Jack in the Box Inc. (JACK) Q2 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

Joseph T. Buckley - BofA Merrill Lynch, Research Division Brian J. Bittner - Oppenheimer & Co. Inc., Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division Alexander Slagle - Jefferies & Company, Inc., Research Division Keith Siegner - Crédit Suisse AG, Research Division Larry Miller - RBC Capital Markets, LLC, Research Division Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division Grant A. Robinson - Robert W. Baird & Co. Incorporated, Research Division Conrad Lyon - B. Riley Caris, Research Division

Good day, everyone, and welcome to the Jack in the Box Inc. Second Quarter Fiscal 2013 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available under Jack in the Box's 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, Cathy, and good morning, everyone. Joining me on our call today are our 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 second quarter of fiscal 2013, as well as some of the guidance we issued yesterday for the third quarter and the balance of the year. 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 attending the annual B. Riley & Co. Investor Conference in Santa Monica on May 21, and presenting at the Jefferies 2013 Global Consumer Conference in Nantucket in Jun 18, and Oppenheimer's Annual Consumer Conference in Boston on June 26. Our third quarter ends on July 7, and we tentatively plan to announce results on August 7 after the market close. And our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on August 8. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning, everyone. Jack in the Box reported another strong quarter despite the economic headwinds that pressured consumers in January and February. Same-store sales increased 0.9% at company Jack in the Box restaurants, representing our tenth consecutive quarter of year-over-year sales growth. On a 2-year cumulative basis, company same-store sales were up 6.5% and improved by roughly 300 basis points in the last 2 months of the quarter versus the first month. We saw sales began improving after mid-February as gas prices dropped, tax refunds were processed and wage earners adjusted to higher payroll taxes. We continue to take market share according to NPD data. Our quarter 2 system same-store sales increase of 0.1% at Jack in the Box exceeded that of the QSR sandwich segment by 190 basis points, with the company gap even wider. In fact, on a weekly basis, Jack in the Box outperformed the segment for 11 out of the 12 weeks. We continue to outperform the industry in the month of April, and so far in this quarter, sales are trending about the same as the last 2 months of quarter 2. Same-store sales in the quarter were positive in all of our major markets, with breakfast and late-night, again, our strongest day parts with the largest year-over-year increases. Looking at our promotional calendar in the second quarter, we launched our Hot Mess campaign in early February featuring a trio of limited time offerings that leverage social media and the strength of Jack's personality to engage our guests. The campaign was centered on our Hot Mess Burger and also included Hot Mess potato wedges and a Hot Cinnamon Shake. Looking ahead, we'll continue to promote a mix of new products and value offerings, along with multifaceted promotional campaigns like Hot Mess.…

Thank you, Linda, and good morning. All of my comments this morning regarding per share amounts refer to diluted earnings per share. Second quarter earnings from continuing operations on a GAAP basis were $0.30 per share, including $0.03 of losses related to refranchising compared with $0.48 last year, which included $0.21 of refranchising gains and $0.02 of restructuring charges. Operating earnings per share, which we define as EPS on a GAAP basis, excluding gains or losses from refranchising and restructuring charges, were $0.33 in the quarter versus $0.30 last year. Consolidated restaurant operating margin of 15.8% of sales for the quarter was 30 basis points better than last year's second quarter. We were extremely pleased with Jack in the Box margins, which improved 160 basis points to 17.1% in Q2 despite commodity inflation of 2.6% and negative same-store sales in the first month of the quarter. While same-store sales growth is obviously important to driving margin expansion, we get higher flow through on the incremental sales growth when our average weekly sales volumes are near $31,000 or roughly $1.6 million annualized as they were in the quarter. The same-store sales and volumes improved throughout the quarter, margin solid. Let me give you an update on our Jack in the Box refranchising strategy. During the second quarter, we sold 4 company restaurants in one of our seed markets and entered into a letter of intent to sell 16 restaurants in 1 of our 4 Southeast markets. We expect this sale to be completed by the end of the fourth quarter. Thus far, in Q3, we have completed the sale of 18 restaurants and 1 market in Texas. And we have also recently decided to refranchise more than 50 additional locations and expect to sell approximately 40 of these restaurants by the…

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

[indiscernible] just asking the -- you to discuss just the difference between the company-operated Jack in the Box comps and the franchise Jack in the Box comps. The compare was easier for the franchisees, but obviously, the company outperformed and I'm just kind of curious what you think the drivers of that were.

