Good day, everyone, and welcome to the Jack in the Box Inc. Fourth Quarter Fiscal 2013 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, 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.

Thank you, Cathy, and good morning, everyone. Joining me on the call today are: Chairman and CEO, Linda Lang; Executive Vice President and CFO, Jerry Rebel; and President and Chief Operating Officer, Lenny Comma. During this morning's session, we'll review the company's operating results for the fourth quarter of fiscal 2013, as well as some of the guidance we issued yesterday for the first quarter and fiscal 2014 and provide an update on some of our long-term goals. 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 from refranchising. Following today's presentation, we'll take questions from the financial community. Please be advised that during the course of our presentation and in 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. Jack in the Box management will be presenting at the ICR XChange Conference in Orlando, Florida on January 13 and our first quarter ends on January 19. We tentatively plan to announce results on February 19 after the market close and our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on February 20. And with that, I'll turn the call over to Linda.

Thank you, Carol, and good morning, everyone. Jack in the Box posted another solid quarter, highlighted by a 45% increase in operating EPS versus the year-ago period. This helps to drive a 39% increase in operating EPS for the full year on top of last year's 41% operating EPS growth. Before reviewing some of our other fourth quarter accomplishments, let's look at some highlights from fiscal 2013. Our business model transformation is nearly complete. During the year, we raised our ultimate target for franchise ownership of the Jack in the Box brand to 80% to 85% and we reached 79% at year end. This transformation has resulted in a less capital-intensive business model with more annuity-like cash flows, as well as higher AUVs and margins for the remaining company restaurants that we operate. During the year, we took steps to strengthen our Qdoba brand. Most importantly in March, we hired Tim Casey as Qdoba's Brand President. Tim took swift action to identify and close underperforming restaurants and began a comprehensive review of Qdoba's brand strategy. As a result of our Jack in the Box refranchising and the closure of underperforming Qdoba locations, our consolidated restaurant operating margin improved to 17.1% of sales for the full year. As we've restructured the organization to reflect changes in our Jack in the Box and Qdoba systems, we've been transitioning to a shared services approach to support the enterprise and both brands. This process is creating a more efficient organization while moving the company toward our goal of G&A expense in the range of 3.5% to 4% of systemwide sales, which we now expect to achieve in fiscal 2014. One of the biggest benefits of our business model transformation has been the company's conversion into a free cash flow generator. During the year, we…

Thank you, Linda, and good morning. Fourth quarter earnings from continuing operations on a GAAP basis were $0.54 per share, including $0.13 in gains related to refranchising and $0.03 of restructuring charges. This compares with GAAP EPS of $0.42 last year, which included $0.16 of refranchising gains and $0.04 of restructuring charges. A lower tax rate of 28% benefited the quarter versus street expectations by about $0.05 but similar to last year's 29.4%. Full year tax rate was 32.8% versus 33.2% in 2013. And a legal judgment of $1 million negatively impacted the quarter by $0.02. Operating earnings per share, which we define as EPS on a GAAP basis excluding gains or losses from refranchising and restructuring charges, were $0.45 in the quarter versus $0.31 last year and for the full year, increased 39% to $1.82 from $1.31 last year. Our results for the year reflect the transformation of our business model and the annuity-like cash flows that franchising produces. As an example, we generated EBITDA of $79 million from rental income on the nearly 1,600 properties or 89% that we lease to franchisees. We refranchised 16 Jack in the Box restaurants in 1 of our 4 Southeast markets during the fourth quarter and 40 restaurants in 1 other market, as well as 3 Qdoba locations. Gain from the sale of these restaurants totaled $7.8 million or approximately $0.13 per diluted share. This leaves us with roughly 60 Jack in the Box restaurants that we have targeted to refranchise by the end of 2014, including the remainder of the Southeast, which is roughly 50 locations. When we've completed our refranchising strategy, we expect to operate roughly 400 company Jack in the Box restaurants and the branch will ultimately be between 80% and 85% franchised. We continue to expect our refranchising…

[Operator Instructions] Our first question is from Joe Buckley from Bank of America.

I have a question on the franchisee sales versus the company sales. Can you talk about that gap in the quarter? And then I think the comment was made that franchisee sales have improved on par with company sales. What does that mean? Are they comping up at the same rate as the company sales? Or is the improvement from the fourth quarter decline the same amount?

