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Edited Transcript of JACK earnings conference call or presentation 16-May-19 3:30pm GMT

Q2 2019 Jack in the Box Inc Earnings Call

SAN DIEGO Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Jack in the Box Inc earnings conference call or presentation Thursday, May 16, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carol A. DiRaimo

Jack in the Box Inc. - VP, Chief IR & Corporate Communications Officer

* Lance F. Tucker

Jack in the Box Inc. - Executive VP & CFO

* Leonard A. Comma

Jack in the Box Inc. - Interim Chairman & CEO

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Conference Call Participants

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* Andrew Michael Charles

Cowen and Company, LLC, Research Division - Director

* 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 - Co-Director of Research and Senior Research Analyst

* Dennis Geiger

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

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jeffrey Andrew Bernstein

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

* Jeffrey Daniel Farmer

Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* Jon Michael Tower

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Matthew James DiFrisco

Guggenheim Securities, LLC, Research Division - Director and Senior Equity 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 Second Quarter Fiscal 2019 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on Jack in the Box corporate website starting today. (Operator Instructions)

At this time, for opening remarks and introduction, I would like to turn the call over to Carol DiRaimo, Chief Investor Relations and Corporate Communication Office for Jack in the Box. Please go ahead.

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Carol A. DiRaimo, Jack in the Box Inc. - VP, Chief IR & Corporate Communications Officer [2]

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Thank you, Jake, 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, and operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis, excluding gains or losses on the sale of company-operated restaurants, restructuring charges and the impact of tax reform on the company's deferred tax assets as well as the excess tax benefits from share-based compensation arrangements, which are now recorded as a component of income tax expense versus equity previously.

Adjusted EBITDA represents net earnings on a GAAP basis, excluding discontinued operations, income taxes, interest expense, gains or losses on the sale of company-operated restaurants, impairment and other charges, depreciation and amortization, and the amortization of franchise tenant improvement allowances.

Our comments may also include other non-GAAP measures such as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliations included in the earnings release as well as the prior year results recast for the adoption of the new revenue recognition accounting standard.

Following today's presentation, we'll take questions from the financial community. Please be advised that during the course of our presentation in our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks of 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 this conference call.

Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available in the Investors Section of our website at www.jackinthebox.com.

Few calendar items to note this morning. Our third quarter of fiscal 2019 ends on Sunday, July 7, and we tentatively plan to announce results on Wednesday, August 7 after market close.

Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Thursday, August 8.

I'd also like to take this opportunity to announce a couple of changes on the IR team. Rachel Webb, whom many of you have spoken with over the past few months, has been named as Director of Investor Relations for Strategic Analysis. Rachel has been with the company for over 3 years, where she previously led the sales analytics function. Rachel also spent 4 years with Sonic prior to joining Jack in the Box.

In addition, after 20 years with the company, our Executive Assistant, Linda Wallace, will be retiring at the end of June. I want to thank her for her dedication, attention to detail, responsiveness and sense of humor, you will truly be missed.

I hope you'll join me in officially welcoming Rachel to the team and congratulating Linda on her well-deserved retirement. With that, I'll turn the call to Lenny.

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [3]

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Thank you, Carol, and good morning. Before reviewing second quarter results, I want to thank our employees and investors for their patience, while we've been evaluating various strategic alternatives. The process was robust and included contacting a broad range of potential strategic and financial buyers, both domestic and international. The company also explored multiple financing alternatives and the Board and management teams included is implementing a new capital structure and a performance securitization with the best alternative for driving shareholder value at this time. With that decision, we are committing our full attention to moving the Jack in the Box brand forward.

As for the second quarter, I'm generally pleased with how the business performed and with the progress we're making on our long-term strategic initiatives to grow sales and improve operations consistency.

Our promotional calendar in the second quarter had a greater emphasis on value, which drove the increase in same-store sales. Discounting still persuasive in the marketplace, we leveraged our slightly different approach to value and saw a sequential increase in both sales and transactions without negatively impacting restaurant-level margins, which remains among the highest in the industry. 2 under $5 combos featuring a Sourdough Patty Melt sandwich and a Fish Sandwich were great examples of how we delivered a lot of value at margin-friendly price points in Q2.

We're pleased this momentum has accelerated through the first 4 weeks of our third quarter, and same-store sales have increased by more than 2%. Guests are responding favorably to our promotional line up in Q3, which leverages our history of introducing innovative new products and the strength of our guest favorites. Combos featuring Jack's new Spicy Chicken Strips and Triple Bonus Jack have been very popular, as has the return of 2 for $4 Croissant Sandwiches. Our approach to value differs from the deep discounting tactics of some of our competitors, which we believe is not in the best interest of the long-term health of our brand, particularly in the face of rising labor and commodity cost. Many of our value-oriented promotions are either new menu items or limited-time offers, which minimizes the risk of diluting the equity of core products that our loyal customers crave. To reach our core customers wherever they may be we're continue to invest a larger portion of our advertising budget in nontraditional media. In Q3, we [worked with] Lele Pons, a crossover celebrity and popular social media influencer with 34 million followers. You'll see Lele in our TV spots, but she's also helping us spread the word about Jack's Spicy Chicken Strips via several social media platforms.

