Jack in the Box Inc. (JACK) Q1 2013 Earnings Report, Transcript and Summary

Carol A. DiRaimo - Vice President of Investor Relations & Corporate Communications Linda A. Lang - Chairman, Chief Executive Officer and Chairman of Executive Committee Jerry P. Rebel - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Leonard A. Comma - President and Chief Operating Officer

John S. Glass - Morgan Stanley, Research Division Brian J. Bittner - Oppenheimer & Co. Inc., Research Division Joseph T. Buckley - BofA Merrill Lynch, Research Division Keith Siegner - Crédit Suisse AG, Research Division David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division Alexander Slagle - Jefferies & Company, Inc., Research Division Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division Larry Miller - RBC Capital Markets, LLC, Research Division Howard W. Penney - Hedgeye Risk Management LLC Conrad Lyon - B. Riley & Co., LLC, Research Division Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Good day, everyone, and welcome to the Jack in the Box Inc. First 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 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.

Thank you, Marianne, 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 first quarter of fiscal 2013, as well as some of the guidance we issued yesterday for the second quarter and fiscal 2013. And following today's presentation, we'll take questions from the financial community. 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. Jack in the Box management will be presenting at the Bank of America Merrill Lynch Consumer and Retail conference in New York on March 13 and at the UBS Global Consumer conference in Boston on March 14. Our second quarter ends on April 14, and we tentatively plan to announce results on May 15 after the market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on May 16. And with that, I'll turn the call over to Linda.

Thank you, Carol, and good morning. Jack in the Box reported another strong quarter of operating results yesterday that built upon our accomplishments from last year. Let's look at some of the highlights that we reported for the first quarter. Operating earnings per share more than doubled from the year-ago quarter, increasing to $0.54. Consolidated restaurant operating margin improved 220 basis points to 15.7% of sales. Same-store sales increased 2.1% at company Jack in the Box restaurants and 1.5% at company Qdoba restaurants. And through an ongoing review and refinement of our organization, we're creating a structure that more efficiently supports our new business model. Focusing on Jack in the Box, our same-store sales growth exceeded that of the QSR sandwich segment according to NPD, which we attribute to the investments we've made over the past few years to enhance our food, service and restaurant facilities. We did not take additional price increases during the quarter, and traffic was roughly flat. On a 2-year cumulative basis, same-store sales were up 7.4%. The first quarter sales improvement was seen across all dayparts with breakfast and late night, posting the largest year-over-year increases. Our promotional calendar during the quarter featured a balance of media messages, promoting a mix of products that benefited all dayparts, from our Loaded Breakfast Sandwich and Sourdough Cheesesteak Melt to a value-priced Bonus Jack combo and a value offering for chicken nuggets. Our recent focus on speed of service continued to result in improvement across all dayparts at company and franchise restaurants. Faster service is building trust with our guests, driving additional visits and contributing to the improvement we see in our overall guest satisfaction scores. Turning to Qdoba. One of our key priorities in 2013 is to drive traffic. We believe our first quarter promotional efforts to differentiate the brand helps to generate the 1.5% increase in same-store sales at company locations, with the improvement driven by transaction and catering growth. Like Jack in the Box, Qdoba did not take additional pricing during the quarter. Several brand activation initiatives are in various stages of development and execution, including a new brand campaign to drive traffic and sales. The new campaign will focus on more clearly articulating Qdoba's unique brand positioning and innovative menu, which includes craveable items like our 3-cheese Queso. Certain markets featured Queso and a first quarter promotion in which guests could add Queso for free to their burritos. As expected, promotions like these can negatively impact average check, but our goal is to increase frequency and loyalty to the brand. A key point of differentiation for Qdoba is the varied menu of products that are made with unique flavors, fresh quality ingredients and handcrafted preparation. For example, this week, we're introducing a brown rice that is seasoned with garlic, fire roasted tomatoes and a hint of red chilies. Our brown rice is a healthful and flavorful complement to our adobo marinated steak and chicken, slow-simmered pork and other distinctive menu items. Catering continued to positively impact sales in the first quarter, representing approximately 6.5% of total sales. During the quarter, we hired a director of catering, and with our increased focus on catering sales, we believe we can significantly grow this part of our business. Our search for a new President at Qdoba is going very well. We're looking for someone who can build upon Qdoba's success and distinct brand equities. We've hired -- we've had a lot of interest in this position and have interviewed some outstanding candidates who are experienced restaurant industry executives. We'll make a public announcement as soon as we've made a decision on this critical position. Looking ahead, our sales guidance for Q2 reflects several issues that are negatively impacting discretionary spending, including the rapid increase in gas prices, higher payroll taxes and delayed tax refunds. Several companies in both the restaurant and retail space have reported some sales weakness in the last part of January and first half of February. Our guidance reflects softness we've seen thus far in the quarter and the uncertainties surrounding consumer spending. In closing, we're pleased with the solid results we reported for the first quarter and the strategies we're executing to take market share and build upon the success we've experienced. Our long-term outlook reflects a balance of growth from all segments of our business model. We have transformed our company in recent years and positioned our brand for significant earnings growth and cash flow generation. And now I'd like to turn the call over to Jerry for a more detailed look at our first quarter results and outlook for the future. Jerry?

