Jack in the Box - Q2 2023

Transcript

Operator (participant)

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jack's 2nd quarter 2023 earnings webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Chris Brandon, Vice President of Investor Relations, you may begin your conference.

Chris Brandon (VP of Investor Relations.)

Thanks, operator, and good morning, everyone. We appreciate you joining today's conference call highlighting results from our 2nd quarter 2023. With me today, our Chief Executive Officer, Darin Harris, and our Interim Chief Financial Officer, Dawn Hooper. Following their prepared remarks, we will be happy to take questions from our covering sell-side analysts. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available on our investor relations website at jackinthebox.com. We will also be making forward-looking statements based on current information and judgments that reflect management's outlook for the future. However, actual results may differ materially from these expectations because of business risks.

We therefore consider the safe harbor statement in today's earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. 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 and are available on our investor relations website. I'd like to provide our conference and event schedule for the next few weeks. We will be attending the Cowen Future of the Consumer Conference on Tuesday, June 6th, the Baird Global Consumer Tech and Services Conference on Wednesday, June seventh, and the RBC Capital Markets Consumer Conference on Thursday, June 8th, all in person and all taking place in New York City. The week following, we will attend the Oppenheimer Conference on Wednesday, June fourteenth, which is being held virtually.

We look forward to participating and seeing many of you there. Lastly, we'd like to apologize in advance for any background noise. Our headquarters are 5 mi from Miramar. The naval base decided to go ahead with their training exercises this morning regardless of the Jack in the Box earnings call. While fun to watch out the window, it is not ideal for a conference call. Please forgive us for any aviation or Top Gun sounding noises throughout our remarks. With that, I would like to turn the call over to our Chief Executive Officer, Darin Harris.

Darin Harris (CEO and Director)

Thanks, Chris. We are very pleased to report strong quarter two performance as we are seeing momentum from our strategy execution and the results prove it out. Our performance can be best characterized by a sharp increase in same-store sales, improvements in restaurant and franchise level margin, growth in adjusted EBITDA and operating EPS, combined with continued confidence in reaching positive net unit growth for the year. This progress on top of our results from the 1st quarter have given us the confidence to raise annual guidance across key metrics. In doing so, we want to thank our franchisees, dedicated center staff, and our restaurant level team members who are working together to successfully execute our strategy and put wins on the scoreboard. They are a talented team that makes it possible to achieve our objective of creating value for our shareholders.

I will keep utilizing our four strategic pillars as a guide in discussing the progress and outcomes of many actions supporting our strategy before turning it over to Dawn to review our financial results and updated guidance in greater detail. We start with building brand loyalty and our efforts to grow sales and accelerate transactions through our Crave marketing strategy and positioning. We exhibited strong calendar execution in quarter two by balancing value with premium offerings beginning the quarter focused on the debut of the $5 Jack Pack combo. This new value platform can be revisited throughout the year and was particularly effective in driving incremental transactions. In January, we launched a new beverage layer through our partnership with Red Bull, debuting our premium Red Bull Infusion iced beverages.

These products expanded our variety and drove incremental sales in our beverage category by providing customers with a new use occasion. We also enhanced our core by rolling out a new and improved grilled chicken sandwich for guests looking for a great tasting, healthier option to start off the year. In early March, we featured the return of classic and spicy Popcorn Chicken, a fan's favorite that has proved itself as a strong performance driver for the brand. We celebrated a cultural moment with our distinctive St. Patrick's promotion, the Mint Mobile Shake, which was supported by a fun and edgy campaign featuring one of the sexiest men alive, Jack in the Box. Of course, Ryan Reynolds. This one of a kind activation created a unique partnership between the popular actor and his Mint Mobile investment.

Along with the Jack brand, we saw strong social engagement and positive brand sentiment, helping average check growth, mobile and app sales while setting a new benchmark for future shake promotions. Continuing to develop these unique brand partnerships is a priority, and it's one more lever in making Jack even more Crave in 2023. Over the past two years, Ryan Ostrom and team have optimized our marketing spend by focusing on reach over frequency while using digital channels to keep an active dialogue with core users. When hand in hand with effective creative and the right offer, this adds a meaningful layer of sales performance. By investing in our MarTech stack, it has enabled us to become a more formidable digital competitor and assisted in driving same-store sales and brand loyalty. We have gone from sub 1% digital sales pre-COVID, we are now approaching 12%.

Last quarter, we rolled out a new app plus a new web ordering platform, which now allows guests to order when they want and from whichever device they choose, all while we get to capture important data on our guests. We're now positioned to drive incremental upsell and add-ons to our order while offering saved payment methods, favorite locations, previous orders, and the ability to easily earn and redeem loyalty points through Jack Pack Rewards. This has all led to higher average check, greater transactions, and a 30% increase in web and app sales during quarter two. 3rd-party delivery continues to perform well with room to grow, and we continue to focus on the operational initiatives that assist further in optimizing this channel.

While we have only scratched the surface of our overall digital potential, we have clear next steps, including personalization, driving loyalty and frequency with our biggest fans, and the ability to retarget lapsed users while growing our CRM and loyalty database. In fact, Jack Pack Rewards membership grew 45% during the 2nd quarter, driven by our in-app promotions of the Mint Mobile Shake and our famous tacos. We are well equipped to realize this big opportunity and see realistic potential to do so by leveraging our scale and resources to capture and better utilize data to yield incremental sales for both brands. Lastly, on this pillar, I will touch on the early progress of our reimage program, which is garnering solid interest from our franchisees.