Joe, this is Lenny. Let me address the second part of your question first. And the answer to the second part of your question is yes, the franchisees in the first quarter 2014 fiscal year are comping right alongside the company ops. And week-by-week, it seems pretty much on par. And what we've talked about in the last couple of years are the initiatives that we had put in place around the rollout of our improvement in speed and some of the planned initiatives to increase our performance with guest service. And we've consistently said that the franchisees have lagged the company ops in executing those initiatives mainly due to their sensitivities around margin and sort of they start off with a show-me sort of position on the things that we're doing. And then as they prove out, they tend to accelerate their engagement in those areas. And we've seen that throughout the year, the franchisees have done a great job of sort of catching up and accelerating their engagement in the things that drive both the speed initiatives and also the great rollout of some of the guest service initiatives. The final note really though that I think we've seen lots of improvement on it is how we're rolling out new products. We've been able to generate a much deeper level of engagement from the franchisee all the way down to the frontline employees through rallies and large meetings that we've used to roll out the major initiatives throughout the year. And this past year, we've done that about 3 times. But the most recent ones, which started just toward the end of the fourth quarter, which was setting us up for the launch of late-night into the first quarter went exceptionally well and we seem to have a very high level of engagement from that late-night crew and from the franchisees. So we're spending a significant amount of time in their operations driving performance during late-night. So if I had the sum it up in one word, I would say it's really engagement. The franchisees are bought in to what we're doing and we've seen that throughout the year, that buy-in has sort of paid off for us. And we think that the results through the first 7 weeks of the first quarter really do reflect that. So I think that pretty much tells the story.

Our next question comes from Alex Slagle of Jefferies.

Jerry, a question on the long-term guidance, what you're trying to boil down, the various guidance metrics for each brand in that longer-term outlook. Basically wondering what portion of the margin expansion comes from the Qdoba business versus Jack in the Box business. I know we've got some perspective on the impact from the refranchising activities, but I wonder if you could boil that down further.

Yes. So let me talk about Jack in the Box first, Alex, and let me just also remind everybody that the Jack in the Box margin carries about a 75% weight to the overall consolidated margin numbers. So in other for us to have margin improvement, such as we just described, Jack in the Box had to also improved. But let me just walk you through what we have thought about for Jack in the Box. So the current year Jack in the Box number was 16.8%. For 2013, we described the pro forma effect of what it would have been if these restaurants that we sold throughout the year, many of which are in the fourth quarter, if they were going for the entire year, that would've been an additional 70 basis points, so now we're at 17.5%. And I described in my talking points earlier this morning that the completion of the remaining 60 locations that we have planned to sell to franchisees by the end of 2014 would add about another 100 basis points on top of that. So we're at 18.5% there. And then you would go forward with our comp guidance of 2% to 3% per year for Jack in the Box, we'd expect some margin expansion on that also. And then for Qdoba with the comps at 3% to 4% per year and they get a disproportionate amount of margin growth on the same kind of same-store sales growth because a good portion of their model has fixed costs. Their food costs runs about 300 basis points below the Jack in the Box food costs and their labor runs about 100 basis points below the Jack in the Box labor. So they're going to get a better lift on their same-store sales growth. And Qdoba ended 2013 with a 17.9% margin. So we would see -- and that included some extra staffing levels, particularly in the new markets, an extra staffing level from the closures of some of those restaurants that we closed in the early part of July. So we would expect both brands to be performing well and within the range that we guided to.

Our next question comes from Brian Bittner from Oppenheimer.

A question about -- 2 questions, 1 about comps, jack in the Box comps. The QSR industry, I think, did have a nice bump in October, I think up in the mid-2% range. And so the question here is how much of the improvement that you're seeing in the Jack in the Box comps so far in the first quarter is a rising tide theme for the industry? And how much do you believe is really bottoms-up drivers, like this new late-night menu introduction? And anything incrementally you could give us on the late-night impact that you're seeing so far would be helpful.

