Jack in the Box Inc. (JACK) Q3 2020 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box, Inc., Third 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, Vice President of Investor Relations and Strategic Analysis for Jack in the Box. Please go ahead.

Thank you, Stephanie, and good morning, everyone. Joining me on the call today are Chief Executive Officer, Darin Harris; 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 reconciliations 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. And while management will provide current thinking on this call around the potential impacts of COVID-19 on our business, given the unprecedented nature of this pandemic and the rapidly changing environment, any forward-looking statements should be considered with this elevated level of uncertainty. 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. Our fourth quarter ends on Sunday, September 27. We tentatively plan to announce results on Wednesday, November 18, after market close. Our conference call is tentatively scheduled to be at 8:30 a.m. Pacific Time on Thursday, November 19. With that, I will turn the call over to Darin.

Thank you, Rachel, and good morning. I’d first like to take a moment to express my heartfelt thanks to our restaurant team members for keeping everyone’s safety a top priority, as we provide for the needs of our guests and first responders. I’d also like to thank our corporate employees, franchisees and suppliers for their partnership flexibility and ingenuity during these unprecedented times. I’ve only been in the role for a little over 6 weeks now, but they’ve been a very busy 6 weeks. I’ve had the opportunity to make burgers, cook tacos with team members in our restaurant. I’ve met with many of our valued franchisees, and I have onboarded with many of the corporate staff. In addition, I’ve also spent a significant amount of time with my executive leadership team. And through all of these interactions, I have been extremely impressed with the nimbleness of this brand and the willingness of our employees and our franchisees to pivot towards keeping our guests safe as well as our staff safe, which has enabled us to drive strong results in the middle of a pandemic. The passion for the brand has been evident in every interaction. As mentioned last quarter, Jack pivoted early in the pandemic to capitalize on changing consumer trends, including changing media placements, leaning into delivery and offering indulgent, flavorful and portable menu items. Sales for the third quarter were the direct result of this, up 6.6%. Sales accelerated throughout the third quarter and the momentum from the end of the quarter has continued so far into the fourth quarter. We won’t get into too many specifics, but this performance drives our continued outlook to be cautiously optimistic. Additionally, we will be thoughtful about what we’ve learned throughout the pandemic and apply it to future strategies to help preserve this momentum. Sales and cash flow remain robust, and the company is in a very strong position amidst the pandemic. Lance will share more detail on this in a minute. As we look at the results for the third quarter, same-store sales were the strongest in 5 years, since the third quarter of 2015. I will take a minute to outline some of the key success drivers. Over the past few years, the team has been dialing in the right value equation to drive overall sales. In 2019 and into 2020, we experienced success with our $4.99 bundles and upsell and add-on strategies. We continue to see these price-pointed offers appealing to our core consumers during this time. We also continue to benefit from our innovation. Since the launch in mid-January, Tiny Tacos have remained highly incremental to our overall performance. We’ve seen sustained success from them over the past 6 or so months and they certainly appeal to off-premise occasions as they are featured in a takeout box and are very portable. Consumer response remains strong and Tiny Tacos are helping to bring attention to the entire taco category. Tiny Tacos drove transactions and bolstered check sizes, as they’re frequently added on to guest orders. We also launched our popcorn chicken, an indulgent product that is, again, portable and snackable during this pandemic while capitalizing on chicken trends. Our successful promotions in prior quarters have included a thoughtful upsell strategy, but popcorn chicken has been the most successful, offering double the chicken for $2 more. These upsell strategies are not only easy for our crews to execute, they enable the guests to get what they want at a great value and support profitability of these promotions for us and our franchisees. Customers also start – are also starting to acknowledge our speed improvement. Customer perceptions of speed of service improved significantly in the third quarter, reflecting our continued focus on giving the guests an experience that is consistent and quick and will make them want to return. Aside from these continued strategies, we are also seeing shifts in our business as a result of changes from consumer behavior amidst COVID. First, consumers are utilizing delivery and our mobile app more than ever. Delivery and mobile app sales remain approximately double what they were prior to the pandemic. As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers, with 80% utilizing at least three of the major providers. We continue to integrate our POS systems with these third-party providers, allowing for simpler procedures for the restaurants. Second, occasions have shifted away from the traditional breakfast daypart with consumers no longer commuting to work. But since we offer anything on the menu any time of day, we are seeing plenty of breakfast items selling later in the day. While the breakfast daypart has certainly been impacted, by the end of the third quarter, all five of our dayparts were positively contributing to overall sales performance. Third, we’ve increased sales of our more premium and indulgent items, items such as our homestyle chicken sandwich and Classic Buttery Jack. Consumers are now placing larger orders as well, typically for multiple people. These shifts in consumer behavior have led to a sustained significant increase in our check sizes during the pandemic. As our sales have improved, we shifted some of our marketing spend. The media team has been extremely nimble, leveraging consumer consumption trends around gaming and binging on social and video content to really meet the consumer where they are during this time. For example, if you recall, we moved media away from sports last quarter as most events were canceled. Now that they’re back, albeit in a very different capacity, we are incorporating our brand into content and placements that makes sense to the fans watching from home. Now switching gears to unit growth. Franchisees opened four new restaurants in the quarter and closed six restaurants. This brings our year-to-date total to 20 new restaurants and 19 closures, one of which was company owned. For those of you that attended my meet and greet, you know I have a very strong background in development. We are currently working to get the team, the process and tools in place to really jump-start growth, but it’s going to take some time. You’re aware, developing a strong new unit pipeline takes anywhere from 18 to 24 months. Looking overall at the business, we are feeling bullish about our current trajectory, especially in light of our strong performance at this time last year and continued momentum into the fourth quarter. Before turning over the call to Lance, I’d like to take a moment to address his departure. As I mentioned in the release, it certainly has been a pleasure working together, although a very short time. But I’d like to thank Lance for his many contributions and leadership to the company, strengthening our financial position and managing cash well through the pandemic. On behalf of the leadership team, you will be missed and we wish you the best of luck in your new opportunity. We feel confident in Dawn and Sean in the meantime. And while we have already initiated the search for Lance’s replacement, just know, given the strength of the finance team, we will be prioritizing finding the right person over filling the position urgently. I’ll now turn the call over to Lance for a closer look at our third quarter results.

