Jack in the Box - Q4 2020

Transcript

Operator (participant)

Good day, everyone, and welcome to the Jack in the Box, Inc. fourth quarter fiscal 2020 earnings conference call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. During the question-and-answer period, please use your handset when asking a question. Please do not ask over a speakerphone. At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo for Jack in the Box. Please go ahead.

Carol DiRaimo (Head of Investor Relations)

Thank you, Mariama, and good morning, everyone. Joining me on the call today are Chief Executive Officer Darin Harris, Interim Principal Financial Officer Dawn Hooper, and Treasurer and VP of Financial Planning and Analysis Dawn Bogue. In our comments this morning, per share amounts refer to diluted earnings per share. We will refer to non-GAAP items throughout today's call, including operating earnings per share, Adjusted EBITDA, as well as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliations provided in yesterday's earnings release. 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.

While management may provide current thinking on this call around the potential impacts of COVID-19 on our business, given the unprecedented nature of this pandemic and the rapidly changing environment, any forward-looking statements should be considered with this elevated level of uncertainty. 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 filed yesterday 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 in the Investors section of our website at www.jackinthebox.com.

A couple of calendar items to note: Jack in the Box management will be participating in a Morgan Stanley Virtual Global Consumer and Retail Conference on December 1st. Our first quarter ends on Sunday, January 17th, 2021, and we tentatively plan to announce results on Wednesday, February 17th, after market close. Our conference call is tentatively scheduled to be held at 8:30 A.M. Pacific Time on Thursday, February 18th. With that, I'll turn the call over to Darin.

Darin Harris (CEO)

Thank you, Carol, and good morning. I'd first like to take a moment to express my continued heartfelt thanks to our restaurant team members for keeping everyone's safety a top priority as we provide for the needs of our guests and first responders. I'd also like to thank our corporate employees, franchisees, and suppliers for their partnership, flexibility, and ingenuity during these unprecedented times. I'm excited to discuss our strong fourth quarter results. But first, I'd like to provide a quick update on where I am with onboarding, Jack's strategy, and some key leadership positions we are in the process of filling. I can tell you we have talked to several great candidates and have made tremendous progress on our CFO search. This role will be pivotal to our long-term strategy, not only as a CFO but also in terms of development and growth of the company.

As to development, we have recently hired Tim Linderman as Senior Vice President, Franchise and Corporate Development, who will report directly into me. He will be responsible for leading the development and execution of franchise sales and real estate strategies and initiatives. With his extensive background in the restaurant industry, including some of Tim's most recent experience as Chief Development Officer at Huddle House and prior to that, Global Franchise Group, Tim and I have also worked together before when I recruited him to both Arby's and Primrose Schools. He has an impressive track record of accelerating growth through innovative approaches and fostering exceptional relationships with existing and potential franchisees. We did not previously have a dedicated franchise sales leader at Jack, so we are very excited to bring him on board and get him started to grow the pipeline of new units with our franchisees, both existing and future.

We have also initiated a CMO search, a position that has been vacant for the last few years. While our two marketing SVPs have done a fantastic job of splitting the role and putting the customer first through this uncertain time, we are looking for a leader to come in and focus on three core areas for the long-term success of the brand: overall brand strategy, the evolution to a more digitally enabled experience, and continued strength in product innovation. I'm very pleased to report that we have made significant progress with strengthening our relationship with our franchisees, including the resolution of a two-year lawsuit with the National Franchisee Association. Jack cannot succeed unless our franchisees succeed. I like to think of this as a race. Historically, we've passed the baton to the franchisees that are the fourth leg in the race.

Now we're bringing them to the starting line with us. And by doing so, we have re-energized the relationship and look forward to seeing this transpire into further growth of the Jack in the Box brand. Lastly, I have met with my leadership team extensively over the past five months to get a better handle on where the brand has been and just how far we can take Jack in the Box. I plan to share more of these details next year after a CFO is on board, but I'm excited about the strategy that is being formalized. Today's focus will be primarily on quarter four's outstanding performance, which has continued through the first seven weeks of the first quarter.

We have certainly learned a lot about where consumers are headed during this pandemic, the continued importance of digital, the consolidation of transactions to drive higher check gains, and the desire for more indulgence. As mentioned last quarter, Jack pivoted early in the pandemic to capitalize on changing consumer trends, including changing media placement, leaning into delivery, and offering indulgent, flavorful, and portable menu items. Many of these consumer trends held strong through our fourth quarter. Same-Store Sales for fourth quarter were the direct result of this, increasing 12.2%. We are very pleased with the sequential improvement from our third quarter same-store sales of 6.6%. This improvement was primarily driven by transactions. Although they remain negative as consumers are using brands differently, transaction consolidation and more premium product purchases drove strong check growth throughout the quarter.

Sales and cash flow remain robust, and the company is in a very strong position amidst the pandemic. Dawn will share more detail on this in a minute. As we look at the results for the fourth quarter, same-store sales were the strongest in over 25 years since 1994. I will take a minute to outline some of the key success drivers. Over the past few years, the team has been dialing in the right value equation to drive overall sales. In 2019 and in 2020, we experienced success with our $4.99 bundles and upsell and add-on strategies. We continue to see these price-pointed offers appealing to our core consumers during this time. We also continue to benefit from our innovation. Since their launch in mid-January, Tiny Tacos have remained highly incremental to our overall performance of the permanent menu item. Consumer response remained strong.