On the franchise side, there are currently 405 reimage forms that have been submitted. Already 71 of these in the design and permitting stage. We expect about five industrial image remodels to be completed by the end of the fiscal year. For company-owned, we have approved 28 restaurants set to be updated in the new Crave image, with 10 restaurants in the design and permitting phase, with five of these to be completed by the end of the fiscal year. We are targeting and expecting sales lifts at these restaurants, and we'll update you on this regularly as the program continues to gain meaningful traction going forward. Let's move on to our 2nd pillar, driving operational excellence and the three key items within. Building our people capability through training and staffing, elevating the execution of standards across the system, and simplifying operations.

In terms of executing standards, we continue to see significant progress overall. We began by focusing on training, resulting in lower turnover and better staffing, which has directly driven improvements related to speed, alerts, and guest satisfaction. Our drive-throughs were 11 seconds faster year-over-year in the 2nd quarter, even as we rolled over improvements the previous year. After implementing our guest experience standards a year ago, we have seen over a 20% improvement in our standards execution from third-party assessments. All in all, due to these many efforts, we are operating at higher levels and giving our guests a better experience. I'd like to touch on hours of operation and the reopening of dining rooms, which are both having a positive impact on transactions.

We have been particularly focused on owning late night by increasing hours, specifically on the franchise side, and did so again compared to Q1. While we are still about 30 minutes behind average hours open versus 2019, our franchisees are taking actions and understand that late night represents a day part where we believe we can take share. In terms of dining room reopenings, we have now increased the number of dining rooms open greater than 5 hours a day to 98% system-wide. On average, dining rooms across the system were open just over 13 hours a day, an improvement from last quarter. We continue to share the playbook and work with our franchisees and are pleased with this progress. Touching on our point-of-sale selection process, we have narrowed the field to two POS providers and plan to finalize our decision during Q3.

Restaurant implementation funded by franchisees will begin in fiscal year 2024, and we anticipate being near system completion by the end of fiscal year 2025. The new POS will allow us to drive cost out of the system and improve the guest experience with advanced tools like automation and AI. We won't wait for the POS rollout to innovate on other automation initiatives. In fact, we will be expanding our current Miso Robotics automatic fryer test to a 2nd location. Del Taco is successfully testing voice ordering with Presto, which is providing us insight that could benefit both brands. Success across these operational focus areas should lead to growing restaurant profits, which is our third strategic pillar. We see profitability going in the right direction after a tough inflationary environment in 2022. We're starting to see progress on the 200 basis point Restaurant-Level Margin opportunity.

We identified potential savings of about $55,000 per restaurant on an annualized basis. As of today, 50% of the system has installed both cheese pumps and Hydro-Rinse equipment. These two initiatives represent almost 30% of the annualized savings possible. We will continue to roll out other equipment, process, and technology programs that will assist us in achieving the 200 basis point goal and maintain the momentum displayed within our improved RLM performance. While inflation is showing signs of easing, we continue to be strategic with each pricing action using a more data-driven and surgical approach. With the assistance of machine learning and more sophisticated analytical tools, we are identifying pricing opportunities by store, channel, and market while enabling us to benchmark competitively. We are regularly sharing these best practices with franchisees so that they can make more educated pricing decisions.

The profitability initiatives we just mentioned, along with synergy savings and focus on maximizing store-level ROI, further encourages franchisees to build and open new restaurants, which brings us to our fourth and all-important final pillar, expanding our reach. Our growth plan has led to more development commitments and site approvals in the last year alone than we had in the previous three years. We are slated to have a very active back half of the year and remain positive in our ability to meet our annual guidance for gross openings. We now have 61 restaurants currently in the permitting design or construction phases, which is the most we have seen in at least a decade. Naturally, we will still experience some closures, but we remain confident in our ability to reach net positive unit growth in 2023 for the 1st time in four years.

Next month, we will open the 1st Jack restaurant in Salt Lake City with a new Crave image. We plan to open three stores in 2023 and at least seven in 2024, both company and franchise locations. With this being a combined market, all resources and efforts are activated in hopes of making this our strongest new market opening in history. Later in the summer, we will open restaurants in Louisville, beginning with company restaurants. Speaking of strong early performance, I'd like to provide the latest on our newest Jack drive-thru only prototype in Tulsa, Oklahoma. Through the end of Q2, this restaurant is still outperforming expectations, generating average weekly sales of approximately $43,000. We're also seeing about 15% of sales coming through digital, aided by food lockers for speed and convenience.

The restaurant has been open for about nine months, has all of our latest equipment, and we have seen a much higher level of sustained outperformance in terms of AUV and sales, particularly compared to the honeymoon curve we typically see in newly opened locations. This is very encouraging as our franchisees look to expand with this lower cost prototype. Since launching our Jack development program in mid-2021, we have signed a total of 76 new agreements for a total of 335 restaurants, with 69 commitments in fiscal 2023. Highlights within these commitments include our 1st new Jack franchisees in over a decade. Brand new market commitments including Florida and Arkansas, and incremental development agreements via Del Taco refranchising, including commitments from a Del Taco franchisees to build both Jack and Del Taco restaurants for the 1st time in new markets, Montana and Wyoming.

