Thank you for standing by. My name is Dina, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Jack Third Quarter 2023 Earnings Webcast. [Operator Instructions] Thank you. Now I would like to turn the call over to Chris Brandon, Vice President, Investors Relations.

Thanks, operator, and good morning, everyone. We appreciate you joining today's conference call, highlighting results from our third quarter 2023. With me today are Chief Executive Officer, Darin Harris; and our Interim Chief Financial Officer, Dawn Hooper. Following their prepared remarks, we will be happy to take questions from our covering sell-side analysts. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in the earnings release, which is available on our Investor Relations website at jackinthebox.com. We will also be making forward-looking statements based on current information and judgments that reflect management's outlook for the future. However, actual results may differ materially from these expectations because of business risks. We therefore, consider the safe harbor statement in the earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. 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 and are available on our Investor Relations website. And with that, I'd like to turn the call over to our Chief Executive Officer, Darin Harris.

Thank you, Chris. I want to begin by thanking our restaurant-level team members, our franchisees and the Jack and Del Taco corporate staff who continue to make us proud of their dedication to serve our guests and the results being achieved from the execution of our strategy. We are very pleased with the performance of our business in Q3 and we continue to see the execution of our strategy deliver results. In the quarter and year-to-date, we have demonstrated continued top-line and margin momentum that has resulted in impressive adjusted EBITDA and operating EPS growth. I believe our performance reflects 3 items; strong operations execution, the right promotions at the right time and effective communication and engagement with our core users. This quarter was also an exciting milestone for entering new markets and our future growth with a very successful start to our entry into Salt Lake City and strong sales results right from the start. We are also pleased to reiterate our guidance from last quarter, while increasing our share repurchase outlook as a result of the accelerated refranchising of Del Taco restaurants. As you saw this morning, we are very excited to announce that Brian Scott has accepted the role of Chief Financial Officer at Jack in the Box. Brian brings tremendous experience to the Jack family, including a decade-long tenure as CFO of AMN Healthcare, helping take the company public and grow it into a $3.5 billion leader within its industry. We look forward to introducing you to him. And lastly, I'd like to give a special thanks to Dawn Hooper, who has done an outstanding job the past 8 months as our Interim Chief Financial Officer. Part of this morning's announcement included the addition of Dawn to our executive leadership team. I, along with our management…

Thanks, Darin, and good morning, everyone. I'm going to start by reviewing each of our 2 brands individually, followed by details on our consolidated performance and capital allocation. Beginning with Jack in the Box, our third quarter system same-store sales growth was 7.9% consisting of company-owned comps of 6.9% and franchise comps of 8%. On a 3-year basis, same-store sales growth was 17.5%. Jack's quarterly system-wide same-store sales growth of 7.9% includes an 8.7% increase in pricing, a 0.2% increase in mix and a 1% decrease in transactions. As a result, our overall average check increased since the prior year and we have also seen positive year-over-year mix shift for the second consecutive quarter. And although down, our transactions were supported by the effective execution of our hook and build strategy and the successful marketing of our barbell menu with culturally-relevant messaging. Additionally, we have had improvements in operations execution, including increasing the average operating and dining room hours, which remain tailwinds for the Jack in the Box system. And while company operations are leading the way, franchise operations are nearly caught up. On product categories, notable contributions came from burgers, chicken and breakfast. All dayparts generated positive sales year-over-year. But once again, the late night daypart stood out the most with late night now posting positive transactions year-over-year for the third straight quarter. Turning to restaurant count. There were 6 Jack franchise openings along with 2 franchise closures. This resulted in a quarter-end restaurant count of 2,191 restaurants. As a reminder, Jack will be delivering positive net restaurant growth in fiscal year 2023 for the first time since fiscal 2019. Moving on to our Jack restaurant-level margin. We expanded performance year-over-year by 600 basis points to 21.8%. Notably, this is inclusive of our 2 remaining evolving markets, Oklahoma and…

[Operator Instructions] Your first question comes from Brian Bittner, Oppenheimer.