Joe, this is Lenny, thanks for the question. A couple of things to think about. There's really 2 reasons why the compares were a little different for company and franchise. The primary reason is really just the footprint of our remaining company stores versus franchise. Company primarily located in California, Texas and Southeast, not impacted by the weather and performing well against our internal initiatives. Franchise operations, much more impacted by weather in the Midwest primarily, and so we certainly saw the impact there. And then as we've stated on previous calls, we do have a lot of internal initiatives that the company ops tend to move much faster to initiate and then the franchisees follow suit. So we do expect the franchisees will close the gap in those areas. But certainly, as we stated earlier, we don't typically speak about weather, but we certainly saw the difference based on the footprint this time around.

Okay. And then just a question on the decision to franchise more Jack in the Boxes, just talk about the drivers of that. And I know you mentioned it would be kind of accretive all around, but maybe just elaborate a little bit on that if you can, too, please.

Yes, Joe, so let me just walk you through the impact of the decision. So if we were to -- let me back up. These restaurants that we're looking at are cash flow positive, and they generate reasonable AUVs and margins. However, having said that, when you look at the refranchising of the ones that we just talked about in the second quarter, the one Southeast market and the additional locations that we just discussed that we'll sell this year, on a pro forma basis, if they were out of the company footprint at the end of Q2, our Q2 margin would have been 17.9% versus 17.1%. So it's 80 basis points accretive to the restaurant operating margin, but it's also accretive to operating EPS on a fully annualized basis. So it seems to fit in with our strategy of continuing to operate the higher AUV locations across our footprint.

Our next question comes from Brian Bittner of Oppenheimer. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: So as far as just you just kind of talked about decreasing the EPS from this additional refranchising. I mean, is there any way you can kind of put some numbers around that by any chance?

Well, we've indicated that all of our refranchising activities over the last couple of years have been accretive. If you look at this, depending on what you would expect to see with flow through and reduction of G&A, you're probably looking at somewhere neighborhood of $0.02 accretive to operating EPS annualized. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: And then you also kind of touched on the discrepancy between the franchisee and the company owned comps, but the guidance for same-store sales for the June or for the fiscal third quarter, I think it was just for company-owned. I mean is it fair to think that, that's probably a good guidance range for the franchise piece as well?

No, I think when we talked about the company stores and the guidance there, we spoke about the continuing trends in the last 2 periods of the quarter into this quarter, and that's really where we want to focus our energy. On the franchise side, there may be some upside potential, but I think we should expect that to trend along the same lines as a company, which would be following the last 2 periods of quarter 2.

And Brian, just one addition to my response is, when we sell the remaining 3 markets in the Southeast, we would expect those to have much more benefit to our operating EPS going forward. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Okay. So this is kind of $0.02 above what that initial range was back when you originally talked about the Southeast market.

Yes, you can -- yes, that's a pretty fair way to look at it, yes. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Okay. And then lastly, I realize it's been 7 weeks since Tim's been on the job. But at the same time, it's been 7 weeks, so clearly, he's had an opportunity to take a look at the brand and maybe see -- take a step back and reevaluate. I mean, is there any initial glimpse or peek you can give us into kind of the way that he's thinking or potential strategies going on there? I mean, we saw some more deleverage in the margins this quarter. Understand the comps had a lot of weather problems, but the margins were pretty weak, and just trying to get an understanding if there's additional strategy you can convey to us on Qdoba now or is this something that you just rather wait and have Tim take a little more time?

