Jack In The Box Inc (NASDAQ: JACK)Q2 2019 Earnings CallMay 16, 2019, 11:30 a.m. ET

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Prepared RemarksQuestions and AnswersCall ParticipantsPrepared Remarks:

Operator

Good day, everyone, and welcome to the Jack in the Box Second Quarter Fiscal 2019 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Chief Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Carol DiRaimo — Chief Investor Relations

Thank you, Jack, and good morning, everyone. Joining me on the call today are Chairman and CEO, Lenny Comma, and Executive Vice President and CFO, Lance Tucker.

In our comments this morning, per share amounts refer to diluted earnings per share and operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis, excluding gains or losses on the sale of company-operated restaurants, restructuring charges and the impact of tax reform on the company's deferred tax assets, as well as the excess tax benefits from share-based compensation arrangements, which are now recorded as a component of income tax expense versus equity previously. Adjusted EBITDA represents net earnings on a GAAP basis, excluding discontinued operations, income taxes, interest expense, gains or losses from the sale of company-operated restaurants, impairment and other charges, depreciation and amortization, and the amortization of franchise tenant improvement allowances.

Our comments may include other non-GAAP measures such as restaurant level margin, and franchise level margin. Please refer to the non-GAAP reconciliations included in the earnings release, as well as the prior year results recast for the adoption of the new revenue recognition accounting standard. Following today's presentation, we'll take questions from the financial community. Please be advised that during the course of our presentation our question-and-answer session today, we may make forward-looking statements that reflect management's expectations in future which are based on current information. Actual results may differ materially from these expectations based on risks and business. The Safe Harbor statement in yesterday's news release and the cautionary statement in the company's most recent Form 10-K are considered a part of this conference call. Material risk factors, as well as information related to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com.

A few calendar items to note this morning, our third quarter of fiscal 2019 ends on Sunday, July 7, and we tentatively plan to announce results on Wednesday, August 7 after market close. Our conference call is tentatively scheduled to be held at 8:30 A.M. Pacific time on Thursday, August 8. I'd also like to take this opportunity to announce a couple of changes on the IR team. Rachel Webb, so many of you have spoken with over the past few months has been named as Director of Investor Relations for Strategic Analysis. Rachel has been with the company for over three years where she previously led the sales analytics function. Rachel also spent four years with Sonik (ph) prior to joining Jack in the Box.

In addition after 20 years with the company our executive assistant, Linda Wallace, will be retiring at the end of June. I want to thank her for her dedication, attention to details, responsiveness and sense of humor. She will truly be missed. I hope you'll join me in officially welcoming Rachel to the team and congratulating Linda on her well-deserved retirement.

With that I'll turn the call to Lenny.

Leonard Comma — Chairman and Chief Executive Officer

Thank you Carol, and good morning. Before reviewing second quarter results, I want to thank our employees and investors for their patience while we've been evaluating various strategic alternatives. Process was robust and included contacting a broad range of potential strategic and financial buyers, both domestic and international. Company also explores multiple financing alternatives and the Board and management team concluded that implementing a new capital structure in the form of securitization was the best alternative for driving shareholder value at this time. With that decision we are committing our full attention to moving the Jack in the Box brand forward.

As for the second quarter, I'm generally pleased with how the business performed and the progress we're making on our long-term strategic initiatives to grow sales and improve operations consistency. A promotional calendar in the second quarter had a greater emphasis on value which drove the increase in same-store sales. Discounting is still pervasive in the marketplace, we leveraged a slightly different approach to value and thought a sequential increase in both sales and transaction without negatively impacting restaurant level margins which remains among the highest in the industry. Two under $5 combos featuring a Sourdough Patty Melt sandwich and a fish sandwich were great examples of how we delivered a lot of value at margin friendly price point in Q2.

We believe this momentum has accelerated through the first four weeks of our third quarter and same-store sales have increased by more than 2%. Guests are responding favorably to our promotional line-up in Q3 which leverages our history of introducing innovative new products and the strength of our guest favorites. Combos featuring Jack's new spicy chicken strip and triple bonus Jack have been very popular as has the return of $2 for $4 (ph) sandwiches. Our approach to value differs from the deep discounting tactics of some of our competitors which we believe is not in the best interest of the long-term health of our brand, particularly in the face of rising labor and commodity cost.

Many of our value-oriented promotions are either new menu items or in limited time offers which minimizes the risk of diluting the equity of core products that our loyal customers crave. We reach our core customers wherever they may be, we're continuing to invest a larger portion of our advertising budget in non-traditional media. In Q3, we (inaudible) upon a crossover celebrity and popular social media influencer with 34 million followers. You'll see lately in our TV spots which is also helping us spread the word about Jack spicy chicken strips via several social media platforms. Delivery continue to contribute to sales in Q2 with sales mix growing an additional 60 basis points from the first quarter.

The average check for delivery orders remains consistently higher than other dining mode with most orders placed during the dinner and late night date work. Additional restaurants began supporting delivery in Q2, and at quarter-end nearly 90% of our system was served by at least one delivery service. I also want to mention that guests are increasing their use of our new mobile app which we launched in the first quarter. We continue to see adoption grow with the number of users increasing and app-generated transactions nearly doubling during the quarter. When it comes to value, digital marketing and delivery; our marketing communications and product marketing teams have done a great job in aligning our approach with the evolving expectations of our guests. I want to especially thank the two VP's leading those teams, Andrew Engle and Jim Kennedy for their efforts in ensuring that we continue to remain relevant to our guests.

