Jack in the Box Inc. (NASDAQ:JACK) Q1 2024 Earnings Call Transcript
Jack in the Box Inc. (NASDAQ:JACK) Q1 2024 Earnings Call Transcript February 21, 2024
Jack in the Box Inc. reports earnings inline with expectations. Reported EPS is $1.95 EPS, expectations were $1.95. JACK isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to the Jack First Quarter 2024 Earnings Webcast Call. I would now like to welcome, Chris Brandon, Vice President of Investor Relations, to begin the call. Chris, over to you.
Chris Brandon: Thanks operator, and good afternoon, everyone. We appreciate you joining today's conference call, highlighting results from our first quarter of 2024. With me today are Chief Executive Officer, Darin Harris, and our Chief Financial Officer, Brian Scott. Following their prepared remarks, we will be happy to take questions from our covering sell-side analysts. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in the earnings release which is available on our Investor Relations website at jackinthebox.com. We will also be making forward-looking statements based on current information and judgments that reflect management's outlook for the future.
However, actual results may differ materially from these expectations because of business risks. We therefore consider the Safe Harbor statement in the earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. The material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC, and are all available on our Investor Relations website. And with that, I would like to turn the call over to our Chief Executive Officer, Darin Harris.
Darin Harris: Thank you, Chris. Last month, we hosted our first in-person Investor Day in several years here at our restaurant support center in San Diego, and we appreciate everyone who was able to join us in-person or tune in. During the Investor Day, we introduced how we intend to take the next step in our strategy and break out of the box. We communicated our bold ambition, starting with expanding our reach to achieve 2.5% net new restaurant growth based upon the tremendous whitespace we have in new and existing markets. We want to increase AUVs at our two challenger brands by exceeding $2.5 million in sales at Jack and $2 million for Del Taco. Our AUV goals will be supported by achieving 20% digital sales. And lastly, if we can generate 15% four-wall franchise EBITDA with a sub-five-year new restaurant payback, our top-tier restaurant economics will further support our growth strategy.
We have entered the next phase of our transformation, and to achieve our ambition, there are three key drivers that will be the focus of our strategy, driving top-tier AUVs, improving restaurant-level economics, and strengthen development capabilities. I'd like to mention a few highlights from the first quarter that support achieving our ambition. Our AUV performance for both brands is driven by steady same-store sales for Jack in the Box and Del Taco. We generated systemwide sales of over $1.3 billion for Jack and nearly $300 million for Del Taco. Our comps at Jack in the Box overcame some meaningful pressure during the last four weeks of the quarter as a result of weather during January. With that said, sales accelerated sequentially on a two, three, and four-year stack basis helped by the performance of our burgers, including our ultimate cheeseburger platform, with support from our three-week soft launch of Smashed Jack, our sides, including our Jack wraps and famous tacos, and lastly, our Munchie Meal platform, particularly at late night.
Del Taco's sales performance was bolstered by our Birria promotion, a new product we introduced during the quarter. Both brands continued to accelerate digital sales, having now achieved 12% of total revenue with year-over-year growth in all channels and particularly strong growth in first-party web and app ordering. Breakfast continues to be an opportunity we are addressing, starting with bringing back some deleted items that, while good for margins and speed, were too strong of a headwind to sales. I am confident we can improve our breakfast share helped by three tactics. First, making breakfast a regular recurring part of the marketing calendar, innovating around new breakfast items while continuing to roll out fan-favorite LTOs such as French Toast Sticks or Mini Cinnis, and testing new breakfast offers, especially through digital channels, to target and reengage the valued guest.
Now switching to restaurant-level economics. Jack restaurant-level margin continued to accelerate and serve as a highlight for our business. Coming off a year of 4.5% improvement in 2023, our 23.1% margin in Q1 is a 3.3% increase year-over-year and demonstrates that our margin initiatives are working. We will continue our focus on these financial fundamental initiatives to strengthen restaurant-level EBITDA and gain further franchisee adoption. At Del Taco, our new leadership team of Tom Rose and Sarah McAloon are very focused on both sales and restaurant profitability initiatives, some of which can be realized as soon as this year. We will continue to provide updates on the execution and results as we progress throughout the year. And lastly, our strength in development capabilities enabled a solid start to 2024, highlighted by seven restaurant openings and one closure in Q1 at Jack in the Box.