Yes, Brian, thanks for the question, and if you don't mind, I'd like to address the question a little more broadly. So I won't give you specifics, that will come later, but I did indicate that -- and as you said, he's been in position for what, 2 months now, 8 weeks or so. And so -- however, he clearly has a sense of urgency around the need to improve the performance at Qdoba. So he, right away, began a comprehensive review of the business, and that includes, like we said, brand positioning work, consumer analytic work, organizational structure and looking at market performance. And so we'll have more to share with you later in the year, but we haven't stopped making improvements, though. In the meantime, we reengaged the field ops team, so we've gone out with a roadshow and retrained everyone to enhance the interaction between our guest service employees and the guests that come into Qdoba. And we're beginning to see that traction, we're beginning to see positive EOG results. And then we've also reworked the marketing calendar, the marketing plan to reduce the level of discounting in most markets. So some of those initiatives have already begun and are underway, and others are -- will follow based on Tim's review of the business and the brand.

And then just a follow-up on the margin impact on weather and on discounting, and Linda mentioned the discounting activities in the second quarter. The impact on margin for that, we estimate to be about 190 basis points, so were it not for that it would've been just a scosh above 14% on the restaurant operating margin. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: And that's the discounting, is 190?

Discounting and weather combined. And they were about even on that.

The next question comes from Jeff Bernstein from Barclays.

Two questions as well. Just first, in terms of the shorter term with the refranchising that you're doing, I'm just wondering whether there's any push from the franchisees. Do they have to do a certain amount of remodels on these stores or remodel their existing stores? Or is there any sort of incentive for them to grow incremental new units? I'm just kind of thinking about the unit count for Jack and kind of the mix of recently remodeled or what not. Kind of what the franchisees who are taking in these new stores, what kind of promises they make going forward?

So these restaurants have all been reimaged, and they have all new signage also. So there's no unusual capital requirements for the franchisees going forward. We typically do package up some development opportunities for the franchisees in those locations. This particular market, we've subdivided into 4 territories, if you will. And we have -- we would expect to sell 3 out of the 4 territories this year with potentially for some new units going forward.

Are there incentives to -- for them to maybe remodel their own stores, not the ones they're buying from you or to grow new units? Do you guys see that as an opportunity?

Yes. These are by and large new franchisees to the system. So it's not like they have additional locations that haven't been reimaged. And plus, all of our systemwide units have already been reimaged.

Got it. And just longer term, you've talked about $2 in EPS by fiscal '14. So one, hasn't been discussed today, but I'm assuming that's still intact or whether there's upside to that with the most recent discussion on refranchising. And as it pertains to that, obviously, that would still be outsized earnings growth next year being that fiscal '14 is next year. There'd be another 25% earnings growth. So I was wondering as you look past that, can you size up what you think the steady-state long-term earnings growth rate would be post all the kind of the refranchising initiatives, how you think about the long-term growth for the business?

Yes, we'll update the -- our long-term outlook as we get closer to the end of the year or perhaps in November as we typically do. I would say the refranchising that we just announced and the improvement on the restaurant margins for the Jack in the Box brand, I would say, just provides additional confidence in terms of the $2, particularly with what we're seeing with some underperformance on Qdoba now. That just gives some additional confidence going forward.

Got it. And lastly, Jerry, you mentioned, I think, the second half guidance, 67 to 77. And I thought you said it will be skewed to the fourth quarter. Did you mean the growth rate would be larger in the fourth quarter than third quarter or the absolute earnings as well would be larger?

No -- yes, the absolute would be larger. And the only reason that we gave that clarity was we just noticed that the consensus had it skewed the other way. And so this is just a directional tip, nothing unusual 1 quarter versus the other. We just wanted to give you what we were thinking in terms of that split.

This third quarter wouldn't really have any earnings growth, and the fourth quarter would seem to be huge year-over-year percentage growth.

Again, the only thing we're trying to do is just give you some directional split about how we would see it because the consensus had it pretty highly skewed the other way. I'm not saying that there's 1 -- I'm not saying that Q4 substantially outperforms Q3. I'm just saying that we have it a little more heavily weighted in Q4 versus what you guys did.

Our next question comes from Matthew DiFrisco from Lazard Capital Markets.

