Jack In The Box Inc (JACK) Q2 2021 Earnings Call Transcript

Good day, everyone and thank you for standing by. Welcome to the Jack in the Box, Inc. Second Quarter Fiscal 2021 Earnings Conference Call. My name is Christian, and I'll be your conference operator. At this time, all participants are in a listen-only mode. We have read the prepared remarks, and the management from Jack in the Box will conduct a question-and-answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. A replay of the call will be available on the Jack in the Box corporate website, starting today. I'd now like to turn the call over to Mr. Ron Parham with Arbor Advisory Group. Sir, please go ahead.

Thank you, Christian, and good evening everyone. Thanks for joining us tonight. Joining me on today's call are Chief Executive Officer, Darin Harris; and EVP, Chief Financial Officer, Tim Mullany. During our prepared remarks and the Q&A portion of today's call, we will refer to non-GAAP items, 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 today's earnings release and available in the Investor Relations section of our website at www.jackinthebox.com. Also during today's call, we may make forward-looking statements that reflect management's current expectations for the future, which are based on current information and judgments and while management may provide current thinking on this call around the potential impacts of COVID-19 on our business, given 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 today's news release and the cautionary statement in the company's most recent 10-K are considered a part of this conference call, material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC and are available on the Investor Relations section of our website at www.jackinthebox.com. Couple of calendar items to note quickly. Jack in the Box management plans to host a Virtual Investor Day on Tuesday, June 29. Watch for more information about that event in the coming weeks. And our third quarter ends on Sunday, July 4 and we tentatively plan to announce results on Wednesday, August 4, after market close and host a conference call at 5:00 PM Eastern Time that same day. So with that, I'll turn the call over to Darin.