Moving on to operations; we're addressing an area that's been a long-standing challenge for us, improving speed of service. We've been our own worst enemy when it comes to speed of service as the breath of our ever-changing menu has added complexity and prep times in our kitchen. To reduce this complexity while also improving consistency and accuracy, we've been testing opportunities to reduce redundant SKUs and to lead some low volume items while also streamlining back of the house procedures. We're very pleased with the results of Phase 1 of this program and saw no detrimental impact on sales at about 180 restaurants, both company and franchise where it was tested. But we did see an improvement in speed of service at participating restaurants saw other benefits. Training team members got easier, the space savings was noticeable, it took less time to count inventory, and there was less food waste. We plan to rollout Phase 1 changes across the system beginning in July and to begin testing Phase 2 of this program immediately, which is intended to optimize additional back at the house procedures.

The overall objective of these efforts are to make training and execution easier on our crews, provide faster and more consistent service for our guests and deliver more sales and profit for all operators. By the end of 2021, we're targeting a 1-minute improvement in average service time while maintaining quality, accuracy and friendliness rating. Another reason that we've taken to improve restaurant operations, was the addition of three seasons industry executives to complete the leadership team of our Chief Operations Officer, Marcus Tom. Bob Shallow and Greg Miller have joined longtime Jack In The Box (inaudible) as our VP's of Operations, and they'll be focusing on all facets of our system, both company and franchise restaurants. And Shannon McKinney is our new VP of Operations Services and Field Performance Support.

We're looking forward to the impact they'll have on improving efficiency in our system and delivering a higher and more consistent level of service to our guests. As for our restaurant facilities, we continue to evaluate our capital programs to make sure we're being as efficient as possible with our spends. I want to provide an update on some changes we're making to restaurant investments as we shift our focus more to our drive through the future initiative. You recall that we talked about 600 of our oldest restaurants being remodeled, by 150 of these involve structural enhancement, roughly half of which have already been completed.

We'll complete the balance of those remodels, however, we've decided to no longer require full remodels for the remaining 450 or so restaurants. We've learned the majority of the return from a full remodel is coming through the drive through, aligning with 70% of our business generated. As such, we're prioritizing our spending and shifting our focus to our drive through of the future initiative in an effort to get most of the sales lift for a smaller investment. We're expanding the test that's been under way, which includes members amenities like digital menu boards, increased use of LED lighting and canopy. As we determine the final elements, we'll expect to begin a system wide rollout in early calendar of 2020. We're expecting substantially all restaurants to participate in this initiative.

With that, I'll turn the call over to Lance for a more detailed look at the second quarter and our expectation for the full fiscal year. Lance?

Lance Tucker — Executive Vice President and Chief Financial Officer

Thanks, Lenny and good morning everyone. I'm going to provide an update on our second quarter operating results and our performance so far in the third quarter. As a reminder, effect of this fiscal year we adopted the new revenue recognition accounting standard and the new pension accounting standards. Given these two accounting changes, we will compare this quarter's results to recast 2019 figures where appropriate. Please refer to the press release for more detail pertaining to these adjustments.

Now onto a discussion of our second quarter results; operating EPS for the second quarter with $0.99 as compared to $0.80 last year, this 24% increase, was driven primarily by lower G&A costs, lower shares outstanding, and the impact of tax reform which more than offset dilution from refranchising. Systemwide comparable sales increased 20 basis points from the second quarter. Company comparable sales increased 60 basis points comprised to pricing of 2.1% while mix increased 70 basis points and transactions declined by 2.2%. This is a sequential improvement from the first quarter on both a one and two-year basis. Franchise comparable sales increased 10 basis points for the quarter.

Opening restaurant level margin increased to 120 basis points to 27.6% (ph), this increase was primarily driven by refranchising. Food and packaging costs were favorable during the quarter. However, we expect inflation in the back half of the year as commodities are projected to increase, most notably pork. Wage inflation is also expected in the back half of the year with Los Angeles as one of our primary company markets, increasing wages again this July. During these cost pressures on where we're tracking year to date, we reaffirm our full year guidance for company restaurant level margin of 26% to 27%.

Franchise level margins increased by $3.3 million in the quarter or 6% when compared to last year recaps figures, due primarily to retrain charging. Rent and royalties were also roughly 6% higher than the prior year. G&A in second quarter decreased to approximately 1.7% and system wide sales as compared to 2.3% as recast for last year. $0.6 million decrease was primarily driven by $3.8 decrease in mark-to-market adjustments. G&A benefited further from more first reductions related to refranchising and an increase in transition services income related to the sale of Qdoba which is reflected as a reduction of G&A. Decreases were partially offset by increases in insurance costs as well as higher Internet publizational. Advertising costs, which are included in SG&A were $3.9 million in the second quarter compared with $7.3 million last year. This decrease was due to a $1.9 million decrease from refranchising and an additional $1.5 million decrease, resulting from incremental company contributions to marketing fund in the prior year that were not repeated this year.

Our tax rate for the second quarter was 25%, benefiting from favorable mark-to-market adjustments. As a result, we have lowered our full year guidance, 25 to 26. We did not repurchase any shares of common stock in the second quarter. We currently have approximately $100 million of share repurchase authorization available. As at the end of the quarter, our leverage ratio was approximately 4X the EBITDA. We opened two new restaurants within the quarter, both of which were franchise restaurants and remain on track to achieve our full year guidance of $25 million to $35 million in 2019. Moving on to performance so far in the third quarter and our full year expectations. Through the first four weeks of the third quarter, system same store sales have accelerated nicely and are trending above 2% and as Lenny noted. We're pleased with our sales trajectory so far in Q3 driven by our greater emphasis on compelling value bundles, we're given flat same store sales in the first half of 2019. We are lowering the top end of our annual 2019 same store sales guidance from 2% to 1%.

