Jack in the Box Inc. (JACK) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us. I hope you and your families are staying safe and healthy and enjoying the start to summer. On the webcast today, I have Darin Harris, our new CEO here at Jack in the Box; and Jeff Thomas, SVP, Head of Western U.S. Listings and Capital Markets at NASDAQ. I would like to say thank you to Jeff for making the time to chat with us today. Typically, we would host an in-person meet and greet at NASDAQ's market site in Times Square, but 2020 is making us get creative, so this will have to do. Like we mentioned in the release, we will not have live Q&A on this call. I have collected feedback from many of you in the investment community, and Darin and Jeff will discuss most of the hot topics that we have captured. As a reminder, this is the beginning of week 3 for Darin. So as you can imagine, he does not yet have a formal opinion on Jack's strategy or vision. We do plan to have him share his formal thought as he gets up to speed on the business, either later this year or early next. We will provide more information on this as soon as we have a time frame locked down. Just a couple of housekeeping items. We will be going into our quiet period following this week, so I would not anticipate any communication with Darin until after August earnings. Our third quarter earnings call is scheduled for Thursday, August 6. And lastly, the cautionary statement in the company's most recent Form 10-K are considered a part of this conference call and webcast. 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. And with that, I will turn the call over to Jeff to kick off the conversation. Jeff?

Thanks, Rachel, and welcome, Darin. Congrats on the new role.

Thank you, Jeff.

I thought maybe we could start out with talking a little bit about your background. The story about how you got into the restaurant space is an interesting one. So I wonder if you could give us a little bit of background on how you ended up in restaurants and what you've done most recently, prior to Jack?

Sure, Jeff. Yes. I grew up in Kansas, and I had the opportunity to play baseball and football at the University of Kansas, starting as a pitcher and a quarterback and then -- did that for a semester and then just stuck to baseball. I ended up transferring to creating and playing -- getting in the opportunity to play in the college world series, and it eventually led to an opportunity to play baseball in Italy And you'll hear me talk about sports and I bring it up because it's something that's near and dear to my heart, but it's also really something that had an impact on my life, and it led to my career in restaurants. One of the things that just crossed the mind is, I know we possibly would have had this meet and greet in New York, if not for COVID, and many of you may be a Yankees fan, at least I'm guessing. Someone that I know well there is, if you know Jim Hendry, who is the #2 in the organization next to Brian Cashman. So definitely, I follow his career on how the Yankees are doing just for that reason. But I'll transition and really, when I finished my baseball career, I started working for the Montreal Expos, which was my intro into food. I was trying to figure out how to bring some excitement to our spring training team that didn't draw attendance well. And my idea back then was to bring brands and events to a stadium so that we could get businesses to come over for a launch or enjoy a game and generate some kind of excitement beyond peanuts, popcorn and hotdogs. And as a result and starting doing research around this area, I ended up doing my grad school thesis on co-branding. I was attending grad school while I was working for the Montreal Expos, and during this time, Pizza Hut was based in Kansas. So I asked a few of my friends, parents who I played baseball with to make some introductions to some people at Pizza Hut. After 3 months of calling every Friday at 2 p.m. to the person that led a group called nontraditional and co-branding, I received a callback. And at that point, I'd let him know the things I was learning through my grad school thesis, a little bit about myself, my family. And so he invited me in to meet with him, finally called me back 3 months later and invited me to meet with them. And in the first conversation, he hired me on the spot to spearhead the development of Pizza Hut nontraditional units. And then at that point in time, Pizza Hut had 5 locations, venues in airports, hotels, schools, that's what I consider nontraditional. So it was a great platform early in my career to learn the business. It led to about 280 new outlets for Pizza Hut. But what was interesting about it back then, we didn't have a nontraditional prototype. We didn't know how to serve our breakfast product from a Pizza Hut or how do we retrofit an airport location of fit a Pizza Hut unit. So it forced me to really learn the business broadly. But it also -- from day 1, franchisees were like, why would we want somebody to put a nontraditional location in our backyard and it forced me also to learn how to influence those relationships, both internally and externally. So great platform in my career. Transitioning to -- that started me into the industry that I've been in since 1994, and it led to spending time with brands like Pizza Hut, Arby's, Captain D's, CICIs and Papa John's. Most recently, I led IWG Regus North America, and that company specializes in flexible workspace. My role was to lead the North American business and focus on expanding, clarifying our brand strategy, launching a franchise strategy that the company had really not focused on and had very few franchisees. In addition, it really was about helping determine ways we could evolve our hospitality culture, but also look at ways that we could utilize strategic alternatives to create value for our shareholders. It was one of the fastest-growing industries in the world, just not too long ago until the pandemic. And to give a perspective to it, we were growing faster than any competitor in our industry. So in essence, we would build 1 million square foot of real estate or flexible workplace a year, and that was bigger than every competitor we had except for WeWork. So it was robust. The pipeline was robust and growth was robust. We had a pipeline of over 200 million -- or 2 million square feet in process of a concept that had 21 million square feet in the U.S. So in results, it led to a double-digit revenue growth. It led to a combined annual growth rate of 20% per year for the EBITDA during the time that I was there. We were publicly traded on the London Stock Exchange, and the North American business contributed the majority of the earnings for the company. So let me tell you a little bit about me personally. I have a wife and 3 children. My oldest son will be a sophomore at Davidson College. He was also a pitcher. He just finished his baseball career due to -- just scheduling his third surgery, shoulder surgery for next week actually. So in addition, I have 2 daughters, both in high school, one's a junior and the other is a senior.

