Jack in the Box Inc. (JACK) Q1 2021 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box, Inc., First Quarter Fiscal 2021 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo with Investor Relations for Jack in the Box. Please go ahead.

Thank you, Mariana, and good morning, everyone. Joining me on the call today are Chief Executive Officer, Darin Harris; Chief Financial Officer, Tim Mullany; Vice President and Controller, Dawn Hooper; and Treasurer, VP of Financial Planning and Analysis, Sean Bogue. 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 may provide current thinking on this call around the potential impacts of COVID-19 on our business, given the unprecedented nature of this pandemic in 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 part of this conference call. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com. A couple of calendar items to note. Jack in the Box management will be participating in the Bank of America Securities 2021 Consumer and Retail Technology Virtual Conference on March 11. Our second quarter ends on Sunday, April 11, 2021, and we tentatively plan to announce results on Wednesday, May 12, after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Thursday, May 13. And with that, I'll turn the call over to Darin.

Thank you, Carol, and good morning. I'm excited to discuss our strong first quarter results. But first, I would like to provide an update on some key leadership positions. As you know, Tim Mullany joined us as CFO four weeks ago. This role will be pivotal to our long-term strategy, not only as CFO, but also in terms of development and growth of the company. He has quickly immersed himself in all things Jack, including spending time working in our restaurants and onboarding with the leadership team. Tim is a well-founded – or well-rounded finance leader with more than 20 years of experience leading multiunit operations. Most recently, Tim served as Chief Financial Officer at VASA Fitness, where he was responsible for leading the finance and accounting team, plus developing and executing company growth strategies, including site acquisition, and market entry development. Tim has demonstrated strong financial leadership while supporting growing businesses in the restaurant industry. We are confident in his executive leadership ability to help continue the momentum being experienced at Jack in the Box. Previously, Tim was Chief Financial Officer at RAVE Restaurant Group, Inc. Prior to that, he held Chief Financial Officer roles at Restaurants Unlimited and Consumer Capital Partners, franchisor and operator of the Smashburger and Quiznos brands. His career began with positions in private equity and investment banking at JPMorgan and Bank of America, as well as KPMG. Ryan Ostrom joined us earlier this month as CMO, a position that has been vacant for the last few years. Ryan joins the company with over 15 years of marketing and branding experience, with a passion for driving innovation through creative consumer strategies. Most recently, he served as Chief Brand Officer for General Nutrition Centers, where he helped lead the transformation of GNC from a traditional retailer to a global digital brand by modernizing their marketing, e-commerce, innovation and product development. Previously, Ryan served roles at Yum! Brands, Kenmore, Craftsman & DieHard at Sears Holding Corporation, as well as Reebok. During his time at Yum! Brands, Ryan helped KFC enhance their global store and e-commerce customer experience through new digital, delivery, curbside and loyalty solutions while also partnering with global markets to modernize their marketing tactics. We're very excited to have Ryan join the team. His experience and leadership demonstrate a proven track record of transforming brands through unique campaigns, all while leveraging digital platforms to modernize how consumers engage with brands. He will be an integral part of helping evolve the future of how Jack in the Box builds lasting relationships with customers. Ryan will be focused on three core areas for the long-term success of the brand, overall brand strategy, the evolution to a more digitally enabled experience and continued strength in product innovation. We are currently in the midst of a COO search and have met with a number of folks, who will be responsible for leading both company and franchise operations and driving key initiatives to improve both operational excellence and restaurant profitability across the system. And lastly, I can tell you we have talked to several great candidates and are getting close to concluding our search for a permanent Investor Relations Officer, so that Carol can return to enjoying retirement. We appreciate her willingness to come back and help us out over the past few months. I'm very pleased to report that we continue to make significant process with strengthening our relationship with our franchisees. And we held our first Leadership Advisory Council meeting a few weeks ago. Jack cannot succeed unless our franchisees succeed, and I'd like to think of it as a race. And historically, we passed the baton to the franchisees at the fourth leg in the race and ask them to cross the finish line. Now we're bringing them to the starting line with us. By doing so, we have reenergized the relationship and look forward to seeing this transpire into further growth of the Jack in the Box brand. With the majority of my leadership team now in place, we plan to share our updated strategic plan and vision in the next few months and are looking to lock down a date for an Investor and Analyst meeting in May or June. Now, to talk about Q1's outstanding performance. We have certainly learned a lot about where consumers are headed during this pandemic. The continued importance of digital, the consolidation of transaction to drive higher check gains and the desire for craveable and snackable items. As mentioned over the last couple of quarters, Jack pivoted early in the pandemic to capitalize on changing consumer trends, including changing media placements, leaning into delivery, offering new flavorful and portable menu items. Many of these consumer trends held strong through our first quarter. Same-store sales for the first quarter were the direct result of this, increasing 12.5% for the system. This was our best performance since 1994 and significantly outperformed our direct competitors. Tim will go into more details, but consumers have continued to drive check through more premium product purchases. We also saw the benefit of the stimulus payments in the last few weeks of our quarter. I'll take a minute to outline some of the key success drivers. We continue to see price-pointed offers appealing to our core customers during this time. We also continue to benefit from our innovation. Since their launch last January, Tiny Tacos have remained highly incremental to our overall performance as a permanent menu item. Consumer response remains strong. Tiny Tacos drove transactions and bolstered check sizes as they're frequently added on to our guest orders. In Q1, we introduced a number of products, including our new Cluck Chicken Sandwich and improved Chicken Strips, which contributed significantly to our same-store sales performance. We remain focused on delivering a more consistent experience for our guests and initiatives that focus on the consistency of speed of service, while remaining at the top of our priorities for driving throughput and sales growth. Aside from these continued strategies, we're also seeing shifts in our business because of changes from consumer behavior amidst COVID. First, consumers are utilizing delivery in our mobile app more than ever, with digital sales more than doubling year-over-year to nearly 7% of system sales. 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 vendors, allowing for simpler procedures for the restaurants. Second, while we had seen significant shifts away from breakfast and late night dayparts earlier in the pandemic, all five of our dayparts were positive in the first quarter. While traffic remains negative across all five dayparts, we have seen a significant rebound across each, including breakfast and late night. Third, we've experienced continued increased sales of our more premium core menu items, such as our Jumbo Breakfast Platter, Ultimate Bacon Cheeseburger and Chicken Strips. Consumers are now placing larger orders as well, typically from multiple people. More than half of our same-store sales increase was driven by premium items. These shifts in consumer behavior have led to a sustained significant increase in our check sizes during the pandemic. The media team has remained extremely nimble capitalizing on shifts in the consumer consumption trends around gaming and video content to really meet the consumer where they are during this time. We have increased our social media presence and converted all sports sponsorships into digital formats. To celebrate the launch of our new chicken sandwich, Jack in the Box partnered with singer and actress Becky G to create a brand-new chicken dance for fans to learn and share on social platforms like Instagram and TikTok. Lastly, as to unit growth, franchisees opened three new restaurants in the quarter and we currently expect to open 20 to 25 restaurants this year. With the addition of Tim Linderman and the continued work on the new prototype, we are ironing out the development strategy to invigorate long-term growth for us and our franchisees. And we'll begin actively marketing to potential new franchisees in the next few months. We look forward to sharing more about this strategy in our upcoming Investor Day. Lastly, I'd like to take a moment to express my continued 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. Jack in the Box will celebrate its 70th anniversary on February 21, and we look forward to continuing to enhance the brand's relevance for decades to come. I'll now turn the call over to Tim Mullany, our Chief Financial Officer, for a closer look at the first quarter results. Welcome aboard, Tim.

