Jack in the Box Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 12 speakers on the call.

Operator

Thank you for standing by, and welcome to the JAK First Quarter 2024 Earnings Webcast Call. I would now like to welcome Chris Brandon, Vice President of Investor Relations to begin the call. Chris, over to you.

Speaker 1

Thanks, operator, and good afternoon, everyone. We appreciate you joining today's conference call, highlighting results from our Q1 of 2024. With me today are Chief Executive Officer, Darren Harris and our Chief Financial Officer, Brian Scott. Following their prepared remarks, we will be happy to take questions from our covering sell side analysts. Note that during both our discussion and Q and A, we may refer to non GAAP items.

Speaker 1

Please refer to the non GAAP reconciliations provided in the earnings release, which is available on our Investor Relations website at jackinthebox.com. We will also be making forward looking statements based on current information and judgments that reflect management's outlook for the future. However, actual results may differ materially from these expectations because of business risks. We therefore consider the Safe Harbor statement in the earnings release and the cautionary statements in our most recent 10 ks to be part of our discussion. Material risk factors as well as information relating to company operations are detailed in our most recent 10 ks, 10 Q and other public documents filed with the SEC and are available on our Investor Relations website.

Speaker 1

And with that, I'd like to turn the call over to our Chief Executive Officer, Darren Harris.

Speaker 2

Thank you, Chris. Last month, we hosted our 1st in person Investor Day in several years here at our restaurant support center in San Diego. And we appreciate everyone who was able to join us in person or tune in. During the Investor Day, we introduced how we intend to take the next step in our strategy and break out of the box. We communicated our bold ambition, starting with expanding our reach to achieve 2.5% net new restaurant growth based upon the tremendous white space we have in new and existing markets.

Speaker 2

We want to increase AUVs at our 2 challenger brands by exceeding $2,500,000 in sales at Jack and $2,000,000 for Del Taco. Our AUV goals will be supported by achieving 20% digital sales. And lastly, if we can generate 15% 4 wall franchise EBITDA with a sub 5 year new restaurant payback, our top tier restaurant economics will further support our growth strategy. We have entered the next phase of our transformation and to achieve our ambition, there are 3 key drivers that will be the focus of our strategy: driving top tier AUVs, improving restaurant level economics and strengthened development capabilities. I'd like to mention a few highlights from the Q1 that support achieving our ambition.

Speaker 2

Our AUV performance for both brands is driven by steady same store sales for Jack in the Box and Del Taco. We generated system wide sales of over $1,300,000,000 for Jack and nearly $300,000,000 for Del Taco. Our comps at Jack in the Box overcame some meaningful pressure during the last 4 weeks of the quarter as a result of weather during January. With that said, sales accelerated sequentially on a 2, 3 and 4 year stack basis, helped by the performance of our burgers, including our ultimate cheeseburger platform with support from our 3 week soft launch of Smash Jack. Our sides, including our Jack Wraps and Famous Tacos.

Speaker 2

And lastly, our Munchie Meal platform, particularly at late night. Del Taco sales performance was bolstered by our Birria promotion, a new product we introduced during the quarter. Both brands continued to accelerate digital sales, having now achieved 12% of total revenue with year over year growth in all channels and particularly strong growth in 1st party web and app ordering. Breakfast continues to be an opportunity we are addressing, starting with bringing back some deleted items that while good for margins and speed were too strong of a headwind to sales. I'm confident we can improve our breakfast share helped by 3 tactics.

Speaker 2

1st, making breakfast a regular recurring part of the marketing calendar, innovating around new breakfast items while continuing to roll out fan favorite LTOs such as French Toast Sticks or Mini Cinnies and testing new breakfast offers especially through digital channels to target and reengage the valued guest. Now switching to restaurant level economics. Jack restaurant level margin continued to accelerate and serve as a highlight for our business. Coming off a year of 4.5% improvement in 2023, our 23.1% margin in Q1 is a 3.3% increase year over year and demonstrates that our margin initiatives are working. We will continue our focus on these financial fundamental initiatives to strengthen restaurant level EBITDA and gain further franchisee adoption.