Congratulations on the strong quarter. You did have a very strong third quarter with your EPS. It was well above consensus expectations despite the fact that you had a $0.19 impairment charge that none of us were modeling. And I think that shows that the underlying business was tracking well above consensus forecast, but the full year guidance has an implication for the fourth quarter. It has an EPS range for the fourth quarter that's well below the Street. And I know you have a lot of refranchising, you talked about the labs from last year, but we kind of all have those in our model. So all things considered, the only way to get to the fourth quarter implied EPS range is to have a pretty measurable deterioration in the underlying business. So I guess, the question is, is there some costs coming in the fourth quarter that maybe we're not aware of? Or is your guidance for the fourth quarter perhaps [ tilting ]? Is it little bit conservative? Any color you can provide on all that would be helpful.

Yes, I think there are several factors that you need to consider, one of which I mentioned in my prepared remarks, and that's a non-recurring benefit that we received in Q4 last year that won't be recurring and that relates to some outsized early termination fees related to accelerated closures and then a chicken settlement. As you noted, we did record $0.19 of impairment. The other items to take into consideration is the increased refranchising that we've accelerated due to the strong interest in multiples we've received in addition to the acceleration in our development pipeline as it related to the development agreements we've been able to sign with those refranchising transactions. And lastly, I think like others in our industry, we're going to be lapping some of our peak pricing that we took a year ago. In fact, Q4 for both brands was the strongest performing quarter of last year. And just from a pricing standpoint, we're going to be rolling over or rolling off about 400 basis points of price in Q4. And then lastly, we really saw an increase or an uptick in our hours of operations recovery last year, and we're rolling over that. So when you take all that into consideration, we're reaffirming the operating EPS guidance for the year.

So Brian, I think Dawn did a good job of capturing our sentiment. We feel that generally the business is performing extremely well. You're seeing it quarter-after-quarter. We anticipate that continuing into the fourth quarter. All year we've been guiding conservatively for this fourth quarter because of these one-time events. And as most of us in the industry trying to figure out what the fourth quarter will look like overcoming such price.

That makes sense. And just, Darin, if I could follow-up with you. You made an interesting comment in your prepared remarks as it relates to value becoming much more important for driving the business. Can you just unpack that comment a little bit? Is that a comment on the macro? Are you seeing something in the macro that's causing you to believe that value is becoming incrementally vital or anything else you can add to your comments around value?

I think for us, what we're noticing within our business and within the industry is that balancing between premium and value is critical to driving transactions. And so we're just paying closer attention, not that anything has shifted yet. We're anticipating that small shift. And so we're balancing more of our promotional items through the back half of the year with some focused value opportunities.

Your next question comes from Gregory Francfort, Guggenheim Securities.

Maybe, Darin, I think maybe 8, 9 months ago, we were speaking and you were talking about low-hanging fruit around rightsizing pricing by market. And I'm wondering if you could maybe first address what you think are the biggest pieces of low-hanging fruits from here going forward? And two, as you think about pricing, do you think you should outsize the industry or underprice the industry going forward, just given that that may still be a continued opportunity?

Yes. I think for us, we continue to feel really good about late night and that business growing. And I also think we have opportunity to continue to perform at the breakfast daypart. Those are the 2 areas I think that we have from a daypart standpoint. And then digital, digital continues to grow for us. It continues to be a substantial growth part of our business. We saw an 18% -- a little over 18% increase in digital alone leading to 2% of the comp. So we're seeing our overall business perform across both daypart and different delivery modes. The other thing on pricing, what we're seeing is, we've implemented internal discipline with analytics tools that enable us to go in and pick specific regions, stores and find unique opportunities across our whole menu. And so we're focused more on a surgical approach than a blanket approach. And we look at those opportunities market-by-market and store-by-store.

Your next question comes from Brian Mullan, Piper Sandler.

Just a question on the Del Taco refranchising process. It's great to see it progressing so quickly now. We now have visibility into what the system should look like at the end of this fiscal year. Can you just give us your current thinking on how you expect this to evolve throughout fiscal '24? I understand it's probably hard to be precise, but just any kind of guardrails or ranges around how you expect it to look would be great.