Thank you for the warm welcome, Darin. It's an honor to join Jack in the Box at such a transformational stage in its journey. And good morning, everyone, I look forward to getting to know all of you. Operating EPS for the first quarter was $2.16, as compared with $1.17 last year. The roughly 85% increase was primarily driven by strong sales growth across the system, which flowed through to company and franchise margins, coupled with lower G&A in the quarter. Adjusted EBITDA increased by nearly $26 million, or 34% to $102.4 million in the quarter. Our system-wide comparable sales increased 12.5% in the first quarter. Company same-store sales increased 7.5%, comprised of average check increases of 21.2%, including pricing of 3.1%, offset by transaction declines of 13.7%. Franchise same-store sales increased 13% for the quarter, including a sequential improvement in transactions. Total system-wide sales increased 13.4% in Q1. Average check continues to be driven by premium products as well as a 9% increase in the number of items per check from 3.87 last year to 4.22 items this year -- or this quarter, excuse me. The difference between company and franchise same-store sales was primarily driven by a few company-owned locations that are heavily dependent upon border traffic. In addition, reduced hours at some company restaurants resulting from COVID staffing challenges contributed to the gap in performance. Despite this, company AUVs exceeded $50,000 per week in Q1. As mentioned in yesterday's release, this strong performance has continued into the second quarter of 2021, with two-year trends through the first four weeks of the quarter remaining consistent with the first quarter, while lapping the very successful launch of Tiny Tacos when same-store sales were up 7% in the comparable four weeks of the prior year. As you may recall, same-store sales for the first seven weeks of our prior year second quarter were up 5.2%, while the last five weeks of the quarter, which were impacted by COVID were down 17%. Company restaurant-level margin improved in the first quarter to 25.5%, increasing 70 basis points from 24.8% last year. This increase was primarily due to sales leverage and lower food and packaging costs. Food and packaging costs decreased 150 basis points in the quarter, driven by a favorable mix shift as more purchases of premium items increased our average check, along with menu price increases, which more than offset commodity inflation of 1.6%. Labor costs increased by 30 basis points as sales leverage was offset by continued pressure from wage inflation, which was roughly 5.0% in the quarter. Occupancy and other costs increased 50 basis points, driven primarily by higher delivery fees. Franchise-level margin increased $15.2 million when compared with the prior year quarter, primarily driven by higher royalties and rental revenues as franchise same-store sales increased 13% as well as a $1.7 million decrease in bad debt expense. As a percentage of total franchise revenues, franchise-level margin for the quarter was 41.5% versus 38.5% in the prior year. Advertising costs, which are included in SG&A, were $5.8 million in the first quarter compared with $5.3 million in the prior year, but remained constant at 5.1% of company restaurant sales. G&A, excluding advertising, decreased $8.2 million in the quarter, which was largely driven by a decrease of $3.9 million in costs related to litigation matters versus the prior year. Mark-to-market adjustments related to company-owned life insurance policies or COLI policies, as we refer to them, drove a favorable $2.7 million reduction in G&A versus the prior year. As we discussed, these policies are sensitive to swings in the stock market. Excluding the $4.8 million COLI benefit in the current quarter, G&A as a percentage of system sales was 1.6%. Depreciation and amortization dropped by $2.2 million in the quarter, and we expect this trend to continue as franchise assets become fully depreciated and franchisees are responsible for ongoing improvements. We expect full year depreciation to decrease by roughly $6 million. Our effective tax rate in the first quarter was 25.1%, lower than the statutory rate due primarily to the benefit of the COLI gains which are not taxable. Now to turn to our liquidity and debt. The company ended the first quarter with roughly $289 million in cash on the balance sheet, of which $251 million was unrestricted. Our leverage ratio, as defined in our agreements was 4.2 times at the end of the first quarter. We continue to be in a strong position with respect to our debt covenants and liquidity. Subsequent to the end of the quarter, we repaid $107.9 million outstanding on our variable funding notes. We did not repurchase any shares in the first quarter, but with the VFN now repaid, we anticipate resuming shares repurchases in the second quarter. We currently have $200 million available under Board-authorized share buyback programs, of which $100 million expires in November 2021 and another $100 million expires in November 2022. We do not want to provide, however, EBITDA -- we do, excuse me, want to provide, however, EBITDA sensitivities for the year. Every 1% change in company same-store sales results in just over $1 million impact on EBITDA. Every 1% change in franchise same-store sales results in approximately $5 million in EBITDA. Every 30 basis points in restaurant-level margin equates to roughly $1 million impact in EBITDA, while every 10 basis points of G&A equates to approximately $4 million in EBITDA. As a reminder, fiscal 2021 is a 53-week year with 13 weeks in the fourth quarter. Lastly, you may have seen in our 10-Q filed last night that the Midwest franchisee -- a Midwest franchisee filed for bankruptcy earlier this week. The franchisee currently operates 68 restaurants, including 18 where we own the land and building. It's too soon to determine how many leases and franchise agreements the franchisee may reject in bankruptcy or any impact on our future financial results. But in the event of a sale, we have the right to approve any new franchisee. In summary, we are really pleased with the continued momentum in the business in our Q1 results. I'd now like to turn the call over to the operator to open the line for questions. Mariana?

