Jack In The Box Q2'16 Earnings Conference Call: Full Transcript

Operator:

Good day, everyone, and welcome to the <b>Jack In The Box Inc.</b> JACK Second Quarter Fiscal 2016 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. During the question-and-answer period please mute your handset when asking a question. Please do not ask over a speaker phone.

At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Carol A. DiRaimo: Vice President, Investor Relations:

Thank you, Kate and good morning everyone. Joining me on the call today are Chairman and CEO, Lenny Comma, and Executive Vice President and CFO, Jerry Rebel. During this morning’s session we’ll review the company’s operating results for the second quarter of fiscal 2016 as well as some of the guidance we updated yesterday for the third quarter and fiscal 2016.

In our comments this morning, per share amounts refer to diluted earnings per share and operating earnings per share is defined as diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains or losses from re-franchising. Following today’s presentation, we’ll take questions from the financial community. Since I received the few questions of our comparisons to other companies reported same store sales results it should be note that there is no benefit in our numbers for leap day because of our fiscal period. The NPD results included in our press release also excludes the extra day.

Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management’s expectations for the future which are based on current information. Actual results may differ materially from these expectations based on risks to the 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 relating 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. As you know where we hosting an Investor and analyst meeting on May 24th and 25th in Kansas City the presentations on May 25th will be webcast. Jack in the Box management will be attending Oppenheimer’s Annual Consumer Conference in Boston on June 21st and Jeffries Consumer Conference --on June 22nd. Our third quarter ends on July 3rd and we tentatively plan to announce results on Wednesday August 3 after market close. Our conference call’s tentatively scheduled to be held at 8.30 AM Pacific Time on Thursday, August 4.

With that I will turn the call over to Jerry. Lenny. I am so Sorry.

Leonard A. Comma: Chairman & Chief Executive Officer:

Thank you Carol and good morning everyone. This is Lenny. After a slow start to the second quarter, we ended with a 23% increase in operating EPS which exceeded our expectations and guidance.

The improvement was largely driven by healthy margins and cost control along with some benefits from mark-to-market adjustments and a lower tax rate. We were especially pleased with the solid sales performance at Qdoba company restaurants which was driven by traffic growth as well as with improvement in the labor cost and margins at that brand as compared to the first quarter. More on Qdoba in a bit, first I want to talk about our Jack In The Box brand where we continue to focus our efforts on delivering higher quality burgers, drinks, and fries which is what our consumer research identified in 2014 was a top priority for our brand.

The first major quality change we made was the introduction of our Buttery Jack burgers in Q2 of last year which contributed to our best same-store sales performance in more than 15 years and in quarter two of this year, we upgraded nearly 30 core products in one of the biggest initiatives we have undertaken to improve quality. Our most frequent guests are noticing all the improvements we are making. Over the past year, we have seen a significant increase in top box scores or how our burgers, drinks, and fries taste. On average, a nearly 10% improvement. This kind of response is key to driving higher levels of customer loyalty over the long term.

In the short term we recognize the need to be more aggressive on the value front given the amount of competitive discounting activity we are seeing. We waded through the most recent quarter we began promoting value priced combos featuring our new improved burger. This increasing trial of those products, we slowed the transaction decline we have been experiencing in our gap to NPD narrowed. Importantly the way we approach value enabled the company and our franchisees to preserve margins in the quarter which remained above 20%.

We also focused on the breakfast daypart in the quarter with a breakfast croissant value message and our new triple cheese and hashbrown breakfast burrito, the latest in our popular lineup of breakfast burritos.

Encouragingly despite a lot of competitive promotional activity in the quarter and some continued weakness in the 1030 to noon period, sales were positive during the entire breakfast daypart with mix reaching an all time high of 23%. Looking ahead, our promotional calendar will continue to balance both value and quality related messages with compelling new products.

Now let’s take a look at our Qdoba brand. Second quarter sales were strong on top of difficult comparisons for the year ago quarter. In the second quarter, we reformulated our Mexican Gumbo and reintroduced this guest favorite as Loaded Tortilla Soup. With TV support in certain markets, we positioned it as the perfect antidote to the doldrums of winter.

Promotion triggered a nice increase in product mix. Looking ahead, we are bringing back a seasonal favorite next week, Mango Salsa. Over the summer expect us to encourage our guests to take advantage of our new pricing structure, enjoy the refreshing flavor of mango across our entire menu. Q3 also features two of the year’s biggest catering events; Cinco de Mayo and graduations. Growing catering remains important focus of ours to expect us to continue to message catering opportunities with our guests.

Moving on to restaurant facilities, since last year we’ve been testing various design elements at new company locations. More recently, we added some franchise restaurants and remodels to the test. When we are in Kansas City in a few weeks, in a few days to excuse me our Investor and Analyst meeting will have a lot to talk about regarding a future look and feel of our restaurants. I don’t want to front line that discussion today, but we will also be very clear on how we plan to expand those trends and drives sustainable sales growth in the coming years. Additionally, we’ll be sharing our initiatives that are intended to deliver returns for our shareholders.

On that note, I will turn the call over to Jerry for more detailed look at the second quarter and our outlook for the remainder of fiscal 2016. Jerry?

Jerry P. Rebel: Executive Vice President and Chief Financial Officer:

Thank you, Lenny and good morning everyone. After a slow start to the quarter, with operating EPS roughly flat after the first two months. We finished with a 23% increase in our operating earnings.