Yes, not at this time. We'll continue to focus on the guidance of $90 million to $120 million for this year. We'll revise our guidance as we head into '24. But overall, you're seeing us make substantial progress getting incremental development agreements for Jack and Del. We're putting restaurants in the hands of our best operators at Jack. That was part of our thesis going into this transaction, we knew there was pent-up demand and our Del Taco operators. So overall, what you can definitely see is that we're continuing to up our share repurchases. These transactions are accretive based upon the multiple valuations that we're getting. And so we'll continue to execute on that strategy as aggressively as we have in '23.

Next question is from Andrew Charles, TD Cowen.

Darin, I have a 2-part questions on the value prioritization. So first, is hook and build going to be the preferred route that you guys offer value through? I know the $6 Jack Pack is something you have, but are you planning to lean into value more that way or just given the digital traction, is that going to be more of a preferred route as you look to do kind of more targeted and personalized value offerings? So curious on the format of how we should think about value going forward? And then secondly, on the value. I mean, is this also the timeframe of the planned launch, [ The Hero ] menu item that you guys previously talked about is launching at some point early in fiscal 2024?

So related to value, I think value is what you get for what you pay. And so we look at channel. So on digital, we're more aggressive with our value offers and our discounting. As we think about menu items, it's items that will drive traffic similar to the $6 Jack Pack or we also have Jack's Deals now that are in test and we feel good about that offering. Very similar to what you would see at Del Taco with our 20 Under $2. We were able to learn from what they've done there and we're replicating something for that that we would rollout later into 2024. So we have multiple levers to play in value now that maybe Jack didn't have previously. And so we focus those on the right channels at the right time. And then as far as The Hero menu item, we're testing that item or a few different items related to that. And we anticipate rolling that out in 2024.

Next question comes from David Tarantino from Baird.

My question, Darin, is about the performance you're seeing in Salt Lake City, which seems pretty encouraging. I was wondering if you could share more details on -- I know you mentioned that the volumes are a lot higher than what you normally expect in a new market, but I don't think you've ever shared what you expect in a new market. So I was wondering if you could share more details on what the volumes are tracking towards? And what that would mean for a return profile, because it sounds like a pretty good early data point? And I might have a follow-up.

Yes. We're not going to quote exact sales, but I can tell you, this is an all-time record for the brand and 66% higher than any of our previous store openings for monthly sales. And what's encouraging about that, we're not open at late night yet. We're just starting to open the digital channel. We're implementing our playbook for new markets. And this store is on track to be, if not the highest volume restaurant in our system, but one of them. So we feel good about the franchise operator there, how he's executed. We feel good about the playbook we implemented. And we're just now getting to the point of starting to deliver media in the market. What's even more exciting about that is we have 3 more openings in Salt Lake City in fiscal year '23 and another 6 planned for fiscal year '24. And so we're encouraged by what we're seeing with the 3 unit opening. And beyond that, what we didn't comment is on the other openings within the system. We're definitely seeing them outperform system average. And so we think we're on to something, especially with the new CRAVED image.

Great. And on the playbook, can you just elaborate on what you did to create so much excitement around this new restaurant in Salt Lake City versus maybe what you've done before in newer markets, just to give us some context on how you're going to market?

Yes. Overall, from -- we want to make sure operations are executing at the highest level. So we staff at a very high level. We've trained our team for multiple months being ready to launch in the market. And so with that, then we kicked into marketing and we're at the early stage of our marketing. So after simplifying operations, making sure they were in order, then we started communicating locally within the market about Jack in the Box entering. And a lot of that was through social and digital channels. And we're just now getting to the point where we're ready to launch our overall awareness within campaign.

Next question is from Dennis Geiger, UBS.

Great. As you continue to make progress against restaurant development growth, can you talk a little bit more about franchisee sentiment right now on development, particularly as it relates to the environment across any macro pressures or industry timing issues that we're hearing from some of your peers? All sounds good and positive, but just curious if any updates there, Darin? And maybe if there's any early thoughts kind of into next year's development considerations to high-level touch on today?

