Earnings Call Transcript
Jack In The Box Inc (JACK)
Earnings Call Transcript - JACK Q1 2021
Operator, Operator
Good day, everyone, and welcome to the Jack in the Box, Inc., First Quarter Fiscal 2021 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo with Investor Relations for Jack in the Box. Please go ahead.
Carol DiRaimo, Investor Relations
Thank you, Mariana, and good morning, everyone. Joining me on the call today are Chief Executive Officer, Darin Harris; Chief Financial Officer, Tim Mullany; Vice President and Controller, Dawn Hooper; and Treasurer, VP of Financial Planning and Analysis, Sean Bogue. In our comments this morning, per share amounts refer to diluted earnings per share. We will refer to non-GAAP items throughout today's call, including operating earnings per share, adjusted EBITDA as well as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliations provided in yesterday's earnings release. Following today's presentation, we will take questions from the financial community. Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. And while management may provide current thinking on this call around the potential impacts of COVID-19 on our business, given the unprecedented nature of this pandemic in the rapidly changing environment, any forward-looking statements should be considered with this elevated level of uncertainty. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in yesterday's news release and the cautionary statement in the company's most recent Form 10-K are considered part of this conference call. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com. A couple of calendar items to note. Jack in the Box management will be participating in the Bank of America Securities 2021 Consumer and Retail Technology Virtual Conference on March 11. Our second quarter ends on Sunday, April 11, 2021, and we tentatively plan to announce results on Wednesday, May 12, after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Thursday, May 13. And with that, I'll turn the call over to Darin.
Darin Harris, CEO
Thank you, Carol, and good morning. I'm excited to discuss our strong first quarter results. But first, I would like to provide an update on some key leadership positions. As you know, Tim Mullany joined us as CFO four weeks ago. This role will be pivotal to our long-term strategy, not only as CFO, but also in terms of development and growth of the company. He has quickly immersed himself in all things Jack, including spending time working in our restaurants and onboarding with the leadership team. Tim is a well-rounded finance leader with more than 20 years of experience leading multi-unit operations. Most recently, Tim served as Chief Financial Officer at VASA Fitness, where he was responsible for leading the finance and accounting team, plus developing and executing company growth strategies, including site acquisition, and market entry development. Tim has demonstrated strong financial leadership while supporting growing businesses in the restaurant industry. We are confident in his executive leadership ability to help continue the momentum being experienced at Jack in the Box. Previously, Tim was Chief Financial Officer at RAVE Restaurant Group, Inc. Prior to that, he held Chief Financial Officer roles at Restaurants Unlimited and Consumer Capital Partners, franchisor and operator of the Smashburger and Quiznos brands. His career began with positions in private equity and investment banking at JPMorgan and Bank of America, as well as KPMG. Ryan Ostrom joined us earlier this month as CMO, a position that has been vacant for the last few years. Ryan joins the company with over 15 years of marketing and branding experience, with a passion for driving innovation through creative consumer strategies. Most recently, he served as Chief Brand Officer for General Nutrition Centers, where he helped lead the transformation of GNC from a traditional retailer to a global digital brand by modernizing their marketing, e-commerce, innovation, and product development. Previously, Ryan served roles at Yum! Brands, Kenmore, Craftsman & DieHard at Sears Holding Corporation, as well as Reebok. During his time at Yum! Brands, Ryan helped KFC enhance their global store and e-commerce customer experience through new digital, delivery, curbside, and loyalty solutions while also partnering with global markets to modernize their marketing tactics. We're very excited to have Ryan join the team. His experience and leadership demonstrate a proven track record of transforming brands through unique campaigns, all while leveraging digital platforms to modernize how consumers engage with brands. He will be an integral part of helping evolve the future of how Jack in the Box builds lasting relationships with customers. Ryan will be focused on three core areas for the long-term success of the brand: overall brand strategy, the evolution to a more digitally enabled experience, and continued strength in product innovation. We are currently in the midst of a COO search and have met with a number of candidates, who will be responsible for leading both company and franchise operations and driving key initiatives to improve both operational excellence and restaurant profitability across the system. Lastly, I can tell you we have talked to several great candidates and are getting close to concluding our search for a permanent Investor Relations Officer, so that Carol can return to enjoying retirement. We appreciate her willingness to come back and help us out over the past few months. I'm very pleased to report that we continue to make significant progress with strengthening our relationship with our franchisees. And we held our first Leadership Advisory Council meeting a few weeks ago. Jack cannot succeed unless our franchisees succeed, and I'd like to think of it as a race. Historically, we passed the baton to the franchisees at the fourth leg in the race and asked them to cross the finish line. Now we're bringing them to the starting line with us. By doing so, we have re-energized the relationship and look forward to seeing this transpire into further growth of the Jack in the Box brand. With the majority of my leadership team now in place, we plan to share our updated strategic plan and vision in the next