A number of items contributed to the beat including mark-to-market adjustments of about $0.04 which resulted in a lower tax rate that benefited the quarter by about $0.02. The results for an annual adjustment to rent for certain market that had been previously re-franchised, and based on their higher sales levels approximately $0.03 of the additional net rental income was recognized in the quarter.

In addition, margins at both brands came in better than we anticipated. Despite additional promotional activity do impart to continued favorable commodity markets. We also to saw the benefit of good cost controls with more often our steady mindset throughout the organization.

For Jack in the Box the 1% decrease in company same store sales was comprised of pricing of 3.2% which was offset by 1.8% decline in mix and a 2.4% decline in transactions.

As Lenny mentioned, midway through the quarter we are more aggressive on the value front with price point messages running in the majority of our markets. Despite the additional promotional activity, Jack In The Box margins decreased by only 70 basis points compared to last year as favorable commodity costs largely offset the impact of minimum wage increases that will into effect in January and higher cost related to equipment upgrades.

For Q2, for Qdoba Q2, company same store sales increased 3.1% driven by transaction growth of 3.7% in catering which contributed 0.5%, partially offset by 1.1% decline in average check. In addition to the solid sales performance at Qdoba, we were pleased with the sequential improvement and margins compared to Q1 as the labor staffing issues we talked about were largely addressed. A greater number of new openings in the last two quarters affected margins but we remain pleased with the new store volumes we are experiencing. To the first two quarters of year we have opened 19 company Qdoba restaurants versus three in the first two quarters of last year.

Favorable commodity cost helped margins and we expect that to continue for the balance of the year. We now expect commodity deflation of approximately 2% to 3% as Jack in the Box versus our prior guidance of 2% deflation. We also expect deflation of roughly 5% at Qdoba versus our prior guidance of approximately 4%. Given the annuity like cash flows of our business model, we remain committed to returning cash to shareholders.

We repurchased $150 million of stock during the quarter and now have $150 million available under current Board Authorization. Our outstanding shares decreased by more than 11% versus last year’s second quarter which will continue to contribute to our EPS growth. Our leverage ratio at the end of the quarter was 2.9 times.

Here is our current thinking on guidance for other key items for the balance of the year. Our Q3 sales guidance for Jack In The Box ranges from approximately down 2% to flat at company restaurants versus a 5.5% increase in a year-ago quarter. It is worth noting that franchising for sales which have less impact from Huston are currently running up 0.4% quarter-to-date.

Our Q3 sales guidance for Qdoba ranges from approximately down 1% to up 1% at company restaurants versus a 6.6% increase in the year ago quarter. We lowered our full year same-store sales guidance for Jack In The Box company restaurants to flat to up 1% and for Qdoba company restaurants to up 1.5% to 2.5% reflecting our performance through Q2 in our outlook for Q3.

Based on our lower same-store sales expectations offset in part by the mark-to-market and rental income adjustments in Q2, we continue to expect operating earnings per share to range from $3.50 to $3.63 in fiscal 2016 compared to $3 in fiscal 2015. I will make one other note, our guidance excludes the impact of any potential restructuring charges in 2016 driven by our plans to increase Jack In The Box franchise ownership and reduce overhead costs.

That concludes my prepared remakes. I’d like to turn the call back over to Lenny.

Leonard A. Comma:

Thank you, Jerry. I just want to take a moment in light of the recent changes with in case we leaving the organization and Keith Guilbault taking over as President, first one to recognize Tim Casey for his contribution in leading the Qdoba brand over the past three years. I think he is a great brand builder and he’s really helped to reinvigorate that brand and we want to wish him well.

I also want to take an opportunity to welcome Keith Guilbault to the position. Keith I think brings a unique skillset and balance across many different disciplines starting with his operations background as Regional Vice President of Operations and the Divisional Vice President of Operations Initiatives for the Jack In The Box brand also spending time running to franchised group as VP of Franchising, also working as VP of Marketing Innovation and CMO of the Jack In The Box brand and then most recently Chief Operating Officer for Qdoba, I think he brings a wealth of experience and a balanced approach that will help to lead this brand forward and I just want to wish him well and I am looking forward to what he will do to write the next chapter for the Qdoba brand.

So with that, I’d like to turn the call over to Kate and ask her to queue up the Q&A. Thank you.

Question & Answer

Operator:

Okay. Thank you. We are now open for the question-and-answer session. Due to time considerations, we ask that you please limit yourself to one question and one follow up. If you do have additional questions, you may re-queue at that time. Thank you. And our first question is from the line of Brian Bittner. Your line is open now.

Brian Bittner: Oppenheimer:

Thank you. Thanks for taking the question. Question on your sale so far in the third quarter. We know that the industry has been week in April based on the industry data, based on what a lot of competitors have said but is there way to -- I know you just told us what the franchise comps were but is there a way to quantify how your company owned trends look at Jack In The Box outside of Houston and look at Qdoba outside of Denver so far in the quarter.

Leonard A. Comma:

Brian what I can tell you is when we look at the Houston market for the company restaurants by the way we have about 17% of our company units in the Houston market. When we look at the weather impacted weeks and how that’s impacting the overall total looks like that is impacting the total comp by about 60 basis points during the first four weeks of the quarter and that would be compared to what normal trends were for the Houston market. We had a couple of weeks in the first four weeks here where Houston was tracking down near the 10% range.

