Jack In The Box Inc (JACK) Q3 2022 Earnings Call Transcript

Good morning. And welcome to the Q3 2022 Jack in the Box Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Chris Brandon, Vice President, Investor Relation, you may begin.

Thanks operator, and good morning, everyone. We appreciate you joining today's conference call highlighting our third quarter 2022 results. With me today are Chief Executive Officer, Darin Harris, and Chief Financial Officer, Tim Mullany. Following their prepared remarks, we will be happy to take some questions from our covering sell-side analysts. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available on our investor relations website at jackinthebox.com. We will also be making forward-looking statements based on current information and judgments that reflect management's outlook for the future. However, actual results may differ materially from these expectations because of business risks. We therefore consider the Safe Harbor statement in today's earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC, and are available on our investor relations website. And with that, I would like to turn the call over to our Chief Executive Officer, Darin Harris.

Thank you, Chris, and good morning, everyone. I want to start by acknowledging the dedication of our operators, team members, and franchisees. Even in a challenging environment, our strategy is working and positioning us for growth. We look forward to ending 2022 with the enthusiasm that makes both the Jack and Del Taco brands unique. Now, let's dive into our Q3 performance, marking our first full quarter with Del Taco as part of the Jack family and a strong quarter for overall top-line results. Both brands achieved impressive two-year same-store sales, building on strong comparisons, record-setting average unit volumes, and the residual boost from last year's stimulus. With a gradual increase in operating hours, open dining rooms, and a focus on marketing and product innovation, we experienced improved sales performance as we exited Q3, setting a positive sales outlook for Q4. Naturally, we encountered challenges such as significant inflationary pressures, competition for customers dining out, and recession risks. However, since these macro issues impact the entire industry, what matters most is how we are addressing these challenges, which I will outline through our strategic four pillars and our emphasis on our people. Moving to margins and flow-through, inflation, staffing, and operating hours are continuing to exert pressure on our restaurant-level performance. Nonetheless, through increased pricing, enhanced training, and focused execution at the restaurant level, our franchisees are providing a superior guest experience and supporting financial fundamentals. Overall, I am optimistic that our progress over the past two years is reflected in our sales performance, and we are maintaining that momentum. With that, let's explore our four strategic pillars through the lens of our Q3 performance and our plans for the remainder of the year. Starting with brand loyalty, our crave marketing strategy remains at the core of our advertising, innovation, and digital initiatives. We have successfully launched with our new ad agency, Chiat/Day, showcasing our first creative work featuring Mark Hamill, which has been well-received nationally. This is just one step in our efforts to make Jack more culturally relevant while delivering strong value through innovative and desirable products that guests will seek out at all hours. Our innovation focus continued in Q3, including the launch of our new grilled Chicken Sandwich and the Girl Scout Adventure Cookie Shake, along with fan favorites like Popcorn Chicken and Roche Fries in both classic and spicy variants. Our burger platforms performed notably well, particularly the Ultimate Cheeseburger and Sourdough Jack, both of which are popular among customers and contributed positively to our sales. Our tacos also drove strong sales and mix with inSITE, a minor category where we see potential for additional pricing power. Items such as Egg Rolls and Tiny Tacos contributed positively to our upward trend in items per check. We are committed to innovating new snacking products that include attractive upsells and add-ons as part of our hook and build strategy to grow check sizes without relying solely on price increases. In Q4, we are targeting the breakfast daypart, utilizing our new creative featuring Mark Hamill to promote the return of French Toast Sticks, which will be available as a standalone item or as part of our breakfast platters. French Toast Sticks provide a great way to increase check size while offering guests more food at a good value. We believe this promotion will help boost breakfast sales as the year concludes. Although traffic remains a challenge, our late-night business is showing improvements in staffing. In fact, our company-owned core markets have returned to pre-pandemic staffing levels, which is reflected in our top-line results. With a continued focus on value, we are adapting to guest behaviors while ensuring we can deliver on Jack's promise to offer everything on the menu every day, all day. An example of this value is our late-night munching meals, where we have successfully increased prices and are now testing a solution for better ordering and operational simplicity. I am more optimistic than ever that we can stand out from the competition and lead in the late-night segment. We are also making progress in harnessing our digital loyalty potential. Our digital sales rose over 30% compared to last year, and the Jack Pack Rewards program, although still in its early stages, has surpassed 2 million members since its rollout for drive-through and in-store guests in Q3. Looking ahead, we are eager to launch our enhanced digital platform that will include mobile web ordering in Q4. We believe this platform will attract new e-commerce guests and foster a more seamless, personalized relationship with our loyal customers while re-engaging lapsed users through both our app and mobile web solution. I see digital as a key area where the combined resources of our two brands will enable us to accelerate progress and efficiently expand our digital and tech initiatives as a new company. Now, turning to our second pillar, operational excellence involves actively recruiting and training new restaurant team members and executing operational basics through our new guest experience review and enhanced brand standards. Our staffing initiatives are delivering positive results, particularly among company-owned locations, where we are increasing employment levels per store and providing enhanced training to team members, which is driving higher completion of training certification. This progress allows us to better execute our dayparts, open more dining rooms, and meet our high standards for guest service. Our guest experience review, alongside a focus on process and brand standards, improved our speed of service and contributed to overall sales growth. Those who adhered to our brand standards saw the highest sales growth within the system. By the end of the quarter, the year-over-year gap in service plans actually decreased, a first since the pandemic began. We are actively collaborating