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

I think we should be good to go. Good afternoon, everyone. Thank you for joining us as we wrap up day 1 of the Goldman Sachs Travel and Leisure Conference. I'd like to now introduce the team from Jack in the Box. To my left, Darin Harris, CEO of Jack in the Box. And to my further left is VP of Investor Relations, Chris Brandon. Thank you both for joining us today. Really appreciate the time. Certainly have a lot to catch up on. We've got the macro backdrop. We've got consumer spending. We've got results you guys reported a couple of weeks ago. We've got the Del Taco acquisition. But -- to start off with -- I want to start with the sort of the core Jack in the Box business and all the work that you've been doing there in the last couple of years since you took over the helm.

So Darin, maybe just to kick it off, you joined Jack in the Box as CEO in June of 2020. So maybe not the best time to start, but maybe also an opportunity for you to dig into the business when it was under pressure a little bit. If we could take a step back for a second, what were the things that excited you about the opportunity the most as you were assessing the job? And then I guess maybe what surprised you the most, maybe one positive, one negative sort of over the last 2 years?

So I think as I looked at the opportunity, I saw a few things. First is, I think the way the brand had been positioned in the marketplace, I think, needed to be clarified, and I saw that as an opportunity that absolutely is true -- continue to benefit from the character in Jack and how do we bring them to life and communicate the story and who do we communicate to. So I knew there was an opportunity there. The big unlock is still growth. And how do we grow the business. And then I'd say the third big benefit is also what can we do with digital that was really -- there wasn't a strategy for Jack in digital. So growth, growth in digital and then also just telling the brand story in a different way. I also was attracted because of the relationship and the franchisees. Typically, I find myself going into a situation where there is a stress in the relationship and being able to bring back -- people back together. And absolutely -- you said, what was a surprise is that willingness of the franchisees to be led. They are not looking to lead the brand. They're looking to be led and to be a part of something and to provide insight. So I was surprised at how willing they were to have a seat at the table and how participative and collaborative they are more so than wanting to drive all the strategy. And that's not where they want to live. They want some -- at least a voice to sit at the table. So that was one of the big surprises that I thought would be more challenging than what it's been. And so that's where I would answer that question.

Cool. Yes, I mean, you've pretty quickly, I think, coming into the business, settled things down with franchisees. I mean was it as easy -- not as easy, but maybe as simple as opening those lines of communication? Or was there something else that you think underlying the business? I mean, maybe was it top line growth? Was it cost management? And presumably, you're still working on those things.

Yes. I think the key things that I heard over and over is that we want to have a seat at the table. We want to have a relationship that's built on something that we can trust in that what you say you're going to do, you're going to end up doing. And if you're not, tell us why, and help us understand. And that was not the way, that kind of transparency and openness or the way the brand had been run for years. So that was the big unlock. It's just being transparent. We have bad news or good news or when we change the direction for a specific reason, letting them into the story at the starting line, and I've always used this analogy publicly if you think of a relay race, we would hand the baton off to the franchisees at the fourth leg and say, go finish, turn around and run as fast as you can and don't look back and don't ask questions. Instead of a 3-legged sack race where they're starting at the front -- at the starting line with us, and they're going through the race together and bringing them along. And that's the nuance, not that they wanted to run the brand. It's being a participant.

Yes, the only thing I'd chip in with there is, Darin's a former operator. And I think that the ability to both kind of lead in the C-suite, but also have that credibility with franchisees, where you speak the language, you know what keeps them up at night. I think you have a lot of credibility right away, which probably makes getting a relationship like that in a good direction, even easier.

Yes. That makes sense. Let's pull it back to the maybe the near term, you guys reported earnings, and we don't have to rehash earnings, but I'm interested, you reported a couple of weeks ago. And I'm interested to know a little bit more and maybe you can help share with the audience what you're seeing from a consumer standpoint, right? We're in a time right now where there's a lot of inflationary pressure on consumers and questions around consumer spending and recession. And you guys are maybe a little bit more concentrated in certain markets. So that might help give some light on what you're seeing in those specific markets and how the consumer's been acting lately?