Thank you, Linda, and good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. First quarter earnings from continuing operations on a GAAP basis were $0.54 per share compared with $0.27 last year. Operating earnings per share, which we defined as EPS on a GAAP basis, excluding gains from refranchising and restructuring charges, were also $0.54 in the quarter versus $0.25 last year. Our results continue to reflect transformation of our business model and the annuity-like cash flows that franchising produces. As an example, we generated $11.6 million more in franchise revenues in this year's first quarter than last year. Franchise margins grew by more than 300 basis points, and our margin dollars increased by more than 20% as we benefited from lower reimage incentive payments, as well as the restructuring efforts we undertook last year that reduced franchise support costs in addition to G&A. Restructuring charges of about $800,000 or approximately $0.01 per share in Q1 are included in impairment and other charges. Jack in the Box company average weekly sales were over $30,500 in Q1, up 4.5% from last year due to same-store sales growth of 2.1% and the benefit of refranchising. Consolidated restaurant operating margin of 15.7% of sales for the quarter was 220 basis points better than last year's first quarter. Jack in the Box margins improved 320 basis points to 17.1% in Q1, with half of the improvement due to lower food and packaging costs. The remaining half was due primarily to sales leverage and a modest impact from refranchising. Qdoba margins decreased 40 basis points to 11.6% in the quarter as incremental promotional activity drove traffic. As a reminder, the first quarter is seasonally the lowest margin quarter for Qdoba. Commodity inflation moderated to less than 1% in Q1, with modest deflation at Jack in the Box and approximately 1% inflation at Qdoba. The lower tax rate in the first quarter was due primarily to legislation that retroactively reinstated Work Opportunity Tax Credits, and we now expect the full year tax rate to be approximately 35% to 36% as a result of the reinstated tax credits. We completed the outsourcing of our Jack in the Box distribution business during the first quarter, and the benefit can be seen on our balance sheet. We freed up approximately $60 million in working capital, tied up in franchise receivables and distribution center inventories. In the first quarter, we bought back approximately $27 million worth of stock, leaving $50 million available under an authorization that expires in November 2013 and $100 million under an authorization that expires in November 2014. Given our growing free cash flow, we would expect to more consistently repurchase shares on an ongoing basis, and we plan to repurchase approximately $50 million of our stock over the next 3 quarters, fulfilling the authorization that expires in November 2013. As far as commodities are concerned, overall, we expect commodity costs for the full year to increase by approximately 2% to 3%, with higher inflation in each of the next 3 quarters than we saw in Q1. Beef and corn have the potential to be the most volatile, and we are currently -- and we currently expect beef costs to be up approximately 4% and chicken prices to be up approximately 6% for the full year. And here's our current thinking on guidance for the balance of the year. We're expecting same-store sales growth at Jack in the Box company restaurants in the second quarter to be approximately flat compared to a 5.6% increase last year. And same-store sales at Qdoba company restaurants in the second quarter are expected to be flat to down 2% versus a 3.8% increase last year. Qdoba tends to be more impacted by weather, given the geography of where the majority of its locations are, and weather has been less favorable than last year. As to our full year guidance, same-store sales for the full year are expected to increase approximately 1.5% to 2% at Jack in the Box and 1% to 2% at Qdoba company restaurants. We are assuming that the current deceleration in industry sales is temporary as consumers adjust to the payroll tax increase and the timing of tax refunds starts to catch up. Operating earnings per share, which we define as diluted earnings per share from company operations on a GAAP basis, excluding restructuring charges and gains from refranchising, are now expected to range from $1.48 to $1.63 in fiscal 2013 compared to operating EPS of $1.20 in fiscal 2012. Diluted earnings per share includes approximately $0.04 of incentive payments to Jack in the Box franchisees in fiscal 2013 to complete the installation of new signage as compared to $0.11 in fiscal 2012 to complete the reimage program. As a reminder, we estimate EPS sensitivity as follows: for every 1% change in Jack in the Box system same-store sales, we estimate the annual impact to earnings is about $0.09 per share, approximately half of which relates to company operations depending on flow-through and assuming stable costs and the other half relates to franchise revenues, which are not subject to commodity costs or other inflation. The impact of a 1% change in Qdoba company same-store sales is approximately $0.02. For every 10-basis-point change in restaurant operating margin, the estimated annual EPS impact is approximately $0.015 to $0.02 per share on a consolidated basis. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. Marianne?