Delivery continues to contribute to sales in Q2, with sales mix growing an additional 60 basis points from the first quarter. The average check per delivery orders remains consistently higher than other dining modes, with most orders placed during the dinner and late-night day parts. Additional restaurants began supporting delivery in Q2 and at quarter end, nearly 90% of our system was served by at least 1 delivery service.

I also want to mention that guests are increasing their use of our new mobile app, which we launched in the first quarter. We continue to see adoption grow with the number of users increasing and app-generated transactions nearly doubling during the quarter. When it comes to value, digital marketing and delivery, our marketing communications and product marketing teams have done a great job in aligning our approach with the evolving expectations of our guests. I want to especially thank the 2 VPs leading those teams, Adrienne Ingoldt and Jen Kennedy, for their efforts in ensuring that we continue to remain relevant to our guests.

Moving onto operations. We're addressing an area that's been a long-standing challenge for us, improving speed of service. We've been our own worst enemy when it comes to speed of service as the breadth of our ever-changing menu has added complexity and prep times in our kitchen. To reduce this complexity while also improving consistency and accuracy, we've been testing opportunities to reduce redundant SKUs and delete some low-volume items while also streamlining back-of-the-house procedures. We're very pleased with the results of Phase I of this program and saw no detrimental impact on sales at about 180 restaurants, both company and franchise, where it was tested. But we did see improvement in speed of service and participating restaurants saw other benefits. Training team members got easier, the space savings was noticeable, it took less time to count inventory and there was less food waste.

We plan to roll out Phase I changes across the system beginning in July and begin testing Phase II of this program immediately, which is intended to optimize additional back-of-the-house procedures.

The overall objectives of these efforts are to make training and execution easier on our crews, provide faster and more consistent service for our guests and deliver more sales and profit for all operators. By the end of 2021, we're targeting a 1-minute improvement in average service time, while maintaining quality, accuracy and friendliness rate. Another recent step we've taken to improve restaurant operations was the addition of 3 seasoned industry executives to complete the leadership team of our Chief Operations Officer, Marcus Tom. Bob Schalow and [Greg Miller] have joined longtime Jack in the Box veteran Rudy Robles as our VP's of Operations. And they'll be focusing on all facets of our system, both company and franchise restaurant. And [Shannon McKinney] is our new VP of Operations Services and field performance support. We're looking forward to the impact they'll have on improving efficiencies in our systems and delivering a higher and more consistent level of service to our guests. As for our restaurant facilities, we continue to evaluate our capital programs to make sure we're being as efficient as possible with our spend. I want to provide an update on some changes we're making to restaurant investments, as we shift our focus more to our drive-thru of the future initiative.

If you recall that we talked about 600 of our oldest restaurants needing remodel. About 150 of these involve structural enhancements, roughly half of which have already been completed. We'll complete the balance of those remodels, however, we've decided to no longer require full remodels for the remaining 450 or so restaurants.

We have learned the majority of the returns from a full remodel is coming through the drive-thru, aligning with where 70% of our business is generated. As such, we are reprioritizing our spending and shifting our focus to our drive-thru of the future initiative in an effort to get most of the sales lift for smaller investments. We're expanding the test that's been underway, which includes amenities like digital menu boards, increased use of LED lighting and canopies. As we determine the final elements, we'll expect to begin a systemwide rollout in early calendar 2020. We're expecting substantially all restaurants to participate in this initiative.

With that, I'll turn the call over to Lance for a more detailed look at the second quarter and our expectations for the full fiscal year. Lance?

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

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Thanks, Lenny, and good morning, everyone. I'll provide an update on our second quarter operating results and our performance so far in the third quarter. As a reminder, effective this fiscal year, we adopted the new revenue recognition accounting standard and the new pension accounting standard. Given these 2 accounting changes, we will compare this quarter's results to recast 2018 figures where appropriate. Please refer to the press release for a more detail pertaining to these adjustments.

Now onto a discussion of our second quarter results. Operating EPS for the second quarter was $0.99 as compared to $0.80 last year. This 24% increase was driven primarily by lower G&A costs, lower shares outstanding and the impact of tax reform, which more than offset dilution from refranchising.

Systemwide comparable sales increased 20 basis points in the second quarter. Company comp sales increased 60 basis points comprised of pricing of 2.1%, while mix increased 70 basis points and transactions declined by 2.2%. This is a sequential improvement from the first quarter on both the 1- and 2-year basis. Franchise comparable sales increased 10 basis points for the quarter. Company restaurant-level margin increased 120 basis points to 27.6%. This increase was primarily driven by refranchising. Food and packaging costs were favorable during the quarter, however, we expect inflation in the back half of the year as commodities are projected to increase, most notably pork. Rate inflation is also expected in the back half of the year, with Los Angeles, one of our primary company markets, increasing wages again this July. Considering these cost pressures and where we are tracking year-to-date, we reaffirm our full year guidance for company's restaurant-level margin of 26% to 27%. Franchise-level margin increased by $3.3 million in the quarter or 6% when compared to last year's recast figures due primarily to refranchising.

Rent and royalties were also roughly 6% higher than the prior year. G&A in the second quarter decreased to approximately 1.7% of systemwide sales as compared to 2.3% as recast for last year. $5.6 million decrease was primarily driven by a $3.8 million decrease of mark-to-market adjustments. G&A benefited further from workforce reductions related to refranchising and an increase in transition services income related to the sale of Qdoba, which is reflected as a reduction of G&A. Decreases were partially offset by increases in interest costs as well as higher incentive compensation accrual. Advertising costs, which were included in SG&A, were $3.9 million in the second quarter compared with $7.3 million last year. This decrease was due to a $1.9 million decrease from refranchising and an additional $1.5 million decrease resulting from incremental company contributions to the marketing fund in the prior year that were not repeated this year.

