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Edited Transcript of JACK.OQ earnings conference call or presentation 14-May-20 3:30pm GMT

Q2 2020 Jack in the Box Inc Earnings Call

SAN DIEGO Jun 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Jack in the Box Inc earnings conference call or presentation Thursday, May 14, 2020 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lance F. Tucker

Jack in the Box Inc. - Executive VP & CFO

* Leonard Comma;Chairman & CEO

* Rachel Webb

Jack in the Box Inc. - VP of IR & Strategic Analysis

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Conference Call Participants

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* Alexander Russell Slagle

Jefferies LLC, Research Division - Equity Analyst

* Brian John Bittner

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Christopher Thomas O'Cull

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Director of Research and Senior Research Analyst

* Dennis Geiger

UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants

* Eric Andrew Gonzalez

KeyBanc Capital Markets Inc., Research Division - Restaurants Analyst

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* Jon Michael Tower

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Lauren Danielle Silberman

Crédit Suisse AG, Research Division - Senior Analyst

* Robert Marshall Derrington

Telsey Advisory Group LLC - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Jack in the Box Inc. Second Quarter Fiscal 2020 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. (Operator Instructions)

At this time, for opening remarks and introductions, I would like to turn the call over to Rachel Webb, Vice President of Investor Relations and Strategic Analysis for Jack in the Box. Please go ahead.

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Rachel Webb, Jack in the Box Inc. - VP of IR & Strategic Analysis [2]

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Thank you, Cheryl, and good morning, everyone. Joining me on the call today are Chairman and CEO, Lenny Comma; and Executive Vice President and CFO, Lance Tucker.

In our comments this morning, per share amounts refer to diluted earnings per share. We will refer to non-GAAP items throughout today's call, including operating earnings per share, adjusted EBITDA as well as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliations provided in yesterday's earnings release.

Following today's presentation, we will take questions from the financial community. Please be advised that during the course of our presentation and question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. And while management will provide current thinking on this call around the potential impacts of COVID-19 on our business, given the unprecedented nature of this pandemic and the rapidly changing environment, any forward-looking statements should be considered with this elevated level of uncertainty. Actual results may differ materially from these expectations based on risks to the business.

The safe harbor statement in yesterday's news release and the cautionary statement in the company's most recent Form 10-K are considered a part of the 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 this morning. Jack in the Box management will be attending Oppenheimer's Consumer Conference virtually on June 16. Our third quarter ends on Sunday, July 5, and we tentatively plan to announce results on Wednesday, August 5, after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Thursday, August 6.

And with that, I'll turn the call over to Lenny.

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Leonard Comma;Chairman & CEO, [3]

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Thank you, Rachel, and good morning. I'd first like to take a moment to express my heartfelt thanks to our restaurant team members for keeping everyone's safety a top priority as we provide for the needs of our guests and first responders. I'd also like to thank our corporate employees, franchisees and suppliers for their partnership, flexibility and ingenuity during these unprecedented times. It has truly been remarkable to see the way the brand has rallied to meet the changing needs of our consumers.

Sales have rebounded to positive for the first 4 weeks of quarter 3 and improving each week to, most recently, positive 8-plus percent for the week ending May 10. Based on these results, I would describe our outlook going forward as cautiously optimistic and we will continue with an approach that will be careful and conservative. Lance will share more on this momentarily. But if I contemplate the next chapter for Jack in the box, it gives me a great piece to know that sales and cash flow remain robust despite the challenges brought on by the coronavirus.

Taking a look at quarter 2 and as we outlined in our release in April, our business was on a positive sales trajectory in the second quarter, averaging over 5% versus prior year for the weeks preceding the impact of the coronavirus. This was on track to be our strongest quarter since quarter 3 of 2015 driven by the strong performance of our newest menu item Tiny Tacos. As I've shared on previous calls Tiny Tacos is intended to store some of the value-related equity we lost when we raised the price of our iconic 2 for $0.99 Tacos to $1.19 a few years back.

Although it is still too early to determine the staying power of our new Tiny Tacos offering, we are seeing a great consumer response that is not only showing up in our Tiny Tacos sales but is also helping to bring attention to the entire Taco category. Tiny Tacos not only drove transactions, bringing back some of our lapsed users but also bolstered check sizes as they're frequently added on to guest orders.

COVID-19 had a significant impact on our operating results in the second quarter, and Lance will recap this in a moment. Before we get to that, I'll briefly mention some of the changes in consumer behavior we are seeing in our business today.

First, consumers are utilizing delivery and our mobile app more than ever. Delivery sales have more than doubled in the quarter, and we are experiencing record high usage of our mobile app, with active users doubling since the start of the pandemic. As a reminder, over 95% of our restaurants are covered by at least 1 of the 4 major delivery providers, with 80% utilizing at least 3 of the major providers.

Second, occasions have shifted away from the traditional breakfast daypart with consumers no longer commuting to work. But since we offer anything on the menu any time of day, we are seeing plenty of breakfast items selling later in the day, and we believe this is one of the positive factors contributing to our sales at this time.

These shifts in consumer behavior have led to a significant increase in our check sizes, as consumers are now placing larger orders typically for multiple people.