[Operator Instructions] Our first question comes from John Glass.

I guess just my first question then would be on, Linda, on the current trend you're seeing. And you commented on it, the weakness has been pervasive but -- across retail. But you are unique in the sense the Jack business didn't probably have as much weather. So you're really seeing the pure macro impact, x weather. So can you comment on, is it trends weekday versus weekends? Is it sort of dayparts? Is there a trade-down in the menu? Kind of what is the granularity you're picking up? And specifically, as really recently as today, Walmart has said, "Well, now that tax refunds are beginning to normalize, some of this is going away." Do you have the same sense, too, that it was more an anomaly and you are already starting to see trends of improvement or stabilization?

Right. Yes, we saw a pretty precipitous drop right about mid-January at both Qdoba and Jack in the Box. And since that time, we've actually seen a little bit of improvement in the sales trends, especially at Jack in the Box. With Qdoba, we had a little bit of weather impact, so it's a little more volatile at Qdoba. But we do -- as we had indicated and Jerry had indicated in his comments, we do think this is more temporary. And as consumers begin to absorb the impact of gas prices as tax refunds catch up, that we'll begin to see sales pick up in the latter part of the year. So the trends, the sales trends, have been a little more positive versus where we started in about mid-January, improving, I should say, improving trends.

Got you. Okay. And my follow-up is on Qdoba. And what's going on with margins and the promotional activity? Can you maybe just articulate, is this -- is the limited time promotions that drove comps this quarter, are those limited time promotions? Or are they more structurally you're changing the promotional attributes to the brand? It does seem like if you took the increase in comp and then also the decrease in gross margins or food costs, they kind of washed out. So it wasn't clear that profit dollars really grew. And I know it's not pure comparison, but -- so can you just comment on that and -- or if you're taking a more permanent promotional stand or this is just something to drive traffic during the current quarter?

Yes, it was more the latter to drive traffic in the current quarter. So we were pretty aggressive in the promotional calendar in several markets, and we definitely saw the impact on our mix. We're probably not going to be as aggressive going forward. So this isn't something structural, but we were testing a couple of versions of some promotions. So we're evaluating the results of that, and those will be included in some of our Q3 and Q4 marketing events. So we're really focused on getting traffic back in the door at Qdoba, and so that will involve some promotional activity going forward.

Our next question is from Brian Bittner. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Great quarter. I want to talk about the outlook. You increased the EPS guidance, and it seems very small increase relative to the upside from this quarter's big beat. And I want to really focus specifically on the restaurant margin assumptions within that guidance because I think that's where there's some disconnect, at least that's where I'm most confused. You expanded restaurant margins, I think, 220 basis points in Q1, but guidance assumes kind of flattish restaurant margins for the rest of the year. And I understand inflation picks up a little bit, but still, that's a very wide gap. So maybe you can talk about what the reason for that would be. Was there any onetime things in the first quarter that don't repeat? And any other dynamics you can do to explain that assumption would be really helpful.

Sure. Let me take a stab at that. Brian, if I miss some of that, just come back at me with a follow-up. So I think a couple of things. First of all, let me just mention that while our quarterly beat versus our own internal expectations was significant, it wasn't a $0.10 operating beat that we had versus the consensus. So if you kind of break down where we were, we had the same tax rate beat that I think consensus did about $0.05. But our operating EPS beat for the sales and margin and franchise margin and SG&A was about half of what the Street had. So rather than a $0.15 beat, it looks more like, on operating and taxes, about $0.10 beat for us. Most of that difference is because of the margin rate that we had expected in our business versus what the Street had guided. There was almost 100 basis points difference in the first quarter from our expectations better than what the Street was. So there's a part of it. Secondly, I want to point out that when you look at the construct of our guidance, which is up $0.03 a share, I would look at it this way. So take what we -- what I just said about our expectations, $0.05 operating, $0.05 tax. And then when you look at what the changes were in our full year guidance, the tax rate went down, but we -- 200 basis points, and that's the $0.05 a share. So that will continue. Sales actually went down because of what Linda and I spoke about on our prepared remarks with respect to current trends in the industry. So -- and then when you look at that and tie that into what I talked about with our EPS sensitivities, that costs around $0.07 a share based upon the Q2 softness. So take the plus $0.10 versus our expectations minus the $0.07 on the Q2 sales office and that's how you get to the change in our guidance at up $0.03 on the low end and the high end. Let me talk a bit about margin. So margin, we have -- if you look at the midpoint on the margin, even with sales softness in Q2, we're anticipating margin will be up about 65 basis points from prior year at the midpoint. So 15.5% to 16% versus the 15.1% last year. Now when you look at the construct of that, the Jack in the Box margin actually improves much better than that 65 basis points, and we get less improvement on the Qdoba side because of the discounting that we had in Q1. And Linda mentioned that we would expect to have some discounting going forward, although not as significant as we had in Q1. So that's how we get to the margin story. And if I said Q2 on the margin, I meant full year on the margin, 15.5% to 16% for the full year. So I'll stop there and see if I answered all your questions. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Well, you did answer it, and it makes sense. I appreciate it. But I guess a follow-up or take it from a different angle. You expect comps to rebound after the second quarter, back to the -- whatever it may be, 1.5%, 2% range for Jack in the Box. Would you expect the same type of margin leverage on that type of comp in, say, the third and fourth quarter as you got in the first quarter? Or was there something different going on in the first quarter that you won't get that same type of leverage on that type of comp going forward?