We expanded further into Salt Lake City, now at four restaurants, and Louisville now at two restaurants, and both markets continue to perform very well. We announced two new franchise agreements. The first one will add an additional 10 restaurants to our Florida expansion, and the second is another new franchisee that will bring Jack to Michigan by signing on to build five restaurants. Our new restaurant pipeline continues to grow, as we now have 91 signed development agreements for 399 future restaurants. We currently have 81 restaurants that are in the construction or permitting phases. I'm also pleased to report we will open our first Jack in the Box restaurant in Mexico next week, our latest new market, and one that we are very excited about given high demand for the brand.
At Del, we had flat net unit growth, including three restaurant openings in the first quarter. We currently have 155 development agreements at quarter end and 49 sites that are in the construction or permitting phases. Quarter two will see the systemwide launch of Smashed Jack. Our most exciting burger innovation in nearly a decade, and I may be biased, but it is the best burger I have tasted in QSR. And guests who got their hands on one during the soft launch agreed, as we sold over 70,000 on our very first day with no media support. The full launch, including a bold television campaign featuring real Jack guests, begins this quarter, and we're excited about the potential for this product and building on the positive response we've already received.
I'd like to briefly touch on value, a key topic within the industry at the moment. We continue to work with our franchisees and utilize guest insights on the best approach to make value a competitive advantage for both brands. We're seeing solid results from our variety of value offers, such as our $3 Jack Wrap, $5 Jack Pack, our $10 Fan Box, and our $12 Munchie Meals. In today's competitive environment, we are looking to provide even more everyday value. So look for an improved Jack's deal menu, providing a variety of value for the budget-conscious guest. In the meantime, we will continue to utilize our digital channel to provide targeted offers to our most loyal guests and app users. And we continue to attract new users via aggressive offers, such as our famous two tacos for $0.99.
At Del Taco, our brand insights have demonstrated that we win on value versus the competition and have an opportunity to go beyond just low price points and offer more food for the money. We will utilize the hook and build strategy and lead with value while growing average check in a healthy way via upsell. I'm also excited about our learnings thus far from our current menu redesign initiative at Del. And once fully rolled out, we expect this to drive both sales and margin improvement. To close, I'd like to thank our franchisees and team members for helping us get off to a good start in 2024 and for their continued passion toward providing remarkable guest experiences. I will now turn the call over to Brian.
Brian Scott: Thanks, Darin, and good afternoon, everyone. I will start by reviewing our two brands individually, followed by details on our consolidated performance and capital allocation. Beginning with Jack in the Box, our first quarter system same-store sales growth was 0.8%, consisting of company-owned comps of 2% and franchise comps of 0.7%. Our overall average check increased in the prior year driven by price. And while transactions were down, we are seeing continued success from our hook and build platforms and certainly saw a nice lift in sales and transactions during the Smashed Jack soft launch period. Additionally, we have continued our positive trends related to operations and speed, posting the sixth consecutive quarter of increasing speed of service with a six-second sequential improvement.
Regarding product categories, notable contributors came from burgers and sides. The late-night daypart once again stood out and was the strongest contributor to overall sales. Turning to restaurant count, there were seven restaurant openings and one closure in the quarter. This resulted in a quarter end restaurant count of 2,192, and we remain on track to achieve our net unit growth objectives for the full fiscal year. Jack restaurant level margin expanded year-over-year by 330 basis points to 23.1%, driven primarily by commodity deflation, strong sales leverage, and operational improvements. Food and packaging costs of the percentage of company-owned sales declined 310 basis points to 29.7%, primarily due to lower commodity costs. Commodity deflation was 2.9% for the quarter.
Labor as a percentage of company-owned sales fell 50 basis points to 30.8% due to sales leverage partially offset by higher wages and insurance costs. Labor inflation was 2.8% in the quarter, in line with our expectations. Occupancy and other operating costs increased 20 basis points to 16.4% of company restaurant sales. Franchise level margin was $97.5 million, or 41.2% of franchise revenues, compared to $106.8 million, or 44.4% a year ago. The decrease was expected and driven mainly by lapping the $7.3 million fee paid by a franchisee related to their sale of the Hawaii market, along with a prior year $1.5 million bad debt reversal. Turning now to Del Taco. System same-store sales rose 2.2%, consisting of company-owned comps of 1.8% and franchise comps of 2.4%.