I want to thank Jack in the Box's team for their agility and rapid response to these changing trends. Within the first 2 weeks in March, restaurants swiftly moved to a new operating model to facilitate drive-thru and takeout only. The corporate team shifted to working from home, and our supply chain insured restaurants were all receiving masks, gloves and sanitizer while also making the appropriate adjustments to reduce supply risk.

I also want to thank our marketing team for pivoting our menu offering to address current consumer needs for indulgent food that travels well and meals that provide great overall value. Our $4.99 Spicy Popcorn Chicken has hit the mark by ensuring great value, affordability, pace and temperature in a way that lends itself to delivery, takeout and drive-thru. Our Tiny Tacos are equally portable in a popular takeout box with high marks on value for the money and craveability. And we continue to generate success with our price pointed bundles, such as the $4.99 Triple Bonus Jack, which offered a successful upsell option to 4 patties. This upsell option is not only easy for our crews to execute, it also supports the profitability of these promotions for us and our franchisees.

With major sporting events and concerts canceled and consumers commuting less, the team quickly shifted advertising, both in placement and in messaging. We shifted media from events and billboards to streaming entertainment and digital content to help meet consumers where they are. The team also launched campaigns such as #StayInTheBox to promote sheltering in place and developed ads to communicate our dedication to safely staying open to serve the community through delivery, drive-thru and our mobile app. I believe all of these changes have allowed us to fare much better than we initially expected. We are feeling bullish about our current trajectory, especially in light of lapping our strongest quarter from last year.

I'll now turn the call over to Lance for a closer look at our second quarter results and current trends. Lance?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [4]

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Thank you, Lenny, and good morning, everyone. Before getting into the detail, as you're undoubtedly aware, operating performance for the second quarter was largely negative versus the prior year driven by the weeks impacted by the COVID-19 pandemic. Rather than mention this for every item I speak to, I wanted to just state this upfront.

Operating EPS for the second quarter was $0.50 as compared to $0.99 last year. The decline of $0.49 was primarily driven by lower sales versus the prior year and higher G&A costs during the quarter. Our system-wide comparable sales decreased 4.2% in the second quarter as we preannounced. Company comp sales decreased 4.1% comprised of check increases of 6.4% and transaction declines of 10.5%. Franchise comp sales decreased 4.1% for the quarter.

Our system was off to a great start for the first 7 weeks of the quarter as sales increased 5.2%. During this time, transactions were also positive for the entire system. As we felt the impacts of the COVID-19 pandemic later in the quarter, sales for that 5-week period declined by 17%.

Now allow me to give an update on what we've seen thus far in the third quarter for the 4 weeks ending May 10. Same-store sales have been positive, up around 1.6%. As Lenny mentioned, the sales have been accelerating with sales, the week ending May 10, up over 8%. This is versus the start of our strongest quarter last year, and it's testament to the brand's nimbleness during this time.

During the second quarter, company restaurant-level margin decreased to 20.6%, down from 27.6% last year. Most of this decline was driven by labor. Wage inflation was between 6% and 7% in the quarter as California moved to $13 per hour in January. We also maintained higher staffing in the restaurants during the weeks of the pandemic-impacted sales to ensure a positive experience for our guests and consistency in employment for our employees. Additionally, food and packaging costs increased 1.6% in the quarter driven by commodity inflation of approximately 4.4%.

Also, the company acquired 8 restaurants in January prior to any impacts from the pandemic. This had an unfavorable impact of approximately 70 basis points on company restaurant-level margin. Franchise-level margin decreased $2.7 million when compared with the prior year quarter, primarily driven by the decrease in franchise same-store sales. As a percent of total franchise revenues, franchise-level margin for the quarter was 38.6%. Without the changes from the new lease accounting standard, franchise-level margin percent would have been 41.4%, very comparable to the 41.3% from the prior year.

To help ensure the financial stability of our franchisees during this unprecedented time, we provided rent, marketing and capital requirement reliefs. To give some color on our franchise base prior to the pandemic, our average franchisee owns and operates approximately 15 to 20 restaurants with strong unit volumes averaging approximately $1.5 million.

To help franchisees preserve their liquidity, we first postponed a portion of their rent payments. As we previously disclosed, we postponed collection of approximately 40% of our franchisees' April rent payments. This totals roughly $9 million that will be collected beginning in July 2020. This does not impact our rental revenues on the income statement but does impact our balance sheet and cash flows. Similarly, we have received relief from some of our landlords and have passed through over $10 million in savings to our franchisees for the months of April, May and June, collectively.

Second, we provided marketing relief through marketing fee reductions and payment deferrals. In addition to the fee reduction for March from 5% to 4%, we announced yesterday, we will also be reducing April's marketing fee percentage to a range of 2% to 4% based on sales volumes. These fees are typically collected in the subsequent month though we have postponed collection of the remaining fees as described in our press releases.

Third, we delayed all 2020 development agreements by at least 6 months and suspended any other capital investment requirements. In the second quarter, franchisees opened 5 new units, bringing us to 16 opens through Q2. We anticipate much of the new unit development previously expected in the second half of 2020 will push into 2021.

Given the sales performance since the start of the pandemic and the relief our franchisees have received, the liquidity of our franchisees generally remain strong. As a reminder, we've had temporary -- or minimal temporary closures throughout the quarter with less than 1% of our restaurants closed on any given day, again, a testament to the health of our restaurants. As the primary nature of the franchise relief is through the extension of payment terms, these relief efforts do not have a material effort -- or a material impact, rather, on our franchise-level margin.