No. I think -- well, first of all, we do expect that the slowdown in sales is temporary for all the reasons that we and everybody else have been talking about. But as far as commodities go, if the trends remain soft, we would expect commodity inflation to not be in that 2% to 3% range. We'd expect some lower commodity inflation, assuming that demand stays low. I don't know if that offsets fully sales softness, don't know, but it will certainly go a long way to mitigate sales softness if it continues beyond Q2. But, again, we're not expecting that.

Our next question is from Joe Buckley.

A couple of questions though as I recover here myself. Just on the speed of service, could you share a little bit more insight into the improvement that Linda mentioned in her opening remarks? Did you see sequential improvement again and where you think you are on that round? And then just on the same-store sales, you didn't mention anything about competitive activity. And I guess I'm curious if McDonalds' more aggressive stance is starting to become more visible to you and if you think that has played any role in sales slowing down a little bit.

Joe, this is Lenny. First, let me address the speed of service question. We do continue to make a steady progress on speed of service improvements versus our internal expectations. And what we've seen in the first couple of years that we've gone after this is a pretty sizable improvement at a pretty fast rate. We continue to make improvement moving forward, but you can expect to see that improvement at a slower rate than we've made in prior years. But there's still a lot of opportunity, and we continue to make progress each quarter. So we're pretty bullish on our ability to capitalize on that. As far as the competitive activity, we are seeing a lot of activity around dollar menu and value messages, primarily focused on dollar menu or approximate dollar menu from some of the competition. But the way we choose to compete against that is by driving transactions profitably through combos, like the Bonus Jack combo that you've seen and things that you've seen from us in the past like Jumbo Breakfast Platter or the Jumbo deal. So we'll continue to use those bundle deals to drive value, but we'll also balance that out by promoting our premium items so that we can continue to do that in a profitable way. So competitive activities out there, but we think that our formula is working to keep us competitive at the same time.

Our next question is from Keith Siegner. Keith Siegner - Crédit Suisse AG, Research Division: Linda, a question on Qdoba. Just if you could remind us about, at the end of the quarter, what was the run rate of pricing in the menu, maybe when that pricing rolls off. And as you think of the concept kind of structurally and the inflation outlook now, what is the plan for pricing? Is there room for pricing? How do you approach that outlook now?

Yes, in the quarter, pricing at Qdoba was 2%. So we actually -- versus 4% last year. So we did roll off 200 basis points of pricing. And last quarter, it was 2.6%. So a little bit lower than typical. At the end of the quarter, it was 1.5%. So that is a little bit lower because we are taking somewhat of a more cautious approach on pricing, given the kind of the consumer spending environment. And we don't really comment on our plans going forward in terms of pricing. We continue to evaluate and look at opportunities and take advantage of those opportunities if it makes sense. But I'd say, overall, generally, a cautious approach when it comes to pricing. Keith Siegner - Crédit Suisse AG, Research Division: Okay. Jerry, just 1 real quick question for you. The guidance for the quarter and for the full year for Jack continues to be focused on the company-operated stores, but clearly, that's become a much smaller percent of the overall concept mix. The compares are quite different in the next couple of quarters. Is there anything unique we should be thinking about in terms of company versus franchise, 2 year trends roughly similar off the same base? How should we think about the system versus company for the next couple of quarters?

There hasn't been -- Keith, let me just mention that it was probably 1 year to 18 months ago that -- and Lenny had been talking about this at that time that franchisees were lagging on the same-store sales improvement, in large part because they were lagging on the improvements that we were making across the restaurants, the reimage program, the speed of service and so forth and so on. They have now completed the reimage program. They're tracking pretty consistently with where we are on the speed of service. And as a result, we've seen them close that gap in the same-store sales performance. We're not modeling any difference in the -- or any significant difference in the same-store sales outlook for franchisees than we are for the company restaurants.