Brian Bittner:

Okay and what about Qdoba outside of the Colorado Denver region?

Leonard A. Comma:

I’d say less of an impact directly with Denver as I would say the -- it’s been a broader weather impact given the overall footprint with some snow storms and weather across the country.

Brian Bittner:

Okay. And just a follow up, what gives you guys the confidence on the implied fourth quarter comp guidance because that suggest that you have solidly positive comps in the fourth quarter what’s driving that confidence?

Leonard A. Comma:

Brian this is Lenny. First I would tell you that the lineup of new product introductions and promotions for the fourth quarter supported by media for both brands is going to be exceptional compared what we have done in first three quarters. So that’s given us a lot of confidence that we should have a strong fourth quarter. We are looking forward to seeing those things in the marketplace.

Brian Bittner:

Okay. Thank you.

Operator:

Okay, thank you. Our next question comes from the line of Andrew Charles of Cowen and Company. Your line is opened now.

Andrew Charles: Cowen and Company:

Great. Thanks. Lenny just following up on that as we think about the balance of the year and new opportunities at Jack, do you expect to see more lasting product upgrades as a continuation of the declaration deliciousness which I presume will be more beneficial operations or more on the LTOs that’s the reason ----- and new breakfast breeders.

Jerry P. Rebel:

I think what you will see in the form of LTO’s is the continued push towards the declaration of deliciousness. So I guess the way to say that is when you take a look at the type of products that we launched for example the Buttery Jack line. That’s the type of quality that you should expect to see in the LTO’s coming forward and that will be complemented by some aggressive value oriented promotions as well. So we think it will be a nice one to punch.

Andrew Charles:

And I am just curious as well just give me a California exposure about your perspectives on lowering to consumer and what I expect to be an outsize benefit for Jack from increasing California minimum wage. So did you see California outperformed the rest of the system as well as 2Q?

Leonard A. Comma:

Yes. California did out performed most of the rest of the system.

Andrew Charles:

Thank you.

Operator:

Okay, thank you and our next question is from the line of Joseph Buckley of Bank of America. Your line is opened now.

Joseph Buckley: Bank of America:

Thank you. Can I ask some of the regional question about Texas several companies and brands have called out some weakness in Texas and on the Houston range is Texas lagging this system.

Leonard A. Comma:

I think the range are probably the biggest current driver we’ve been paying close attention to this and we do see that California’s outperforming in Texas but what we’re not seeing yet is any confirmation that Texas has a major economic slowdown. So, we’re looking really at the most recent weather impact as the bigger contributor.

Joseph Buckley:

Okay and then can I have a broader question about value. You made the adjustments mid quarter, we can back into what the Jack In The Box comp was for the last eight weeks of the quarter, but did you see sales get better as the quarter progressed, do you think the value messaging you’ve done so far is gaining some traction or do you need to, to do more?

Jerry P. Rebel:

I think where we saw the biggest impact is we slowed down the negative trends on transactions. And that’s probably the thing that we’re most concerned about. So from a value perspective I think certainly we’d love to see the top line sales and we’d also like to see the transaction impact and that was what we think we achieved in the back half of the quarter by putting those promotions in place. I think going forward, what we’ll be looking to do is make sure that we have the right balance of premium LTOs that helps to sustain the margins and the average check while we have the aggressive promotions in there that help to allay any of the erosion of the transactions.

Joseph Buckley:

Okay. Thank you.

Operator:

Okay, thank you. Our next question is from the line of David Tarantino of Robert W. Baird. Your line is open now.

David Tarantino: Robert W. Baird:

Hi. Good morning. Lenny just a quick follow up to that last comment. I was wondering if you think you are satisfied with the impact of the promotional approach that you’re using on the value side or do you think you need to be any more aggressive in terms of whether it’s the discount or price point that you are offering as you move into the rest to this year and into next year?

Leonard A. Comma:

I think if you pay attention to our two year comparisons, it was strongest in the last period and that’s probably the best indication of how well those value promotions are working for us and taking a balanced approach to holding on to margin will also driving some transaction sale. It’s a competitive marketplace we are trying to walk the fine line of both profitability and sales. It seems like there is lot of aggressive activity out there that is willing to sacrifice a lot of the margin.

We are trying to make a balanced approach on our end that retain some of the gains that we’ve had in this premium positioning while at the same time make sure that we are beating competitors in the marketplace and not just allowing the bottom side of our menu, the value stuff of our menu to completely erode.

David Tarantino:

Great that makes sense. And Jerry I was wondering if you could help us I think help for the components you gave on the upside for Q2 but you mentioned a couple of factors, margins came in better than anticipated and you had some good cost control. So I was wondering if you can elaborate on what the drivers of those are and whether you think you are able to continue those as you look into the next couple of quarters?

Jerry P. Rebel:

Yes, a couple of things. So one on the margins, the promotional activity at both brands actually saw improving sales but with really good flow-through on those sales driven in part by I think it’s overall good expense control in the restaurants but also we were helped by the continued deflationary nature of the commodity market. And you can see it reflected on our guidance there as we continue to forecast commodity to be more deflationary than what we had in the prior quarter.