Tiny Tacos drove transactions and bolstered check sizes as they're frequently added on to guest orders. We relaunched Mini Munchies in quarter four, featuring the return of Mozzarella Sticks as a $3 add-on. Meeting our guests' needs for craveable, snackable, and shareable sides enabled us to further bolster check sizes in the quarter. We brought back our popular Spicy Chicken Strips in mid-August. We found success in promotions with a thoughtful upsell strategy, and spicy strips were no different as we offered 2 more chicken strips for $2 more. We also focused on digitally enabled consumer trends, offering a 10-piece Spicy Chicken Strips option available only through delivery. These upsell strategies are not only easy for our crews to execute. They enable the guests to get what they want at a great value and support profitability of these promotions for us and our franchisees.

Operationally, we improved our procedures related to the Spicy Chicken Strips, leading to better quality while reducing the frying time to ensure guests could get their favorite spicy strips faster. As to speed of service, customer perceptions improved again in the fourth quarter. During the quarter, we restarted the rollout of our holding bin enhancements to restaurants. This initiative will also enable higher quality products, faster speed of service, and it continues our focus on giving the guests an experience that is consistent and quick. Aside from these continued strategies, we are also seeing shifts in our business as a result of changes from consumer behavior amidst COVID. First, consumers are utilizing delivery in our mobile app more than ever. Delivery and mobile app sales remain approximately double what they were prior to the pandemic.

As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers, with 80% utilizing at least three of the major providers. We continue to integrate our POS systems with these third-party purveyors, allowing for simpler procedures for the restaurants. Second, while we had significant shifts away from breakfast and late-night dayparts earlier in the pandemic, all five of our dayparts were positive in the fourth quarter. While traffic remains negative across these dayparts, we have seen significant rebound across all of them, including both breakfast and late-night. Third, we've experienced continued increased sales of our more premium and indulgent items, items such as our Homestyle Chicken Sandwich and Classic Buttery Jack. Consumers are now placing larger orders as well, typically for multiple people.

These shifts in consumer behavior have led to a sustained, significant increase in our check sizes during the pandemic. As our sales continue to improve in the fourth quarter, we shifted some of our marketing spend. The media team has remained extremely nimble, leaning into shifts in consumer consumption trends around gaming and video content to really meet the consumer where they are during this time. We've increased our social media presence and converted all our sports sponsorships into digital formats. Lastly, as to unit growth, franchisees opened seven new restaurants in the quarter and 27 new restaurants for the year. With the addition of Tim and the continued work on the new prototype, we are ironing out the development strategy to invigorate long-term growth for us and our franchisees. We look forward to sharing more about this strategy in 2021.

I'll now turn the call over to Dawn, our Principal Financial Officer, for a closer look at our fourth quarter results.

Dawn Hooper (Interim Principal Financial Officer)

Thank you, Darin, and good morning, everyone. Operating EPS for the fourth quarter was $1.61 as compared with $0.95 last year. The roughly 70% increase was primarily driven by strong sales results across the system, coupled with higher restaurant-level margins in the quarter. Our system-wide comparable sales increased 12.2% in the fourth quarter. Company comp sales increased 9.6%, comprised of check increases of 21.9% and transaction declines of 12.3%. Franchise comp sales increased 12.4% for the quarter, and total system-wide sales increased 13.7% in Q4. The difference between company and franchise same-store sales was primarily driven by a few company-owned locations that are heavily dependent upon dine-in traffic. Those locations had a drag of just over a percentage point on overall company same-store sales. The sequential improvement from Q3 to Q4 was driven primarily by an improvement in transactions.

As mentioned in yesterday's release, the strong performance has continued through the first seven weeks of the first quarter of fiscal 2021. Company restaurant-level margin improved in the fourth quarter to 27%, increasing 280 basis points from 24.2% last year. This increase was primarily due to sales leverage. Labor costs improved by 120 basis points, which was partially offset by continued pressure from wage inflation, which was roughly 6% in the quarter. Food and packaging costs decreased 100 basis points in the quarter, driven by a favorable mix shift as more purchases of premium items increased our average check. Commodity inflation also decelerated to approximately 40 basis points. Occupancy and other costs improved by 50 basis points as higher costs for delivery fees and COVID-19-related supplies were offset by lower maintenance and repair expenses.

Franchise-level margin increased $11.6 million when compared with the prior year quarter, primarily driven by the increase in franchise same-store sales. As a percent of total franchise revenues, franchise-level margin for the quarter was 41.3%. Without the changes from the new lease accounting standard, franchise-level margin would have been 43.7%, a 2.9 percentage point increase versus 40.8% in the prior year. Advertising costs, which are included in SG&A, were $4.4 million in the fourth quarter compared with $4 million in the prior year but remained constant at 5.1% of company restaurant sales. G&A increased approximately $4 million in the quarter, which was largely driven by a favorable reversal of a legal settlement in the prior year quarter, partially offset by a favorable settlement related to credit card fees in the current year quarter.