Thank you. [Operator Instructions] Your first question comes from Brian Bittner with Oppenheimer. Please go ahead.

Thanks. Good morning, and Tim, congratulations on your new role. Darin, with Tim coming on Board now, you're clearly rounding out your executive team nicely. I know you're still searching for a COO. But you're looking towards this Investor Day that you're talking about in May or June. And I'm assuming you're going to use this as a great opportunity to share your long-term strategy with the investment community. I'm also curious to understand, do you have a philosophy on communicating financial targets with investors? Is that something you believe is necessary?

Brian, yeah, we -- as part of that process, we will start to set our long-term plan and financial targets.

Okay, great.

And I'll just say -- I would just say, Brian, we would communicate targets similar to what we did in 2018 when we gave updated long-term guidance back at that time.

Terrific. And it looks like you've executed on that as we look at these results. And when I look at your average weekly sales, Darin, they've really inflected, obviously, on the back of your strong same-store sales trends that you've been generating and that you continue to generate. And I'm just curious what gives you confidence or what evidence you may have that you can share with us that suggests that the sales gains and the volume gains are sustainable and that these new higher levels of unit economics are indeed sustainable?

Yeah. As you know, I mean, with everything going on with COVID, none of us can speculate or have a crystal ball. But what I'm really encouraged by is even prior to pandemic, we were seeing strong trends as a result of the sales layer with Tiny Tacos. But beyond that, what I'm even more impressed by is the strategy we've been using around our core variety with our loyal base of customers. And what we're seeing is this increase or more frequency from these core menu items and core heavy users. So that's, obviously, encouraging. Our value bundles, we put them in place as well to drive a value opportunity at competitive price points, but we're seeing the continuation of the strategy of add-ons and upsells improving performance. We are innovating and we'll continue to aggressively amplify our innovation. And recently, you saw the rollout of the chicken sandwich or Cluck sandwich, and we had substantial performance from Cluck. So we'll continue innovation. Our operational execution, a lot of the initiatives that we delayed during the pandemic are starting to take hold. And we're seeing better execution of both quality and consistency of speed. And then lastly, the way we're communicating guests is we've done a lot of the research I shared on the last call around who our guest is, why they come to us, why they leave. We've changed our tactics and how we're communicating. I think we're communicating more effectively, but we're also taking the opportunity to enhance our digital. And as we think about that, we'll be adding a loyalty program as we go forward in this quarter. We have -- are building a very robust database where we're having more frequency of communication on a one-on-one basis based upon individuals consumers' trends. So you take all that, you mix it together and what I feel comfortable about is what was working before the pandemic continues -- we continue to see the outcome of that and then we've enhanced it during the pandemic. And so I'm confident that what we're doing is resonating with our guests, and that's part of why we're outperforming the industry.