Our next question is from David Tarantino. David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division: My question is back on the assumptions related to the comp trends for the rest of the year. And I just wanted to further understand what is giving you comfort and projecting a better trend line as you move forward. And, in particular, some of the factors you mentioned, higher gas prices, the payroll tax, those could continue. So I'm just wondering maybe what's giving you comfort that the recent trend is more temporary in nature.

Well, some of that is around the trends that we've seen since mid-January. So as I mentioned earlier, the trends are improving almost every week. And what we've seen from the industry tracking of sales, we're outperforming the industry so far this quarter. And as we mentioned, we outperformed the industry last quarter. We also look at our promotional calendar of what we have planned. We feel very positive about our marketing calendar. And certainly, at Qdoba, lots of things in development, including the new campaign that has not been launched yet. So we'll begin to launch with some media support in the third and fourth quarter. So we're feeling more bullish. And we're hopeful that it is a temporary -- the macroeconomic impact to discretionary spending is more temporary, but that is uncertain at this point. David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division: All right. Maybe just a quick follow-up. I guess the other factor that you mentioned was the tax refunds. And I guess as you look at all your data and certainly a better weekly data or better data to look at than we do, is it becoming more evident that maybe the tax refund issue might have been the overwriting factor in the recent weakness? Or do you think it's still a combination of some of those things that might still be out there, like the payroll tax and higher gas prices?

Yes. It's hard to say. I can't really tease that out from the data, but I think it's all -- I think it's everything.

Yes. David, just a follow-on to that. If you look at the payroll taxes, it's immediate 2% reduction in take-home pay. In addition, gasoline prices, last week, anyway, were at the highest level that they've ever been this early in the year. They're up about $0.50 a gallon from where they were in mid-January. So it's been not just a steady rise, it's been a significant hockey stick look-up. And, of course, that's having an immediate impact on people's disposable income. We believe that, that will become to be absorbed in international behavior, which is what history has shown us.

Our next question is from Jeffrey Bernstein.

Great. Just 2 questions. First, kind of following up from that kind of macro perspective. Just wondering, at its kind of worst point in January, albeit getting better since then, what do you see in your results that support the macro headwinds? What do you see -- is it primarily just a loss of traffic? Or do you see trading within the menu? And then when you see those type of things, how do you respond? I know you don't do dollar menus, but you kind of rejiggered -- you have the flexibility to rejigger your marketing campaign for more of a value message. And then I have a follow-up.

Jeff, this is Lenny. I think if you look at the macro trends, we see it primarily hitting traffic, and that's pretty much across the board. But we are a pretty nimble company. So as we were experiencing those types of traffic trends, we were able to make some adjustments to what we would do promotionally, whether it be through couponing or through media. So we think we have the ability to make the adjustments along the way to mitigate as much of it as possible. So we'll continue to do that going forward.

And I think you guys have said in the past that in your top 10 markets, you're #2 behind McDonald's in all of them. Just curious if that is the case. And more importantly, I know you've often talked about Burger King. And kind of in past years, with everyone getting more aggressive on value, it seems like they're perhaps going to be pushing that as well. So just wondering, is McDonald's kind of the primary one that your kind of trends change based on what they do? Or is it more the broader category?

I think the industry, in general, is going to be impacted by what McDonald's does more so than the other players because they're the largest and they have a huge focus on value right now. But many of our major markets where McDonald's is a huge player, we're actually performing quite well. So I wouldn't say that they're the only influence. I think we're looking at a combination of both the macroeconomic influence and then also the competitive activity. So I don't know that I could overgeneralize what the impact is. But certainly, discounting across the board, it's something that we'll continue to respond to, as well as the trends, economically.

I think, Jeff, it's important to note that we perform better than QSR sandwich in Q1. And what we're seeing so far, we continue to perform better than what QSR sandwich is.

Got it. And then just, Jerry, if you could comment. I know from a cash usage perspective, we talked about, I guess, the $2 number by fiscal '14 now. The share repurchase component of that, I think you said you'd use the remaining $50 million for this November. And then should we therefore assume that you guys always target using that and, therefore, the $100 million by fiscal '14? Or asked another way, I mean, how much of the assumed EPS is being driven by share repurchase over the next couple of years to get to that $2-plus number by the end of fiscal '14?

Yes, actually, the share repurchases are assumed only to offset dilution. So that would not indicate that the whole $100 million would be used. However, I don't recall ever a share repurchase authorization expiring here at Jack in the Box at least in the last 9 years or so. So I would expect that we would stick with that history going forward.