Actually, I have a follow-up while we're fresh on the EPS guidance. I guess can you go into that, what would be the drivers for that greater growth? I mean, I looked at your commodity guidance. You suggest that it gets increasingly harder against you in the back half of the year. And then the comp comparisons 1 year ago doesn't look too different. I wouldn't assume that your comps are different. Is it just purely share repurchase having a greater impact on the fourth quarter within your internal models that would drive the greater aggregate EPS dollars in 4Q?

You are -- again, let me go back to what I said earlier. The only thing we're trying to do with that language was to be helpful from how The Street had the split between Q3 and Q4. The Street consensus is not significantly different from where our full year guidance is, we're just trying to give you some directional between Q3 and Q4 split. There's nothing magic about that, it's just how we're seeing it. So you can take that for what you think it's worth.

Understand. I don't mean to be pressing you on -- I'm just curious of -- it doesn't seem to correspond though with your margin guidance, so I'm missing the other side of the equation that would offset the rising commodity cost in the back half of the year to a greater EPS contribution in 4Q.

Sure. Let me give you a couple of things on that then. So you're correct about the share buybacks. We announced that we would -- that we're going to buy back the stock and that we would expect to be in the market because of just the math on the weighted averaging of that. You would expect stock buyback, we would enter into in the third quarter to be more beneficial into the fourth quarter weighted average shares. That's a piece of it. However, if you just look at the restaurant operating margin, I just want to go back to Q1 versus Q2 sequential, and to reiterate what I had said in my prepared remarks about this notion of weekly store average sales that are $31,000 or above. So we had, in the first quarter, we had 17.1% margin; Q2, 17.1% margin on the Jack in the Box brand. Q2 only had a 0.9% comp, Q1's comp was higher than that. And even with a 2.6% inflation in Q2 versus modest deflation in Q1, we achieved the same level of margin. The reason for that is the weekly average PSAs were up about $550 per restaurant. So when you think about that level of improvement store-to-store, virtually everything, except for the food and packaging cost, is fixed. So even at $550 extra a week, you're not adding a ton of labor into that. That was the other thing that might be somewhat variable, but it's not completely variable. Everything else flows right through. So that's what -- that also gives us confidence for the improving restaurant operating margin assuming that those average weekly volumes at Jack in the Box stay above the level that I just described.

Excellent, that's very helpful. My original question was with respect to sort of expansion for the Jack in the Box concept. And I guess when we look at reimaging and refranchising sort of coming to a conclusion at the end of this fiscal year and looking into '14, I realize you haven't gone through yet or don't want to disclose your long-term growth plans. But would it be correct to presume that we would see a meaningful step-up most likely? And given what you're seeing in the pipeline for franchise development versus, say, the sub-20 store openings that we've had for the last couple of years, could we see that get back into a more meaningful 30 or 40 store openings scheduled from the franchise side?

Yes, so a couple of things there. Let me just give you some pluses and some minuses on that. So on the plus side, the fact that we have announced a sale of restaurants in 1 market in the Southeast, another market that we sold earlier this quarter in Texas and then the other 50-plus units we've identified for sale, there could be some opportunities in 1 or more of those markets for additional franchisee growth going forward. Also, as we continue to sell our seed markets, this also provides additional opportunity for growth, which is part of that strategy. So those are the pluses. On the negatives is -- or I would say maybe not so much negative, but on the delay of that, while the remodels and the signage are complete, franchisees are working through the additional leverage that many of them took on to affect those reimages and those signage improvements. Plus, they're also not paying full cash when they buy a particular market or a group of restaurants. So as we get a little more seasoned beyond the refranchising strategy, we would expect them to have more capital to grow, but I wouldn't expect that necessarily in 2014.

Okay. Just a last follow-up to that. Is there any change to your -- is there a large swath of franchisees that might be coming up to a new royalty rate that could give you a little bit of earnings pop or rent or royalty rate given their vintage of yours?

No, the -- we generally do not have variable royalties. We do in some instances, but it's a minor piece of that. I would not expect to have increasing royalty rates as franchisees renew.

Our next question comes from Andy Barish of Jefferies. Alexander Slagle - Jefferies & Company, Inc., Research Division: This is actually Alex. Just a question on the Jack in the Box same-store sales. Seems like the outperformance versus your peers has accelerated a little bit. Do you have any of the details kind of going back on that gap versus in recent quarters?