So I think that’s part of that and I think you would expect to see that going forward. The other I think is just related to some of the work that we’re doing with that we’ll talk about in much more detail when we see you guys at the Investor and Analyst Day with our overall cost control, so we’ve been has been very visible throughout the organization and I think it’s just natural with that conversation and the level of activity that we’re seeing here that you’re going to have folks that are a bit more cost cautious than they might otherwise be. And I think we’re seeing some of that flow through although I can tell you it’s very difficult to put your finger on exactly what that is and how much it is. But it would be us do not have that be through the numbers and I think that’s also reflected in the guidance going forward.

David Tarantino:

Great. Thank you.

Operator:

Okay. Thank you and our next question is from the line of John Glass with Morgan Stanley. Your line is open now.

John Glass: Morgan Stanley:

Thanks, thanks very much. Jerry you alluded to the fact that you might see some cost and restructuring itself coming through later this year, or that the guidance was exclusive of that. Where are you may be in that process, and you going to provide more detail on few weeks, but where is some of this re-franchising underway now is it reasonable to expect any re-franchising transactions in the calendar year and can you get ahead of those with the G&A culture or those lag just by their nature of need to cut the stores first.

Jerry P. Rebel:

So, I won’t I won’t give a lot color on that, but I will tell you is when we will give a lot of detail around that in what 10 days. But the corporate level G&A cuts are independent of the re-franchising. I don’t think you need to do re-franchising to start all of the G&A cuts.

John Glass:

Okay that’s helpful and your guidance for the year is this quarter had some you mentioned some unexpected puts and takes is there anything else that is notable in your thinking about the current earnings guidance that we wouldn’t see movement in the G&A line or lack of assumptions in G&A are there any underlying assumptions we need know now just to reconcile that with our own forecasts.

Jerry P. Rebel:

Yes. Let me see if I can make this answers bit more helpful than what my last answer about. So the way I would look at this just walking through the --. So we are add $1.77 in Q2 year-to-date EPS. If you just take the mid-point of our guidance called 357 and implies bucket in the back half of the year rolling over $1.38 last year roughly get 30% increase. The way I would look at this is when you look at 53rd week impact, but I think we’ve identified $0.08 per share previously. Then you look at the lower share count based upon what we’ve purchased offset a bit by some higher interest expense and lower SG&A which is primarily related to ongoing lower pension expense and lower incentive compensation because this year’s performance as nearly good as last year’s performance was.

That makes of about two-thirds of that 30% increase. The other one-third or roughly 10% of that earnings growth is related to sales and margin activities or the four walls of the restaurant if you will.

John Glass:

Thank you.

Operator:

Thank you and our next question is from the line of Keith Siegner of UBS. your line is opened now.

Keith Siegner: UBS:

Thanks and Jerry that was very helpful that last bit of clarity so I appreciate that as well. Switching gears a little bit, if we think about some of the things we have learned through this earnings season right, we have learned about loyalty programs, kiosks, mobile order and pay, delivery tests, basically all of the major mainstream quick service brands have a lot of tests in place and a lot of this we are going to see even yearend at some of these big chains. And I know I am asking this a lot but Lenny, if you could just give us an update about what test do you have in place, maybe just what’s your philosophy about how you are thinking about these things just some form of update and again we really learned so much about all the other brands this earnings season so just like to know the latest about you too. Thanks.

Leonard A. Comma:

When you look at the list of potentially all things digital in delivery, we understand that in order for us to be competitive going forward we will have to play in that space. What we have been able to evaluate and get some information on is really this understanding of how much of that business is being led by the aggregators that are out there as a third party subs that you digital four major organizations and how much of that is being done internally. And what we see is, there is going to be a pretty decent contest with the aggregators versus the internal investment.

Either way what you are going to see is every major brand including us will play in that space. Whether we do it all ourselves or partially ourselves, we will be involved in everything from delivery to apps and digital applications that allow us to manage everything from CRM programs to mobile payments. I can’t tell you that we have decided on the path forward as far as how much of that we want to handle internally versus how much of that we want to use the aggregate us for but we have lined up several tests using both internal and external resources to sort that out within the coming year. So our plan is to wade into that water pretty deeply and get a good understanding of the path forward and make a firm commitment to that path.

So Keith I know there is not a ton of detail there on all that we’ll be doing specifically but the Qdoba brand as I talked about in the past is little further ahead than the Jack In The Box brand we build an infrastructure for and approximately and digital test there and we currently have that in test. We know that there will be some learnings that coming out of that we’ll be able to apply to the Jack brand as well and I would say in the next 6 to 12 months, we should feel a lot more sure about where we want to place those investments and how we want to move forward but I don’t feel like we’re behind and I feel like the information we have and the testing we’ve done is right on par with where everybody else is from the standpoint of understanding and figuring out how we move forward. I don’t think anybody’s got it sorted out but I do think that everybody’s making that commitment right now.

Keith Siegner:

That’s great thanks and then may be just one follow up to an earlier question. You mentioned that product in promo for 4Q as exceptional versus 1Q to 3Q, which is really exciting considering that we had the Declaration of Delicious, Million Burger Give Away, 29 new product updates, should I think of it as the 1Q through 3Q in total or this is even exciting compared to those promos and products?