Thanks, Darin. And I appreciate the kind words, and good morning, everyone. Operating EPS for the third quarter was $1.37 as compared with $1.07 last year. The roughly 25% increase was primarily driven by strong sales results across the system coupled with lower G&A costs in the quarter. Our system-wide comparable sales increased 6.6% in the third quarter, company comp sales increased 4.1%, comprised of check increases of 20.2% and transaction declines of just over 16%. Franchise comp sales increased 6.9% for the quarter. Similar to last quarter, sales results continue to be strong across our system with all regions positive in the third quarter. The difference between company and franchise same-store sales was primarily driven by a few company-owned locations that are heavily dependent upon dine-in traffic. Those locations had a drag of just over 1 percentage point on overall company same-store sales. As mentioned in yesterday’s release, for the four weeks ending August 2, the strong trends we experienced at the end of Q3 have continued to this point in Q4. During the third quarter, company restaurant-level margin decreased to 25.4%, down from 27% last year. Nearly one point of this decline was driven by labor with wage inflation between 6% and 7% in the quarter and the addition of our emergency paid sick leave program, which added roughly 30 basis points. Occupancy and other costs were also up nearly 1%, driven primarily by delivery cost increases in COVID-19 related supplies. Food and packaging costs decreased 20 basis points during the quarter, driven by a favorable mix shift, as more purchases of premium items increased our average check. Commodity inflation in the quarter was approximately 3.6%. Franchise-level margin increased $5.4 million when compared with the prior year quarter, primarily driven by the increase in franchise same-store sales. As a percent of total franchise revenues, franchise-level margin for the quarter was 41.5%. Without the changes from the new lease accounting standard, franchise-level margin would have been 44.4%, a 2% increase versus 42.4% in the prior year. Advertising costs, which are included in SG&A, were $3.9 million in the third quarter compared with $4 million in the prior year. This slight decrease was due to the reduction in marketing fees for the last couple of weeks of April, which fell within the third quarter. Marketing fees for the fourth quarter remain at the traditional 5% of sales. G&A decreased $10.6 million in the quarter, as last year’s G&A was inflated by $7 million due to a legal settlement. As a reminder, this settlement accrual was reversed in the fourth quarter of last year. Mark-to-market adjustments related to company-owned life insurance policies, or COLI policies as we refer to them, also drove a favorable $2.6 million reduction in G&A versus the prior year. As we’ve discussed, these policies are sensitive to swings in the stock market. These COLI gains are nontaxable, which, in combination with an improvement in earnings before interest and taxes – before income taxes rather, drove our tax rate in the third quarter to 27.9%. Now to turn to our liquidity and debt. Like many in our industry, we have seen business performance change significantly. While our performance has certainly held up relatively well, given the uncertainty around the magnitude and duration of the financial impacts caused by the pandemic, we continue to believe it is prudent to take actions that will maintain and bolster our healthy liquidity position. To provide a quick update on cash, the company ended the third quarter with roughly $197 million in cash on the balance sheet, of which $160 million was unrestricted. We temporarily paused our share repurchase program and have $122 million of share repurchase authorization remaining. We do not expect to repurchase any shares for the remainder of the fiscal year. We do, however, remain committed to returning cash to shareholders. As we assessed our cash position for the quarter, we have decided to reinstate the quarterly dividend of $0.40 per share. We will continue to revisit and monitor our capital allocation policies each quarter as we gain further clarity around the impacts of the COVID-19 pandemic. Our leverage ratio at the end of the third quarter was just over 5x. We continue to be in a strong position when looking at the covenants associated with our debt structure as well. Lastly, we have scaled back capital spending for the year and are spending only on essential projects at this time. To put some color around this, you can think of it as approximately half of what we were planning to spend for the full year initially. That concludes our prepared remarks. I’d now like to turn the call over to the operator to open the line for questions. So Stephanie, we’ll turn it back to you.