Thank you, Ron and good evening, everyone. Thank you for joining us today. We are very pleased with our second quarter results announced earlier this afternoon. They reflect the power of the Jack in the Box brand, our iconic differentiated all-day menu and our continuous product innovation. And most importantly, they are a direct result of the dedication and passion of our franchisees, store managers, and staff. All of the team members throughout the entire Jack system have worked relentlessly to serve our guests safely and effectively through the challenges of the past year. Tim will go into more detail on our strong second quarter results and how we currently anticipate fiscal year 2021 will play out. I'm pleased to report that we are off to a good start through the first four weeks of the third quarter, giving us confidence that our key strategies continue to resonate with guests and position us to maintain momentum while we work closely with our franchisees. Let me provide a brief update on the strategies, which I believe are driving our current performance and laying the groundwork to pursue our longer-term strategic initiative to expand Jack's reach with renewed unit growth. All of our strategies are rooted in two foundational principles. The first foundational principle is shaping and carrying a high-performance culture focused on serving our people and franchisees well. If we do this, we are confident they will take care of our guests. The second foundational principle is accentuating Jack's history of innovation and leveraging technology. Over the long run, Jack will create value by investing and serving our people and franchisees innovating in new ways, leveraging our data, expanding our reach, and scaling our infrastructure to drive operational excellence. As we've indicated, with the past 10-year re-franchising process now solidly behind us, Jack's next 10 years will be driven by new unit growth and by emphasizing all the things that Jack guests love and trust about the Jack brand. Our broad and unique menu, all-day availability, constant innovation, and out-of-the-box attitude. One of my priorities over the past year has been to revitalize our leadership team with professionals who have deep experience in expansion-oriented restaurant and franchise business models. So I'd like to start today by welcoming two newest additions to the team. First, Steve Piano, our new Chief People Officer joined the company on April 26. Steve brings more than 10 years of executive-level HR experience from GNC Holdings, a $1.6 billion global health wellness and supplements brand where he served as Head of Human Resources. Second, Carlson Choi, our new Chief Information Officer, joined us on May 3. He comes to us from Jollibee Foods, a $4 billion global restaurant operator with a portfolio of franchise brands where he served as Global Chief Digital Officer and Chief Information Officer. He also served previously as Global VP in the digital initiatives group at Mattel. We are also in the final stages of recruiting a new Chief Operating Officer, who will be responsible for leading both company and franchise operations, focused on driving operational excellence and growing restaurant profitability across the system. This is part of our long-term strategic plan. Our executive leadership team is already working closely with our corporate team members and our franchisees to drive Jack's long-term growth initiatives. Over that time, Jack has carved out a distinctive position in the QSR industry and our committed franchisees have been a key part of this achievement. Jack's future success will be a function of building strong relationships with our franchisees and enabling them to deliver exceptional guest experiences that enhance brand loyalty and grow their business. I'm very encouraged by the progress that we continue to make on that front. We held our first quarterly Leadership Advisory Council Meeting in January and have another scheduled in San Diego in less than two weeks. In addition, we've also held virtual monthly business meetings that are helping to accelerate the exchange of ideas and activation of our strategies in partnership with our franchisees. We're openly sharing with our franchisees our corporate aspirations to expand Jack's reach and they, in return, are sharing their own aspirations for the strong Jack brand and on the substantial expansion opportunities available to us together to build and operate new restaurants. Although we're still in the early stages, we're very encouraged by the initial enthusiasm expressed by our franchisees. To date, more than two-thirds of our existing franchisees have expressed interest in expanding in the coming years. We've recently signed development agreements with eight existing franchisees. That calls for them to add a total of 23 new stores over the next several years, representing a greater than 6% expansion of their current combined 358 units. In addition to our plans to expand with the majority of our existing franchisees, we launched several new franchise recruitment initiatives in late March, including filing our updated franchise disclosure document, standing up a new franchise development website jackintheboxfranchising.com, and in late April initiating our first paid ad campaign to solicit new franchisee leads. These steps are also beginning to bear fruit. Through the first four months of 2021, we received double the number of inbound franchise leads compared with last year at this time. And our store development team has been finalizing work on a modular Jack in the Box restaurant of the future design, that will provide franchisees greater access to a wider variety of store sites including drive-thru only, in-caps, smaller and streamlined narrow sites, and non-traditional locations such as airports, convenience stores, and college campuses. As part of that work, we developed a new efficient kitchen for our smaller drive-thru only stores that is incorporated into our future modular restaurant plan. Initial construction costs for the drive-thru only store prototype are approximately 20% lower than our current stores, making our category-leading store economics even more compelling as an investment for new and existing franchisees. We recently finalized an agreement with a national partner, Reef Kitchens, to open an initial group of up to eight ghost kitchens in three states this summer. This builds upon our system-wide rollout of an in-app ordering and the launch of Jack's first-ever loyalty program over the past few weeks. All of these initiatives have accelerated our acquisition of customer data to expand our database, which has grown by more than 60% over the past 18 months. This represents a significant opportunity for Jack. Combined with our newly implemented digital marketing technology platform, our growing guest database will enable us to support our strategic pillar to build brand loyalty by communicating through more personalized messages and timely offers. Over the past year, our customer data indicates that we have been attracting and retaining more higher-income consumers even as dining restrictions have been relaxed. As you can see, we are working on all fronts, putting the building blocks in place to drive brand loyalty and franchise opportunities that will fuel future growth and category-leading performance. We're pleased with the progress we're making and with the enthusiasm of existing and prospective franchisees. At the same time, I want to carefully manage expectations, taking into account normal and COVID-impacted lead times for site selection, financing, permitting, and build-out. We anticipate there will be at least 18 to 24 months before we begin to show meaningful net new store growth. In the meantime, we will continue to focus on driving operating performance across our existing store base, building brand loyalty by working closely with our franchisees to delight guests with our all-day menu, continually introduce new craveable menu innovations, and implement new technologies and procedures to ensure consistent speed of service. We look forward to providing additional details about our long-term strategies and our three-year financial framework at our June 29 Virtual Investor Day. Before I turn the call over to Tim to review our second-quarter financial results and elements of our full-year expectations, I'd like to again sincerely thank our restaurant team members for keeping everyone's safety a top priority as we provide for the needs of our guests. I also like to thank our corporate employees, franchisees, and suppliers for their partnership, flexibility, and ingenuity during these unprecedented times. At this time, I will turn it over to Tim.