few months and are looking to lock down a date for an Investor and Analyst meeting in May or June. Now, to talk about Q1's outstanding performance. We have certainly learned a lot about where consumers are headed during this pandemic. The continued importance of digital, the consolidation of transactions to drive higher check gains, and the desire for craveable and snackable items. As mentioned over the last couple of quarters, Jack pivoted early in the pandemic to capitalize on changing consumer trends, including changing media placements, leaning into delivery, and offering new flavorful and portable menu items. Many of these consumer trends held strong through our first quarter. Same-store sales for the first quarter were the direct result of this, increasing 12.5% for the system. This was our best performance since 1994 and significantly outperformed our direct competitors. Tim will go into more details, but consumers have continued to drive check through more premium product purchases. We also saw the benefit of the stimulus payments in the last few weeks of our quarter. I'll take a minute to outline some of the key success drivers. We continue to see price-pointed offers appealing to our core customers during this time. We also continue to benefit from our innovation. Since their launch last January, Tiny Tacos have remained highly incremental to our overall performance as a permanent menu item. Consumer response remains strong. Tiny Tacos drove transactions and bolstered check sizes as they're frequently added to our guest orders. In Q1, we introduced a number of products, including our new Cluck Chicken Sandwich and improved Chicken Strips, which contributed significantly to our same-store sales performance. We remain focused on delivering a more consistent experience for our guests and initiatives that focus on the consistency of speed of service, while remaining at the top of our priorities for driving throughput and sales growth. Aside from these continued strategies, we're also seeing shifts in our business because of changes from consumer behavior amidst COVID. First, consumers are utilizing delivery in our mobile app more than ever, with digital sales more than doubling year-over-year to nearly 7% of system sales. As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers, with 80% utilizing at least three of the major providers. We continue to integrate our POS systems with these third-party vendors, allowing for simpler procedures for the restaurants. Second, while we had seen significant shifts away from breakfast and late-night dayparts earlier in the pandemic, all five of our dayparts were positive in the first quarter. While traffic remains negative across all five dayparts, we have seen a significant rebound across each, including breakfast and late-night. Third, we've experienced continued increased sales of our more premium core menu items, such as our Jumbo Breakfast Platter, Ultimate Bacon Cheeseburger, and Chicken Strips. Consumers are now placing larger orders as well, typically from multiple people. More than half of our same-store sales increase was driven by premium items. These shifts in consumer behavior have led to a sustained significant increase in our check sizes during the pandemic. The media team has remained extremely nimble, capitalizing on shifts in consumer consumption trends around gaming and video content to really meet the consumer where they are during this time. We have increased our social media presence and converted all sports sponsorships into digital formats. To celebrate the launch of our new chicken sandwich, Jack in the Box partnered with singer and actress Becky G to create a brand-new chicken dance for fans to learn and share on social platforms like Instagram and TikTok. Lastly, as to unit growth, franchisees opened three new restaurants in the quarter and we currently expect to open 20 to 25 restaurants this year. With the addition of Tim Linderman and the continued work on the new prototype, we are ironing out the development strategy to invigorate long-term growth for us and our franchisees. And we'll begin actively marketing to potential new franchisees in the next few months. We look forward to sharing more about this strategy in our upcoming Investor Day. Lastly, I'd like to take a moment to express my continued heartfelt thanks to our restaurant team members for keeping everyone's safety a top priority, as we provide for the needs of our guests and first responders. I'd also like to thank our corporate employees, franchisees, and suppliers for their partnership, flexibility, and ingenuity during these unprecedented times. Jack in the Box will celebrate its 70th anniversary on February 21, and we look forward to continuing to enhance the brand's relevance for decades to come. I'll now turn the call over to Tim Mullany, our Chief Financial Officer, for a closer look at the first quarter results. Welcome aboard, Tim.
Tim Mullany, CFO
Thank you for the warm welcome, Darin. It's an honor to join Jack in the Box at such a transformational stage in its journey. Good morning, everyone, and I look forward to getting to know all of you. Operating EPS for the first quarter was $2.16, compared to $1.17 last year. This approximately 85% increase was primarily driven by strong sales growth across the system, benefiting both company and franchise margins, along with lower G&A during the quarter. Adjusted EBITDA rose by nearly $26 million, or 34%, reaching $102.4 million in the quarter. System-wide comparable sales increased by 12.5% in the first quarter, while company same-store sales rose by 7.5%, which included average check increases of 21.2%, with a pricing effect of 3.1%, offset by transaction declines of 13.7%. Franchise same-store sales increased by 13% for the quarter, showing a sequential improvement in transactions. Total system-wide sales experienced a 13.4% growth in Q1. The average check continues to be influenced by premium products and a 9% rise in the number of items per check, from 3.87 last year to 4.22 items this quarter. The variance between company and franchise same-store sales was primarily due to a few company-owned locations that rely heavily on border traffic. Additionally, the reduced operating hours at some company restaurants