Our tax rate for the second quarter was 25%, benefiting from favorable mark-to-market adjustments. As a result, we have lowered our full year guidance to 25% to 26%. We did not repurchase any shares of common stock in the second quarter. We currently have approximately $100 million of share repurchase authorization available.

As of the end of the quarter, our leverage ratio is approximately 4x EBITDA. We opened 2 new restaurants within the quarter, both of which were franchise restaurants, and remain on track to achieve our full year guidance of 25 to 35 new units in 2019.

Moving on to performance so far in the third quarter and our full year expectations. In the first 4 weeks of the third quarter, system -- same-store sales have accelerated nicely and are trending above 2% at a blending noticed. We are pleased with our sales trajectory so far in Q3 driven by our greater emphasis on compelling value bundles given flat same-store sales in the first half of 2019, we are lowering the top end of our annual 2019 same-store sales guidance from 2% to 1%.

Moving onto capital expenditure and tenant improvement allowance expectations for 2019 and beyond. As Lenny mentioned, we have 150 or so restaurants that require structural enhancements. Spend on these units represented the majority of our expected spend in 2019 was built into our guidance, for both tenant improvement allowances as well as the capital expenditures, and stats were reaffirming our guidance for 2019 for each of these items. Of these 150 restaurants roughly half are yet to receive the required enhancements. These remaining units are expected to be substantially completed by the end of calendar 2019.

To date, 75 restaurants have completed full remodels, a large majority of which include these structural enhancements. These units are generating mid- to high single-digit sales lift, most of which is coming through the drive-thru, as Lenny mentioned. As a result, we are shifting our focus to the drive-thru initiative. We may also require other exterior or interior refreshers to our restaurants, and we will let you know if and when we decide to do so. Once we've firmed up our path forward, we'll provide updated financial expectations and confirm, however, that our long-term capital expenditure and tenant-improvement allowances will be no higher than what we reaffirmed yesterday in our press release. Also, as mentioned in yesterday's press release, we are pursuing securitization. And we will work diligently to quickly complete the process. Once the securitization is completed the company intends to resume share repurchases through open market transactions and potential accelerated share repurchase program or maybe a combination of the 2 for the target leverage ratio of approximately 5x EBITDA.

This concludes our prepared remarks. I'd now like to turn the call over to the operator to open up the call for questions. So Jake, I'll turn it back to you.

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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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In regards to the improving comp trends that you're seeing in the third quarter, do you see this as the whole industry is improving or are you improving your market share because of the new value offerings you have in place?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [3]

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Yes, we -- Brian, this is Lenny. We really see this as a reflection of what we are specifically doing in the marketplace. And the reason that we feel confident about that is as we look back throughout each of the promotional periods of this year and even 2018, we have data that shows that when we put compelling new news into the marketplace that is appropriately priced, not always super discounts but appropriately priced in a way that tells the consumer how much value they're getting for the money right up front in the communication, we have performed well. And so we've, as I said in my prepared remarks, focused on LTOs and new items to promote so that we don't steal from the core and create a bunch of trades. And essentially, what we see is that when we put these bundles into the marketplace, it's driving a lot of incremental sales and also traffic. And so it's been a very positive result for us that we can say that even when the industry is doing well, if we're not doing those things, we're not typically doing as well. So don't think that we're just riding the wave here.

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Brian John Bittner, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Okay. And just a follow-up question on unit growth. Lenny, during your refranchising strategy, your franchises were growing units very rapidly but -- through acquisition, and your systemwide units weren't actually growing. But now that your refranchising is complete, do you think this is going to help improve the opportunity for net new openings moving forward relative to what you've seen can you walk through what you're seeing in the pipeline now that refranchising is complete as it relates to new units? Any color there would be helpful.

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [5]

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Yes. I think the answer to that question is yes. Growth is probably our top priority going forward. When we look at all of the various business model changes that we've had to manage, it's been a significant amount of change management for all of our stakeholders. And I think we're finally at a place where we can say we've put that behind us and we can focus our energy on the business at hand and growth is really what we need to start generating. So when we look at whether it'd be the operating -- the size of -- or the footprint of the facility or even the markets in which we grow. We plan to move very aggressively for testing and implementing the types of evolutions of our concept that would allow us to really get a high take-rate from not only our existing franchisees but also look to bring new franchisees into the fold as well.

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Brian John Bittner, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Congratulations to Rachel, and Linda as well on her retirement.

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Operator [7]

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Our next question comes from the line of John Glass of Morgan Stanley.

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

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First, just on the remodel, I just want to make sure I understand. Are the 75 that you've completed, were they full remodels but you're -- and you're getting the high single-digit lift and you're pivoting to just focusing on the drive-thrus, or have you -- and you're just extrapolating you get the same benefit from drive-thru only or have you actually tested that independently and you're seeing the same kind of lift without doing the full remodel?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [9]

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John, it's Lance. I'll start with that one and let Lenny jump in if there's anything he wants to add. So after the 75 that we have completed, for the most part, first of all, they were all full remodels. And for the most part, the big majority of that includes the structural enhancements we've spoken about. So they do not include any just straight drive-thru. With the drive-thrus what we're doing is we've begun some testing and we're going to be expanding that testing and that's going to be happening over the balance of the calendar year. So those returns are coming from full remodels. We are seeing the biggest part of the returns coming through the drive-thrus though, which has led us to believe, as Lenny said, we think we can capture the bigger part of the returns and the sales lifts from converting to a drive-thru, if we do it, with less of a capital investment for ourselves and also for our franchisees.