Moving on to the rest of our P&L. Advertising costs, which are included in SG&A, were $3.5 million in the second quarter compared with $3.9 million in the prior year. This decrease of $0.4 million was due to the reduction in marketing fees for the month of March and April within the quarter. In addition, the company did not make any incremental marketing contributions during the quarter.

G&A increased $7 million during the quarter driven primarily by mark-to-market adjustments related to company-owned life insurance policies or, as we refer to them, COLI policies. These policies are sensitive to swings in the stock market and the losses associated with these COLI policies were $4.4 million in the second quarter given the stock market declines. Legal reserves were also higher in the quarter by roughly $1.8 million. Both the COLI and legal reserve amounts are noncash items.

Our tax rate in the second quarter was elevated at 32.3%, with the biggest reasons being reduced income and that the COLI losses are not tax deductible. We anticipate the tax rate to remain elevated for the remainder of the year. Our 10-Q contains additional details on the tax rate.

Now to turn to our business outlook and comments on our liquidity and debt. Like many in our industry, we have seen business performance change significantly and sales volatility increase, and we do not know how long these trends will sustain. Because of this uncertainty, we have withdrawn both our 2020 and our long-term guidance.

Further, while our performance has held up relatively well, given the uncertainty around the magnitude and duration of the financial impacts caused by the pandemic, we continue to believe it is prudent to take actions that will maintain and bolster our current healthy liquidity position.

To provide a quick update on cash, the company ended the second quarter with $169 million of cash on the balance sheet, of which $132 million was unrestricted. As of Monday of this week, that number is unchanged. We temporarily paused our share repurchase program and have $122 million of share repurchase authorization remaining. Similarly, we have temporarily paused our quarterly dividend, which is typically paid in June. While we remain committed to returning cash to shareholders, we are prioritizing maintaining financial flexibility in the near term. We will continue to monitor our capital allocation policies each quarter with the goal of reinstating the dividend and returning to share repurchases as soon as we have more clarity around the scope and duration of the disruption to the business caused by COVID-19.

In an abundance of caution, we also drew down $108 million of our variable funding notes, which is effectively our line of credit. This, combined with EBITDA declines, increases our debt-to-EBITDA leverage ratio to slightly higher than the 5x we have targeted but does not put us at risk with any covenants associated with our debt structure.

As a reminder, our primary debt covenant is our debt service coverage ratio, or DSCR, and that must remain above 1.75x. While we do not typically disclose our actual ratio, at the end of the second quarter, our DSCR was roughly 2x the covenant amount where we had a significant amount of cushion.

Lastly, we have scaled back capital spending for the year and are spending only on essential and sales-driving projects at this time.

That concludes our prepared remarks. I'd now like to turn the call over to the operator to open up the line for questions. Cheryl?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Brian Bittner of Oppenheimer.

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Brian John Bittner, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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To be trending with your same-store sales up 8% currently, and I think you said positive quarter-to-date, it is very impressive, and it is outperforming the industry, I think. So you seem to be doing something right, but it also begs the question of, do you think there's now a tailwind in your business from this new environment we're all living in? In other words, as states reopen and things start to normalize, how do you now think about how that will impact your business from here?

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Leonard Comma;Chairman & CEO, [3]

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Yes. Brian, this is Lenny. I think a couple of things. One, when you look at some of the guest-related feedback about our service, we're actually seeing that the sentiment around our service is improving. And I think that, combined with the food that we're executing that seems to be working on all levels, family bundles, the craveable sides and snacks, their add-ons and then also the LTOs that are driving great value, it just seems like all of those things are working exceptionally well at this time. And I can't imagine that as the dining rooms open and we have an opportunity for even more capacity, that we would lose momentum. I would expect that we'd be able to maintain what we've been able to achieve. And so we're, like we said in my planned remarks, cautiously optimistic. Moving forward, we think the team has done a great job of sort of setting us up to not only get through this time but come out of it stronger.

And again, I think a lot of it really comes down to it's a safe transaction for the consumer and the employee. It's an efficient sort of convenience-oriented transaction right now. And I think the team is executing really well on those fronts. And then most importantly, the food that we're putting in the marketplace right now is exceptional. And I think that it travels really well. So for the takeout and drive-thru portion, which I would expect -- and delivery, which I'd expect would continue to be a growing trend, having things that travel well seem to be playing well into our hands at this time. So yes, we feel good about maybe a little bit of wind in the sails, but like I said earlier, we'll just -- we'll remain cautiously optimistic going forward.

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Operator [4]

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Your next question comes from Gregory Francfort of Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [5]

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Just maybe can you talk a little bit about operationally because I would guess that the drive-thru right now is up 30%, 40% in sales to kind of be doing breakeven. And I'm curious where you're seeing that, is that in boosted checks? Is that in more shoulder period sales? And I guess, because of that, more of the business going through the drive-thru, are you able to manage labor a little bit more efficiently than you were in the past just because you don't have to dine in? And does that change how you think about the timing of when to open dine-ins?

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Leonard Comma;Chairman & CEO, [6]

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Yes. Good question. I think actually, as we meet with our franchise advisory council, those are the exact kind of conversations that we're having. It's really a twofold conversation. The first is about making sure that as we open dining rooms, we do it safely for the public and also for the employees. And then the second is, there's a lot of efficiency right now through the drive-thru for multiple reasons. One is a lot of what we're seeing in our sales being driven by much larger orders and a higher average check, as I said in my remarks earlier, these are entire families that people are purchasing for.