with our franchisees to implement successful staffing initiatives and open more dining rooms. As of Q3, we have achieved around 55% of our goal to open more dining spaces, and we are improving daily. These reopened restaurants have consistently seen a low single-digit sales boost. Let’s move on to an update regarding our evolving market. We are pleased to announce that we have finalized a letter of intent to refranchise seven stores in Oregon by the end of the year, with plans to close the remaining company-owned stores in that market. The transaction also includes six stores in Southern California and a development agreement that supports our commitment to an asset-light model while demonstrating our refranchising capabilities, which ultimately will drive growth. We are optimistic about entrusting Oregon, a territory we believe has growth potential, to a top operator within our system. We are also working on letters of intent to refranchise two other evolving markets, which will come with development agreements once completed. Our ownership of these markets was always intended to be temporary, and we aim to hand them over to capable operators who are committed to investing in operations, renovations, and growth. The end result will be better-performing markets with more consistent restaurant-level margin trends as we advance into 2023, further simplifying our business model towards an asset-light approach. Our third pillar focuses on increasing restaurant profitability by executing our financial fundamentals roadmap. We are more committed than ever to tackling inflation to improve our economic model. Restaurant-level EBITDA will always be a primary objective for our team. Our operational services team and franchisee margin task force are working to enhance margins by 200 basis points through new restaurant-level processes, equipment, and technology. We continuously seek a balance between efficiency and cost savings without compromising guest experience. We are making commendable progress on various identified opportunities. Highlights include testing simplified build logic and packaging to streamline processes and throughput, deploying a hydro-rich machine that standardizes cleaning and sanitization with over 1,000 units shipped or on order, and testing cheese pumps across more than 20 restaurants. Additionally, while it is a longer-term goal, our automation tests with Miso are underway at a restaurant in San Diego. We look forward to sharing insights from these and other margin-driving initiatives in the future. Combined with improvements in the inflationary landscape over time, we are confident that these initiatives will effectively enhance our restaurant-level bottom line. We managed to counter some inflationary impacts by leveraging our pricing power on key products and core items. Opportunities for price increases on some core items remain. However, we also recognize the importance of reinforcing our value proposition in certain dayparts and consumer segments in Q4. We believe it is crucial to sustainably grow check sizes beyond merely raising prices, maintaining our hook and build strategy. This add-on tactic will remain a central element of our plan to achieve strong top-line performance, as Jack has consistently accomplished. Lastly, our fourth crucial pillar is expanding Jack's presence. We will start with a brief update on our reimage program, which is receiving strong interest and early participation from our franchisees in its first full quarter since the official launch. We have received reimage forms for 373 franchise restaurants, with 173 approved to receive our incentive offer. Additionally, we are undertaking four company-owned reimages that will commence construction in Q4, along with another eight company locations set for completion in 2023. These company locations will all be tested under the new crave image, representing a progression from the previous industrial image version. We have observed traffic-led sales growth from reimage openings and look forward to sharing updates on the success of this new image and the significant advancements we intend to make with our remodel program in 2023. The number of development agreements has also increased, with our count now at 62 of the 233 restaurants included in the program launched last summer. Under these agreements, 13 restaurants have already opened, leaving 220 for future development. We have achieved more site approvals in the past six quarters than in the previous three years combined, with more approvals expected in Q4. Furthermore, we are approaching two critical market openings anticipated for 2023. Salt Lake City, which is well-positioned due to its proximity to core markets and brand demand, is one. The other is Louisville, a new territory we are excited to enter. Our refined approach to new market openings will involve both franchise and company-owned construction efforts to maximize resource allocation while enhancing market penetration and awareness, leading to success. We anticipate providing more details as we draw closer to opening these restaurants in 2023 and will keep you informed on their performance. Now, let's turn to Del Taco. We are very pleased with the results from our first full quarter with this excellent brand as part of our new company. Tim will outline the specifics, but I want to share a few high-level highlights. This quarter saw strong sales performance, underscoring brand loyalty and demand for Del Taco's appealing menu. Notably, the 20 under $2 menu maintained strong performance, despite significant price increases within the value platform. We observed a rise in mix for some menu items that increased in price, which we plan to leverage for items per check opportunities, similar to our strategy with hook and build on the Jack side. The Del Taco team emphasized two key aspects this quarter: the capacity to implement record price increases just below 12% and effective labor management that improved restaurant-level margins even amid rising wage pressures. Areas such as snack and dinner performed well, aided by delivery and improved staffing. Additionally, we saw substantial contributions from dine-in due to the reopening of many company and franchise locations. Operational hours have now aligned with 2021, with plans to restore more stores to pre-pandemic hours as summer advances. On the growth front, the innovative Fresh Flex prototype continues to excite franchisees, who signed 11 new development agreements, bringing the total signed agreements since 2021 to 79 restaurants across 11 states. We are thrilled with this progress and the brand’s growth potential. I especially want to thank Del Taco franchisees and team members for an excellent quarter. With our ongoing integration and synergy efforts, we look forward to working together to finish the year strong. In closing, I am genuinely pleased with how our corporate team members and franchisees are overcoming challenges, controlling what we can, and staying focused on our growth objectives. We believe our long-term fundamentals are the strongest they have been in our company's history and look forward to utilizing the remainder of 2022 to set the stage for upcoming unit growth. Thank you once again for joining the call today. Now I will turn it over to Tim.