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [10]

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John, the only thing I would add to that as we look at consumer trends and also how consumers use our business, not only do 70% of the guests come to the drive-thru but the remaining 30% that go in the dining room half are takeout consumers. When we look at sort of the convenience factor associated with our brand, it's relatively high. And when we focus on drive-thru, it allows us to sort of double down on what consumers primarily see us as, a convenient fast food offering that has sort of a twist to its menu. So we're going to focus on that. And then when you look at what's happening with delivery and order ahead and pick up trends, it sort of begs the question what's the appropriate level of investment in dining rooms? And then for us, obviously, we have a much higher takeout. So for all those reasons, it just seems like the most appropriate spend for us to make and also to ask our franchisees to invest in is going to be the one that's most in alignment with not only what the consumer's overall behavior has been but also specifically, how they've been using our brand.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [11]

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That's helpful. And if I can just ask about the menu restructuring or SKU, I wasn't clear if it was a menu item count reduction or just a SKU reduction. And if you're reducing the number of menu items by how many or what percent? Or is this just taking the number of ingredients down so it's simplifying it but you're not really changing what -- the architecture of the menu.

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [12]

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Yes. It is mostly the former and not the latter. So it's mostly that we're pulling out redundant ingredients. For example, there's a time where we had 5-plus mayo-related sauces. And this makes it very complex for the crew to deal with 5 mayo-based sauces. We have at one point 7-plus cheeses and a ridiculous number of bread carriers. And many of those items are so similar that when we slightly modify the product by essentially using 1 ingredient over several products versus 2 or 3 ingredients over those products, the consumer isn't telling us that they don't like the product, in fact they say they like it just as much. So we're really careful not to kill an equity by bringing the quality of the product or the perceived craveability, or taste of the product down. But -- and when we can keep it neutral and make it easier on the crew, it just makes a whole lot of sense. So the depth and breadth of our menu has, just over time, continued to add complexity. And I will also say that culturally the way we created these products and implemented them is we essentially started in the culinary and R&D space and created what we thought was the best product for the consumer, and it was really up to operations to figure out how they were going to implement that. And today, we actually have a team of people that combines operations, training, the R&D and culinary and marketing folks, supply chain folks, all-in-one team. So as we're developing the product right up front we're really pushing hard to make operations our first priority and not bring in ingredients or complexity into the processes. So let's just say there's a lot of low-hanging fruit right now, and without any consumer impact we're able to have a positive impact on the crew.

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Operator [13]

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Our next question comes from the line of Christopher O'Cull of Stifel.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [14]

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Lenny, I apologize if I missed this but can you explain why the system saw a sequential improvement in the comps given, I believe, you've been promoting bundled value offerings for a few months now?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [15]

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Yes. Some of that has to do with the take-rate on the promotions, right? So right now we have a pretty high percentage of the system who is involved in all of these primary promotions. So we've got the new chicken strips: Spicy Chicken Strips. We have the new burger that's in the marketplace and also the breakfast offering. And all 3 of those things are showing pretty high degree of success where the people are participating in them. And where we don't have the participation, obviously, we're not seeing that level of success. But right now the vast majority of the system is participating in these promotions. And we really only have a few outliers to have picked, one or 2 that they're not going to participate in. So a lot of it just has to do with participation rates. And I think the new news on the spicy chicken is a big deal as well because chicken is obviously on trend right now.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [16]

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Just as a follow-up. Can you talk a little bit about why the participation rate has improved among the franchisees? And then maybe quantify some of the benefit or what the -- what type of participation rate you used to have versus now? And maybe the ad contribution from that?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [17]

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Yes. So I would say that our marketing and operations teams have done a good job of just sharing information, sharing the facts about how the prior promotions have performed for those who participated and what performance we saw from the markets that did not participate. We've been having road shows, we had a roadshow a few months back where we went and showed the sales differential for those markets that participated. We also shared the profit differential for those that participated. And I think that franchisees were able to see that we are trying our best to be careful with their margins, while at the same time, we're trying to make sure that we're competitive in the marketplace. Today, when we execute value the way that you see, it is driving incremental sales, incremental traffic, and that's keeping us from eroding margins. If we see a different response from the consumer or we promote something that starts to dramatically erode margins, we're going to make an adjustment. So it's really just trying to take a balanced approach to it. And I think that the operators in conjunction with their franchise business consultants and marketing folks, have just gotten aligned on it. And we'll see how it continues to go. Hopefully, sales is -- or will be the biggest catalyst to participation and the confidence in the things that we're doing.

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Operator [18]

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Our next question comes from the line of Gregory Francfort from Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [19]

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Lenny, just going back to John's question on the reimage spend and the decision to maybe allocate a little bit more to the drive-thru rather than the in-store. I mean, I think, it's a very different philosophical approach from one of your biggest quick-service peers. And I think the 70% drive-thru mix is actually pretty similar across both brands. And so I guess I'm curious if maybe you're not seeing the same sort of lift on the in-store business. Are there longer term brand benefits that might not show up in near-term traffic that would be a reason to make a bigger capital commitment to the in-store remodeling effort. I'm curious how you think about that.