I guess, the way -- this is Lenny. And I think that the rising tide, I'll address that first. I don't think that's the major driver for us right now. When we look at our performance, we're looking at approximately half of the improvement that we're seeing today come from the late-night initiative. And when we look at the additional new products that we've rolled out that are hitting all dayparts, that's really where we're seeing the drivers in the other dayparts. So I would say it's not the rising tide that's necessarily moving Jack in the Box where it is today. So I would say further that when we look at sort of our outlook for the year, we expect many of the major competitors to be very focused on their value messaging. And I think that Jack in the Box will continue to use product innovation and value bundles to compete against that. If you look at what we've done with the late-night, it essentially attacks those 2 things. We do this sort of late-night Munchie Meal, which is essentially a combination of products in a box at a very competitive price, which hits on the sort of value bundle that Jack in the Box is known for. In addition to that, it includes 4 new items, which hits on the always something new with product innovation equity that we have in our brand. So we think those are the major drivers for us. And based on where we're seeing the results come from, we believe that it's really the product innovation that's driving our current results.

Okay. And then the second question is on just '14 guidance. When I do the bridge of just the $1.82 in 2013, and then thinking about like the midpoint of your guidance in 2014, the G&A loan getting to be close to 1/4 of earnings benefit, and then when you layer on the sensitivity that Jerry went through between comp growth at Jack in the Box, comp growth at Qdoba and margin expansion, it just looks like there's opportunity to do a lot more than the current range. So is the initial guidance have a dose of conservatism in it? Or just using the sensitivity factors you guys laid out, it seems as though there could be at the midpoint, it seems like it could be a little bit higher.

Yes. A couple of things on that, Alex, I think -- Brian. But same-store sales, I think, will be the key element that will drive us higher than where the current guidance is. I'll also make a couple of other comments. One, we have no mark-to-market improvement or decline, for that matter, within our guidance. And the other thing is if you notice the tax rate is up about 500 basis points from where we currently have that. And that's probably worth in the neighborhood of $0.14 or $0.15 a share. So with all of what we're working on, with the G&A reduction as the same-store sales growth, the tax rate change is creating a significant headwind for us.

Our next question comes from Jon Komp.

It's Jon Komp from Baird. Jerry, just, first, a quick clarification question on the SG&A guidance for '14. The dollar amount, the implied reduction in the dollars is pretty substantial. So can you maybe just clarify again maybe the major buckets of what's driving the big decrease in the dollars being spent?

Yes, be happy to. So if you look at the overall dollars, it implies about a $25 million in round numbers reduction in overall SG&A spend. Let me break that down for you a little bit. 40% of that is due to the restructuring activities, the early retirement window that we had last year, the ongoing shared services integration with the Qdoba brand that we completed this year, that's -- as well as our refranchising activities that we've had this year. That's generating about 40% of that $25 million. The other 60% of that is lower pension expense. And I would describe that as being 2 pieces to that, each worth about half of the pension expense reduction. So we will have a higher discount rate on our pension expense this year by about 100 basis points from what we had last year. In addition to that, our decisions that we've made to sunset the pension plan and also the early retirement plan and we embarked on a process this year, as well as towards the end of last year, to offer lump sum payments to individuals who are -- who have termed out of the company but may not be actually a retiree at this point in time. And that significantly reduced the overall liability that we have in our pension plan. So those items combined add up about 60% of that $25 million worth of overall savings. And then we have a couple of items going the other way. As we mentioned earlier, we do not anticipate a mark-to-market benefit, so we're covering that $4.6 million within our guidance. And then based on -- and then we have higher incentive payments accrued for the Qdoba brand as the performance this year did not have them have an incentive payment. So we are assuming that they'll have one next year, that also is included within our overall G&A guidance.

Okay. That's very helpful color. And then just a broader question, Jerry, on the 3-year targets that you outlined for 2015 to 2017. First of all, thanks for the color on those targets. But secondly, the one thing that was not included, which I think maybe was last year at least for 1 of the years, was an EPS target included within that 3-year target. So I'm just wondering, I know in your prepared remarks you said after 2014, you expect the growth to be -- come from a lot more balanced sources overall and certainly can look a lot different in terms of the sources of growth relative to what you've had the last few years. So is there any perspective you can provide, maybe the type of sustainable earnings growth you might suspect or any thoughts you can provide relative to those targets?