Moving on to capital expenditure, intent improvement, allowance expectations for 2019 and beyond, as Lenny mentioned, we have 150 or so restaurants that require structural enhancement. Spend of these units represent the majority of our expected spend in 2019, was built into our guidance for both tenant improvement allowances as well as capital expenditures. And such we're reaffirming our guidance for 2019 for each of these items. Now these 150 restaurants roughly are yet to receive the required enhancements. These remaining units are expected to be substantially completed by the end of calendar 2019. Today, 75 restaurants have completed full remodels, a large majority of which includes these structural enhancements. These units are generating mid to high-single-digit selfless, most of which is coming through the drive-through as Lenny mentioned. As a result, we are shifting our focus to the drive-through initiative. We may also require other exterior or interior refreshes to our restaurants and we will let you know if and when we decide to do so.

Once we firmed up our path forward, we'll provide updated financial expectations. And confirm, however, that our long-term capital expenditure and tenant improvement allowance will be no (inaudible) and what we reaffirmed yesterday in our press release. Also as mentioned in yesterday's press release, we are pursuing a securitization and we will work diligently to quickly complete the process. Once the securitization is completed the company intends to resume share repurchases, through open market transactions, a potential accelerated share repurchase program or maybe a combination of the two for the target leverage ratio of approximately 5X EBITDA.

This concludes our prepared remarks. I'd now like to turn the call over to the operator to open up the call for questions. I'll turn back to you.

Questions-And-Answers

Operator — Executive Vice President and Chief Financial Officer

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) Our first question is from Brian Bittner of Oppenheimer.

Brian Bittner — Analyst

Thank you, hello. In regards to the improving content that you see in the third quarter, do you see this as the whole industry is improving or are you improving your market share because of the new value offerings you have in place?

Leonard Comma — Chairman and Chief Executive Officer

We — Brian, it's Lenny. We really see this as a reflection of what we're specifically doing in the marketplace. And the reason that we feel confident about that is as we look back throughout each of the promotional periods of this year and even 2018, we have data that shows that when we put compelling new news into the marketplace that is appropriately priced — not always super discounts but appropriately priced, in a way that tells the consumer how much value they're getting for the money, right up front and the communication we have performed well. And so we — as I said in my prepared remarks, focused on LPOs and new items to promote so that we don't steal from the core and create a bunch of trades. And essentially what we see is that when we put these bundles into the marketplace, it's driving a lot of incremental sales and also traffic. And so it's been a very positive result for us that we can say that even when the industry is doing well, if we're not doing those things, we're not typically doing as well. So I don't think that we're just riding the way here.

Brian Bittner — Analyst

Okay. And just a follow-up question on unit growth. Lenny, during your refranchising strategy, your franchisees were growing units very rapidly but through acquisition and your system wide units weren't actually growing. But now that you refranchising is complete, do you think this is going to help improve the opportunity for net unit openings moving forward relative to what you've seen? Can you walk through what you're seeing in the pipeline now that refranchising is complete as it relates to new units? Any color there would be helpful. Thanks.

Leonard Comma — Chairman and Chief Executive Officer

Yes, I think the answer to that question is yes. Growth is probably our top priority going forward. When we look at all of the various business model changes that we've had to manage, it's been a significant amount of change management for all of our stakeholders and I think we're finally at a place where we can say we've put that behind us and we can focus our energy on the business at hand and growth is really what we need to start generating. So when we look at whether it be the offering, the size or the footprint of the facility or even the markets in which we grow, we plan to move very aggressively or in testing and implementing the types of evolutions of our concept that would allow us to really get a high take rate from not only our existing franchisees but also look to bring new franchisees into the fold as well.

Brian Bittner — Analyst

Okay. Thank you and congratulations to Rachel and Randall (ph) as well for the timing. Thank you.

Operator — Analyst

Thank you. Our next question comes from the line of John Glass of Morgan Stanley. Your line is open.

John Glass — Analyst

Hi, good morning. First, just on the remodels, I just want to make sure I understand. Of the 75 that you've completed with a full remodels budgeting and you're getting the high single-digit lift and you're pivoting to just focusing on the drive user view and you're extrapolating, you get the same benefit from drive-through only or have you actually tested that independently and you're seeing the same kind of left without doing the full remodel?

Lance Tucker — Executive Vice President and Chief Financial Officer

Good morning, John. It's Lance. I'll start with that one and let Leonard jump in if there's anything he wants to add. So after the 75 that we have completed, for the most part — first of all, they are all full remodels and for the most part, the big majority that includes the structural enhancements we've spoken about though they do not include any just straight drafter. With the drafter what we're doing as we've begun some testing and we're going to be expanding that testing and that's going to be happening over the balance of the calendar year. Those returns are coming from full remodels. We are seeing the biggest part of the returns coming to the drafters though, which has led us to believe, as Lenny said, we think we can capture the bigger part of the returns in the sales list from converting to a drafter, they do it with less of a capital investment for ourselves and also for our franchisees.

Leonard Comma — Chairman and Chief Executive Officer

John, one thing I would add to that is as we look at consumer trends and also how consumers use our business, not only do 70% of the guests come through the drive-through but at the remaining 30% that go in the dining room, half our takeout consumers. When we look at sort of the convenience factor associated with our brand it's relatively high and when we focus on drive-through, it allows us to sort of double down on what consumers primarily see us at, as a convenient fast food offering that has sort of a twist to its menus. So we're going to focus on that and then when you look at what's happening with delivery and order ahead and pick-up trends, it sort of back to the question, what's the appropriate level of investment in dining rooms? And then for us obviously we have a much higher takeout. So for all those reasons it just seems like the most appropriate spend for us to make and also to ask our franchisees to invest in, it's going to be the one that's most in alignment with not only what the consumer's overall behavior has been but also specifically in how they've been using our brand.