because of COVID staffing challenges contributed to the performance gap. However, company AUVs surpassed $50,000 per week in Q1. As mentioned in yesterday's release, this robust performance has persisted into the second quarter of 2021, with two-year trends for the initial four weeks of the quarter aligning with the first quarter, while we are also comparing against the very successful launch of Tiny Tacos, which saw same-store sales up by 7% during the comparable four weeks of the previous year. You may recall that same-store sales for the first seven weeks of our previous year's second quarter were up by 5.2%, whereas the last five weeks of that quarter, impacted by COVID, saw a decline of 17%. Company restaurant-level margin improved to 25.5% in the first quarter, reflecting an increase of 70 basis points over last year's 24.8%. This improvement was mainly driven by sales leverage and lower food and packaging costs. Food and packaging costs fell by 150 basis points in the quarter due to a favorable shift in product mix, as increased purchases of premium items elevated our average check, alongside menu price increases that more than compensated for commodity inflation of 1.6%. Labor costs were up by 30 basis points as sales leverage was countered by ongoing pressure from wage inflation, which was around 5.0% for the quarter. Occupancy and other costs rose by 50 basis points, primarily due to higher delivery fees. Franchise-level margin increased by $15.2 million compared to the same quarter last year, mainly driven by increased royalties and rental revenues as franchise same-store sales rose by 13%, along with a $1.7 million reduction in bad debt expense. Franchise-level margin as a percentage of total franchise revenues was 41.5% for the quarter, up from 38.5% the previous year. Advertising costs included in SG&A were $5.8 million in the first quarter, up from $5.3 million last year, but remained steady at 5.1% of company restaurant sales. G&A, excluding advertising, decreased by $8.2 million in the quarter, primarily due to a $3.9 million reduction in litigation-related costs compared to the prior year. Mark-to-market adjustments related to company-owned life insurance policies brought about a favorable $2.7 million reduction in G&A year-over-year. These policies are sensitive to fluctuations in the stock market. Excluding the $4.8 million COLI benefit this quarter, G&A as a percentage of system sales was 1.6%. Depreciation and amortization declined by $2.2 million during the quarter, and we expect this trend to carry on as franchise assets reach full depreciation and franchisees take on responsibilities for ongoing improvements. We anticipate a full-year depreciation decrease of approximately $6 million. Our effective tax rate for the first quarter was 25.1%, lower than the statutory rate mainly due to the benefit from COLI gains, which are not taxable. Now regarding our liquidity and debt, the company concluded the first quarter with about $289 million in cash on its balance sheet, including $251 million that is unrestricted. Our leverage ratio was 4.2 times at the end of the first quarter. We remain in a strong position concerning our debt covenants and liquidity. After the quarter ended, we repaid $107.9 million outstanding on our variable funding notes. We did not repurchase any shares in the first quarter, but now that the VFN is repaid, we expect to resume share repurchases in the second quarter. We currently have $200 million available under board-authorized share buyback programs, with $100 million expiring in November 2021 and another $100 million expiring in November 2022. We do want to provide EBITDA sensitivities for the year. A 1% change in company same-store sales results in an impact of just over $1 million on EBITDA. A 1% change in franchise same-store sales results in about $5 million in EBITDA. Every 30 basis points in restaurant-level margin corresponds to roughly a $1 million impact on EBITDA, while every 10 basis points in G&A translates to around $4 million in EBITDA. As a reminder, fiscal 2021 is a 53-week year with 13 weeks in the fourth quarter. Lastly, you may have seen in our 10-Q filed last night that a Midwest franchisee filed for bankruptcy earlier this week. This franchisee operates 68 restaurants, 18 of which we own the land and building. It is too early to determine how many leases and franchise agreements the franchisee may reject in bankruptcy or the potential impact on our future financial results. However, in the event of a sale, we have the right to approve any new franchisee. In summary, we are very pleased with the ongoing momentum in our business reflected in our Q1 results.
Operator, Operator
Thank you. Your first question comes from Brian Bittner with Oppenheimer. Please go ahead.
Brian Bittner, Analyst
Thanks. Good morning, and Tim, congratulations on your new role. Darin, with Tim coming on board now, you're clearly rounding out your executive team nicely. I know you're still searching for a COO. But you're looking towards this Investor Day that you're talking about in May or June. And I'm assuming you're going to use this as a great opportunity to share your long-term strategy with the investment community. I'm also curious to understand, do you have a philosophy on communicating financial targets with investors? Is that something you believe is necessary?
Darin Harris, CEO
Brian, as part of that process, we will begin to establish our long-term plan and financial targets.
Brian Bittner, Analyst
Okay, great.
Carol DiRaimo, Investor Relations
I would just mention that we will communicate targets in a manner similar to what we did in 2018 when we provided updated long-term guidance at that time.
Brian Bittner, Analyst
Terrific. And it looks like you've executed on that as we look at these results. And when I look at your average weekly sales, Darin, they've really inflected, obviously, on the back of your strong same-store sales trends that you've been generating and that you continue to generate. And I'm just curious what gives you confidence or what evidence you may have that you can share with us that suggests that the sales gains and the volume gains are sustainable and that these new higher levels of unit economics are indeed sustainable?