Yes. Let me talk about -- let me just mention what we said last year, we said $2 by 2014. I think the only real reason that we mentioned that, I think there is questions out from our shareholder community and I think also out on the sell side about when or could we ever get back to a $2 operating EPS. So we wanted to provide some color for where we thought that was going to be. And I think we actually might have been a little cautious on that, given our current guidance for 2014. But I think when you take a look at all of the things that we laid out in our long-term plan with 2% to 3% comps for Jack and 3% to 4% for Qdoba, I just described that the restaurant operating margin, both brands should be within the range. I also mentioned that I think that the G&A cost reductions that we have here are sustainable. It's not something that I would expect we're going to pop back up next year. The only caveat I would give you on that is that we see a significant decline in pension discount rates. But that would be the only item that I could foresee that would cause our G&A numbers to kick back up. So I think we're pretty committed to where we are within that 3.5% to 4% range. And then also we've had a penchant for returning cash to shareholders in the form of share repurchases. Oftentimes that is accretive and we would continue to do that going forward. And we would expect to do that here for 2014 also. So we didn't really give you the numbers, but I think we've given you all the pieces to calculate your own model, particularly with the EPS sensitivities that we've provided earlier.

Our next question comes from John Glass from Morgan Stanley.

First, just maybe on your longer-term guidance of 1% to 2% Jack in the Box unit development. Given that your refranchised, franchisees are fresher in the system and presumably they're better capitalized now, what -- and I think previously maybe you've spoken to the higher end of that range. Is there a nuance in saying 1% to 2%? And what's the upside potential? Or why wouldn't there be upside potential to system unit growth?

Yes. John, this is Jerry. First of all, I think the only real change in -- from the about 2% to 1% to 2% is just the reality of where we -- of what we grew this year and where our guidance is for growing next year. So I think that's just a reality check. We still think that we should be able to be a 2% growing company. But what we're seeing is taking a little longer for the franchisees to have accelerated their franchise operations and their ownership percentage in the Jack in the Box brand. It's taking them a little longer to absorb the operational aspects of that as well as the overall debt reduction. They're all well-capitalized. I would agree with what you just said there. But they're not taking out 2-year loans to buy Jack in the Box restaurants. So the debt financing looks more in the 5- to 7-year timeframe. So I think our current guidance is reflective of all of those items.

That's helpful. And then Lenny, you talked about speed of service, achieving some goals, which you don't want to sacrifice accuracy and other elements. So are you finding that you're hitting a point in reduction, where you don't want to go anymore at least in the near term because those things are starting to -- you're bumping up against those? Or I guess, what are the short-term and long-term opportunities in speed of service?

Yes. Let's talk about the short term first. I think we've continued to work with our franchise and company operations on the systems and processes that drive product out the window at a fast rate. And that will continue to be our focus. And what we've been able to do is identify the locations in the chain that are really sort of the outliers. And we are giving them some extra resources and focus to get their operations really to sort of the average performance of the rest of the chain. We think that will create greater consistency in the markets and across the chain. So you can call that basic blocking and tackling. But essentially, the focus for that are on the units that have struggled to reach the same level of performance as the average chain or the top quartile. The second place that we'll be going is really looking at return-oriented equipment investments in our restaurants that simply make the operation easier. And so we're undergoing some tests right now looking at individual pieces of equipment, and then also multivariant testing, looking at combinations of equipment in the same facility. And we've already gotten some early learnings from that, that give us a high degree of confidence that the investment in that area will pay off for us. But we want to be really careful about how we approach it. We want our franchisees to be very engaged in that type of testing so that when we are ready to invest in the business a little bit through equipment, we've got the full community onboard. But certainly, we think those are the 2 places. The short term would be sort of the outlier approach of basic blocking and tackling. Longer term would be find ways through equipment improvements to simply make the operation easier to execute.

John, I just want to add on to that. The equipment investments that Lenny talked about are included in our CapEx guidance that we provided for you.

In 2014?

In 2014, yes.

The next question comes from Jeff Bernstein from Barclays.

Two questions as well. The first one, just focused more on Qdoba. I know this year at least the company acquired close to 50 stores from franchisees. And it seems like the long-term guidance is for company operated growth much faster than the franchisee. I'm just wondering whether that's a demonstration of confidence in the brand that corporate has that they want to own a larger percentage or perhaps on the other side, less franchise demand. I'm just wondering what the drivers are and kind of wondering as you wrap up your strategic review, whether there's anything specific you can share thus far in terms of site selection or penetration or menu changes. And then I had one follow-up.