Thanks, Darin, and good morning, everyone. My quarterly review will begin with financial results for both of our brands before closing with remarks on guidance and capital allocation. Note that Q3 marked the first full quarter of Del Taco within our consolidated results. Starting with Jack in the Box, system-wide sales fell 1.4% while same-store sales declined 0.6% in the quarter, consisting of positive company-wide same-store sales up 3.5% and a franchise same-store sales decline of 1%. When removing the impact of our four evolving markets, our company same-store sales would have been approximately 200 basis points higher. During the quarter, system-wide sales declined relative to same-store sales due to a one-week shift affecting the calculation of same-store sales related to the 53rd week in 2021. This one-week shift had a more positive impact on same-store sales due to lapping less of the stimulus benefit in its calculation when compared to the fiscal quarter comparison. The decline in system same-store sales was largely attributable to fewer transactions and reduced operating hours compared to the prior year period. These were mostly offset by price increases. The Jack in the Box brand continues to experience staffing challenges that resulted in lost operating hours compared to the prior year period. Although we showed consistent improvement within the company portfolio, helping mitigate its impact on third quarter sales performance. Furthermore, we experienced improvements in speed of service trends, which Darin touched on earlier as the quarter progressed. And for the first time in several quarters, we were pleased to not experience any meaningful product supply disruptions or shortages during Q3. The quarter began with negative same-store sales trends as we lapsed stimulus checks from last year, but as that impact faded, the trend turned positive. The snack and dinner dayparts drove most of our quarterly sales improvement, seeing the least amount of traffic pressure of all dayparts and benefiting from fan-favorite menu items, notably Popcorn Chicken and a Double Bacon Cheese Jack. Transactions for both the breakfast and late-night dayparts declined, and to address this in Q4 we will run a popular breakfast LTO along with improvements in staffing during the late-night daypart. Same-store sales increased sequentially on a three-year basis by 70 basis points, and company-owned same-store sales were also 70 basis points higher than our 2019 performance of the same period. Core premium menu items, driven by the Cluck Chicken Sandwich, Ultimate Cheeseburger and Sourdough Jack, and value items driven by the Chicken Sandwich inside such as Tacos and Tiny Tacos contributed positively to Q3 sales. As we have long stated, we will continue to innovate and seek to benefit from the return of fan favorites, as well as employ our successful barbell strategy to balance value and premium offerings. Notably, restaurants with open dining rooms at quarter end were at about 55% of the system and experienced higher sales gains year-over-year than stores with closed dining rooms as in-store activity continued to increase. Regarding store count, during the quarter, there were three openings and three closings, maintaining our Jack restaurant count at 2,207. Inclusive of Del Taco, there are now over 2,800 units across the entire company. Jack's restaurant-level margin for the quarter was 15.8%, inclusive of our temporary evolving markets portfolio. As a reminder, the evolving markets are comprised of Oklahoma, Kansas City, Oregon and Nashville, which were acquired for the purpose of refranchising. Excluding these four evolving markets, restaurant-level margin would have been 19.3%. Additionally, we are pleased to enter into an LOI for the Oregon market. As Darin mentioned, we are nearing agreement on two of the remaining three markets. In addition to the impact from these markets, restaurant-level margin was pressured by unprecedented commodity and wage inflation at levels consistent with industry trends. Pricing of 9.7% helped us manage the cost environment, and we will continue to take a disciplined and measured approach to pricing strategies as a means of mitigating the impact on our margin and bottom line. Food and packaging as a percentage of company-owned sales in the period was up 3.6% versus the prior year, primarily due to commodity inflation of 16.8% as well as unfavorable sales mix, partially offset by menu price increases. The inflation we have experienced is across all categories, with the greatest impact seen in proteins, sauces, oils and beverages. Excluding evolving markets, this impact decreases to 3.3%. Labor as a percentage of company-owned sales in the period was up 3.6% due largely to wage inflation of 13.2% compared to the prior year, as well as the impact of our evolving markets. These two cost pressures were partially offset by price increases and by lower incentive compensation. As you know, the labor market remains tight, and we have selectively increased wages in key markets to attract and retain talent. Excluding evolving markets, labor as a percentage of company-owned sales was up 2.2%. Occupancy and other costs as a percentage of company sales in the period was up 2.5% due largely to 29 restaurants within our evolving markets portfolio with lower than average sales volumes and higher costs for maintenance, repair and utilities. Franchise level margin in the quarter came in at 41.4% or $70.8 million, a $6 million decrease compared to the prior year with just over $2.7 million due to the St. Louis area of franchisee bankruptcy. Without this impact, franchise level margin would have been 42.2% for the quarter, only 110 basis points lower than the prior year of 43.3%. Jack SG&A in the quarter was $26.9 million. Excluding advertising, G&A was $21.8 million, $4.7 million higher than the prior year. The driver of the increase was net COLI losses in the period versus a gain in the prior year. This increase was partially offset by lower litigation matters, incentive compensation and others. Adjusted EBITDA was $73.2 million, down from $79 million in the prior year due primarily to lower restaurant and franchise level margin as well as net COLI losses. Consolidated GAAP EPS for the third quarter came in at $1.08 compared to $1.79 in the prior year. Operating earnings per share, which includes certain adjustments came in at $1.38 for the quarter versus $1.64 in the prior year. The decline in operating earnings per share was primarily attributable to lower company restaurant level margin and franchise level margins at Jack, as well as a higher interest expense