Thank you, Darin, and good afternoon, everyone. Thank you for joining us on the call today. Having now been with Jack in the Box for one full quarter, I want to start by expressing how energized I am about the strength of the Jack in the Box brand and the opportunity to work alongside the other members of the leadership team, all of our team members, and our franchisees as we embark on a new long-term expansion phase. As Darin noted, our strong second-quarter results announced earlier this afternoon are a testament to the ability of our team members across the entire system to respond to the unprecedented circumstances in the past year with innovation and nimbleness to continue serving our guests safely and effectively. You will find a thorough discussion and analysis of our second quarter results in our 10-Q filed this afternoon. I'd like to use my time on today's call to focus your attention and provide additional context on a few key areas. Let's start with a quick overview of our strong second-quarter sales and profitability. Same-store sales increased 20.6% compared with the year-ago period. System transactions increased year-over-year for the first time since the fourth quarter of 2019. Earnings from operations nearly doubled to $64.9 million from $32.8 million. Net income more than tripled to $35.9 million from $11.5 million. Adjusted EBITDA of $75.8 million was up 63.7% from $46.3 million. Recall during the final five weeks of last year's second quarter, we began to suffer the most extreme effects of the onset of the pandemic. This year, stimulus checks gave a boost in the final four weeks, so naturally, those two factors amplify the year-over-year comparisons. To eliminate that noise, I think it's informative to compare the second quarter of 2021 against the second quarter of 2019 as a normalized base. And those comparisons also show very strong performance. On a two-year stack basis, Q2 system same-store sales were up 16%, reflecting a 27% increase in average check. Weekly system per store average sales were up 17% to approximately $35,000 versus approximately $30,000. Company store-level margins declined slightly to 25.9% versus 27.6%, primarily reflecting commodity and labor cost inflation. G&A as a percentage of sales improved to 1.6% including COLI gains of $1.5 million, which is 10 basis points lower than the second quarter of 2019, which included $2.9 million of COLI gains. Excluding COLI gains, second quarter G&A was 1.7% of sales compared with 2.1% in the second quarter of 2019. Operating earnings of $64.9 million increased 37.7% compared to $47.1 million. Net income of $35.9 million increased 43.2% compared to $25.1 million. Adjusted EBITDA of $75.8 million was up 23.9% compared to $61.2 million. Sales performance was strong across all regions and remains strong even in regions that reopened for indoor dining during the quarter. In fact, in Texas, we saw the strongest transaction trend improvement following the lifting of indoor dining restrictions and our Texas stores have continued to post solid sales during the first four weeks of the third quarter, even as the pandemic restrictions have been further relaxed. Clearly, Jack has met the challenge and the opportunity presented by the pandemic-driven changes in consumer behavior. Some of those changes will render, while others will likely dissipate over time. What won't change are the pillars of the Jack in the Box brand that have solidified our distinctive and resilient position in the US quick-service restaurant industry over the past seven years. One key element of Jack's brand is our continual menu innovation. Our strong second quarter was driven by continued mix shift towards core premium menu items including Chicken Strips, the Bacon & Swiss Buttery Jack and Supreme Croissant. That mix shift was also boosted by our limited-time offers including the Club Chicken Sandwich during the first half of the quarter and the return of the Triple Bonus Jack during the latter part of the quarter, which successfully lapped its strong prior-year performance. Combined, these premium offerings in addition