John Glass — Analyst

That's helpful, thank you. And if I could just ask about the menu restructuring or SKU. I wasn't careful with the menu item count reduction or just a SKU reduction. And if you're reducing the number of menu items, by how many or what percent? Or is this just taking the number of ingredients down so it's simplifying it but you're not really changing the architecture of the menu?

Leonard Comma — Chairman and Chief Executive Officer

Yes, it is. It is mostly the former and not the latter. So it's mostly that we're pulling out redundant ingredients. For example, there's a time where we had five plus meal (ph) related sauces and it makes it very complex for the crew to deal with five meal-based sauces. We have at one point seven plus cheeses and ridiculous number of bread carriers and many of those items are so similar that when we slightly modify the product by essentially using one ingredient over several products versus two or three ingredients over those products, the consumer isn't telling us that they don't like the product. In fact, if they maybe like it just as much. So we're really careful not to kill inequity by bringing the quality of the product or the perceived cravability or taste of the product down but when we can keep it neutral and make it easier on the crew, it just makes a whole lot of sense.

So it's the depth and breadth of our menu, has just overtime continued to add complexity and I will also say that culturally, the way we created these products and implemented them as we essentially started in the culinary R&D space and created what we thought was the best products for the consumer and it was really up to operations to figure out how they were going to implement that. And today we actually have a team of people that combines operations, training, the R&D and culinary marketing folks, supply chain folks, all in one team; so that we're developing the product right up front where we're really pushing hard to make operations our first priority and not bring any ingredients or complexity into the processes. So let's just say there's a lot of low hanging fruit right now and without any consumer impact, we're able to have a positive impact on the crew.

John Glass — Analyst

Great. Thank you.

Operator — Analyst

Thank you. Our next question comes from the line of Chris O'Cull of Stifel. Your line is open.

Chris O'Cull — Analyst

Thanks. Good morning guys. Lenny, I apologize if I missed this, but can you explain why the system saw a sequential improvement in the comps, given I believe, you've been promoting bundled value offerings for a few months now?

Leonard Comma — Chairman and Chief Executive Officer

Yes, some of that has to do with the take rate on the promotions, right. So right now we have a pretty high percentage of the system who is involved in all of these primary promotions. So we've got the new chicken strips, spicy chicken strips. We have the new burger that's in the marketplace and also the breakfast offerings and all three of those things are showing pretty high degree of the success where the people are participating in them and where we don't have the participation, obviously we're not seeing that level of success. But right now, the vast majority of the system is participating in these promotions and we really only have a few outliers who have picked, one or two that they're not going to participate in. So a lot of it just has to do with participation rate and I think the new news on the spicy chicken is a big deal as well, because chicken is obviously on trend right now.

Chris O'Cull — Analyst

Just as a follow-up, can you talk a little bit about why the participation rate has improved among the franchisees and then maybe quantify some of the benefit or what type of participation rate you used to have versus now and maybe the ad contribution from that?

Leonard Comma — Chairman and Chief Executive Officer

Yes. So I would say that our marketing and operations teams have done a good job of just sharing information, sharing the facts about how the prior promotions have performed for those who participated in and what performance we saw from the markets that did not participate. We've been having roadshows, we had a roadshow a few months back where we went showed, the sales differential for those markets that participated, we also shared the profit differential for those that participated. And I think that franchisees were able to see that we are trying our best to be careful with their margins while at the same time, we're trying to make sure that we're competitive in the marketplace. Today, when we execute value the way that you see, it is driving incremental sales, incremental traffic and that's keeping us from eroding margin. If we see a different response from the consumer or we promote something that starts to dramatically erode margins, we're going to make an adjustment. So it's really just trying to take a balanced approach to it and I think that the operators in conjunction with their franchise business consultants and marketing both. I've just got aligned (ph) on it and we'll see how it continues to go. Hopefully, they all do it or we'll be the biggest catalyst to participation in the confidence the things that we're doing.

Chris O'Cull — Analyst

Thanks.

Operator — Analyst

Thanks you. Our next question comes from the line of Gregory Francfort from Bank of America. Your line is open.

Gregory Francfort — Analyst

Hi, Lenny. Just going back to John's question on the reimaged brand and the decision to maybe allocate a little more to the drive-through rather than in-store. I mean, I think it's a very different philosophical approach from one of your biggest quick service peers and I think the 70% drive-through mix is actually pretty similar across both brands and so I guess I'm curious if maybe you're not seeing the same sort of lift on the in-store business. Are there longer-term brand benefits that might not show up in near-term traffic? That would be a reason to make a bigger capital commitment to the in-store remodeling effort. I'm curious how you think about that.

Leonard Comma — Chairman and Chief Executive Officer

I guess what I would tell you is that I don't think the consumer is valuing all new furniture and wall treatments and lighting as much as they're going to value the enhancements to the drive-through in a more efficient pick-up system at the front counter. And so when I look at what consumer trends are, I would say, it'd be better for us to focus our attention on where the take rate is. Doesn't mean that the other parts of the facility present themselves poorly to the consumer. It just means they don't necessarily need quite the refresher enhancement going forward. So I kind of look at what's going on in the industry and try to think back to the events that have happened in the past. Whether it be with e-commerce or even when you look at what happened with Blockbuster and Netflix and I don't want us to ever be in a position where we're ignoring what the consumer is telling us that we want or what they want and we just continue to do what we want. At the end of the day, the consumer is saying that convenience has been enhanced through this whole digital world and they want to participate in it whether it's order ahead and pick up or delivery and they want to participate in the convenience of fast drive-through. So I think that's where we need to focus our attention.