Mark-to-market adjustments related to company-owned life insurance policies, or COLI policies as we refer to them, drove a favorable $700,000 reduction in G&A versus the prior year. As we've discussed, these policies are sensitive to swings in the stock market. For the full year, G&A as a percentage of system sales came in at 1.7%. Our effective tax rate in the fourth quarter was 23.6%, with a number of puts and takes. Now to turn to our liquidity and debt. While performance has held up well, given the uncertainty around the magnitude and duration of the financial impacts caused by the pandemic, we continue to believe it is prudent to take actions that will maintain and bolster our healthy liquidity position. The company ended the fourth quarter with roughly $237 million in cash on the balance sheet, of which just under $200 million was unrestricted.

As a reminder, we reinstated our dividend in the third quarter. We did not repurchase any shares in the fourth quarter, and we do not expect to repurchase any shares this quarter. We do, however, remain committed to returning cash to shareholders. You will see in yesterday's press release that the board authorized an additional $100 million stock buyback program, bringing the total to $200 million, so that as our visibility becomes clearer, we can resume repurchases. We also scaled back capital spending for the year and spent mostly on essential projects. We spent roughly $27 million between capital spending and tenant improvement allowances for the full year. We expect to resume our remodel program in 2021. Our leverage ratio, as defined in our debt agreement, was 4.7 times at the end of the fourth quarter.

We continue to be in a strong position with respect to our debt covenants and liquidity. While we are not providing fiscal 2021 guidance at this time due to the uncertainty surrounding COVID-19, the economic impacts, and the interaction of the two, we will evaluate on a quarterly basis with the intent to return to providing guidance when visibility into sustained trends becomes more clear. We do want to provide, however, EBITDA sensitivities for the year. Every 1% increase in company same-store sales results in just over $1 million impact to EBITDA. Every 1% increase in franchise same-store sales results in roughly $4.8 million in EBITDA. Every 30 basis points in restaurant-level margin equates to a roughly $1 million impact in EBITDA, while every 10 basis points of G&A equates to just shy of $4 million in EBITDA. And lastly, as a reminder, fiscal 2021 is the 53rd week.

That concludes our prepared remarks. I'd now like to turn the call over to the operator to open the line for questions. Mariama.

Operator (participant)

Thank you very much. Due to time considerations, we ask that you please limit yourself to one question and one follow-up per turn. If you do have additional questions, you may reach us at that time. Thank you. Our first question comes from Brian Bittner with Oppenheimer. Your line is open.

Brian Bittner (Analyst)

Thanks for taking the question, and congratulations on very impressive operating results here. Darin, in terms of your same-store sales performance, I'm just wondering if it would be possible for you to frame up your performance against the industry, either quantitatively or qualitatively, just so we can try and maybe better understand the extent to which you're outperforming the category. I think this would help us better understand the impact or the boost that the self-help strategies you outlined in your prepared remarks are having on the business.

Darin Harris (CEO)

Well, we can't share specific NPD numbers, but we're definitely seeing significant improvement compared to the competition and outperformance.

Brian Bittner (Analyst)

Okay. And as you talked about in your prepared remarks, you did settle the lawsuit with the NFA. And clearly, from all reports, we're seeing enhanced alignment between the franchisees and the franchisor since you've come into your leadership role. And again, I know you aren't able to share specific views on unit growth until possibly sometime in 2021, but can you maybe give us just some general flavor on why the future could be different as it relates to unit growth? Investors certainly aren't used to hearing unit growth Jack in the Box in the same sentence. So maybe you can maybe touch on what the biggest drivers of this potential change are.

Darin Harris (CEO)

Great question. I'm looking forward to answering this. I know as we think about typical pipelines, it takes a period of time to develop. But some of the key points of why I'm so enthused about the potential, like you said, the franchise lawsuit has been resolved. It clears the path for our existing franchisees to grow, and they've expressed that desire to grow. In some of the recent surveys we've completed, two-thirds of them have raised their hand saying, "We want to grow, so we need to find the right opportunities for them." Beyond that, our AUVs in 2019 and 2020 opened at higher than the system average. Last year, franchisees opened 27 new stores, which is more than in the last 10 years, despite the pandemic.

We have a new head of development with a focus on franchise recruitment and aggressively supporting our partners in the hunt for sites. This is not a position that existed in Jack previously. So really, that enhanced focus on both recruiting new franchisees and supporting our existing franchisees will be a part of our focus. We've just rolled out a new lower-cost prototype that's flexible to be able to fit on many different potential sites where our consumers want to experience Jack, such as drive-through-only, in-line, end-cap, non-traditional, dark kitchens, and then opportunities for conversion as we see some restaurant chains closing their doors. Our franchise profitability at existing stores we don't have the final Q4 numbers yet from our franchise system, but Q3 average profitability is up $20,000 per store. And then lastly, part of our focus will be to help them secure capital.

Many of them already have capital providers, but we will aggressively seek out ways to partner capital with our existing franchise base to grow more rapidly. So those are just some of the reasons. And then we have plenty of opportunity in our existing markets around the country. If you think about it, if we focus on just our existing markets, we could put another 950-1,100 locations just in our existing footprint. So a lot of upside. I'm extremely encouraged. And the last point I would make is just focus. As you know, Jack in the Box for many years focused on growing Qdoba. And as they focus on growing Qdoba, this change in focus will be all about Jack and how do we support our franchisees to grow and expand our footprint.

Brian Bittner (Analyst)

That's great, color. Thank you, Darin.