Well, let me talk about the acquisitions first here. So one, we don't have any acquisitions baked into our guidance. The acquisitions that we had in the past were opportunistic, where we had franchisees that were in some of the larger markets that had a reason for an exit plan and we wanted to go into those markets because we felt we could grow them out more quickly than perhaps what a franchisee typically would do. And they were all accretive in terms of average unit volumes, restaurant operating margins and EPS. So they all made a lot of sense for us. And we'd actually like to do a few other markets, but we don't have willing and ready franchisees that are willing to sell any additional market at this time. So we think it's still a good opportunity for us. But franchisees at this point in time are not wanting to sell any of their particular restaurants. So I wouldn't look for a lot of that going forward. But if there is something, opportunistically we'd be happy to take a look at it.

And the growth going forward in terms of just the company operated being faster, I don't know if that was again a demonstration of confidence or less franchisee growth going forward and how that relates to early learnings from that strategic review.

Yes. In terms of the growth that the projected, it's on par with fiscal '13, the '14 growth, and then ramping up from there. And we have -- I think I talked in the last quarter that we've really built the infrastructure in the development organization. So we brought on a new Chief Development Officer. We updated our site selection model. We have new real estate folks, new construction folks, new process of approval and so forth, so really picked those A locations for us. So those are in the pipeline for '14 and beyond. But we will probably be making some changes to the facility based on what comes out of the brand strategy work, the brand positioning work. So that will be tested in some prototypes, and then incorporated into further development beyond '14 and probably in the end of '14. So that's the plan right now is to incorporate and let that brand strategy work guide us on that facility.

And then Jeff, just one follow-on comment there is what we're guiding for franchise growth is consistent with what we've been guiding for franchise growth and consistent with what they've been doing. So I wouldn't look at this as a lack of confidence with respect to franchise growth, as they continue to grow at about the same rate that they have been. And then also that could ramp up, depending on what the brand strategy outcome looks like. But we all know that franchisees will probably take a wait-and-see before they would start to ramp that up. But they're still building.

Understood. And then Jerry, just a clarification. You mentioned before share repurchase has been the focus. And I think you said over time it's been over $1 billion now. I'm just wondering, at what point do you reconsider the balance with dividend or whether for some reason or other, your shareholders or management prefers kind of solely the repo focus?

No. I would say, look, we're not antidividend. We look at our capital deployment opportunities on a continuing basis and we'll continue to do that. We're not ruling one out, but we don't have any current plans to offer a dividend.

Our next question comes from Jeff Farmer from Wells Fargo.

I might have missed this. But did you guys provide any commentary on what you expected the menu pricing to be in '14 at both concepts or what's implied in that same-store sales guidance?

We did not.

Okay. So it sounds like you're not too looking forward to providing more color there. But is it safe to assume that it would be less than 2013?

I think it's safe to assume that we're going to be a little cautious on price, look at what our competitors are doing but also having a keen eye to what grocery store or a food-at-home pricing is because we know we have to -- we know that generally bad things happen when QSR pricing gets north of grocery store pricing. So we keep an eye on all of those. But we're not anticipating aggressive pricing in '14.

And with regards to Qdoba, again the brand strategy will help kind of inform us on pricing at Qdoba.

Okay. That is helpful. And then just sticking with Qdoba for a second. And I think I know the answer to this since it's probably not too much. But just in terms of the units that have been closed, I know a lot of them were sort of in these contained markets. But were there situations where you did see sort of neighboring Qdoba units benefit from displaced sales that eventually found their way back into some of these still-open restaurants, neighboring Qdobas?

Yes. What I would say, most of the restaurants that we closed, I'll use Manhattan as an example, we just really exited the entire market. So you wouldn't expect sales transfer from that. Other markets like Chicago or L.A., where they are very large in terms of the geographic reach, you wouldn't expect sales transfer from those either just because of where our locations are.

And then just one more quick one. I know based on the ongoing concept review that the -- some of the development timeline for Qdoba is a little bit up in the air. But is there any color you can provide on a potential quarterly cadence of some of these openings for the Qdoba brand in '14?

Yes. We really haven't disclosed that.

Our next question comes from Dave Carlson.

Going back to the Qdoba questions from earlier, realizing that you guys are still conducting this brand review, can you provide any early indications as to what additional investments, whether it's capital or investments that hit the P&L, that might be necessary in order to generate the sustained comp sales growth at the brand?