Speaker 2

At Del Taco, our new leadership team of Tom Rose and Sarah McAloon are very focused on both sales and restaurant profitability initiatives, some of which can be realized as soon as this year. We will continue to provide updates on the execution and results as we progress throughout the year. And lastly, our strength in development capabilities enabled a solid start to 2024, highlighted by 7 restaurant openings and one closure in Q1 at Jack in the Box. We expanded further into Salt Lake City now at 4 restaurants and Louisville now at 2 restaurants and both markets continue to perform very well. We announced 2 new franchise agreements.

Speaker 2

The first one will add an additional 10 restaurants to our Florida expansion and the second is another new franchisee that will bring Jack to Michigan by signing on to build 5 restaurants. Our new restaurant pipeline continues to grow as we now have 91 signed development agreements for 399 future restaurants. We currently have 81 restaurants that are in the construction or permitting phases. I'm also pleased to report we will open our 1st Jack in the Box restaurant in Mexico next week. Our latest new market and one that we are very excited about given high demand for the brand.

Speaker 2

At Dell, we had flat net unit growth including 3 restaurant openings in the Q1. We currently have 155 development agreements at quarter end and 49 sites that are in the construction or permitting phases. Quarter 2 will see the system wide launch of Smash Jack, our most exciting burger innovation in nearly a decade. And I may be biased, but it is the best burger I have tasted in QSR. And guests who got their hands on 1 during the soft launch agreed, as we sold over 70,000 on our very first day with no media support.

Speaker 2

The full launch, including a bold television campaign featuring RealJack Guess, begins this quarter and we're excited about the potential for this product and building on the positive response we've already received. I'd like to briefly touch on value, a key topic within the industry at the moment. We continue to work with our franchisees and utilize guest insights on the best approach to make value a competitive advantage for both brands. We are seeing solid results from our variety of value offers such as our $3 JackWrap, $5 JackWrap, our $10 Fan Box and our $12 Munchie Mills. In today's competitive environment, we are looking to provide even more everyday value.

Speaker 2

So look for an improved Jack's deal menu providing a variety of value for the budget conscious guest. In the meantime, we will continue to utilize our digital channel to provide targeted offers to our most loyal guests and app users. And we continue to attract new users via aggressive offers such as our famous 2 Tacos for $0.99 At Del Taco, our brand insights have demonstrated that we win on value versus the competition and have an opportunity to go beyond just low price points and offer more food for the money. We will utilize the hook and build strategy and lead with value while growing average check-in a healthy way via upsell. I'm also excited about our learnings thus far from our current menu redesign initiative at Dell.

Speaker 2

And once fully rolled out, we expect this to drive both sales and margin improvement. To close, I'd like to thank our franchisees and team members for helping us get off to a good start in 2024 and for their continued passion toward providing remarkable guest experiences. I will now turn the call over to Brian.

Speaker 3

Thanks, Darren, and good afternoon, everyone. I will start by reviewing our 2 brands individually, followed by details on our consolidated performance and capital allocation. Beginning with Jack in the Box, our first quarter system same store sales growth was 0.8%, consisting of company owned comps of 2% and franchise comps of 0.7%. Our overall average check increased from the prior year driven by price. And while transactions were down, we are seeing continued success from our hook and build platforms and certainly saw a nice lift in sales and transactions during the Smash Jack soft launch period.

Speaker 3

Additionally, we have continued our positive trends related to operations and speed, posting the 6th consecutive quarter of increasing speed of service with a 6 second sequential improvement. Regarding product categories, notable contributors came from burgers and sides. The late night daypart once again stood out and was the strongest contributor to overall sales. Turning to restaurant count, there were 7 restaurant openings and one closure in the quarter. This resulted in a quarter end restaurant count of 2,192 and we remain on track to achieve our net unit growth objectives for the full fiscal year.