Leonard A. Comma:

I really don’t think that we’ve done anything in the first three quarters that wasn’t exciting as what we expect to happen in the fourth quarter from a product perspective. The core product improvement that we did earlier in the year I think I have gotten exceptional results from the standpoint of the consumer recognizing the quality improvement but I also recognize that that’s not a new product in getting attention to that in a short term is harder to do so that’s more of a long term play and it really flew in the face of lot of short term discounting that was doing on out there. In the fourth quarter I feel like we have some exciting discounting and some exciting new premium product hitting and I think that’s probably from a competitive environment standpoint going to stack up a little bit better.

Keith Siegner:

That’s great. Thank you very much.

Operator:

Thank you and our next question from the line of Chris O’Cull of KeyBanc. You line is open.

Chris O’Cull: KeyBanc Capital Markets:

Thanks good morning guys. My question relates to the rebound menu at Jack. Lenny You mentioned the food quality scores have risen with core guess but I am wondering if the changes have increased they are likelihood to return whether you seen that score increase in the survey work?

Leonard A. Comma:

Yes great question. You could be fly on the walls to our consumer insights conversation and yes the likelihood to return has increased and we saw even in the original taste testing that we did that the likelihood to return would increase then we had to go prove it out by actually launching the product and we are happy to report that we are seeing that now in the real world.

So pretty pleased with that I think that the long term ----- for core the product improvements are positive and we are looking forward to see and all of that will do.

Chris O’Cull:

Okay and then just a question on Qdoba, I mean the comps in the transactions will remain a nice rebound balance but the profit dollars per store were flat to down it looks year-over-year. Is this a sacrifice the brands and potentially making to build awareness in trial and if so how long do you plan to use this kind of promotional strategy at Qdoba?

Leonard A. Comma:

Chris I am going to jumped in and addressed there is at least in the begin here. So, if you look at the restaurants that are the non new restaurants. Those margins were actually up year-over-year even with the additional promotional activity and that’s why I was getting too earlier I mentioned that the closer on this promotional sales were actually quite good.

We’ve opened up over the last three quarters 28 new units which is 8%of our overall company store base for Qdoba and so that is impacting the margins down a bit although the average unit volumes on an annualize basis are over $1.1 million in those new units. And then if you look at the areas in which there would be a margin drag it would be the area that you would expect a new restaurant to have a margin drag, so they have a little higher labor which is shorter term not longer term so you expect that to improve.

We have a little food cost because of just the extra waste to gain more of a learning standpoint and then you’d expect that to go way. The other piece that’s driving a little higher operating cost is the depreciation because they are all brand new restaurants. Since we going to have a little higher depreciation on that, but other than that the restaurants are performing very well and fail than the depreciation and perhaps little occupancy cost you could expect these restaurants to begin the perform similarly to what the longer term openings are.

Chris O’Cull:

That’s very helpful so the margin percent of the comparable base Jerry than is it up year-over-year with

Jerry P. Rebel:

it’s up a bit Chris. It’s not up a ton but it is up a little bit.

Chris O’Cull:

That’s helpful. Thank you.

Leonard A. Comma:

Chris you asked about the promotion strategy for Qdoba and whether we were intentionally sacrificing margin. I think that Jerry addressed the margin information that you needed but I will from a strategic standpoint say that when we look back to Q1 and what we learned as the Jack In The Box brand committed a lot of resources to rollout a core products improvement initiative that was one of the biggest initiatives we’ve had in years. Once we committed to that we were not able to pivot as quickly to the competitive activity that was in the marketplace and it negatively impacted our results.

When we took a look at what was happening with one of our major competitors in the fresh Mexican grill space, we didn’t want to have the promotional activity that we were seeing from that major competitor negatively impact the Qdoba brand. So in fact we did pivot and make sure that we had significant amount of promotional activity in the marketplace at this time and we will stick with that strategy as long as the environment requires it.

Chris O’Cull:

Okay. Thank you. That’s very helpful.

Operator:

Okay. Thank you and our next question is from the line of Alex Slagle of Jefferies. Your line is opened.

Alexander Slagle: Jefferies:

Thanks. A question on the Qdoba media strategy and if you can update us on the TV advertising tests sort of how they performed versus your expectations and how we should think about the strategy to the rest of the year?

Leonard A. Comma:

Yes. So we tested TV alongside several other things and what we actually found is that some of the other things we were doing outside the television actually drove better results. So though TV was a great way for us to bring intention to the brand and some of the innovation that was happening, we didn’t feel like after the test it was the best go forward strategy.

So we are going to use other media type platforms, on online, and also promotional activities intended to put offers in front of the consumer’s face very directly and we’ll use those types of things to bring that messaging alive and essentially get food in people’s mouth. That strategy seems to be playing well for us and we are going to see more on that side of things versus television.

Alexander Slagle:

Okay and a follow up on the Qdoba development. The fact that you’ve already build a good debt of the potential 25 to 30 Qdoba company stores expected this and it sounds those are not non-traditional. Just seemingly it’s a bit front-end loaded more than expected, I mean is that, is it merely bad or is there some potential upside to your implied guidance for a company owned billed this year.

Leonard A. Comma:

I’d say it is a little bit front-end loaded but that lives more by design not by surprise. The 28 restaurants I mentioned was inclusive of late four quarter openings. So we’ve actually opened up 19 this year versus three last year at this time. And last year’s restaurant happen to be more back-end loaded.

Alexander Slagle:

Thanks.

Operator:

And our next question is from the line Jeffery Bernstein of Barclays. Your line open.