Darin Harris, CEO
Yeah. As you know, I mean, with everything going on with COVID, none of us can speculate or have a crystal ball. But what I'm really encouraged by is even prior to the pandemic, we were seeing strong trends as a result of the sales layer with Tiny Tacos. But beyond that, what I'm even more impressed by is the strategy we've been using around our core variety with our loyal base of customers. And what we're seeing is this increase or more frequency from these core menu items and core heavy users. So that's, obviously, encouraging. Our value bundles, we put them in place as well to drive a value opportunity at competitive price points, but we're seeing the continuation of the strategy of add-ons and upsells improving performance. We are innovating and we'll continue to aggressively amplify our innovation. Recently, you saw the rollout of the chicken sandwich or Cluck Sandwich, and we had substantial performance from Cluck. So we'll continue innovation. Our operational execution, a lot of the initiatives that we delayed during the pandemic are starting to take hold. We're seeing better execution of both quality and consistency of speed. Lastly, the way we're communicating to guests, we've done a lot of the research I shared on the last call around who our guest is, why they come to us, and why they leave. We've changed our tactics and how we're communicating. I think we're communicating more effectively, but we're also taking the opportunity to enhance our digital. As we think about that, we'll be adding a loyalty program as we go forward this quarter. We are building a very robust database where we're having more frequency of communication on a one-on-one basis based upon individual consumer trends. So you take all that, you mix it together and what I feel comfortable about is what was working before the pandemic continues – we continue to see the outcome of that and then we've enhanced it during the pandemic. I'm confident that what we're doing is resonating with our guests, and that's part of why we're outperforming the industry.
Brian Bittner, Analyst
That’s great detail color and I really appreciate it. Thank you.
Carol DiRaimo, Investor Relations
Next question.
Operator, Operator
Your next question comes from Dennis Geiger from UBS. Please go ahead.
Dennis Geiger, Analyst
Great. Thanks for the question. Darin, another one, maybe if I could, just on maintaining the impressive sales momentum that we've seen for many quarters now. I think you largely highlighted the drivers just now as it relates to all the brand-specific initiatives. But curious if there's anything else that you could highlight on what you've seen most recently over the last several weeks and months as certain markets have reopened, what the AUV performance in those markets have been, and if it's still been relatively strong. Also, I think you talked about late night and breakfast kind of gaining momentum, so presumably, that could be something as things start to reopen, you see continued gains there. So wondering if you could kind of take it from that angle, beyond all those other initiatives and just talk about what you've seen, and how that will help you think about sustaining this momentum.
Darin Harris, CEO
We continue to experience strong performance across all areas. The trends within the industry, particularly in fast casual and casual dining, have gradually improved throughout the pandemic. Even with that, we observe a consistent enhancement in our performance from quarter to quarter. We anticipate that off-premise dining will continue to be significant post-COVID, which is fundamental to our business model. There is a growing trend in our delivery and mobile app usage. Additionally, we expect to see an increase in the number of items added to orders, particularly in a delivery and contactless environment, with the average check rising from 3.7 to 4.22. This trend may slightly decline once we fully reopen, but we firmly believe there is an ongoing trend in the industry that will maintain or enhance average check sizes. It's important to note that our drive-thru enhancements were strategically implemented to reduce investment in dining rooms and cater to off-premise consumers. We are also noticing that guests with higher incomes are dining with us more frequently, and our heavy users are increasing their usage as well. Our California and Texas markets are performing well, with California surpassing some other markets, and Texas also showing stronger same-store sales compared to industry averages, including those reported by our competitors.
Dennis Geiger, Analyst
Got it. That's helpful. And if I could ask, just one unrelated follow-up. Just as it relates to the unit development prospects, recognizing there's going to be much more to come a few months from now, anything new to share, kind of on thoughts in speaking with franchisees? Any update over the last few months on the demand there, if that's changed at all? If there's anything, as you've kind of worked on kind of engineering costs, et cetera, if there's anything new there that you can share today? Thank you very much.
Darin Harris, CEO
We are excited about our new prototype, which has reduced costs by 18% to 23%. We currently have three sites approved to open, compared to just one from our last call. This increase indicates growing interest from franchisees, as two-thirds of our system indicated a desire for growth in a recent survey. We are now having substantial discussions about entering new markets and developing agreements. The average unit volumes for our openings in 2019, 2020, and 2021 exceed the system average. In 2020, we achieved the highest number of new franchise openings in a decade, even during the pandemic. Our new Head of Development, Tim, is focused on franchise recruitment, and we will be launching an aggressive marketing campaign this quarter to support our partners in finding available sites. Profitability for our existing stores in the fiscal year 2020 increased by 20% compared to 2019. As we grow sales and improve margins, it generates excitement within the franchise system about expansion. We have a new approach to our policies regarding growth, making them more inviting for capital investment. We will actively engage with capital providers like private equity and family offices. Additionally, we have identified that there is potential for 950 to 1,200 units within our existing markets. We are very enthusiastic about the growth opportunities ahead but are also aware that we need to maintain a realistic timeline to build our pipeline.
Dennis Geiger, Analyst
Great. Thank you.
Operator, Operator
Your next question comes from Jared Garber with Goldman Sachs. Please go ahead.
Jared Garber, Analyst
Hi, thanks for the questions. I wanted to get a sense of what you think is driving some of those premium product success. And what is driving the higher income user to the brand? Are those new users that you're seeing? And what do you think is sort of driving that? Is it – it's a little bit different than what we've heard, I think, across the industry with some more value offers coming into the system. So very curious to hear your thoughts there.