Well, it's definitely a situation that I keep thinking that there's going to be some historical baseline for some of the decisions we have to make, example, pricing or taking price in this environment. It doesn't seem to be following any traditional trends. It's this balance of data and gut and instinct about what's happening with the consumer. We have not seen price slowdown transactions. That's not where we've seen transactional decline. So in the good news, typically in an environment where you're seeing gas prices increase and all the inflation we're experiencing, grocery prices have not -- they've outpaced our industry. And so at that point, you usually get the benefit of that, but then gas prices bring it back. We're not seeing that across the business. The only place that I would say that we're seeing some slower kind of movement within our business is that, that transition from those who are in the pandemic ordering digitally and then going back to their normal pattern of lunch, you're definitely not seeing as large of a ticket in that daypart compared to other dayparts, but across the board, everything else seems to be that natural trend, except for the ability to price, which we haven't seen an end of that yet. We haven't seen transaction decline as a result of price. If we can staff, we can take share. and we've seen that consistently.

And I think there were some commentary last quarter as you moved through Omicron in the beginning of the quarter and then sort of lapped some stimulus headwinds from a year ago, you're still at a pace -- at a place where the staffing levels are not adequate, let's say, right? And I think you're still leaving some sales sort of on the table, if you will. Can you help frame maybe what that looks like and where you're losing sales because of staffing and how you recapture?

Yes. So for our franchise base, what we would measure is that they're at a place that they're 95% of pre-pandemic levels. On the corporate side of the business, on the markets we've operated for more than 24 months, we're close to 90 -- a little bit over 98% pre-pandemic levels. And we've really seen that movement since Omicron. Really, we've had some tactics that we've put in place that have seen the corporate side really staff up. And immediately, we saw sales improving in our corporate restaurants and transactions get to flat or close to flat. We're not at flat yet, but we're close to flat. Whereas the industry is pacing at about a 5% transaction decline where the burger segment is the QSR segment. So we know that there's opportunity if we staff to take share, and so the tactics of premium pay at late night of culture, of things like same-day pay. All those are tactics that we need to use to access employees, and they have been working.

Great. I'm sure we'll swing back around to some sales-driving tactics. But what I want to switch to now is what I view as sort of the biggest piece of the story here, which is unit growth. Top priority for you as you laid out last year at Investor Day, putting together a plan and a pipeline in place to get that unit growth moving in a positive direction after, let's call it, a decade of very limited growth with the sort of ultimate near term, if you will, goal of getting that 4% by 2025. You provided an update a couple of weeks ago on what that development pipeline looks like from your franchisees. I think you're about 206 restaurants now that you've got still to put in the ground. That pipeline reached 218, but you've opened a couple of those. Can you talk a little bit about maybe what the composition of that pipeline looks like right now and the time line of how you think about getting some of those units from paper to ground?

Yes, as we were building our internal capabilities and discipline for development. we knew the place to focus was existing franchisees. But a lot of the background is building mapping tools across the entire portfolio and understanding where there are opportunities, building the team and the capability, building the real estate relationships in the market for the developers that we would go after and work with in our broker network. So we've built all that over the first 6 to 9 months plus putting the leadership team in place so that we could establish the next step, which was going to our existing franchises and laying out the plans and saying, here are the opportunities in where you can grow in your existing markets. Do you want those? If you don't want those, we'll build them corporately or we'll find another franchisee before we go to new. We're now at the stage of that shift moving. We went through the system, 30% of our existing franchisees have signed up for a development commitment. And there's probably what I would say is when we're at peak next year in '23, we'll probably have a little over 50% that have signed up for commitments. We're still working through that whole existing base of franchisees first. And now our focus is turning to attracting new. And so we're still finishing the existing base. We'll kind of always go back to them and say, you've met your pipeline or you've met your commitment, would you like to do more? But we still have a group of existing franchisees that need to sign up for their commitment and then new, some news in the next stage. And what we've seen is a very rapid increase in our pipeline. We had a very small pipeline of real estate in the funnel to the most sites we've had in the funnel in at least 7 to 10 years. So we're encouraged by the funnel. We have not seen with the margin compression, franchisees are saying, I don't want to do this anymore. More of the opposite. We've seen our big developers saying this is an opportunity to get real estate that others are not going to chase right now. So we see this as a place to put the gas -- the pedal down. We've naturally seen our existing franchisees like any system, say, we're fearful and anxious a little bit about margin compression, but we think this is a period of time, and we'll get through this period of time. And so it hasn't stopped the developers from developing the rest of the system as any system will be right now, as you know, they're concerned, but they also know that Jack in the Box has historically performed over time, and we'll get through this period like we have others.

