Jack In The Box Earnings Call Nuggets: Compares Analysis and Refranchising Activities

Jack In The Box (NASDAQ:JACK) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Compares Analysis

Joseph Buckley – Bank of America/Merrill Lynch Research: Cash flow just asking you to discuss just the difference between the Company operated Jack in the Box comps and the franchise Jack in the Box comps. The compare was easier for the franchisees, but obviously the Company outperformed and I was just kind of curious what you think the drivers of that were?

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Lenny Comma – President and COO: Joe, this is Lenny. A couple of things to think about. There’s really two reasons why the compares were a little different for Company and franchise. The primary reason is really just the footprint of our remaining Company stores versus franchise. Company primarily located in California, Texas and Southeast, not impacted by the weather and performing well against our internal initiatives, franchise operations, much more impacted by weather in the Midwest primarily and so we certainly saw the impact there. Then, as we’ve stated on previous calls, we do have a lot of internal initiatives that the Company tend to move much faster to initiate, and then the franchisees follow suit. So we do expect the franchisees will closely gap in those areas, but certainly as we said early we will typically speak about weather but we certainly saw the difference based on the footprint this time around.

Joseph Buckley – Bank of America/Merrill Lynch Research: Then just a question on the decision to franchise more Jack in the Boxes. You just talked about the drivers of that and I know you mentioned they would be kind of accretive all around but maybe just elaborate a little bit on that if you can too please?

Lenny Comma – President and COO: Yes. Joe, so let me just walk you through the impact of the decision. So if we were to – let me back up, these restaurants that we are looking at are cash flow positive and they generate reasonable AUVs and margins. However, having said that, when you look at the refranchising of the ones that we just talked about in the second quarter, the one southeast market and the additional locations that we just discussed that we will sell this year, on a pro forma basis if they were out of the Company footprint at the end of Q2, our Q2 margins would have been 17.9% versus 17.1%. So it is 80 basis points accretive to the restaurant operating margin but it’s also accretive to operating EPS on a fully annualized basis. So it seems to fit in with our strategy of continuing to operate the higher AUV locations across our footprint.

Refranchising Activities

Brian Bittner – Oppenheimer: So as far as you just kind of talked about the accretion leap I guess from this additional re-franchising. I mean is there any way you can kind of put some numbers around that by any chance?

Jerry P. Rebel – EVP and CFO: We have indicated that all of our refranchising activities over the last couple of years have been accretive. If you look at this depending on what you would expect to see with flow through and reduction of G&A, you are probably looking at somewhere in the neighborhood of $0.02 accretive to operating EPS annualized.

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Brian Bittner – Oppenheimer: Then you also kind of touched on the discrepancy between franchise and the Company owned comps, but the guidance for same-store sales for the June or for the fiscal third quarter, I think it was just for Company owned. I mean is it fair to think that that’s probably a good guidance range for the franchise piece as well?

Jerry P. Rebel – EVP and CFO: I think when we talked about the Company stores and the guidance there, we spoke about the continuing trends in the last two periods of the quarter into this quarter, and that’s really we want to focus our energy on. On the franchise side, there may be some upside potential, but I think we should expect them to trend along the same lines as Company, which will be following the last two periods of quarter two.

Lenny Comma – President and COO: Brian, just one addition to my response is, when we sell the remaining three markets in the southeast, we would expect to have much more benefit to our operating EPS going forward.

Brian Bittner – Oppenheimer: So, this is kind of $0.02 above what that initial range was back when you originally talked about the southeast market?

Lenny Comma – President and COO: Yeah, that’s pretty fair way to look at it, yes…

Brian Bittner – Oppenheimer: Lastly, I realize it’s been seven weeks since Tim’s been on the job. But at the same time it’s been seven weeks. So, clearly he had an opportunity to take a look at the brand and maybe see take a step back and reevaluate I mean is there any initial glimpse or peek you can give us into kind of the way that he’s thinking or potential strategies going on there. We saw some more deleverage in the margins this quarter, understand the comps had a lot of weather problems, but the margins were pretty weak and just trying to get an understanding, if there’s additional strategy (indiscernible) on Qdoba now or is this something that you’d just rather wait and have Tim take a little more time?

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Linda A. Lang – Chairman and CEO: If you don’t mind, I’d like to address the question a little more broadly, so I won’t give you specifics. That will come later but I did indicate that, as you said, he’s been in position for what, two months now, eight weeks or so, and – however, he clearly has a sense of urgency around the need to improve the performance at Qdoba. So, he right away began a comprehensive review of the business and that includes, like we said brand positioning work; consumer analytic work, organizational structure and looking at market performance. So, we’ll have more to share with you later in the year, but we haven’t stopped making improvements though, in the meantime we reengaged the field ops team, so we’ve gone out with the roadshow and retrained everyone to enhance the interaction between our guest service employees and the guests that come into Qdoba, and we’re beginning to see that traction. We’re beginning to see positive VOG results. Then, we’ve also reworked the marketing calendar and the marketing plan to reduce the level of discounting in most markets. So, some of those initiatives have already begun and are underway and others will follow based on Tim’s review of the business and the brand.

Jerry P. Rebel – EVP and CFO: Then, just to follow-up on the margin impact on weather and on discounting that Linda mentioned, the discounting activities in the second quarter, the impact on margin for that, we estimate to be about 190 basis points, so were it not for that it would have been just (indiscernible) about 14% of the restaurant operating margin.

Brian Bittner – Oppenheimer: That’s the discounting, is the 190 basis points or the weather?

Lenny Comma – President and COO: Discounting and weather combined and they are about even on that.

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