Operator (participant)

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

Chris O'Cull (Managing Director and Senior Analyst)

Thanks. Good morning and congratulations on a great quarter. Darin, Jack seems to have been on a clearly nice streak with new product introductions and promotions. I heard the reasons you outlined for the strong comps, but I'm wondering if there has been a more fundamental change. For example, has the company made any changes to the team or the processes that has helped support product development and promotional planning?

Darin Harris (CEO)

I think the biggest change that we can communicate is alignment around our brand strategy and how that rolls into our focus around our menu strategy and our operational execution. So when you have the value focus, the combination of upsells and add-ons with innovation and operational execution all working hand in hand, you drive better results. And so I think that's the biggest thing, is clarity around our brand strategy. And then beyond that, what we've done differently is we spent a lot of time, just since I've joined, intensely focused on listening to our guests. We have a better understanding about why they come to Jack in the Box.

With this clarity, we will continue to find ways to communicate effectively related to our variety, our innovation, the value I mentioned, while at the same time making sure guests get the products they order quickly, that they taste great, and they're received from friendly and well-trained team members. I think all those things working in conjunction are part of what's driving this outcome.

Chris O'Cull (Managing Director and Senior Analyst)

That's great. And then just one other one. Last quarter, you mentioned you'd be evaluating the size of the box and dining rooms. Do you have any updates on what opportunities you see for maybe developing that smaller footprint? I know you made the comment about the footprint that can fit in different locations, but when do you expect to have one of those prototypes developed, and what's the feedback you're hearing from franchisees?

Darin Harris (CEO)

Yeah. Franchisees are expressing a lot of interest in this prototype. We've seen already in one of our franchisees, we approved a site in Tulsa to develop this new smaller prototype. And we went out and bid the prototype, and we're seeing anywhere from 19%-24% reduced cost. So definitely enhancing our economic model, and we will focus aggressively on enhancing the model.

Chris O'Cull (Managing Director and Senior Analyst)

Great. Thanks, Jack.

Darin Harris (CEO)

And then lastly, I would say also, we have approved a company site in California to develop that prototype so we can lead the way for our franchisees and give them a chance to learn from our experience as well.

Operator (participant)

Next question. Your next question comes from Dennis Geiger with UBS. Your line is open.

Dennis Geiger (Executive Director and Senior Equity Analyst)

Great. Thank you. Darin, let me ask a bit more about the improvement in transactions in the quarter and if you have a sense for how much of it is increased frequency from existing customers versus new customers and then where maybe it is new customers. Any greater sense for the stickiness going into next year, how you're thinking about that, if customers have rediscovered or discovered the credibility, the affordability of the menu, the convenience? Just curious some thoughts around that.

Sean Bogue (Treasurer, VP of Financial Planning and Analysis)

Hey, Dennis. This is Dawn. I'll chime in a little bit before I let Darin weigh in as well. Some of the things that we've seen in our customer profile changing through the pandemic, in particular, is that we've seen some gains with higher-income customers. Household incomes above $50,000, we've managed to attract more of them through these changes in customer behavior. But the other two things I'd say are really around product and where we're meeting the customer. Like we've mentioned in the prepared remarks, while we'll always have a compelling value offering, the appeal of our premium and add-on items is definitely intersecting well with these higher-income households. And then lastly, where we're meeting our customers is not only safe and efficient with the drive-throughs but well-executed other off-premise options like delivery and mobile, which we've increased significantly.

That's positioned us well to retain all these customers that we're attracting through this change in behavior as well, which gives us some confidence that it can definitely continue at some point as they return more to dine-in.

Dennis Geiger (Executive Director and Senior Equity Analyst)

Great. Thanks. And then just wondering, as it relates to COVID case spikes in different areas of the country, wondering if you could share any thoughts on regional performance in certain areas that have been hit harder most recently by case spikes, how those areas are performing. Not sure how much exposure you have to areas that have employed or implemented curfews, if that's impacted late-night at all, or just where dining rooms have closed and given you're seemingly well-positioned to manage through that, just if there's any insights there. Thank you.

Darin Harris (CEO)

Sure. It's a great question. And what we're seeing is that we continue to see strong performance across all geographies. And that's really even with the macro factor changes, we continue to focus on what we can control. And that's safety, keeping our employees and customers safe. For example, we're not in a hurry to open our dining rooms. We want to make sure that our employees are safe, that they're well-trained, and they're providing the best experience they can to guests who are concerned during this pandemic. And then, like I said, innovation, the value, the execution experience, all those are key drivers of our success. And we've done a lot around execution to make sure we continue to improve what we're providing from a service standpoint to our guests.

As an example, we have just re-engaged rolling out new holding bins that will help improve the quality of the product. I mentioned that in my opening remarks. We've rolled out our new training platform so that we train our team members to be even more supportive and even additionally focused around safety during this time frame. Then also some new cooking procedures that we think provide a better product to the guest. All three of these things are working to enhance the execution within our restaurants.

Dennis Geiger (Executive Director and Senior Equity Analyst)

Great. Thanks and congratulations.

Operator (participant)

Your next question comes from John Glass with Morgan Stanley. Your line is open.

John Glass (Analyst)

Thanks. Good morning. Can you first just maybe try to unpack a little more the check average increase you've experienced in the last two quarters? If you think about it maybe in terms of sandwich count or entrée count versus what the add-ons are providing, any way to sort of dimensionalize what benefits you're getting from those incremental add-on sales versus sort of core business?