What they're not telling us specifically for our brand is that they want to spend a lot of time in our dining rooms and particularly don't spend a lot of time in our dining room in groups. They typically do that but as individuals. So from that standpoint, I just think that I'm hard pressed to ask our franchisees to make an investment in something that isn't necessarily going to drive the type of returns that they're going to need. And I would rather take the safer path, which are essentially to align our investments and where the consumer is going.

Gregory Francfort — Analyst

Got it, that makes sense. And maybe just want one follow-up for Lance. The quarterly number you've given, is there any higher advertising spend in those four weeks than other parts of the year? I'm just trying to figure out if there's anything one time that might be boosting that number.

Lance Tucker — Executive Vice President and Chief Financial Officer

No, the company has not made any additional contributions this quarter in advertising.

Gregory Francfort — Analyst

Cool. Thank you very much.

Operator — Analyst

Thank you. Our next question comes from the line of Jeffrey Bernstein of Barclays. Your line is open.

Jeffrey Bernstein — Analyst

Great, thank you very much. This question was just on the pricing side of things. I think you mentioned the average check was up to 8% at least on the company operates side and that included just North of 2% price. But I know Lenny, you also mentioned labor and food inflation going up, so I'm wondering how the conversations are playing out with franchisees as they think about protecting their profitability. Presumably franchisees would need to increase further to mitigate the inflation levels but that might obviously further degrade traffic. So I'm just wondering the balance of those things and how the franchisees are receiving the suggestions you're making on price.

Leonard Comma — Chairman and Chief Executive Officer

Yes, we can only educate franchisees on what's happened in the marketplace between them and their competitors and also what's happening with obviously some of the underlying commodity costs. And so we'll spend the time talking about that, we certainly don't dictate pricing even in our promotional calendar, we will give them the option to be in the marketplace without price. And so from that standpoint, I would say just sort of focus on the education versus the dictate pricing. But ultimately what it comes down to franchisees, that if you're going to have discounts in the marketplace, those discounts have to drive incremental sales traffic or else they're going to erode the margin. If you can see a flight rate decrease but you see margin dollars increasing, you might be OK with that, but when you start to see significant rate decreases and you start to see much margin dollar erosion, I think that's dangerous. And so all that to say, that the number one thing that our franchisees are going to be focused on is same store sales growth. Because if you can drive same store sales, you can cover some of those other underlying cost increases that are going to happen. You want that sales growth not to just come from price but you also need it to come from traffic.

So we're seeing positive trends in traffic right now, which I hope our franchisees — as they're experiencing them, are gaining more confidence in the things that we're recommending they do. Ultimately, if we continue to drive traffic increases along with the reasonable price increases, that's where they're going to start to see the flow through and they'll be less concerned about some of the underlying cost pressures that they're dealing with.

Jeffrey Bernstein — Analyst

Got it. And then just to follow-up; Lenny, in your prepared remarks you talked about the patient that you appreciate from an investor standpoint in terms of the sale process and all the alternatives you considered. I'm just wondering if there's any takeaways you're permitted to share. Maybe more qualitative in terms of interest store challenges and it seems like M&A has been quite high in the space over the past couple of years. I'm just wondering if there's any qualitative learnings or things you could share in terms of how that process played out.

Leonard Comma — Chairman and Chief Executive Officer

No, we're really not permitted to get into the details of that. What I will say is that one of the silver linings of just meaning that much time on our business, evaluating our business in conjunction with other folks we're looking at it, is you just you start to find opportunities through other people's lenses that maybe you hadn't thought of along the way and they're just — some of it's just minutia. But it's valuable when you spread it out across 20,200 restaurants so still a lot of really bright individuals who are very familiar with our space. And it was actually quite rewarding to go through the process and just hear what they had to say and I listened to their opinions and even advice on the business. So I can't talk about anything beyond that but I will say that although it's a pretty rigorous process that most will interpret it as — at times something that's sort of dogging you out, right, it's just running you down. But the truth is although it takes a lot of energy, you're actually gaining a lot from it too.

So on the other side of it, I'd say our team is pretty energized to take what we learned from the process and use it to implement the changes that we think will grow the business going forward. But as far as the process itself, I can't say too much about that.

Jeffrey Bernstein — Analyst

Got it, congratulations. Good luck.

Leonard Comma — Chairman and Chief Executive Officer

Thank you.

Operator — Chairman and Chief Executive Officer

Thank you. Your next question comes from the line of Dennis Geiger of UBS. Your line is open.

Dennis Geiger — Analyst

This is for Lenny. And I guess if the strength that you're seeing thus far in 3Q is really almost entirely about the franchise, the adoption of the offers more so than the customer adoption. And if the customer adoption and feedback is largely similar over the last few quarters. I guess as we just look ahead, do you have decent visibility? It's not clear, I guess, but into what adoption looks like going forward particularly off the back of good results. And if the adoption was high, should we assume that the margin profile on what you're running right now is pretty good? Just a little more color if you can share it on how to think about value uptake or adoption there? Thanks.

Leonard Comma — Chairman and Chief Executive Officer

Yes, I'd say a couple of things. First off, it really is a combination of both, the consumer's adoption rate, as well as the franchises adoption rate. The reason I'd say that is, we're looking at patty melt and a fish sandwich which are good products but spicy chicken is completely new, it's something that folks have not seen before whereas patty melt and fish sandwiches are things that folks have seen before. So spicy chicken completely new news to our space and I think that consumer adoption has been quite strong there, but also the triple bonus Jack is a fan favorite from the past that hadn't been in the marketplace for a very long time, and we're able to get a very compelling price point in the marketplace which is driving a lot of incremental traffic as well. So I think you're getting both, franchise and consumer adoption which is sort of the point of this first statement and not — and what's driving it is not just franchise adoption.