connected with increased borrowings to fund the acquisition. Turning now to the Del Taco segment, system-wide sales were up 3.3%, while same-store sales rose 3.5%, consisting of the company's same-store sales increase of 2.3% and a franchise same-store sales increase of 4.8%. The difference in same-store sales performance was primarily due to pricing, as well as a number of non-California markets posting outside same-store sales performance, as these franchise markets continue to demonstrate considerable brand loyalty. Notably, the brand outperformed the fast food industry during the quarter for 11 out of 12 weeks and exceeded the quarterly industry benchmark by more than 200 basis points. Similar to Jack, Del Taco looked toward price and helping combat inflationary headwinds related to food and labor. Average check rose as a result in spite of modest transaction declines. The impact of reduced operating hours in the quarter was immaterial to the system-wide same-store sales result and the trend line was stable. The snack and dinner dayparts drove the majority of the sales improvement versus the prior year in 2019 and was aided by delivery growth that over-indexes at late-night. Compared to 2019, same-store sales growth was mid-single digits for the company and double digits for franchise with positive results across all major geographies. During the quarter, the two-for-quick combo meal platform had the greatest contribution of sales through higher pricing from the $5.50 to $6, while the 20 under $2 menu, which launched in Q2 to help preserve and drive value, contributed a notable sales lift from the chicken roller refresh. There were five closings of which two were company and three were franchised, and the quarter-end Del Taco restaurant count was 594. Since the beginning of the fiscal year, which includes both before and after the acquisition, there have been three Del Taco openings and 11 closings. Del Taco restaurant level margin was 17.6% compared to 21.2% in the prior year. The variance was due primarily to pressure from commodities, wage inflation and the impact from purchase accounting. Company owned pricing for the quarter was just over 11%. Food and packaging as a percentage of company-owned sales in the period was up 2.7% versus the prior year, primarily due to commodity inflation of 20.5% that was only partially offset by menu price increases. While commodity inflation was pervasive across all categories, the greatest headwinds were seen in proteins, oil, avocados, cheese and tortilla shells, which collectively represent 70% of the overall impact. Labor as a percentage of company-owned sales in that period was down 0.4% versus the prior year. The rate per hour inflation was 10.8% but same-store sales increases and well-controlled labor hours resulted in an improved labor margin percentage. Finally, occupancy and operating costs as a percentage of company-owned sales in the period were up 1.3% due to higher utility costs and delivery fees. Franchise level margin in the quarter came in at $5.1 million or 42.7%, a decrease of 1.6% from a year ago. This modest decrease was mostly due to the impact of increased leasehold interest amortization and franchise IT support costs, while favorable same-store sales and royalties as well as lower support and other costs contributed positively. We are focused on successfully integrating Del Taco and realizing our target synergies, which will be a continued priority as we close out 2022 and head into 2023. Moving on to guidance. We are updating our restaurant-level margin guidance as well as our CapEx and other investments for full year 2022. Jack's restaurant-level margin is now expected to be around 16%, which includes high single-digit price increases. Our previous guidance was around 17%. Restaurant-level margin, when removing the temporary evolving markets, is expected to be around 19%, also 1% lower than our previous guidance of around 20%. And lastly, our company-wide CapEx and other investments guidance is now at $50 million to $55 million for full year 2022 due primarily to lower franchise incentive capital deployment towards restaurant reimages. Our previous guidance was $75 million to $80 million. All guidance measures not mentioned remain the same as previously disclosed. And as we said in May, our intention remains to provide specific Del Taco guidance beginning in November for full year 2023. Turning now to our capital allocation strategy. We have previously discussed that our primary goal is investing in growth while being disciplined in returning cash to shareholders via share repurchases and quarterly dividends. This combination, in our view, is the surest means to unlock shareholder value over the long term. Our strategy also entails operating an asset light business model, which would involve refranchising Del Taco along with our Jack in the Box evolving markets. However, identifying appropriate partners as part of this effort is critical, both in terms of strengthening our franchisee base across both brands so that we can deliver attractive annualized net unit growth by 2025, as well as maximize proceeds. We continue to pursue sale leasebacks for our own Jack in the Box properties in consultation with our advisers, who are evaluating optimal structures within the securitization. This program is underway and we look forward to providing more updates in the future as further details are finalized. Shifting to share repurchases. As I said on our Q2 call, we would be resuming share repurchases in the back half of this year and stand by that commitment. While we did not repurchase any shares during Q3 as part of our $200 million share repurchase authorization, we intend to execute $25 million in share repurchases in the fiscal fourth quarter. These repurchases demonstrate our commitment to deploying capital to drive shareholder return when we have excess liquidity available and can do so at an attractive price. In closing, we are making progress on simplifying our business model through refranchising Del Taco, addressing evolving markets at Jack in the Box, and continuing to provide short-term visibility where it would be most helpful. On behalf of myself and this leadership team, I would like to thank all of our team members and franchisees across Jack and Del Taco for their efforts and perseverance. As we navigate through the near term, we are looking confidently towards our future of harnessing the combined power of our two brands. We have great optimism for what lies ahead for Jack in the Box. And with that, we'd be happy to take some questions. Operator, please feel free to open the line for Q&A.