Jeffery Bernstein: Barclays:

Great. Thank you very much. Two questions; first, maybe Lenny on the broader category as was discussed earlier, it seems like there are some easing trends in recent weeks. I am wondering whether you’d say it’s there to say you’ve seen at both brands beyond the weather which was noticeable at the brands but just wondering if you’d care to --. It does seem like the value push remains of course the industry so perhaps it’s something more macro but it’s got a whole lot better data than we do. So just wondering your opinion on the slowdown and then I had a follow up.

Leonard A. Comma:

We’ve got a couple of hypothesis processes on that the one that’s seems to be playing out the most right now is the regional impacts that are driven by the weather and there have been some questions since whether or not something is impacting us here in the tax season but we’re not quite sure that that’s the place we want to go yet. I don’t know that it’s completely clear that there is a softening, that’s happening outside of the regional impacts we’re going to keep a close eye on it, but at the end of the day the piece of that are very clear is that the industry continues in a deflationary commodities environment to be aggressive and we’re going to stay focused on those things that are pretty easy to see at this point in time and keeping the balance mix of both promotional activity and new product introductions into the market place. But I am not so sure that there is anything we’re seeing Jeff that has us in a place where we would say here is the right response to a softening in the industry or some long term economic impact and we’re just going to have to keep the close eye on it.

Jeffery Bernstein:

Got it and then just a bit at the Jack’s brands specifically and I think note in the press release that the corporate lagging kind of that quick service sample set by 270 bps which I guess was slightly worse than the 240 in fiscal 1Q and maybe that’s may be that just quarter-to-quarter or month-in-month and things got meaningfully better perhaps unless you don’t for color on that, but it seems like maybe you -- but I am just wondering how you go about taking share or whether you think just the competition of both practice to both values just proving more challenging in the near term so we shouldn’t expect any meaningful reverse that trend may be that fourth quarter excitement you’re talking about might do it but just wondering your outlook on being able to once again take share when the competitive pressures are so intense?

Jerry P. Rebel:

And Jeff I will actually take that when if you look at the NPD data for the quarter, keep in mind our GAAP last year this time was up 760 basis points. So on a two year basis we clearly took a significant amount of share and based on our 8.9% system comp. So on a two year basis we took significant share as compared to the last quarter.

Jeffery Bernstein:

And there is expectation that you would go back to taking share as we perhaps look at fiscal ‘17 or again is competitive pressures just make it more difficult for anybody to be running away with meaningful share.

Jerry P. Rebel:

Yes. I don’t want to make crystal bowl out today however I would say that we did see the gap narrow as we got more active on the promotional front in the back half of the quarter.

Jeffery Bernstein:

Got it. Thank you.

Operator:

Okay. Thank you and our next question is from the line of Jeff Farmer of Wells Fargo. Your line is open.

Jeff Farmer: Wells Fargo:

Thanks. Actually just following up on Jeff’s question and it was touched on earlier but just in terms of the same-store sales trends you are seeing from 10: 30 to noon any color there I would assume that peaked several months ago but has it began to moderate what are you seeing there?

Leonard A. Comma:

Yes it has begun to moderate we can see that on a quarter-to-quarter. Additionally we had mentioned back when we reported first quarter results that the bakers item that we’re being sold outside of that 10: 30 to noon timeframe had taken a hit which we thought was largely due to the role over on prior year’s promotions for Jack in the Box and it was certainly compound though by the aggressive marketing of the breakfast all day promotion from one of our major competitors. But as we moved here into Q2 and Q3, we do see that the 10: 30 to noon timeframe which is the timeframe we said was most impacted has veined and we also see if the impact outside of that timeframe has indicated so we feel pretty good about where we are right now and we are able to isolate it to 1030 to noon timeframe and able to think about strategies that would help us to protect that timeframe and restore it going forward.

Jeff Farmer:

That’s helpful and then Jerry I think the franchise revenue margin almost 54% in the quarter looks like according to my model the high it’s been in five or six years, something along those lines. So two questions; you expect able to hold on to that margin level and could we perhaps even see that margin level move higher and as we get into FY17.

Jerry P. Rebel:

Okay so let me give you the quick answer on the 54% margin sustainable, short answer is no at least not in the short term anyway. Let me give a little color around this rent adjustment and I am going to try and make this brief and understandable. I think I am going to fail on both of those targets.

But this is somewhat technical when I saw accounting. When we sold the Southeastern markets we did an analysis with outside real estate folks determined the rent that we should to those franchise operators to determine that the rent that we were paying under our lease was above market rates of rent and so we decided to charge the franchisee in those markets market rates of rent because they were lower performing restaurants and we wanted them to be healthy in terms of cash flow.

So we basically created a rent subsidy not a technical term but pretty much what we did and we have that set up a reserve and accrual liability for that which represented the subsidy for the entire lease term for all the restaurants in which we provided that subsidy. But what we did also in those contracts with the franchisees we indicated that if sales improved, the rent could go up and you either reduce the subsidy or wipe out the subsidy completely and so we look at that on an annual basis which is what you saw in the second quarter.

Good news is that we are seeing significant improvements in sales in many of those locations and some of those markets which necessitated us to effectively reduce the amount of that liability or that subsidy and therefore we got $1.9 million benefit in the quarter. You won’t expect to see any improvement or anything similar or even closer to that in Q3 and Q4 but we’ll look at it again next year and we’ll adjust as appropriate. But if it were me I wouldn’t model anything for that adjustment because I don’t know if that will go up or that will go down and if it does either, I don’t know how much it’s going to go up or down. So -- but it will be based upon fair performance in those markets.