And typically, when you have that type of a transaction, it actually puts a toll on the drive-thru employees to meet the feed requirements because there's so much more food going through at each transaction. But I applaud the team for doing a great job in adjusting to the type of demand. And as you mentioned, the labor efficiency associated with these transactions is rather high. So we would expect that our franchisees would be able to flow a lot of cash flow to the bottom line.

As we think about dining rooms reopening, yes, it's a less-efficient transaction. But my anticipation is that with Jack in the Box being only 15% dine-in, we won't lose too much of our efficiency as we start to reopen dining rooms. Essentially, when you look at our trend prior to the pandemic, 70% going to the drive-thru and another 15% takeout. I would expect that even as dining rooms open up, the 15% remaining for dine-in would be much lower than that or than historic levels, and we'll likely maintain a lot of the current efficiencies that we've gained.

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Operator [7]

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Your next question comes from John Glass of Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [8]

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First, just a follow-up, can you just unpack the quarter-to-date or the most recent trends between check and traffic? And also just by daypart, you mentioned people pivoted away from breakfast. So is breakfast still actually a negative, and you're actually achieving this despite that drag. And more broadly, Lenny, I know the company is in a very different position than it was in '08 and '09. But when unemployment spiked back then, your traffic did suffer. Do you think you now have -- or do you need to make further adjustments to value going forward, just cognizant of the fact that unemployment will be nearly 20% probably by the end of this quarter?

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Leonard Comma;Chairman & CEO, [9]

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Yes. So a couple of things. I'll [stick] to things that we have typically disclosed and stay away from the ones we haven't, but I'll address the last part of your question first. We actually are seeing that in the trends through the first 4 weeks of this quarter, most recent trends are actually showing transaction improvements. Although, obviously, most of our sales are coming from check, we're actually seeing sequential improvement in week-over-week in traffic. So feeling pretty good about that. And as you talked about the unemployment trend, we've got massive unemployment right now. And Jack in the Box, I think, is in a great position just based on the offering that we have to drive a significant amount of sales and traffic going forward.

I think the business may shift during this period of time to higher check average and lower than historic transactions. But what we've been able to see over the last 9 years is year-over-year same-store sales growth despite some of the transaction erosion that we've experienced. So we feel like we're well suited to pivot the offering in a way that maintains the sales and flows through the profit even if we have to sacrifice some of the traffic. But I don't believe that the traffic will be sacrificed because of a lack of value. When you look at what we're providing today, both in the bundled deals and also in the sides and snacks, there's actually a tremendous amount of value. And that's just looking at in a traditional sense where value is equated to price and quantity of food that you get for the price.

But if you look beyond that, what we're seeing from consumer information is that the consumer is starting to see value in a much broader way. They're looking at the digital component, the drive-thru component, the delivery component as also a component of value, and they're looking at the safety of the transaction as a component of value. So when you look at family bundled deals that can be delivered through a drive-thru, takeout or delivery in a safe manner and at an overall reasonable price, that all seems to be on the table right now in the consumers' evaluation of value. And based on what we're seeing from our promotions and also our overall mix in sales, it does seem to be proving out in the way people are using the brand right now. So just -- I think it's going to be important that we not only look at some of the historic drivers of our business, but we're going to have to pivot the way we think about the brand and the way we present product to consumer to meet their current set of needs, which has evolved quite rapidly.

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Operator [10]

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Your next question is from Alex Slagle of Jefferies.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [11]

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I was wondering if you could talk about the speed initiatives and the target of getting a minute faster by 2021, just how this is impacted given the franchisees' tighter belt on capital spending and how much can be accomplished just through process changes and other changes?

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Leonard Comma;Chairman & CEO, [12]

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Absolutely. So a couple of really good things. The operations team did a great job of identifying short term, relatively low-cost process changes, minor equipment adjustments that could be made to significantly improve throughput in the drive-thru. And all of those things not only were identified but also tested and sourced prior to the pandemic. What the pandemic has done is obviously not allowed, just based on social distancing, for folks to actually come together for some of the installation and project rollout throughout the field. But we do have 300-plus locations that have already received those adjustments to their operation. And we have created some optionality for our franchisees to work directly with the suppliers to continue to move forward with that at their own pace, even during the pandemic.

But the main takeaway is we are sort of standing at the starting line, very much ready to execute that the first minute that some of the restrictions are lifted and we can safely get folks into restaurants to make those adjustments to equipment. And then on a long-term basis, the team has already started to identify much sort of broader-reaching changes that could happen operationally and to some of the equipment and procedures that would allow us to go the next step in reducing the complexity and taking out many seconds from the drive-thru transaction. So feeling good, both on a short-term and long-term basis that we've actually identified the path forward.

The biggest impact is that in some of the longer-term things that we've identified, the pandemic disrupted our ability to go into restaurants and test those adjustments and new pieces of equipment at this time. So when we come out of the restrictions, we will start to be able to test some of the longer-term things going forward. But the main thing I would want the shareholders to know is that as we look at some of the short-term, low-cost adjustments, and we couple that with some of the operating procedural adjustment and just more accountability and training that has been all identified, that whole part of the system is actually what generates that first minute. And all of that is what I'm saying we can quickly continue with once the restrictions are lifted.