to strong attachment of size and add-ons outperformed last year's second quarter, which included a very successful launch of Tiny Tacos. Another key element of Jack's brand is our all-day menu. During the second quarter, the late-night dayparts showed the strongest year-over-year improvement, accounting for two-thirds of the contribution to the year-over-year improvement in transactions. A new element of the Jack brand is our digital accessibility. Digital off-premise sales accounted for more than 7% of total second quarter sales, up 150% over last year's second quarter and they've continued to decline during the first four weeks of the third quarter. As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers, 80% utilizing at least three of the major providers. We also added Halo, the leading mobile app delivery platform to our digital order and delivery platform during the quarter and have been pleased with the initial sales volume and average check that is coming in through that service. Earlier, Darin and I each alluded to the 2021 being Jack's 70th anniversary. I am pleased to be able to announce another significant milestone that we expect to reach during the third quarter. On a trailing 12-month basis, we expect Jack system sales to cross $4 billion for the first time in Jack's 70-year history. That's a great milestone to achieve at the same time that we are laying the groundwork to launch the multi-year unit growth initiatives that Darin covered in his remarks. We are entering this new chapter, Jack's story, with a strong balance sheet to support our plans. We ended the second quarter with approximately $109 million in cash on the balance sheet, including restricted cash of approximately $18.1 million. During the second quarter, we repaid $107.9 million in our variable funding notes and now have $110.5 million of borrowing capacity under that facility. Our leverage ratio, as defined in our agreements, was 4.1 times at the end of the second quarter and we remain in a strong position with respect to our debt covenants and liquidity. Also during the quarter, we repurchased 640,709 shares of our common stock at an aggregate cost of approximately $65 million. We currently have $135 million available under Board authorized share buyback programs, of which $35 million expires in November 2021 and a $100 million expires in November 2022. And last week as an expression of confidence in the company's future, the Board of Directors approved a 10% increase in the regular quarterly cash dividend to $0.44 per share. Looking ahead to the remainder of 2021, we feel we're, once again in a position to provide a full-year 2021 outlook, subject to all the risks and uncertainties that you'll find described in our SEC filings as well as continuing effects from the pandemic. We currently expect high single-digit same-store sales growth. G&A as a percentage of system-wide sales of approximately 1.7% excluding net COLI gains or losses, commodity cost inflation of approximately 3%, labor cost inflation of 5% to 6%, and adjusted EBITDA between $320 million and $330 million including approximately $6 million to $7 million benefit from the 53rd week. I'll close by echoing Darin's optimism about the progress we are making in laying the foundations to begin a new growth chapter for Jack in the Box. Our financial results over the past year clearly demonstrate that we have a strong brand, strengthening brand loyalty, and a sound operating model. We're focused on making what we believe to be the right investments to lean into consumer trends and tastes that will persist well beyond COVID. That combination of brand, operating model, and targeted investment will help drive performance and bridge the 18 to 24 month lead time before we begin to show meaningful unit growth acceleration beginning in 2023. In summary, we are very pleased with the continued momentum in the business and are looking forward to sharing more about our long-term growth strategies at our June 29 Virtual Investor Day. I'd now like to turn the call over to the operator to open the line for questions. Christian?

