Most of management’s commentary was a repeat of what we heard on the company’s fiscal 1Q10 earnings call about three weeks ago. Management did say that it is still comfortable with its 2Q10 same-store sales guidance of -8% to -10% at Jack in the Box. In response to a question about the competitive landscape, CEO Linda Lang stated that she thinks the industry will see some immediate relief on the discounting front when BKC removes the dollar double cheeseburger from its menu in mid-April.
Similar to the company’s earnings call, management spent at least the first five minutes of the presentation (and more time later) outlining all of the macro issues that are facing the company rather than talking about any company-specific issues.
Notes from the presentation:
One of the key aspects is unemployment
- Especially at breakfast
- Food prices dropping at grocers
- 2009 was weakest year commercial food service industry has experienced in 30 years
- Discounting has increased sharply
Cost structure being improved
- G&A initiatives
Regional concentration is exacerbating effects of unemployment on JACK
- Texas, California both terrible markets
Demographics also unfavorable
- Young males, Hispanics are struggling
Customer base skews 1/3 more Hispanic than competitors
Sales:
- Texas has caused slowing of sales from Q4 to Q1
- California has stabilized (rate of decline has stabilized)
- Guidance unchanged
Discounting among big players
- Bar and Grill has begun to encroach on price point for premium QSR products and may be creating a trade up effect
- Prices for food at home are experiencing deflation
Advertising
- Adjusted marketing plans to better respond to market conditions
- Reallocation of media spend to reach multiple consumer markets…hmmm
- New products and platforms
Qdoba
- Rolling out new menu, “Craft two”
- Mix and match menu and compelling price point
- Also more for kids
- Trends improved through quarter although down for the quarter as a whole
Refranchising strategy
- Number of restaurants being refranchised was 194 in 2009
- Franchise ownership is at 46%, going to 70-80% for FYE 2013
- Expecting to pass 50% mark in 2010
- Proceeds were 116.5m and gains were 78.6m in 2009
- Q1 gains so far were 408k per restaurant
Geography
- 42% of system units in California
- 28% of system units in Texas
- 26% of company units in California
- 30% of company units in Texas
Capital expenditures
- Refranchising strategy and completion of reimaging should bring capex down to 110m per year from 2013 onwards
G&A excl advertising
- G&A as % of system sales has been decreasing
- 2006 to 2009 decline was 120 bps
- In 2014, fully franchised, should be at 3.5% (5.2% in 2009).
- Most of peer group are in 3-4% range
Share repurchases
- 750m returned to shareholders over last 5 years
- 40m in Q12010
Debt repayment schedule is expected to be light
Conclusion
- Movement from company owned to franchise model
- Continued expansion for Jack in the Box beyond 18 states
- Growth of high ROI Qdoba
- Growing FCF
Q&A:
Q: Are you seeing any change in consumer spending/behavior?
A: We are seeing a lot of stabilization in California. Believe our sales have hit a bottom in California. Rate of decline has stabilized…ambiguous…higher end retailers are seeing improvement, hopefully that trickles down. Our consumer base will be the last to go back to jobs and come back
Q: Market share in CA?
A: We don’t believe that we have lost share but it has been a shrinking pie.
Q: Macro environment implies that JACK’s customer is typical for QSR, over-indexed to Hispanics perhaps, but brand has been positioned up. Is premium positioning working against you in the near term?
A: Promotional offerings are there. We’ve had to run concurrent premium and value products whereas beforehand we did not need to do that. We’ve had to bring down price point of premium products through recipe-ing and portion sizing (making margin-friendly products at compelling prices)
Q: Capex degradation seems understated given the level of refranchising?
A: A good portion of the capex is related to planned new store openings and a resumption of spending on Qdoba.
Q: You’ve had a strategy of opening new markets with the intent to franchise them. How many markets are you “seeding”?
A: New contiguous markets are our target. AUV’s in these markets outperform new stores in existing markets. Denver could be an example. In Corpus Christi we had an opportunity to show that AUV’s were attractive there and then sell the location to a franchisee.
We do have new markets that are franchise developed. Colorado Springs, Albuquerque…
More challenging to get financing so seeding strategy helps
Q: Health of franchisee system?
A: Very, very good. Growing franchisees. Average franchisee now has 10 units vs. 4/5 units a few years ago. Focus on taking costs out of the business has helped franchisees.
We sold 194 restaurants last year when people didn’t think we could sell 150. The aim for this year is 150-170.
Q: What about franchisee in Texas?
A: We sold restaurants in Texas last year and continue to do so this year. It’s a 20 year deal, not just looking at this year. These restaurants are projected to provide attractive cash flow over the next 20 years.
Weather has impacted sales in Texas, also lapping reconstruction-post-hurricane sales figures. Operators in Texas remain positive.
Q: Where will operating income and cash flow go with refranchising?
A: Bringing down G&A cost. Much less maintenance capital going forward. EBIT margins will improve and we’ll give guidance on that in the not too distant future.
Q: If you were 100% franchised, you’d get 5% royalty less 3/4% of G&A, ex rent?
A: Yes but we’d have less G&A.
Q: Level of discounting seems to be moderated in FSR. Any indication of this following suit in QSR?
A: BKC going off dollar double cheeseburger will bring improvement in April
Q: What did you finance last year in terms of the 194 stores and has that changed in the last 7/8 months in conversations with franchisees?
A: 22 million worth of financing support last year. A “good portion” of that is repaid. 1Q has seen $12m range of support for existing franchisees. Less requests for assistance as we’ve moved through 2009 and into 2010
Q: Qdoba, how it fits in company.
A: we were looking for a concept with strong consumer appeal. Not geographically concentrated, strong management team. Fast growing segment. May look to divest at some point.
Q: Capex..
A: When we get to 110 figure, we will continue to invest in new restaurants and expect a return on that cash.
Q: What will you do with excess FCF?
A: funding new restaurant growth of perhaps another Qdoba-esque acquisition at some point and of course returning cash to shareholders.