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

Welcome to the JACK's Management and Franchisee Q&A Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chris Brandon. Please go ahead.

Thanks, Misty. Good morning, everyone. I hope you're having a nice, almost holiday time and I hope you're as excited about today's event as we are. Before we get started, allow me the brief IR formalities here. This presentation may include plans and estimates for the future, which are subject to various risks and uncertainties that may cause actual results to differ from these plans and estimates. Please review the risk factors outlined in the company's recent 10-K and 10-Qs on file with the SEC and available through the Jack in the Box website at investors.jackinthebox.com. These forward-looking statements speak only as of the date of this presentation, and we expressly disclaim any obligation to update these statements whether as a result of new information, future events or otherwise. So with that, why don't we get started here, and I will turn it over to Darin Harris. Darin?

Thanks, Chris, and good morning, everyone. We really appreciate you taking the time to join us today. I'm extremely excited about joining some of our franchise operator partners to talk to you about their perspective on the direction of our brand and some of our growth-related strategic priorities. I think many of you know -- I've shared this often with you that when I joined Jack in the Box as the CEO 1.5 years ago, one of the most important, if not the most important, thing from the day I started and even before I started was to reach out to our franchisees and just really start to strengthen that relationship because it wouldn't have mattered anything that we try to accomplish, whether it was tech changes or marketing strategy changes or development, it would not have occurred if we couldn't get the relationship right and start building that as our foundation for the future. And so I'm proud to sit here today with the gentlemen we're going to introduce you to as partners in strategy. And I'm going to take a brief moment to just publicly acknowledge how much they've meant to me, how much they've contributed to this relationship, improvement we've seen in our business, and I'm grateful for this team and these gentlemen what they've done to help not only JACK but myself personally and our team be successful. So thank you, gentlemen. Let me take a moment and share a slide with you. We've talked about the relationship. We've talked about a survey that we conducted utilizing Franchise Relationship Institute. Franchise Relationship Institute conducts surveys all over the world related to franchise businesses. We focused -- there's over 200 companies that they -- are in this survey related to restaurants and they show a very detailed survey. This is the summary of it all that says basically, satisfaction -- goes into a lot of details, are you satisfied with the relationship, to financials, to our marketing strategy and a lot of different details. But this is a summary of it all that says what is their satisfaction. It's improved to 72%, which is data that shows you it's more than just me speaking about it, it's more than Chris talking about it or Tim. It's data-driven that says we've improved, and it's much higher than last year and much higher than the industry average. So we're really proud of this metric. The red bar was where we were at in September of '20, so tremendous improvement. But the one point I'll make -- and the gentlemen you meet today, they can speak to it. But if we were to take in -- this survey was taken in September of '20 and September of '21. If we would have taken the September -- if we would have taken the survey the first time in June of '20, that red bar probably would have been in the clearly dissatisfied or dissatisfied range. So I'm proud of our team, I'm proud of our franchisees for really, really figuring out a way to really start to rebuild the relationship, and we're seeing the momentum from it. So let's go ahead and move forward. We have talked often about how we become better aligned with our franchisees and how it's driven enthusiasm in the business, it's driven momentum and early growth results through development agreements that we've communicated. But really, the other thing that are intangibles that we haven't talked about is just how important this relationship is enabling us to prioritize areas that need improvement. So one examples are IT support. We heard often and frequently from this group about some challenges we were having in supporting our restaurants in IT and just the ability to take payment. And so we very aggressively started attacking that issue. It doesn't mean we solved them all, but that's the type of feedback we're getting often and openly, and we need that to improve. So rather than me go on and on and just talk about it, we thought it'd be valuable for you to hear about our business from 3 of our outstanding operators. So let me take a moment to introduce them. First is David Beshay, and David is based in Southern California in Temecula, California. He has 211 stores throughout San Diego, L.A., Idaho, Colorado, Texas and other areas. He's been in the system for 30 years and has just been a tremendous partner but also very influential in the system and a great operator. Next is Mike Norwich. Mike was the NFA Chairman when I joined the brand. And as you know, we were in a challenging situation with our franchise system. And so Mike was really the key communication partner to help direct, direct contact with me, kind of resolve and settle the challenges and really build a relationship that was based on trust and the ability to say, "Hey, I think this will be beneficial for both of us and this will be challenging for both of us," and find a middle ground. And so I truly appreciate the way he handled that relationship. He's based in El Paso, Texas. He has 14 Jack restaurants and has been in the system for 30 years. And last is Clyde Rucker. Clyde is our Leadership Advisory Council Chairman. He's an industry veteran. He's based in San Antonio, Texas, has 63 Jack in the Box restaurants, most in Austin and Phoenix. And he's been in the system at Jack in the Box for 11 years. Not only have these men became friends but they are partners that I trust to call and ask for real feedback and insight, and I know they feel comfortable reaching out to me in saying something's wrong, and I appreciate that about them. And so let's move forward in the day today. And today is designed really about helping provide you insight into the relationship, our economic model, to hear from our franchisees, these strong franchisees that serve on our Leadership Advisory Council and to hear more about the business from them, our front line. They'll add perspective about the four-wall economics, our desire to improve specifically around operations and our financial returns for franchisees. But you'll also got to hear about the excitement and momentum that maybe others in the system have for this future growth. So it's just another way for you to get insight into our system and how things are operating. Before we do that, we'll make one last brief overview of our performance of our business, and that is to discuss, very timely, our final 2021 franchise-restaurant-level profitability. And that's something a few in the industry provide and provide it in such a transparent way, and I've made that commitment to you that I'm going to do that. As you well know at our Investor Day, we committed to this, we committed to improving this metric and communicating it, and that's what we're going to do today clear -- in a clear way. Probably the #1, most important metric at Jack in the Box for driving growth is four-wall economics. It ultimately will determine our success because if we create compelling ROI and cash-on-cash returns, then our franchisees, our existing franchisees can't wait to build restaurants. And that's what we have to focus our energy around. If I direct your attention to this slide, I'm pleased to report that our system-average restaurant volumes are now at $1.8 million with final four-wall average EBITDA figure coming in at $227,000 per store, which is a 20% increase in restaurant-level EBITDA over fiscal 2020. And I want to point out one thing about this, that $227,000 number. And if you remember that when Jack in the Box went through the refranchising effort, typical rent spread on this business was about 2% to 2.5%. So if you think about that, this is burdened with rent from refranchising. That is also kind of on a percentage basis, compared to other brands, may show differently but it's because of that refranchising. So this includes that kind of burden from the extra rent from when we refranchise stores, tremendous performance, tremendous improvement. Our average franchisee today has 19 restaurants. This equates to $4.3 million of average enterprise EBITDA in 2021 for each operator, solely from the Jack portfolio of restaurants. And I bring that up for a point and that is we have well-heeled franchisees that perform very, very well in their individual businesses. They're well-capitalized. They have the ability to not only help us grow but invest in their own business on where they need improvement. In addition to the performance of our economics in 2021, we wanted to talk about the performance of our new restaurants. And building off what we talked about on Investor Day, we continue to see our new restaurants, notably those opened in fiscal year 2020, increasing their profitability and their performance. To better make the point, we included EBITDAR really because it enables us to normalize how franchisees structure their real estate and financing. We went ahead and included EBITDA anyway but we -- EBITDAR is the easier way to really take the financing and real estate deal structure out of the equation. And what you're seeing here is clearly good cash-on-cash returns with around a 3 -- 2.5- to 3-year payback or -- and that's a leveraged payback. And so we're really proud to present these numbers and we're -- we definitely know that they're solid and continuing to improve. But I would be remiss if I didn't say we all know there are headwinds in the industry and, in most cases -- or in so many cases, out of our control, but I won't leave this call without telling you my commitment is continue to focus on driving profitability for our franchisees. It's our focus, and we will continue to build upon the things that we have already put in place to help navigate through the challenges that we're facing in 2021. And so with that positive update related to our financial model, I think it's a great time for us to engage in a conversation. So let me take a moment and offer the opportunity for David, Clyde or Mike to jump in and touch on anything that they may want to mention before we open it up for questions. So David, Clyde, Mike, any of the 3 of you, if you'd like to add to anything I've stated, feel free.