Thank you. We will now begin the question-and-answer session. Your first question is from Brian Bittner from Oppenheimer and Company. Your line is open.

Thank you. Thanks for taking the question and congratulations on such strong business results here. My first question is related to the same-store sales guidance. The guidance you issued for the year around high single digits implies same-store sales in the second half, suggesting anywhere from negative 3% to plus 3% based on the math. Your average weekly sales trends, particularly in the last quarter are actually trending at levels higher than you were executing in the second half of last year. Suggesting, I guess the sales could stay positive if you retain them. How do you want to set expectations here related to the full-year guidance and what it implies for your business in the second half? Should we assume some of these stimulus benefits roll off of the AUV trends as we model out your second half? Any tidbits would be helpful.

Yeah, I think a few things. One, you'll note that in the prior fiscal year, in the first half of the year, we had negative 80 basis point same-store sales and then in the second half of the prior year, we meaningfully strengthened to a positive 9.4% same-store sales. So as you look at the current fiscal year, our first half was positive 15.9%, so overlapping very strongly and then in the second half, we are looking at a positive 2.7%. So we're continuing to anticipate continued strength in our overall performance, similar to what we've seen in recent periods.

Thank you. That's helpful. And my follow-up question is on unit growth. There is obviously some excitement building around your ability, Darin, to spearhead better long-term unit growth. You outlined some of the tools you're putting in place to drive this. You also talked about the lag and the desire to grow versus actually displaying that growth, which I appreciate. But this quarter in particular, you had nine net closures, which is the most we've seen in quite a long time. The question is, are we going to go through a short-term period of elevated closures like we did this quarter as weak units are pruned? And any other tidbits you can provide on how that closure line should bode moving forward? Thanks.

Sure. Yes, I'll let Tim answer this question.

Yes. So we did see some elevated closures in the quarter; you'll notice in the Q filing that we released earlier today, we had 19 total closures in the quarter. So we are seeing some elevated levels there. A lot of that is due to the improved relationship actually with the franchise system and corporate where we're dialoging very frequently with them and allowing them to exit out of underperforming locations in anticipation of our expansion into new offsetting units within existing markets. So it's really a way for us to cultivate our portfolio and, in the long run, improve the overall quality.

And in many instances, we are gaining an offsite or an offset location in addition to remodels and trades.

Great, thank you.

Thanks for taking the question. I wanted to follow up on the last question there. Just wanted to get a sense of, you talked about that 18 to 24-month timeframe. I think we've heard that a couple of quarters now. So I just want to get a sense of exactly how we should be thinking about the pace of acceleration in the year development. And when we should start thinking about that actually flowing into the model?

I will begin and then Tim will continue. Essentially, we have been indicating an 18 to 24-month timeframe as we enhance our development pipeline by launching our Franchise Disclosure Document and encouraging franchisees to invest in new units. This has required time to establish as we also need to discover locations, secure permits, and open them. We recently submitted our Franchise Disclosure Document, which allows us to initiate the recruitment of franchisees for designated areas. We have observed a strong response from our existing franchisees, especially in the early stages since the Franchise Disclosure Document went live last month. This gives us confidence that our pipeline is increasing.

Yes, I would just underscore that; we'll be getting into a lot of details on this at our Analyst Day on June 29. As Darin mentioned in his comments earlier, our strategy is really predicated on understanding that unit growth is something that is a keystone to our overarching long-term strategy and pipeline. But I think what we also communicated in the earlier remarks is that we have new leadership in the development group with Tim Linderman who was recently hired. We recently rolled out a new franchising website and then launched some of these early initiatives to get out and start getting interest from new franchisees coming into the system. As those development agreements get signed in the future, that's sort of the canary that indicates when that 18 to 24-month clock starts so to speak for those units that are announced in each development agreement. So we're actively pursuing it and are really optimistic about the early results.

Thanks, that's really helpful color. And just one more follow-up if I may. It seems like you're starting to see some green shoots in those conversations with franchisees, especially first and other things you talked about in terms of the FTD, and the new leadership there. Just wanted to get a sense of what you're seeing in terms of interest in existing markets versus new markets from some franchisees and if there are broader opportunities in newer markets as well? Thanks.

Yes, as part of our overall strategy, it's important that we expand in our existing core where we have awareness. As we've laid out before we have about 950 to 1,200 locations that we've identified or potential trade areas we've begun sharing that with our existing base of franchisees. In California alone, we have 945 locations; we could add another 180. Our competition, McDonald's has 1,270. Texas as an example, we have about 600 locations today; we could add another 110, while there's 1,183 McDonald's and 943 Sonic locations. Colorado, we have 17 locations and could add another 90 but McDonald's has 200. So we know there's opportunity in our core focus there first and then we will also proceed into markets that are nearby our core; one example is Salt Lake City, where we can aggressively pursue growth as we have three locations today and can add another 52. So we’ll focus on core where we have awareness and then build concentric circles around that core as we pursue new markets.