I would also like to make special mention of our franchise agreement for 22 restaurants in Mexico. It is a monumental step for the brand to be returning after 30 years, and we know that many citizens of Mexico are familiar with our brand due to the proximity to many of our U.S. restaurants. We're excited to work with this experienced multi-brand franchise operator in this new territory, centered on the border states of Mexico. We believe he and his family have the right operations and development experience, personal values and culture fit, and an established distribution network to be successful right from the start. To be clear, we are not pursuing an aggressive international growth strategy at this time.

We chose to enter the Mexico border states due to the strategic partner we identified, their distribution capability, the brand affinity due to adjacent Jack in the Box markets, and the ease to which we can assist with nearby restaurant and franchise support. Turning to Del Taco, which continues to be a value-driving addition to our company that I'm excited about. The brand is well-positioned to meet varied customer needs with its strong value proposition and barbell menu strategy. Despite the elevated market pricing model to protect margins hindered from inflation, we started the quarter with a promotional focus on the 20 Under $2 menu platform and the Epic Fresh Guacamole Burrito. 20 Under $2 continues to be well-received, mixing at approximately 16% during non-promotional periods and over 18% when on primary message.

Promoting the premium Epic Burrito simultaneously was designed to enhance check and did so nicely by mixing at over 8%. We shifted primary message to premium Crispy Jumbo Shrimp with an added beer-battered fish focus during Lent. In the last week of Q2, we introduced $5 Del's Deals, which added another value layer beyond 20 Under $2. The Del Yeah Rewards program launched about 18 months ago and is currently up to 1.3 million members compared to 1.2 million members as of Q1. Throughout Q2, we also tested a variety of additional offers in our mobile app to drive incremental visits and frequency, where we have seen an uptick in app engagement and use. As membership continues to grow, Del Taco will also gain the ability to target guests to help drive average spend and reorder trends.

Turning to operations, there is a continued focus on recruiting and the expansion of operating hours to help drive same-store sales. Thankfully, we are seeing labor availability increase in most of the brand's geographical footprint and have invested additional wages in order to increase staffing for late night. We are getting closer to pre-COVID levels for operating hours and are now well above 2022 average hours per store. We have started the process of implementing the same operational focus as we have at Jack, including training and standards execution. This has led to an improvement related to restaurant-level turnover in Q2, which is actually the lowest it's been in over a year. Alarms per store are also showing early signs of being helped by these initiatives, with Q2 seeing the lowest number the brand has seen in well over a year.

Since the Del development program launched in 2021, Del Taco has signed 14 agreements for a total of 101 restaurants. Within these agreements, two restaurants have opened, leaving 99 remaining for future development. We opened three franchise restaurants in Q2, and there are currently 17 restaurants in the permitting, design, or construction phases. This includes our 1st drive-through-only Fresh Flex restaurant, which opens next month in New Mexico. We are feeling optimistic about the opportunity to increase the development pipeline at Del Taco while continuing the progress made at Jack. We are making progress on the three major benefits to shareholders of refranchising Del Taco restaurants. First, getting closer to a company-wide asset-light model. Second, capturing incremental development agreements involving both existing and new franchisees, as well as existing and new markets for both brands.

Third, accretion via share buybacks from refranchising proceeds, evidenced by, again, raising our share repurchase output to at least $70 million for fiscal year 2023. We completed a 17-unit agreement subsequent to the 2nd quarter and continue to see demand with several more agreements in process. When including the 32 restaurants completed year to date, we expect to refranchise 65-85 restaurants in this fiscal year, all of which will contain at least a 1-to-1 ratio of restaurants purchased to restaurants developed. In fact, as part of the development agreements within the most recent transaction, both Jack and Del Taco will enter Montana and Wyoming for the 1st time in each brand's history. We will continue to update regularly on our continued progress.

Finally, as we noted at ICR last January, we have made steady progress in three areas of note thus far in 2023. Media buying consolidation, providing both brands with better rates and further reach. Second, supply chain and integration. Third, the completion of the initial phase of headcount and shared service consolidation, resulting in $3.8 million of EBITDA benefits with an additional $2.3 million benefiting the full system, which is an ongoing process and assessment. Opportunities for the future include a company-wide approach to technology and digital scale benefit, as well as continued supply chain and procurement projects.

To conclude, we will remain focused on delivering results from the significant progress made executing our strategy to create value, whether it be digital and the steps we have made to become a formidable player in this competitive area, unit economics and restaurant level profitability moving in the right direction, and the beginning stages of real progress against our 200 basis points RLM objective. Staffing initiatives when coupled with our top-line fundamentals is driving sales, traffic, and faster service levels. Refranchising and synergies, both of which are helping make our new company more efficient while driving shareholder value. Lastly, unit growth performance that is going beyond development agreements and starting to reflect in openings. Thank you again for your time today, and I will now turn the call over to Dawn.

Dawn Hooper (Senior VP, Controller, and Interim CFO)

Thanks, Darin. I will begin my review with a discussion of each of our two brands, followed by details on our consolidated performance and capital allocation. Finally, I will provide updates on our outlook for fiscal year 2023 as we are increasing our guidance across several key metrics. Let's start with Jack in the Box, where Q2 system same-store sales growth was 9.5%, consisting of company-owned comps of 10.8% and franchise comps of 9.4%. On a three-year basis, same-store sales growth was 29.3%. The system-wide quarterly same-store sales breakdown was as follows. A 9.1% increase in pricing, reflecting a sequential decrease of 90 basis points.