Well, that's a good segue maybe to the second part of the unit growth conversation, which we touched on a little bit, which is this relationship with franchisees. It's obviously been quite a bit mended over the last couple of years. But I think the secondary piece of that is franchisee health and their ability to maybe withstand some of the margin compression right now. Can you talk a little bit about maybe the franchisee health coming into 2022? The brand saw a lot of strength last year and maybe what the franchisee profitability looks like and how they're entering the year to withstand some of that?

Yes. If you look back, '21 was an all-time record performance from a standpoint of unit economics and EBITDA for the system. So incredibly strong performance. Also, most of our franchisees received some type of PIP loan. So between the 2, they're in a really strong financial position. And you take even that out of it, the average franchisee in our system owns over 20 locations and has more than -- close to $5 million in EBITDA, so -- with very low leverage. So very strong economics within our portfolio. And so the focus of our franchisees is still start -- is focusing to growth, but also how do we get through this margin compression time and work through it together. And so we partnered with them. We brought them into the seat at the table at what I call this margin task force to look for small-, medium- and long-term opportunities. And very quickly, we were able to find some that we can capture in the next 12 to 24 months, beyond just price.

Yes. I'm going to swing back to that in a few minutes, but I want to touch on something that you said earlier. Yes, go ahead.

Yes. So I was going to add to growth. So our plan, and it's consistent where we're seeing it is -- was in the first portion of this pipeline, 1% to 3% growth, ramping to 4% growth by 2025. And we feel very comfortable that that's where the brand is headed based upon what we're seeing from an activity standpoint and what we continue to see from an activity standpoint.

And I guess to that point, before I move on, I think one of the challenges from investors that I get quite a bit is you've been in the seat for 2 years and there's been some conversations about maybe 18 to 24 months was that time frame of getting a development and then starting to see it hit the ground. And I think we've seen some of those opens happen, right? You talked about that pipeline being 218, you've opened 12 of them. But it's been maybe 24 months that you took the helm, right? So not trying to put a time line on it. But I think some of the questions have started to become, at what point do we see that growth flip positive, right? You're still working through some initiatives on cleaning up some of the base. But at what point do we see that inflection where it's a positive number that we're talking about in terms of unit growth, even if it's 50 basis points, and how do we see that trajectory moving forward?

I think if I'm sitting in the audience's shoes on that question, I would basically say, when does that flip? And our belief is in '23 based upon everything we're working on and cleaning out some of the closures that needed to take place. And also getting in front of this pipeline, like I said, as we have more sites now in the pipeline than the brand has had in years. We've approved a substantial number, and we're ahead of our trajectory that we had planned internally on sites in process. So we feel good about that starting to flip next year. But everything like this current supply chain is unprecedented. So I'd hate to make a commitment, except for everything within the strategy that we laid out and the timing is starting to come together. In addition to the other lever we have, which is the corporate pipeline. That's the piece that Jack in the Box didn't add to the component before is building on top of what franchisees are doing in the corporate. So where I get really comfortable is historically, Jack in the Box franchisees have built 16 to 18 units. And it was based upon when I find the perfect piece of real estate every 3 to 5 years, I'll raise my hand and say I'll develop one versus now they have a substantial number of franchisees with commitments they have to meet by a certain deadline. And we're adding on top of that other franchisees and new franchises and then the corporate side is also -- we're going to add to that. So we feel very good about getting to that growth rate. it's more about timing. And so I think '23 -- I would be the first to tell you, and I've said this openly, publicly, is that I think we, as a leadership team, underestimated how thin the pipeline is. And now we've started to rebuild that to a point where I feel comfortable about what's coming in the pipeline. Now it's cleaning up the existing portfolio and then the future pipeline, I feel good about.

Great. No, that makes a lot of sense, and we're eagerly waiting for that as well. Let's move on a little bit maybe to some sales drivers. A lot of initiatives announced in the last week or so when you reported earnings, I think some -- a rebranding initiative to a degree. You hired a new marketing agency. You noted on the call, though, you don't see a need to sort of rebrand the system or the company at all. So I guess in the -- maybe in the simplest terms, can you give us a sense of maybe what you're looking for as an evolution of the brand over the next maybe 6 to 12 months from some of these new initiatives in terms of asset design and brand?