Speaker 3

Jack restaurant level margin expanded year over year by 3 30 basis points to 23.1 percent, driven primarily by commodity deflation, strong sales leverage and operational improvements. Food and Packaging costs as a percentage of company on sales declined 310 basis points to 29.7%, primarily due to lower commodity costs. Commodity deflation was 2.9% for the quarter. Labor as a percentage of company owned sales fell 50 basis points to 30.8% due to sales leverage partially offset by higher wages and insurance costs. Labor inflation was 2.8% in the quarter in line with our expectations.

Speaker 3

Occupancy and other operating costs increased 20 basis points to 16.4 percent of company restaurant sales. Franchise level margin was $97,500,000 or 41.2 percent of franchise revenues compared to $106,800,000 or 44.4 percent a year ago. The decrease was expected and driven mainly by lapping the $7,300,000 fee paid by a franchisee related to their sale of the Hawaii market, along with a prior year $1,500,000 bad debt reversal. Turning now to Del Taco. System same store sales rose 2.2% consisting of company owned comps of 1.8% and franchise comps of 2.4%.

Speaker 3

Average check was up year over year, partially offset by lower transactions. Del Taco restaurant count at quarter end was unchanged at 592 with 3 openings and 3 closures. Del Taco restaurant level margin was 15.6% compared to 16.1% in the prior year. The decrease is due to wage and utility inflation as well as a change in the mix of restaurants, partially offset by higher sales performance and commodity deflation. Food and Packaging as a percentage of sales decreased 120 basis points to 27%, which is primarily due to menu price increases and commodity deflation of 0.5%.

Speaker 3

Labor as a percentage of sales increased 100 basis points to 35.2 percent, primarily due to wage inflation, which was approximately 3.2% in the quarter. Occupancy and other operating expenses increased 70 basis points to 22.2%, driven primarily by higher utility costs as well as the change in the mix of restaurants. Franchise level margin was $8,000,000 or 29.3 percent of franchise revenues compared to $6,400,000 or 39.6 percent last year. The decrease in percentage was driven by higher franchise support costs and the impact of refranchising transactions with pass through rent and advertising, partially offset by franchise same store sales growth. While there were no refranchising transactions in Q1, we have signed an agreement to sell 13 Del Taco Restaurants later this month.

Speaker 3

We also signed a letter of intent this week to refranchise an additional 25 restaurants. Both of these transactions include development agreements. We remain on track for 40 to 60 refranchised restaurants this year and achieving our goal of having Dell 90% franchised by the end of 2025. Shifting now to our consolidated results. Consolidated SG and A for the Q1 was $46,400,000 or 9.5 percent of revenues as compared to $50,100,000 or 9.5 percent a year ago.

Speaker 3

The decline was due in large part to $5,900,000 lower legal expenses from a prior year litigation settlement. G and A expenses, excluding Net Cola gains and selling and advertising, were 2.5 percent of total system wide sales. Consolidated adjusted EBITDA was $101,800,000 down from $108,600,000 in the prior year due primarily to the previously noted prior year Hawaii franchise transaction gain and impacts from the Del Taco refranchising. Consolidated GAAP diluted earnings per share was $1.93 compared to $2.54 in the prior year. Operating earnings per share, which includes certain adjustments, was $1.95 for the quarter versus $2.01 in the prior year.

Speaker 3

The effective tax rate for the Q1 was 26.9% compared to 26.7% for the same quarter a year ago. The operating EPS tax rate for the Q1 of 2024 was 27.2%. Cash flows from operations reflect a use of cash of $22,700,000 an $85,100,000 decrease from the prior year. There were 2 primary causes of this change. First, we had $50,000,000 of income tax payments related to 2023 that we deferred into Q1 in connection with the weather disaster relief program.