Darin Harris, CEO
Yes. As I mentioned, we've been doing a lot of research around who our target segment is and enhancing the way that we communicate through digital means and through our overall marketing strategy to be more effective at communicating to these guests. That's enabling them to explore what's additional on our menu. Things like I mentioned, our Ultimate Cheeseburger, maybe something that last time, it was the Homestyle chicken sandwich where they were ordering more of. We're definitely encouraging them to explore different parts of our menu than what their frequency or their first-time use is, which has been an improvement. We also saw an enhancement of our breakfast platter by bringing back an old favorite in our French Toast Sticks, and it also drove our breakfast performance. We saw that as part of our core premium menu items that people engaged over the last quarter.
Jared Garber, Analyst
Great. That's really helpful. And just one more, if I can follow up on your breakfast comment. It seems like you guys are definitely taking share across the industry, maybe especially at some of the shoulder periods, breakfast and late night like you called out. Where do you think you guys are taking that share from?
Carol DiRaimo, Investor Relations
Yes. I'll just – this is Carol. I'll articulate it a little. As we saw in the pandemic, several of our fast food competitors – well, one launched breakfast, right? But others actually cut back their breakfast hours and kind of stopped the all-day breakfast phenomenon. So keep in mind that Jack in the Box, you can order anything on the menu anytime of day. So if I want tacos at 9:00 a.m. or a breakfast platter at 3:00 p.m., we give consumers that option, and that's a distinct competitive advantage for the Jack in the Box brand.
Jared Garber, Analyst
Thanks. I’ll hop back in queue.
Operator, Operator
Your next question comes from John Glass with Morgan Stanley. Please go ahead.
John Glass, Analyst
Thanks very much. Hey, Darin, just on development again, you mentioned inviting in new franchisees into the system. Do you have a goal as to what percentage do you think you want as new franchisees versus the existing base, or is it too early to tell that? Do the existing franchisees have territory protections such that those that may not choose one and develop, you can still find other franchisees, or do you have some territory protections in place, so that wouldn't be the case? And then one follow-up, if you could.
Darin Harris, CEO
Yes. I think we haven't publicly shared kind of where we're headed with new versus existing franchisees. What I can do is answer the last part of that question, where philosophically we are going to begin to aggressively pursue development agreements that lock up territory for franchisees to develop within. We've shared that with our existing base of franchisees, so they are aware that we want them to grow. If they decide that that's not what they want to do, we'll always give them the first right to say, 'Hey, do you want this site? Do you want this territory? If not, we're going to bring in new franchisees to help support our growth.'
John Glass, Analyst
Okay. Thank you for that. And just on closures, how do you – is this still a clean-up year in 2021, where you may see some closures, particularly as you start to think about growth and as franchisees are looking at their existing asset base. Do you have a sense of what the net growth would look like based on your plans this year or not?
Darin Harris, CEO
We continue to anticipate our net unit count will remain stable. However, there may be some closures in St. Louis, so I cannot provide specific guidance on that. Beyond St. Louis, we are focused on optimizing our portfolio and exploring new opportunities. Recently, we have been assessing the right timing to potentially close underperforming units. Our strategy involves considering offsets—identifying the best time to open a new location to enhance the market, remodel existing locations, or increase sales in nearby units by closing another unit. These factors are part of our optimization strategy, and we are actively discussing potential closures with our franchisees. We are exploring whether there are offsets, remodel opportunities to boost sales, or chances to increase sales in existing nearby units.
Carol DiRaimo, Investor Relations
Right. And John, I'll just add, if you look at the first quarter, our system-wide same-store sales were up 12.5%. The total system-wide sales actually increased 13.4%. So, even though we had more closures than openings in the quarter, the system sales still outperformed the column number.
John Glass, Analyst
Got it. Very helpful. Thank you.
Operator, Operator
Your next question comes from Greg Francfort with Bank of America. Please go ahead.
Greg Francfort, Analyst
Thank you. Regarding unit growth and expansion plans, you mentioned aiming for around 950 to 1,200 new units. Can you elaborate on their locations? I understand that these will be in your existing markets, but could you clarify your approach to this? Will a significant portion of these units be in California, or will they be spread across the West Coast, Midwest, Texas, or other regions? What areas are you prioritizing? Thank you, I appreciate it.
Darin Harris, CEO
Yeah. I think stage one is always to focus on growing within our core and finding every opportunity that we can to grow with our existing franchisees around our current stores. Beyond that, we know there's opportunities like in Denver that we could grow greater than 50 units. That's still a market where we have some penetration but a huge upside. First and foremost is grow around our existing core, then slowly edge out to concentric circles around those markets and build those out. The last thing I would share is, we’ll be more specific about geographic areas ahead of our Analyst Day.
Greg Francfort, Analyst
Okay. Thanks, Darin.
Operator, Operator
Your next question comes from Jeffrey Bernstein with Barclays. Your line is open.
Jeffrey Bernstein, Analyst
Thank you very much. I have two questions. Darin, it's hard to believe, but you are already nearing one year in your role. In your prepared remarks, you mentioned that strengthening franchise relations has been critical. I would like to know what your learnings have been regarding how they perceive the greatest improvements or accomplishments in the early days. Is it primarily about driving the top line, which you have clearly been doing, or were there any underlying frustrations within the franchise community that you believe you have addressed? I also have one follow-up question.