A 0.8% decrease in transactions, reflecting a 30 basis point sequential improvement, a 1.2% increase in mix, reflecting a 230 basis point sequential improvement. We are especially encouraged by the return of positive year-over-year mix shift for the 1st time since Q3 of 2021. Transactions were supported by our hook and build strategy as well as the successful marketing of our barbell menu with culturally relevant messaging. These marketing initiatives, in addition to improvements in hours of operation and ops execution, have been the key drivers of our improving transactions over the last three quarters. Increasing average operating and dining room hours also remain tailwinds for the Jack in the Box system. While company ops are leading the way, franchise ops are catching up.

Notably, 11.5% of net sales came from digital channels, the highest in Jack's history. Mobile ordering on the Jack app is increasing month to month, and web ordering is starting to build as well, having launched fairly recently in Q1 of 2023. On product categories, notable contributions came from sides, burgers, chicken and breakfast. All day parts generated positive sales, but once again, dinner and late night stood out the most, with late night now posting positive transactions for the 2nd straight quarter. We are making significant headway in our objective to dominate this day part, helped by expanding operating hours and compelling products that resonate particularly well with our late-night guests. Turning to restaurant count, there were two Jack franchise openings in Texas and Arizona, along with one franchise closure.

This resulted in a quarter end restaurant count of 2,187 restaurants. We are pleased to have posted positive net unit growth again in Q2. We'll be further building on this throughout the back half of the year, supported by our strong and growing development pipeline. Importantly, we continue to anticipate Jack will deliver positive net restaurant growth for the 1st time since 2019 and meet our growth opening guidance of 25-30 restaurants in fiscal year 2023. Turning to our Jack Restaurant-Level Margin, we expanded performance by 640 basis points to 21.4%. Notably, this is inclusive of our two remaining evolving markets, Oklahoma and Kansas City.

Food and packaging costs as a percentage of company-owned sales declined 130 basis points to 31.3%, driven primarily by sales performance led by menu price increases and positive mix shift. Commodity inflation was 7.7% for the quarter, with increases across nearly all categories except for pork and beef, with the greatest impact seen in sauces, potatoes, beverages and bakery. Labor as a percentage of company-owned sales fell 340 basis points due to sales leverage inclusive of price increases and the benefit of refranchising Oregon and Nashville within the last year. This was partially offset by wage inflation of 4.8% compared to the prior year.

Recall that in Q2 2022, we executed a substantial wage increase in order to attract and retain team members due to the tight labor market and are now beginning to lap that. This resulted in lower sequential labor inflation year-over-year. Occupancy and other operating costs decreased 160 basis points to 16.8% of company restaurant sales due to leverage from higher sales and the Oregon and Nashville refranchising benefit, partially offset by higher costs from utilities, maintenance and repair expenses, delivery fees, and other operating expenses. Franchise margin was 41.2% of franchise revenues, or $73.9 million, an $8.9 million increase compared to the prior year, helped by flow through from higher sales and lower costs for bad debt expense. Turning now to Del Taco.

System same-store sales rose 3.2%, consisting of company-owned comps of 3.5% and franchise comps of 2.8%. There were positive sales results in all major geographies, with particular strength across the non-California franchise footprint, demonstrating our ability to drive strength in non-core markets. Del Taco's system same-store sales breakdown included pricing of 9.9%, down 200 basis points sequentially, a decline in transactions of 3.8%, a sequential improvement of 200 basis points, and a mix decline of 2.6%, up 10 basis points sequentially. All day parts were positive, led by strength during snack, dinner and late night. Late night was aided by growth in delivery, which over indexed this during late night hours.

Staffing improvements resulted in operating hours running above 2022 levels. We are roughly 1 hour per store on average lower than pre-COVID, with continued upside opportunity. In Q2, there were no restaurant closures and three Del Taco franchise openings in Ohio, Idaho and California. The Del Taco restaurant count at quarter end was 595. Del Taco Restaurant-Level Margin was 17.3% compared to 17.8% in the prior year. Food and packaging as a percentage of sales decreased 90 basis points to 27.5%. Tortillas, shells and potatoes drove most of the 6.8% commodity inflation we experienced and was offset favorably by chicken, produce and beef. Labor as a percentage of sales increased 40 basis points to 33.5%, while average wage inflation was approximately 4% in Q2.

Occupancy and other operating expenses increased 100 basis points to 21.7%, driven by higher utilities, increases in maintenance and repair costs and higher rent expense. Franchise-level margin was $5.1 million or 37.3% of franchise revenues, compared to $2.5 million or 41.7% last year. Shifting now to our consolidated results. Consolidated SG&A was $39.4 million or 10% of revenues, compared to $28.2 million or 8.8% a year ago. Note that Q2 2023 reflected a full quarter of Del Taco, whereas last year only included about six weeks. Excluding net COLI gains, G&A was 2.5% of total system-wide sales and within our long-term expectations.

Consolidated adjusted EBITDA was $78.8 million, up from $64.4 million in the prior year, due primarily to higher Jack, franchise and restaurant level margins and a full quarter of Del Taco contribution compared to the partial quarter in the prior year, partially offset by higher G&A. Consolidated GAAP diluted EPS was $1.27 compared to $0.37 in the prior year. Operating earnings per share, which includes certain adjustments, was $1.47 for the quarter versus $1.16 in the prior year. Note that the effective tax rate for Q2 was 34.8% compared to 33.3% a year ago. The operating EPS tax rate for the 2nd quarter of 2023 was 26.7%. Moving to capital allocation.