Darin Harris (CEO)

Sure. I'll answer the first part of that, and then I'll turn it over to Dawn or Dawn. I'll turn it over to Dawn. I apologize. Items per order. We're seeing it move from 3.8 items per order to 4.2. And we're seeing really a big portion of that same-store sales increase coming from both add-ons and upsells. Dawn, did you have anything to add to that?

Dawn Hooper (Interim Principal Financial Officer)

Yeah. I would just add that, as Darin noted in his prepared remarks, we've seen a product-mix shift into more core premium entrée products. If you look at our overall check, we're currently tracking about $10.72 in Q4, and that compares to $8.58 a year ago.

John Glass (Analyst)

That's great. That's really helpful detail. And then, Darin, maybe just on the remodels, maybe remind us where you were in this remodel journey prior to your joining the company. And I think there was an emphasis on the drive-throughs, for example. And have you rethought how you want to think about the new image on a remodel basis going forward? Is there franchisee buy-in to that, or is that something you're also negotiating with franchisees as you think about the total package of both growth and remodeling of the assets?

Darin Harris (CEO)

Yeah. At this point, what I would say without providing too much color but trying to give you some insight is franchisees are excited right now about reinvesting in their restaurants. And we're providing a lower-cost refresh as a starting point. And so we're in the midst of rolling that out throughout the system. And in addition to that, part of our strategy going forward - and we'll talk more about this into the new year - is innovating around new designs that speak to the future of addressing our guests' needs.

John Glass (Analyst)

Okay. Thank you very much.

Operator (participant)

Your next question comes from Gregory Francfort with Bank of America. Your line is open.

Gregory Francfort (Analyst)

Hey. Hey. Thanks for the question. My question's around G&A. And you've had a couple quarters where you've run substantially below the 1.7%-1.8%, I think, is the most recent target as a percentage of system sales. We've seen a couple of the larger players really lean in to G&A the last quarter or two or G&A plans around technology and digital. Can you maybe talk about is the long-term target still 1.7%-1.8%? And if it's going to be higher or lower than that, what do you think will be the drivers of that decision? Thanks.

Dawn Hooper (Interim Principal Financial Officer)

Yeah. I'll take that one. At this time, we're not prepared to give guidance for 2021 or long-term. I would suggest that you look at it on a full-year basis. So on a full year, we were at 1.7% of system-wide sales. Q4 was low to a few discrete items. But 1.7 is historically where we have said we want to be. And just lastly, during the pandemic, there's been no significant G&A cuts. However, we have seen things like travel come in lower.

Gregory Francfort (Analyst)

Good. Got it. Thanks. Maybe just to follow up on that, I mean, can you talk a little bit about the plans to have technology in-sourced versus outsourced and whether or not the pandemic's kind of changing any of those goals or core plans? Thanks.

Darin Harris (CEO)

Yeah. Our intent is to continue utilizing a clear technology roadmap. We have moved some things to the cloud. And so during the pandemic, we made some shifts through some of our data storage. But as far as in-restaurant versus out-of-restaurant, we're right now going through recrafting and redesigning our technology roadmap to address some of those items. Clearly, we want to fast-follow in the industry and be up to speed with technology at the restaurant level to help our operators run restaurants more effectively and efficiently.

Gregory Francfort (Analyst)

Thanks, Darin.

Operator (participant)

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

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

Great. Thank you very much. Two questions. The first, just following up in terms of franchise relations. Darin, you mentioned how mending those relations is critical to enhance the long-term performance. And it sounds like it's encouraging. I'm just wondering maybe if you could share any early learnings in those discussions that you've now had with these franchisees. It sounds like perhaps they're a little bit more re-energized. Maybe you can share what the greatest franchisee or even corporate frustration was that perhaps has been the roadblock that maybe is easing now, that gives you the confidence on the re-acceleration of the unit growth and the reinvestment. And then I had one follow-up.

Darin Harris (CEO)

Yeah. It's a great question. And what I've been encouraged by is just the sheer number of conversations that we have with franchisees to just listen and learn about what their concerns were and how we addressed those. We recently conducted a franchise survey that really talked about what's important in the minds of our franchisees and what we're effective at. And we learned a lot through that process, and we've engaged the franchisees in discussion around it and taken that into account for our long-term strategy on how we'll address some of these things. And so I'm excited about what we've learned. And quite frankly, the focus of the organization around treating our franchisees as a customer that we can serve well. So outside of that piece of it, we've formed a leadership advisory council.

And the biggest reason we're forming that is so we can do, like I mentioned, I want to bring franchisees into our process as partners in strategy from the beginning versus waiting till the end and saying, "Here's our rollout. Go execute." And that's the biggest change, is as an organization, making sure that we communicate earlier in the process and bring our franchisees along as we're developing our strategies and rolling out any new programs or promotions.

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

Got it. Then just a follow-up, more of a theoretical question, as you think of yourself presumably as a smaller, currently regional player in a very much national burger segment. I'm just wondering how you think about playing offense versus defense when you talk about the marketing and promotion that you're doing. For example, I guess if you've established your marketing and promotional game plan, and then one of your larger peers makes a big push with breakfast or value or chicken, what do you think your role is in terms of response? Do you respond to them and have to adjust your plan, or do you feel like you just play your game and kind of steer clear of making adjustments based on what you're seeing in the competitive landscape?