Average check was up year-over-year, partially offset by lower transactions. Del Taco restaurant count at quarter end was unchanged at 592, with three openings and three closures. Del Taco restaurant level margin was 15.6%, compared to 16.1% in the prior year. The decrease was due to wage and utility inflation, as well as a change in the mix of restaurants, partially offset by higher sales performance and commodity deflation. Food and packaging as a percentage of sales decreased 120 basis points to 27%, which was primarily due to menu price increases and commodity deflation of 0.5%. Labor as a percentage of sales increased 100 basis points to 35.2%, primarily due to wage inflation, which was approximately 3.2% in the quarter. Occupancy and other operating expenses increased 70 basis points to 22.2%, driven primarily by higher utility costs, as well as a change in the mix of restaurants.
Franchise level margin was $8 million, or 29.3% of franchise revenues, compared to $6.4 million, or 39.6% last year. The decrease in percentage was driven by higher franchise support costs, and the impact of refranchising transactions was passed through rent and advertising, partially offset by franchise same-store sales growth. While there were no refranchising transactions in Q1, we have signed an agreement to sell 13 Del Taco restaurants later this month. We also signed a letter of intent this week to refranchise an additional 25 restaurants. Both of these transactions include development agreements. We remain on track for 40 to 60 refranchised restaurants this year, and achieving our goal of having Del 90% franchised by the end of 2025.
Shifting now to our consolidated results. Consolidated SG&A for the first quarter was $46.4 million, or 9.5% of revenues, as compared to $50.1 million, or 9.5% a year ago. The decline was due in large part to $5.9 million lower legal expenses from a prior year litigation settlement. G&A expenses, excluding net COLI gains and selling and advertising, were 2.5% of total systemwide sales. Consolidated adjusted EBITDA was $101.8 million, down from $108.6 million in the prior year, due primarily to the previously noted prior year Hawaii franchise transaction gain and impacts from the Del Taco refranchising. Consolidated GAAP diluted earnings per share was $1.93, compared to $2.54 in the prior year. Operating earnings per share, which includes certain adjustments, was $1.95 for the quarter versus $2.01 in the prior year.
The effective tax rate for the first quarter was 26.9%, compared to 26.7% for the same quarter a year ago. The operating EPS tax rate for the first quarter of 2024 was 27.2%. Cash flows from operations reflect a use of cash of $22.7 million, an $85.1 million decrease from the prior year. There were two primary causes of this change. First, we had $50 million of income tax payments related to 2023 that we deferred into Q1 in connection with a weather disaster relief program. And second, we incurred a $25 million final payment on the Torrez legal settlement. Overall, cash flow in the quarter was consistent with our expectations. During the first quarter, we repurchased approximately 300,000 shares for $25 million as part of our ongoing share repurchase program.
We currently have $225 million remaining under our board-authorized program. On February 16, 2024, the Board of Directors declared a cash dividend of $0.44 per share to be paid on March 27, 2024. As a quarter end, we had available borrowing capacity of $172 million under our variable funding notes and credit facility. Our total debt outstanding at quarter end was $1.7 billion, and our net debt to adjusted EBITDA leverage ratio was five times. Related to guidance, we are not providing any updates to our outlook and expectations from what was provided during the earnings call last November. With that, we did provide some updated 2027 targets at our recent Investor Day, which included the following. Annual same-store sales growth of 2% to 3%; ramping Jack restaurant-level margin to 23% to 25%; and Del Taco to 18% to 20%; improving operating leverage to drive G&A as a percentage of systemwide sales down to 2.2% to 2.3%; reaching 20% digital sales, and achieving 2% to 2.5% company-wide net unit growth.
In closing, I would also like to thank every member of our Jack and Del Taco teams, as well as our outstanding franchise partners, for what they do every day on behalf of our brands. Their efforts are the key to Jack's ability to deliver sustained growth and shareholder value. And with that, we'd be happy to take some questions. Operators, please feel free to open up the line for Q&A.
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