During Q2, we repurchased approximately 200,000 shares for $18.4 million as part of our ongoing share repurchase program, and year to date, we have repurchased $33.4 million. We now plan to execute at least $70 million in share repurchases this fiscal year, up from $60 million previously, and currently have $141.6 million remaining under our board authorized buyback program. On our previous call, we committed to paying down $50 million of our variable funding note this fiscal year. During the quarter, we strategically decided to accelerate the entire paydown of the balance due to our strong cash position and the current interest rate environment. We now have approximately $172 million of total available borrowing capacity under our VFN and Del Taco credit facility.

Beyond share repurchases and paying down debt, we will also continue investing in the future of our brands while returning cash to shareholders through dividends. To that end, on May 12th, our board declared a cash dividend of $0.44 per share to be paid on June 13th to shareholders of record as of the close of business on May 31st. Of course, future dividends will be subject to board approval. Let's conclude with a review of our updated company-wide and segment guidance, reflecting our revised expectations across several key metrics for the fiscal year ending October 1st, 2023. Our updated company-wide guidance includes the following. CapEx and other investments guidance of $75 million-$90 million, inclusive of capital expenditures and franchise tenant improvement allowances and incentives is unchanged.

SG&A guidance of $170 million-$180 million, excluding net COLI gains, which amount to $6.6 million year to date. This increase is primarily due to $5 million in net litigation charges year to date, in addition to higher incentive-based compensation. Company-owned commodity guidance is now up 8%-10% versus 2022. Company-owned wage rate guidance is unchanged, still at 3%-6% versus 2022. Lastly, we are raising our fiscal year 2023 operating EPS guidance to between $5.90 and $6.10. This includes the $0.22 negative impact from the legal charge in Q1 of 2023, as well as the $0.05 net positive impact from the two litigation matters in Q2 of 2023, all of which are not expected to recur.

Recall, this also includes the $0.23 positive impact from the Hawaii transaction in Q1, which should be noted as a one-time item that will not recur in Q1 2024. In addition, note the $0.11 negative impact associated with store-level technology and POS investments, which was previously $0.22 when we originally guided last November. Lastly, this includes the impact from the expected refranchising of 65-85 total Del Taco restaurants in fiscal year 2023. Shifting to our brand segment guidance measures, we reiterated our expectation of positive net unit growth for Jack in 2023, led by 25-30 expected growth openings. For Del Taco, we anticipate positive net unit growth led by 8-12 expected growth openings.

Same-store sales for Jack is now expected to be up mid to high single digits, which is up from our prior low single digits guidance. Same-store sales for Del Taco is still expected to be low single digits for the full year. Turning now to Restaurant-Level Margin guidance. For Jack, we are now expecting between 19% and 21%, up from 18%-20% previously. This assumes high single digit price increases for the year. We still estimate a roughly 125 basis point impact from our evolving markets. For Del Taco Restaurant-Level Margins, we still expect it to be 14%-16%, inclusive of a high single-digit price increase and the impact of refranchising. Jack franchise level margin is expected to now be between 41% and 42% for the year.

This includes the negative impact of store-level technology platforms to support POS selection, operations, and e-commerce. As a reminder, the $7.3 million or roughly 90 basis point impact from the Hawaii transaction was included in both the original franchise level margin guidance from November, as well as the current franchise level margin guidance update provided today. On the Del Taco side, franchise level margin is now expected to be 37%-38%, primarily due to the impact of refranchising. Keep in mind that although refranchising is accretive via share buybacks and incremental development agreements and accretive to franchise level margin dollars via royalties, it is dilutive to the franchise level margin percentage due to the pass-through nature of rent on refranchised Del Taco restaurants.

To conclude, strong execution against the four strategic pillars has yielded robust quarterly performance through the 1st half of the year while enabling us to increase our guidance for the remainder of 2023. Of course, these results would not be possible without the combined efforts of our Jack and Del Taco teams. We thank them for helping us continue to unlock the combined power of our brands. With that, we'd be happy to take some questions. Operator, please feel free to open the line for Q&A.

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star, then the one on our telephone keypad. In the interest of time, we ask that you please limit yourself to one question. Your 1st question comes from a line of Brian Bittner from Oppenheimer. Your line is open.

Brian Bittner (Managing Director, and Senior Equity Analyst)

Thank you. I just boarded a plane, so hopefully you can hear me. Darin, Jack in the Box same store sales have significantly outperformed so far this year relative to your original guidance that you gave at the beginning of the fiscal year. What's been the biggest drivers of the upside surprise? Is it a flip in the mix, or is there anything else that you'd like to describe as what's driving this upside? What are your current indicators telling you about the health of your core consumer as we move forward from here?

Darin Harris (CEO and Director)

I think overall, Brian, it's been a strong quarter, as you can tell, and I think there's just a triangulation of things happening. We've had strong operations performance. We've had the right promotions at the right time, speaking to the right guests. You know, from those two things, it's led to some things we've done in our marketing, speaking to our guests. The last piece of this is with our marketing and offers. All three things are resonating. We've had the combination of price, we've had sequential improvement in transactions, we've had positive improvement from mix, and then the acceleration of our digital business. All those things are working together to really drive our top line. We feel great about the momentum we've been able to maintain in our business.

