Earnings Call Transcript - JACK Q4 2021

Operator, Operator

Good day everyone and thank you for standing by. Welcome to the Jack in the Box Fourth Quarter Fiscal 2021 Earnings Conference Call. My name is Peter and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from Jack in the Box will conduct a question-and-answer session and the conference participants will be given instructions at that time. As a reminder, this conference is being recorded. A replay of the call will be available on Jack in the Box corporate website starting today. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations. Please go ahead.

Chris Brandon, Vice President of Investor Relations

Thanks, Peter, and good morning, everyone. We appreciate you joining today's discussion, highlighting our fourth quarter and full year 2021 results. Joining us today are Chief Executive Officer, Darin Harris; and Chief Financial Officer, Tim Mullany. Following their prepared remarks, we are happy to take some questions from our sell-side coverage analysts. During our prepared remarks and the Q&A portion of today's call, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release which is available on the Investor Relations website at jackinthebox.com. We may also make forward-looking statements that reflect management's current expectations for the future which are based on current information and judgments. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in today's news release and the cautionary statement in the company's most recent 10-K are considered a part of today's 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 also available on the Investor Relations section of our website. A few brief housekeeping items before we get started. First, a quick review of our 2022 guidance updates included in this morning's earnings release. 2022 SG&A of $92 million to $97 million. This excludes net COLI gains and losses and now includes selling and advertising expense. 2022 commodity outlook up 6% to 7% compared to 2021; and 2022 labor cost outlook, up 8% to 10% compared to 2021. And as we previously stated during last quarter's earnings, 2022 CapEx and other investments of $65 million to $75 million which includes both capital expenditures and franchise tenant improvement allowances and incentives. Our 3-year to 5-year outlook related to comps, unit growth, and system-wide sales metrics which all factor into that outlook beginning this year remains the same as previously stated. Also, this morning, for additional visibility, we provided a company-owned store funding outlook for 2022 and 2023, as well as due to the unique operating environment expected to continue next year, a one-time restaurant-level margin outlook for 2022. Tim will speak to this further in his prepared remarks. Lastly, please make sure to mark your calendars for our management and franchisee Q&A event open to investors and the general public via webcast, with sell-side coverage analysts welcome to join and ask questions of the group. The event will take place on Tuesday, December 14, at 2:00 P.M. Eastern Time, 11 A.M. Pacific. And we look forward to virtually seeing you there. And with that detail out of the way, let's get started. I will now turn the call over to our Chief Financial Officer, Tim Mullany.