Well, I think the way to look at the outperformance is really just based on what we're doing in the marketplace versus what we see our peers doing. Our peers are sort of screaming from the rooftops, value at $0.99, and Jack in the Box continues to do bundles as a way of promoting value. And then we also promote our interesting, sometimes a little different products and promote it a little differently than our peer group does, similar to what you saw with the Hot Mess. So I think it's really just a reflection of us kind of getting maybe an above average share of voice out there based on the way we're promoting and the type of items that we're promoting. And I think it's paying off for us.

And I will say, Alex, that gap has widened. This was, I think, the widest gap we've seen in the last 5 quarters. Alexander Slagle - Jefferies & Company, Inc., Research Division: Okay. And Jerry, I had a clarification now on the existing long-term outlook regarding G&A, just whether you're still looking at that 3.5% to 4% range for fiscal '14. And it's a pretty big -- I guess it would imply a pretty meaningful decline in the G&A dollars, and just seems like a big contributor to hitting that $2 mark in fiscal '14, if you had any thoughts on that.

Yes, I would say it's a contributor, I'm not sure that it's the key contributor to that. So if you were to -- if we didn't improve, if we didn't generate any additional sales from where we are today, you're probably looking at a $10 million to $15 million reduction in the overall cost on the G&A line. However, we are anticipating we will continue to grow sales volumes. So on the cost side, you're probably looking at something just south of $10 million that we would need to get from an overall cost reduction going forward. And some of that is going to come on the restructuring that we've already completed. You may recall that we talked about a $12 million annualized reduction in G&A cost related to our early retirement program and our restructuring. And we said we were going to get around $7.5 million of that realized in fiscal '13 as a result of a number of the early retirees were here for much of the first quarter. So we'll get that wraparound of, call it, $4 million anyway. Additionally, we continue to look at the opportunities that we have, continuing with the integration work and the shared services between the Jack in the Box brand and the Qdoba brand. We did a lot of that, thus far. Some of that just takes a little longer, but we're continuing to look at that. And then we also mentioned the possibility of some additional restructuring charges, both related to the ongoing work that we have to get down to that 3.5% to 4% G&A. I want to remind the Street that we were still working on those activities because we wanted to reiterate the restructuring charges going forward. So that also, Linda mentioned what Tim is working on with the Qdoba brand. So we would expect some opportunity there also. Does that help? Alexander Slagle - Jefferies & Company, Inc., Research Division: Yes, that does.

Our next question comes from Keith Siegner from Credit Suisse. Keith Siegner - Crédit Suisse AG, Research Division: And Linda, I have a question about Qdoba. Considering -- even weather aside, right, we had sales deceleration, we had margin deceleration actually. And yet, you're still planning on double-digit unit growth for that concept this year. It came down actually even slightly less than it did for Jack in the Box on the company side. I guess what I'm wondering is given some of these challenges, given what sounds like is a pretty holistic review that's about to take place under Tim, I'm curious as to why maybe don't back off a little bit more near term on the unit growth on Qdoba while you sort out what you plan to do with the brand. Any thoughts there would be helpful.

Yes. I think we mentioned, Keith, that actually, this year's new openings, fiscal '13, are performing above the system average. So that is above what prior year new openings for Qdoba were. And we've really kind of refocused our efforts in that area, and we're much more selective on the markets that we're going into. We have just -- with John Dawashinski [ph] in the position. We have -- he has led the effort to rebuild the site selection model, and that is almost operational, it's pretty close to being operational. So that will help us to even focus more on really prioritizing and making sure that we're opening only the high-quality, high-return. So it's more about quality, and to your point, it's less about quantity. So we'll be taking a look at that and we will certainly be giving you more information about that later in the year. But that is something that we're certainly reviewing at this point.