Yes. Darin, this is Clyde from the -- thanks for giving me and my peers the opportunity to speak today. And one of the things that I want to comment on is really going back to the fact that you have mentioned I'm an industry veteran. That is very, very true. I worked with some of the larger organizations out there on my corporate career before I became a franchisee. And one of the things that I will tell you is that after being on -- having been on executive teams in a couple of those organizations, one of the thing I would say is that the team that, Darin, you have assembled from an executive standpoint and certainly throughout the -- continue to throughout the organization is a world-class team, world-class leadership team, one that, to me, I think, is among the best I have seen when it comes to listening to franchisees, collaborating with franchisees, providing focus for the brand and then also being driven for results and growth. The other thing I would say is that these attributes alone personally give me the confidence to reinvest on an ongoing basis in the Jack in the Box brand with true comfort. So I just appreciate the opportunity to be able to be a part of this organization on -- and then -- and look forward to the future because there's no doubt it's going to be extremely bright.

Thank you, Clyde. Thanks for that comment, and I know our team always appreciates it. David, do you want to go?

I can. I want to echo what you said, Darin. I think the relationship between the franchisees and the franchisor has never been better. And I know Mike wants to talk a little bit about that. But for me, as a guy that loves to develop restaurants, the environment couldn't have been better for me today to build restaurants for Jack in the Box. And the slide that you showed is accurate in the sense that franchisees love to build Jack in the Box restaurants particularly because of the rent spread that we pay on restaurants we purchased from Jack. So if we can develop our own real estate portfolio and take the Jack rent spread out of the equation, it only improves the business model and, on the top of that, bonus depreciation and favorable other things that really makes building a Jack in the Box very attractive for a franchisee. And I would probably put it among some of the best investments. And as you know, I also am involved in multiple other brands, but I'll put Jack in the Box as an investment in new restaurants probably on the top of any investment opportunities out there. Not only that, but when we remodel restaurants, we also see some significant return on that investment. So between creating a robust pipeline of new stores and remodeling the existing fleet, I think we have some significant opportunities to grow our business, and I'm just excited to be a part of it. Thank you.

Great, David. Thank you so much. And Mike?

Cool. I don't have to be redundant. Clyde and David spoke really eloquently about certain things, and I certainly want to pipe in and mostly focus on the relationship and opportunity from a different perspective than David, which was great. Thanks, David. First of all, I mean having basically been on the front lines, at odds with our franchisors, a leader of the NFA for 2.5 to 3 years, and that was the culmination of years of stunted growth at Jack in the Box, to have Darin come in was just an unbelievably great choice by the Board of Directors. They knew that there had to be collaboration. They knew that franchisees had to be working together with management in order for the brand to be successful. They couldn't have chosen a better leader than Darin. We root for his success. We pray for his success. And we hope that -- and know that he has assembled a great team, and he's going to do an amazing job as our leader. We stand by him. That's -- and that's really what you need. It's somebody that you can fall in line and know that he's got your back. He's one of us. He's been one of us. He was a franchisee. So that -- those, in my mind, make great franchisors because they can always remember what it's like to be on the other side of the table. Jack in the Box franchise group is a great group. It's a very unified group, and it's a very experienced group. Most of the operators on our system have been in the system for many, many years. David and I are both 30-year veterans. Clyde is shorter term, but he certainly has the experience. But throughout our system, we have guys that are -- David and I are almost rookies. We've got 40- and 50-year guys that are out there. We're hungry for Jack in the Box to be on the right track, and we really encourage and believe that Darin has got us going in the right direction. And so I can't be happier about the direction that we're going. And I think that you're going to hear the 3 of us echo a lot of what management is going to talk about today. So thank you for this opportunity.

Thank you, Mike. And no doubt about it. We've made tremendous strides together with this group of people because they've been right at my side on our LAC as we've moved this business forward over the last 18 months. But no doubt about it, we're going to highlight a lot of the great things that have occurred. We've had challenges during that time that we've had to come together and work together as a group, and that's just made us closer. So I thank each one of you. And we will open up to questions. It's -- this is your time now, and we appreciate you participating. And it's your time to ask questions of this leadership team, both our franchisees and Tim and myself and Chris.

[Operator Instructions] Your first question is from the line of Brian Bittner with Oppenheimer.

Thanks for putting this together. I think the fact that we're sitting here today with the franchisees and JACK executives on the same call maybe shows how far we've come versus years past. But Clyde, David and Mike, just a question for you guys. Under this new JACK leadership team, you've obviously seen much improved store-level financials. This is clear. We can all see that. But why specifically is now the time to start putting capital into growing the Jack brand through opening new units? And I asked that because from the outside looking in, all of us analysts and investors, we've noticed that JACK's never really gotten the store growth engine running. And I think investors are very curious to understand why this time is going to be different.

Yes. I'd to take a stab at it, Darin, if you'll allow me.

Absolutely.

Yes. A wonderful question. And for me, personally, I love to build restaurants and I've built a lot of restaurants over the years. But as you know, the last few years, before Darin gets here, we were in odds with our management team. And it's very difficult for a franchisee. And I'm speaking honestly and straightforward. I hope everybody is okay with that. It's very difficult for franchisees to make investments when they don't necessarily agree with the direction of the brand and the direction of the management team. But ever since Darin came in and assembled -- I agree with Clyde, one of probably the best teams in the restaurant industry, we feel confident, our banks feel confident, our investors feel confident that we have a strategy and we have a leadership team that is putting their money where their mouth is and dedicated to the growth of the brand. So we feel bullish about the future of the company with the new management team. That's why we -- you see a lot of interest and growth. I personally signed a large development agreement because of the confidence level that I have in the management team. Additionally, this management team created a lot of flexibility when it comes to development. As you know, we have a lot of restaurants in California, for example, and it's not easy to cultivate a piece of real estate in California. So this management team began a structure of flexibility as to what kind of real estate, what kind of restaurant, what kind of footprint we can put the restaurant on. So that gives you a lot of flexibility as far as doing end caps, doing small restaurants, drive-through-only, 1,900-square-feet restaurant, or if you have the real estate, you could do a prototype. So that flexibility also helps us grow the portfolio. And then lastly, the strength of our current fleet per se. When you look at our P&Ls and when you look at our profitability in the last few years, we're very, very well-capitalized, and we're able to take on additional capital expenditures via the remodel program or building new stores.

Do you want me to jump in, Clyde, or do you want to go?

Yes. I'll just -- I'm going to echo a bit of what David said, and thank you, David, for that. I would say that the biggest reason for wanting to reinvest and build units is really one of, I would say, alignment with the franchisor and knowing that your franchisor is -- has the same -- is looking at the same lens that you're looking out of in terms of concerns and those -- long term, as you look at your return on investment, that they're aligned with how you look at your P&L. And I think that -- to take Mike's point earlier, with Darin being -- having been a franchisee, he knows what the lens -- he knows what that lens looks like. And when you have that, it gives you a lot more confidence that when you are putting your dollars on the line to go and develop new restaurants, more specifically Jack in the Box, it really does give you the -- at least given me the confidence, and I know for David and Mike as well. So -- and I know our peers out there are also feeling it. So I'm excited about it actually. I think that our balance sheets are strong. And we've had sales -- our business results have been that -- in a place where it has created a lot of this confidence. And so we just look forward to putting more out there in order to be able to get more of a return. So I'm excited about that.

Mike, did you want to touch on any of that? We've got to have you go first next one because everyone keeps stealing your thunder.

No. It's okay. What I want to try to do is try not to be redundant, and David and Clyde really did say it well. Clyde -- to David's point, if I could just expand on it a little bit, obviously, we weren't going to be growing much when we weren't trusting the leadership that we had. And so just having that trust is a great jump-start. But beyond that, there's a lot of work to do to get that growth engine going. And Darin has made that a priority. We've made big strides in it. There are things that obviously we need to still work on and bring ourselves up to the current century with respect to technology and so forth. So those are all things that are being addressed at the same time. And as those things all come together, it's going to bode well. I don't think every one of us -- all 3 of us have stores that are under construction or about to begin. So -- and for me, it's been a while since I've built.

That's great. Thanks, guys.

Your next question is from the line of Lauren Silberman with Credit Suisse.

David, Mike, Clyde, I also wanted to ask about development. You all have systems of different sizes. Can you just talk about how you look at the investment opportunity at Jack in the Box perhaps versus another franchise brand? And then are you willing to share plans for future development? You guys have alluded to it a bit. And just how that compares to new capital invested over the last, call it, 5 to 10 years?

You want me to -- David, do you want to go or...

I'll let Mike go first this time.