Darin Harris, CEO
Yeah. I think the most important thing is just engaging them in our communication and being partners and strategy. Really, as we think about our strategic plan in laying out the pillars of our growth plan, they've had input and feedback and are going through the process with us. That just builds upon our relationship and enables us to have open communication about continual improvements, as an example, a smaller prototype and getting their engagement and insight as to what would they change, because they're in the restaurants every day and how would they improve some cost opportunities? Or they also have local relationships and find different ways to improve costs or technology enhancements. By bringing them into a loop and opening communication, we find opportunities.
Jeffrey Bernstein, Analyst
Understood. And then just a follow-up, I'm not sure whether Darin or Tim. Obviously, you're both relatively new. I think you mentioned you're roughly four turns leveraged and presumably maybe even lower. I think you said you've done some debt pay downs since the last quarter. But how do you think about the target leverage? I know most of your 95% or more franchise peers seem comfortable in the five to six turns range. Just wondering how you think about that as you now drift perhaps below four. Maybe your outlook for leverage versus repo, which I think you said, you're going to relaunch starting in this second quarter. Thank you.
Carol DiRaimo, Investor Relations
Yes. First, Jeff, before I turn it over to Tim, the VFN, the way it's calculated and the way that our cash balance calculates, it doesn't really change the leverage when we paid down the VFN for the covenant calculation. So it will remain kind of in that low four-point range even after we paid down the VFN. Now I'll turn it back to Tim.
Tim Mullany, CFO
Yes. Thanks, Carol. I think that's a great point. It's a very specific calculation according to our agreements. But having said that, we know that we ended Q1 with $289 million in cash. We mentioned we did pay down $107.9 million on the VFN. But we also say it, again, that we're going to resume the share repurchasing buyback. So we anticipate that we're going to get back to a more normalized liquidity and cash flow position as we were pre-COVID. Having said that, our perspectives on leverage are very specific to overall company strategy. As Darin mentioned, in May, June, we'll be looking to roll out a more comprehensive strategic sort of dialogue with the investment community. So we'll look forward to that discussion.
Operator, Operator
Your next question comes from Chris O'Cull with Stifel. Please go ahead. Your line is open.
Chris O'Cull, Analyst
Thanks. Good morning, guys. Darin, the company has made a lot of progress preparing for expansion with changes to development policies, as you mentioned, working on reducing the cost of the prototype. So I'm just wondering, what are some of the other key steps that you need to take to prepare the system for greater expansion? I mean, is it a matter of just testing the new prototype, demonstrating returns, or can you start building development commitments with the existing package? And then I have a follow-up.
Darin Harris, CEO
Yes. I think with the revision of our FDD, the change in the policies and just the increase in communication around the putting development agreements in place, I think those are the key next steps. The franchisees with the performance of the brand, the engagement of them as a part of our process as strategic partners, the desire to grow, we're getting a lot of engagement. Now it's about going out and soliciting and signing development agreements and getting commitments for that pipeline.
Chris O'Cull, Analyst
Do you think you can do that with the existing prototypes, or are franchisees going to wait till they see the new prototype results?
Darin Harris, CEO
I think we can do it with both.
Carol DiRaimo, Investor Relations
There was a LinkedIn post from one of our franchisees this week about opening a new store with a double drive-thru. They are working with existing plans, and while some are opening under the old model, this particular store features a double drive-thru.
Darin Harris, CEO
To add to what Carol mentioned, they're already showing excitement about our existing prototype. Just last week, we announced to the system that we would make the new prototype available, the lower-cost prototype. So just by that alone, we're seeing an enhanced engagement and interest level and growth.
Chris O'Cull, Analyst
That's great. And my other question just relates to the innovation strategy. It seems like the past year, innovation was designed to drive trial, repeat usage. Do you still see innovation playing a big part of the strategy, or is the risk that operations could become too complex with more major product launches?
Darin Harris, CEO
Yes. It's always a balancing effort to make sure that we can still execute our operational strategy. A foundational element of our business strategy is innovation. That is core to Jack in the Box. As you know, we were one of the first at breakfast, first to drive-thru. We'll continue to be a brand that is focused around innovation, but making sure that we can still execute it. A great example is our chicken improvements. As we went into the chicken improvement, we changed our entire cooking procedures to do two things: one, to reduce the time it takes to cook in half, which helps with our speed, but it also produced a better quality product. That's an example of the way we think about innovation, how to make sure that we can still deliver a great guest experience while also driving innovation.
Tim Mullany, CFO
And just to add to that, chicken was a meaningful contributor to the year-over-year sales improvement as well.
Chris O'Cull, Analyst
Thank you, guys.
Operator, Operator
Your next question comes from Jon Tower with Wells Fargo. Please go ahead.
Jon Tower, Analyst
Thank you for the question. I wanted to discuss your views on general and administrative expenses and technology spending. Over the past few years, prior to your arrival, G&A expenses have been decreasing and, in many instances, falling below the industry average among our highly franchised peers. I'm interested in your perspective on where you see G&A spending heading, especially in relation to technology. Do you believe that to achieve greater digital sales, you need to invest more in technology capabilities? Additionally, do you foresee handling this development in-house or considering outsourcing options in the future?