That’s great detail color and I really appreciate it. Thank you.

Next question.

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

Great. Thanks for the question. Darin, another one, maybe if I could, just on maintaining the impressive sales momentum that we've seen for many quarters now. I think you largely highlighted the drivers just now as it relates to all the brand-specific initiatives. But curious if there's anything else that you could highlight on what you've seen most recently over the last several weeks and months as certain markets have reopened, what the AUV performance in those markets have been, and if it's still been relatively strong. Also, I think you talked about late night and breakfast kind of gaining momentum, so presumably, that could be something as things start to reopen, you see continued gains there. So wondering if you could kind of take it from that angle, beyond all those other initiatives and just talk about what you've seen, and how that will help you think about sustaining this momentum.

Yeah. We continue to see strong performance, across all geographies. And you can see the trends in both, what's happening in the industry with fast casual and casual dining is it's slowly improved throughout the pandemic. And despite that, we still see improving performance quarter-over-quarter. We also think that the current trends, what will happen post-COVID, we think off-premise will continue to remain important, and that's core to Jack. Delivery and contactless, we continue to see, an increasing trend towards our delivery and mobile app. But also what I believe will continue to occur is, the incidence of checks going from 3.7 or to 4.22 and people adding more items to the order, especially through a delivery now contactless environment. So, we see -- we believe check. That trend will continue that -- will it come down some maybe once we reopen? Possibly, but we definitely think there's a trend out there in the industry that enhance -- will continue to enhance check averages. And so, if you recall, some of the drive-thru enhancements were made to eliminate as much of the investment in dining rooms and really to meet our consumers, off-premise. One of the other things I think I would focus on as well is that, during this trend, we're seeing guests with higher income continue to frequent us. We're seeing our heavy users also increase their frequency of use. So we're seeing some really strong trends. And then, the last thing, our California and Texas business, what we're finding in California, although, it's outperforming, some of our other markets, our same-store sales strength has been broad-based. So as an example, our Texas market has also outpaced overall industry same-store sales, including publicly reported numbers from our competitors.

Got it. That's helpful. And if I could ask, just one unrelated follow-up. Just as it relates to the unit development prospects, recognizing there's going to be much more to come a few months from now, anything new to share, kind of on, thoughts in speaking with franchisees? Any update over the last few months on the demand there, if that's changed at all? And if there's anything, as you've kind of worked on kind of engineering costs, et cetera, if there's anything new there, that you can share today? Thank you very much.

Yeah. We continue to have excitement around our new prototype, that's reduced cost between 18% and 23%. We now have three of those sites already in process as far as approved to be open, which I think on the last call we were just looking at one. So we're definitely seeing an increased level. We're having multiple franchisees reach out to us saying, we're -- as I mentioned on the last call, two-thirds of our system has expressed an interest in growth through the survey that we took. But now we're starting to have real conversation about, where and how they would pursue additional markets or development agreements. Our AUVs in our 2019, our 2020 and our 2021 openings are higher than the system average. We had -- in 2020 we had the most new franchise openings in a decade, despite the pandemic. Our new Head of Development, Tim, has really been focused on preparing for franchise recruitment. As I mentioned, we'll launch an aggressive marketing program in this quarter and supporting our current partners with a hunt for existing sites. The profitability of our existing stores for the fiscal 2020 year increased 20% over 2019. And as we're growing sales and improving margins, that always gets franchise system excited about growth. And then I think one of the things that you'll find interesting or different, and we'll continue to talk about this at our Investor Day, in May or June, is that, the way we're looking at our policies and our procedures around opening up the funnel for growth is different than maybe, how we've pursued it in the past, when we were selling locations. So maybe we now -- our policies are more friendly to inviting in capital. And we'll spend time going out and energy around engaging with capital providers, whether that's private equity or family office. So we're opening up those policies to be more investor-friendly. And then lastly, as we've scoured the market to determine just in our existing markets, I shared this on our last call, that 950 units to 1,200 units are possible just within our existing core. So we're extremely excited about the possibility of growth, but we also know that to be realistic, there's a time line that we have to continue to build the pipeline.

Great. Thank you.

Your next question comes from Jared Garber with Goldman Sachs. Please go ahead.