Okay. I get to go first. So Lauren, the question sounded a little bit similar to some of the responses we gave as far as capital goes. I think that, again, we -- I think David brought up the point that we are hungry for investment. We've got the balance sheets. I believe most franchisees are in a good place. And obviously, with the kind of leadership that we have -- and I hope I'm answering your question properly. With the leadership that we have, we have a stronger propensity for desiring to put that capital to work and get that -- those good returns on investment that we're used to seeing in the past. And so I believe that you will see that as the systems get improved, the opportunities for us to remodel, to build new stores, I believe that, that capital will get deployed from the franchise community. It's sitting there, waiting for the right investment, and we believe obviously that we're at that stage. Did I address that correctly?

David, do you want to...

Yes. Lauren, I'll expand a little bit by saying Jack is a great investment for us, particularly as franchisees, because as you know, just like me, most of the other franchisees bought the restaurants from Jack in the Box. So our rent structure is 9.5% rent. We don't own the real estate. And we're generating -- our portfolios are generating a lot of cash, but we also need the real estate to balance our portfolios out. So what attracts me to new restaurant development is I want to be able to create wealth for my family and for their children. And one of the best ways to do it is real estate acquisitions. And with new restaurant growth, especially if you structure the real estate appropriately, you can actually generate quite a bit of return whether from a sale-leaseback perspective or by hanging on to the real estate and leveraging the real estate portfolio. But if you look at the new restaurant performance despite of the real estate transaction, new restaurants perform much better than the system. Whether from a sales standpoint, profitability standpoint, you're able to attract a better quality team, you're able to increase average check and also reduce cost as far as utilities and repair and maintenance and what have you, not to mention the tax advantages. So as an investor, Jack is a wonderful investment. As far as is the rest of the competitors, Jack doesn't require a big footprint. You could build a Jack in the Box on a 30,000-square-feet lot. Not a lot of fast feeders can do that. And if you're really tight, you can actually build a Jack. I got 6 of them that I built in the last couple of years, over a 20,000-square-feet lot, less than 2,000-square-feet buildings with a nice drive-through stack. You can really generate a wonderful return on that investment.

David, at any point in time, how many just -- I think just curious with your development agreement, how many pieces of property and how many stores are you building not only for Jack, but also for other brands, I think, is a little bit of Lauren's question.

Yes. I build a restaurant -- I have a large DA with another brand. I build 6 to 7 restaurants per year for that other brand. And with Jack, I've built 25 stores in the last 14, 15 years. So we're still finding opportunities to build Jack in the Box in existing markets. If we can figure out a way to take this brand to new markets, the sky is the limit for us, no doubt about it. But we still have a lot of opportunities. And what I love about Jack is it's actually complementary to a lot of the other brands out there. So if I can put a Jack in the Box and a Popeyes next to each other, which I do, they work very well together without a problem.

And now Del Taco, by the way, but I can't state that yet.

Yes, sir.

But we had a -- it sounds like -- I think that number was 40 that you signed up for. And so...

Yes, I did.

And you built...

And I signed up 40 restaurant development agreement, correct.

Yes. So it's to ramp it up, Lauren. It's to ramp up our development. Clyde, were you going to add something?

Yes. I was just going to say, look, I would say, Lauren, I -- Jack in the Box, I only get involved with blue-chip brands. And Jack in the Box is the leading blue-chip brand that I'm involved with. And I will say that I have a -- it's built -- it's continuing to build but I have a larger development agreement than I do with the -- than I have with the other brands. But I will tell you that when I look at a Jack in the Box, I kind of look at it from a lot of different ways, IRR, along with the fact of how much is a lender willing to lend on a brand like Jack in the Box. And then at the same time, what kind of -- to David's point, what kind of cap rates I can get from a real estate standpoint if I happen to do a sale-leaseback, all those sorts of things. And I will tell you that Jack in the Box is at the very top tier of all of what I just mentioned. So I'm -- I actually look at it from that standpoint. So that's the reason which -- that's why I -- it fuels my continued interest in growth from a Jack in the Box perspective.

Thanks, guys. Yes. The...

Thank you guys so much.

Thank you, Lauren. And to David's point, obviously, we have this nice, healthy, pretty stable revenue stream as a company for our rental revenue and rental income. But as David mentioned, going forward, as franchisees have new builds, they're going to own that real estate. And if that means driving even better four-wall economics, not having to pay that rent spread, we'll take that. That's really, really good from our advantage point for growth and for their four-wall health. So we'll take that all day.

And also -- I think also one of the things that we haven't talked about much, but very historically, Jack in the Box was not as open to buying real estate or having -- looking at deals that were not beyond -- that were beyond, say, ground leases. Most of the deals were ground leases. And so what we've given is we're building relationships with multiple different ways to grow. So buying real estate, build-to-suit ground lease, what's end cap, which is a pure lease. So just all structures work within this economic model, and that's what I like about it is -- we don't -- we're not limited to one over the other. As David likes to buy real estate, it doesn't mean we have others that develop that are build-to-suit. So that's something Jack in the Box didn't do as much in the past.

Good point, Darin.

Your next question is from the line of Andrew Charles with Cowen.

Thank you for this very unique and creative event. You 3 gentlemen have been around the system for some time and know this brand well. And this isn't the first time that the Jack in the Box brand has made a push to grow outside of the core West Coast and Southwest with drive-through competition has only increased since the last time this was pursued. So I guess what I'm curious about is what is different this time that leads you to believe that new territory outside of Jack in the Box' core is ripe for Jack in the Box development?

Yes. I'd like to take a stab at it, Darin, if you'll allow me.

Sure, absolutely.

I've said that repeatedly to the management team. I told Darin and his team that if there is a team -- remember, Andrew, we've been around for 70 years as a brand. And we've made several attempts to get out of our core markets. Some were very successful. Some were not. But keep in mind that every leadership staff that we've ever had in the last 70 years before Darin was homegrown right here in my hometown of San Diego. None of them really had the ability to understand what happens in the Bible Belt, what happens in the East Coast, what happens outside of the western part of the United States. This is the first management team that we ever got that actually understands that because they're from there, and they're not homegrown right here in San Diego. Second very important point is the lack of flexibility in previous paths where it's a cookie-cutter approach. You build in Indianapolis the way you build in San Diego. Your menu in Indianapolis is the same as El Paso. That just doesn't work, as you know, different population require different attention. They want different menus. They want localized focus on their taste, palates. And a lot of the brands have figured that out and Jack wasn't that flexible in the past as far as regional menus, as far as understanding the markets that you're developing. And as a result, when we used to develop in the past -- and I was in the company side back then, we used to actually ship people from San Diego to go build stores in god knows where, Cincinnati or Kansas. That doesn't work. You know that better than anybody. So this new management team has the understanding and the flexibility. And if there is anyone that can really take this brand national and go and conquer new territories, I think we've got the right management team now to do it.

I'd like to jump in on that, if I could, too. David, great point. And I think all 3 of us have had experience in an emerging market or one of the new markets. Look, it's always been a challenge and there will still be challenges, no doubt. But I can tell you that some of the things that I've heard without going into detail because we didn't talk about whether or not we could go into detail on this or not, I do like the flexibility that I'm hearing in some of the approaches. It's -- to David's point, it was cookie-cutter. It was basically just kind of jamming the old Jack model to whatever the different socioeconomic market or environment we were going into and just assuming it would work well. But I like the idea of trying to kind of tailor to the specific needs of a certain geographical area. Perhaps the real estate approach can be looked at and be a little bit more enticing to get the market jump-started. So I think flexibility and really looking at what has made it fail in the past or what has made it successful in the past and taking the learnings, and again with the leadership that listens to the franchisees, I think we've got ourselves in a much better position to attack the new markets.

Clyde, did you want to touch on anything? Or should we go to the next one?

Yes. I'm just going to echo what both David and Mike said. I think the real key thing here is this flexibility. When we think about -- when Darin talked about the footprint, for instance, I mean obviously, that's going to feed right back into the unit economics overall. And quite -- and box economics are very, very important when we start talking about a brand like Jack in the Box or any other brand out there that's trying to expand. So my view is that box economics, flexibility around that is going to really, really be the real gateway to success in emerging markets, not only that but staying focused in a specific market in terms of penetration, penetrating that market by -- footprint by footprint by footprint, expansion by expansion by expansion and just -- before moving on or, shall I say, stopping the momentum. So I think that -- because I think that folks really do love the Jack in the Box brand when they have a chance to taste the variety or see the variety or experience the variety of our products. I mean we really do cause folks to salivate. And so I think that, that can go -- continue to go nationwide. And this is, in fact, the team, I believe, to get that done just based on what they've been doing thus far and the success we've seen so far. So we're looking forward to that and it's exciting to experience it.