It seems like that's been a challenge in the past as a regional player that maybe doesn't have the same marketing spend as some of your national players and your ability to be nimble if you were so inclined. Just wondering how you think about that broadly.

Darin Harris (CEO)

Yeah. Great question. I really enjoy being in a position of being a challenger brand because it enables us to be more nimble and address the issues that we face in the marketplace more rapidly. And so just what you've seen us do during the pandemic and quickly pivoting to the way we promoted and marketed to our consumers helped us. Switching to more of the digital and focus around gaming and entertainment and sports sponsorship being digital, we were able to capture and win the hearts and minds of many consumers just by being able to pivot quickly. So that's one area.

And then just by having such a strong pipeline of innovation that's built out over two years, it gives us a lot of flexibility to go in and out of different types of promotions around value, around premium, around add-ons or snackable items that create value in the mind of our consumers. And so beyond that, what I would say one of the things I'm really encouraged by is just to give you a kind of peek under the tent is we have a new major product line introduction coming soon. And that is we're going to get in the chicken game. And so the team has been working on a new chicken program, and we're eager to see what happens here in a few weeks with a focus on improved quality, thickness, and flavor. And who knows?

My hope is we'll get a chance to celebrate that as well by doing a new chicken dance.

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

I look forward to that, Darin. Thank you.

Operator (participant)

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

Alexander Slagle (SVP and Equity Research Analyst)

Thanks. Good morning. I wondered if you could provide an update on the progress rolling out the drive-through enhancements and what you're still waiting to address or the things you'd like to pull forward. As I imagine, I mean, the huge volumes you're running through the drive-through now are probably making it a bit more challenging operationally. And then any color on the performance that you've seen in those restaurants that have received the equipment and the process adjustments relative to the rest of the system.

Darin Harris (CEO)

Yeah. That's a great question. With the increase in demand through the drive-through and the, as we mentioned, just on the average order moving from 3.8 to 4.2, it definitely creates different types of challenges. But our team has responded well. And I think our focus has been on giving some tools to the restaurants such as the new holding bins, new cooking procedures on chicken that reduces the time in half. Also, things like just focus around behaviors and training. We rolled out a whole new training platform and really focused on what we called Speed 101. So giving them the tools and techniques to really focus on how do we improve the experience at the drive-through and be more consistent. Our focus is on being more consistent at speed than just quick.

And so with that being said, is what we've seen already in the last two quarters. The perception of guests around our speed of service has improved quarter-over-quarter.

Alexander Slagle (SVP and Equity Research Analyst)

Got it. Just to follow up on labor, really impressive leverage given the 6% wage inflation. I mean, how much did the closed dining rooms benefit the margin in the quarter? And how should we think about potential reopening and any incremental margin headwinds from that?

Darin Harris (CEO)

So Dawn, would you address that for me?

Speaker 19

Yeah. We've definitely seen some efficiencies in obviously being able to focus on just the drive-through portion of the business. But I'd say the biggest piece of the labor efficiency is really generated by the higher sales. I mean, when the stores are running at higher volumes, in general, there's just more efficiency to be had, and they can get more transactions per labor hour out of the crew.

Alexander Slagle (SVP and Equity Research Analyst)

That's great. Thank you.

Operator (participant)

Your next question comes from Jeff Farmer with Gordon Haskett. Your line is open.

Jeff Farmer (Managing Director and Senior Analyst)

Thank you. Just have a couple of quick follow-ups. So what, if any, relationship is there between increased indoor dining restrictions in your home state of California and the transaction or check trends that you see at a Jack in the Box? So I guess said differently, does Jack benefit when indoor dining is largely shut down in California?

Dawn Hooper (Interim Principal Financial Officer)

Yeah. I'll take that one, Jeff. So the latest round of restrictions that we've seen really came into effect this weekend. And I would say just in general, when consumers have less options on that front, that's not a negative for Jack in the Box or any of the QSR players.

Jeff Farmer (Managing Director and Senior Analyst)

Okay. And then one more follow-up. As Jack gets further down the road, do you expect that improving transaction trends will come with a lower average check growth, or is there an opportunity to potentially see Jack simultaneously benefit from both, meaning average check growth and transaction growth?

Dawn Hooper (Interim Principal Financial Officer)

Yeah. I think we just have to see how the consumer resumes using brands as we go forward, right? As Dawn mentioned, the items per ticket have increased by roughly 10%, right, when you go from 3.8-4.2 times. And then you've seen a higher incidence of the premium items that we have on our menu. So consumers are clearly using the brands differently. As Darin mentioned, we are attracting a higher-income consumer. So it's too early to kind of see how many of those trends sustain as we get back to "a more normalized environment.

Darin Harris (CEO)

Yeah. In addition to what Carol's saying, what I would say is that as we continue to do a lot of research around and listen to our guests and their needs, we're finding some distinct segments that we may be able to communicate with in different ways to keep that transaction count moving in the right direction.

Jeff Farmer (Managing Director and Senior Analyst)

All right. Thank you.