Keith, I just wanted to add in. We're much more focused than -- we're much more focused on generating profitable return-oriented growth than we are just generating growth. So we are clearly looking at that, and that is the strong filter that we're using in terms of what locations we're opening up and in which markets. Keith Siegner - Crédit Suisse AG, Research Division: One follow-up question then. You mentioned double-digit growth in catering for the brand at the macro level. It was interesting, this quarter now, in the Denver market at least has Chipotle's catering effort rolled out. And I'm just curious if you can talk about -- I know it is 1 specific market, but if you could talk about any trends you might have seen in that market and how they're different versus the national catering growth, that'd be great.

Yes, we have not seen an impact as a result of Chipotle's catering rollout in Denver, in particular.

Next question comes from Larry Miller of RBC.

I also had a couple of questions. You guys have transitioned to the asset-light model, and that asset-light model argues just for taking on some more debt. We do have historically low rates. You could theoretically take on a lot more debt and do a very large buyback. What are your guys thoughts about that?

So Larry, if you look at where our current debt load is on a debt to EBITDA, we're pretty much in line, I think, where a good portion of the industry is. I saw a report that came out the other day that there was a regression line about where the optimal debt level was and we were the only ones that were touching the line there. So I think we're pretty happy on -- with that. I think one thing though that it's important to know is that while it looks low on a debt-to-EBITDA basis, on an adjusted debt-to-EBITDAR basis, it's a little greater than 4 turns there. And so we look at not just debt-to-EBITDA, but also debt-to-EBITDAR. So I'm not sure we'll do anything in terms of ramping up debt meaningfully. With respect to share repurchases, let me just mention that our existing --or our new credit facility provides a basket for up to $500 million worth of additional share repurchases. And to your point, it is asset light and we're generating a fair amount of cash flow. So we'll expect to continue to be very constructive with respect to our share repurchase program, and we just talked about what we had planned to do on the remainder of this year, at least on a minimal basis, at least using remaining of the $50 million of our authorization expires in '13. And we're not suggesting that we may not dip into some of that, that we have authorized through 2014.

Okay. And then, Linda, I just want to follow up on that question before about Qdoba growth, maybe the future. And what do you see as some of the major changes in real estate strategy that you -- you said high-quality sites with high return. What does that actually entail? Can you give us a little preview?

Well, I think we've talked, Larry, earlier about the fact that we do much better when we have brand awareness in the market. And so in markets where we've gone in and we've penetrated the market and have decent presence, we do very well. So we've been focusing on filling in those markets versus trying to enter new markets that have very, very competitive landscapes. So that's what we're looking at. We've also have a couple of other initiatives and other strategies that right now, we're -- it's -- I'm not comfortable sharing for competitive reasons. But we're -- those strategies and that approach is being developed as we speak.

Could you maybe give us a sense of how much greater in magnitude the penetrated markets are in volume versus the less penetrated markets?

Yes, we don't provide that level of information in terms of -- but there is a dispersion. There is a variance in terms of AUVs. And there has been a variance in terms of performance as well.

Larry, let me just add to that there. And we all agree here with the company that we have a significant opportunity to profitably grow Qdoba. But I think when you look at it today, Qdoba represents, year-to-date through Q2, about 13% of our EBITDA. Our rental income stream on the Jack in the Box refranchising is almost 3x that. So I just want to give some perspective about where the cash flow generation is today. I think Qdoba creates a great amount of upside. But today, rental income was almost 3x higher cash flow generator.

Right. But that said, there is still opportunity. It's still a great brand, we have a lot of confidence in the brand. And so there are still lots of opportunities to grow Qdoba. We just have to be very selective on those markets and those sites within those markets.

The next question comes from Jeff Farmer from Wells Fargo.

I just got a handful of follow-ups for you guys. First up would be with the additional Jack in the Box refranchising plan over the balance of the year, where could that 16% restaurant level margin move to in FY '14 on a pro forma basis? So I guess said differently, I know it's a difficult question to answer, what's the incremental margin tailwind from that refranchising that you guys could see next year?

Well, we indicated that on a -- in Q2, it would've had an 80 basis point positive impact on that. I don't -- and that was on Jack in the Box, not consolidated by the way. So the Jack in the Box margin, just for modeling, it's probably worth about 70% to 75% of the total. So you look at a 50-basis-point to 60-basis-point improvement on a consolidated basis. But unless there is significant commodity or other inflationary actions, I'd expect that to flow through.