Speaker 3

And second, we incurred a $25,000,000 final payment on the Torres legal settlement. Overall cash flow in the quarter was consistent with our expectations. During the Q1, we repurchased approximately 300,000 shares for 25,000,000 dollars as part of our ongoing share repurchase program. We currently have $225,000,000 remaining under our Board authorized program. On February 16, 2024, the Board of Directors declared a cash dividend of $0.44 per share to be paid on March 27, 2024.

Speaker 3

As of quarter end, we had available borrowing capacity of $172,000,000 under our variable funding notes and credit facility. Our total debt outstanding at quarter end was $1,700,000,000 and our net debt to adjusted EBITDA leverage ratio was 5 times. Related to guidance, we are not providing any updates to our outlook and expectations from what was provided during the earnings call last November. With that, we did provide some updated 2027 targets at our recent Investor Day, which included the following: annual same store sales growth of 2% to 3%, ramping Jack restaurant level margin to 23% to 25% and Del Taco to 18% to 20%, improving operating leverage to drive G and A as percentage of system wide sales down to 2.2% to 2.3%, reaching 20% digital sales and achieving 2% to 2.5% company wide net unit growth. In closing, I would also like to thank every member of our Jack and Del Taco teams as well as our outstanding franchise partners for what they do every day on behalf of our brands.

Speaker 3

Their efforts are the key to Jack's ability to deliver sustained growth and shareholder value. And with that, we'd be happy to take some questions. Operator, please feel free to open up the line for Q and A. The

Operator

floor is now open for your questions. Our first question comes from the line of Brian Bittner with Oppenheimer and Company. Please go ahead.

Speaker 4

Thank you. Hey, good afternoon, guys. Just as it relates to Jack in the Box, your full year guidance for same store sales for Jack in the Box is low to mid single digits, which you kept intact. You did a 0.8% in the Q1. So I'm just curious how do you anticipate your sales trends at Jack in the Box to unfold following this quarter into the rest of the year?

Speaker 4

I know that weather impacted you guys in the Q1 and I also realize you're very excited about the Smash Jack Burger that's coming in March and posting in some value with that. So is that kind of what's underpinning your confidence on the Jack in the Box comps moving forward, just the weather impact and then the new catalyst coming or anything you could unpack there would be helpful? Thanks.

Speaker 2

So I'll turn it to Brian. Well, first of all, good to talk to you, Brian. But I'll turn it to Brian Scott in a second. But I think the first comment I would say is we're really excited about Smash Shack and what it can do for the year. We knew this going into the year that we had tough comps that we were lapping over in Q1 and Q2 and that we had a good marketing plan for the back half of the year with Smash Shack and some of the other things we have coming.

Speaker 2

So we took that into account as we built our plan and we provided guidance. And as you mentioned, I think the industry as a whole has seen some softness at the start of the year. We've experienced the weather, as you mentioned, that probably impacted us somewhere between 0.5. In sales for the quarter. But we do know that going into the year, we had a strong back end plan with our marketing calendar.

Speaker 2

Brian, what would you add?

Speaker 3

Yes. Thanks. And a good summary, Brian, that you made with the question. As Darren said, we had some pressure in January the weather. But we look at our plan for this year, we knew that the comps in the first half of the year were going to be tougher.

Speaker 3

So and as Darren said, the back half of the year, we would expect to be stronger, not only because of Smash, but just our overall marketing calendar and the comps will get easier as we get to the back half of the year. In addition to that, we still will have some price that will come as we get closer to implementing AB1228. So I mean ultimately, it's a little early in the year for us to really try to predict what the full year is going to look like. So we've kind of kept everything as is and we still see a path towards achieving a number within that range. But there's more to unfold here over the next several months.

Speaker 3

I'll just add as you as we came out of the Q1 here, February has still been down a little more than we expected. It sounds like it's more of an industry thing that we're hearing from others as well. So we're still trending a little bit slightly below in the negative year over year right now. But as again, we have Smash rolling out here soon and some of the other actions we're taking to attract value guests, we feel good that we're going to be able to move that in a positive direction here in the ensuing weeks.