[Operator Instructions] Our first question is from Brian Bittner with Oppenheimer. Please go ahead.

Thanks for the question. Darin, it feels like you could be a change agent for Jack in the Box as it relates to unit growth over the long term. That’s what I felt like in the meet and greet, and that’s what it feels like today. And I’m just curious, what do you believe is really needed to crack the code on getting the brand to open units outside of its regional core markets where most of the units are clustered? It seems like the company has never really cracked that code. And I’m wondering, after 6 weeks, if you have any thoughts?

Brian, I appreciate that comment. And my thoughts, I’ve have had a chance to lean into the business somewhat, is really understanding what drives our success. So part of that is making sure that we have the people, the process and the tools to focus on growing the brand. Understanding what’s driving our consumer behavior is another component that we will continue to focus on so that we can make sure we’re entering the right markets with the right economic model and the right box. So what I would suggest is that as we look at, whether it’s our existing markets where we have plenty of room to grow or new, it’s really understanding our consumer behavior, what demographics are important and then making sure that we have the flexibility in what type of units that we open or the prototype, in essence, kit-of-parts, so whether it’s in-line, in-cap, whether it’s nontraditional, we need to be able to meet consumers where they want to experience Jack in the Box.

And my follow-up, is there any color you can provide on franchisee-level cash flow? And how it’s trending right now relative to past years? And maybe tie into that, where franchisee sentiment stands right now?

Yes. At this point, what I would say is that the sales across all geographic regions for franchisees are trending in a positive direction. And we haven’t disclosed cash flow for our franchisees. As you are aware, we’ve provided relief and many of our franchises were able to get PPP loans. Overall, what I would say is many of them have decided not to defer rent payments and have paid early on some of those adjustments that we made or the relief that we provided.

Your next question comes from Alex Slagle with Jefferies. Please go ahead.

Good morning, Darin, I realize you’ve only been there at the company for several weeks now. But what are the franchisees asking for? I mean where do you see the most immediate way to help them keep moving the system forward based on what they have told you?

Yes. Great question. I mean it’s been a great first 6 weeks of getting a chance to connect with franchisees. I’ve had a chance to spend time with over 65 of them – or 65% of the system. So it’s been a great opportunity to just connect and get to know some of what’s on their mind. What I would tell you is the biggest thing they’re looking for from us is the ability to have a seat at the table and really be engaged in how we think about the path forward with the business. So really, the ability to provide feedback for us to listen, for us to engage and get their input on initiatives we’re rolling out because a lot of times, they have great ideas on how they can make us better. And so we want to make sure that we take the opportunity to engage them in all the right areas of our business that will just enhance the strategies that we put in place.

That's helpful. Thank you.

Your next question comes from Dennis Geiger with UBS. Please go ahead.

Great. Thank you. Darin, wondering if you could talk a bit more about your impressions around both the new product pipeline, the strategy which seemingly has resonated very well in the recent quarters, as well as just kind of the overall value strategy, any kind of updates that you see going forward, anything as it relates to value and new products, any kind of tweaks that you see depending on the pressure that consumers are coming under over the coming quarters? Just kind of on that strategy and whether anything needs to change or how confident you are that this is kind of the right strategy to drive continued momentum for the business in coming quarters and going forward?