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [20]

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I guess what I would tell you is that I don't think the consumer is valuing all new furniture and wall treatments and lighting as much as they're going to value enhancements to the drive-thru and a more efficient pick-up system at the front counter. And so when I look at what consumer trends are, I would say it'd be better for us to focus our attention on where the take-rate is. It doesn't mean that the other parts of the facility present themselves poorly to the consumer. It just means they don't necessarily need quite the refresher enhancement going forward. So I kind of look at what's going on in the industry and try to kind of think back to the events that have happened in the past, whether it be with e-commerce or even when you look at what happened with Blockbuster and Netflix. And I don't want us to ever be in a position where we're ignoring what the consumer is telling us that we want -- or what they want, and we just continue to do what we want. At the end of the day, the consumer is saying that convenience has been enhanced through this whole digital world, and they want to participate in it whether it's order ahead and pickup or delivery and they want to participate in the convenience of fast drive-thrus. So I think that's where we need to focus our attention. What they're not telling us specifically for our brand is that they want to spend a lot of time in our dining rooms and particularly don't spend a lot of time in our dining rooms in groups, they typically do that as individuals. So from that standpoint, I just think that I'm hard-pressed to ask our franchisees to make an investment in something that isn't necessarily going to drive the type of returns that they're going to need. And I would rather take a safer bet, which is essentially to align our investments in where the consumer is going.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [21]

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That makes sense. And then maybe just one follow-up for Lance. The quarter to date number you've given, is there any higher advertising spend in those 4 weeks than other parts of the year? I guess I'm just trying to figure out if there's anything onetime that might be boosting that number?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [22]

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No. The company has not made any additional contributions this quarter in advertising.

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Operator [23]

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Our next question comes from the line of Jeffrey Bernstein of Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [24]

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Great. First question is just on the pricing side of things. I think you mentioned the average check was up [to $8] at least on the company-operated side, and that included just north of 2% price. But I know, Lenny, you also mentioned labor and food inflation going up. So I'm just wondering how the conversations are playing out with franchisees as they think about protecting their profitability. Presumably, franchisees would need to increase further to mitigate the inflation levels but that might obviously further degrade traffic. So I'm just wondering the balance of those things and how the franchisees are receiving the suggestions you're making on price?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [25]

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Yes. We can only educate franchisees on what's happening in the marketplace between them and their competitors and also what's happening with, obviously, some of the underlying commodity costs. And so we'll spend the time talking about that. We certainly don't dictate pricing, even on our promotional calendar, we will give them the option to be in the marketplace without price. And so from that standpoint, I would say just sort of focused on the education versus the dictate of pricing.

But ultimately, what it comes down to for franchisees, that if you're going to have discounts in the marketplace, those discounts have to drive incremental sales traffic or else they're going to erode their margins. If you can see a slight rate decrease but you see margin dollars increasing, you might be okay with that. But when you start to see significant rate decreases and you start to see margin dollar erosion, I think that's dangerous. And so all of that to say that the #1 thing that our franchisees are going to be focused on is same-store sales growth. Because if you can drive same-store sales, you can cover some of those other underlying cost increases that are going to happen. And you want that sales growth not to just come from price but you also need it to come from traffic. So we're seeing positive trends in traffic right now, which I hope our franchisees as their experiencing them are gaining more confidence in the things that we're recommending they do.

Ultimately, if we continue to drive traffic increases along with some reasonable price increases, that's where they're going to start to see the flow through and they'll be less concerned about some of the underlying cost pressures that they're dealing with.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [26]

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Got it. And then just a follow-up, Lenny, I know in your prepared remarks you talked about the patience that you appreciate from an investor standpoint in terms of the sales process and all the alternatives you considered. I'm just wondering if there's any takeaways you're permitted to share, maybe more qualitative, in terms of interest or challenges?

And then things like M&A has been quite high in the space over the past couple of years, and I'm just wondering if there's any qualitative learnings or things you could share in terms of how that process played out?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [27]

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No. We're really not permitted to get into the details of that. What I will say is that one of the silver linings of just spending that much time on our business, evaluating our business in conjunction with other folks who are looking at is, you just -- you start to find opportunities through other people's lenses that maybe you hadn't thought of along the way. And they're just -- some of it is just minutiae but it's valuable when you spread it out across 2,200 restaurants. So we spoke to a lot of really bright individuals who were very familiar with our space, and it was actually quite rewarding to go through the process and just hear what they had to say and listen to their opinions and even advice on the business.

So can't talk about anything beyond that but I will say that although it's a pretty rigorous process that most will interpret as at times something that's sort of dogging you out, right? It's just running you down. But the truth is although it takes a lot of energy you're actually gaining a lot from it too.

So on the other side of it, I'd say our team's pretty energized to take what we learned from the process and use it to implement the changes that we think will grow the business going forward. But as far as the process itself, we can't say too much about that.