Your first question comes from Brian Bittner from Oppenheimer & Company.

I just want to clarify and ask a question. Overall, to make sure we're on the same page, the EPS guidance and the brand-level same-store sales guidance provided last quarter remain unchanged, correct?

Yes, that's correct, Brian.

And just, Darin, the sales trends for the third quarter, they outperformed our expectations. They accelerated on a three-year basis. And on this call, you're saying you're seeing a continued ramp-up in sales exiting Q3. So I just think generally speaking, investors are somewhat worried about Jack's exposure to the lower end consumer. So based on these updated trends, is it safe to say you're not seeing a degradation in consumer spending patterns? And there's just a lot of mixed messages out there. So would love your thoughts there. And what just makes you incrementally confident that these two brands are better positioned in an environment where your core customer is feeling more pressure than normal.

We are very confident in both of our brands and the effectiveness of our strategy. We have been cautious with our pricing and promotions, and we will maintain our successful hook and build strategy moving forward. Beyond the execution of our strategy and innovation, I believe there is potential for improvement in staffing and continuing to open dining rooms. I am seeing strong execution at the restaurant level across both brands, which reassures me that our marketing efforts are resonating and being implemented effectively. Additionally, both brands are advancing in the digital space. For instance, we are rolling out e-commerce at Jack and leveraging our loyalty database to boost same-store sales. We feel optimistic about executing our current strategy and the new initiatives we have planned. Regarding consumer income levels, while the industry faces challenges with lower-income consumers, we have understood through segmentation work that we can effectively reach higher-income consumers at Jack, where we have successfully communicated our message and increased sales. We did notice some weakness within the lower-income bracket under $50,000. However, we still experienced growth in the lowest income level during the quarter. We recognize the opportunity in the middle income brackets and will seek ways to deliver value that resonates with consumers in various forms. Our pricing team has dedicated significant time to identifying opportunities and understanding sensitivity, considering what value means across different aspects like promotional offers, pricing, combo meals, family packs, and communication channels, including digital and dine-in. We've conducted extensive research on pricing strategies to enhance our communication with consumers.

Your next question comes from Lauren Silberman from Credit Suisse.

Just a quick follow-up. Are you seeing any differences across regions as it relates to comp performance? And then my question is actually on value. How are you thinking about everyday value, balancing elevated costs, and sort of what's the franchisee appetite for value in a more challenging environment? Are you starting to see the industry more broadly get more aggressive on that front?

Let's start with the value question. We are definitely noticing that the industry is becoming more aggressive in promoting value. As I mentioned earlier, value can mean different things depending on income levels, product types, and channels. We see opportunities for both Jack and Del Taco in this area, particularly with our premium and value items. For example, Del Taco's 20 under $2 menu has been very successful, allowing them to implement significant price increases while still being perceived as a value product. We have similar opportunities at Jack that we've been pursuing. During the last quarter, they also promoted their premium taco line at Del Taco, which performed exceptionally well. Ultimately, it depends on the consumers and how we communicate value to different segments of our customer base. Regionally, we observed strong performance in California and Texas, our largest markets, but faced challenges in the Northwest and Midwest, largely due to staffing issues. These areas have been most affected by staffing shortages. When we are able to open our dining rooms, we experience about a 0.8% improvement in sales. This indicates that these markets could potentially perform even better if staffing challenges are overcome and dining rooms are fully operational.

Just to underscore Darin's point, a lot of that Midwest market is our evolving market basket. Excluding those markets, our same-store sales on the company portfolio would have been roughly 200 basis points higher or somewhere around 5.5%.