Okay, that makes sense. And then just drilling down on Qdoba same-store sales, looking at this closely, at least on a 2-year basis, you had a 6-quarter run of what looks to be something like 8% to 9% to your same-store sales. That number's fallen to about 2% to 5% over the last 3 quarters. I absolutely acknowledge that you saw some weather in the most recent quarter, but is that a function of new restaurants entering the comparable store base sort of underperforming, greater development in less established markets? Some other competitive dynamic that you guys can just give us a little bit help on, shed some more light on what you think is going on with the core Qdoba same-store sales number?

Yes. I'd say this is, Jeff, I'd say it's sort of all of the above. It's different than market performance, it's some underperforming marketing event, it's weather. It's -- so it's all of the above. It's rolling off. We were more aggressive on price, so we've rolled off a couple of points of price that we didn't take. That's part of it.

Final question. If you look out at the next 2 quarters of '13 and get into '14 and you think about the new stores, the comparable stores or the stores that are about to enter the comparable store base, the stores that are on tap, is that a pretty picture or do you expect to see some same-store sales pressure as some of these restaurants that have been opened over the last 2 to 3 years are beginning to enter the comparable store base? How are they holding up? Will there be a tailwind, headwind, neutral? How should we think about that?

You're asking about Qdoba?

Yes, I'm sorry.

Yes. It should be more of a positive because as we said, the new restaurants that we've opened this year are outperforming the system. So that should be a positive.

Okay. I didn't know if there's a honeymoon issue or anything like that, so okay.

No, no. We generally don't see that at Qdoba.

Next question comes from John Glass of Morgan Stanley.

Jake Bartlett on for John Glass. I had a follow-up, first, on the incremental refranchising that you're expecting. Did I hear right that 40 of them are going to be in 2013? And wondering how that's affecting the restaurant margins, the 16% restaurant margin guidance.

Yes, good point. 40 should be in 2013 fourth quarter, I would say. And late in the fourth quarter, I would expect them to not have any impact to this year at all. We have a fairly extensive training program that franchisees have to get through when they come into the system, so it's just not possible to get the transactions done before that.

Okay. And the 16 units in the Southeast that are, I guess, close to being under contract or you're nearing it, you still expect those in the fourth quarter? I ask because it sounds like you expect the others in that market in the fourth quarter as well, yet they're not under contract or not as close. Are they all happening in the fourth quarter to your guidance?

No. I would expect just this particular market to occur in the fourth quarter. I would not expect the remaining 3 markets in the Southeast to be sold this year. We still have them for sale, we're still marketing them, we like the momentum that we have now with selling 1 market in the Southeast. But we don't anticipate that they would be sold by the end of fiscal 2013.

Okay. Am I right that, that's a little different than what you'd expected or what we have been talking about in the last quarter? Has it been maybe a little longer to sell those than you had expected?

No, I don't think it's inconsistent with what we've talked about in the past. We said that they were in the -- that we assume that they were out of the -- that they would have been refranchised in the $2, but I also said for '14. But I also said they're in there, but I don't think we need to have them sold to hit the $2, and we're still comfortable with that.

Got it, got it. And then just on Qdoba, in 1Q, you talked about margins were hit because promotions were a little too aggressive. It looks like when I look at COGS delevered more in Q2, suggesting that you were perhaps more aggressive in 2Q. Wondering what -- how that happened, what the approach was in 2Q, and maybe how it's shaping up. I'm wondering whether this is delaying the plan to kind of put your new marketing message out in the third and fourth quarter, where you are in that iteration on the promotional balance at Qdoba.

Yes, Jake. So actually, the weather is what created the additional deleverage in Q2 versus Q1. The promotional activity was actually a little softer in Q2 than it was in Q1, perhaps not meaningfully so, but less impactful. Weather was almost 100 basis points.

Does weather affect the food and packaging cost? I'm just looking, I think that delevered about 130 basis points versus 100 basis points in the first quarter.