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Operator [28]

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Our next question comes from the line of Dennis Geiger of UBS.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [29]

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Questions, Lenny. And I guess if the strength that you're seeing thus far in 3Q is really almost entirely about the franchisee adoption of the offers, more so than the customer adoption than the customer adoption, and if the customer adoption and feedback is largely similar over the last few quarters. I guess as we just look ahead, do you have decent visibility? It's not clear I guess, but into what adoption looks like going forward particularly off the back of good results? And if the adoption was high, should we assume that the margin profile on what you're running right now is pretty good? Just a little more color if you can share it on how to think about value uptake or adoption there?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [30]

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Yes. I'd say a couple of things. First off, it really is a combination of both the consumers' adoption rate as well as the franchisees' adoption rate. The reason I say that is looking at Patty Melt and the Fish Sandwich, which are good products, but Spicy Chicken is completely new, right? It's something that folks have not seen before whereas Patty Melt and Fish Sandwiches are things that folks have seen before. So Spicy Chicken completely new news to our space and I think that consumer adoption has been quite strong there. But also the Triple Bonus Jack is a fan favorite from the past that hadn't been in the marketplace for a very long time. And we're able to get a very compelling price point in the marketplace, which is driving a lot of incremental traffic as well.

So I think you're getting both franchise and consumer adoption, which is really sort of the point of this first statement and not -- and what's driving it is not just franchise adoption. And then as far as how we look at this going forward, everything that we're doing has been margin-friendly. And it's margin-friendly mainly because we're doing it as LTOs and new products. We're not discounting a bunch of our core items where the franchisees are making strong margins and where they have high sales mix.

And so the incremental traffic is driving great flow through for the operators. And what I would hope is that if operators are seeing their pockets getting more full of money, they will be more apt to sign up for the promotions going forward, right?

At the end of the day, I think the best positive reinforcement or way to positively reinforce what we're doing is for folks to see that their period and quarterly sales and profits have gone up. So I expect, with current performance, they'll be seeing that. And I would expect that as they look at what we're rolling out going forward that they would start to gain even more confidence that the take rate would stay high.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [31]

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Great. And then if I could just any geographic differences on comp trends or the weather impacts particularly in the quarter to date?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [32]

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This is Lance. We've had a little bit of weather impact or had a little bit of weather impact in the second quarter. It wasn't real meaningful so I'm not going to give an exact number. I mean California has been performing quite well for some time so it won't be a surprise that that's really where we're seeing a lot of strength. Beyond that, I don't think there's a lot of regional differences that we need to call out. What I'll tell you is that sales have improved here in this first 4 weeks of the third quarter. They've improved kind of across the board no matter the low count so that's always been what you're looking for when you're running things out.

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Operator [33]

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Our next question comes from the line of David Tarantino of Robert W. Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [34]

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Lenny, I just want to revisit the question on franchisee profitability, and was wondering if you could maybe give a little bit of context on how that's trending now versus maybe a year ago? And with this current construct of driving comps in traffic just north of 2%, is that a level that franchisees can improve their year-over-year profitability? Or is that enough to hold it with all the inflation environment? How do you think about that equation?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [35]

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David, this is Lance. I'll start and let Lenny jump in. So I wouldn't say there's been an appreciable change year-over-year on franchise profitability. What I can tell you is we have 1,000-plus units in California and a big preponderance on the West Coast. You're obviously seeing some wage inflation there. So I'm not going to put an exact number on it but I will tell you that we do need to run some pretty reasonable sales numbers in order to keep the profitability meter going up.

Fortunately for us, we're starting with one of the higher margins in the industry, if not the highest. So our goal is always going to be to drive comps in a profitable way as much as we can and try to add to that profitability. But the reality is the Jack in the Box system and where we're located, we are going to need relatively decent comps for, call it half that system, to keep up with wage inflation. So I don't want to give you more numbers on that, but that would give you a feel.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [36]

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Great. And then maybe one more for you, Lance. The securitization that you're planning to do is going to give you a big onetime influx of cash. So can you maybe talk about how you plan to deploy that? I know you mentioned in the press release that an accelerated buyback was one of the things you're considering but is that currently the thinking? Maybe an accelerated buyback? Or do you think you would deploy that more gradually?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [37]

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I think there's a couple of pieces to that question. First of all, the big preponderance of the use approach is going to back to shareholders in the form of share repurchase. So let me answer that piece first, and I think that's the expectation and it should be.

As to the vehicle we use to do that, what we said was we're going to look at both open market and an accelerated share repurchase. I can tell you, given Jack's trading liquidity and the volumes we see, the truth is there's not a great deal of difference between those 2 options as far as how quickly we're able to get the share repurchase programs completed. It really becomes more a matter of execution and what makes the most sense. So we're going to evaluate both open-market and accelerated share repurchase. I'm not going to commit to which one we'll do. But I guess what I'll -- what I want to leave you guys with is given our trading liquidity and given the amount of volume we run, there's not a great deal of difference either way. So I'll kind of leave it at that.

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Operator [38]

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Our next question comes from the line of Jeff Farmer of Gordon Haskett.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants [39]

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Just following up on the recent same-store strength. I'm just curious what does the success of some of these new $4.99 combo meals introduced in April either tell you or inform you about the products and price points that drive demand for your customers? So said differently, do you guys feel like you're honing in a little bit more on not only the product that gets customers to transact or come through the door but also the price point that will drive that demand?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [40]

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Yes. So what I would share with you first is that we evaluate our business and we look at just the way the consumer uses that. Half of our overall brand equity is really associated with more craveable food. Consumers are less concerned about the price associated with that and more concerned about the flavor.