And then as far as how we look at this going forward, everything that we're doing has been margin-friendly and it's margin friendly mainly because we're doing it as LTOs and new products, we're not discounting a bunch of our core items where the franchisees are making strong margins, and where they have high sales mix. And so the incremental traffic is driving great flow through for the operators. And what I would hope is that if operators are seeing their pockets getting more full of money there will be more apt sign-up for the promotions going forward, right. At the end of the day, I think the best positive reinforcement — the way to possibly enforce what we're doing is for folks to see that their period and quarterly sales and profits have gone up.

So, I expect with current performance they will be seeing that and I would expect that they look at what we're rolling out. Going forward, they would start to gain even more confidence and take rates would stay high.

Dennis Geiger — Analyst

Great. And then if I could, just any geographic differences on comp trends or weather impact particularly in the quarter-to-date? Thanks again.

Lance Tucker — Executive Vice President and Chief Financial Officer

This is Lance. We had a little bit of weather impact or have a little bit of weather impact in the second quarter, it wasn't real meaningful so I'm not going to give an exact number. I mean California has been performing quite well for some time, so it won't be a surprise if that's really where we're seeing a lot of. Beyond that I don't think there is a lot of regional differences that we need to call out. What I'll tell you is, sales have improved here in this first 4-weeks of the third quarter, they've improved kind of across the board, no matter the low pound, so that's obviously what you're looking for when you're running this thing now.

Dennis Geiger — Analyst

Thank you.

Operator — Analyst

Thank you. Our next question comes from the line of David Tarantino of Robert W. Baird. Your line is open.

David Tarantino — Analyst

Hi, good morning. Lenny, I just want to revisit the question on franchisee profitability and I was wondering if you could maybe give a little bit of context on how that's trending now versus maybe a year ago and with this current construct of driving comps and traffic, just north of 2%; is that a level that franchisees can improve their year-over-year profitability or is that enough to hold it with all the inflation environment? How do you think about that equation?

Lance Tucker — Executive Vice President and Chief Financial Officer

Hi, this is Lance. I'll start and let Lenny jump in. So, I wouldn't say there has been an appreciable change year-over-year on franchise profitability; what I can tell you is we have a 1,000 plus units in California and a big proponents on the West Coast, you're obviously seeing some vague inflation there. So, I'm not going to put an exact number on it but I will tell you that we do need to run some pretty reasonable sales numbers in order to keep the profitability meter going up. Fortunate for us, we're starting with one of the higher margins in the industry if not the highest. So our goal is always going to be to drive comps in a profitable way, as much as we can and try to add to that profitability. But the reality of the Jack in the Box system and where we're located; we are going to need relatively decent comps to kind of have that system to keep up with wage inflation. I want to give you more numbers on that but that will give you a feel.

David Tarantino — Analyst

Great. And then maybe one more for you Lance; this securitization that you're planning to do is going to give you a big one-time influx of cash. So can you maybe talk about how you plan to deploy that? I know you mentioned in the press release that an accelerated buyback was one of the things you're considering but is that currently the thinking — maybe an accelerated buyback or do you think you'd deploy that more gradually? Thanks.

Lance Tucker — Executive Vice President and Chief Financial Officer

I think there's a couple of pieces to that question. First of all, the big preponderance of the use of proceeds is going to go back to shareholders in the form of share repurchase; so let me answer that piece first. And I think that's the expectation and it's should be. As to the vehicle we use to do that return — what we said was, we're going to look at both, open market and accelerated share repurchase. I can tell you given Jack's trading liquidity and the volumes we see, the truth is there is not a great deal of difference between those two options as far as how quickly we're able to get the share repurchase programs completed, it really becomes more matter of execution and what makes the most sense; so we're going to evaluate both, open market and accelerated share repurchase. I'm not going to commit to which one will do but I guess what I want to leave you guys with is given our trading liquidity and given the amount of volume we run there is not a great deal of difference either way. So I'll kind of leave it at that.

David Tarantino — Analyst

Great. Thanks for that perspective.

Operator — Analyst

Thank you. Our next question comes from the line of Jeff Farmer of Gordon Haskett. Your line is open.

Jeff Farmer — Analyst

Thanks. Just following up on the recent same-store sales strength. I'm just curious what does the success of some of these new 499 combo meals introduced in April either tell you or inform you about the products and price points that drive demand for your customers? So said differently, do you guys feel like you're honing in a little bit more on not only the product that gets customers to transact or come to the door but also the price point that will drive demand?

Leonard Comma — Chairman and Chief Executive Officer

Yes. So what I would share with you first is that we evaluate our businesses and we look at — it's the way the consumer uses us. Half of our overall brand equity is really associated with more cravable food, consumers are less concerned about the price associated with that but more concerned about the flavor; and so these are the smothered items that we sell or the indulgent sandwiches that we sell, those types of things, some are higher priced, some are lower priced but ultimately price is not the main driver. And then, half — the other half of our overall brand equity is really associated with value and a lot of that value in the past was associated with tacos, and we've lost some of the brand equity that we had in the past when our taco pricing went up. And so a lot of what we have done from a bundled perspective is, we've introduced value into the marketplace that the consumer has been missing in our brand, and given them an opportunity to participate essentially at the below $5 price point.