Operator (participant)

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

Lauren Silberman (Analyst)

Thanks for the question. So across the state, we've seen a greater focus around the notion of a holistic digital ecosystem and extensions of digital strategies beyond just consumer-facing channels. So Darin, I know you talked about reassessing the digital roadmap, but how would you evaluate Jack's current efforts around technology? And do you believe Jack is spending the appropriate level of capital to build out his technology infrastructure, or could there be need for more?

Darin Harris (CEO)

Yeah. Great question. And I think Jack has done a nice job of being equal to the industry from a standpoint of digital. We do support all four of the providers. We've integrated into our POS systems, and we're communicating effectively via social and other channels. But I do think there is a way for us to continue to innovate the overall guest experience through digital means from communicating to them and understanding their orders from the time they enter our parking lot like you're seeing or digital menu boards to just overall experience. So I do think there's going to be some necessary investment from a technology standpoint into the digital space. Things like loyalty, as an example, is an opportunity for us. Our mobile app can continue to evolve it to where it's agile.

Operator (participant)

Great. Thank you. Your next question comes from Jon Tower with Wells Fargo. Your line is open.

John Tower (Analyst)

Great. Thanks. Just following up some stuff earlier around unit growth, Darin, I know you're relatively new to the company, and your impact on unit growth likely will be felt for perhaps a little while, maybe Fiscal 2022. But is there anything unique about the gross openings in Fiscal 2020 that would prevent you from seeing a similar level of gross openings in Fiscal 2021?

Darin Harris (CEO)

I can't give any guidance related to 2021. But what I will say is that even in a year heavily impacted by COVID, we managed to open these 27 restaurants. And we also had restaurants delayed into this year. So I think that's the way to think of it from the standpoint of sustaining kind of a level of growth is where we're focused at this point while we ramp up development in the future.

John Tower (Analyst)

Great. Thank you. And then just following up a little bit on the balance sheet, a few of your competitors in the quick service space have taken advantage of the lower rates. And I know you had set up this ABS structure not too many years ago. But even looking at that, it appears that you could potentially get some lower rates in the market. Where does that stand today? I know, obviously, you don't have a formal CFO in the seat at the moment. So would something like that be down the line?

Darin Harris (CEO)

Dawn, will you?

Speaker 19

Hey, Travis. It's Dawn. I'll address that and let Darin weigh in if he feels there's any more color to add. I mean, the securitization structure that we've entered into is we still feel far and away the least cost structure for us to continue to use going forward. So as we evaluate our leverage with our EBITDA continuing to grow over time, I think you'd probably see us continue to use that structure as a means to explore adding additional debt capacity.

John Tower (Analyst)

Okay. But nothing on refinancing?

Speaker 19

Not in the short term.

John Tower (Analyst)

Okay. And then just lastly, any reason why you wouldn't be in the market now repurchasing shares?

Darin Harris (CEO)

I think what we're focused on at this point is to remain cautious around share repurchase. But as you'll notice, we just approved an additional $100 million for the future for additional share repurchasing.

John Tower (Analyst)

Yeah. I didn't know if there was anything in the fiscal first quarter that would be preventing you from getting out there and taking advantage of the stock price now. But understood. Thank you. Appreciate the time.

Operator (participant)

Your next question comes from Andrew Charles with Cowen and Company. Your line is open.

Andrew Charles (TD Cowen)

Great. Thank you. Most of my questions have been asked, but I guess just the Unchicken Sandwich that you guys were testing in 2 markets last month, generating a lot of publicity. And I recognize you're using these as pilots to understand if you want to scale this to the entire system. But what are you looking to see to judge if this is going to be something that you'll roll out? And would love any insights into recent learnings as well around who you are attracting. Is it new customers, the brand, or any other learnings from the product would be helpful.

Darin Harris (CEO)

Yeah. I think the key for us is always continuing to push the envelope on what is innovation and how will that relate to our investment? So our focus we have criteria that we evaluate how products perform, whether it's an Unchicken Sandwich or a new burger. And so our objective is to increase sales at the restaurant level and unit count sold. And so we'll evaluate it through multiple measures, including those two. And so overall, we've seen response from our guests that is positive. But we're not ready at a point to make a decision on how does that change our overall menu strategy at this point in time.

Andrew Charles (TD Cowen)

Got it. And then we're calculating allowance for doubtful accounts. It's about 7% of trade receivables. That's similar to what it was last quarter. Is there anything structural in the way of getting into reclaiming those receivables that are past due?

Dawn Hooper (Interim Principal Financial Officer)

Well, I can tell you that bad debt was definitely elevated in Q4 of 2019 and Q1 of this year due to a couple of specific franchise matters that have since been resolved. But since the pandemic, we've seen no real deterioration as our franchise profitability has definitely increased in the back half of the year.

Andrew Charles (TD Cowen)

Great. Thank you.

Operator (participant)

Your next question comes from Jake Bartlett with Truist Securities. Your line is open.

Jake Bartlett (Analyst)

Great. Thanks for taking the question. Mine is about momentum and the reference to momentum continuing into this quarter. Last quarter, you helped by clarifying that that was the momentum that you saw towards the end of the quarter from the third quarter. Can you help us now? It seems like sales accelerated again throughout the months in the fourth quarter. Is momentum continuing from the better results in the back half of the quarter, or how should we interpret that?

Darin Harris (CEO)

The first seven weeks, we're continuing to run in the low double digits.