Many of you on the call know that for years, I mean AUV was such a focus of the discussion versus driving ROI. And so whether you're doing an end cap that's doing less in volume but the ROI is high, we're past that. We're focused on driving ROI and returns. And if we can do that, people want to grow.

Yes. Well said, guys. You can have the fanciest growth strategy of all time, but if you're not driving four-wall ROI, it won't matter. So that's part of why we wanted to lead with that today. Thanks for the question, A.C.

Your next question is from the line of Brian Mullan with Deutsche Bank.

Clyde or David or Mike, I wonder if you might provide some thoughts on how you think about loyalty programs in the quick-service business more broadly, also specifically at Jack in the Box. How do you think about converting quick-service drive-through customers into digital channel as a franchisee? I'm wondering if that is a priority for you in the same way it is for corporate. I'm assuming you are aligned. And do you believe a shift to digital over time can ever be substantial enough to have a meaningful impact on unit economics either on existing assets or potential new formats you might build?

I'll go if that's okay. I mean I'm going to sound like a cheerleader here because I'm so thrilled with the job that Ryan has done as our Chief Marketing Officer. Definitely, he seems to be -- that seems to be well suited for him. And again, I don't want to step out of line here, but I think that he's done an amazing job. And I think he's done a good job convincing franchisees that this is the way forward. And we've seen it ourselves personally. I believe that these channels have allowed us to compete more on a national basis with our larger competitors. We're not national. We're a smaller chain. I think we're only in 20 states. And digital has allowed us to look like we're everywhere. I was actually, just this morning, reading an article on my university athletics and one of my own Jack in the Box ads pops up. It looks like it came right from the university. So that's how amazing this has been, and I think we've got really, really good talent in that regard. Your question about loyalty. I don't know. I'm kind of an old guy but I think I'm hooked on loyalty. I've got -- I probably belong to 20 different loyalty programs. And it does drive behavior. There's no doubt about it. And again, Ryan has really done a good job making that a focus. He's had to change the culture a little bit because again, this is new for us because we've been so behind and we've got great opportunities ahead of us. I think the emphasis is there, the impetus is there and the talent is there for us to really capitalize. And I think the franchisees are going to learn to really appreciate what opportunities we have with respect to digital and loyalty.

Yes.

Mike, for the record, I don't think you're old. I think you're young, looking young at heart. Clyde and David, did you guys want to chime in?

Yes. David, do you want to or I'm going to -- I'll go ahead and chime in unless you...

Go ahead, Clyde.

Okay. What I would say is that from a loyalty standpoint, I think it's another area that I think we have a great expert coming in, someone that's had experience in doing -- in launching these types of programs in a way where it's going to really be commensurate with what the brand deserves, and that's Ryan Ostrom. He actually -- in my view, I think he's brought a lot of marketing prowess to our organization overall. But number one, I think from a loyalty standpoint, it's all about who's leading that and the type of support, supporting cash you have from a vendor perspective to provide you that support. I mean it's all about giving us a real blue-chip opportunity. And to me, Ryan is on his way to doing that. So we're -- I'm excited about that. And I think that that's only going to give us a very constant base from a consumer standpoint. And that's an area that we've just never been in, and it's going to definitely mean something to share gain for us as we go forward. The other side of it is really -- the other complement to that is going to be digital. And I think from a drive-through standpoint, gosh, if we can really capitalize on digital, and I know that we've already started to see success around digital, but we're only -- we've only -- to me, I think, embarked on it mildly. I don't think that we've gotten full-on into digital the way that we're -- I think we will based on the leadership [indiscernible]. I am excited about that as well. And again, that kind of goes back to what entices you to reinvest. That's another area that we haven't seen before that's going to give you the confidence in moving this brand forward from an investment standpoint.

Yes. I agree with what you both said. I would add that honestly, digital now is like a table stake. You can't exist by not offering it. And a lot of franchisees initially were a little fearful of digital sales because of the cost. But we're seeing that over time, actually, the cost comes down as the sales continue to grow especially during the pandemic and after the pandemic. So over time, through negotiations and pricing. And thank god through scale, the acquisition that Darin is doing can only help with the scale. We can lower the cost and continue to build this platform that I think is just the table stake today in the restaurant industry.

Great. Thanks, guys.

Your next question is from the line of Gregory Francfort with Guggenheim Securities.

Thank you guys for doing this. I appreciate it. A bunch of the frustrations, it sounds like, under the old management team were around real estate, rent spreads and some of the kind of asset side of things. Can you maybe talk about what might be changing on the marketing and operational side of things, any kind of key examples or other areas we should be focused on?

Yes. I don't know if you guys are -- or Tim or Darin, if you want to weigh in on that. We've talked about some of the things that we're looking at, to go after restaurant margins and those type of things a little bit.

Well, I'll start. But I mean this team is -- they're part of our LAC and they've given us some -- we shared at our last Leadership Advisory Council the activity we're doing, what we call financial fundamentals. And under that financial fundamentals, it's really about operational systems, processes and technology that will drive cost out of the business. And our target over the next couple of years is 2%. And we've built a bridge to get there. So we've talked about things like we showed at our last LAC, the test we have starting with robotics. We showed other examples of operational tools that we've implemented from a scorecarding standpoint to measure our progress from a training standpoint, from a technology standpoint to all drive operational improvement. We can only scale and go so fast with those initiatives. Our most recent one is of enhancing the standards around our guest experience review and our consultative approach. And all those things lead to store-level performance. So we -- some of the gentlemen on this call have tested the shake machine where it's a self-cleaning shake machine. All those are tools and components that lead to a bigger place, which is about a 2% improvement. We mentioned Altametrics, our software tool. We're still implementing that throughout the system. That is something that enables us to tighten our labor or manage our inventory more effectively to drive cost out that Jack in the Box is just not implementing and these are tools that have been out in the marketplace for years. So I'll let David and Clyde and Mike, any of you, chime in on this, but just a few things.

Yes. I want to add that while rent and ownership of real estate were frustrations for us in the past but it wasn't really the biggest issue for us. In the past, we had problems with strategy or lack of staffing the appropriate department with the talented people and just like overall leadership of the organization. And when Darin came in and presented his strategic plan, I think it was Clyde or somebody else on that presentation, and I agree that it was probably the best strategic plan I've ever seen in my 30 years here at Jack in the Box. So that's what was lacking in the past. This is what we're excited about now. We now have a strategy. We have a strategic direction. We have a strategic plan. We're staffed up with amazing people, talented, hardworking, hungry people. And we have the leadership to take the brand forward. I think that's what is exciting the franchisees today.

Great.

Your next question is from the line of Nick Setyan with Wedbush Securities.

First, let me be the first question -- first person to ask about Del Taco and your views on the acquisition and perhaps the appetite from within Jack's system to take on the Del Taco locations and become franchisees of Del Taco and grow that brand as well. And then two, does the current headwind in terms of inflation, both on the labor side and commodities and supply chain headwinds in general, do those headwinds perhaps somewhat make you less excited about the growth going forward?

David, do you want to start on the Del Taco part?

Yes. I do. I'm close to that brand. I'm right here in Southern California. When I first heard about Del Taco, I was just so excited. I actually personally looked into Del Taco a few years ago as a brand that I wanted to franchise, and for multiple reasons, I didn't at the time. But what a wonderful brand, Del Taco, what a complementary brand to Jack in the Box. It's a brand with a lot of following particularly in Southern California, a brand with a lot of equities particularly in food quality, variety, late-night, et cetera. And the brand, how it complements Jack in the Box, it's just unbelievable. I think one of my quotes said that it fits hand in glove. And I really believe that. It's a brand that we can grow actually as franchisees and develop Jack in the Box next to Del Taco on the same lot without any trouble whatsoever. Currently, I have multiple locations where Del Taco and Jack on the Box sit on the same property. And their line is out the door, my line is out the door, and there is no problems at all with coexistence. They have amazing, wonderful culture, good people, good training systems just like Jack in the Box. I've always admired that brand. And I just -- I'm so excited that Jack in the Box is acquiring Del Taco. I told Darin that on Monday when he first made the announcement. I actually submitted my request for a development agreement. I said I'd like to be the first guy to request it. Hopefully, I can get a first dip on geography. But it's a great, great brand. I couldn't be more excited about it, and I couldn't -- congratulate the management team at Jack in the Box for the foresight and the leadership on picking a wonderful brand, a brand that I think Darin and his team can -- and us, we can probably double in size in no time.