Your next question comes from Brian Mullan from Deutsche Bank.

I have a question regarding the possibility of refranchising company-owned Del Taco units over time. It would be beneficial to understand your long-term vision for Del Taco once that process is complete. Specifically, how long do you anticipate it will take and how many transactions do you expect to occur? Are you aiming for a franchise mix close to 5%, similar to what you aimed for with Jack prior to COVID, or is there a reason to consider retaining more Del Taco units in the long run?

We'll continue to give further guidance there when we come to an Investor Day and investor conference related to the specifics on Del Taco. But what I can say is we want this business to be asset light and to look very familiar to the Jack footprint eventually. In that time, what we're going to do is we're going to do it in the right way, we're going to get the right partners. And so whether that's 12 months or 24 months, we think it's a relatively short period to move to asset light. And as we've shared all along, not only did we know going into this acquisition that we had Jack franchisees in existing markets that were interested in buying Del Taco, we knew there was already some pent-up demand from when Del Taco executed a couple of transactions 12 or 18 months ago. So we felt very confident that refranchising is a part of our strategy and that we can execute against it. Just to provide solid substantiation of that, we've already had two offers on two markets with Del Taco that we’re still considering those offers and whether we accept them. And we are just about ready to launch a full-scale refranchising effort for Del Taco.

Your next question comes from Gregory Francfort from Guggenheim Securities.

I think last quarter, your system pricing was 1 point lower than the company stores. So I guess just confirming, are you guys running like 9% pricing for the system? And as you talk with franchisees, obviously, you can't dictate where their pricing is, but what's your advice to them? And kind of are you comfortable with that level of pricing right now running through the system?

Our pricing is in the high single digits for the system. As we noted, the company price is 9.7. We have aligned our company port basket with the franchisees, which historically have had higher pricing. So we have reached a balance across the overall system. Therefore, high single digits and the 9s serve as a good target.

Your next question comes from Dennis Geiger.

We continue to see some positive developments regarding unit growth. Darin, I was curious about your latest thoughts on the current environment, particularly regarding cost pressures and rates. Is any of that affecting the timing and pace of signing agreements or openings? In previous quarters, it didn't seem to have an impact. I'd appreciate any updates you can provide on that front.

And the way I would categorize it is we are making substantial progress with the Jack base of franchisees against our development. For example, we've approved more sites in the last six quarters than we have in the prior three years. So we're building our pipeline. We feel good about that. We're signing development agreements still mostly with our existing base. And yet we also see interest from new franchisees. Now what I would say on the other side of that is with this economic backdrop, we definitely see new franchisees taking their time evaluating the opportunity, which I think is just natural with this and the backdrop in the environment we're in, but we continue to see a lot of interest, especially on the refranchising deals. As we mentioned on the call, we have a couple of other evolving markets where we've had LOIs that we are deep in the process of finalizing that are both with new franchisees that also want to develop and grow these markets. So we feel really confident about the strides we've made related to development. The one other thing I would add is that, as you've heard from many of my peers in the industry, we are definitely facing headwinds as it relates to the cost of development, we're definitely facing headwinds on the availability of equipment to local market conditions, whether it's labor. And we've done our best to set ourselves up to execute against our growth strategy by expanding our vendor base, going out and using our balance sheet to make sure we have equipment available to us and then working hand-in-hand with franchisees to make sure that, that pipeline stays intact. And lastly, I would just say our franchisees have continued to show excitement for growth, because they know this current environment is temporary.

Your next question comes from Jon Tower from Citi.

I have a couple of questions regarding the macro situation in California. First, with the stimulus coming this fall, how does the company plan to capture more than its fair share of those stimulus dollars as they reach consumers? Specifically, what strategies do you have in place to ensure this continues over time? Will you be utilizing the app or other methods to engage people in loyalty programs? Secondly, I would like to know your thoughts on the FAST Act. Do you believe that bill will pass through the California legislature and become law, and what implications do you think this will have for your business?

Let's address that last question first. It’s difficult to predict what will happen, but we are closely monitoring the situation to ensure we are well-prepared. Both our team and our franchisees hope that the Senate and the governor recognize that passing this legislation as it stands will do more harm than good. Regardless of the outcome, Jack and our franchisees will be ready to adapt accordingly, and we are aware of this reality. Regarding the stimulus, we believe our current strategy, which focuses on hook and build innovation, sets Jack apart. A prime example is our return to Spicy Strips and the Breakfast limited-time offer featuring French Toast Sticks. We're also planning for further innovation as we move into the next calendar year. We see a clear opportunity to capitalize on the stimulus, leveraging what has been successful while also innovating, particularly in digital as we roll out our e-commerce platform. Our digital business has seen significant growth, achieving a 30% increase year-over-year in Q3, allowing us to take advantage of the stimulus checks.

Your next question comes from David Tarantino from Baird.