And how much would that -- could you ballpark what that contribution would be if you did that steadily over the next number of quarters?

A lot of that depends upon the dilutive effect of stock options, those kind of things. And -- but in round numbers, it takes roughly $50 million to offset dilution, plus or minus.

Our next question is from Jeff Farmer.

Actually, just following up on Jeff's question. So to reach that preliminary FY '14 number, I think it's $2. At least according to my model, you need to deliver another 100 basis points of incremental margin expansion on top of what you theoretically are going to deliver in '13. So, again, even if my numbers are roughly in the ballpark, what are the margin drivers that are still going to be actively in play as you get through FY '13 and into FY '14? What's really going to be driving again that margin expansion if it's not a lower share count that's driving that big EPS growth?

Yes, a couple of things. Well, one, you have the same-store sales growth and at Jack in the Box because of the franchise model that we have where we get both the royalty income stream, as well as the rental income stream. We -- that's worth about $0.09 a share for every 1 point worth of same-store sales improvement, which I think is better than most franchise operators. Secondly, we still have some restaurants to refranchise, and we would expect those to be accretive to earnings and also restaurant operating margin. So...

All right. So a lot of moving pieces. But just to be clear, you guys are still pretty confident that $2 number is a pretty reasonable objective?

Yes, I think we said approximately $2 a share in 2014, and we haven't moved off of that.

Our next question is from Matthew DiFrisco.

Just looking at your guidance again on the margin side also, is it correct to assume, given your comp is a little slower in 2Q than what you just booked to in 1Q and then you have a little bit more to return to in the back half of the year? And on the Qdoba margins, should we expect or is it internally assumed then that you expect to have more quarters of some margin pressure and probably year-over-year, a little bit of margin decline?

Well, I think, certainly, at Q2, flat to down, too, versus an up -- I think it was 3.8% last year in Q2 on the comps that we would expect some margin pressure as a result of that. But to more than balance against that, we are expecting margin expansion for the full year at Jack in the Box. As I said earlier, if you look at the full year guidance, it's at 15.5% to 16%. At the midpoint, again, it's 65 basis points over prior year. But Jack in the Box is doing much better than a 65-basis-point improvement over the prior year. So the Jack in the Box margins, we would expect to drive the improvement in consolidated margins this year, again, with Qdoba not driving it as much as a result of the discounting and the Q2 sales forecast.

Okay. And then sort of as a follow-up here in Qdoba as far as the average weekly sales from the new stores. I guess from the rough math here, can you -- are those still opening up relatively strong? It does look like the stores outside of the comp base are growing a little bit faster as far as on an average weekly sales basis in same-store sales. So should we assume they are a favorable addition when they roll into the comp base, maybe the 30 or so stores you've opened in the last 18 months as they roll in, in the back half of the year?

The new units, they start lower. So we would expect them to grow more quickly than, say, an established location. However, as we talked earlier, the guidance is -- excuse me, the margins start low and then begin to build. And the $1 million mark seem to be the key for when we see rapid expansion of the overall margin. Well, I think you're seeing most of the margin expansion is really due to the recent Qdoba acquisitions that we've had of the high-performing units in the -- in those highly concentrated markets that we were buying back from franchisees over the last 18 months or so.

Right. Okay. So it does look like the stores are growing faster that are -- the young stores are growing faster and that's somewhat factoring into the acceleration in comps in the back half of the year?

Yes, but I would say, Matt -- no, I don't think that, that's generating into the acceleration of the comps. What I would say on the new store performance is if you go and you look at about what we talked with our new store openings, we talked about the balanced approach and opening up in the markets that we've been acquiring from franchisees that they have a much better hit rate and they open up higher. So I think a lot of it depends on whether or not we're opening up in existing highly penetrated markets versus brand-new or developing markets. So it's a mixed bag.

Excellent. And then I appreciate the color and the data on the catering side. As a reference,though, how much did that drive your average checkup? I don't think we have a baseline as far as what that 6.5% was a year ago, and you haven't mentioned the pace of growth from it. So I'm just trying to see how much that contributed to the comp in the quarter or how much that's helping your average check.

Yes, we don't disclose the breakdown in terms of catering impact to our sales. I can tell you that quarter 3 is the highest catering quarter for us, and we see a pretty nice increase from that 6.5%. That's where we have graduation and Cinco de Mayo.

Okay. So the 6.5% is only for 1Q, it's not an annualized number?

Correct.

Our next question is from Andy Barish. Alexander Slagle - Jefferies & Company, Inc., Research Division: It is Alex Slagle. Jerry, a couple of questions for you, clarifications. The Q2 dynamics, with the $0.07 you talked about from the sales shortfall in the second quarter, does that essentially -- do you have any color? Or does that essentially make the 2Q earnings flattish? Is there any color on that?