Fantastic. And where are you joining us from today?

So I'm -- today, I'm in Dallas. I have spent the last -- last week, I was in San Diego and the week before in Dallas. So back in Dallas.

Fantastic. And so as you get set to start the -- as you roll into the new role of Jack, what do you think it is about your background that sets you up nicely for this role?

Well, I think the brand, the culture and historic performance of Jack, franchising, especially my return to food, and lastly, the opportunity for growth. I'll categorize that kind of as some of the opportunity in front of us. So -- or just why it was a good transition. But first, I've always watched Jack from afar. I believe the brand is just iconic. It has such a reverent and fun personality to build on. It has a great menu, a tremendous variety. I think about how can you go wrong with the Jumbo Jack and cheese, a couple of tacos and hazy fries. It's not a bad day at the office. And I'm excited that I get a chance to be the first CEO from outside the organization. It really enables me to challenge the organization to think differently. Some of you want to call, may call that thinking outside the box, and I did -- pun intended there. Really so we could innovate in multiple areas of our business, and I think that's an opportunity for the brand for sure. And being new to the organization gives me a different lens to view it through a challenge, challenge the team to think different. It's also a challenger brand, and that certainly resonates with me. Just if you look at my experience with regional brands, having that ability to think and behave large, have enough resources but still be nimble is energizing. I'll give you an example. When I was a franchisee at Papa John's, we had the largest franchisee of Domino's in our backyard. They had over 300 restaurants, we had 9. And you may think of that as a challenge, but we obviously were growing but it enabled us to react and execute faster than the market and change on a dime. It also enabled us to connect with our guests at a different level and lean into our community relationships. And that's an example of the benefit, I think that Jack in the Box has of having such strong market share in fewer markets. Clearly, we need to grow outside of those markets, but it definitely gives us an opportunity to lean in, in different ways and it would be more nimble, but also build those community relationships. Another thought is the brand personality I mentioned, it shines through in all my interaction with employees, both corporate, restaurant franchisees. Culture and people are at the heart of restaurant brands' success, I believe. And that is as long as we have a clear vision. So get the culture and people right with a clear vision or we can succeed. Jack in the Box is known in the industry for having such a great culture. I've witnessed it in my 2 weeks within the brand. Even in my restaurant experience the last couple of weeks, I will tell you was probably one of the most positive things I could have hoped for that came out of that restaurant experience. I was asking employees, what is it that you like about Jack in the Box? What is it -- why are you here? And to a tee, not one, but multiple would say, I've been here 10 years. There's just something different about this brand. There's something different in the way they treat me. They care about me. They're a family. And that's a cultural experience that we can build on. And to hear that at the lowest level of the organization, those who are meeting with our guests is powerful, and it's something that I know that we can continue to leverage. Second, I think the company has really reached an inflection point. And I think as we talked about my background, I think it's set up nicely for my background, in essence, where the brand is today and where it's ready to go. Lenny and the team have done a great job of creating a really solid foundation, consistent same-store sales growth, launching some innovative initiatives around ops and marketing and pouring financial levers that they could pull. They've been on a great run, and the brand is healthy. And as I mentioned, I get the benefit of that success but really getting a chance to come in as the first leader in the brand history from outside and really help change the paradigms to bring about new growth and profitability for the brand. The one big opportunity that sticks out for sure is unit growth. We will always need to maintain our same-store sales growth and innovate around transactional growth. But the other core component of growth is really about getting our unit development going again. And that's where my background really fits, and I'm excited to take it from here. My background -- I'm sure you'll ask me about today is robust in development. And I'm eager to jump in and really get that part of our engine started. The last point I'll make is just returning to food and franchising. Food is in my blood, it's been in my blood since I started my career, and then franchising is at the heart of it. So as you've heard today, there's a theme in that background, whether it's baseball, growth, multiunit consumer businesses. Focused on franchising and bringing people together towards a common goal that will be consistent throughout any conversation that you have with me.