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Operator [13]

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Your next question is from Dennis Geiger of UBS.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [14]

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Lenny, best of luck, of course. Just wanted to ask another one looking into the recent sales trends and kind of the learnings. Specifically, just thinking about the customer segmentation, anything more on kind of new customers you're seeing, how you're thinking about that? If so, related kind of on the new product, value bundle, mix, any comments on kind of what's been most impactful there and how that might shape the mix of those 2 going forward? And then I'd just be curious on the geographic split, if you guys care to provide any commentary.

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Leonard Comma;Chairman & CEO, [15]

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Yes. So a lot there. I would say a couple of things. When we look at the trend in general, I think the agility of the marketing team, operations team, supply chain as far as the impact to the consumer and to the operation, those were the things that clearly put us in a position of strength as we entered into the pandemic. When I look at -- for example, in working with the delivery providers, our team very quickly, even the week prior to some of the social distancing really starting to sweep the nation, they started to create family bundles and also delivery -- third-party delivery promotions that would allow us to attract new consumers, particularly, when you look at the purchase occasions shifting dramatically during a pandemic, right? Folks aren't driving to work, so they're not going through the drive-thru for breakfast. But those same folks are looking for an opportunity to order in or take out for lunch and dinner and even early evening and until late night. So when you look at some of the family bundles, I think that sort of hit the mark there.

But also what we're seeing is that during times like this, folks are looking for craveable items that they can trust. They want to know that when the food is taken home or brought home through a delivery provider, the products are still going to be hot, they're going to be crunchy, they're going to be fresh, whatever they need to be. And when you look at the Popcorn Chicken and the Tiny Tacos, for example, those products hold really well many minutes after they're cooked. And I think using the packaging that our team put together and also selecting those products to be featured is a big deal.

And even when they looked at the burger promotions that they were going to promote, they tried to focus on products that traveled well that didn't have an abundance of produce on them because those are the types of things that water down the product and make the bread soggy and don't make the experience so great once the consumer actually indulges. So I think all of this sort of foresight going into the pandemic and sort of insight about what the consumer would need is really what's sort of paying off for us.

And I think to your question around how the products sort of line up and drive the outcome, it kind of goes back to what I was saying before. I think convenience and the definition of it is being expanded. And although -- and value, the definition of that is being expanded, and you've got to bring all of these things together around portability and the way the food is going to taste, whether it's eaten immediately or 20 minutes later. You have to bring all of that along with price into your sort of position when you present it to the consumer, or else I don't think they're going to be repeat customers.

And then from a daypart perspective, I think it is important today more than ever that Jack in the Box is offering the entire menu 24/7 because the consumer is buying a lot of breakfast items sort of later in the morning and early afternoon because their patterns have changed, right? They're not commuting to work but folks still, at times, want to go out and grab some breakfast. But they're not doing that at 6:30 in the morning, they're doing it more like 10:00 in the morning or 11:00 in the morning, early afternoon, those types of things. So we're seeing that the 24/7 menu is really helping. And when you look at the post sort of 9:00 p.m. time frame, so many restaurant companies are struggling right now financially with cash flows that they're cutting their hours. So even offerings that would typically be open until 10:00 at night are shutting down early. And oftentimes, it's just drive-thru businesses, particularly Jack in the Box that are available. So a lot of things playing into our hands right now that are helping.

From a regional perspective, maybe I'll let Lance share a few sort of tidbits on that.

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [16]

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Thank you, Lenny. We traditionally haven't said a lot on the regional side. But what I can tell you, and looking back at this last week, we've really seen very similar types of regional performance. And every region, this past week, was up at least mid-single digits. So we're seeing pretty consistent performance across those regions. And thankfully, no region looks like it's necessarily being left behind as we continue to drive good results.

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Operator [17]

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Your next question is from Jeff Bernstein of Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [18]

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Just a question related to the franchise system. One, Lenny, I'm just wondering if you could offer any thoughts on the sentiment evolution, whether there's any feedback on -- from franchisees on the support management has offered in terms of abatements and deferrals or perhaps anything on their current financial or leverage position. And then as you think post pandemic, and Lenny, I recognize this probably wouldn't be under your watch, but how do you think franchisees will think about the significant geographic growth opportunity. I think you mentioned lower cost, maybe there's an opportunity for it to go only restaurants or you said changes in operations and equipment as a potential catalyst. I'm just wondering on the other side of this whether this opens up franchisees to increasing interest, if you were able to bring the cost down despite holding the sales quite well. Any thoughts would be great.

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [19]

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Jeff, it's Lance, I'll start with this one. And I'll turn it over to Lenny when I'm done. But relative to franchisee health, first of all. As I said kind of in my prepared remarks, we feel like they were in good shape going into the pandemic with AUVs of $1.5 million on average, and like all brands, we do have some units that struggled more than others, but generally, we felt like the system was strong, and we continue to feel that way. We have not closed any units permanently due to the pandemic. As we said, we've had less than 1% even temporarily closed and those were due to low sales at the time. That wasn't for anything related to pandemic other than just reduced sales.