Speaker 2

The only thing I would add to what Brian said is, as he mentioned, we're seeing similar trends industry wide and at Dell we're seeing flat comps at this point.

Speaker 4

Okay. And just real quick on the new markets, Louisville, Salt Lake, are you guys sustaining the outperformance you initially saw entering those new markets? Are you still seeing super high volumes? And what are your expectations for Mexico? I can't believe you're opening in Mexico next week.

Speaker 4

Can you just talk to us about what your expectations are there? Thanks.

Speaker 2

Well, I'm going to start with Mexico. Mexico is very exciting. We'll have 2 openings in 2024. We know some of our highest performing restaurants in the country until we had Salt Lake City. We're along the border states.

Speaker 2

So we anticipate big volume out of Mexico and we really are excited about the partnership we have with the operator there. As far as our new markets in Salt Lake City and Louisville, we couldn't be happier. We're seeing volume sustain, new stores are opening up very strong. I think our restaurants at this point in time, I think the we're our lowest performing unit somewhere in the $70,000 range per week and the highest is still in the $140,000 $150,000 a week. So very good volumes.

Speaker 2

We're getting a lot of great reception on the design that we put in those markets, the Crave design. And so I couldn't be as excited as I am right now about what we're doing with new stores.

Speaker 5

Thanks, guys.

Operator

Our next question comes from the line of Gregory Francfort with Guggenheim. Please go ahead.

Speaker 6

Hey, guys. Thanks for the question. I'm just curious on your pricing, I mean, I know you're planning on pricing 6% to 8% this year for the company. I think over the last 4 years, you've taken 4%, 5%, 6% less pricing than a lot of your large QSR competitors. Are you seeing that show up in value scores or anything else in the business where you might see a leading indicator that might be improving traffic going forward?

Speaker 2

Greg, I think that where I would go with this question is more around we're seeing on the franchise side of it pricing more in line with the competition. The company needs to catch up from a pricing standpoint. We do see some room there. We also see some room where our franchisees in California have not taken as much price compared to the competition. So we do think with what's happening with AB1228 coming up that we do have some room to take anywhere from 2% to 3% additional price heading into April.

Speaker 6

Got it. Thanks. And then just maybe any thoughts on the consumer, anything you're seeing in the business in terms of trade down or utilization of beverages or attach that might give you a read on flow through from pricing the comps or any changes on that front? Thanks.

Speaker 2

I think we're seeing the same thing that most of our competition is that as you the consumer that's 75,000 and under, particularly the 45,000 and under, you're definitely seeing some challenges with attach rates. And so our focus is how do we make sure that we have the right breakfast offerings, the right offerings and deals through digital channels, that we have the right value menu. So our focus is about making sure we understand our consumers by all segments and dayparts. And so from a value standpoint, as I mentioned on my remarks, we have multiple options, whether it's our $3 wrap, our Jack Pack, dollars 10 fan faves, our $12 Munchie Meals. And then beyond that different channel offers like the 2 tacos for $0.99 and getting even more aggressive through that channel to build loyalty members.

Speaker 2

And the last point is we've tested a value menu that we feel really good about that we will roll out throughout this year. And it had a revised Jack deals menu that we think can have some strong performance. So feel good there. And then Dell on its own with the things we're doing at Dell, we feel really good about what's happening with our menu redesign. We've seen both sales and margin improvement in our early test.

Speaker 2

We still have some more time with those tests to solidify it. And then as we've done at Jack, we'll implement our hook and build strategy because we already know we get credit for value at Dell. Now it's how do we bring people in and then build them into a more attach rate.

Speaker 6

Thanks, Darren.

Operator

Our next question comes from the line of Sara Senatore with Bank of America. Please go ahead.

Speaker 7

Okay. Thank you. I just follow-up on some of your comments about the consumer and what you're doing to reengage the value guests. I guess on Jack in Box, could you talk about the dayparts like the breakfast daypart, is there softness there and that's why you have to sort of reinvest a little bit more, it's just more competitive? And then you mentioned that burgers I think were strength in the quarter.