Well, it's great that you got the perspective of franchising from both the franchisee as well as the development side. So I think that plays in nicely. As you think about kind of the go-forward, what's your leadership philosophy and your style? How would you characterize that?

Great question. At all the brands I've worked with, people and culture, I believe, are at the forefront. Servanthood is what I would call my natural style and then really trying to engage all stakeholders, franchisees, the investment community, the investor community, our vendor community, our team members. Engaging all those stakeholders is a priority for me in trying to serve and give. The way I think about leadership and my philosophy is that I want to be a leader worth following. To really provide clarity of vision is probably the best thing that I can do and be -- unify us around a common purpose and to challenge us to reach beyond growth that we've ever experienced, including profitability. To think outside the box, as I mentioned, with innovative thinking, new business models. And the way -- if I brought a word picture to life, I would say, for Jack in the Box coming in, one of the most important things I can do, as the new leader, is to take this and turn it into a river versus a flood, really focus on a river going in one direction, pursing, letting our strategy be a flood and trying to be all things to all people. So helping the organization be a river. I've had the benefit to start my tenure here at Jack by listening. I think it's important to listen, to ask questions, to leverage the people that we have around me and helping us all make an informed decision. If a good decision, give credit to the team. If it's a bad decision, I got to personally own it on behalf of the brand and everybody affiliated and I'll do that. But with that said, what I would just say is I'm eager to listen to each of you, the stakeholders, the investors to help identify further opportunities for Jack in the Box to grow.

Well, that analogy, the river versus the flood is so powerful. If you get everybody kind of focused, go in the same direction that will really help to accelerate things. So I really like that. Easier said than done...

Easier said than done, but absolutely, one of the best things we can do.

So you've been on the job for 2 weeks now. So what have you done in your first couple of weeks as CEO?

Yes. I mentioned I was -- I had the benefit to really spend my first week in Texas, in restaurants, learning operations. I even had the benefit of experiencing COVID and what this pandemic has done live. The actual location I was at, we had a COVID scare with one of our employees. We had to shut down the restaurant. We had to sanitize it. Not what I would have chose for experience, but I'm looking back, I'm glad that I did and had that opportunity. But I was working the grill. I was making tacos and just digging in and really understanding our systems and operations in the business and having that really is a good starting point to get perspective on what we do each day and the challenges that our employees face and our franchisees face. I mentioned getting the chance to hear from our employees on the front line, and it's just made me even more excited, as I mentioned some of the stories that they were telling me about why they were part of Jack in the Box. Last week, I was in San Diego. Great opportunity for me to spend face-to-face and one-on-one time with the leadership team where I could. Diving into their goals, listening to the strategy we currently had in place, what's working, what's not. And like, I think, Rachel mentioned, it's too early to provide any real perspective on the brand and the leadership plans for the future, but I'm eager to learn. I'm eager to review them in more detail and then provide my thoughts around them. And as I mentioned, help clarify a path forward and a clear vision. I've also jumped right into hosting calls with many of our major franchisees, or just franchisees in general, to start to gain their perspective and listen about their concerns, what's worked, what hasn't, where they're frustrated. I've already spoken to our franchise advisory council. I spoke to the 2 franchise associations that the brand has today. And I think at this point, the count is around 20 to 25 franchisees that I've had personal calls with to -- more in that group, really connect personally and start to build a relationship and rapport, but also begin to listen to their thoughts on where the brand is today. So it's been a great -- a busy 2 weeks, but I couldn't ask for it to have been any better.

Well, it sounds like listening is such an important part of certain leadership. So it sounds like you're doing a great job getting a number of perspectives. And importantly, of course, there's going to be the perspective of franchisees. So I wonder, if next, you could maybe share a little bit more about what you've done in previous roles to help enhance and deepen franchise relationships? And what your thoughts are about helping that at Jack?