If technical accounting we’re happy that we have the adjustment. It is sales based again so that’s the good news but it wouldn’t be something I’d rely on going forward.

Jeff Farmer:

Okay. Thank you.

Operator:

Okay. Thank you and our next question is from the line of Nick Setyan of Wedbush Securities. Your line is open.

Carol A. DiRaimo:

Nick, hello?

Nick Setyan: Wedbush Securities:

my questions and then I do have a kind of a bigger question. First, what was the deflation I guess we would see in Q2 and Q1? So should we think about may be that packaging going taking another step down in Q3 and Q4, how should you think about the cadence there?

Carol A. DiRaimo:

So, in the press release we shared roughly deflation for each brand in the quarter and if you look at that on a go forward basis obviously we increased our expected deflation numbers. So in the quarter of Jack deflation is 2.9% I believe I think some stored have in the same ranges of that 2% to 3% for the back half of the year.

Nick Setyan:

Got it. And on the occupancy and other we do see a big jump at the percent of sales year-over-year at the Jack In Box brand is that just deleverage on the comp or other some a kind of onetime items that will go away and we should less of a headwind in the second half?

Leonard A. Comma:

No Jack good question. Let me give you guys little color on that. We mentioned in the press release about equipment upgrade impacting margin so we’ve done a number of things to the Jack In The Box brand to improve the restaurants and technology and also equipment.

We’ve improved widening across many of our restaurants to drive same-store sales growth in the late night hours. We have also upgraded our POS hardware, we’ve also completely installed the free style systems and we’ve upgraded our restaurant computer network systems which will both improves security for the lost that enabled us to offer free WiFi to all of our guest, at all of our locations. So the combination of all those things ads about 60 basis points in cost about 40 basis points is depreciation of that.

Nick Setyan:

Got it. Great color. Thank you and I guess the fair question is. Since we started the change over the ad agency it does seem like there is been a little bit of an evolution and have Jack at the characters ---- and I guess how your kind of the right words as memorable the commercial in terms of how do you ---- the kind of comment that’s used et cetera.

Is there a way that you guys maybe have measured the impact of the New York commercial versus how impactful they were, memorable they were in prior years and I guess what is your overall strategy and how your how this evolution, how you’re going to be thinking about the evolution of how you guys plan on --- Jack In the Box’s brand.

Leonard A. Comma:

Yes good question good insights too. we do monitor that confidently we will talk about the analyst day, we do have measurements that tell us when we need to make adjustments and I think in the market place you already seeing some of the types of adjustments that we make based on the feedback that we have been given. So we see what you see and just like any promotional period we have got to question the advertising periodically to keep a so you probably already that Jack’s voice has comeback his voice had taken a little bit of and he was on a journey trying to discover new wonderful ingredients to health to clear this deliciousness and now he is back to talk about things discovery so more to come on that.

Nick Setyan:

Great. Thank you.

Operator:

Okay thank you. And our next question is from the line of Matthew DiFrisco of Guggenheim Securities. Your line is open.

Matthew DiFrisco: Guggenheim Securities:

Thank you I have one follow up question and original one. So I just curious on the specific product items towards the end of the quarter and a lot of the comps focus and your trends and how you’re doing versus your peers have been focused on sort of improving into the back half for the year the implied improvement now in that gap with the peers. I wonder the Jumbo Jack and the product there mid-March being launched, is that now -- can you give us some color on how much of the percentage of your menu that is or is that a driving force sort of the value and that’s going to be the thing that’s driving the narrowing of the gap? And I guess or should we start to see then the improvement also in the non-breakfast daypart comp-wise and did you see that in the month of March? And then I have a follow up question or real question on growth as well, development.

Leonard A. Comma:

Yes just to share why we featured the Jumbo Jack and several other products. They were all appreciating with the core product improvements that we had made. It wasn’t any specific strategy to use one particular product to drive sales.

It was really promotional in nature to get the new food in people’s mouth. So wouldn’t want you to imply anything from that other than what it was because we were going to be on promotion and we had just improved a bunch of core products, we didn’t want to have promotions out there that weren’t featuring those products.

Matthew DiFrisco:

Most of the value bundle also towards mid-March there being launched, is that representing a larger portion of your menu as it progresses and gains some notoriety and builds part of identifying with your brand?

Leonard A. Comma:

I guess I’d say that’s probably in the short term, yes, but if you look at what Jack In The Box has done historically, we have used value bundles just like the ones we just did, when we needed to get aggressive in the marketplace with promotions. I think probably what’s changed today is that everybody has some form of a value bundle out there and so it’s not so unique to Jack In The Box. But this what you see us doing today is very much in line with what we’ve always done and the type of products that we’ve always done it with.

Matthew DiFrisco:

Great and then just a question on development, you said in the press release here 20 Jack In The Box for the full year or for the full fiscal year primarily being franchised stores.

It looks like you -- is that a net number or a gross number because you’ve opened looks like may be two net and then five in total year-to-date. So, I was just curious or in gross. That seems like a big ramp-up in the back half of the year. Is that still a strong target to 21 or I guess we have those coming that you must have some visibility around and if they’re going to be done by September?