Jake Bartlett (Analyst)

Okay. Okay. Then a quick clarification on development and kind of what we should maybe expect going forward. It was great to see the new units being very strong. But also, there was more closures, and there seemed to be an acceleration of closures. Any color around that? Was that a pull forward of closures that might have happened in upcoming years, or should we think of that level as continuing going forward?

Darin Harris (CEO)

Yeah. I think for us, we're going to evaluate our portfolio to make sure we're in a position to enhance growth, right? So there's opportunity for us in some areas to take some of our loyal guests and transfer those sales to a different unit. And so we're going through that process today of evaluating our overall portfolio. And even with this pandemic, it enabled us to close some locations that probably should have closed a while ago.

Jake Bartlett (Analyst)

Okay. And then last question. The promotional, your approach in 2021, just noting that customers are gravitating towards more premium items during the crisis here, should we expect more innovation on kind of the higher-end, more premium side? For instance, would that chicken sandwich that it seems like that you're working on, would that come out as a standalone kind of premium item or as the $4.99 kind of combo?

Darin Harris (CEO)

Yeah. What I would say is I would address it as we're going to continue to amplify and really aggressively focus on innovation. And that means our core menu or premium, that's a core part of our menu. We're also going to make sure we innovate around value, and we also innovate around snack items as well. So across the menu and beyond that, we want to start framing our innovation on the overall guest experience, not just the product. So we know in this environment, there's a lot of opportunity, whether it's better packaging to digital experience, as one person asked a question around. There's a lot of opportunity for us to think about how do we innovate beyond just product. With that said, we've brought in some additional resources to support our innovation pipeline.

And we've really given them a clear brand brief around some of the areas we want their support and help. So we've brought in some best-in-class third-party providers to help bring in even more additional ideas. We've also started partnering with our vendors more aggressively on utilizing their resources to generate even more ideas for our overall product pipeline. And again, coming back to we don't want to just limit it to core or premium. We want to do it across the key areas where our guests, which are very different by segment and daypart, we want to innovate to where it'll drive them back to our restaurants more.

Jake Bartlett (Analyst)

Great. Thank you very much.

Operator (participant)

Your next question comes from Robert Derrington with Telsey Advisory Group. Your line is open.

Bob Derrington (Analyst)

Yeah. Thank you. Thanks for the question. Darin, I'm curious. You've had some time now to spend within the system visiting some of the restaurants, both company and franchise. And excuse me, you mentioned earlier within your prepared remarks restarting a low-level refresh remodel program. I'm trying to understand, basically, the company's remodel plan has been fairly substantial in the past, some higher-priced, more extensive remodels. Is that what you're referring to? Or as you look at a lower-level refresh for your system, is that something I'm just trying to understand, one, the cost of that roughly, and two, the timing at which that rolls out and how extensive it is at helping improve the visibility and the look of some of your restaurants?

Darin Harris (CEO)

Yeah. Great question. We're still in the process of finalizing all the details around the enhanced reimage strategy. But the way I think about it is the piece we've been focused on most recently is a lower-level refresh that's mostly exterior, especially since the increase in traffic through the drive-thru. However, with that being said, our teams are working on what I would call a three-tiered reimage strategy, which is three different levels of investment depending on the type of site, the type of traffic, the behaviors at that restaurant. So some, we need to go and do a complete reimage, which is a more costly reimage. And some just needs the refresh I'm talking about to spruce up the exterior of the building and some of the interior.

Bob Derrington (Analyst)

Okay. Super. Thank you.

Carol DiRaimo (Head of Investor Relations)

Alfred, I think we have time for one more question.

Operator (participant)

Okay. Thank you. Your final question comes from James Sanderson with North Coast Research. Your line is open.

Jim Sanderson (Analyst)

Hey. Thank you for the question. Just wanted to follow up a little bit more on digital strategy. Wonder if you could provide a sense of how the mix of delivery transactions has changed since the pandemic and how this influences average check. And then if you're considering any type of what I would describe as a white-label solution that would allow the consumer to order delivery directly through the mobile app or some other Jack in the Box platform. Thank you.

Dawn Hooper (Interim Principal Financial Officer)

I'll take the first part of that and then hand it over to Darin. Overall, we've seen our digital sales double from what they were pre-pandemic. They're in the mid-single-digit range. Do you have anything to add, Darin?

Darin Harris (CEO)

Yeah. So as far as the white-label, right now, our view on that is to use that as an innovation pipeline. So we have tested in about 6 restaurants, what we would call a virtual brand. But it's not something, at this point, a plan for us to roll that out across the system. We're seeing it more as a great way to test innovative new products and get receptivity. And so that's where our focus is with the virtual white-label product.

Jim Sanderson (Analyst)

Just a quick follow-up. The mid-single-digit mix, that is delivery and mobile orders both combined? Is that the right way to look at that?

Dawn Hooper (Interim Principal Financial Officer)

That is correct.

Jim Sanderson (Analyst)

Any sense of what the third-party component is?

Dawn Hooper (Interim Principal Financial Officer)

It's about 5%.

Jim Sanderson (Analyst)

Okay. All right. Very good. Thank you very much.

Operator (participant)

All right. Well, I'll turn the call back over to Carol for closing remarks.

Carol DiRaimo (Head of Investor Relations)

Thank you, everyone, for joining us today. Have a very safe and happy Thanksgiving.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.