Yes. Great question. It's clearly something that is a focus at Jack. I mean, I know recently, the question comes from, the Jack franchise has been very vocal, and it's -- I'm eager to listen to them. I'm eager for them to be heard for sure. And my approach to leadership, especially in franchise organizations, is what I mentioned to listen first. It's certainly what I've done over the past few weeks. It's important that we engage our franchisees and utilize their knowledge. It's something I call a partner in strategy. I mean if you think about our business today, we're asset-light and franchising is a key to our strategy. So that means we need franchisee input. We need their feedback on enhancements or evolutions in our business model. They have great ideas on how we can change the brand, take it to another level, operate in different ways to improve and serve our guests. Most of my background I've spent with franchise organizations, so I'm very familiar. And it's part of my excitement about joining Jack. I enjoy coming into a brand that sometimes has challenges or vocal franchisees about their frustration. It gives me the opportunity to try to unify them and bring the system together for a common cause. It's energizing, and it's a critical component as my role is the leader for sure. I think about some of my experience. And while I was a CEO, at CICIs, we had a very large disconnect and disgruntled franchisees when I joined. That's somewhat between our franchise base and our support center. And before I joined, the brand had 5 years of negative comp sales, 200 store closures. And just when I joined, the year I joined, I think there was already 50-plus closures in the pipeline. So we had a long road to go to really try to improve the situation. When you think about, the franchisees were losing their life savings. It was in a challenging environment. So I utilized my time there to enhance that relationship, not only through communication, but as I've mentioned, listening, gathering feedback, partnering, having empathy, really trying to understand the perspective. And if I look back what I was most proud of about that experience was not the 5 years or 16 quarters of comps, same-store sales growth and the performance. That was great, having the chance to sell the business to another equity firm. But it was that the franchisees getting a chance to see them go from losing their businesses, losing their stores, their college, education to transforming that to growth and seeing them pay cash for a new store or pay cash for their college savings, that's what I'm most proud of about that experience and having a chance to impact their future. So philosophically, being effective in franchising is about building and solidifying that relationship. Don't -- by any means, a relationship requires 2-way dialogue, and that's -- our responsibility as a brand is to create that 2-way dialogue because 1-way communication, if it's only what they want or only what we want, that's not a relationship. So we're going to have to show each other respect, and we can benefit by all of our unique skills and what we bring to the table. And with that said, I've already mentioned it a couple of times, but clarifying our roles, clarifying the vision and putting boundaries around the way we engage is going to be critical. Again, furthering up on my experience in franchising. What I would say is some of you, I mentioned it earlier, I was a franchisee of Papa John's, at Qdoba. It was by far the best experience for my career, and I wouldn't be in the role I am in today without it. I had the chance to see from the franchisees' perspective what success looks like as well as experience challenges. My Papa John's just did nothing but perform from the time we took over the business. But the Qdoba experience was the exact opposite. It was -- the business was challenged, and I learned so much and gained such a tremendous amount of empathy for franchisees and what they go through when I faced weeks where the business wasn't performing or I was worried about how I was going to make payroll that week. And we dug in and we figured it out. It wasn't easy. So I've had the chance to experience that frustration at times that you as a franchisee would have because of the communication and what that looks like and then what success and good communication looks like. And so we'll always try to do our best in communicating and working with our franchisees. And so having empathy and experience, it definitely helped me to be in a position to lead franchisees or franchised organizations and I plan on utilizing that at Jack. And the last point I'll mention is, for Jack to continue to grow, we have to focus the relationship, in any franchise organization, in my opinion, on serving our guests. They are the most important thing we can do. We can always align around how to serve the guest, it can become our common goal and how we can get and keep more and more guests. That can always be a common goal. So I'll leave it at that from a standpoint of my experience as it relates to franchisee and my thoughts on franchises.

Fantastic. I think the -- again, the fact that you're bringing both perspectives to play is going to be so critical. Now you also have a great background in development. So can you talk a little bit about your history in development and what you hope to bring to the role from those experiences?