Speaker 7

So do you have sharper price points there or was the industry stronger? I'm trying to tease out how much you think is kind of industry and where the consumer is versus what you think you can, like is it within your control?

Speaker 2

Yes. I think a lot of what we're seeing with breakfast is consumer. And we've got to make sure that we have a very competitive plan. We also know that when we market to the consumer for breakfast that we see it benefit our business. So we'll make sure that's a part of our marketing calendar.

Speaker 2

We also know that we will bring back some items that we took off the menu that we thought were beneficial to margin and speed, but we found it was too much of a headwind to sales. So we'll bring back some of the items, not all. And so again, with breakfast, I think it's one of the more competitive areas right now that we have to make sure we're competing heavily in and having the right offerings. So I think that's one that we have to lean into and be more aggressive. With LTOs like we've just introduced a new French toast stick with a cinnamon churro flavor and then our mini cinnies that performed well.

Speaker 2

And then as it relates to burgers, I think for the quarter, it was more about a difference in what we promoted last year was more of chicken focus versus burger focus. So that's more of why we had stronger performance out of our burgers this quarter versus last year at this time. And then also Smash Shack, which we've talked about, it more than outperformed our expectations. And so we're excited about the launch of Smash Shack in March.

Speaker 7

Thank you.

Operator

Our next question comes from the line of Alton Stump with Loop Capital. Please go ahead.

Speaker 5

Great. Thank you. Good afternoon. I just want to ask Darren, as you think about the LightNet business specifically, this doesn't horse chatter from some of your peers that they are trying to get into late night, but clearly, that's not a day part that anybody can establish overnight, sorry for the pun. But are you seeing any competition?

Speaker 5

You guys clearly have outpaced obviously other dayparts here for quite some time in your Light Nut business. And just overall, are you seeing any signs of that slowing down at all? Or are you continuing to gain share, do you think, particularly in that daypart?

Speaker 2

We're very aware of what the competition is doing and we want to make sure that we continue to own late night, which we've done for years. And so we're seeing hours of operation benefiting still some of our regions. We're seeing transactions positive year over year for the 6th straight quarter at late night. And our munchie meals were a very solid contributor to Q1. And so I think we have the right offerings at the right time.

Speaker 2

And so we know that the competition wants to challenge us and so we'll be ready for it through innovation and other marketing opportunities that we see available at late night.

Speaker 5

Got it. Great. Thanks so much. I'll hop back in the queue.

Operator

Our next question comes from the line of Dennis Geiger with UBS. Please go ahead.

Speaker 8

Great. Thanks guys. I just wanted to ask a little bit more on the Smash Jack. Clearly a great product, I think for those of us fortunate enough to have tried it thus far You saw great results there in the soft launch. I guess the question is specific to it being sort of on the premium end of the barbell strategy there.

Speaker 8

As you think about this environment where a portion of the industry consumer is acting a bit more cautiously, How do you think about that dynamic? Is this just that much of a hero new item based on what you've seen in soft launch that this is going to be that strong for however long. Do you do anything different around marketing the products knowing maybe a portion of that customer base is a bit softer? Any kind of comments on Smash Jack and then relative to the environment to add? Thank you.

Speaker 2

Yes. Any day of the week, I'll take the best tasting product out there over the competition. And so I think from a differentiation standpoint, Smash Jack is that differentiated and that much tastier than a lot of what's out there in the marketplace. So we feel really good about what Smash Jack can do to our business. So I think it does have the ability to overcome some of the challenges that we see with the consumer just because of the product is so good.

Speaker 2

And that's what we saw in test. It's what we saw in our soft launch. And we believe that it can help us throughout the year really outperform what we anticipate with some of the headwinds that we're facing right now. So Smash Jack is by far something that we are leaning into and very excited about And we can't wait to roll in our marketing campaign where we really tell an authentic story about what Jack has done differently with the burger to make it the best in QSR.