Yes. Great question. So let me talk about value first in the value strategy of Jack and how I think we can set ourselves up for success, if we see our competitors lean into price-pointed offers as an example. Over the past couple of years, the team has really been working on getting the approach to value right. We focused on these $4.99 bundles that the product team has created to help insulate our margin as well as drive transactions in this environment. Some of our successful add-ons at a $3 price point can also mean different types of value for different consumers. So while the vast majority of our customers add these onto their checks, many want a $3 meal of Tiny Tacos, and they can have those as well. So to me, for the value piece, it’s really meeting our consumer’s desire to value, what they get for what they pay. And we’ll continue to focus on innovation around doing that, whether it’s upsells, whether it’s unique snackable items that they can treat as their main entrée or whether it’s indulgent items like our Buttery Jack or our homestyle chicken. We want to give consumers what they desire from Jack at any time of the day.

Great. And then if I could just add a quick follow-up, just around the discussions that you mentioned with franchisees. Can you just describe kind of the demand for growth? Does it seem to be there? I know that pipeline will take a time to build. But does there seem to be a strong interest in demand for new units based on the conversations you’ve had to date?

Yes, great question. What I would tell you is that from my discussions with our franchise system, what I found is that they’re eager to grow. They want to grow. Now what I would say we need to do in order to accelerate that is give them the tools, provide the correct processes to really enhance their desire to grow. So like I mentioned earlier, kit-of-parts, being able to go to many different locations with the Jack brand, giving them the tools to find real estate more rapidly. And then more than anything, focus on the unit economic model and getting the right-sized box for them to build in that markets.

Your next question comes from John Glass with Morgan Stanley. Please go ahead.

Thanks, good morning. First, maybe just some context on the sales acceleration, Darin or Lance. What do you see underneath it? Is this – is there – I know you said all regions are positive, but is there a regional SKU? You talked about, I think, breakfast daypart contributing, which is a bit surprising to me. Is there anything that you see other than we’ve seen through results of getting better? And obviously, you’ve got some product news that’s in the market. But is there any sort of granularity you can provide about why you’re so much ahead of a lot of your peers right now on a comp basis?

John, this is Rachel. I’m going to take that one. So first of all, from a regional standpoint, we’re not going to share specifics by region, but just know in areas where places have started to reopen, we really haven’t seen degradation. And as Lance mentioned, we continue to see strength across regions. In terms of the daypart trends, as we’ve seen transactions really drive our improvement throughout the third quarter, we’ve seen that across dayparts. And so if you think about breakfast in particular, really, those hours right before the lunch daypart is really where we’ve seen the growth flipping to positive for that daypart.

That’s helpful. And then Darin, just one more on development. You and others in the industry have gone through a refranchising process. But as you rekindle development, sometimes companies like to lead with company stores to sort of prove the economics or prove the new model. Do you see any change in how you think about the company franchise? Or are you thinking about maybe leading development in the system more aggressively to underscore your confidence in the model? Or do you see it not changing?

At this point, it would be too early for me to provide any guidance around how we’ll approach growth outside of we’ll continue to focus on incenting and providing the tools for our franchisees to grow. But we’ll continue to evaluate that into our – both our short-term and long-term strategy. In essence, will the company grow units alongside franchisees? At this point in time, it’s focused around franchise growth.

Your next question comes from Gregory Francfort with [Bank of America] B&A Securities. Please go ahead.

Thank you very much for the question. Just maybe on the margin. I guess I would think that the company store margins are probably not a great proxy for franchise margins because of the regional SKU and also the comp difference. Can you maybe help just at least frame up if the franchise margins are kind of up on the current comps and – given kind of how much of the business is going through the drive-thru? And then a follow-up would be, does, I guess, how much is going through the drive-through change your plans for what the assets are going to look like on a go-forward basis in terms of the store design and the percent of the dining room, square footage or anything like that?

Greg, thanks for the question. I’m going to answer your first question and then pitch it over to Darin on your second question. But I think you’re right in terms of company being a little more outsized in terms of margin impact, first, based on our largely California footprint. Like you mentioned, we should see some benefit from the dining rooms being largely closed across the system. But company, in particular, kept our staffing the entire time with no reduction in hours. We could have layered on that emergency sick leave program also. So a couple of things that I would say are a little bit unique for company compared to franchise results. And given the sales performance, we would expect them to be a little bit – in a little bit stronger position from a margin standpoint. I will kick it over to Darin for the unit piece.