Carol A. DiRaimo:

Yes Matt, it’s Carol. I’ll take that question. So yes, you are right. On the inspired gross stores and our guidance on openings is always gross and yes we have high visibility into the projected number of opening for the franchise and the company restaurants for the balance late year.

Matthew DiFrisco:

So we should see those fees also flow through I guess in the third quarter primarily because it seems like when you’ll be opening?

Carol A. DiRaimo:

Right.

Matthew DiFrisco:

Okay. Thank you.

Carol A. DiRaimo:

Operator I think if we could prompt for additional questions.

Operator:

Thank you. Participants of the call, if you would like to ask a question, you may press star and one on your touch tone phone. Once again for any additional questions, you may press star followed by the number one. And our next question is from the line of Matt McGinley from Evercore. Your line is open.

Matt McGinley: Evercore:

Hi. Thanks for taking my question. Have a quick follow up on that rental income benefit of $0.03 that you had. I don’t think you get into all the accounting details of what happened but was that a benefit that helped the revenue line or was that a reduction on the cost side that you’d have had in the quarter?

Jerry P. Rebel:

It benefited the cost sides. I am not saying -- I am saying that makes logical sense but that’s where we’re required to put it given the accounting rules but it impacted net rental income, okay. So there will be the reduction of the expense.

Matt McGinley:

Okay got it. And then I have a follow up on the Qdoba comp in the quarter. Can you comment on that regional weakness that you saw out of the gate with Qdoba in the third quarter was that just the same kind of used in type impact that you saw with Jack in the Box was that something broader than that and then on the comment on the promotional activity in the quarter was that a timing issue or you doing something incremental this later in the quarter that you didn’t in the prior year.

Leonard A. Comma:

From the Qdoba front it was broad based impact and was really based late winter storms throughout the country more so than any particular region and we don’t have stores and Huston so it’s certainly wasn’t based on that 17% or in Denver and you had a second part to your question if you don’t mind.

Matt McGinley:

Yes. The second one was on the promotional cadence in the quarter you said that it will be in the quarter and that would accelerate the comp so I am wondering that is just timing issue or is that is something incremental that you didn’t do in the prior year.

Leonard A. Comma:

If the timing of the promotional activity in Q3 versus where we are currently. So lower promotional activity first what we would have that ramp up going forward.

Matt McGinley:

Okay, all right. Thank you.

Operator:

Yes, Ma’am go ahead.

Carol A. DiRaimo:

Yes I think we have time for one more question.

Operator:

Okay, yes. Our next question is from the line of Jake Bartlett of SunTrust Robinson Humphrey. Your line is open.

Jake Bartlett: SunTrust Robinson Humphrey:

Hi thanks for taking the question. My question was on your expectations on the promotional environment for the rest of the year, do you expected to remain as intensive as now and just kind of you wanted to dig in to your conference that consumers are going to be to receptive to it sounds like more the higher end LTO’s that you are going to be promoting in the fourth quarter that you feel good about.

Leonard A. Comma:

If I think your first question on the competitive environment I fully expected to stay as is and it’s potentially could get more aggressive just depending on whether or not some of the major competitors that have suffered some losses in sales most recently, but they are not there seeing any type of resurgence if not I would expect them to continue to get even more aggressive than they are today. So that’s sort of week-by-week view of the market place that we have and in all of our promotional line up we have continued to see plans in place to pivot to more aggressive promotional activities if necessary if we see the market place try to get more aggressive than it is today. So I think that’s the first piece and the second part of your question which I wish I could recall at this time.

Jake Bartlett:

It was really I get think part of the same answer but just the confidence that you have that consumers are going to be receptive to more a more premium or quality message by the fourth quarter it seems like they hadn’t been as much year-to-date.

Leonard A. Comma:

Here is the way I would look at that if we do in a premium message on a completely new product the adjuvant being receptive are much higher than when we do a premium message on our existing product. So where we feel the confidence is that and when it comes to the discount oriented things that we will do those are products they are familiar to people and they will instantly see the value they you see the comparison in the everyday price to the LTL price. When we look at the premium products that we are putting in the market place, they will be completely new news to the consumer and we think that increases the likelihood of success there.

Jake Bartlett:

Okay. And lastly little quick and forgive me if I missed it, but if you could give what your pricing was the menu price increases for both concepts and I think it’s going to imply a negative mix as Jack In The Box. I am wondering whether that we should can expect that to continue throughout the rest of the year.

Carol A. DiRaimo:

Yes so the pricing for both brands I think we said on the call in Jerry’s comments. So the price for Jack was 3.2% for the quarter and for Qdoba was 1% and yes we did have negative mix at both brands. We don’t talk about our forward pricing rules all the time and keep in mind we obviously had a minimum wage increases in California that we did take some pricing before.

Jake Bartlett:

Well I just try to think that we should that mix could possibly even get more negative given you have a kind of four quarter of the value bundle.

Carol A. DiRaimo:

It will really depend on what the activity is and what’s the balances on the other products that we’re running.

Jake Bartlett:

Got it. Thank you very much.

Carol A. DiRaimo:

Thanks everyone for joining us today and we look forward to speaking to you all on the 24 and 25 in Kansas City.

Operator:

Okay thank you and this concludes today’s conference. Thank you all for participating you may now all disconnect.