Speaker 8

Appreciate it. Thanks, Karen.

Operator

Our next question comes from the line of Alex Slagle with Jefferies. Please go ahead.

Speaker 9

Thanks guys. Do you think there'll be additional opportunities like the 9 units you took over in Detroit, where you sort of end up with the small portfolio evolving markets again, that you fix up and refranchise? Didn't seem like you're heading that way or that was on the radar at this point, but curious if you think there's more opportunity there?

Speaker 2

I'll let Brian handle this question.

Speaker 3

Yes. I mean, this was, I think, a very unique situation. As you know, we're on a path towards refranchising Del Tacos. And as we mentioned in prepared remarks, we actually just signed a deal and have another one in the works here. This particular case, it's a good market.

Speaker 3

We happen to have a franchise operator that wanted to disengage from the franchise. And so we took it back now. We're already seeing improving trends as we've invested more in operations and extending hours and are absolutely intend to at some point refranchise that market. So we don't really look at this as a new trend that we're going to start to take back more restaurants. But in a case like this, we absolutely think it's a good market to be in.

Speaker 3

We can grow and the next operator that we'll partner with there, we think we'll grow that market as well.

Speaker 2

Yes. To add what Brian is that, before Brian joined us, we had a term called evolving markets that we use related to Jack where we're bringing them in, operating them corporately for a period of time and preparing them for refranchising. And that's exactly what we'll do at Detroit as Brian has mentioned.

Speaker 9

Okay, thanks. And just to clarify on the softer comps in February's weather piece of that, I know being here in California, it's been pretty wet January, February.

Speaker 10

Yes. We do think it's been

Speaker 3

a part of the story with the storms that have continued to persist here and different weather patterns in some other markets as well. So I think it's a combination of that as well as just some of the consumer behavior and we have to align our marketing to that. And so we're on the track to do that right now and that in conjunction with the launch of Smash next month, we feel like we're we've got a good strategy in place to turn that around here.

Speaker 9

Great. Thanks.

Operator

Our next question comes from the line of Drew North with Baird. Please go ahead.

Speaker 10

Great. Thanks for taking the question. I was hoping you could provide an update on some of the various cost savings initiatives you have in place and perhaps your level of confidence in reaching that 15% unit level EBITDA target at Jack in the Box. It seems like commodities are providing a bit of a tailwind on the food cost line so far this year. I guess, do you see that continuing in the near term?

Speaker 10

And maybe more broadly, where are the key risks that you see related to your ability to achieve that 15% target over the next several years?

Speaker 2

Yes. So I think, as we mentioned in our targets, prior to inflation, we were getting close to 13% to 13.5% at Jack in the Box. We've been able to improve some of the inflationary impacts that we had in 2022 through these initiatives that we've had called financial fundamentals where we were looking for 200 to 300 basis points of improvement. So we've rolled out some of those initiatives. They've taken hold.

Speaker 2

We're also getting some benefit from commodities and some deflation right now. So 2 of those things are working in our favor. But we feel it's an achievable target. We haven't put the specific timeframe on it. But we know already if you look at some of the improvement we've had just on the JAK corporate side, the RLM running at 23.1 percent would point to some of these initiatives are taking hold and actually showing results on the scoreboard and we want continue to do that.

Speaker 2

So we will it is a core part of our focus as I mentioned in my earlier comments, drive top AUVs, help improve that with innovation and digital, make sure our economic model is always being challenged and looked at on how do we improve it. And I think we've done that in light of our pricing strategy, our supply chain strategy and also our operational strategy. And those things will ultimately help us lead to new restaurant growth.

Speaker 3

Yes. I'd add as well as you look at some of the newer markets we're in, you see the strong AUV. So that's another component of how we're going to get to that higher margin. And so that as we continue that down that path, that's going to help. And our Crave strategy and the new restaurant designs, we think is an important factor in that.