Yes, I think the way we categorize it is, it's an evolution not a revolution. And what I would say is, Jack, as a character is beloved, but modernizing him a bit, making him someone that's part of pop culture. He's relevant enough to do that. He -- any time we use the character of Jack in that way, we get a lot of acknowledgment for it. So we're finding ways to bring him to life even further in that character that represents the brand and attracts consumers to our brand. So we think that's the piece where we can play more aggressively along with evolving the brand look and feel to the consumer. So it's Jack as a character, how we communicate it and then the image of the business. And so we went out and we've done remodels. We've committed capital to remodels into the system. We have a large contingency of our existing franchise base almost in a very short period of time, within about a 90- to 120-day period, 136, is that the right number, Chris?

Yes.

136 franchisees that have already raised their hands saying -- or 136 restaurants that have already raised their hands saying, we want to participate, and we're at the early stages of the reimage program. So we feel really confident that all those things working together in addition to what we're doing and investment on a digital front gives us a good pathway to growth on a -- just a comp basis.

And is there a way to maybe tie that back to how you see comps accelerating or sales opportunities? Because I mean, obviously, great to talk about rebranding and asset updates and all those things that we know, theoretically it should work to drive sales, but how are you thinking about putting pen to paper to that?

Yes. So take those out -- the bigger picture things out of it. I would say there's 4 really key things that we can do quickly to grow comp. We have pricing opportunities, we have our innovation pipeline. We have digital and then we have operational initiatives. And then on the operational initiatives, if we just staff, we've shown that we can take share at late night, as an example, on some other dayparts, but mostly at late night. And so when we staff, we see transactions become flat or close to flat and sales go up. Right now, that 95% pre-pandemic level equates to about 2.5 to 3 points of sales, so that alone. 50% of our dining rooms are open at this point in time. And we've been apprehensive to open because in previous quarters, none of the data would suggest that it's outperformance by opening dining rooms. This is the first quarter we've seen that transition that those that are open, outperform, so we'll very quickly move that and open up dining rooms across the brand. And with that comes sales. And this is the first quarter we saw that. So we'll aggressively move to open up the rest of the dining rooms. And then with that, we see speed enhance. And so we'll be able to have more throughput as we open the dining room as well. So those 3 areas alone, just operationally, we know we can grow sales and then doing the things we're doing on the digital side with e-commerce and online ordering and then just our natural innovation pipeline. We think we have still a lot of room on top line.

Just touching on the digital piece really quick. Right now, really, you can only access e-com with the brand through the app. So back half of the year, we're going to launch web ordering. Simple, most people have it, but for us, it's a big step, opening up a new avenue for a new customer. We just saw this last quarter, we expanded our loyalty program beyond just the app to drive-thru and dine-in customers. And we saw a 25% increase in the active users. So that alone, just opening up more avenues for guests to access loyalty, to access e-com is part of what we're going to be rolling out in the back half of the year. In addition to a whole new experience, look and feel to the point earlier about marketing and look and feel in those things, it's going to be a whole new e-com experience. So pretty exciting stuff.

Yes. That's great. I think last -- on the call a couple of weeks ago, you mentioned a store in the Arizona market. I think that had already gone through some of these remodel initiatives. And were there some sales indicators that you saw in that market? I know it's one store in one market so I don't want to...

Yes it's one only. It's a store in Yuma, Arizona that's -- it was already a great performing store, doing $70,000 a week. We're seeing upwards of anywhere from $100,000 to $130,000 a week. So on average, we're seeing 25% to 30% sales increases in that location. It's early, it's 8 weeks in, so we'll see how that pans out. But our other location that we did to this with the double drive-thru and the full remodel is in San Diego. And we actually scaled down the dining room and open up more drive-thru. We're seeing similar type of results, north of $20,000. And so huge opportunity for Jack in the Box, where we can enhance the image, enhance throughput for our consumers. And the brand hasn't had this type of reimage program available for many years. It was -- we have a tiered reimage. So we have a basic reimage, and that's more of what the brand has done historically, and that was a 7% to 9% increase. This is a broader reimage program with a lot more aspects from an image standpoint to the street and also operational opportunities like double drive-thrus and different things like that, a more efficient kitchen that we can push throughput that also enhances sales. So between the combination of those things, we think the sales upside is pretty tremendous.

And you touched on menu innovation and the innovation pipeline there. So I want to have sort of 2 questions. In the current environment where consumers may be getting a little bit weary about how much they're spending and potential to pull back, how are you leveraging sort of this maybe barbell approach or what you've worked on in the last couple of years in terms of value side plus premium side? I know you've gained some consumers throughout the pandemic. And then you dropped a little bit of a hint last quarter on a game changer that we'll see coming soon. So I'm curious if you can give us any hints on either a product category or a time line of how to think about that?