Yes. It's interesting. The CEO role frequently in a restaurant business, sometimes in other franchise businesses. You don't see the CEO come up through the development background typically. But that happened to be where my -- the majority of my career has been spent. And if there's anything you take away from my track record is my strength in really trying to find ways for a brand to grow by focusing on enhancing and developing the brand economic model. That's critical. We will talk about that ad nauseam, you'll hear me mention it many, many, many days in these conversations ahead as how do we enhance and create an economic model that attracts capital and enhances the desire of our franchisees or outside investors to build more locations. During my early days at Pizza Hut, I was able to add 280 outlets in just 2 years through the brand, creating a new model, but being a part of that in that nontraditional format. At Arby's, when I joined the development team kind of recast our whole team and our strategy, we went from building 65 to 70 locations a year to 140, 150 and having record growth at that time. I think they've surpassed it since -- with the great things that they've been doing. At other brands, the numbers haven't been as large, but they've certainly been as meaningful. At CICIs, when I arrived, they've been closing, as I mentioned, more restaurants than opening, closing over 200 restaurants in a 5-year period before I joined. And when I left, we got to the point where we had net growth. We had one unit, my last year there are positive. So it doesn't sound like a lot, but from closing 50 to 60 a year to then also having a pipeline of 85 in the pipeline to be developed over the -- in the future was an exciting time for the brand for sure. We developed a restaurant of the future. We built a new prototype, had a new logo and new brand strategy and brand experience that can really spur growth. At Captain D's, the company had not built a unit in over 7 years when I joined. And when I left, we were building 15 to 20 per year on a consistent basis. So just like other examples it was focused about redesigning our box, focused on the unit economics and how could we attract capital. And then lastly, I'll say, Regus and Spaces, we were growing at approximately a 5% increase in square footage per year, outpacing our key competitors. And then Primrose moving a franchise model from 10 to 12 locations a year of schools to 25 to 30. So you can see a lot of growth, all about growth, and I definitely look forward to growing the Jack in the Box brand and have footprint across the U.S. Undoubtedly, I have a lot to learn about Jack's overall box unit economics. But I do think we can find one that works, where the investment is right, and I'm going to be diving in now and spending more time validating that, working with the team to evolve and I know Lance Tucker, our CFO, has already been doing a lot of work around the box economics, and he's got some good thinking, and our marketing team does as well about how we can continue to improve it. My early conversation with franchisees these past week have been very encouraging. Very eager to grow. But we have to rebuild those relationships and solidify them, provide them the tools and support they need to grow and make sure we have that right economic model. This will definitely help us with unit acceleration at a faster pace than what we've been doing over the last couple of years.

Yes. And those numbers you mentioned around the increase in units, previous roles is truly impressive. So kudos on that. You mentioned a couple of times the brand, that is being one of the reasons why you were attracted to the role. Jack is definitely known for being a challenger brand. You've got a great reverent spokesperson, great marketing. So why don't you talk a little bit about your background in branding and how you see that fitting into your number?

Yes. That's -- I've been fortunate to have good teams to help me do all of the things we mentioned, whether it's development or brand strategy. After unifying our franchise system and focusing the time there and driving unit development, I'd say the next element that's been part of my toolkit has been brand positioning and brand strategy. You mentioned that Jack has such a great foundation to build on that personality people know it for. We just need to amplify it, continue to find ways to tell our story and whether through digital or other means, I think, there's definitely a way that -- or social, we can amplify it. We'll continue to focus on -- we have to focus on why we're different, why we're better, why our guests are coming to us, and we need to be clear on what that -- what we stand for. And in order so that we can capture more opportunities from the competition. A little bit of my experience in brand positioning, I took on 2 tasks, both at CICIs and Primrose, where we went through an exhaustive look at our brand through research and data, really so that we could inform and make clear decisions on how we should or shouldn't change our brand strategy and then communicate that new strategy and positioning clearly to our customers and how the brands are differentiated. And we were fortunate at both brands following the work. CICIs, like I mentioned, had 16 quarters of same-store sales growth. Primrose, the team and I, we were able to reach all-time highs for school occupancy. So I think that's going to be a core component of what we do as we already have a great brand and a great history in key equities. How do we continue to clarify those and go into the market with a clear voice? So a lot of my work in the next coming days and weeks will be focusing on reviewing the key equities of the brand with the team, understanding why and how our guests get anything on the menu at any time of day. How we differentiation -- how we can differentiate and focus our innovation and then make sure we get credit for these differentiators in such a competitive space in the restaurant environment. The team has done a great job of developing a strong product pipeline at Jack. I think the teams have certainly been delivering on a variety of innovation, value and meeting the consumers' needs. But as you know, in the restaurant industry, it's extremely competitive, especially in the new -- in the midst of this pandemic. We will have to focus on our guests, their needs for innovation around product value and the end objective, which is to grow transactions to ensure long-term health of the brand. And lastly, I'll just say it again because I can't say it enough is, the brand personality is so unique. It's so reverent. It's so fun. It's got such a brand loyalty. I'm just grateful to be a part of it. And try to find ways to continue to enhance that advertising that's brought awareness to the brand. So it's going to be a great and fun brand to grow with.

Well, Darin, thank you so much for all your thoughts on that. I think it is something we're all excited to watch where you're going to take the brand in the future. And best of luck as you guys get ready for your earnings call coming up and good luck with the rest of your listing and setting the river to contain the flood. Thanks for your time today.

And thanks for hosting us today, Jeff. Appreciate it.

Great.

Then, I guess, we'll turn it back over to Rachel.

Seeing no here says the operator, we'll end the call. So I appreciate everybody's time today. And appreciate your time as well, Darin.

Thank you, Jeff.

This concludes today's conference call. You may now disconnect.