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

All right. Good afternoon. I'm David Buckley at Bank of America, and we are pleased this afternoon to be joined by the Jack in the Box team with CEO, Darin Harris; CFO, Tim Mullany; and several other members from the team at Jack. Gentlemen, thanks for taking the time to speak with us this afternoon.

Thank you.

I'm going to kick it -- I'm going to kick it off with you first. So starting with your most recent results, the 12.5% comp, can you just discuss how Jack has been outperforming the category over the last 2 quarters?

Yes. We've been fortunate to have transaction increases quarter-over-quarter. We've seen with our check activity. We've seen the number of items ordered moved from 3.7 to 4.2, with average check up pretty substantially. We were able to take share in breakfast in our late-night business by promoting some items there. But with that being said, is that's kind of the outcome of doing some other things? And what's been working for us is continuing our strategy of compelling value bundles as well as the successful upsell strategy that started before my tenure, but we've really amplified it during the pandemic. Many variety and many know that's a differentiator for Jack and having a full menu all day every day. We've had strength across multiple dayparts, breakfast and late night, as I mentioned. And then new product innovation has been a core driver of success. And during the pandemic, where others may have kind of slowed that down a little bit. We went more aggressively on it -- after it. And so things like Tiny Tacos or snackable craveable items that people can add on to their overall check. That's been -- that's helped in drive our overall sales. But beyond that, our premium items and what we've innovated around such as our chicken, our club chicken sandwich, have really made an impact to our guests.

Yes. Just on the premium comment. So you previously mentioned that half of the comp increase was due to premium items. How have you successfully driven more premium purchases over the last several quarters?

So part of it is we've been doing a lot of listening to our guests and understanding why they come to us, why they leave and just pure guest segmentation work. And so what we found is the right, I think, communication strategy to communicate to guests that are, what I would say, some of our higher frequency guests, but also, we found a guest base that was higher income and once we learned a little bit about what we're doing from a higher income standpoint, we started communicating different and opening up our channels and our strategy and how we reach them, and we've seen it result in higher sales and the desire to purchase these premium items.

That's great. Tim, we'll take the next one to you. Can you break it down by what you're seeing by [ J Park ]. Breakfast and late night struggled earlier in the pandemic, but I believe it come back stronger in the last 2 quarters. So where are you seeing the greatest strength?

Yes. Great question. So 2 things there. One, lunch and dinner, which represent more than 50% of our overall sales have been the strongest in Q1. But as you mentioned early on in the pandemic, breakfast and late night were pressure fairly meaningfully. But what we saw most recently is the move from Q4 to Q1, we meaningfully outperformed our peers in growth in attainment of market share there. So we're really excited about what we're seeing in breakfast and late night and the trends there.

That's great. Okay. Darin, just on store. So you recently shared your views that you see about 950 to 1,200 additional stores possible within your existing core markets. Can you just discuss how you're thinking about unit growth over the next several years? And where you see the greatest opportunities?

Yes. So obviously, with our existing franchisees, now they're well capitalized. They're in a good -- they've been performing. They're excited about the leadership team. We shared strategy with them and where we're headed. They're bought in and want to grow, and they're in a position right now because of history at Jack of buying units. They're now past that point of reinvesting in those units they bought to where -- they have capital where they want to grow. And now they're excited about the direction we're going. So first with existing, but we also are launching aggressively into communicating a development strategy around attracting new and lead generation activity. And so how does that mean to where do we grow? Well, in our core markets alone, just in our top 9 markets, we're only 60% penetrated. And you can compare that to any competitor out there and take California or Colorado as an example. Colorado, we have 17 units, and we could build another 90. Competitors have anywhere from 80 to 200. So California, we could add another 200 locations in McDonald's, and that market has 1,200. We have 945 today. So we have plenty of opportunity in our core, and we'll focus there first. And then we'll start to go outside of that core in concentric circles and attract both existing and new franchisees to help us build it.

That's great. Can you discuss the new store prototype? I understand it's about 20% reduced operational costs. What are some of the changes in the new prototype compared to your legacy format stores?

Yes, the way we've created our new prototype is a kit of parts. And so that way, we can go in and fit on the best site. Sometimes there are flagship building all the way to in-line in cap, which is different than the way that Jack in the Box thought about it before. It was mostly one-size-fits-all prototype. Our current -- the one we've talked about is a drive-through only. It's about 1,300 square feet. So it will fit on a smaller piece of property, which reduces cost that's not in that 20% savings number. That's even additional savings. And we anticipated doing the same AUV. And so reduced square footage, a high-speed kitchen, which is different that we can go faster in through time and motion studies, we've really paid attention to how to utilize every -- into the building to be efficient. We've also redesigned the format in which people can walk up -- have a walkup window. We've seen more people have a desire during the pandemic to eat in their cars. So we can also do carryout more effectively and provide double drive-through in these units.