Yes. We won't provide any more than that at this point.

I think it was worth a shot.

But we had -- we're excited about our calendar and mostly because we have a 2-year calendar. And so that gives us flexibility on how to move promotions around to be most effective in environment with rising costs and inflation. So we're excited about that because it's tested. And in that test, we have some breakthrough innovation as you mentioned, that we'll hold off on sharing, but we think that adds another layer of sales. So we're excited about the future to come. Innovation for us is key to the brand and innovating around both our core and our add-ons. That's been a strategy that's continued to work. Any time we can promote something that's premium, that has upsell or add-on opportunities, that's where we've seen Jack in the Box really work well. So Tiny Tacos is an example. We've had -- Tiny Tacos was a huge add-on. And then you had Spicy Tiny Tacos, Nacho Tiny Tacos. Those were tremendous performers, and we'll continue to find those add-on items like that, that can really help boost check.

Cool. I've got some questions on margins. You hit on them already a little bit in terms of the margin task force and working towards some better profitability there. I think you touched on a couple of sales drivers. So I'm going to put the margin questions aside, just in an effort to keep on time, I want to make sure we hit on Del Taco. So I want to shift a little bit there. The timing of the acquisition, I think, caught some people off guard maybe a little bit announcing that in December when it seemed like you guys were just getting to the point where you had some, I think, maybe clarity in the business and the core business that you were communicating to investors. So I guess maybe talk about what excited you about the brand. You've talked a lot about being a sort of another challenger brand that you can bring into the portfolio. So what excited you about it? And why do you think now is the right time to do the acquisition?

Yes. So I'll back up all the way to our strategies. We looked at our strategy. It was based on what we call a staircase to value. The starting point was people and culture, really around the franchisee side of it. We think Jack in the Box had a strong culture, where we're bringing a leadership team. So bringing that fully into focus on how do people help us drive the business. And then it was innovation. Jack has historically been known around innovation around the product front. But if you really back up to what's inherent in the Jack in the Box system and something franchisees were focused on is innovation around beyond just products. So first drive-thru was Jack in the Box. We have a lot of systems that we've operated the same way for many, many years when there's better process equipment and technology that we could apply to execute and get throughput. So innovation was number 2. So we got that piece of the business up and running. Third was technology and how do we use data to be and digital. So digital we stood up. We're now in the process of finalizing our tech road map and also data and how we use data through getting our first domain, which is the focus around getting consumer data through digital because we know that's an efficient way to market in the future and grow top line. The fourth piece was expand Jack's reach, and you hear the progress we've made against that kind of component of our staircase. And then the fifth was how do we scale. And scale was we're making investments in technology, we're making investments in MarTech. Others are doing the same. We have a shared service model. We can have shared knowledge, what are other people doing that we could apply and vice versa. The timing of that is never perfect. And so that was always part of our strategic plan that we had not spent a lot of time communicating outwardly, but as a brand and as our corporate system and with our Board of Directors, we are always talking about it as part of our strategy. Del Taco happened to fit exactly what we were looking for, a similar geographic footprint, a very similar business model with drive-thru, QSR. Some of the same places they were making investments that we felt we could get synergies around. And then the footprint was very important because a lot of the Jack franchisees are limited in how many stores they could buy. But the #1 requested brand that they wanted to build outside of the Jack system, and many of our franchisees owned other brands was a taco brand. We limited that because of our taco, even though we have many Jacks with the Del Taco next door. So with a well-held franchise base that is still going to build Jack in the Box and already building other brands, we'd say, let's keep it within the portfolio. And they can fill in Jack in the Box in L.A., where they have operational capability and now build Del Taco or buy Del Taco. So that was one of the key reasons we had existing franchisees that with capital who wanted to grow that brand and grow our brand. We had a very like-minded culture. And then we also had a lot of stores that they currently operate, 50%, that we could refranchise. And we know that's a historical element of what Jack in the Box did well is refranchised their business to franchisees. So we're executing on all those strategies in addition to seeing that there are synergy opportunities.

Great. Well, we're -- for better or worse, up on time here. I know we didn't get to hit on everything. But as always, I appreciate the time. Thank you, Darin and Chris, I appreciate the time.

Absolutely.

Thanks Jared.

Thank you.

I hope everyone enjoyed.