Darin Harris, CEO
Sure. So full year 2020 in G&A ran 1.7% and quarter one, excluding the benefit of COLI gains, is 1.6%. Obviously, we're showing some benefit from the sales increase. The prior long-term guidance was 1.7% to 1.8%, and we would expect any significant G&A investments to be able to generate a return so that this target remains reasonable. Tech investments or tech spending is the same. The way I think about it is, with the investments, I believe that we can generate returns. As we think about investing in our data platforms and enhancing through data science, all those are things that will either grow sales or enhance our operational execution to drive margin. So far, everything we've looked at, we believe has an opportunity to have a return.
Jon Tower, Analyst
Got it. And then maybe just putting a little bit of guardrails around the St. Louis franchisee. I think it's about 3% or so of your store base. Can you give us an idea of what that represents from a percentage of your system-wide sales? Just trying to figure out if these stores outperform or underperform, the system could soon underperform, but wanted to get some info for you?
Carol DiRaimo, Investor Relations
Correct. So without giving the specifics on their AUVs, they are substantially lower than the system average in total, right? But their sales performance in the recent quarters has been very close to the system-wide sales performance. So it's not a same-store sales issue, but it is a volume and a leverage issue.
Tim Mullany, CFO
And just to add to that. So it's not a new market, and it's not an under-penetrated market. The average store is 30 years old in St. Louis, with the first one opening in 1969. So it's core.
Jon Tower, Analyst
Yeah. And just lastly, on the topic. During this bankruptcy time period, do you still collect royalties and any payments from them, or is that on hold?
Dawn Hooper, Controller
Hi. This is Dawn. I'll take that question. So, yes, we will be still collecting payments from them as they operate the restaurants. The key point during the bankruptcy process will be when the restaurants are either accepted or rejected. But while they are still operating, they will continue to pay us.
Jon Tower, Analyst
It’s helpful. Thank you very much.
Operator, Operator
Your next question comes from Brian Mullan with Deutsche Bank. Your line is open.
Brian Mullan, Analyst
Hi, thanks. Just another question on development. Darin, wondering if the company would be willing to use its own balance sheet to develop units if needed in select situations, understanding that growth through franchisees is a preference. Do you view on-balance sheet development as a tool in the toolkit at least over the next few years?
Darin Harris, CEO
As we roll out and provide insight into our capital allocation strategy going forward, we do believe that company growth is important to spur on and seed franchise growth. So we will look at using our balance sheet to do that. I think it's wise of us to lay out that strategy. But also, what's critical, and I want to make sure anyone that hears that answer understands that we're going to remain asset light.
Brian Mullan, Analyst
Okay, understood. Thank you. And just an unrelated follow-up, just a question on the CMO hire. Congrats there. I think might be helpful if you could just describe his mandate, if he has one or maybe what are the key early priorities you've seen for the role this year? And when is it reasonable to think maybe they could start to have a positive impact on the sales of the business if things go according to plan?
Darin Harris, CEO
Yes. Ryan's mandate is to come in and really focus on a clear brand strategy and brand positioning, as I mentioned earlier. So that's task one is we're listening to our guests. We've got a lot of good research that we've collected prior to him joining. Now he gets to work with the team and our right agency partners to bring that to life and how we engage our guests at a different level. As you know from his background, he's got really strong digital experience. His second mandate is to continue to build that platform and enhance what's already been in place. As I mentioned, loyalty program, we'll roll out mobile web ordering, app delivery. How do we continue to engage using data to have trends where we can communicate one-on-one with each guest and serve up offers that are unique to them? So first and foremost is brand strategy, brand positioning, and the right way to bring that to life; second is digital; and the third is continuing this incredible calendar we have right now that we've forecasted out over two years and making sure that, that innovation is recognized by our guests and that they'll come back more often.
Brian Mullan, Analyst
Thank you.
Operator, Operator
Your next question comes from Andrew Charles with Cowen. Please go ahead.
Andrew Charles, Analyst
Great. Thank you. With the search for the new COO, is the prior plan targeting one minute of savings expected to be executed, or will that be paused until the new COO comes on board and has a chance to prioritize initiatives? And I also have a follow-up.
Darin Harris, CEO
Yeah. Our focus with speed and operational execution will continue. The tweet that I would say with speed is that what we want to do is be the most consistent that we can be in the industry. So, focusing on enhancing at a target speed, our consistency of speed. So making sure guests know that, if they're going to come to us, that they know what to expect, 80-plus percent of the time, on how long it's going to take through our drive-thru or any of our delivery platforms. That's where a lot of our focus is, is consistency of speed, while we continue to enhance the operational procedures to deliver that. As you mentioned earlier, we're just now getting the benefit of the equipment rollout that we had started pre-pandemic. It started in Q4 and early Q1. That involves new holding cabinets that enable us to cook the product upfront, which could improve speed, our cooking procedures on our chicken which reduce time. We are also in the process of enhancing our training platforms. We rolled them out late last year, and we've seen an improvement in consistency across stores and speed of service, but we've also seen an increase in improved behaviors that lead to speed improvements.
Andrew Charles, Analyst
Okay. That's helpful. And then, Darin, you called out 20 to 25 openings expected for 2021. It's a bit below what you opened in 2020 amid disruption from the pandemic. Can you just talk about why it's a bit lighter amid the boost in franchisee cash flow that you guys were successful in seeing this year?