Gregory Francfort (Director, and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Lauren Silberman from Credit Suisse. Your line is open.

Lauren Silberman (Director, and Equity Research Analyst)

Thanks so much, and congrats on the quarter. Would you be able to talk about the cadence of comp that you saw throughout the quarter and any color on what you're seeing quarter to date? I know you talked about continued momentum. Then related, any additional color you can provide on what you're seeing across different consumer cohorts. I know the past couple of quarters you had mentioned about, you know, regarding the strength in the low and high-end consumer and potentially some opportunities in the middle band. Thank you very much.

Dawn Hooper (Senior VP, Controller, and Interim CFO)

Hi, Lauren. Thanks for the question. I would say on the cadence on composition during the quarter, we really saw some favorable momentum in specifically February and March. As a reminder, our quarter ended April 16th. Trends in Q3 are remain favorable. The momentum continues, and we're active on the innovation front. We have a lot of strong promotions coming in. Ribeye Burger, we have French Toast Sticks, which is always a fan favorite. A lot of positivity going into Q3.

Darin Harris (CEO and Director)

As a result, Lauren, you know, we've taken the chance to move our guidance upwards to, you know, mid to high single digits. As Dawn remarked, you know, there's really no big changes in momentum. Our AUV is strong, and it continues to remain favorable. I think you mentioned something about the consumers.

Lauren Silberman (Director, and Equity Research Analyst)

Yeah

Darin Harris (CEO and Director)

... looked at business and the income level... I'm sorry. The income level of our customers, what we've been able to do is we've seen a really good balance between all levels of income. Most substantially over a two-year basis, we're seeing heavy contribution from high income. Overall, you know, this year we've seen a really balanced across all levels of income and, you know, positive momentum in both sales and transactions.

Lauren Silberman (Director, and Equity Research Analyst)

Great. Thanks so much.

Operator (participant)

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

Dennis Geiger (Executive Director, and Senior Equity Research Analyst)

Great. Thank you. Encouraging development updates specific to the unit growth and the development agreements that you highlighted. I'm wondering if you could talk a bit more about sort of where franchisee sentiment is now on development and broadly, particularly as it relates to thoughts on the environment and cost across cost pressures and interest rates. If you're seeing any impact there, obviously, you know, heading in the right direction with all the agreements. Just if there's been any impact there, Darin, you know, how you would kind of frame some of that up. Thank you.

Darin Harris (CEO and Director)

Yeah, Dennis. I think as I think about our development pipeline, the biggest positive I'm seeing are people continue to show desire to sign agreements. We're, you know, we've mentioned in our release and in our commentary that the pipeline for real estate continues to build. We have more locations in both permitting all the way through construction than we've had, you know, in the last 10 years. The sentiment is positive. I think naturally, as most of the industry has described, we've had, you know, a run-up in costs, but we've also had a run-up in, you know, pricing to offset some of those costs related to, you know, our sales.

All the benefits we were getting from, you know, a lower cost model, you know, we've had to make up for in price or have been erased because of the increasing in cost of build. Long story short is favorability from the franchisees and sentiment is positive, and ultimately, we're showing that through our pipeline growth. At this time, you know, we've kept our guide at 25-30 for gross opening.

Dennis Geiger (Executive Director, and Senior Equity Research Analyst)

Great. Thanks, Darin.

Operator (participant)

Your next question comes from the line of Andrew Charles from TD Cowen. Your line is open.

Andrew Charles (Managing Director, Consumer of Restaurants Research Analyst)

Great. Thank you. Darin, we get a lot of questions around what is different today for Jack in the Box versus the brand's more challenged 2008, 2009 experience. That, of course, predated your time with the company. It's good to hear about the continued momentum that you're seeing in 3Q. Hypothetically, if we were to see a more challenging macro for the industry, which part of the Crave playbook would you anticipate leaning into more to help preserve traffic?

Darin Harris (CEO and Director)

I think for us, it's balancing our barbell approach to both premium, which we've seen working, but also having a very strong value offer that drives people into the restaurant. you know, we've been deeply in the middle of our value menu, things like $5 Jack Pack. We also have highlighted things like Munchies Under $3 as a way to drive the value, but also combine it with a premium promotion like we did with the Ribeye Burger or, you know, Popcorn Chicken. Beyond that, I think we've been really strong at driving our digital business compared to pre-pandemic and, you know, 2008. I think that helps us as far as driving check and substantially increasing our overall AUV and ticket.

Gregory Francfort (Director, and Senior Equity Research Analyst)

Well, thanks.

Operator (participant)

Your next question comes from a line of Gregory Francfort from Guggenheim Securities. Your line is open.

Gregory Francfort (Director, and Senior Equity Research Analyst)

Hey, hey, thanks. Darin, maybe just to follow up to Dennis's question. I would imagine you're starting to get a look into what the development pipeline looks like for 2024 and openings. Do you expect acceleration in 2024? Do you expect that to start to play out? Can you talk maybe just a little bit about franchisees balancing remodel CapEx versus growth CapEx and the way to fund that? Thanks.

Darin Harris (CEO and Director)

Yeah. I think as I mentioned, our pipeline, we've already have a line of sight into 61 restaurants that between now and the end of next year that are in the permitting and design and construction phases. We have a very strong pipeline. Some of those obviously can get extended beyond 2024. The pipeline is as strong as it's ever been at Jack in the Box. From a standpoint of related to reimage and franchisees balancing between reimage and development, at this point, it's a balanced approach. Most of our franchisees have shown the interest in growing, and that would be the primary factor as to where their capital dollars are going.