Yes. Dave, I think we'll be in a much better position after the end of the calendar year to give you a little bit more color. But clearly, we know that there's some menu innovation, there's some design work and so forth. So that will most likely include some investments in terms of building the infrastructure and the capability and the talent. But a lot of that talent is available at the enterprise level. So we'll give you more information on that after the brand review is done.

Understood. And this also could be a little bit premature. But anything that you could address as to what degree the brand itself may need to be repositioned?

Yes. I would hold off on that as well.

Our next question comes from Nick Setyan from Wedbush Securities.

It seems like next year, the commodity environment is going to continue to be a little bit of a tailwind. And I want to understand this quarter a little bit more just so I can project forward. We have, I think, 32.7% food and packaging as a percentage of sales in a 5% inflation environment. Last year, it was only 32.6%, it was 32.6%. So we only had about 10 bps there of delevers -- of deleverage. And I think if I heard you correctly, you said you held pricing pretty stable. There was very minimal pricing. And so if we're going to -- first, I want to understand sort of what were the drivers of such, I guess, stellar performance on the food and packaging side in a 5% environment, when you guys weren't taking much pricing. And then does that mean -- I mean, that kind of indicates that next year is going to be -- have a pretty big tailwind from cost of sales and that could impact, kind of drive a lot of that improvement in the margins. So how can I kind of interpret all that?

Yes. So Nick, a couple of things. One, the pricing comment that I mentioned no pricing, that was specific to Qdoba. So Qdoba had no price in Q4 versus 2.8% last year. The Jack in the Box pricing was similar year-to-year. We had 2.5% in price this year. It's essentially the same number last year. And the other thing, it really depends upon product mix and what you're promoting in the quarter versus what you did in the prior year. So there's more that goes into it -- a lot more that goes into it than just what the commodity inflation level and pricing look like.

Got it. So it could change from quarter-to-quarter in terms of mix. There's no sort of strategy to focus on those items that would benefit the margin a little bit more going forward.

No, I think there is. But just seasonally, as an example, I think the easiest thing to do is to say you'll sell more solids and soft drinks in the summer months and you'll sell more coffee in the winter months and heavier product items perhaps in the winter months. So I think just normally what you see with how people buy food, you'll see the same kind of shift in product mix.

Okay. And then just another question on Qdoba. I think you had previously commented that the newer openings are actually doing much better than what we've seen in the sort of the last 2, 3 years. So could you maybe give us another update on now that you guys have almost 30 units that you guys already opened this year, how those sales are tracking, what kind of margins we're looking at? And then just kind of a bigger question on Qdoba. What was sort of the big problem, I guess, over the last 3 years with those openings? I mean, besides the development, I mean, you guys commented that you hired a new development team, that they're looking at different criteria of how they're going to open them. Are there any other drivers that going forward are going to be different that we can have 3%, 4% types of comps longer term and see cash and cash returns that are more in that 30% range?

Yes. Regarding the new locations, they have improved because the volumes are closer to the system average versus low volumes in some of those very challenged markets. Those were the very markets that we ended up closing as a result of lack of brand awareness. And I think we talked about that quite a bit over the last couple of years that Qdoba entering those markets, where they were new to the market, that there was competition in the market and we had the lack of market penetration and the lack of brand awareness. So that was the challenge. Obviously, going forward it's 2 things. One is to build in those markets where we have some brand awareness and to improve our positioning of the brand so that we clearly become a destination brand that's differentiated from the competition in the Mexican fast casual category.

[Operator Instructions] The next question comes from Joe Buckley of Bank of America.

Jerry, I wanted to ask about your margin on the franchise revenues. You gave us a lot of breakdown between the rents and the royalties. Since the same-store sales for the franchisees improved, should we see that margin percent, your expenses versus revenues, also show pretty good improvement?

Yes. Short answer, yes. But while our rents that we carry does move up from time-to-time, it doesn't move up based upon sales. So if you're looking at any point in time, we can get a 9.5% flow-through on the incremental sales volume for a franchisee, as well as 5% on the royalties. So we can get marginal flow-through as high as 14.5%. I'm not saying that's always 14.5%, but it can be as high as 14.5% on that. So that is -- well, I hope that answers your question, Joe.

At this time, it doesn't look like we have any further questions. We appreciate you all joining us this morning and have a happy Thanksgiving.

Thank you.

Thank you. This does conclude today's conference call. You may disconnect at this time.