Thanks, that's great color. I'll pass it on.

Great, thanks for the question. Darin and Tim, thanks for the color on thinking about rest of the year and for the guidance; certainly helpful. Just got to ask one more on that. Just as we think about the go-forward and maintaining and essentially growing your sales volumes based on the strength of last year's results. Just curious how you think about some of the tailwinds that you have into the back half of the fiscal year, thinking about mobility, daypart-wise how that might help dining room-wise how that might help and then some of the brand initiatives. Good color as it relates to Texas and kind of what you're seeing there. Just curious anything more there as it relates to some of the drivers in the back half of the year or maybe even what you've seen in recent weeks?

Our current strategy is working and we'll continue to prioritize what we've been doing this first part of the year in listening to our guests and providing them what they want. This is helping Jack's performance. So we're providing the right product, the right message, and the right offer by focusing on innovation and value in the way our guests define it. With that being said, you asked some questions about how we are performing in markets that have reopened like California and Texas? For Texas, we are cautiously optimistic. We continue to see strong performance there as it reopened. It’s hard to determine how long that will continue, but we've definitely seen a positive trend in Texas. As far as California, our California markets continue to outperform the system average. Therefore, it's too soon to tell. We've actually seen in greater than 90% of all markets double-digit sales growth.

So we’ve been positive across all dayparts. A lot of strength in dinner and late-night particularly. Late-night traffic has led the shift to positive transactions this quarter, which again is the first time since Q4 of 2019 that we've had that. So that was a really good thing for us to see in this quarter. Additionally, when you look at the 20.6% same-store sales performance, more than half of that was driven by a shift in our core premium products. We've seen that continue through several quarters now and we anticipate that through this increase in innovation from Ryan Ostrom's marketing team. Therefore, we should be able to carry on that strength going forward.

The other thing important for us is launching our digital strategy. We've obviously had third-party delivery as a key component, and enhanced that by incorporating all the third-party delivery partners into our app and additionally launching loyalty. So we’re connecting with our guests and enabling one-to-one marketing, seeing tremendous growth from digital. We are also observing some shifts in our customer base. New higher-income customers are holding steady, meaning when we measured churn of customers compared to last year, we’re seeing that Jack has been able to retain these customers acquired at the start of the pandemic.

Great, thanks very much guys.

Thanks, good afternoon. Sorry for another comp question. One is, I don't know when you really saw what played in the third quarter last year you really started to see that explosive check growth I presume that sort of ramping in. But have you begun to fully lap that; be up 20% or so last year? How do you think about check in the back half in that dynamic?

So we hit that mid PA, we just came off this quarter with an average check of $11.13 that lapped in $9.28. So we saw an increase of 20%. We feel good about that performance. And we do anticipate with the performance we’ve had with our core premium products and the continued strength of that, we are anticipating that that average check strength is continuing.

Thank you for clarifying that 2.7%, that's what I was missing. And then Darin you talked about the development and the drive-thru-only formats and how do you see — overall, when you look at development in the future, is it more going to be non-traditional or non-full on Jack's? Is there any way to sort of think about the mix of stores going forward?

We're thinking about it in a way to give us access to more sites and more places where Jack consumers are, so having modular Jack in the Box restaurants for drive-thru only locations, smaller, and non-traditional sites such as airports, convenience stores, and college campuses. Additionally, as we mentioned, we’re also experimenting with ghost kitchens. Our view is focused around providing more opportunities for customers to experience Jack.