Over time, as we begin to prove out our remodel program, I anticipate more and more franchisees will participate because of the ROI from that opportunity. We're at the early stages of our reimage program. At this point, we rolled it out. We've had 71 of the 400, you know, and five forms submitted to move to permitting. Those, you know, we'll have five of those remodels open or reopen this year. We'll be able to report on the progress, and we anticipate pretty strong ROI. At the same time, the company is testing our Crave reimage, and we're going aggressively into the Crave reimage program.

We'll be able to report on results that I think will, you know, increase the momentum of the system to want to do more reimages, but not at a lack of a desire for growth.

Gregory Francfort (Director, and Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from a line of Chris O'Cull from Stifel. Your line is open.

Christopher O'Cull (Managing Director, and Senior Equity Research Analyst)

Thanks. Good morning, I wanted to make sure we understood your comments about sales momentum continuing into the third quarter. Just wondering if you're implying comps are still up in that high single-digit range? How much pricing will the company stores have during the last two quarters? Maybe give us any commentary you think about menu mix change?

Dawn Hooper (Senior VP, Controller, and Interim CFO)

Yeah. I think we're just gonna say that momentum continues to be favorable. As far as pricing, we guided to pricing being up high single digits. Pricing through Q one and Q two is about 9.7% for the Jack brand. You know, kind of continuing at that higher level. However, if you recall, the most substantial pricing we took was in Q three and Q four last year. The rollover of pricing is gonna decrease as we progress throughout the year.

Christopher O'Cull (Managing Director, and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from a line of Alex Slagle from Jefferies. Your line is open.

Alexander Slagle (Senior VP, and Equity Research Analyst)

Thanks. Congrats on the quarter. With the outlook for 65-85 units to be refranchised this fiscal year, does this alter your view on the longer term opportunity for 120 over three years? I mean, perhaps it's premature to talk about that, but would seem you're happier about the kinds of valuations and development agreements you're seeing. Any, any color on how you're thinking about the opportunity beyond this year?

Darin Harris (CEO and Director)

Yeah. At this point, our focus on the refranchising transactions is that we've provided a guidance at 120 over three years. We've had offers on every market. We like the valuations that we've received. They're accretive. You know, what we've shared is that they'll probably move faster than the three years as we get through this early stage of the 120. We'll update you on, you know, the further, you know, or the next steps related to our overall refranchising strategy.

Alexander Slagle (Senior VP, and Equity Research Analyst)

Okay. Thank you.

Darin Harris (CEO and Director)

You know, and with that, as we've stated before, that we will use proceeds towards share repurchases. You see in this report, we increased our guidance to at least $70 million in share repurchases this fiscal year.

Operator (participant)

Your next question comes from the line of Eric Gonzalez from KeyBanc. Your line is open.

Eric Gonzalez (VP and Equity Research Analyst)

Hey, thanks for the question. Congrats on the quarter. My question's about your guidance. You know, given the momentum that you're seeing, you know, as you head into the 3rd quarter, I'm wondering whether you might be being a bit conservative with the outlook for the 2nd half, just given that you know, that you delivered low double-digit EPS growth in the 1st half. I think the midpoint of the guidance implies that EPS will be down mid to high single digits in the back half. You know, obviously, you're lapping the Del Taco acquisition. Maybe if you can comment on that assumption and then call out any other one-time items that we should note as we think about the next two quarters. Thanks.

Darin Harris (CEO and Director)

Yeah, I don't know that I have, you know, an opinion to say that there's anything conservative or otherwise. You know, we're focused on our guidance. We've shown that, you know, we're putting results on the scoreboard, and we'll continue to keep strategy so far.

Operator (participant)

Your next question comes from a line of David Tarantino from Baird. Your line is open.

David Tarantino (Managing Director, Senior Research Analyst, and Director of Research)

Hi, good morning. Darin, I think you referenced in your prepared remarks, some pricing analytics that you're doing and helping the franchisees with better, I guess, technology around pricing. I was wondering if you could elaborate on that and also talk about really the outlook for pricing. Do you think you can price or your franchisees can price ahead of inflation to try to recoup some of the margin pressures they've had or profitability pressures they have? Or is this more of a strategy to just offset the inflation they're seeing and drive margins through some of the productivity initiatives you mentioned? Any color there would be great.

Darin Harris (CEO and Director)

Yeah. I think I'll start with the latter part of the question first, and that is, what we've been able to do with pricing is cover this year's inflation and what we've seen in food and wage. That was our focus is go into this year and make sure at least through pricing, covering this year's inflation. Through other means, whether it's operational performance, better discipline around, you know, how we look at mix and what we're promoting, chip away at last year's inflation. We've been able to do that on both brands is make up for some of the margin we lost in 2022. That's been our focus. Now as about, you know, 16 to 18 months ago, we built an internal pricing team.

We've supported them with technology tools and machine learning so that we can go in and we can understand the ability to find, you know, strategic pricing opportunities by store, by market, and do competitive benchmarking. We've been able to find each quarter different opportunities related to pricing and that's where we remain focused is how do we find by store, by market, and by product an opportunity to price, you know, more strategically and make sure we're, you know, we're in line with the competition versus just historically, the approach was looking at pricing sensitivity and then spreading a price across the whole menu. Now we're looking specifically by item and by market.