I'll just jump in. I'm not super familiar with the whole Del Taco thing yet. That was -- that's all kind of been really relatively short news, a lot of buzz for sure. So definitely, we'll be taking a look at it. But as far as your question about the headwinds or the things that could possibly be deterrences or detriments to us moving forward with development, I've actually developed most -- all of my units, and that's how I grow. I'm a smaller operator but that's because I'm a turnkey developer that I do ground up. And so I'm going to continue to keep doing that, believing that even though we're facing some headwinds now, starting to see in my own personal business that it's how we can navigate through that and still benefit the way that we always have with the good ROIs that we've gotten in the past. And so I'm still moving forward with my plans.

Mike, just since they talked about some of the navigating the headwinds, you and I had a conversation just a few weeks ago about how you've managed price over the last few months and some of the things you've seen. I think this group would be interesting because when we talk about to the Street, we have opportunity of pricing and some of you went faster further.

Sure.

I'd love -- I think they would be interested in probably hearing about that.

Sure. So -- and I think this is probably something that can be unique market by market. But we -- what we've done, we've definitely taken more aggressive pricing in my market than I've ever taken before. And I think I have maybe better runway for doing that because I kept a close eye on my competition. And I know that the numbers that they've taken. And so I basically was able to kind of reel them in and still remain very value-sensitive and oriented. And I believe that because QSR is definitely considered the value proposition in basically the restaurant industry, even if things got even worse inflationary, we would still be the least cost option, the best option for eating out of any of the restaurant concepts. Whether it's fast-casual or full-serve, whatever, QSR is going to always be the value leader. So if you're careful in your market and make sure that you're staying -- actually, in line is not even the right word. I'm less expensive than my competitors. And that served me very well, but it's given me a lot of runway that takes a pretty good price.

How much price did you take in over what period of time? I think you were taking almost monthly price increases here.

So I did accelerate in August, in late September. I actually took 3 different bites at it in 3 different pieces. It was -- I think right now, analytics are really struggling right now to keep up with the way inflation is impacting the bottom line and the top line for that matter. And again, I think that, that what's given me the opportunity. It's the fact that competitors are going way up here and I'm staying -- I'm moving it up, but I'm not moving up as quickly as they are. I took about 7.35% in just over a quarter in 3 different bites, which I don't think that most people would say that's a smart way to do it. In fact, my -- I was kind of -- my pricing group decided that, that probably wasn't the right way to do it, but it's actually worked out well for us again because all of our competitors are taking price at an even quicker rate. And so it's worked out well for us, but we took about 7.35% in 1 quarter. But that's -- for the year, we dipped just a little bit more than that, and that's the most we've ever taken, but it's -- transactions and sales were great and they've been good.

Great.

Your next question is from Chris Carril with RBC Capital Markets.

Thanks everyone for your time today. This has been a really interesting conversation. Darin, perhaps a question for you. Thanks for the franchisee profitability detail provided earlier. Can you talk a little bit about the profitability spread between markets where there are higher costs to operate versus lower operating cost markets and perhaps how that impacts our direct development in the near to medium term?

Tim -- I'm going to let Tim speak to that since he's been on the call and hasn't had an opportunity to jump in. So Tim, do you want to take that one? And then also, while I have him in the call, just publicly want to acknowledge just what a great deal he was able to help us get with Del Taco. So congratulations on that, Tim, as well.

Thank you. So we don't see necessarily a really tight, ironically, correlation between high-cost operating environment and the profitability of our franchisees. As a matter of fact, in L.A. or California in general, one of our higher-cost states, those are some of our most profitable franchisees, and you have one of our larger ones on this call. So we don't typically -- as we look at development and growth outwardly from -- or concentrate from our dominant markets that we're in, we're not necessarily using that as a guide or sort of a triage criteria of where we're going. We're actually looking more and we have a fairly complex, sophisticated real estate model that we utilize to direct us on what -- where our market points are and why we should develop but -- so that's not one. But two, we do have multiple levers that we're talking about. I mean price right now in the environment we're in is one of the major ones we're using to combat these sort of unusual headwinds, so to speak. But I think Jack in the Box, generally speaking, has operated typically in these higher-cost environments to begin with. So this isn't a shock to us like it is with much of our peer set or the industry at large. We're fairly comfortable operating in higher labor cost environments. We're familiar with it. And frankly, the menu breadth that we have as a brand at Jack in the Box gives us a lot of tools. Or like a chessboard, so to speak, we can move the pieces around quite a bit on the menu to combat supply chain and procurement challenges that we tend to have and move price around a little bit as well. So it hasn't slowed down our development or affected our thinking in any true fashion.

Great. Thanks for that detail.

I echo the kudos to Tim beyond -- there's always debates with acquisitions and those things. But I think one thing we can all agree on is that's a strong move for the brand and strong move for a management team in year 1. So I echo that.

Your next question is from Jared Garber with Goldman Sachs.

Clyde, David and Mike, thank you for the time today. Mike, you noted a little bit earlier about some need for increased tech integration. We've heard a lot today about the confidence in the management team in driving the business forward, which is obviously great to hear. But I would love to hear from the 3 of you on what are the incremental investments you think you need to make in the boxes to keep pace with both order macro and some of the peers that you compete against and also to help offset maybe some of the incremental costs that are flowing through into the business now, namely labor and commodities to a degree?

Well, I think that first, to go into technology. I think we're hopeful especially with the new Chief Information Officer that we have that we all have really actually good pricing, yet another good choice by Darin. I think we're believing that there's going to be efficiencies that are going to get wrung out. Yes, maybe the cost to the franchisees might be a little bit higher than we're used to. But I think we're all believing that the efficiencies that we'll create, the opportunities that we'll create, the technology advances that you talked about are all going to be things that are going to be the intangibles that are going to probably be worth some costs. I think, obviously, franchisees don't like to increase costs ever. But given the right circumstances and very well vetted out technology investments, I think franchisees will get on board with. As far as other things, what can we do to mitigate and to offset -- and believe me, every one of us on this call is looking top-down from sales all the way down to the very bottom line, what can we do as far as cost, what can we do to raise the top line to make the bottom line as good as what we've used to. And I think we're getting creative. Certainly, there's challenges. I'd say right now, labor is huge. We're seeing that hitting us on all fronts. But I think we're doing a better job kind of ascertaining the right balance between price and increase in labor cost. And I'm finding at least personally that I'm able to mitigate it better now because of that, just looking at it more analytically that way. And I'm finding some, actually, low-hanging fruit out there on my own P&L, some things that I can do better, and maybe I don't need to do as much or spend less here and there. So we're finding ways. We always are. That's why we've been in business for 30 years.

Yes. And I would -- this is Clyde. I would say that, to Mike's point on technology, technology as an investment can ever be made but -- and I think we have a -- not think, but I know we have a great CIO that's navigating those waters to try and get us the lowest cost out there but yet at a high quality. Marketing is also going to be an investment especially when we think about -- as we think about digital and enhancing digital. But I also think that from a local standpoint, a lot of our cost reductions may come regionally because of what may be available -- or shall I say what we may be able to collaborate on from a franchisee and franchisor standpoint that may give better cost from a regional perspective just based on where a vendor may be located or what have you. So there's a lot of things that I think that we'll be looking at as we go forward. This is not -- this is the discussion that we've also talked about even at the LAC with regard to cost out versus cost in. So that is something that I know that Darin and the leadership team are going to continue to work with us on in terms of getting through that. But aside from that, I think the biggest thing to mitigate all of our costs is really just continuing to build the top line. And if we continue to build the top line as we are, a lot of those pressures sort of get mitigated as a result of being able to generate top line sales more so than what we have even today. So that's kind of where I sit.

To the technology question, this team has been very integrated along with our LAC and an RFP we have for POS provider. And we're shifting the model from the historical way of many systems of investing or buying the technology upfront to technology as a service, where we build a platform that we can plug the latest and greatest into. And that's just not the way the architecture was built historically. And so that gives us the ability compared to other systems that I've been a part of to have this long-embedded technology system. We're kind of at that stage where we have an opportunity, a unique opportunity to system-wide go to the latest and greatest, build a platform that enables us to plug and play what the newest technologies are or tools to drive costs out of the system. So that's something this group has been very hand in glove, as David used earlier, working through that process and that RFP so we can be state-of-the-art from a technology standpoint and build the capability at a low cost to invest in future technology upgrades when we utilize technology as a service.