And then when you look at the performance, the support that we provided, the support landlords have provided and the fact that many of our franchisees, we believe, have received PPP loans, either received them or awaiting on them, we feel like their cash position remains quite strong. So overall, we feel very good about the health of the franchisees. I know some of the questions. I've seen some of the notes are around franchisee debt levels, and that's something that we haven't disclosed, and we're not going to do so at this time. But I think it's fair to say from a liquidity standpoint, our franchisees are in good shape. Some of them have probably taken on a little more debt due to the PPP loans, but a lot of that's going to ultimately be forgiven. But we feel like we're going to emerge from this in pretty good shape, which leads to your development question.

From a development standpoint, I think there are likely to be some opportunities. We've got to get a little further along in this and make sure franchisee balance sheets look the way we expect and hope they'll look coming out of this situation. But with that said, we do have a lot of work underway to make sure that we're providing a really effective affordable cheaper unit to franchisees and various iterations that would include very minimal seating and walk-up windows and some of those things. So I don't want to get too ahead of that. But that is some stuff that is in process now and frankly was in process prior to this. And we think we could hopefully have some ability for franchisees to get out and want to grow units in an effective way.

Lenny, anything you'd add there?

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Leonard Comma;Chairman & CEO, [20]

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I think you pretty much summed it up, Lance.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [21]

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Best of luck, Lenny.

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Leonard Comma;Chairman & CEO, [22]

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Thank you. Appreciate that.

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Operator [23]

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Your next question is from Chris O'Cull of Stifel.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [24]

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And I also wish you the best of luck, Lenny. And Lenny, I apologize if I missed this, but has consumer behavior changed in markets where restaurants have been allowed to reopen, like, let's say, Texas over the past couple of weeks or even Tennessee? I'm just curious if you've seen any kind of change in daypart usage or any other change behavior in those markets.

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Leonard Comma;Chairman & CEO, [25]

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Yes. It's really too soon to tell. We still have the majority of our restaurants working in the format that we had to move to when social distancing started. And so vast majority are drive-thru with takeout and delivery being the primary drivers of the business. Just this past week, we started working with the franchise community and company operations on procedural things that they need to put in place and signage packages that we prepared for them for sort of the eventuality of dining room openings. But even in states like Texas where they have allowed sort of loosening of those restrictions, there are certain cities or market areas where the franchise community decided not to immediately open those dining rooms as they want to sort of be cautious about the phased approach in getting those dining rooms back open. And mainly what they're concerned about is health and safety, first and foremost, and then keeping the operation efficient with some of the changes that we've all experienced.

So definitely too soon to tell, but it's something that we're looking at almost daily, and we meet with our franchise advisory council via conference call every week to talk to them about these types of things and to make sure that we're gathering sort of their feedback and sentiment about it. And in the last call, we got a lot of great feedback and, as you can imagine, various opinions. But the dominant opinion was let's sort of slow walk the reopening of these dining rooms. And we're going to give our franchisees some optionality on the pace in which they move, so that they can ensure that they do things safely.

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Operator [26]

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Your next question is from Eric Gonzalez of KeyBanc.

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Eric Andrew Gonzalez, KeyBanc Capital Markets Inc., Research Division - Restaurants Analyst [27]

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So it seems like the national chains, they're a little bit more focused on core menu items and value. It's clear that JACK had a big win with Tiny Tacos and maybe Popcorn Chicken. But I'm just wondering how the pandemic has changed your ability to test new products and what your view is on LTOs going forward, whether there's been any changes to your innovation pipeline. And maybe if you can comment on these costs as well, that would be helpful.

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Leonard Comma;Chairman & CEO, [28]

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Yes, good question. So prior to the pandemic, our product marketing teams had created a pipeline of products that was almost a couple of years' long, and they had tested many of those products already. So we don't believe that the pandemic is actually going to impact our ability to roll out successful LTOs just based on the fact that most of what we'd be rolling out was already tested and sourced prior to the pandemic. But what you did mention about core products and focusing in on that, the adjustments we've made, which was based on what we believe the consumer would be looking for, was to make sure that whether it was an LTO or it was a core product, we're focusing on things that were familiar and things that traveled well. And I think that's what we'll continue to do until we're in a place where some of the pandemic-related consumer sort of changes start to wane a bit.

And so at this time, I think we've got a great pipeline. We are not concerned about our ability to utilize that pipeline going forward successfully. But we'll likely lean more into the products that are in that pipeline, like I said, that would travel well and then are more familiar. So Popcorn Chicken is a perfect example of that. If we were going to do something that was less familiar, like a maybe a new Italian-inspired chicken sandwich that it's been forever since we've done anything like that at JACK, probably not the right time to do that, right? But Popcorn Chicken, right down the middle of the fairway, the consumer really knows what to expect before they get the product, and then they're pleasantly surprised to know that we have a spicy option as well as a regular option. And when you look at the quantity of food and the packaging and portability in the way that it keeps it hot, it really all works quite well but, again, focusing on the familiar.

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [29]

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Eric, its Lance. I'll jump in on the beef stuff real quick just to give you a feel. Obviously, we pulled our guidance, but our initial guidance this year relative to commodities was to be about 4% up for the year. And commodity markets are showing a lot of volatility. But I don't think overall, unless protein markets go crazy, that we would expect to be really any worse than that kind of 4%.