When you look at what the value consumer is looking for, they're looking for an established meal, that total price is below $5 or they're going to bundle a bunch of individual items and put them together for a meal. that's under $5 and we were not doing a good job of presenting enough of that to the consumer. When we look at our overall pricing in our restaurant operations, we're on the higher side of things when it comes to A La Carte pricing; so it's going to be important that — if we're going to have a slightly higher price on the everyday items that we are doing enough on the limited time offer and promotional windows to present value to the consumer. So, we know that 90% plus of the transaction loss that we've experienced in recent years has been at the below $5 transaction level.

So, essentially if we start presenting to that group of consumers that has historically used us for value we start presenting value to them, we'll get them back in the door and today it's not really a matter of those consumers trading, they are not trading down from our breakable items to these more value-oriented items, they are not the same customer. And essentially what's happening when we don't put value in the marketplace is the value-oriented consumer trades to one of our competitors, that's really what the phenomenon is. So that's what we've been sharing with our operators in the field and trying to educate them on how the consumer is behaving, and essentially we have to address that value-oriented side of our brand equity which is half of our overall brand equity; that's really what this is doing.

Jeff Farmer — Analyst

That's helpful. And just switching gears quickly on a follow-up question; so focusing on the long-term guidance I think the current street estimates for EBITDA out there — excuse me 2021-2022 sit somewhere where pretty materially below the $300 million guidance that you guys have put out there for our FY22. So with that being said, is there a simple way to just walk us through the bridge to get to $260 million to $270 million which is where the guidance stands for EBITDA as of '19 to that $300 million number out in FY22? What do you expect the primary drivers sort of beyond low-single-digit same-store sales, I think low-single-digit comps but what is the bridge to that much higher number out in 2022?

Lance Tucker — Executive Vice President and Chief Financial Officer

This is Lance, I'll take that one and I'm going to keep it very high level. But it's really primarily just system sales growth in the form both of costs and units, it's following through on what we talked about rolled up to our G&A restructuring. And beyond that that really gets you pretty close to a number I don't — I'm not going to go line-by-line, frankly, because I don't have that in front of me but even if I did, I think at a high level we're not — there is no smoking mirrors (ph) here, what we're doing is, it's all the sales unit and controlling G&A and more blocking and tackling things than anything kind of out of the box.

Operator — Executive Vice President and Chief Financial Officer

Thank you. Our next question comes from the line of John Tower of Wells Fargo. Your line is open.

John Tower — Analyst

Great, thanks. Lance, just maybe to clarify, I'm a little confused. You mentioned earlier in the call that the idea of not spending as much on the full remodels but in the — one of the releases last night you maintained the longer term CapEx and TI spend numbers; so can you talk about maybe where those dollars are going if they're staying in the stores? And then separate question on the franchisee relationships, it seems like some of the news stories that are still out there — there continues to be a handful of or maybe just one disgruntled franchisee; so is there any chance to potentially figure out a way to move on from this franchisee by lining them up with a potentially interested another franchisee out there who might be interested in growing their business or potentially even buying in those stores to the corporate structure with the intention of ultimately re franchising them? Thank you.

Lance Tucker — Executive Vice President and Chief Financial Officer

This is Lance, I'll start on the remodel piece. So relative to long-term guidance, we did in fact leave that guidance intact for now but what I did say in my prepared remarks is we're going to continue to evaluate and certainly we wouldn't spend any more than we've put in that guidance. I'm not going to make any commitments right at this minute but as you would imagine, if we do get back on a remote model program and therefore potentially look at a lesser contribution than we were talking about under the prior program in the former tenant improvements then there could be some dollars free up there. But what we need to address internally as a team is are we making the proper investments elsewhere, whether that's in technology or in other areas. So as we continue to work through this we'll give you updates, we can confirm it's definitely not going to be any higher, maybe there will be some room there to come down but we've got to make sure that we've adequately thought out, are we investing across all the areas we need to before we commit to that long-term.

Leonard Comma — Chairman and Chief Executive Officer

This is Lenny, I'll address the franchise piece. First, I would say there is still a lot of demand for our restaurants, both the franchise restaurants, as well as our company-operated restaurants and we've seen that in various proposals, even in recent months; there is folks who tried to serve in pace as to sell our own restaurants, let alone some of the operators who are looking to sell their businesses and they are spending lots of time with primarily other franchisees in our system who are looking to buy those restaurants. So that's I think a good starting place and I think that had a lot to do with despite some of the disagreements. I think that has a lot to do with the fact that we're going on eight, hopefully, soon to be nine straight years of same-store sales growth with some of the highest margins in the industry. At the end of the day it is a very strong franchise offering and I would hope that it will continue to have that type of demand.

And as far as franchisees that may disagree with us; at the end of the day we want to work hand-in-hand with those franchisees to try to resolve those disagreements and to be able to get aligned and really move forward together. And obviously, if there is someone who gets to a point where they just don't feel like they can move forward with us, we would certainly be willing to take a look at either buying back that business or helping them facilitate the sale that business to another operator. But our hope is that we can put those things in the past and a lot of that's going to really come down to the individuals and kind of what they want to do to move forward.

But I can tell you from our standpoint as a franchisor; what we're focused on is driving the success of this business for all of the operators, we're focused on keeping our ears and our minds open to the feedback that our franchise operators would give us along the way that help us to make the types of improvements that they would need. And we're focused on growing this business, and so to be honest with you — we don't want to spend a whole lot of time on really the disagreements from the standpoint of it being the drama of the day that creates news. And instead what I want to do is, let's focus on the business at hand, let's focus on the improvements we want to make, let's focus on the alignment that we should have, and let's do it in a professional way. And I think the best way to do that is through open and honest dialogue, and we've been open to that.

John Tower — Analyst

Great. Thank you.