Yes. As we think about how we evaluate the current economic model on the box as it relates to off-premise, clearly, we’re learning some things through the pandemic and one is we have to continue to focus on how do we create this incredible guest experience through our drive-thru or any off-premise occasion. And so we’re definitely going to take some of the opportunity into our future strategy to evaluate that. I do think the pandemic will change some things where we have to ask ourselves some questions about. As we develop a kit-of-parts, some locations should have a very limited dining room. We have some like that today. So I think what your question was leading is we absolutely will evaluate both the size of our box and the size of our dining rooms to meet the guests’ needs in the way that they want to experience Jack.

Your next question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Great, thank you very much. Two questions. One, Darin, broadly speaking, obviously, you joined at a very interesting time. So welcome. Now it seems like all the restaurants that are reporting tend to talk about despite a horrible situation that there has been some silver linings in the industry, whether it’s technology adoption or drive-thru usage, real estate availability, speed of service, lots of potential positives. I’m just wondering maybe what trends have you seen change over the past few months in the underlying business? And maybe what would you do differently going forward to maybe further accelerate the change that you’ve seen? Maybe what are the biggest areas of opportunity? And then I had one follow-up.

Jeffrey, good question. One of the things with the trends is, off-premise, I think it’s going to continue to remain important. I think it’s just accelerated and now we have to amplify how we pay attention to it and how we still give the guest the best experience we can, whether it’s through delivery or whether it’s through the drive-thru. The consumer data also indicates cleanliness is going to continue to remain top of mind for our consumers after the pandemic. So continuing focus around our cleanliness and taking care of our guests and letting them know that they should feel safe as well as our employees. I think it’s a trend that’s going to continue. I also think about, from an operations standpoint, in this time, what we’ve recognized is through our ability to focus, say, for example, more of our energy through delivery and/or the drive-thru, what we’ve tried to do is focus on taking care of our guests and in ways they are really focused around their experience and teaching our teams to make sure they’re focused on the experience, delivering a product that’s flavorful at a good speed and then also that’s accurate. So just by that focus alone being able to focus on drive-thru, we’ve seen enhancement to our business.

Got it. And then just a follow-up or maybe a clarification. You talked about, in the press release, momentum through June or that it accelerated, I guess, through the third quarter and based on the fact that we had already had some tidbits of information earlier in the quarter, it does seem like perhaps you ended the quarter in a low double-digit range. And then there’s mention that the acceleration continued thus far into the fourth quarter. So just trying to interpret when you say the acceleration continued, does that mean that trends have further improved? Or are you just happy to say that the momentum you had in the third quarter has sustained at the same level, just – because we did have so much granularity through the fiscal third quarter, just trying to get a sense for what the implication was thus far in the fiscal fourth quarter?

Yes. So based on the tidbits of information we gave throughout the third quarter, you can calculate the exit rate that we experienced throughout the third quarter, which does speak to the acceleration we felt throughout Q3. And based on the comments in the release, it’s really pointing to that sustained performance we experienced towards the end of the third quarter.

Your next question comes from Chris O’Cull with Stifel. Please go ahead. Chris O’Cull: Thanks, good morning. Darin, based on your comments, it sounds like you think the system does not have the development tools needed to support franchisees and – which is surprising to me given the company of Jack size that they wouldn’t have that capability. So can you elaborate on the magnitude of changes that you think are needed to support franchisee development?

Absolutely. So Chris, first, I thought your title this morning was pretty interesting using my name. So I’ll give you credit for that. But beyond that, what I would say, to answer your question specifically, Jack has tools. I don’t want to mislead anybody. What I’m talking about is seeing how we can upgrade those and take it to another level. For example, multiple different unit economic models and multiple different ways to open locations, whether it’s travel centers to in-line units to in-cap units and freestanding. We need to figure out – even if it’s conversions in this environment, we’re taking advantage of some of the real estate opportunities that may exist. We have to continue to develop our process and systems to adjust and be more agile and adapt rapidly. So that’s more where I’m referring to. And then just continuing to find ways to value engineer our new development box or basically our unit economic model. And so that’s really what I’m talking about, making sure that we have continuing to make our tools, our prototype and everything more efficient and effective to be prepared for more aggressive growth.

Just to add on to that for just a second. I would add that keep in mind too, we’ve been so focused on refranchising over the past few years that really getting unit box right for growth going forward is even more of a focus for us, just to add a little history to them. Chris O’Cull: That’s helpful. And then just given the elevated importance of drive-thrus in this environment, are there any updates to your thinking of some of the drive-thru initiatives that the company had been working on previously? And why not maybe accelerate the program given franchisee cash flows have improved?