Specific to beef, we're in constant contact with our suppliers. As of right now, we're not expecting to have supply issues. Our formulation does use a little over half 90's and the remainder is fresh 50's. And then our supply chain team truthfully has done a wonderful job of buying forward on the 90's, which kind of protects against cost pressures on the 50's side. So I'm not going to share exactly how much we have forward contracted, but we do feel like we're in a good strong position certainly for the rest of 2020 on the contract side as well.

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Operator [30]

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Next question is from Lauren Silberman of Crédit Suisse.

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Lauren Danielle Silberman, Crédit Suisse AG, Research Division - Senior Analyst [31]

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You mentioned delivery is a driver of recent trends. Are you willing to quantify the current delivery mix? And then a large competitor of yours recently announced they made a sizable incremental advertising investment. So how are you thinking about any incremental corporate contributions to supplement the advertising fund?

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Leonard Comma;Chairman & CEO, [32]

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Yes, thank you. So we haven't commented on the delivery mix. So I'm going to stay away from that one. We don't feel like we need to incrementally invest in marketing at this time. We think that the most important thing that we did was to adjust the marketing to target the offerings that consumers were more likely to purchase. So for example, we're not spending a whole lot of time advertising breakfast items right now. And then also, we adjusted away from the channels that would be sort of irrelevant.

Like, for example, we do a lot of advertising on live sporting events. That doesn't exist for us today, but people are streaming video more so than they ever had. They're playing video games more so than they ever have, and they're spending a ton of time on social media. So we've pivoted the advertising to those spaces. And we think that it wasn't necessarily an incremental investment that was needed, but it was more so make sure you know where the consumers are and go attract them in those spaces. So when you look at our sales results, which is far outpacing the competition, it just doesn't seem to be a compelling reason why we would throw more marketing dollars at this time. But certainly, in the future, if we were to see some volatile trends, we'll keep our minds open. Right now, we feel like we've got the formula right.

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Operator [33]

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Your next question is from Robert Derrington of Telsey Advisory Group.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [34]

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Lenny, listen, we're going to really miss the transparency and all the color you've provided over time in helping us understand the business. So best of luck to you in the future. My question -- a couple of things. One, I'm just wondering what the company's view is on the need for additional funding. We've seen a number of other companies essentially look towards outside sources to provide additional liquidity. And I'm just wondering the perspective of management and the Board about the need for that. And then I have a quick follow-up.

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Leonard Comma;Chairman & CEO, [35]

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I'll let Lance address that one. As you can imagine, he's been spending a lot of time paying attention to it.

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [36]

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Sure. Bob, a couple of things. First of all, we're not actively raising. It doesn't mean we'll rule that out. But given our current performance and the fact that our cash flow has actually been positive, it's not something that we have needed to pursue in any kind of aggressive fashion. So I won't rule it out but I don't think it's something we need to be doing at this time. I turn it back to you, Lenny.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [37]

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Okay. And then my follow-up, Lance, for you. I'm just wondering about your perspective on the QIP bonus depreciation opportunity and how much additional liquidity, cash flow that could ultimately provide the company in a recapture of past taxes paid.

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Leonard Comma;Chairman & CEO, [38]

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Bob, that's something the team is still working out. So I'm not prepared to give a number on this today. But when we have one identified, we'll certainly make it known to the entire investment community.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [39]

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Got you. Okay. Again, best of luck. And thanks, Lenny, for everything you've helped us with over the years.

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Leonard Comma;Chairman & CEO, [40]

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Thank you. Best of luck to you, too.

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Operator [41]

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Next question is from David Tarantino of Robert W. Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Director of Research and Senior Research Analyst [42]

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I had a question just philosophically about kind of how you're thinking about investments in the business. And I definitely appreciate the uncertainty of the current environment. But just curious about the decisions to pull back on dividends and pull back on capital spending and actually lower the advertising fund contributions in light of the recent turn to positive sales momentum. It seems like those 2 are a little bit disconnected or those decisions are a little disconnected. So I'm just curious, why those decisions now? Is it that you're questioning the sustainability of the trend you're seeing? Or is it some other reason? And then I guess, secondly, when would you be comfortable starting to lean in on investments and bringing back the dividend, et cetera?

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Leonard Comma;Chairman & CEO, [43]

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Yes. Good question. So I'll start, and then I'll hand it over to Lance to provide a little more color. But what I would share is this, when you look at the volatility that we've experienced in the business in essentially 6 to 7 weeks, to us, it seems prudent to take a very conservative approach at this time. Obviously, with our performance, it could be very easily justified to go ahead and loosen up the reins at this time. And certainly, if the trend continues, and as I said earlier, we're cautiously optimistic about it, then I would anticipate the reins will certainly loosen.

But the last thing that we would want to have happen, particularly when we want to be in a position of strength to support our franchise community as well as to make sure that the employees are supported through this time to come out on the other end even stronger, the last thing we would want is to make some aggressive moves or loosen the purse strings at this time only to find ourselves 6 weeks, 8 weeks later being in a position where we're now having to raise cash.

We can't -- we don't foresee that. But this is probably the most unprecedented time that we've ever had to manage through in our history. And it just seems like with the amount of volatility and sort of unknowns about this thing, the last thing we should do is to loosen the reins with only 6 weeks or so under our belt. So just wanted to share that. And also would certainly anticipate that as the trends continue and we become more sort of secure in the future and our ability to sort of forecast things that we will not only loosen up the reins but also look to do the types of things that would show our shareholders that this was just a temporary adjustment, and that long term, we're certainly committed both on the share repurchase and dividend side to returning lots of cash to our shareholders.