Food and packaging, I believe, was spot on, Q1 versus Q2 and on Qdoba.

Okay. Yes, we can talk about that afterwards, but I'm just -- yes, I'm just talking about year-over-year and the kind of the change in margins, but -- so in terms of what you've learned in the promotional, do you think you're nearing the correct balance?

Yes, I believe we are. We've sold off there -- on the promotional, we were testing different promotional messaging and the level of discounting, so we've fine-tuned that.

Okay, okay. And then last question real quick. Competitors are promoting value and you've had some large competitors kind of taking some of the higher end products off. How is your mix in the second quarter in terms of premium versus value? Any big shifts you're seeing there? And I guess, how you're responding to the competitive environment?

Jake, I just want to clarify. You're speaking to the Jack in the Box brand, not Qdoba?

Yes, sorry. Yes, I am.

Yes, so I think what you're seeing from us is a response that is pretty consistent with what you've seen from us in the past. We tend to go down the lane of bundled deals for value, which tend to protect the margins a little bit, and allow us to have a competitive offering out there without negatively impacting our business. And keep in mind, we've got a base of franchisees now that's almost 80% of the base and we certainly don't want to have a strategy that is sort of perpetually negatively impacting their margins in sales. So we'll continue to go down the lane of bundled value, which is really, we think, the most responsible way to do it and probably most consistent with our brand personality, because it allows us to put a lot of creativity behind the things that we put in the marketplace. And then on the premium side, you'll see us come out with new items and LTOs periodically, similar to what you saw with Hot Mess. But again, we'll do that with sort of our own flair and personality that brings a lot of attention. And as I said earlier, we've seen this consistently where we do get recognized in the marketplace more so than the competitors that spends significantly more in advertising. So we think that's the right approach for us and that will be the response that you can expect from us versus all of the value messages from the competition.

Got it, got it, makes sense. And then real quick, just a little preview to the 10-Q. But if you could give price mix and traffic for the brands, or I guess, just check-in traffic in 2Q for both brands, that'd be great.

Okay. Let me find those. I think I can get that real quick here. So in terms of pricing, it was very consistent with Q1, Jake. On Jack in the Box, our pricing was 2.7 versus 2.6 year-to-date, and on Qdoba it was actually a little lower, 1.4 versus 1.8. We did have negative mix though at those brands.

Okay. And then what was traffic for both brands?

Traffic for Jack was slightly negative down 70 basis points, and we don't disclose the Qdoba traffic numbers.

Our next question comes from Grant Robinson from R.W. Baird. Grant A. Robinson - Robert W. Baird & Co. Incorporated, Research Division: It's Grant Robinson on for David Tarantino. Maybe perhaps, can you update us on speed of service initiatives at Jack in the Box and if that's something that you guys continue to make progress on or tighten the gap, or kind of what are your expectations for that going forward from here as well?

Yes, Grant, thanks. This is Lenny. What we've seen is continued progress with speed of service, both with franchise and company locations. We continue to focus on that at the market level because the things that need to be focused on aren't necessarily the same market-by-market or restaurant-by-restaurant. So we tend to use a team approach by market to create focus on a lot of basic blocking and tackling that has continued to drive the improvement. And then here at the corporate office, we have our operations support group continuing to look at ways to drive efficiency into the operation, whether it be the back of the house kitchen operations or potentially even the builds or formulation of the food. So we'll continue to focus in both those areas so that we can continue to make progress. So we're happy with what we see because it's allowing us to maintain the improvements that we've seen in the order accuracy and quality of food, while also improving speed. So we'll be very careful to move sort of at a steady rate that allows us to just maintain those equities that we have. But we'll keep you posted, we're closing the gap on the competition and we continue to meet our own internal expectations.

The final question will come from Conrad Lyon from B. Riley.

I got a quick one here. A qualitative one on Qdoba. The choppiness with same-store sales seems to coincide with Gary Beisler's retirement. Might there be any kind of disruption, you think, because of, if you will, turnover and new initiatives coming in?

No. I don't believe it's related to that, no.

Thanks, everyone, for joining us and we will speak to you next quarter.

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