All right. Switching back to your comment earlier on the higher income customers, can you talk about how Jack has been able to attract this higher income customer during the last several quarters? And how do you make sure you hold on to that new customer in a post-COVID environment?

Yes. I think what we found is they were always Jack customers. But by learning more about our guests and listening to who they were, why they came to us and why they left, we've been, I think, more effective at communicating offers that are attractive to them, right? The type of products that they order versus necessary -- all of our guests don't want the value bundle, somewhat the premium item, they just need to be reminded that we have it. And so the club chicken sandwich was a great example of that. We saw in the data that, that was an example of what the higher income customer wanted. Was that more premium product. And so we offered it. And we had tremendous sales success with it. And we now have a pipeline of chicken going out 2 years that we're excited about that we can continue to implement. And we also find chicken to be less price-sensitive than we do, say, the burger category.

Got it. Tim, one for you. Since Jack's has also seen a nice pickup in average order size over the last few quarters. Is this something that you believe can continue in a more normalized environment? And how do you go about achieving that?

Yes, we do. I mean there's two things at play here. So there is the average number of items per check, which we've seen increased from 3.9 items to 4.2. So we feel good with that. But then there's also the overall check value. And some of the things, when look at our menu boards now, the strategy that we've deployed over the last year or so has changed. So we're featuring less so much in pushing deep discounting on our menu boards and really featuring easy add-on items and opportunities on that board, which will increase attachment, particularly with our sides and our drink attachments. And then we're also pushing to increase check value by moving from a core value item strategy to a core premium item strategy, which Darin mentioned a little bit a few minutes ago. So we're seeing some nice upside in net average check values that way.

And last quarter, you were able to take some pricing to help offset some cost increases. Do you plan to take additional pricing this year? And can you just discuss your outlook for commodity and labor costs as well?

Yes, absolutely. So we reported on the company operations, roughly a 3.1% price increase that drove a component of the 12.5% same-store sales figure. That's pretty much in line with our historical trend. We've been fairly consistent on our approach and philosophy towards taking price. We don't have any anticipation of sort of a philosophical change that way relative to commodity inflation and labor inflation. So on the commodity side, it was a fairly benign 1.6% or so inflationary component on product. And then on labor, we were roughly around 5% there. And we anticipate that we will stay somewhere in that mid-single digits going forward. So our balance and how we approach taking price to offset those 2 inflationary components, we feel is pretty well balanced.

Okay. Great. Darin, you mentioned some of the new chicken products coming out, but can you talk about some of the other innovations you have planned for this year? Anything other than -- other categories or other dayparts you're specifically looking to target?

Yes. I think we'll continue to find success with as you think about our Tiny Tacos and what's been successful in that adding a sales layer. I think that's a great product platform where we can focus on that add-on item. And so we'll continue to innovate around that snackable craveable add-on item that can also be a meal in itself at $3. Also, around all of our innovation, we're focused around this opportunity for upsell. And so the club product was exactly that. We had our base product. And we also had the club [indiscernible] where it's an additional $2. And so all of the products that were coming out would have that strategy in mind. And then chicken will be a category, we spend a lot of time in.

Okay. Great. Can you discuss the importance of digital, where you see that channel shaking out post-COVID environment? And then also, how the launch of your new loyalty program will help complement that channel's growth going forward?

Yes. We think it's probably one of the most important initiatives we have right now, especially as we get smarter around not just our kind of broader guest segmentation. But eventually, we want to segment every guest to know exactly what they want for us -- from us and communicate effectively with them. So at the heart of that is data. And during COVID, we started with the 3 delivery provider -- or the delivery providers, and we were with all 4 of the big ones. And we've now moved to more of an app-based platform where we can have the delivery service providers order through our app. Next is loyalty. And then over time, at this time next year, we would like to be enhancing our mobile online ordering, the overall digital marketing capabilities and then store tech. And so at the center of all that, again, is data, so we can capture as much data about our customers, and then learn and do machine learning and data science around how do we give them effective offers. So that's where we're headed. And we're still at the early stage of building that database so that we can more effectively communicate.

Okay. And then, Tim, just can you talk about what type of investments are needed to support the digital growth moving forward?