Yes, Alex, we don't really guide individual quarter EPS numbers, but -- we don't -- I don't know the right way to answer that. We don't really dig into that. But I would just ask you to factor in the same-store sales guidance that we gave you. Alexander Slagle - Jefferies & Company, Inc., Research Division: Yes. And the repurchase of $50 million over the next 3 quarters, is that also in the full year guidance?

It is. But if it has very little impact, maybe $0.01 because of the timing in which that would be purchased over the time, then you have the increased interest expense as a result of that. But it's not a significant driver to the EPS guidance for this year. Alexander Slagle - Jefferies & Company, Inc., Research Division: Okay. And last quick one on the franchise restaurant margin leverage. You saw the 330 basis points. I guess you had good sales increase and lower incentive payments. Is there anything else about that leverage that we should think about in terms of the next few quarters, how we should think about it?

Yes. There is one other is -- as part of our restructuring activities last year, we were also able to take some costs out of our franchise supervision and franchise support process that we think that's worth about $2 million annualized, and you did see some benefit of that in the first quarter. The first quarter margins were driven by the compares. First quarter franchise margin improvement was driven by a combination of the restructuring, cost reduction and also the lower reimage incentive payments to franchisees.

Our next question is from Chris O'Cull.

Jerry or Linda, did you say what the average price increase was during the first quarter at Jack? And is there a pricing in the menu now?

Price at Jack was 2.6%.

And is that what we're -- is that the trend right now?

I don't have-- as of the end of the quarter. That was for the quarter. So -- and I'll answer the same way. We don't really disclose our practice pricing, practice going forward. So we'll look for opportunities if it makes sense.

Okay, fair enough. And then, Jerry, would you discuss how you think about using free cash flow to purchase stock versus paying a cash dividend?

Well, Chris, I would say a couple of things. One is, you can implement a share repurchase program to make it look very much like a dividend program, where you're regularly returning cash to shareholders. It was just you're returning cash differently. Returning cash to shareholders via a share repurchase program is: one, it's accretive to earnings, and two, it allows shareholders to decide when and if they want to participate in that program. And so -- and it still allows a great deal of flexibility for the company. So we like that much better at this time than we do a dividend program.

Our next question is from Larry Miller.

Linda, I was wondering if you could give us color on that campaign that you were talking about for Qdoba and the media support. That's something that I don't recall you guys really talking about. And then, in general, can you just give us your general thoughts about advertising for that brand given its lower awareness?

Sure. So I'm not going to disclose the creative right now. It's been in development. We've completed some creative in terms of outdoor and radio. So when I talk about media, I'm talking about radio and then, of course, some digital media as well, social media. So -- but it really focuses on those things that make Qdoba distinctive and unique. So it's around the menu innovation, it's around menu variety, it's around the handcrafted preparation. And so all of the things that we think are very, very compelling in terms of that Qdoba brand. So it will be -- some of them will be promotional messages and some of them will be branding messages. So we're putting that media plan together as we speak, but we wouldn't see anything until quarter 3 and quarter 4. And that is relatively new. It's not going to be in every market. We've done some limited media. Probably it's been over a year since we've done any media of any significance. So this will be new for Qdoba.

Okay. And then are you at the point where you can start thinking about television advertising in the next year or 2? Or is that just too far away at this point?

It's so limited. It may be in a couple of markets, maybe, but it would be very limited. There's just not a lot of Qdoba markets with enough penetration where it makes sense from a financial standpoint.

Yes, that makes sense. And then just 1 more question. Jerry, on the margins, you're pretty close now to that 16% target. Any thoughts on the longer-term margin at this point now that you're there?

No, I think what we're seeing here is we're on track, and I think for 2014, we say greater than 16% consolidated restaurant operating margin. And -- so, yes, we're still very comfortable with that.

Our next question is from Howard Penney.

Linda, I was curious about the Qdoba business in the interim period, with undertaking a new media initiative and promotional initiative, and how that impacts your looking for the next boss, so to speak, and what the type of person is that we'll be looking for.

Yes. What I'm really looking for is someone that has a proven track record in the area of sort of branding or brand repositioning, so strengthening the Qdoba brand in terms of really articulating and communicating what's unique about Qdoba in the marketplace and then as well as just an understanding of restaurant operations. So -- and obviously, a proven leader in terms of leadership ability because they will be operating out of Denver. I can tell you that candidates, so far have all met those requirements. So I'm very confident that we'll find someone that can really drive the performance of Qdoba.

So not having disclosed the new initiative and the branding and the awareness that you're creating, is there the risk that you have to undo, what you're going to do when you hire this new person?