Yes, we're excited. We just left a franchise conference where franchisees are really feeling good about where the brand is, especially from a top-line standpoint. Their margins are coming back. You see what's happened with our margins on the corporate side, improving 600 basis points year-over-year. Our initiatives to drive margin with the 200 basis point focus, we're 50% rolled out of those initiatives. And they're not even taking hold yet, though in the back half of the year, we anticipate those starting to take hold. So sentiment from the franchisee standpoint is very positive. And to come back to where you're talking about our development, I think that our pipeline continues to grow. We now have 82 restaurants in permitting, design or construction. That's the most in well over a decade. That's grown since last quarter. We continue to sign new franchisees. That's just on the Jack side. On the Del side, we're having the same thing. We have a substantial number of agreements signed as a result of refranchising and that was part of our strategy. And that's also with Jack in the Box franchisees and Del Taco franchisees. So the sentiment is positive. The development pipeline is starting to take hold. And now it's about putting shovels in the ground, as we said in our comments, and that's beginning to happen.

That's great. And if I could have a quick follow-up just on Brian's question earlier. I think you spoke to it to a large extent, Darin. But if there's anything to add on what you're seeing from customers? I know you mentioned kind of the number of items per ticket down. That may just be a continuation of what you and maybe the industry has seen. But any other behavior changes to call out, income demographic behaviors, anything like that?

On the Jack side of the business, when we look across all of our income deciles, we're seeing the best performance coming from the higher income. Some of that is our strategy and what we've been promoting from a premium standpoint. Some of it is just the response we're getting since we did segmentation research and identified a customer base that we targeted since myself and Ryan joined the company. And then the last thing is just a balance -- we're seeing balanced sales improvement across all deciles. On the Del Taco business, what we're seeing is, we're seeing strength again across all income levels. We see some opportunity as we tried to change our value offerings to continue to drive value with some of our lower income guests. But overall, especially because Del we've taken so much pride, so we have some opportunity to drive our business with our lower income guests there. But overall, a pretty balanced look at demographics within both businesses.

Next question is from Alex Slagle from Jefferies.

I wanted to see if you could clarify the incremental refranchising actions. Are those neutral to EPS this year or dilutive? Just wanted to get an idea on that, if you have any thoughts on potential for it to be accretive to EPS or EBITDA going forward?

Yes. I think if you look back to our ICR presentation that will help support that these transactions are accretive to earnings based upon our share repurchases. And so when we -- obviously, we're losing EBITDA, we're taking in royalties, but we're also driving them at decent valuations. And so through upping our share repurchases, that will help these be accretive.

Okay. And then could you provide some additional color on the Del Taco performance in Atlanta, Oklahoma? What the challenges are in those markets? And sort of plans to readjust or remedy those issues?

Yes. I think it's with -- many of us in the industry have a few markets that at times if we have leadership changes, we may have some challenges within operations. So we went in with a plan to help turn those markets around and improve them. We have a couple of those markets at Jack in Oklahoma and Kansas City that we implemented a playbook in Kansas City and Oklahoma. We're seeing double-digit comps in Oklahoma, close to 20% comps, and over 12% comps in Kansas City. So we're implementing the playbook and it starts with staffing and training and then eventually starting to market the business and eventually focus on the margin improvement. I would say, for Del Taco, the same holds true in Atlanta and in Oklahoma.

Next, Brian Harbour, Morgan Stanley.

Yes. Just on SG&A, so we have some sense of the fourth quarter. Do you think you'll be kind of in the mid-range of your annual guide, low end? Just any comments on that? And then my second question was just following up on the franchisee sentiment question. These are not new issues, but any newer comments on real estate availability, interest rates just permitting? Has anything changed with those topics?