Operator — Analyst

Thank you. Our next question comes from the line of Matthew DiFrisco of Guggenheim. Your line is open.

Matthew DiFrisco — Analyst

Thank you. Looking at the unit growth, I know you've given a gross number; I was just curious about as far as this has been a couple of quarters now where you've closed as a system-less stores on a year-over-year basis. Is this a good proxy for going forward? I mean, I know you've refranchised a lot of stores and you have a remodel campaign coming up, could that potentially spur some closures or is this sort of three, maybe even like two a quarter or so a good pace to think of as far as closures that you have visibility around?

Leonard Comma — Chairman and Chief Executive Officer

It's kind of difficult to forecast the closures — what I would tell you is this, when you saw an acceleration in closures in the past often times that was actually associated with a refranchising deal; where as part of that deal, the franchisee was not interested in a handful of locations and we decided to close those down at that time, and so that did create an uptick in some of the closures. Outside of that closures are typically related to just the overall asset management process that we go through with our operators. So hard to predict, I don't know if that's the way I would want to look at the business. Obviously, we want to see restaurant opening, not closing; and I guess the best thing I can tell you is we would like to be in a place where a net opening is obviously always positive. And as we look at driving growth going forward, that might be the better metric to try to pay attention to but give us some time to think about that maybe a little further and maybe we'll be able to provide some more color in that future.

Matthew DiFrisco — Analyst

And then if I could just have a follow-up. With respect to the improvement that you're seeing in the first 4-weeks, it sounds like it is a correct to assume we should take away that this is primarily traffic driven improvement and the fact that pricing probably still sits around that 2-1 (ph) range and the mix? There it doesn't — without a change the promos probably isn't too different than what you saw in 2Q?

Leonard Comma — Chairman and Chief Executive Officer

Yes, I won't completely break it down but I would say that traffic is a major driver of what we're seeing right now.

Matthew DiFrisco — Analyst

Excellent. Thank you.

Carol DiRaimo — Chief Investor Relations

We have time for one more question.

Operator — Chief Investor Relations

Our next question comes from the line of Andrew Charles of Cowen & Company. Your line is open.

Andrew Charles — Analyst

Great. Let me — can you talk about your ability to continue the bundled value promotion tactics as guidance implies commodity inflation shifts to about 3% in the back half of the year versus you know 75 basis points experienced in the front-half?

Leonard Comma — Chairman and Chief Executive Officer

Yes, I think a lot of the strength in a bundle deal is that you've got optionality on what gets worked into that bundle and that gives you an opportunity to focus on either specific products where you're not getting the type of commodity increases that would make that detrimental or you're looking at quantity of the items that go into the bundles, so that you can manage price. So for example, with the spicy chicken, it's three chicken strips that we offer in the basic offering and that's what goes into the $4.99 bundle. The operators have an opportunity and then upsell a couple of more chicken strips which we get a very high take rate on. And so you're able to offer the value for the consumer that really has that sort of restriction on their pocket and they just need to make sure that they're only spending what they can afford and then you also have the upsell opportunity for the person who — maybe was enticed by the value but they love the flavor and they want to get it a little bit more.

So think you have not only opportunity to create these upsell and opportunities for the franchisees and company restaurants, but you also — again, sort of mix and match and play with the ingredients and quantity in a way that keeps the margins friendly on the bundle deal. So this is not a new tactic for us, we've been using bundled value for a long time but probably what's newer is that we're really focused on the below $5 price point right now, whereas in the past a lot of our bundled meals would have been a little higher priced when we had an opportunity to do that and still find success. But marketplace is pretty aggressive right now, so we're going to place the price points where the consumer is going to respond.

Andrew Charles — Analyst

Great. And Lance just in regards to levering upto 5x, this is a level that most asset-light highly franchised peers are currently running though most of these companies have some element of brand and geographic diversification, as well as higher top line growth algorithm. So can you talk about why you believe 5x leverage is a healthy level if same-store sales trend in a flat to 1% level beyond 2019?

Lance Tucker — Executive Vice President and Chief Financial Officer

There is a couple of things that I've said there Andrew. First of all, we're on-track to have non-full (ph) years of sales growth and so our sales, if nothing else, has been has been very steady now that we're in these asset-light models. We don't see a tremendous amount of variability within our P&L and within our cash flows, and certainly if communicated we have the ability to control our CapEx and our kind of improvements in those things such that I don't think 5x gives me any heartburn whatsoever. As I look at the modeling and the plans going forward, again, there is very little variability in the P&L and we want to get sales going a little higher and add some of those numbers that you guys have seen in the long-term plan, if possible. But I don't have any issues whatsoever was going about time (ph). Also very critical, the lending market right now if I could add that as well.

Andrew Charles — Analyst

That's helpful. Thank you.

Carol DiRaimo — Chief Investor Relations

Thanks everyone for joining us on the call today. And we look forward to speaking with you soon.

Questions and Answers:

Duration: 62 minutes

Call participants:

Carol DiRaimo — Chief Investor Relations

Leonard Comma — Chairman and Chief Executive Officer

Lance Tucker — Executive Vice President and Chief Financial Officer

Brian Bittner — Oppenheimer — Analyst

John Glass — Morgan Stanley — Analyst

Chris O'Cull — Stifel Nicolaus — Analyst

Gregory Francfort — Bank of America — Analyst

Jeffrey Bernstein — Barclays — Analyst

Dennis Geiger — UBS — Analyst

David Tarantino — Robert W. Baird — Analyst

Jeff Farmer — Gordon Haskett — Analyst

John Tower — Wells Fargo — Analyst

Matthew DiFrisco — Guggenheim Securities — Analyst

Andrew Charles — Cowen and Company — Analyst

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