I had a clarification question or a couple of clarification questions on your comments on the recent sales trends for Jack in the Box. I think, Darin, you mentioned that the growth improved a the quarter progressed. But I wanted to ask, were you referring to growth versus last year or growth versus 2019 or both?

Sales as the quarter continued. So as the quarter continued, we saw improved sales year-over-year and as the quarter continued, sequentially.

In addition to that, so you look at year-over-year, we began the quarter with negative same-store sales trends. As we lapped the stimulus checks from last year, the trend turned positive as we exited and gives us optimism going into this existing quarter.

So I just want to make sure I understand it. So you're talking relative to last year, not necessarily relative to kind of the pre-pandemic level. And I guess related to that, I mean, how does the trend look exiting the quarter relative to 2019 levels, if you're well in this year. Is it similar to what you did in the quarter or is it better or worse?

We're looking on a three-year basis. So the company portfolio is performing 70 basis points higher than our 2019 performance for that same portfolio on a quarterly basis.

Your next question comes from Jared Garber from Goldman Sachs.

This is Ben on for Jared. A question on Del Taco, I guess, with a full quarter plus in the books. What have been some of the key early learnings from the brand along with any realized or potential further synergies?

So far, since we've acquired Del Taco, mostly what we've been impressed with is the management team that we have in place and the people within the Del Taco business. It's definitely a tight-knit family that's clear on how they execute and how they go to business and work every day, and a very similar mindset to Jack, which is a challenge put in front of them. It's accepted, and they get excited about how we're going to solve the problem and make this business work. I've been really encouraged by the team. I was up there a week ago where we had a town hall and had everybody back into the office. It was good to connect with all the team members face-to-face and just see their level of camaraderie and how they work well together. I also like what I've seen is how our teams are working together and sharing ideas back and forth. More than just synergies where I see the real opportunities are how do they share information and share knowledge to create momentum. I'm definitely seeing that take place, and some examples of that are some of the things they're doing with automation, some of the things we're doing with automation versus both brands having to test it separately. The groups on their own decided, hey, we'll take something in the kitchen at Jack, and they're going to take something on the drive-through with some AI technology and test it, and they're sharing that information back and forth. So we both create momentum. Last thing, I think overall, from a synergy standpoint, we are on target with what we expected to meet the $15 million, and that we're furthest along in the merging of our supply chain, working together and working with the Del Taco business and their franchisees.

Just to add to that, we also get share experiences and knowledge sharing on how they're approaching the value consumer as an example, which was brought up earlier on this call. Del Taco had a very successful quarter in their sales, the same store sales were up 3.5%. And we saw that they were able to penetrate to that value consumer very successfully, particularly with their Q4 quick combo meal platform, which was incredibly successful along with their 20 under $2 menu, which is also successful. So we're able to share those learnings on how to approach product development and communication to the consumer with these LTIs as well.

Your next question comes from Alex Slagle from Jefferies.

The question on the Taco franchise development, and you mentioned the building pipeline here, but it also seems like the pace of development has paused. Not sure if that's timing or related to the integration and pending actions following the acquisition or if it's macro or equipment or whatnot. But any thoughts as it relates to that, why that slowed? And then a little bit of a pickup on the closures, perhaps some optimization efforts? But if you could comment, I’d appreciate it.

If I understood the question correctly, it was about Del Taco and their openings, which are delayed compared to previous quarters. They have signed additional development agreements this year and increased their sites in process. So it's mostly a matter of timing.

On the closures, we believe Del Taco experienced relatively minor closures. There were five in total, with two being locations that we were more comfortable closing, and the other three being franchise locations. Therefore, we do not consider this a significant issue for that brand.

Lastly, we'll provide additional guidance on Del Taco in November.

Your next question comes from Chris Carril from RBC Capital Markets.

On the updated CapEx guidance, which is now $25 million lower than before. Is that more of a timing shift or does it, in any way, represent a change to reimage incentive strategy? Ultimately, just trying to understand what normalized CapEx can look like following this year.

Yes, that is primarily a timing shift relative to remodels, refreshes or reimage programs. The guidance that we gave out, the $50 million to $55 million is fairly consistent with what we've historically done. Having said that and as we mentioned earlier, we've got very robust interest in this remodel reimage program. We have 373 applications that came in from our franchise system for that program. We've internally approved 172 of those. So it's a matter of getting through that process, the formality of it and then getting the cash out the door. So that will come at some point fairly shortly here. But relative to our guidance, there was a little bit of a mismatch there. We have seen so far with those units that have done this program so far, very attractive traffic-led sales in those units, which we're very encouraged by.

The only thing I'll add to what Tim had to say on that piece is just like we're building a franchise real estate pipeline, to get the incentives in place, getting franchisees, negotiations with their landlords and moving the process forward with kind of some of the delays that we see at the city level of permitting. It takes a little bit of time for this to ramp up. But the good news is we have a lot of franchisees that have expressed interest. And as Tim just said, we've approved 172 for the incentives.

Your next question comes from Nick Setyan from Wedbush Securities.

