Jack In The Box Earnings Call Insights: Qdoba Guidance, Restructuring

On Thursday, Jack In The Box, Inc. (NASDAQ:JACK) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

Qdoba Guidance

Joseph Buckley – Bank of America/Merrill Lynch Research: Can you just talk a little bit about the guidance changes around Qdoba, the same-store sales being (indiscernible) little bit and the expansion numbers being reduced a bit, in light of what look like pretty strong performance and kind of your long-term goals there.

Linda A. Lang – Chairman and CEO: Let me talk regarding the two questions really around Qdoba, first one being on the sales guidance. The quarter two did come slightly below our expectations. However on a two year basis, it’s still in that 9% range which is consistent with the strong performance over the last several quarters and the main reason for coming in a little bit low was just that there was less promotional activity in the second quarter relative to the second quarter in the prior year. We have some promotions planned later in this quarter, third quarter and also in the fourth quarter. On the franchise side, a bit more impact as a result of the Easter shift from third quarter last year to second quarter this year. So franchisees closed a few more restaurants and that’s some of the underperformance relative to guidance. So we have several things coming up at the end of the third quarter and in the fourth quarter in terms of product launches, social media campaigns and catering promotion. With regard to the development change, if you look at the last 18 months, we’ve acquired several franchise markets and a total of 68 locations. So we’ve shifted our focus to develop in those markets where sales are strong, margins are strong and as a result we’ve lowered just this year’s – the balance of this year’s restaurant counts and however we still maintain the long-term growth targets of that 15% to 20% Company store growth. So it’s really just a shift in timing, Joe.

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Joseph Buckley – Bank of America/Merrill Lynch Research: Its driven by just the number of stores you have bought and kind of the management timing attention that that requires.

Linda A. Lang – Chairman and CEO: It’s really the growth opportunities in those markets where they can be – we can successfully go in more rapidly penetrate those markets that were acquired by the franchisees. Does that answer your question?

Joseph Buckley – Bank of America/Merrill Lynch Research: Just one more for Jerry. Just the lack of share repurchase in the quarter, just update us on your thoughts with respect to buybacks and was there any specific reason there were none in this quarter?

Jerry P. Rebel – EVP and CFO: Joe, in the quarter we purchased 25 restaurants from a Qdoba franchisee for about $33 million midway through the quarter. And our capital deployment policy has long been to invest in return oriented capital first with respect to the core businesses and then beyond that returning capital to shareholders in the form of share repurchases. We still believe in that allocation prioritization and the lack of share repurchase is primarily due to the investment in additional Qdoba franchises that the Company converted.

Restructuring

John Glass – Morgan Stanley: First there was discussion I believe, there were several restructuring charges being taken during the quarter and I presume it’s in G&A or sort of corporate infrastructure. Can you talk a little bit more about what the changes that are occurring there are? What being as more charges coming, so what should we expect both quantitatively to come? And also what is the expected benefit, is there going to be an accelerated benefit to reduce G&A as a result in the next year or maybe if you could put a little color on that please?

Jerry P. Rebel – EVP and CFO: Sure so on the second part of the question first, John, is we had said for a while and including in our Investor Day we talked about as part of the investment thesis and where we expected our operating EPS to go or to come from to get to that $2 EPS target that we had. So part of that was the right sizing of our G&A structure. Remembering that we’ve had a significant acceleration of our refranchising strategy over the last couple of years. It is time to have our cost structure kind of catch up with the refranchising case. So our target again is 3.5% to 4% of system wide sales we were north of that last year. So the restructuring charges are intended and including the early retirement program that we’ve announced is intended to accelerate that reduction in our G&A targets. So additionally we are looking at some things including some of the activities that occurred in the second quarter that will have a positive impact on restaurant operating cost going forward. So as an example we eliminated about 60 positions in the second quarter which was the $0.02 charge that we had. Some of that is related to outsourcing of some restaurant facility activities as we would expect over time to improve our restaurant operating margins somewhat modestly in future years. But in terms of what the size of this looks like, because of the anomaly of the moving pieces that we have right now particularly with the early retirement program which we won’t know what that looks like until late in the third quarter what that accepted phrase looks like. It would be extraordinarily difficult to give you any kind of reasonable or responsible range, of what those cost are going to look like. I think you’ll see much more clarity by the end of the third quarter and also into the fourth quarter.

John Glass – Morgan Stanley: Your beef inflation estimates came down I think fairly substantially from higher single digits to call it maybe more mid single-digits. I understand it from the 50s. But one if you didn’t mentioned it and I didn’t hear it I apologize. What was the inflation during the current quarter and two has this sort of broken the back of the cycle or was there just an opportunistic purchase that you are able to make, what was the driving force behind that reduced inflation numbers?

Jerry P. Rebel – EVP and CFO: Inflation in the second quarter was 3%. What we’re really seeing here is the 50’s, I don’t know that we’ve broken the back on the site, or not we would like to. If we do that will give us and everybody else a little tailwind on the restaurant margin. I’d say it’s too soon to tell that yet it was not an opportunistic purchase, I could say that is difficult to forward buy on the 50’s anyway. But we’re in kind of wait and see at this point John with what happens with 50’s going forward. We would like it to be more of a permanent decline, but we are cautious as we sit here today.

John Glass – Morgan Stanley: Just to clarify, the 3% is that beef inflation or total food inflation in the quarter?

Jerry P. Rebel – EVP and CFO: It’s both. Beef was up 3%, total was up 3%.