Great, thank you very much. Two questions. Just one from a franchisee profitability perspective or maybe you can apply just through your company-operated ownership, but obviously sales are strong, but clearly the cost pressures are prevalent, and I appreciate the color you provided in terms of commodity and labor cost inflation. I was just wondering, how franchisees are responding to those pressures whether there's a push for incremental pricing or whether there's other initiatives you've got to mitigate the cost pressures, specifically around the labor side, wondering whether you're seeing or hearing of any shortages.

Yes, so I guess just to hit the labor shortage initially, right now, we're not seeing material impacts on our sales due to those shortages. It's under 10% of our company stores on the company side that have been impacted. We estimate that the franchise system has similar performance. On the same-store sales side, we're actually seeing a tremendous amount of strength in the franchise system that’s flowing through to franchise level margins with an increase of $7.2 million on franchise level margin, with the flow-through of those higher royalties and rental revenues associated with that strength.

And Tim, our quarterly four-wall EBITDA at the franchise level has improved 50% year-over-year which represents about a 350 basis point improvement as a percent of sales. And our annual franchisee four-wall EBITDA has improved 34% year-over-year, which represents about a 250 basis point improvement as a percent of sales. So we're continuing to focus on, as we mentioned that part of our strategic pillar on growing restaurant profits for our franchisees.

Understood. That's very encouraging from a full EBITDA perspective. And then just my follow-up on the app and Loyalty program, these are pretty recent launches for you. I'm just wondering whether there's any real feedback to share - anything specific to one-to-one marketing plans or just broadly what kind of goals you have for each, so we can measure success?

It's too early at this point to discuss targets.

Any early feedback in terms of customer usage patterns or anything encouraging on that front or still too early to tell?

It’s too early to tell. We’ve seen a substantial growth in our app downloads as we launched Loyalty. Our database guest has increased appreciably as we mentioned in our opening comments. We think we're at the beginning stages of the growth of our database. Our team is excited about what this will bring us, especially with Ryan's background in leading digital for other brands.

Thank you. I think one too on the development as you might be building company-owned stores. I know that would be done in the context of remaining primarily as like overall, but wondering if you might give us a sense of how many company-owned stores you might expect to open these in the back half of this year or perhaps you'd be willing to talk about the pipeline for next year?

Yes. We will pursue that as a strategy to continue to grow. We'll communicate that more at our Analyst Day and our Investor Day, as far as what we're expecting for company growth. At this point for this year, for the back end of this year, outside of potentially the Dark Kitchen openings and we don't have exact timing of those. We don't anticipate any other company-owned stores.

Okay, thanks. And then as a follow-up, wonder if you could just give us an update on the Midwest franchisee situation and any key dates we should be aware of getting that fully resolved?

There aren't any key dates that we can disclose at this point in time, but I will say to date franchise and lease agreements for three locations have been rejected and those have been reported closed in our Q2 filings. So there are remaining 66 restaurants and we’re continuing to monitor the situation as it moves throughout the process.

Great, thanks. Tim, I have a question for you. With your leverage now at four times, I know you've just paid down the variable funding notes, but historically the company preferred to maintain a net debt to EBITDA ratio closer to five times. Do you still adhere to a similar philosophy?

So this is something that this is going to be key to our long-term strategy right. And we're excited to approach the Analyst Day on the 29th and discuss this a little bit more. Keep in mind that the decrease in the leverage ratio isn't from decreasing leverage; it's just the performance that we've had that has moved that downwards and there are some natural points that we could leverage up. But I think just as opposed to an exercise of adding leverage for the sake of that, we really want to be able to communicate to our investors some deliberateness around why we want to do that and how we want to most effectively deploy that capital.

Yes. Adding to the question, yes, the first year as I mentioned in my opening comments is really focused on getting the people and the culture right. So creating the leadership team that's bought into the direction we're taking the company, aligning with our franchisees, and focusing on building a relationship. You're seeing some of the results in our performance as it was a direct result of what we've been focused on around our strategy that we've been executing on, that we defined mid last year. We're already seeing the fruits of our labor come forth. Next year, I would tell you is that it will continue to execute against the strategy and focus on enabling operational excellence, restaurant profitability, and growth.