Darin, the lack of a value menu at Jack in the Box for the past decade has been a significant topic of discussion. Do you believe there's a need for a more systematic approach to value at Jack in the Box, especially now that you have insights from one of the leading brands regarding their value strategies?

Yes, I think in the past, Jack was a little bit slow to approach everyday value, and if you think back to 2016 and the massive value wars. What's a little bit different about our approach this time is we do have Del Taco that's done a lot of research around that with this new team in place as we've done our segmentation work and understood our guest base better. We've done a lot of work behind the scenes on how do you create value with our guests. And as I mentioned earlier, there's a lot of different ways for value at Jack, both to the premium product and to what we consider our value products. It also comes in how we price it, how we promote it, what channel, whether it's digital, app, dine-in, whether it's a different daypart, whether it's ala carte or family pack. So we have a lot of thoughts and an approach that we plan on taking to reach and be prepared to compete from a value standpoint.

Your next question comes from Jeffrey Bernstein from Barclays.

Just a question on inflation and the related pricing. I think you said commodity inflation was up 17% this quarter and labor up 13%. Wondering if you can share your outlook for that as we look, I guess, through the current fourth quarter or any initial thoughts on '23? It does seem like there's potentially some easing on both fronts. So trying to get your sentiment on that. And in response to that, I know you're running 10% price. Just wondering what would that pricing be if there was no incremental pricing taken, just trying to assess the health of the franchisee and their profitability as we look ahead with hopefully inflation easing and the pricing outsized.

For the full year, we expect to be at the high end of our guidance. It's a little higher than the second quarter, it was a little higher than that in the third quarter, and we expect to see some moderation in the fourth quarter. So as expected, it affected company-operated margins from that significant commodity and wage inflation, as well as the rising cost. But we expect some of these pressures will continue to impact margins for the remainder of the year, but ease.

Your next question comes from Jim Sanderson from Northcoast Research.

Just wanted to talk a little bit more about the SG&A. It seems to me Del Taco's numbers were a little bit higher than I had expected relative to system sales. How should we look at that as an opportunity to see some improvement in that budget as you consolidate operations going forward?

I mean, clearly, we have some synergies as part of this acquisition, which we're just at the early stages of realizing. However, in our view of the quarter, we saw the G&A relatively in line. There are some one-time costs that we don't foresee it as being run rate that occurred in the quarter. Generally speaking, from a G&A point of view, we felt we came in, in a very disciplined controlled manner for the quarter.

And just a quick follow-up on the evolving markets. Could you run through the actual number of stores in those markets? Because it seems to me there could be a nice step-up in store margin as you go through that refranchising process in the next couple of quarters. Just like to make sure I have the detail.

We have four markets within our evolving markets that total around 30 units. We recently announced a letter of intent and we are very close to finalizing two more of those markets. In the near term, we expect to have three of the four markets resolved and refranchised. We recognize that this has been a challenge for our restaurant level margin in recent quarters, and we aim to resolve it soon.

And that would only leave one market that you have to work with…

That's correct.

And your last question for today comes from John Glass from Morgan Stanley.

I wanted to ask about breakfast. Once upon a time, I think breakfast was like 20% of your sales. I don't know if you can just level set where that daypart is today? And maybe talk a little bit about trends. You did talk about reemphasizing it, so I don't know maybe if that's not gotten the attention some of the other dayparts have gotten. So besides product innovation, you mentioned, what other things are you doing at the breakfast daypart? So if you can just talk about the product innovation, percentage of sales, particularly as there's a lot of competitive pressure, obviously, in that daypart. Where do you think that opportunity is if you think there is a significant increase and opportunity there?

We haven't broken out or disclosed precision around the composition of dayparts. I will note that there isn't vast disparity amongst our large dayparts where breakfast is meaningful. Also, breakfast is a product category in addition to a daypart for us. So it's clearly important to the business. Darin mentioned earlier in his remarks as well, we're going to come in fairly aggressive in Q4 with a breakfast promo with Mark Hamill, that's got some national attention, introducing our French Toast Sticks, which has been a historical favorite for the brand. So we're excited about the upside opportunity we have in that daypart.

The other thing I would say is when we did some research on why our breakfast daypart had slowed slightly in this quarter, and we had some key learnings that we are applying in Q4, and we're already seeing the benefit. One is we stopped promoting it on a tertiary message through media. We've reengaged that and it's absolutely helping, and we came back out with a really good offer with our French Sticks that are loved. Immediately, we're seeing our breakfast daypart bounce back. So that's part of our approach is to aggressively communicate the right message around breakfast at the right time, and we're going back to some tried-and-true methods.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

We appreciate the time you’ve taken today. We’re excited about where Jack in the Box is in our evolution of our strategy, and all the different things that we're doing to do to execute against our four pillars of building brand loyalty, driving operational excellence, growing restaurant profits, and ultimately expanding Jack's reach. We also will look forward to seeing you for quarter four in November and giving you a further update. Thank you.

Thank you.

This concludes today's conference call. You may now disconnect.