No, no. I've been very involved with the team at Qdoba, and I feel really positive about the work that has been underway for the last several months. So I wouldn't expect that anyone would come in and want to change it significantly. They may want to make some tweaks to it, but I wouldn't expect a complete change in the strategy.

And then if I could, can I -- I know you don't want to talk about price and how much you're going to take. Perhaps maybe the theory behind how you take price. I mean, do you actually have a model that lets you look at consumer demand and reaction to price? Or do you use a cost-plus model that you manage to a margin?

Yes. We use -- we actually use consumer demand pricing and a model that looks at impact to marked sales and margin. We test -- we generally test price increases in different pricing scenarios. And then we look at how consumers trade and react to that price increases -- price increase. So it's not just a cost-plus strategy.

And how long is an average test per price?

It depends on what it is, but it generally takes quite a while to make sure that we fully understand the consumer reaction, so anywhere from 12 weeks on up.

Our next question comes from Conrad Lyon. Conrad Lyon - B. Riley & Co., LLC, Research Division: Question for Jerry on the guidance, and I'll throw my hat in there. It stems from this. So you restated your restaurant operating margin for the year, restated your commodity expectation, obviously trimmed down the same-store sales expectation a little bit because of the consumer. And it sounds like you'll be a little bit more promotional. Is it more arithmetic that's causing you to -- or enabling you to maintain your margin guidance given the strength of the Jack in the Box margins in the first quarter?

Maintain as opposed to what? Conrad Lyon - B. Riley & Co., LLC, Research Division: So all else held equal, trimming your same-store sales expectation, one might think that your margin guidance might have been trimmed as well.

Okay, got you. So the -- what I will say here is on the Jack in the Box side -- and we mentioned that Jack in the Box had north of $30,500 PSA sales, weekly sales volume. When we're north of $30,000 PSA for Jack in the Box, we get pretty good margin leverage on that. And so I think what you're seeing here is the improving margins in Q1 being somewhat eaten up by the softness in Q2 because of the macro environment and then continuing forward at pretty healthy rates beyond that. So, again, where it is sales-oriented versus anything else within the margin, we still feel very powerful with the cost structure, the way we're operating the restaurants and with the leverage that we get from those higher PSA sales. Conrad Lyon - B. Riley & Co., LLC, Research Division: Okay, that's helpful. A final question here. This is -- I'm not sure who it's geared towards. But in general, the rental income becoming so instrumental here, what type of insurance or how do you ensure that, that stream will continue, say, as leases come off in the future?

Sure. A couple of things. One is, most -- if you look at the activity that we have had with our refranchising activity, we sold about 650 units over the last 3 years. Most of those units had a 20-year franchise agreement, which has 20 years worth of lease time tied up in that. And then oftentimes, there's additional options that are at our -- at the company's discretion, whether we exercise those options or not. And the franchisee can decide if they want to re-up for their franchise agreement. So we have a long tail on those. Secondly, our rent structure is based upon our cap rate, based upon our balance sheet franchisees. We don't believe most of them anyway could get a lower rent by going to be outside anyway. And that's one. And then secondly, again, they don't have the opportunity to do so for a long period of time.

Our next question is from Jake Bartlett.

I was wondering if you could talk about regional performance, so California versus Texas, and maybe how some of the macro challenges we're seeing is being affected in both different regions.

Yes. I'd say that all regions -- all of our major regions were positive in the quarter. Texas, Arizona and Nevada were the strongest regions versus California, but still very, very strong and especially when you look at a 2-year cumulative basis. But Texas and Arizona and Nevada outperformed California.

Okay. And then in the current 2Q weakness that you're seeing, was it more pronounced in California given maybe the higher gas prices or what have you?

No. It was really across the board.

Okay. And then I know you're not providing specific guidance for refranchising, but if -- maybe some broad strokes in terms of how we should model the stores being sold. Are they all going to be completed in 2013 still? And I have the majority being in the fourth quarter, the kind of the East Coast stores. Is that all correct still?

Yes, what we said was that if -- that the locations that would have the biggest meaningful impact to operating earnings would be planned to happen late in the fourth quarter. So they would have no meaningful impact on operating earnings in this year.

Our final question comes from Joe Buckley.

Just a point of clarification. I thought the $2 operating EPS number was before share repurchases. Or is before share repurchases beyond anything to offset dilution? Or can you just kind of clarify how share repurchases play into that $2 number?

No, you're right, Joe. It is before any -- it assumes only share repurchases offset dilution and the approximate $2 number by 2014.

Great. Thanks, everyone, for joining us. And we will speak to you in either the upcoming conference or on the next call. Thank you.

This does conclude today's conference call. You may disconnect your phones at this time.