I think what you've heard with our peers within the industry, I think we've all faced a little bit of challenges with permitting and the time it takes to get permitting to occur on a development standpoint. So we've seen some of our pipeline lengthen. I think also from a standpoint of just labor like we face in our industry development, the same thing. Construction labor is a little bit more challenging. And so those are just lengthening the pipeline. It's not stopping the building of our pipeline, which is where I made the comment earlier is, we now have 82 restaurants in the pipeline. That's more than we've had in over a decade. And so now we have a pipeline to work with. And we'll continue to fill that up with sites and eventually get them under construction.

And on the operating EPS, I think we're just going to say we're reiterating our guidance, and it's between $5.90 and $6.10.

Next question comes from Jon Tower from Citi.

So just I wanted to zero in on the celebrity meal deals or tie-ins of partnerships that you guys have been having at the core Jack in the Box brand. And then there's been what appeared to be a home run for the brand so far at driving sales in a great way to get your check lift and having some brand awareness. But I'm just curious, how you're thinking about leading more of these into future plans for the company? And/or how you plan on lapping, say, the Mint Mobile promotion from this year or this Snoop Dogg promo that really looked like it helped comp quite a bit?

Yes. As part of our marketing strategy, we'll continue to focus on partnerships where they make sense. Overall, the key here is elevating Jack in the Box, the character Jack Box and his presence as his own celebrity. And I think a lot of his friends you're seeing him partner with to do these promotions. And we'll continue to do that when and where it makes sense.

I was just going to ask, are they structured differently than, say, just signing up a normal celebrity and paying them a fixed fee or whatever it is annually?

Yes, definitely. We do different type of partnerships. With the Mint Mobile promotion, I think that was interesting, because both of us benefited from that relationship. Mint Mobile got some benefit of our advertising. We got the benefit of Ryan Reynolds celebrity endorsement of our brands. So we both won in that situation. I think the same holds true for our partnership with Snoop. And Snoop has been a long time fan of the brand. And so he wanted to participate with us in this promotion, especially when we relaunched late night and our Munchie Meals, which we have a lot of fans for our late night business.

Next question comes from Chris Carril, RBC Capital Markets.

So maybe just following up on the commentary around the 4Q comparisons. Maybe to help us as we're thinking about the 4Q and just considering the wide range implied by the same-store sales guide, can you maybe expand a bit more on the Jack trends that you saw over the course of the 3Q? And then in particular, what you saw as you exited the quarter? I mean, if I'm looking at the multi-year trends versus 2019, they again accelerated for the third -- for the full third quarter. But curious if you could expand on what you saw throughout the quarter?

Yes. Throughout Q3, we saw sales continue to improve from period 8 through period 10. And I think a lot of it was what we did with our promotional windows. And so we'll continue to do that. I think coming into the fourth quarter, you look at our 4-year geometric stack, it accelerated in Q3 50 basis points. And then we now are going to be lapping some heavy price. So overall, we feel good about the momentum in our business and sales. It's just now how do we forecast overcoming that price and also hours of operation. But overall, the business is sustaining.

Next question comes from Jeffrey Bernstein from Barclays.

Great. I had 2 questions. One, I was just hoping you could talk a little bit about the traffic at Jack in the Box. I think it eased a little bit in the third quarter from the second quarter. And I know you made some cautious comments like you just said about the compares going into the fourth quarter. So I'm just wondering if you can offer some thoughts on when you think you can turn that traffic to the positive side? And what the key drivers would be on that front? And then I had one follow-up.

Yes. I think for the most part, we held steady on traffic throughout the quarter. And I think late night accelerated. It was up, transactions were up 3.1%. And so obviously, year-over-year. And so that continues to improve. I think opportunity for us is continuing to find success within our breakfast daypart and our lunch daypart and driving value transactions in that area.

Got you. And do you break out the sales mix of the breakfast late night and however you define value? It seems like those are important areas. Just trying to get a sense for a benchmark of where you are now, maybe where you were before or what you're anticipating?

No, we don't. And reason why I speak a little bit about breakfast is, we probably had the most acceleration of price through our franchisees at the breakfast daypart. So we know there's some opportunity for us to recapture some value at the breakfast daypart. And so that's why I speak of value during the breakfast component.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. And you may now disconnect.