Darin Harris, CEO
I think basically, when the pandemic hit with just the fear within the market, everything just took a pause. Even from our standpoint, we were amendable with our franchisees to delay their development agreement timing by six months just to give them kind of a breather as we were all kind of going through the pandemic to understand what would be the outcome. So with an abundance of caution, we were doing the right thing for not only our system but our franchisees to make sure that their focus was on taking care of our guests and their employees.
Operator, Operator
Your next question comes from Jeff Farmer with Gordon Haskett. Your line is open.
Jeff Farmer, Analyst
Thanks. Two follow-ups as well. I was just curious, what if any relationship there was between the regional stay-at-home orders in your home state of California and your transaction check trends at the core concept. I'm just curious how big of an impact those stay-at-home orders have on your business, both when they were put into place and removed?
Carol DiRaimo, Investor Relations
Yeah. I think Darin sort of addressed, or I might have addressed it on the California versus Texas numbers. So California continues to outperform as historically. But Texas has remained very stable, and we really didn't see a jump in California sales between Q4 and Q1.
Darin Harris, CEO
Texas outperformed the industry.
Jeff Farmer, Analyst
All right. That's helpful. And then just as a second follow-up, and I might have missed some of this as well. But on the delivery mix, in terms of where it stands as a percent of sales, I'm curious about that where it stood in the quarter. But I'm most interested in understanding sort of the delivery mix spread that you're seeing across the system, markets that are seeing the highest and the lowest? And what you ultimately think the opportunity there is for delivery as a percent of mix?
Carol DiRaimo, Investor Relations
Yes. We haven't shared those figures. It does vary by region, just like our late night varies by region, too. So those sometimes can go hand-in-hand, but we haven't shared those details publicly.
Tim Mullany, CFO
But overall, it's been performing very strong. It's more than doubled, and total digital, including deliveries, is right around 7% of our sales contribution.
Carol DiRaimo, Investor Relations
We've actually seen higher performance in our company markets on delivery than that mix. We're California-centric.
Jeff Farmer, Analyst
Understood. Thank you.
Operator, Operator
And your next question comes from Eric Gonzalez with KeyBanc Capital Markets. Please go ahead.
Eric Gonzalez, Analyst
Hey, thanks for the question. Regarding the innovation pipeline, Jack has clearly one of the more diverse menus. If you think about rolling out new products, maybe if you could talk about some of the areas of the menu that you're focused on, whether it be daypart, product category or price points such as premium versus value. Just curious where you see the most opportunity in the near term. Thanks.
Darin Harris, CEO
Yes. We launched our new Cluck Chicken Sandwich in December as well as the new Chicken Strips, so the focus on improved quality and great taste. We were very pleased with the customer response, and we believe that there's an opportunity for us to continue to grow in the chicken category. So we'll continue to focus there. We think the snackable add-on has been very attractive to our guests and the example of Tiny Tacos. We'll continue to focus on innovation around our snackable category. I think those are the two key areas that we'll focus on for innovation. The last, I would say, that we'll continue to always look at is that core premium area that I mentioned that we're seeing guests respond to. Those are the three areas of innovation right now from a product standpoint that we'll continue to provide focus around.
Eric Gonzalez, Analyst
Thank you.
Carol DiRaimo, Investor Relations
Operator, I think we have time for one more question.
Operator, Operator
Thank you. Your last question comes from Mary Hodes with Baird. Please go ahead.
Mary Hodes, Analyst
Good morning. Thank you for taking the question. I had one quick one on the recent trends and then a bigger-picture question on the outlook. First, have you seen any change in trend in California since the state reinstated outdoor dining in late January? And then second, on the promotional environment, it seems like that's been less focused on entry-level price points in recent quarters. So, I guess, just curious how you're thinking about how the promotional environment will develop going forward as we exit the pandemic and how you're thinking about how your value strategy will play within that. Is your plan to stick with your current strategy, or are you planning for an environment that will necessitate a different approach? Thank you.
Carol DiRaimo, Investor Relations
Maybe I'll take the first one at California. I think we've kind of answered the California one, so it's remained very consistent. I'm surprised we got no weather question today. Obviously, we have 600 restaurants in Texas that are being impacted this week. They actually started to be impacted over the weekend, which is in our four-week to-date numbers. So more than 80% of our Texas stores have been impacted, and we have stores impacted actually across five markets from power outages, et cetera. But I'll turn the rest of the question over to Darin.
Darin Harris, CEO
Yes. During the period of enhanced stay-at-home orders, we observed steady performance in all markets, regardless of those orders. This is encouraging. Regarding our approach to innovation in the value category, we are constantly mindful of competitor activities and promotional calendars. We are confident in our two-year product innovation strategy, which aims to effectively balance value, core premium offerings, and add-ons for customers who wish to enhance their orders. A notable example is our Tiny Tacos, a snackable item priced at $3, which some customers are choosing to use as a meal.
Mary Hodes, Analyst
Thank you.
Operator, Operator
Thank you. This concludes the Q&A portion of the call. I will now turn it back to Carol DiRaimo for closing remarks.
Carol DiRaimo, Investor Relations
Great. Thanks, everyone, for joining us. If you are being affected by the weather, stay warm, and team will look forward to speaking to you in the next few weeks as well as on the May call. Thanks so much.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.