With that, I'll pass it over to Lance for any additional color.

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [44]

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That's well said, Lenny, I really don't have anything to add there.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Director of Research and Senior Research Analyst [45]

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That was a great explanation. On the advertising fund contribution specifically, I'm curious why you chose to do that. It sounds like you made that decision very recently. So I guess, why allow for a lower contribution at this stage?

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Leonard Comma;Chairman & CEO, [46]

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Yes. It's interesting. I know for a lot of folks, what we've seen and heard from competitor in the way they're approaching it is simply not what we believed was necessary, and we certainly didn't believe it was the right way to utilize cash. So some folks are going out and saying, look, we're going to invest a whole bunch of extra dollars in advertising.

But the question that we really should be asking is what eyeballs are going to actually see all of that advertising because television is still the largest driver on the advertising side for what we do. So when you remove that television programming, you're removing those eyeballs. And even though you're converting a lot of your spending and your attention to streaming and digital and gaming and all the rest, there are not as many eyeballs in those platforms that are easy to attract as you can do in television.

So from our standpoint, it made more sense to adjust that spending for both ourselves and our franchisees and do a more targeted approach with the spend than to essentially throw money against the wall that we didn't think was actually going to generate a return. So that's the reason that we looked at it that way. And I would say that based on the results that we're getting, that it was the right call. I truly believe that the more targeted approach was the right call at this time. And I think it's not only sort of saved our franchisees some money, but it's also allowed us to, at the same time, still maximize the number of eyeballs that would respond to the things that we're putting in the marketplace.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Director of Research and Senior Research Analyst [47]

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Great. Lenny, good luck.

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Leonard Comma;Chairman & CEO, [48]

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Thank you.

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Operator [49]

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Your last question is from Jon Tower of Wells Fargo.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [50]

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I appreciate it. And Lenny, I hope you enjoy the golf. Just a couple of ones from me. First, following up on the marketing piece. How much do you think of this shift that's taking place right now away from traditional television media and towards kind of these digital channels will end up sticking after we kind of returned to some sort of normal, meaning, say, sports are back on television? Do you think there's a permanent shift that's taking place right now, especially for you guys? Or do you think it will all kind of revert back to precrisis levels? And then I have a follow-up question as well.

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Leonard Comma;Chairman & CEO, [51]

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Yes. I have to believe that there's a certain percentage of this that will stick. It's hard for me to predict how much. But I'll just -- I'll use my own personal behavior, it has changed dramatically during the pandemic. I downloaded more apps, I participated more in social media. It's really the most convenient way to get a lot of things done, particularly when you don't have access to the traditional means or modes that you use. And so I think many consumers are behaving similarly and forming new habits. And I think there's got to be a percentage of those new habits that are going to stick. So I would imagine that as our marketing teams evaluate where to target the spend, they'll likely continue to focus on some of the areas they're focused in now and at a higher rate than they did prior to the pandemic.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [52]

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And with that, do you expect potentially dollar spend to go down over time if it's essentially more efficient through these channels? And then the additional question on top of that, a piece of the story precrisis was the remodel of the drive-thrus across the system. Obviously, this crisis has emphasized that channel even more so, some of your competitors have also talked about doing a lot more curbside. So has this crisis maybe accelerated plans to remodel once things reopen again or even altered the way you're thinking about how the remodels are going to take place given what you've experienced right now?

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Leonard Comma;Chairman & CEO, [53]

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Yes. So I think that it is obvious to me that the drive-thru will need to be a focus going forward. And obviously, what you've heard from me in the past is that it was a huge focus for me, and I believe it needed to be a huge focus for our brand and our franchisees. I won't speak for our incoming CEO, Darin, but he does have a fair amount of experience in the food industry. And I think as he looks at those trends, he'll be able to help lead the team in the direction that he thinks is best. But I'd imagine that in some shape or form, there'll be heightened focus on the drive-thru business.

And then you had asked about advertising dollars and whether or not we thought the overall spend would go down. I don't believe so. I think that Jack in the Box, when we have an opportunity to go back to television advertising and also some of the out-of-home billboard and other advertising that's proven to be effective for us over time, we're going to want to utilize dollars in that space. And likely, as usual, we'll always find ourselves in a place where we believe it's more about balancing than it is lowering the overall spend. And today, just with, as I said, some of those channels not being available, it just didn't make sense to spend, but certainly not a trend that we would expect to continue.

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Operator [54]

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We have completed the allotted time for questions. I will now turn the call over to Lenny Comma, CEO of Jack in the Box for closing remarks. Please go ahead.

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Leonard Comma;Chairman & CEO, [55]

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Thank you. As this will be my last earnings call, I wanted to take a moment to personally thank the investment community for their time and investment over the past 6-plus years. I enjoyed the candid conversations and very much appreciated the respect you always offered to me and my team. I have tremendous amount of confidence in the future of the Jack in the Box brand and all of its wonderful people. And I will think of you often while I'm sleeping in, surfing and golfing in my retirement. All kidding aside, I will miss this place and all that it offered to me and my family. I hope all of you and your loved ones stay safe, and I wish you all a very bright future. Thanks again for joining us today, and this concludes our call.

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Operator [56]

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