Hi, thanks for the questions. I wanted to get a sense of what you think is driving some of those premium product success. And what is driving the higher income user to the brand? Are those new users that you're seeing? And what do you think is sort of driving that? Is it – it's a little bit different than what we've heard, I think, across the industry with some more value offers coming into the system. So very curious to hear your thoughts there.

Yes. As I mentioned, we've been doing a lot of research around who our target segment is and enhancing the way that we communicate through digital means and through our overall marketing strategy to be more effective at communicating to these guests. So that's enabling them to explore what's additional on our menu. So things like I mentioned, our Ultimate Cheeseburger, maybe something that last time, it was the Homestyle chicken sandwich where they were ordering more of. So we're definitely encouraging them to explore different parts of our menu than what their frequency or their first-time use is, which has been an improvement. We also saw an enhancement of our breakfast platter by bringing back an old favorite in our French Toast Sticks, and it also drove our breakfast performance. And so we saw that as part of our core premium menu items that people engaged over the last quarter.

Great. That's really helpful. And just one more, if I can follow up on your breakfast comment. It seems like you guys are definitely taking share across the industry, maybe especially at some of the shoulder periods, breakfast and late night like you called out. Where do you think you guys are taking that share from?

Yes. I'll just – this is Carol. I'll articulate it a little. As we saw in the pandemic, several of our fast food competitors – well, one launched breakfast, right? But others actually cut back their breakfast hours and kind of stopped the all-day breakfast phenomenon. So keep in mind that Jack in the Box, you can order anything on the menu any time of day. So if I want tacos at 9:00 a.m. or a breakfast platter at 3:00 p.m., we give consumers that option, and that's a distinct competitive advantage for the Jack in the Box brand.

Thanks. I’ll hop back in queue.

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

Thanks very much. Hey, Darin, just on development again, you mentioned inviting in new franchisees into the system. Do you have a goal as to what percentage do you think you want as new franchisees versus the existing base, or is it too early to tell that? Do the existing franchisees have territory protections such that those that may not choose one and develop, you can still find other franchisees, or do you have some territory protections in place, so that wouldn't be the case? And then one follow-up, if you could.

Yes. I think we haven't publicly shared kind of where we're headed with new versus existing franchisees. What I can do is answer the last part of that question, where philosophically, we are going to begin to aggressively pursue development agreements that lock up territory for franchisees to develop within. We've shared that with our existing base of franchisees, so they are aware that we want them to grow. But if they decide that that's not what they want to do, we'll always give them the first right to say, "Hey, do you want this site? Do you want this territory? If not, we're going to bring in new franchisees to help support our growth."

Okay. Thank you for that. And just on closures, how do you – is this still a clean-up year in 2021, where you may see some closures, particularly as you start to think about growth and as franchisees are looking at their existing asset base. Do you have a sense of what the net growth would look like based on your plans this year or not?

We continue to project our net unit count to be as it's been. And as we've kind of performed in the past, what I would say, is St. Louis may have some closures so I can't give specific guidance to that. Outside of St. Louis, I would say, what we would work through is, as I've mentioned on the last call, optimizing our portfolio and looking at opportunities. And we've been doing this a lot recently, trying to figure out when is it right time -- when is the right time to possibly look at closing some underperforming units? But the way we're thinking about it and considering it is to believe in offsets. So what's the right timing of finding a new location to go into, to really improve that market, remodel around it, or where can we pick up sales in existing units around by closing a unit? So, all those things are being considered in our optimization strategy. And that's really the way we've been engaging with our franchisees about potential closures. Is there an offset? Is there a remodel opportunity to pick up sales, or is there an opportunity for you to pick up sales in other existing units around you?

Right. And John, I'll just add, if you look at the first quarter, well, our system-wide same-store sales were up 12.5%. The total system-wide sales actually increased 13.4%. So, even though we had more closures than openings in the quarter, the system sales still outperformed the column number.

Got it. Very helpful. Thank you.

Your next question comes from Greg Francfort with Bank of America. Please go ahead.

Hey, thanks. Just sticking on the unit growth and the plans for expansion, the roughly 1,000 or I think you said 950 to 1,200. Can you talk about where those are going to be? I know those are in your existing markets, but maybe how you're attacking that first. Is that -- are large chunk of it is going to be in California? Are they going to be in kind of states in the West side of the country? Are they going to be in some of these Midwestern or Texas or other areas? And just what you're going after first? Thanks. Appreciate.

Yeah. I think stage one is always to focus on growing within our core and finding every opportunity that we can to grow with our existing franchisees around our current stores. Beyond that, we know there's opportunities like in Denver, that we could grow greater than 50 units. So, that's still a market where we have some penetration but a huge upside. So first and foremost is grow around our existing core, and then slowly edge out to concentric circles around those markets and build those out. And also, the last thing I would share is, we'll be more specific about geographic areas, ahead of our Analyst Day.

Okay. Thanks, Darin.

Your next question comes from Jeffrey Bernstein with Barclays. Your line is open.