Hi, good afternoon. A couple of clarification questions about your comp outlook for the second half. I guess the first question is, I think Tim you mentioned that you're assuming a pretty stable three-year comp. Is that what you're running so far in the third quarter?

We don't anticipate that strength will continue forever. So it's too early for us to tell how much of any performance we have at this point in time in the quarter is directly attributable to stimulus vs. some of these more innovative products that have met with some success as well. So we’ll just say long-winded that we continue to anticipate demonstrable strength in sales going forward without expecting incremental upside that we might attribute to stimulus checks.

Got it. Okay that helps to clarify. Thank you for that. And then Darin, I wanted to ask one likely will be covered at the Analyst Day, but maybe I'll ask it now anyway. I was wondering if you could maybe talk about or give a sense of what type of return on investment you're targeting for the new units and what your conversations with franchisees on that front have been?

Unit economics, as you know, vary from market to market depending on labor, occupancy, and construction costs. But what we have seen, that I can comment on is that new store AUVs of our new restaurants continue to outperform our system averages. Profit is up year-over-year as I mentioned between 250 basis points and 350 basis points. We’ve outlined a prototype that we believe can reduce costs and build-out costs anywhere up to 20% to 23%, so we’re targeting unlevered returns in the neighborhood of high teens and low 20s.

And is that the level you think that franchisees would really get behind or is there more to go on that front?

Our franchisees are excited about the opportunity to grow. They are expressing it. They are showing the desire. We'll always look at ways to continue to improve the performance and improve the return on investment for our franchisees and corporate stores.

Yes, just to add. Again, this is another element we’ll get into more in the Analyst Day. But those unlevered returns put us at the top of the peer set group. So, with typical leverage, that attractiveness only increases.

Thanks for the question. I appreciate all the detail around the performance of the reopened markets versus the more attractive markets. I was wondering if you could talk about some of the shifts in consumer behavior you've observed until those markets reopen. Are you noticing anything in terms of menu preference or dayparts shifts as these markets open up, and how are you capitalizing on these shifts as we move ahead?

We’ve seen late-night show a lot of strength, contributing to the year-over-year improvement in transactions. So late night is driving that almost in its entirety.

Overall performance has improved across all of our dayparts. As Tim mentioned breakfast and late-night were certainly two of the most impacted by COVID, but as overall transactions have improved, sales in all dayparts are positive in Q2, and we’ve observed a general improvement in traffic. Our customer churn declined in the second quarter as we retained the higher-income customer base.

Thank you, guys. You’ve been asked this four to five different ways. So I apologize for sort of adding on here, but I think you said Q2 system average weekly sales were $35,000. Are you willing to share what the metrics for the first four weeks of Q3?

No, I don’t think we’d be wanting to share that at this point.

Okay. And then one more for you guys. Curious if you have any metrics you can share that highlight the benefits you've seen from some of the operational initiatives that you've undertaken, meaning the kitchen equipment training platform, anything that you can point to that sort of highlights throughput or any other benefits that are pretty tangible for the system?

We retrofitted protein holding cabinets, and we trained a substantial number of our employees on how to utilize them and increase hold times. At this point, we've maintained our window time by approximately 10 seconds. So we're continuing to see improvement with our ops initiative, despite all of the labor challenges.

This concludes today's conference call. Thank you for your participation and have a wonderful day.

In summary, we are very pleased with the results of our second quarter and the start of the third. Most important, our team is very encouraged by the initial progress we're making against our long-term strategic initiatives and the enthusiasm being demonstrated by our franchisees as partners and strategy. We look forward to sharing more detailed information about our long-term strategy at our Virtual Investor Day on June 29. Until then, stay healthy, and we hope to see you soon at Jack in the Box.