Darin, I'll just point out that you used 3 acronyms in one sentence. That's very efficient, LAC, RFP, POS.

That is impressive. Yes. Nice call. Guys, if you don't mind, I'll call my own number here for a second, and maybe I'm stealing somebody's eventual question here. But could each of you just give kind of a brief update on what you're seeing related to staffing of late, any trends, any improvements that you think are notable for this audience?

And anything you've done to combat it?

Yes, anything you've done to combat it.

We were talking about that earlier, Mike and I and Clyde. And actually, we've seen a lot of improvements in the last several weeks. We've seen a nice flow of applications. We're seeing a lot of people coming back to the workforce and a lot of people, young people entering the workforce. In San Diego County, I've seen a significant improvement after the border opening, a lot of visitors, J-1 visa holders. So we've seen a significant improvement in that area. We were -- not too long ago, we were somewhere around 25% shorthanded, short-staffed. We're now hovering around 10%, 11%, which is a significant improvement. We're able to operate normal operating hours in most of the restaurants where it's needed. So we've seen a significant improvement. We also have done a lot of referral programs, a lot of investments in recruitment platforms like Indeed or what have you, which has actually helped a lot as well.

This is -- I think 1 of the things that's helped us -- and again, we're -- we struggle to but just recognizing that we have a completely different workforce that's out there right now. Most of the kids don't have any training at all. And that even goes up to in their 20s. So we've kind of taken the approach, really profit service. We try to treat people like family here. But obviously, we've got to apply some tough love to your family members. But I think that when you understand that -- and we see this all the time, our managers get frustrated, the managers that are maybe in their 30s or 40s that are just not used to kids that are coming up that don't really understand even how to hold a broom sometimes. So it's definitely required us to be more patient. We've had to rely more heavily than ever. And I'd give JACK high marks in this regard because we did some excellent interviews with some of the employees that were turning over. And most often, they did tell us that we did a good job -- our training programs were good in that they learned a lot. But it's a fickle workforce. We're trying to learn how to work around the nuances of that, and I think we've been successful in that. We've tried to be competitive with everybody that's considered a major in our market. Amazon comes into town and everybody gets freaked out. Well, we realized that we have to be a place that it's going to be more desirable for them to work at. And they won't leave you if they like where you're at. So I think we focused on retention. Retention is really critical right now. The replenishment has been more of the challenge for us, but we're finding ways to work through that. I like David's optimism. We're on the border. I have not yet seen the same impact from the border opening, but since Jack in the Box is largely Southwest, I would imagine if he's benefiting from it, most of us will at some point in time as well. And so that's probably a good thing. But profit service chain, when you apply it at every level of the company, it feels really good to the employees. They experience it themselves the internal service that we now have because our franchisor treats us with the same level of respect. That culture, I think, is having a positive impact, and it will have a positive impact in our ability to retain and hire.

Mike, anything specific tactically about premium pay or late-night menu price increase related to that to be able to cover some of that? I think it's just interesting for this audience to hear.

Sure, sure. And so definitely, it's got to be a little bit of supply and demand. You -- we obviously -- the demand is very high for QSR and probably restaurants in general right now. Probably if you look at the studies, food at home versus food away from home, I think there's a lot more parity there than there used to be. And so restaurant visits are really highly -- in high demand right now. And because of that, again, talking about the price earlier, that's really been the main reason for the prices to be able to try to keep competitive with those wages and those dayparts in particular. And just looking at our particular model, where are we having the struggles? Those are the areas that we tend to give more emphasis as far as wages goes. Our benefits, we offer a really broad benefit package here that I think is probably very unique in the QSR market, and I think that's helped us as well. So specifically for my operation, those things have played a part. We've taken some pricing at night on things like the Munchie Meals, which are specific to late-night even though you can order them all day. Those were discounted products before. We're not heavily discounting those anymore. There's still a great deal, a great bundle, but the discount that we were giving before isn't there because look, that's an equity that JACK owns. We have to protect that equity. And so that's one of the areas that we've applied a lot of focus on wages.

Clyde, did you want to touch on that one at all with staffing?

Yes. On the staffing side, I've seen some improvement as well. But here's what I found just kind of touching on what Mike said about retention. I've done 3-year and 5-year retention bonuses and that sort of thing, which mean a lot to people. But one thing is that the culture that you have within the organization, which I'm -- obviously, I know David and Mike both have great cultures. And I obviously have tried to obviously emulate that as well within my own organization. But what I found is that people really do lead people. They don't necessarily leave for money a lot of times for the long term. Because what we find is that when people do decide they don't want to go -- they don't want to be a part of the organization or they want to kind of sit at home or whatever the case is, they tend to redate. I've seen some tend to return and they're returning back to us. So that says something about the culture because a lot of folks are out there looking for folks to work in this industry. And this is an industry that's been absolutely annihilated with the loss of folks in the market. So -- but what I find is that the thing that's benefiting me the most is the culture that we have within the organization.

That's great. Sorry if I stole anyone's question, but why don't we go to the next one, Misty?

Your next question is from the line of Darren -- excuse me, David Tarantino with Baird.

This is very helpful. My question, I want to come back to the idea of developing in new markets, and I wanted to ask if any of you have either plans to start developing in new markets or have already started? And then I guess, secondly, the returns in new markets likely, I guess presumably, could be lower than the average given not much brand awareness starting out and you have kind of a risk profile that might be elevated because you got to kind of commit to multiple units to get brand density. So I just -- I wanted to ask how would you kind of frame up that opportunity or think about that opportunity as a franchisee given kind of the short-term tension with putting capital to work in an uncertain market versus maybe the long-term opportunity? I guess how do you guys think about that equation?

And David, I think...

Yes.

David Tarantino, and then David Beshay, if you'd like to speak. One of the things that -- this group has not been part of the group that invested because a lot of them have opportunity within their existing markets. I know David is the closest to that probably because he has developed in some of the new areas. So the one thing I would add before I turn it over to David is that we're always balancing that equation of what we can do now with the approach as far as real estate and the returns. A lot of these new markets have a very different risk profile from a cost standpoint to develop them than, say, California. And so you don't have to have the same top line. And then also from what we've done in the past from a marketing standpoint with digital, we can drive a lot more awareness without having to be on television. So do I think it will be the same top line in say, California, where we have full penetration? Absolutely not. But there's a lot of other things that we can do today to mitigate it, and so including reducing menu and other ideas. So David Beshay, do you want to touch on some of that?

Yes. I want to say that I think Jack in the Box with our help is really developing a robust program to develop the new markets. The new markets can do very, very well for Jack in the Box. And I personally built restaurants in Colorado. I just built one in Greeley, Colorado that is doing phenomenal. There are extreme opportunities in the positive side in new markets. If we put our heads together, develop a robust program that is flexible in the size of the real estate, the shape of the real estate, the menu and also recruit -- what the brand really needs to do is recruit solid developers from these markets as well. That's what is going to fuel the growth and really generate a lot of opportunities in these markets. But for us, like Darin said, we have so much opportunities in our existing markets where we have leverage, we have people, we have scale. So while we look for opportunities every once in a while to develop a new market, when you have so much opportunities in existing markets, that's where our focus is currently, at least for me personally.

Yes. And to that point, I would say -- thank you, David. The -- we have -- we've talked about before our strategy in Utah, which has been different than what Jack in the Box has been in the past. Because of the relationship, we went to many operators in our system and said, where -- who -- which ones of you would like to go to a market like Utah and partner with us with corporate, some of our better operators and developers grow in new markets so we're all building 3 to 5 units a year? And we found one of our -- now the NFA Chairman, who is based in L.A. or Southern -- or in Orange County. He's going into Utah. And then one of our operators out of Texas that also operates in Vegas, who has limited opportunity for growth in Texas, is joining us in that growth in Utah as well. So we've done it from a strategic standpoint, both finding great operators but also developers and people that are willing to do it all at the same time. So it's a coordinated effort to get 3 to 5 units out of each one of us per year in that market so we can get presence faster.

Yes. Utah and David mentioned Colorado, perfect examples of our wagon-wheel markets we've talked about with proximity and familiarity with the brand, but obviously, areas where we are either way, way undertapped or untapped. So good examples of those.