Great, thank you very much. Two questions. One, Darin, as you -- hard to believe, but you're already approaching one year in the role. And I think you noted in your prepared remarks, strengthening franchise relations has kind of been critical. I'm just wondering, what's been your learnings in terms of how they view or what they believe the greatest improvement or what the greatest accomplishment has been in the early days? Is it really just driving top line, which clearly you've been doing, or was there any other underlying frustrations among the franchise community that you believe you've taken steps to resolve? And then, I have one follow-up.

Yeah. I think the most important thing is just engaging them in our communication and being partners and strategy. And really, as we think about our strategic plan in laying out the pillars of our growth plan, they've had input and feedback and are going through the process with us. So I think that just builds upon our relationship and enables us to have open communication about continually improve, as an example, a smaller prototype and getting their engagement and insight as to what would they change, because they're in the restaurants every day and how would they improve some cost opportunities. Or they also have local relationships, as an example, and find different ways to improve costs or technology enhancements. And so, by just bringing them into a loop and opening communication, we find opportunities.

Understood. And then just a follow-up, I'm not sure whether Darin or Tim. Obviously, you're both relatively new. I think you mentioned you're roughly four turns levered and presumably maybe even lower. I think you said you've done some debt pay downs since the last quarter. But how do you think about the target leverage? I know most of your 95% or more franchise peers seem comfortable in the five to six turns range. Just wondering how you think about that as you now drip -- or drift perhaps below four. Maybe your outlook for leverage versus repo, which I think you said, you're going to relaunch starting in this second quarter. Thank you.

Yes. First, Jeff, before I turn it over to Tim, the VFN, the way it's calculated and the way that our cash balance calculates, it doesn't really change the leverage when we paid down the VFN for the covenant calculation. So it will remain kind of in that low four-point range even after we paid down the VFN. Now I'll turn it back to Tim.

Yes. Thanks, Carol. I think that's a great point. It's a very specific calculation according to our agreements. But having said that, so we know that we ended Q1 with $289 million in cash. And we mentioned we did pay down $107.9 million on the VFN. But we also say it, again, that we're going to resume the share repurchasing buyback. So we anticipate that we're going to get back to a fairly more normalized liquidity and cash flow position as we were pre-COVID. And having said that, obviously, our perspectives on leverage are very specific to overall company strategy. And as Darin mentioned, in May, June, we'll be looking to roll out a more comprehensive strategic sort of dialogue with the investment community. So we'll look forward to that discussion. Q – Jeffrey Bernstein: Thank you.

Your next question comes from Chris O'Cull with Stifel. Please go ahead. Your line is open.

Thanks. Good morning, guys. Darin, the company has made a lot of progress preparing for expansion with changes to development policies, as you mentioned, working on reducing the cost of the prototype. So I'm just wondering, what are some of the other key steps that you need to take to prepare the system for greater expansion? I mean is it a matter of just testing the new prototype, demonstrating returns, or can you start building development commitments with the existing package? And then I have a follow-up.

Yes. I think with the revision of our FDD, the change in the policies and just the increase in the communication around the putting development agreements in place, I think those are the key next steps. I think the franchisees with the performance of the brand, the engagement of them as a part of our process as strategic partners, the desire to grow, we're getting a lot of engagement. Now it's about going out and soliciting and signing development agreements and getting commitments for that pipeline.

Do you think you can do that with the existing prototypes, or is -- are you relying on the -- are franchisees going to wait till they see the new prototype results?

I think, we can do it with both.

There was LinkedIn post from one of our franchisees just this week where he's opened a new store with a double drive-thru, for example. So they are building the existing when we put the -- if you think about the pipeline for development and when those plans have to be approved, they're opening under the old model in some cases. But in this case, with a double drive-thru.

And to add to what Carol mentioned, they're already showing excitement about our existing prototype. Just last week, we announced to the system that we would make the new prototype available, the lower-cost prototype. So just by that alone, we're seeing an enhanced engagement and interest level and growth.

That's great. And my other question just relates to the innovation strategy. It seems like the past year, innovation was designed to drive trial, repeat usage. Do you still see innovation playing a big part of the strategy, or is the risk that operations could become too complex with more major product launches?

Yes. It's always a balancing effort to make sure that we can still execute our operational strategy. But a foundational element of our business strategy is innovation. That is core to Jack in the Box. As you know, we were one of the first at breakfast, first to drive-thru. So we'll continue to be a brand that is focused around innovation, but making sure that we can still execute it. And a great example is our chicken improvements. As we went into the chicken improvement, we changed our entire cooking procedures to do two things: one, to reduce the time it takes to cook in half, which helps with our speed, but it also produced a better quality product. So that's an example of the way we think about innovation, how do we make sure that we can still deliver a great guest experience, but also drive innovation.

And just to add to that, chicken was a meaningful contributor to the year-over-year sales improvement as well.

Thank you, guys.