As you can imagine, COVID, certainly, threw the wrench in our plans as far as increasing some of those operational improvements. So we focused on safety and health of our employees, and we focused more on the behaviors that we needed to implement during pandemic to stay consistent. But what we will accelerate are some things that we did delay such as our holding cabinets which they’re expected to roll out later this year that enable us to put more product upfront, that will help with speed. It also makes the product quality better. We will also focus around processes. How do we – some of our items, we’ve learned different ways to cook to deliver speed. We’ve also looked – so basically, equipment processes. I would also say training around speed and then measurement. So those are the areas that we will be continuing to roll out through the back half of the year that I think will enhance. What our guests are already telling us is that their perception of our speed has improved. So first, it improved through focus. Now we’ll get it through tools that will enhance it.

Your next question comes from Eric Gonzalez with KeyBanc Capital Markets. Please go ahead.

Thanks for the question. And congrats on the sales trend so far. Large chains have made mention of some incremental advertising spend in the back half of the year. And I was just wondering if that’s something you’ve considered at Jack in the Box, maybe match the competition and perhaps help sustain your momentum into the back half? And if so, how might – what might – what impact might be the competitive increase in advertising you have on your current momentum?

Yes. So – I mean right now, we’ll continue to focus on the plan that we have for the back half of the year with our current media spend. What we will do is, as you know, sales drive our ability to have additional marketing dollars to spend. So we’re going to look at all opportunities that may exist. As I mentioned earlier, we’re starting to go back into some of the sports opportunities that exist and then also with some targeted consumers where we think we can meet them via social and/or digital channels.

And if I could maybe ask a question – like a follow-up question on some of the development commentary. It seems like every brand wants to maximize the off-premise capabilities in their future store growth. And what that might mean is there’s sort of a gold rush for good locations with drive-thru capability. So I was just wondering the typical pipeline being 18 to 24 months out, is this a time where you maybe consider trying to rush that along and either get to the front end of that 18 to 24 months or perhaps inside of that such that you can take advantage of the real estate opportunities in the marketplace?

Yes. I think we want to look for every opportunity that makes sense from a standpoint in our geographic areas and those right outside of it to accelerate growth through finding, as I mentioned earlier, additional ways for people to consume Jack, whether that’s taking over closed restaurants or whether it’s just having a kit-of-parts to go into different sized buildings. So definitely, I think there’s going to be an opportunity. And I think our franchisees will and have already expressed interest in pursuing some of those opportunities.

Your next question comes from David Tarantino with Baird. Please go ahead.

Good morning. And Lance, first, I just wanted to wish you well in whatever is next for you. You’ll be missed. And Darin, my question is about essentially the drive-thru speed conversation. And one of the things that, I guess, has been a hallmark for Jack in the Box is how diverse and perhaps complex the menu is and I was wondering what the fresh set eyes on that? Do you think there’s an opportunity to simplify the menu to get more focused and drive better through better speed through the drive-thru?

I think you bring up a couple of good points. One of the things Jack has always been known for is innovation and variety throughout all dayparts. We’re going to continue to focus on our strategy and really enhance our product pipeline. And when you do that, we’re going to look at our entire menu and we’re going to make adjustments as needed. But overall, are we going to eliminate a substantial portion of the menu? That’s not our focus. Our focus is how do we drive innovation and grow and create more variety for our guests, and then decide in that process, are there some menu items that we should eliminate?

Keep in mind, too, that some initiatives we’ve had in the past to help with simplification happened with consolidating ingredients and simplifying from an ingredient perspective without taking items fully off of our menu. So there are ways, too, that we can approach it without removing full menu items.

One of the things I would add to what Rachel said is, as I mentioned, for speed, which is part of your question, just the process in which we execute the product or different cooking procedures enable to us to take our current menu and just enhance speed.

Great. That’s helpful. And if I could sneak one more in. Is there any way to know whether you’re attracting new customers during the pandemic? And if you are, I guess, what do you think you need to do to keep them?

So this is Rachel. I’ll take that one. We certainly track a lot of data internally and externally. While we won’t comment on that right now, as you can imagine with the industry shifting so much, a lot of people are using different brands in ways that they haven’t necessarily before. I would say the way to keep the customers now is really through delivering an elevated experience. Darin, I don’t know if you want to add anything to that. But I think in terms of just the trends we’re seeing, in some of the ways that consumer behavior is shifting, it’s important to meet them where they are and continue to really drive that elevated experience.

Your next question comes from Jon Tower with Wells Fargo. Please go ahead.