Your next question comes from the line of Alex Slagle with Jefferies.

Thanks for putting this together. And a question for David, Mike and Clyde. I want to get your views on portfolio optimization and the increased flexibility that the company has provided in this respect and say how much you've leveraged this opportunity and how much room you see ahead to reposition your portfolios where maybe the trade areas have moved a bit and you'd like to reopen existing stores and new sites versus plans to add incremental stores and maybe what that time line might play out like...

Yes. I can take a stab at that. I think portfolio optimization needs to be in the mix as we continue to develop our brand. And this is really the exciting part about it as we have so many tools that we can grow this brand that we haven't really taken advantage of in the past that are now available to us, whether building new restaurants, all kinds of opportunities there, whether remodeling our existing restaurants, so much opportunities there recently. I'm a big believer in that. I remodeled about 8 restaurants recently and just the return on that investment is phenomenal and the sales improvements and the feedback from the guest but also portfolio optimization. As you know, a lot of the trade areas move from here to there. And this management team is flexible. We're talking about them as these opportunities exist. I personally have several locations where I want to relocate the restaurant to a more viable trade area. And there is a lot of flexibility on the Jack in the Box site to do that. It's just a tool that we have today in our toolbox to continue to improve our fleet and continue to grow the brand.

Yes. I...

I think we've shared this publicly. We've shared publicly -- and Clyde, I'll turn it to you -- that part of this is a discussion with franchisees, what -- how do we get the best for the market at the right time. And this group has been one of the groups pushing us to say, "Hey, we don't expect to do that for free." I mean, we've got to make a transition whether it's remodel our existing stores to draw more clients in if we close a store or an offset where we have to have some time to accomplish it. And that's been a dialogue amongst this group and our LAC about how do we accomplish this for the benefit of the brand because we don't want closures. I mean our franchisees don't want closures because it doesn't help our marketing in the market. So it's been an open dialogue situation that we said. So portfolio optimization is good for the brand but, how do we do this in a way that's good for all of us. And Clyde?

Yes. I would echo that. I would say that, look, I think in the end, Jack in the Box from a net growth standpoint needs to remain positive, and we understand that from a franchisee standpoint. The thing that I would say that is great for franchisees and great for franchisors and more specifically Jack in the Box is really offsets that allow for us to be able to optimize our portfolio. And quite honestly, I know that I have had some recent conversations around that. And I know that the receptivity is there. It's just -- it's really a matter of it's not in the right spot and -- that are going to give you main and main opportunity that will keep -- make the offset a big -- give you a big or, shall I say, very positive result as a result of trying to achieve optimization. So it's -- to me, I think that that's the willingness of the brand to want to do it and the franchisee executing in the proper way as well. I think it's going to -- it will work out. It's going to work out.

We're getting towards the end here, but we'll take a few more.

The next question is from the line of [ Ryan Kidd ] with [indiscernible]

Thanks for putting this together. Just a quick one on that new market team. At the Investor Day, you talked about a few different strategies for entering the markets, one being your partnership with REEF's and opening up dark kitchens. I think you had mentioned Chicago specifically in the near term. But just curious if there's anything new to share regarding progress on that front if it's still just too early.

Yes. We see it as a test. We just opened our first dark kitchen with REEF in Houston, Texas last week. So we're excited that that's open and we can start to share some information on what we're learning. Our objective is to learn from these tests and decide how we apply it to our brand going forward. What we have seen is we've even had some franchisees talk about this optimization strategy and say, "Hey, maybe I can turn it into a dark kitchen. First, close it. Would you be willing to consider that?" And we said, "Let's step back and learn from what we learned from REEF," but it may make sense in a few of these areas to have a dark kitchen for some of our restaurants. But we're not moving that forward until we have our key learnings in place.

Ryan, thanks -- go ahead, Darin.

And let me add one thing to that. Chicago, we've -- because of some of the local regulatory changes there, we're going to basically start with Houston and Nashville and then we're picking another market that's at discussion with REEF because Chicago's kind of put a nick on some of the dark kitchen implementation.

Thanks, Ryan.

Your next question is from the line of Eric Gonzalez with KeyBanc Capital Markets.

Thank you all for taking the time to answer your questions today. Can you speak to the performance of the late-night, dayparts? It seems like Jack, by not shutting down during the height of the pandemic, won a lot of shares during those hours. So talk to your confidence in maintaining that share as new competition comes back online and maybe what you're seeing in the markets in terms of your competitors' ability to staff evenly night hours and whether you think you're doing a better job keeping open during those hours?

You want me to go?

Sure. Go ahead, Mike.

That's a brand equity of Jack. I think we actually positioned ourselves very well during the pandemic, and I think that a lot of people that had made an attempt to get into that space, at least in my market, are backtracking their way out of it. And that's given us even more leverage, I think. Personally, I think we've got one major competitor in my market. And I think we go toe to toe but honestly, I think it's a great, great equity that Jack is going to continue to leverage and really own.

Yes. And I would say, too, that -- with what Mike said is that I think that the equity of just having the mass -- the variety of a menu that we have in Jack in the Box, I think it's just tremendous. And that, to me, I think, is a unique equity as well that allows for us to be able to attract a consumer that can really rely on getting all the daypart's -- all their daypart needs, if you will, at any hour. So I'm excited about -- that's another thing from an institutional equity standpoint and certainly one that's a barrier to entry for many that excites me about the brand even as we go forward.

Great. Thanks, guys.

Your next question comes from the line of Jeffrey Bernstein with Barclays.

Great. Thank you all very much for participating today. A quick question on refranchising perhaps. Just wondering if you could offer some color on maybe the lessons you guys learned from the Jack in the Box refranchise that's gone on over the past decade, maybe some advice for the Del Taco system. It seems like there will be a challenge with the goal to open new stores and remodel existing stores when you're also potentially acquiring units from corporate. It seemed like each initiative may be competing for the same dollars. I'm not sure whether that was an issue for Jack in the Box over the past many years. The fact that you were buying stores from corporate and remodeling existing, it becomes hard to open up new. I'm wondering whether that might be a challenge that Del Taco might face as they potentially look to refranchise several hundred units. So any thoughts on learnings you guys had to the Jack system or advice for Del Taco would be great.

I'd like to answer from a franchisee standpoint if you'd like me to...

Absolutely, David. Go ahead.

One of the most exciting opportunities that I see with Del Taco is the fact that Jack in the Box has not been selling restaurants for a period of time now. So the last acquisition I've done with Jack in the Box that is a meaningful acquisition was in 2017 -- meaningful meaning in size, was in 2017. A lot of my 200 units are acquired back in 2006, 2008, 2010. So a lot of these loans are either paid off or coming to maturity, which gives us a significant amount. And I'm speaking about generally, the health of the franchise community here at Jack. We have a significant opportunity when it comes to the strength of our balance sheets and our ability to do all of the above, acquire, develop, remodel and make some investments as well. We heard about POS systems and what have you. We do have that ability, and the fact that we haven't been buying restaurants from Jack in the Box for a period of time, it gives us just a significant amount of dry powder that we can go out, and I just can't wait. Darin, you just let me know when you're ready.

With the Del Taco thing, we put up a slide earlier from the economic model, talking about our average franchisee has 19 stores generating over $4.5 million in EBITDA. And that's been happening for a while. So it was when they bought the stores at really high multiples. Many of them were corporate operators that didn't have the strength of their own personal balance sheet but they had partners. Now they have both, and so with a lot of interest for the future. And so I think that's probably the piece that -- when we -- one of the first questions I had when I joined the company is I want to see kind of the balance sheets and the P&Ls of our franchisees and their leverage ratios because I want to understand what is the capability and let's make smart decisions together. And so I've said it publicly. The -- one of the things that excited us about the Del Taco opportunity was that not only do they have good franchisees, but we have great franchisees. Let's pick the best of the best who have the powder, who can enable us to grow within our existing and some new markets. And that's one of the best things about this. It's that we have that opportunity of well-capitalized franchisees on both sides.

One thing that I would also add is I did come in the system getting through a refranchising effort in the earlier years, I guess at 2011 -- 2010, 2011 time frame. And I believe that what needs to happen with the great brands such as Del Taco is that you've got to make sure that the -- just a key learning. You got to make sure that the development requirement that's out there, that is truly a requirement and is commensurate with what is being refranchised and properly commensurate with what's being refranchised because I will tell you that I don't feel like -- personally that I had enough of a development agreement in accordance with what I purchased. So it -- to me, I think, with -- certainly I think with this leadership team and certainly Darin at the helm, I'm sure that that's going to be very, very different. And there will be, obviously, incremental units that are going to come out of this whole acquisition through -- by the means of development. So that, I think, will certainly help the franchisor as well as the franchisee because obviously, we're all going to win with more units out there to eat up more market share along with just overall building brand awareness. So that's where I see it.