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

Great. Thanks for taking the question. I was going to do about a little bit just in terms of your thinking around G&A and tech spending specifically. I think a piece of the story in the past several years prior to Darin, you coming on board was G&A spend moving its way lower. And frankly, in many cases, below the industry average of the highly franchised peers. And curious to get your philosophy around where you -- what your thinking is around where G&A spend can go and specifically around -- your thinking around technology. Do you think to get greater digital sales you need to invest more behind the capabilities? And do you think you can do it, you'll do it in-house or outsource these options over time?

Sure. So full year 2020 in G&A ran 1.7% and quarter one, excluding the benefit of COLI gains is 1.6%. So, obviously, we're showing some benefit from the sales increase. The prior time -- I think prior long-term guidance was 1.7% to 1.8%, and we would expect any significant G&A investments to be able to generate a return so that this target remains reasonable. And tech investments or tech spending is the same. The way I think about it is, with the investments, I believe that we can generate returns. So as we think about investing in our data platforms and enhancing through data science, all those are things that will either grow sales or enhance our operational execution to drive margin. So far, everything we've looked at, we believe has an opportunity to have a return.

Got it. And then maybe just putting a little bit of guardrails around the St. Louis franchisee. I think it's about 3% or so of your store base. Can you give us an idea of what that represents from a percentage of your system-wide sales? Just trying to figure out if these stores outperform or underperform, the system could soon underperform, but wanted to get some info for you?

Correct. So without giving the specifics on their AUVs, they are substantially lower than the system average in total, right? So -- but their sales performance in the recent quarters has been very close to the system-wide sales performance. So it's not a same-store sales issue, but it is a volume and a leverage issue.

And just to add to that. So it's not a new market, and it's not an underpenetrated market. So the average store is 30 years old in St. Louis, with the first one opening in 1969. So it's core.

Yeah. And just lastly, on the topic. During this bankruptcy time period, do you still collect royalties and any payments from them, or is that on hold?

Hi. This is Dawn. I'll take that question. So, yes, we will be still collecting payments from them as they operate the restaurants. And the key point during the bankruptcy process will be when the restaurants are either accepted or rejected. But while they are still operating, they will continue to pay us.

It’s helpful. Thank you very much.

Your next question comes from Brian Mullan with Deutsche Bank. Your line is open.

Hi, thanks. Just another question on development. Darin, wondering if the company would be willing to use its own balance sheet to develop units if need be in select situations, understanding that growth through franchisees is a preference, do you view on-balance sheet development as a tool in the tool kit at least over the next few years?

As we roll out and provide insight into our capital allocation strategy going forward, we do believe that company growth is important to spur on and seed franchise growth. So we will look at using our balance sheet to do that. I think it's wise of us to lay out that strategy. But also, what's critical, and I want to make sure anyone that hears that answer understands that we're going to remain asset light.

Okay, understood. Thank you. And just an unrelated follow-up, just a question on the CMO hire. Congrats there. I think might be helpful if you could just describe his mandate, if he has one or maybe what are the key early priorities you've seen for the role this year? And when is it reasonable to think maybe they could start to have a positive impact on the sales of the business if things go according to plan?

Yes. Ryan's mandate is to come in and really focus on a clear brand strategy and brand positioning, as I mentioned earlier. So that's task one is we're listening to our guests. We've got a lot of good research that we've collected prior to him joining. Now he gets to work with the team and our right agency partners to bring that to life and how we engage our guests at a different level. As you know from his background, he's got a really strong digital experience or he has really, really strong digital experience. And so mandate number two is continuing to build that platform and enhancing what has already been in place. So as I mentioned, loyalty program, we'll roll out mobile web ordering, app delivery. How do we continue to engage using data to have trends where we can communicate one-on-one with each guest and serve up offers that are unique to them? So first and foremost is brand strategy, brand positioning and the right way to bring that to life; second is digital; and the third is continuing this incredible calendar we have right now that we've forecasted out over two years and making sure that, that innovation is recognized by our guests and that they'll come back more often.

Thank you.

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

Great. Thank you. With the search for the new COO, is the prior plan targeting one minute of savings expected to be executed, or will that be paused until the new COO comes on board and has a chance to prioritize initiatives? And I also have a follow-up.

Yeah. Our focus with speed and operational execution will continue. The tweet that, I would say with speed is that what we want to do is be the most consistent that we can be in the industry. So, focusing on enhancing at a target speed, our consistency of speed. So making sure guests know that, if they're going to come to us, that they know what to expect, 80-plus percent of the time on how long it's going to take through our drive-thru or any of our delivery platforms. So that's where a lot of our focus is, is consistency of speed, while we continue to enhance the operational procedures to deliver that. So as you – as we mentioned earlier, we're just now getting the benefit of the equipment rollout that we had started pre pandemic. It started in Q4 and early Q1. And so that involves new holding cabinets that enable us to cook the product upfront, could improve speed, our cooking procedures on our chicken which reduce time. We also are in the process of enhancing our training platforms. We rolled them out late last year, and we've seen an improvement in consistency across stores and speed of service, but we've also seen an increase in improved behaviors that lead to speed improvements.