And so these are the smothered items that we sell or the indulgent sandwiches that we sell, those types of things. Some are higher priced, some are lower-priced. But ultimately, price is not the main driver. And then half -- the other half of our overall brand equity is really associated with value, and a lot of that value in the past was associated with tacos. And we lost some of the brand equity that we had in the past when our taco pricing went up.

And so a lot of what we have done from a bundled perspective is we've introduced value into the marketplace that the consumer has been missing in our brand and given them an opportunity to participate, essentially at the below-$5 price point. When you look at what the value consumer is looking for, they're either looking for an established meal that total price is below $5 or they're going to bundle a bunch of individual items and put them together for a meal that's under $5.

And we were not doing a good job of presenting enough of that to the consumer. When we look at our overall pricing in our restaurant operations, we're on the higher side of things when it comes to ala carte pricing. So it's going to be important that if we're going to have a slightly higher price on the everyday items, that we are doing enough on the limited time offer and promotional windows to present value to the consumer.

So we know that 90-plus percent of the transaction losses that we've experienced in recent years has been at the below-$5 transaction level. So essentially, if we start presenting to that group of consumers that have historically used us for value, we start presenting value to them, we'll get them back in the door. And today, it's not really a matter of those consumers trading, they are not trading down from our craveable items to these more value-oriented items, these -- they're not the same customer.

Essentially, what's happening when we don't put value in the marketplace is the value-oriented consumer trades to one of our competitors. That's really what the phenomenon is. And so that's what we've been sharing with our operators in the field and trying to educate them on how the consumer is behaving. And essentially, we have to address that value-oriented side of our brand equity, which is half of our overall brand equity. That's really what this is doing.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants [41]

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That's helpful. And then just switching gears quickly on a follow-up question. So focusing on the long-term guidance, I think the current Street estimates for EBITDA out '21, '22 sits somewhere pretty materially below the $300 million guidance that you guys have put out there for FY '22. So with that being said, is there a simple way to just walk us through the bridge to get to $260 million to $270 million which is where the guidance stands for EBITDA as of '19 to that $300 million number out in FY '22. What do you expect the primary drivers, sort of, beyond low single-digit same-store sales? I think low single-digit comps. But what is the bridge to that much higher number out in 2022?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [42]

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This is Lance. I'll take that one, and I'm going to keep it very high level. But it's really primarily the system sales growth in a form both of comps and units. It's following through on what we talked about relative to our G&A restructuring. And beyond that, that really gets you pretty close to the number. I don't -- I'm not going to go line-by-line frankly because I don't have that in front of me but even if I did, thinking at a high level, we're -- there's no smoke and mirrors here. What we're doing is all the sales unit and controlling G&A and more blocking and tackling things than anything kind of out of the box.

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Operator [43]

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Our next question comes from the line of Jon Tower of Wells Fargo.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [44]

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Lance, just maybe to clarify, I'm a little confused. You mentioned earlier on the call the idea of not spending as much on the full remodels but in the -- one of the releases last night, you maintained the longer-term CapEx and TI spend numbers. So can you talk about maybe where those dollars are going if they're staying in the stores?

And then separate question on the franchisee relationships. It seems like some of the new stories that are still out there, there continues to be a handful of -- or maybe just one disgruntled franchisee. So is there any chance to potentially figure out a way to move on from this franchisee by lining them up with a potentially interested another franchisee out there who might be interested in growing their business or potentially even buying in those stores to the corporate structure with the intention of ultimately refranchising them?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [45]

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This is Lance. Well I'll start on the remodel piece. So relative to long-term guidance, we did in fact leave that guidance intact. Now what I did say in my prepared remarks is we're going to continue to evaluate. And certainly, we wouldn't spend any more than we put in that guidance. I'm not going to make any commitments right at this minute. But as you would imagine, if we do step back on the remote model program and therefore potentially look at a lesser contribution than we were talking about under the prior program and the former tenant improvements, then there could be some dollars that free up there.

But what we need to address internally is the teams, are we making the proper investments elsewhere, whether that's in technology or in other areas? So as we continue to work through this, we'll give you updates. We can confirm it's definitely not going to be any higher and be there will be some room there to come down but we've got to make sure that we've adequately thought out, are investing across all areas we need to before we commit to that long term.

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [46]

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This is Lenny. I'll address the franchise piece. First I would say, there's still a lot of demand for our restaurants, both the franchise restaurants as well as our company-operated restaurants, and we've seen that in various proposals even in the recent months. There's folks who've tried to sort of entices to sell our own restaurants, let alone some of the operators who are looking to sell their businesses and they're spending lots of time with primarily other franchisees in our system who are looking to buy those restaurants. So I think that's a good starting place.

And I think that has a lot to do with -- despite some of the disagreements, I think that has a lot to do with the fact that we're going on 8, hopefully soon to be 9 straight years of same-store sales growth, with some of the highest margins in the industry. At the end of the day, it is a very strong franchise offering, and I would hope that it will continue to have that type of demand.

And as far as franchisees that may disagree with us, at the end of the day, we want to work hand-in-hand with those franchisees to try to resolve those disagreements and to be able to get aligned and really move forward together. And obviously, if there's someone who gets to a point where they just don't feel they can move forward with us, we would certainly be willing to take a look at either buying back that business or helping them facilitate the sale of that business to another operator.