All right. So Darin, aside from the unit growth piece of the equation, which you talked about earlier on in this call and in your intro call a couple of weeks ago, are there other pieces of the business that you feel needs to be addressed, that wasn’t necessarily being discussed under prior leadership, whether that be, say, in operations or new products or marketing or anything like that? And then I’ve got a few more.

So I think more than anything, Jack has this incredible iconic brand personality that we have to continue to amplify and let our consumers and our guests enjoy that unique personality that’s always been Jack. And I think there’s a lot of opportunity for us to continue to do that.

Okay. Then on the Tiny Tacos, clearly, it’s been successful. But I’m curious, has it exceeded your internal expectations? And given the success to date, has it pushed out any previously planned product launches?

This is Rachel, I’ll comment on that one. We don’t really share our expectations versus actual performance. But as you can imagine, given the results, we are pleased with what we’re seeing so far from Tiny Tacos. In terms of the innovation pipeline, as Darin mentioned, we have a pretty good list of items that are coming down the pipe. And so from Tiny Tacos’ perspective, the success of it didn’t necessarily push any of that back.

Your next question comes from Andrew Charles with Cowen. Please go ahead.

Darin, congrats on the new role and, Lance, best wishes in your next role as well. Just given your background in the industry, can you talk about your past approaches and processes behind food innovation? I think you noted obviously that Jack in the Box has a lot of credibility here, a lot of success. And I ask in the context of how to sustain the successes of 2020’s launches as this has arguably been the best year for menu innovation since Buttery Jack in 2015?

Yes. So great question. I think, first and foremost, is really dialing into our guests’ desire for what they want from Jack. Why do they come to us and why they leave. So really diving deep into data around our guests and segmentation work, I think, is where it starts, and then creating a robust process internally that engages our franchisees because they have great ideas and their employees have great ideas, our vendors. And then our – also aligning with some third-party providers who think about this 24/7. And then the last piece is really getting our entire company, especially the product development team, excited around how they can find unique ways to give our guests what they want. So I think that’s really our focus. Up until recently, and as Rachel said, we’ve had a really robust pipeline of products. I think this is really just putting it on steroids, in essence, really focusing on getting more ideas into the funnel. And I can tell you, our product team is excited about seeing that occur.

That’s great. And then my other question is that it’s encouraging to hear that digital sales are running at double the pre-pandemic level, but this is still a small part of Jack’s business that’s ripe for growth. What do you view as the key unlock to increasing Jack’s digital presence? Is it the store prototype going forward and making it more accessible? Is it more of an internal focus just given the brand is focused on other things in recent years? How are you thinking about that? And is that a priority for you?

Yes. I think for us, it’s continuing to focus on what I would say is with the experience becoming more off-premise, how do we carry that experience into the lives of our guests, whether it’s via digital means, their phone, and then providing the tools and the operational process to make sure that they have that good experience. So things like continuing to develop our app or integrate all the delivery channels into our app is one of the ways that we can do that.

Your next question comes from Jake Bartlett with SunTrust Robinson. Please go ahead.

Great. Thanks for taking the question. My question was about your late night daypart as well as the all day breakfast sales mix. And I’m wondering if you can give any color as to whether either of those are growing much faster than your average same-store sales as a whole? How much they’ve been driving your results?

This is Rachel. I’ll take that one. So as you can imagine, the breakfast daypart and the late night hours have certainly been impacted from an industry perspective. Consumers aren’t commuting as much. There aren’t as many events for folks to go out to on the weekends, for example. But as we mentioned, all five dayparts are contributing positively by the end of the third quarter. I know last quarter, we mentioned that really the dinner and lunch hours were what was driving our performance. And so I would think about late night and breakfast as sort of catching up and not necessarily driving an outsized portion of that.

And I was actually wondering more about the all day breakfast. What’s kind of moving throughout the whole day?

Yes. I think one of the things that’s been great for me to understand about the Jack brand is that our customers like that they can get all menu items throughout the day. And so having that variety and that option for them has helped us perform during this pandemic.

Great. And then one last question. And that’s really on capital allocation. It’s great to see the reinstating of the dividend. What is the trigger? We see sales sum here as well as margins, cash flow, solid, and it looks like it’s improving. So what is the trigger before you get more aggressive and move to your prior stance of pretty significant return of cash to shareholders? Is it really just a resolution of the COVID crisis? Or just kind of a few more months or quarters under your belt succeeding within that – within this context? What is the trigger?