Speaker 3

So I think that will as you look ahead towards opening more restaurants with that design and our menu innovation and the higher EVs that comes from that, that's going to also be additive. And then the last thing I'd add is as we talked about at Investor Day, we're investing more in technology. Putting in a new point of sale system at Jack is really very foundational to a lot of the opportunity we see to drive more automation and efficiency within the restaurant 4 walls. And so that as we roll that out in the next couple of years, there's more we know we can do in the stores to be drive efficiency, whether it's on food product or staffing that will help us achieve that 15% as well.

Speaker 10

Thank you for all the color.

Speaker 8

Sure.

Operator

Our final question comes from the line of Eric Gonzalez with KeyBanc Capital Markets. Please go ahead.

Speaker 11

Hey, thanks for letting me in the queue here. My question is on the labor environment in California. With fast food wages going up to $20 in the next few months, have you seen other industries start to advertise a similar wage? And I think when this is first contemplated, I think you talked about being proactive with regards to advertising the higher wage at Jack versus other industries. So I'm wondering if that

Speaker 10

gap is closed at all

Speaker 11

and whether you're seeing an influx of demand for these positions or whether we're a bit early on this?

Speaker 2

So I think we're still a bit early. We haven't seen a dramatic influx of the competition starting to take up wages. We know that's about ready to kick off as we want to go out to the market and tell and advertise what we're offering from a wage rate standpoint. So we think we're at the early stage of that occurring. We have heard of some movements within the healthcare sector, specifically a food service and healthcare that are increasing their minimum wage even beyond $20 So we do know it's starting to be talked about in the marketplace, but still early stages.

Speaker 11

Okay. And if I could squeeze one more in. On the refranchising, I think you said you were going to sell 13 later this month and have an agreement to sell 25 more, which puts you pretty close to the low end of that 40 to 60 target. So I'm wondering maybe if there's a little bit of upside given that we're only in the Q2 here and you're kind of approaching that the bottom end of the range?

Speaker 3

Yes. That's why I mentioned that range that we feel confident about. So as we said before, we have plenty of interest. So again, we're being very kind of strategic in how we approach these markets and who we partner with, both as good operators as well as being good development partners. So but there's certainly opportunity for us to end up in that range.

Speaker 3

And if we wanted to exceed it, we likely could, but we're going to do it in a disciplined way.

Speaker 6

Got it.

Speaker 11

Thank you very much.

Speaker 3

Thanks, Eric.

Operator

This concludes today's call. You may

Speaker 4

now disconnect.

Powered by Quartr

Key Takeaways

  • During Investor Day the company set a bold 2027 ambition to drive 2.5% net new restaurant growth, achieve $2.5M AUV at Jack in the Box and $2M at Del Taco, reach 20% digital sales, and hit 15% 4-wall franchise EBITDA with a sub-5-year payback.
  • In Q1 system-wide sales topped $1.3B at Jack in the Box and nearly $300M at Del Taco, with same-store comps overcoming weather headwinds and digital sales rising to 12% of revenue amid strong demand for burgers, sides, Birria and late-night Munchie Meals.
  • Jack in the Box restaurant-level margin expanded 330 basis points year-over-year to 23.1% thanks to commodity deflation, price and operational improvements; Del Taco is pursuing similar margin initiatives despite wage and utility inflation.
  • The development pipeline remains robust with 7 net Jack openings in Q1, 91 signed agreements for 399 future Jack units (including launches in Salt Lake City, Louisville and Mexico), and 155 Del Taco deals for 49 restaurants under construction or permitting.
  • Q2 features the full system rollout of the Smash Jack burger—initially selling 70,000 units on day one of its soft launch—alongside an enhanced value menu and digital-only offers like the $3 JackWrap and $0.99 tacos to boost traffic and loyalty.
A.I. generated. May contain errors.
Earnings Conference Call
Jack in the Box Q1 2024
00:00 / 00:00