But our hope is that we can put those things in the past and a lot of that's going to really come down to the individuals and, kind of, what they want to do to move forward. But I can tell you from our standpoint as the franchisor, what we're focused on is driving success of this business for all of the operators. We're focused on keeping our ears and our minds open to the feedback that our franchise operators would give us along the way that help us to make the types of improvements that they would need, and we're focused on growing this business. And so, to be honest with you, don't want to spend a whole lot of time on really the disagreements from the standpoint of it being the drama of the day that creates news. And instead, what I want to do is let's focus on the business at hand. Let's focus on the improvements we want to make, let's focus on the alignment that we should have and let's do it in a professional way. And I think the best way to do that is through open and honest dialogue, and we've been open to that.

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Operator [47]

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Our next question comes from the line of Matthew DiFrisco, Guggenheim.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [48]

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Looking at the unit growth, I know you've given a gross number. I was just curious about as far as -- it's been a couple of quarters now where you've closed as a system less stores on a year-over-year basis. Is this a good proxy for going forward? I mean I know you've refranchised a lot of stores and you have a remodel campaign coming up. Could that potentially spur some closures or is this sort of 3, maybe even like 2 a quarter or so, a good pace to think of as far as closures that you have visibility around?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [49]

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It's kind of difficult to forecast the closures. What I would tell you is this, when you saw an acceleration in closures in the past often times that was actually associated with a refranchising deal where as part of that deal, the franchisee was not interested in a handful of locations and we decided to close those down at that time.

And so that did create an uptick in some of the closures. Outside of that, closures were typically related to just the overall asset management process that we go through with our operators. So hard to predict. I don't know if that's the way I would want to look at the business. Obviously, we want to see restaurants opening, not closing. And I guess the best thing I can tell you is that we would like to be in a place where our net openings is obviously always positive. And as we look at driving growth going forward, that might be the better metric to try to pay attention to. But give us some time to think about that maybe a little further, and maybe we'll be able to provide some more color on that in the future.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [50]

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And then if I could just have a follow-up with respect to the improvement that you're seeing in the first 4 weeks, it sounds like it's -- is it correct to assume we should take away that this is primarily traffic-driven improvement in the fact that pricing probably still sits around that [2 1] range in the mix? There doesn't -- that without a change to the promos, probably isn't too different than you saw in 2Q?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [51]

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Yes. Won't completely break it down but I would say that traffic is a major driver of what we're seeing right now.

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Operator [52]

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Our next question comes from the line of Andrew Charles of Cowen and Company.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [53]

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Lenny, can you talk about your ability to continue the bundled value promotion tactics as the guidance implies commodity inflation shifts to about 3% in the back half of the year versus 75 basis points experienced from the front half?

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Leonard A. Comma, Jack in the Box Inc. - Interim Chairman & CEO [54]

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No. I think a lot of the strength in a bundle deal is that you've got optionality on what gets worked into that bundle. And that gives you an opportunity to focus on either specific products, where you're not getting the type of commodity increases that would make that detrimental or you're looking at quantity of the items that go into the bundle so that you can manage price. So for example, with the Spicy Chicken, it's 3 chicken strips that we offer in the basic offering. And that's what goes into the $4.99 bundle.

The operators have an opportunity to then upsell a couple more chicken strips, which we get a very high take rate on. And so you're able to offer the value for the consumer that really has that sort of restriction on their pocket and they just need to make sure that they're only spending what they can afford.

And then you also have the upsell opportunity for the person who maybe was enticed by the value but they love the flavor and they want to get a little bit more. So I think you have not only opportunity to create these upsell opportunities for the franchisees and company restaurants but you also can sort of mix and match and play with the ingredients and quantity in a way that keeps the margins friendly on the bundled deal.

So this is not a new tactic for us. We've been using bundled value for a long time. But probably, what's newer is that we're really focused on the below $5 price point right now, whereas in the past, a lot of our bundle meals would have been a little higher priced where we had an opportunity to do that and still find success. But the marketplace is pretty aggressive right now. So we're going to place the price points where the consumer is going to respond.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [55]

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Great. And Lance, just in regards to levering up to 5x, this is a level that most asset-light franchise peers are currently running though most of these companies have some element of brand and geographic diversification as well as higher top line growth algorithm. So can you talk about why you believe 5x leverage is a healthy level if same-store sales trend in a flat to 1% level beyond 2019?

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Lance F. Tucker, Jack in the Box Inc. - Executive VP & CFO [56]

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Yes. There's a couple of things that I'd say to that, Andrew. First of all, we're on track to have 9 full years of sales growth. And so our sales, if nothing else, has been very steady now that we're in this asset light model. We don't see a tremendous amount of variability within our P&L and within our cash flows. And certainly, we have communicated we have the ability to control our CapEx and our agreements and those things such that I don't think 5x gives me any heartburn whatsoever. As I look at the modeling and the plans going forward, again there's very little variability in the P&L. And we want to get sales going a little higher and add to some of those numbers that you guys have seen in the long-term plan if possible. But I don't have any issues whatsoever with going to 5x. Also very favorable lending market right now, if I could add that as well.

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Carol A. DiRaimo, Jack in the Box Inc. - VP, Chief IR & Corporate Communications Officer [57]

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Thanks, everyone, for joining us on the call today, and we look forward to speaking with you soon.