Okay. That's helpful. And then, Darin, you called out 20 to 25 openings expected for 2021. It's a bit below what you opened in 2020 amid disruption from the pandemic. Can you just talk about why it's a bit lighter amid the boost in franchisee cash flow that you guys were successful in seeing this year?

I think basically, when the pandemic hit with just the fear within the market, everything just took a pause. And so even from our standpoint, we were amendable with our franchisees to delay their development agreement timing by six months just to give them kind of a breather as we are all kind of going through the pandemic to understand what would be the outcome. So with an abundance of caution, we were doing the right thing for not only our system but our franchisees to make sure that their focus was on taking care of our guests and their employees.

Okay. Thanks.

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

Thanks. Two follow-ups as well. I was just curious, what if any relationship there was between the regional stay-at-home orders in your home state of California and your transaction check trends at the core concept. I'm just curious, how big of an impact those stay-at-home orders have on your business, both when they were put into place and removed?

Yeah. I think Darin sort of addressed, or I might have addressed it on the California versus Texas numbers. So California continues to outperform as historically. But Texas has remained very stable, and we really didn't see a jump in California sales between Q4 and Q1.

And Texas outperformed the industry.

And Texas outperformed the industry. So it was pretty consistent.

All right. That's helpful. And then just as a second follow-up, and I might have missed some of this as well. But on the delivery mix, in terms of where it stands as a percent of sales, I'm curious about that where it stood in the quarter. But I'm most interested in understanding sort of the delivery mix spread that you're seeing across the system, markets that are seeing the highest and the lowest? And what you ultimately think the opportunity there is for delivery as a percent of mix?

Yes. We haven't shared those gap. It does vary by region, just like our late night varies by region, too. So those sometimes can go hand-in-hand, but we haven't shared those details publicly.

But overall, it's been performing very strong. It's more than doubled, and total digital, including deliveries, right around 7% of our sales contribution.

And we've actually seen higher performance in our company markets on delivery than that mix. We're California-centric.

Understood. Thank you.

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

Hey, thanks for the question. Regarding the innovation pipeline, Jack has clearly one of the more diverse menus. So if you think about rolling out new products, maybe if you could talk about some of the areas of menu that you're focused on, whether it be daypart, product category or price points such as premium versus value. Just curious where you see the most opportunity in the near term. Thanks.

Yes. We launched our new Cluck Chicken Sandwich in December as well as the new Chicken Strips, so the focus on improved quality and great taste. We were very pleased with the customer response, and we believe that there's an opportunity for us to continue to grow in the chicken category. So we'll continue to focus there. We think the snackable add-on has been very attractive to our guests and the example of Tiny Tacos. So we'll continue to focus on innovation around our snackable category. So I think those are the two key areas that we'll focus innovation. And then the last, I would say, that we'll continue to always look at is that core premium area that I mentioned that we're seeing guests respond to. Those are the three areas of innovation right now from a product standpoint that we'll continue to provide focus around.

Thank you.

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

Thank you. Your last question comes from Mary Hodes with Baird. Please go ahead.

Good morning. Thank you for taking the question. I had one quick one on the recent trends and then a bigger-picture question on the outlook. First, have you seen any change in trend in California since the state reinstated outdoor dining in late January? And then second, on the promotional environment, it seems like that's been less focused on entry-level price points in recent quarters. So, I guess, just curious how you're thinking about how the promotional environment will develop going forward as we exit the pandemic and how you're thinking about how your value strategy will play within that? Is your plan to stick with your current strategy, or are you planning for an environment that will necessitate a different approach? Thank you.

Maybe I'll take the first one at California. I think we've kind of answered the California one, so it's remained very consistent. I'm surprised we got no weather question today. But obviously, we have 600 restaurants in Texas that are being impacted this week. They actually started to be impacted over the weekend, which is in our four-week to-date numbers. So more than 80% of our Texas stores have been impacted, and we have stores impacted actually across five markets from power outages, et cetera. But I'll turn the rest of the question over to Darin.

Yes. As far as in the markets that had the -- during the period of time where they had enhanced stay-at-home orders, we definitely saw consistent performance across the board in markets with or without that across our system. So we're encouraged by that as well. But beyond that, as far as overall, how will we approach our innovation in a value category? Yes, I think we're always going to be aware of what's happening around us and what competitors are doing in their promotional calendar. But we feel confident in the way we built the next two-year product innovation strategy that we can make sure that we're balancing value and core premium as well as add-ons for those who want to add on. And what's unique about what we've been doing with items like Tiny Tacos, this snackable item, it's a $3 target price point that some people are using as a meal.

Thank you.

Thank you. This concludes the Q&A portion of the call. I will now turn it back to Carol DiRaimo for closing remarks.

Great. Thanks, everyone, for joining us. If you are being affected by the weather, stay warm, and team will look forward to speaking to you in the next few weeks as well as on the May call. Thanks so much.

This concludes today's conference call. Thank you for participating. You may now disconnect.