This is Lance. I’ll actually take that one. So there’s not what I would call a hard and fast trigger. There’s not some financial metric that’s going to say, okay, now’s the day to turn back on share repurchases. I would tell you a couple of things. I think the biggest overall driver of when the company is going to choose to do that is just having a comfortable feel and outlook for what’s coming next. And so just as we continue to get smarter around being able to predict what’s going to happen as we continue to see what’s happening not only in the industry but certainly just with the public health crisis, then those are the things that we’ll take into consideration as we decide we’re comfortable to go ahead and reinstate that share repurchase program. Obviously, just let me reemphasize the cash return to shareholders is a big part of our model. It’s why we went ahead and turned the dividend back on this quarter. So we will be buying shares again once we think it’s prudent to do so and we feel like we can get a little bit more out of cash preservation mode.

Your next question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

The SG&A line has been all over the place in recent quarters for some of the reasons that you’ve already outlined, but how should we be thinking about, let’s call it, a normalized quarterly run rate, annual run rate in terms of dollars as we move forward? What’s the best way to be thinking about G&A as we move forward?

This is Lance. I’ll take that one as well. So there have been some ups and downs, as you mentioned, as Rachel and I have called out in some of these calls. I think the way to think about it, we have consistently said we believe we’re going to be in the neighborhood of 1.7%, 1.8% of system sales. And that kind of typically excludes some of the COLI stuff as well as any big onetime items. So as I’m thinking about it from the dollars perspective, I would think the same guidance we’ve given previously around being somewhat under 2% of overall system sales. That 1.8% kind of measure isn’t a bad one to think about. And then just know it’s going to be impacted on a quarter-to-quarter basis as COVID moves around or if we have a significant onetime event.

All right. And then as a follow-up, it relates to several questions that have already been asked during the call, but what would you see as the top one to two drivers of this really pretty dramatic same-store sales improvement that Jack has delivered over the last several months? What’s moved the needle the most? What surprised you the most in terms of everything you have going on, on the – either product innovation or marketing front? What’s moved the needle the most for you guys?

The way I would answer is that I think it starts with our team, our franchisees and our employees and really the focus they’ve had around making sure that our guests and employees are safe first and then finding that right value equation at Jack. That’s been going on even before the pandemic. That value equation that is a combination of the bundles at a competitive price point as well as the add-ons and upsells, continuing to innovate on products guests crave and then starting to improve and focus around our operations and operational excellence.

Operator, we have time for probably one more question.

Your last question comes from Nick Setyan with Wedbush Securities. Please go ahead.

Thank you. Darin, congratulations on your new role. I guess with respect to kind of your vision of what the Jack brand represents 6, 7 years ago, it was pretty – it was relatively clear that of the premium brand going after a core customer of 16 to 25-year-old males. I mean you mentioned your reference of the brand, it kind of toned down a bit to maybe expand with the core customer was about 4 or 5 years ago. What’s your assessment of that going forward? And also, the premium positioning 3 years ago, the bundle value resulted arguably in share losses. And it seems like going forward, the bundle value remains the focus. And so what’s – I guess, what’s different now versus 3 years ago? What’s the position of the brand with respect to premium versus value? And who’s your core customer? What’s your take on that going forward?

Yes. What I would say is that I’m still in the learning phase about our customer. And so one thing that I do focus on and will focus on with Jack is that we really need to understand why they come to us and why do they leave, and – so that we can focus on capturing at least one more visit and frequency from our core. And so that’s more of how I think about it versus starting with how do we create kind of our ambition for other customers. So focus on our core, make sure that we can get them coming back more frequently. But as you know, we’ve done a lot of this through variety, making sure that we have something for everyone at every daypart. So that’s one of the key things that I think we’ll continue to focus on and then that value equation and giving people different price options to help them feel what, in their terms, is value. And then the last I would say is the industry is somewhat different from years ago. And it’s become definitely – it’s always been competitive, but it’s become even more competitive recently.

This is Lance. I’m going to jump in and add one thing here, just to give a little bit of historical context. Three or four years ago, we were, in many ways, not necessarily participating in value as much. Some of that was by choice, I think. Decisions made over the last, let’s call it, 18 months, where we’ve really focused on upsells. As Darin mentioned, we’ve done a nice job of making sure we have items that can serve both as a meal or an add-on at a very competitive price, gives us some tools that we didn’t have a few years ago when we did, in fact, lose a little bit of share. So I think the balance of how we’re doing our value versus our premium items is – makes a little more sense now than perhaps it did then.

All right. Well, thank you all so much for joining us this morning. I hope you and your families are staying safe and healthy, and we will talk with you next quarter.

Thank you. This concludes today’s conference call. You may now disconnect.