David Tarantino (Managing Director, Senior Research Analyst, and Director of Research)

Great. Thank you very much.

Operator (participant)

Your next question comes from a line of Chris Carril from RBC Capital Markets. Your line is open.

Christopher Carril (Director, and Senior Equity Research Analyst)

Hi. thanks. Good morning. Darin, can you expand, maybe a little bit more on the progress you've made on staffing levels and, in restaurant operations, and maybe help us better understand to what extent you think that's providing a tailwind to the momentum you're seeing at Jack in the Box here, and then just relative to the other initiatives you have in place? Thanks.

Darin Harris (CEO and Director)

As far as from a staffing standpoint, what we've seen is that at Jack on the company-owned side, it's been working since we, you know, implemented our playbook. You know, we're at, you know, pre-COVID levels, and staffing actually exceeded those on the company side of the business. Our franchisees have been following that playbook and making up for, some of that, you know, lost ground. We're about, you know, you know, 0.6 hours away from being at pre-COVID levels on the franchise side of the business. We're definitely seeing improvement there. On the Del Taco, we're about 1 hour off of pre-COVID levels, and the team has really made up some progress over the last, quarter and a half using some of the same playbook and their own.

You know, we still think there's upside from the Q2 standpoint. We think it had about a 2% impact to same-store sales in a positive, you know, from a positive standpoint. We still think there's opportunity in the back half of the year.

Christopher Carril (Director, and Senior Equity Research Analyst)

Great. Thanks.

Operator (participant)

Your next question comes from the line of Brian Harbour from Morgan Stanley. Your line is open.

Brian Harbour (Executive Director, and Senior Equity Research Analyst)

Yeah. Thank you. Good morning. Could you just maybe comment on the mix component of the same-store sales? You know, is that more about channels? Delivery, it sounds like is still performing well or anything in customer behavior you'd call out or, you know, just was it some specific promotions that drove that?

Dawn Hooper (Senior VP, Controller, and Interim CFO)

I mean, we were very pleased to see the favorable mix return up 1.2%, favorable to Q1 performance. I'd say that we've seen positive for the 1st time, I guess, since Q3 of 2021, so six quarters. We've seen more guests move into the premium items that is contributing to some of that mix benefit that we're posting.

Darin Harris (CEO and Director)

To add to Dawn's comment, we've been balancing between an innovation item and core. What we've seen is a carryover effect when we've promoted core, that it reminds our guests of a product that they love, such as our Bacon Ultimate Cheeseburger. We saw that carry over into this quarter, more guests ordering that premium product.

Operator (participant)

Your next question comes from a line of Jeffrey Bernstein from Barclays. Your line is open.

Jeffrey Bernstein (Managing Director, and Senior Equity Research Analyst)

Great. Thank you. Darin, just wanted to follow up on the franchisee pipeline of unit opportunity and their health more broadly. You know, on the pipeline, I think you said you have, like, 60 or so Jack units that are in permitting design and construction, which presumably, I guess, is double the 30 gross units you're expecting this year. I'm not sure if that 61 is inclusive in it. With an 18-month type pipeline needed to open up a new store, it doesn't seem like the growth in fiscal 2024 will be that much more than 2023. Just trying to gauge. I know your prior target was to get to 4% plus net unit growth in 2024.

I would think that that's been delayed a little bit, just trying to get your expectation for how many you think gross openings you could have in 2024, and whether it's any risk that franchisee balance sheets are elevated or they're becoming a little bit more cautious that the openings might lag the commitments. Thank you.

Darin Harris (CEO and Director)

We will guide 2024 later this year, as we typically do. We provide longer term guidance at our Investor Day. You know, overall, as I mentioned, we are positive about the pipeline. The pipeline that we've seen at Jack in the Box is the strongest I've seen since my tenure and in the last 10 years. We've approved more sites, as I mentioned in my commentary, in the last, you know, three to four quarters than we have in, you know, prior three to four years. You know, all those things, you know, point to a stronger pipeline of growth. We are definitely, and I think the industry is seeing this, that the time from site to open is taking longer because of labor, because of, you know, manufacturing challenges and getting equipment.

Overall, the key is to fill the top of the funnel, and that is our commitment, and with sites, and get stores in that design and permitting process, so we can get them open. 61 for us, like I said, it's the most we've had in our pipeline at this point in 10 years at this stage, with more coming behind it from a site approval standpoint. We feel really good about where we are. It has taken longer in the cycle to build stores. It's not as efficient, and that's where we're spending our time, is how do we make the, you know, pipeline more efficient from the time a site comes in to opening. We'll continue to focus on our guide of 25-30 in 2023.

Jeffrey Bernstein (Managing Director, and Senior Equity Research Analyst)

Thank you.

Darin Harris (CEO and Director)

Well.

Operator (participant)

Oh, please go ahead.

Darin Harris (CEO and Director)

Well, thank you again for joining the call today. You know, we were really excited about this quarter, how we performed. We believe that the strategy that we have in place is working. We felt that it was, you know, the showing in results, you know, and that next quarter, we anticipate, you know, our, you know, performance to be strong as we, you know, see strong momentum. We look forward to seeing many of you this summer on the road at conferences. We look forward to the next time we speak in August for our 3rd quarter 2023 earnings call.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.