room to influence the plan and I think the right call was to broaden what we're doing. So we still expect to do the types of things that would enhance the overall drive-thu experience, but I think there's more that we can do beyond just that. So it's been stretched out a little bit to get all of that done. The good thing is we're seeing the results on the upside that we needed to see, so we'll now couple that with the various image things. And I think that result is going to be a lot better than we've initially intended.

Does that, I assume, make some changes to the financial considerations involved with the process?

Yes. I think at this point, we're going to refrain from throwing out any projections because I think the program needs to be finalized before we do that. But there's nothing that we're considering within these range of possibilities that, at this time, throws the company outside of its long-term guidance.

Got you. And it doesn't sound as though it's a fiscal 2020 necessarily rollout?

Yes. I mean, there's an opportunity, I think, to get something started this year, but certainly, I don't think we're going to be in a place where what we do this year is material to the results this year.

Got you. And secondarily, last year, in the spring time, Lenny, you used a personality, Lele Pons, I believe, what's the name of the individual, who spoke in behalf of the Spicy Chicky Chicken Crispy Strips. And recently, I've noticed that you have what appears to be some kind of a promotional tie-in possibly with Sonic the Hedgehog and Tiny Tacos. Can you give us some thought around that? And is there a movie debut and a promotional tie-in to come? And what's happening in that regard?

Yes. We actually were able to tie in to the Sonic The Hedgehog movie and both through social, digital, even some games that we've put out. We were able to create quite a bit of engagement with consumers around the movie and our Tiny Tacos. We thought it was a great way, particularly around Super Bowl time, to create quite a buzz about what was going on with Tiny Tacos and what was going on with Jack in the Box in lieu of a very expensive Super Bowl commercial. This seemed to be the right way to go about it. So really happy with the way my team sort of thought out of the box to create some momentum with Tiny Tacos and doing it in a way that was very economical. So feeling good about the promotion. We actually gave away a bunch of prizes throughout the Super Bowl for folks who were willing to hashtag on our behalf. And we had a very favorable response and a significant number of impressions for participating in that way, more so than we had gotten in the past and even than we had gotten in some of the more direct, media-related Super Bowl events in the past. So sort of kudos to the team for getting this thing off on the right foot. I think one of the ways that we stretch our marketing dollars is through innovative approaches like this. And I would expect that this play between what happens in social and digital and what happens on television will continue for us going forward.

Thank you. Next question comes from Andrew Charles. Your line is open, sir.

Great, thank you. Lenny, I know you talked about other menu innovation in the pipeline for 2020 besides Tiny Tacos, but to play devil's advocate, given the encouraging start you're seeing with a product, which is a permanent menu addition, why not extend the promotional window and continue to fuel advertising support and save the other innovations for maybe a rainy day or another time rather than take a risk and change advertising focus to a new menu item?

Yes. So we shared the launch of this as a promotional in this promotional window and also as a permanent item, but we haven't shared the duration of time that it will be promoted socially, digitally and also through television. So I will give my marketing team the room to flex as they see fit to make sure that this is getting pulsed as often as it needs to and continue, if necessary, on air. But I think they've got a pretty good plan laid out so that we don't have these completely dormant periods. At the same time, don't can't say at this point in time that we're committed to television as a primary vehicle as the go-forward for 2020.

Got it. Okay. And then, Lance, in light of the elevated number of 1Q store closures, do you still stand by the guidance from the 4Q call that the number of net restaurant openings should be higher in 2020 than 2019? Or does it require a higher take rate of the new development incentives or something more exogenous to achieve this?

First of all, we've got it to kind of the gross openings of 25 to 35. We remain on track for that. We did see a few more closures in the first quarter probably than we would normally see. Historically, we closed 1% or less per year. So as of right now, I still feel pretty good about thinking that the net number is going to look better this year than last year. But beyond that, I don't want to get into a lot of specifics because we just don't talk the net number very often, as you're well aware.

Yeah. Okay, that's helpful. Thanks.

And our last question comes from Jon Tower. Your line is open, sir.

Right, thanks. Just a few ones for me. Can you discuss you've had now a couple of quarters in a row of positive traffic at your company stores and, I guess, three if you include the flat traffic in third quarter 2019. So can you discuss what you're seeing there? And specifically, is it higher frequency of existing customers? Are you drawing in new customers? And then just on that point, it sounds like value's been the primary driver of that under $5 price point. So is that accurate assessment? Or is it broader than that? And then I have another question after.