Sure. As Darin mentioned, this is an incredibly important and valuable vehicle for us that's developing and showing really impressive early performance. So pre versus post COVID, we've doubled our sales contribution from this source. So we'll make the appropriate investments to ensure that we do maximize that growth vehicle. Having said that -- and obviously, those investments would have to meet various ROI hurdles, and we'll take appropriate action that way. Having said that, on the G&A component side, we don't view that this would take us off our previous perspective of achieving the $1.7 to $1.8 billion percent ratio on G&A. However, if other investments may take place that we would anticipate to capitalize, so it wouldn't show up and affect our margin. But nonetheless, again, this is something that's really important to us and showing a lot of promise.

Okay. Darin, just given your significant California exposure, can you discuss how the business has done outside of California? And what different trends you're seeing in other geographic locations?

Yes. We've been fortunate. We've been able to perform in all of our markets. And so while California has outperformed some of the other locations, our same-store sales growth has been broad-based. As an example, Texas has outpaced the overall industry same-store sales, including the publicly reported numbers from our competitors. And then even markets that have higher state home orders, we didn't see -- in those markets like California, the transactions weren't higher -- any higher actually declines compared to other geographies. So we're encouraged by that. We're encouraged by kind of as markets start to move out of the stay-at-home orders and dine-in start to open, we're encouraged by the results we're seeing across all geographies.

Okay. Great. Can you talk about the state of your relationship with your franchisees and just talking about the Midwest franchisee, currently operating about 60 units that filed for bankruptcy? Just any updates you can share on these stores. And could this be an opportunity to return this market to growth?

Sure. I'll touch on our current relationship, and then I'll let Tim touch on the St. Louis market. So since I've joined, a lot of our focus has been around rebuilding that relationship and starting with the relationship. And since doing that, franchisees, we've now formed a leadership advisory council we resolved and settled the lawsuit that was behind us. And they are some of our best advocates. They're excited about where the brand is going. They've been able to have input into our strategy and direction and we're seeing a lot of momentum in the business just because of that relationship is right and their excitement for the future. So we anticipate their interest in growth, continuing to gain momentum from all the conversations we're having with them about it. And then also just the solid way that they've contributed to our overall strategy and thinking. And so with that said, I'll let Tim talk specifically about the St. Louis market.

Yes. Relative to St. Louis, it's still obviously early on in the process. We're going to continue to monitor how that goes. There's a lot of different outcomes that are possible here, whether through a restructuring with the existing franchisee. Or some elements that we, as a franchisor, can assist with here. But until we figure out or get closer to a resolution, we're going to continue operating as we are in normal course. So we'll be collecting our traditional royalties and rentals -- rental fees and marketing fees as well. So there's a normal course expectation of business until some future point in time.

Okay. Great. I just want to open it up to the audience, if any questions, please feel free to submit those, and I'm happy to ask. While we're waiting for those to queue ups, just any comments you guys can give us on unit growth thoughts? It sounds like there's increased interest from the franchisee side, just the timing of when an acceleration might come?

Sure. I think from a timing standpoint on the acceleration, I think, just because the nature of development takes long, 18 to 24 months, it's going to take that long to really get the pipeline moving. And with some of the things we're doing around overall innovation around our prototypes, it gives us access to more sites like conversions in cap and opens up that funnel. We'll do some dark kitchens as well. So overall, the flexibility that we're going to have around doing more in different locations and prototypes, will give us some ability to move a little bit more rapidly. And if you think about the history of Jack in the Box growth, Jack in the Box is focused on refranchising, not actively recruiting new franchisees. And so that's part of the change in our strategy is an aggressive lead generation campaign to identify multi-unit operators of many brands to come in and invest capital. It also is focused around attracting family office and private equity investors who can also fuel that growth with equity financing. We've also laid out every market as far as where we want stores and how we would lay out a market, what would be -- where we prioritize those stores within the market. And so that list of inventory we have been providing to our existing franchisees, so they have the first opportunity to sign up for a development agreement. And then also that enables us to then go to new franchises and say, "If existing doesn't want it, we'll give it to you." Or corporately in some markets where we exist with stores today, we'll build it. And so it starts to create some urgency around growth, and we're already seeing a lot of our existing franchisee respond. Our lead generation activities will launch at the end of this month, and we anticipate that because it's new for Jack, and our model already is successful. We're seeing a lot of interest from multiunit operators who are interested in growing their businesses.

That's great. This time, it looks like we -- there's no questions coming in. So Darin and Tim, I want to thank you both for taking the time to speak with us this afternoon, and look forward to seeing you both in person next year.

Sounds good, David. Thank you.

Thanks, David.

All right.