Yes. Jeff, I would just -- yes, go ahead, Tim, yes.

Just one last thing to add there, Chris. So from a franchisor perspective as well, we are committed to being an asset-light model. So absorbing this 50-50 system and having a much more well-capitalized base of franchisees now versus the last time we franchise, I mean this is a tremendous opportunity for us in our brand and our systems. So that is a meaningful value-add lever that we could pull with our current franchisee base. But to the point that Clyde was making and others, I mean we're not going to do it at the expense of building our new unit pipeline. We understand that JACK needs to grow incrementally. We're still maintaining, if not, hoping for more brightness in our annual 4% net unit growth target that we set for end of 2025. So we will be matching those sort of aspirational development plans and targets as we look and have those conversations with franchisees to refranchise. So that's not something that's lost on us. And I think our system, as you're hearing, is pretty excited about that opportunity as well.

Yes. Great point, Tim. And keep in mind that the refranchising process that Clyde went through that he mentioned, pretty heavy lift. I mean you're taking a lot of company operators, giving them stores, the kind of financing agreements through real estate and those things. I think this time, we have operators that are off and running that probably are going to be very interested in both brands on both sides. So probably something that would be a little bit less of a heavy lift than what we saw for all those reasons during that Jack refranchising period.

Your next question is from the line of Jake Bartlett with Truist Securities.

Thank you, Dave and Clyde and Mike, for the time here. My question is really about that kind of all these different uses of capital and the opportunities that you have right now. And it's been mentioned a couple of times that remodeling has had some strong returns, was appealing. The question is how much do you think the Jack system is in need of a remodel maybe within your own stores but as you look across the system? And it seems like remodels is -- if it's a solid return, is also potentially lower risk. So would you prioritize remodels versus new unit growth? And I guess really the question is, does that push out the need to remodel or desire to remodel? Does that push out your desire to add new units?

I'd like to go first, if I can. Again, I think when we talk about the Jack in the Box system, I think one of the biggest opportunities that we never talk about -- and I'm so happy that I have the opportunity to speak to you all today. We've never had this opportunity in the past. The Jack in the Box system is so unique in the sense that we have a very, very strong operator base. And I know that because I'm involved in multiple other brands. And when I take a look at the 100-plus franchisees that we have in the system, they're all very, very strong. I mean we might have 1 or 2 franchisees who are struggling. But all in all, we're very strong franchisees operationally and financially. So when one looks at their portfolio, one doesn't really look at remodel versus new growth versus other investments. You got to take a look at all of the above. And the beauty about new restaurant growth is you're adding EBITDA to your existing portfolio. So the lines of credit, the development line of credit and the other things that are available for that kind of investment is there and it's available and it's cheap. So the opportunity to do that is phenomenal, and also not to mention the depreciation that one gets and the tax advantages that one gets. But as far as remodeling the stores, the system does need a remodel and the franchise community is committed. I can speak for myself and others on this call. We're absolutely committed to remodeling the existing fleet. And we can do all of the above. We have the ability to do it. We're very well capitalized. We have significant banking relationships at a very attractive rate. We can do this without sacrificing one versus the other.

And to that point, I think the biggest thing -- and this is what we often speak about at our LAC and with our franchisees is it -- how do we prioritize, right? What is the right thing at the right time? And David said that. Right now, we have a little over 400 of what we've called our ugly babies. Those are the ones that are in need to remodel the most. The rest, we can balance over time because we're still getting good performance. The system, as David mentioned, operators have done a nice job of maintaining the facilities. But as you know, we're thinking about for the next 10, 15 years. Picking the time, when is the right time so we get that refresh and update, that gives us another 10 to 15 to 20 years. That's what we're looking for from a remodel standpoint. So we don't have to do it all at once. We have time.

Yes. I'll just jump in real fast because I know we're trying to get multiple questions. But I do -- it is an important balance, definitely need for remodels out there. And I think franchisees are aware of the capital that they need for both growth and remodels. But I think personally, I'm excited about what kind of return I can get on my remodels. And so that's definitely in the -- as much in the forefront for me as growth.

And I can tell you, I'm like many of you on the call, come from the Midwest. And I didn't really -- wasn't very familiar with Jack until spending a lot of time now out here. And there is nothing more beautiful than a reimaged, remodeled Jack in the Box store at night. I mean you can see why we're excited about leaning into that. And I always noticed a pretty hefty line at the drive-through at those beautiful reimaged stores. So they're quite a sight.

Your last question is from the line of Jim Sanderson with Northcoast Research.

Just had one last follow-up on new unit growth. And I'm wondering for the franchisees present, if there's any expectation or need for some sort of incentive package to really help franchisees to invest especially in new markets where brand awareness may limit the AURs in the early years, something like that going forward? Just how you feel about that and how that plays into the overall unit growth story for both Del Taco and Jack in the Box?

Of course. This would be an opportunity for us to tell Darin what we want. I will -- David usually will jump in here quick, but just real fast, I'll say. Look, I -- Jack in the Box is -- they've already had a great incentive package. It's great. And I don't think that there's any hunger for anything really additional than the opportunities we have. And so from my perspective, obviously, we would love to have more but that's -- realistically, it's a great incentive already for us to keep going. And I don't want to speak for every franchisee who might be listening but kill me, but it's a good incentive.

Yes. And I would say from where I sit, I think it's a great -- like Mike said, it's a solid support that we've had from the -- from [indiscernible] when you actually do get top line results and we've gotten -- we've seen this from remodels and we've also seen them from new builds, it's really about -- to me, I think it's really about that. It's about seeing that -- those -- that top line at the end of the day because -- and I think that the -- with the franchisor giving you the support in -- you may -- you will never get everything that you want. But at the same time, I'm not sure that we should be asking for that because again, we need a healthy franchisor and -- as well as we need a healthy franchisee. So my view is that whatever the -- whatever is coming to the table from a support perspective, I think, is -- I feel, has been very adequate. And I think the most -- the thing that I think we should depend on more is to see in these remodeled restaurants or new builds as we go forward. And like I said, we have seen some great numbers there.

Yes. Finally, really quick. I personally think we have one of the best incentives out there in any brand. I'll put it against any incentive out there. But honestly, one doesn't develop for the purpose of getting an incentive. One develops a new restaurant because of the opportunity to bring value to the portfolio and improve EBITDA. So I look at every restaurant on its own. I analyze each opportunity to build each restaurant on its own regardless of the incentive package, but the incentive does improve the decision-making process. It improves our ability to get a loan. So I appreciate the incentive. I think it's great. But really, one develops restaurants for the next 20, 40 years not necessarily for a short period of time of incentive.

I'll just add to that one that I can tell you they appreciate it very much because I tried to reduce it because I thought it was so generous. And I heard about it loud and clear that, "Don't do that. We like the incentive that we have in place." And so we made sure, after getting the feedback, that we extended it if our franchisees sign a development agreement that we would extend the current incentive program, and it's definitely something that our franchisees value and we want to continue to provide. But it's been part of our strategy. It's to continue that so that we can continue to enable our existing base of franchisees to grow. Well, with that, I know that was the last question. I'll just share with this audience. We've come a long way. And hopefully, just through this kind of open dialogue -- and this is the way we engage within our culture. We have open dialogue and not everything has been smooth sailing, but we definitely are aligned as far as where we're headed together. And we had other groups of our franchisees, our base of franchisees out there that were not on this call, not the rest of the LAC. We also have an organization called the JOA. We have the NFA. And we've done a good job of aligning across the organization and bringing those relationships back together to be one unified system. And so we're excited about that. We're excited about where we're headed. And hopefully, you can feel that within the transparency of our discussion, how we work together. And so I just want to say thank you for each of you who took the time. I really want to thank David and Clyde and Mike for donating and sharing all their expertise and their time today and just being committed to the brand and to our system. We thank you for that, and I appreciate everything you do. And so to all of you on the call, we wish you all a happy holiday season. And thank you again for spending the time that you dedicated today to hear from us. With that, we'll close out the day.

And this concludes today's conference call. You may now disconnect.