Yes, it's a great question. So our most fickle and least loyal consumer is the consumer that's looking for purchases below the $5 mark. And I think what you're seeing is that we're able to capture back some of those consumers. Those consumers do like Jack in the Box, but they're deal shoppers. And if you don't have a deal out there, they're not going to participate. We're also doing a lot of upselling because the way that the promotions are created, we're allowing the sandwiches to be upsized, and we're also creating, oftentimes, a side or a snack that can be upsold and added to the meal. And that's worked out very favorably as well. So that's sort of what's driving some of the improvement in transactions versus prior year trends, and we think that's something we're going to need to continue doing.

Okay. And then just, Lenny, on the decision for you to leave. Clearly, it's a Board decision on who comes in next. But since you're on the Board, can you share any thoughts on the characteristics or background of the potential CEO that comes in and takes on the seat?

Yes. I think, first and foremost, they have to be the type of individual who truly respects all the stakeholders who participate in this company. I have historically looked at those stakeholders as our franchisees, our employees, our guests, our suppliers, our shareholders. And I think it's going to be important that whoever comes in realizes how important it is that all those stakeholders are respected and have a seat at the table in the decisions that we make. I also think that you have to be growth-oriented because the whole idea behind getting the company to this place was to be able to focus on this one brand and grow it successfully. And so I would look for someone who's very growth-oriented and has some prior experiences growing this type of content. I think outside of that, as you think about who we are as a brand, we are not a typical QSR, although we play in the space. So I would hope that whoever comes in would have an open mind to the equities that have been established for this brand over 65 years and understand how to capitalize on that versus trying to turn the brand into something that maybe it isn't as capable of being. So I know that the Board is very concerned about those same things, and I would expect that whoever we land on will be somebody that we feel comfortable can deliver all of that on behalf of all of our stakeholders.

There is one more question. It comes from John Glass. This will be the final question.

Thanks. Thanks very much. Can you talk, Lenny, about the incentive franchise incentive program that you've offered and what the uptake has been so far? How long does it take for this to kind of roll through the system? And maybe if you could just be specific about, one, what how does this enhance the returns, like returns prior to incentives and post incentives? So what kind of deal is this? Or what theoretically, as You've constructed it, what did you think you needed to do to incent them? And is there an appetite to grow, given that the current cost environment I know the franchisees probably have different cost structures in the company stores, but high single digit labor in a solid single digit commodity inflation, that's a difficult environment to operate in and probably, therefore, difficult to think about, do I want to continue to open stores until I know where those are headed? So maybe what their cost pressures are and if that's weighing on their development pace as well.

John, it's Lance. I'll take this one, and Lenny can jump in if he needs to or wants to. From an incentive program, we're actually just in the process of rolling this out now. And so we're actually a little further ahead with you guys, been having communicated and spent a lot of time with franchisees on this yet, and we're actually going to be spending some time on this here in a couple of weeks with the franchisees when we see them next. But what I can tell you is we did get some input from franchisees as to what we felt like would help drive growth. And certainly, they had thoughts around both the continuation of royalty abatements, which has been our traditional plan, as well as for some of the particularly some of the smaller folks and ability to put some dollars in and really reduce the costs of the upfront investment they're having to make. So we've kind of landed on a two-pronged approach, where you can either have a royalty incentive or abatement, if you will, which is similar to what we do now. Or an approach where you get a more moderate royalty abatement, but you get a fairly meaningful cash infusion upfront. That does help particularly if you want to look at it from a sales to investment ratio, really helps that sales-to-investment ratio. I'm not going to give the exact numbers until we roll it out officially to the franchisees in a couple of weeks, but we think it will be received well. We think it answers both those folks that might need a little more capital and also those folks that really are just as happy to continue getting a longer royalty break. When you think about, are they kind of willing to open with some of the cost pressures? Interestingly, what we've seen is franchisees continue to want to open restaurants if they think they're going to be able to make good money. And we continue to have some of the best unit economics in the entire industry. There's still only a competitor, perhaps two, that has a better percentage margin that we have, and that puts more money to the bottom line. So I think as long as that continues and as long as we're able to continue to provide kind of good innovative products, they're going to continue to drive sales and offset some of those cost pressures that the franchisees will, in fact, be open to building. And these incentives can only help that.

Awesome. I think that completes today's call. Thank you all for dialing in. We will be in touch next quarter.

That concludes today's conference. You may disconnect at this time, and thank you for joining. Have a great day.