Tim Mullany, Chief Financial Officer

Thanks, Chris, and good morning, everyone. We're excited to discuss our fourth quarter and full year results with you today. Our solid fourth quarter top line results demonstrate the progress we're making against our strategic plan, putting us on a clear path to deliver best-in-class unit economics for our franchisees and achieve the long-term growth targets that we laid out at our Investor Day. We remain as focused as ever on getting our fundamentals in place to achieve these goals. Overall, our franchisees and operators, particularly our restaurant managers, continue to drive solid financial performance in Q4, leading to a diluted EPS of $1.80 or a 9.8% increase from the prior year. In a few moments, I'll provide more detail on the components of these earnings. We achieved system-wide sales growth of 8.6% as compared to Q4 2020 and same-store sales growth of 12.3% on a 2-year basis. Breaking down our Q4 positive comp of 0.1%, our franchise business increased 0.6%, while our company-operated stores were down 4.4%. The difference was primarily due to franchisees taking more aggressive action on price increases faster than company-owned locations, as well as franchisees demonstrating greater success with hourly worker hiring and retention. Our performance this quarter was heavily driven by price, while average check held constant. I'd like to provide some further detail on how labor and the current operating environment impacted our same-store sales for the quarter. We conservatively estimate that limited operating hours due to staffing challenges negatively impacted our comp by roughly 3%. Also, supply chain challenges driven by labor issues within distribution channels impacted our comps negatively by an additional 1%. While we don't typically provide quarter-to-date trends, within this unique top line environment, we wanted to note that we are seeing a very good start to Q1. And in the first six weeks, we are trending at a low double-digit 2-year stack with comps in the low to mid-single-digit range. We continue to believe that our top line fundamentals are in solid shape and are taking action to ensure we successfully execute on our day parts and maintain the reliable wide menu offerings in operating hours our guests have come to expect from Jack in the Box. Shifting to unit count; we opened four restaurants during the quarter and closed five as part of our broader initiative to make our system and store base more efficient. These closures included one company-owned and four franchisee restaurants. For this quarter, there were no offsetting agreements due to the nature of these closures. However, keep in mind that most of our closed locations continue to pay both royalty and rent contributions. We remain very confident in our growth strategy and believe our best-in-class economic opportunity for franchisees will enable us to have Jack in the Box in 40 states by the year 2030. Turning to revenues; we reported $278 million, up $23 million or 9% year-over-year. The increase was largely due to higher system-wide sales, helped by the 53rd week in 2021 as well as positive same-store sales. For our company-owned stores which make up about 7% of total store count and less than 10% of system-wide sales, restaurant-level margin was 20.1%, while franchise-level margin improved 8.7% or $6.1 million. Our franchise-level margin performance was driven by the 53rd week and higher franchise fees. While our company-owned store decline was largely a result of the cost pressures that are impacting us in the broader industry as a whole. G&A expenses increased approximately $4.9 million compared to Q4 2020. This excludes the 53rd week in 2021 which accounted for about $1.5 million in the fourth quarter. Excluding net COLI gains of $200,000 in Q4 versus $1.3 million gain last year, G&A increased by $3.8 million. Our reported effective tax rate as a percentage of earnings from continuing operations before income taxes was 25.4% for the quarter as compared to 23.6% in Q4 2020. This was primarily due to a one-time benefit of favorable federal and state audit findings recorded in the prior year. When you combine all of these elements, net earnings increased to $38.9 million for the fourth quarter compared to $37.8 million a year ago. Additionally, adjusted EBITDA was just over $74 million in the fourth quarter compared to just over $78 million the prior year. Our diluted EPS in Q4 was $1.80, an increase of 9.8% or $0.16. Here is a breakdown of that $0.16: a lower diluted share count driven by share repurchases benefited us by $0.10. I'll provide more detail on share repurchases in a moment. Earnings from operations impacted us negatively by $0.06, net interest expense positively impacted us by $0.02. Our effective tax rate negatively impacted us by $0.02. And lastly, the 53rd week positively impacted us by $0.12. Shifting to cash; our economic model remains strong and resilient, and it continued to generate significant free cash flow throughout the quarter. For the full year 2021, we generated attractive net cash provided by operating activities of approximately $200 million. After deducting free CapEx, we have generated strong free cash flow of approximately $160 million. We spent approximately $41 million on CapEx, primarily toward lease rights of first refusal transactions, remodel refresh of company-operated restaurants, and digital and technology initiatives. During the fourth quarter, we repurchased approximately 677,000 shares for $70 million or approximately $103 per share on average, bringing our total 2021 year-to-date repurchases to $200 million. On November 19, our Board of Directors approved a new stock buyback program, providing authorization for an additional $200 million expiring in November 2030. This new authorization further demonstrates the Board's confidence in our long-term capital allocation strategy. In Q4, we returned $9.4 million to our shareholders in the form of a $0.44 quarterly dividend payment, bringing our full year 2021 dividend payment to approximately $37 million. I also wanted to briefly elaborate on the guidance and outlook measures we provided earlier this morning. First, on the guidance, it is clear that the business will continue to face external cost pressures and due to this unique environment, we thought some additional one-time visibility into our company-owned restaurant level margin for next year would be helpful. As noted in our release, we expect our company-owned restaurant level margin to be between 20% and 21% for 2022, which includes mid- to high single-digit price increases. In addition to just the cost and pricing elements, keep in mind the impact of the 20 stores we took on in 2021 in Oregon, Kansas, and Oklahoma, will add pressure to the margin in the near term as well as our ability to maintain full hours of operation as we work to improve performance of those restaurants. We hope to improve these stores as soon as possible and will actively look to refranchise them once they are in a sound operating state. While there are likely few surprises on the expense and capital front, with the latter being previously disclosed, it is clear we are committed to continuing to make necessary investments in our business to fuel growth. This includes investing in our digital and tech priorities that will have a direct impact on both our top line capabilities and our store-level profitability. One additional area of guidance from this morning's release was our company-owned restaurant funding outlook. We plan to fund up to five company-owned restaurants in 2022 and between 7 and 15 in 2023. We wanted to provide visibility into possible capital impacts within an existing 2022 guidance and give you more insight into our evolving game plan to open company-owned stores, along with franchisee locations in other markets where appropriate. And as an adjustment, the $200 million Board authorization expires in 2023, not 2030. To wrap up our financials before handing it over to Darin, our solid performance results despite a challenging fourth quarter environment demonstrated the strength of our economic model at both the company and store level. We've made meaningful progress on all fronts of our 4-pillar strategy and we're in a great position to continue to successfully execute on each of those pillars heading into fiscal 2022. And most importantly, we are seeing our priorities and strategic initiatives having a meaningful positive impact on franchisees as their economics, profitability, and store-level cash-on-cash returns have maintained best-in-class status within the industry. We are confident that we can build on this momentum as a unified system to advance our growth strategy and expand our reach into new markets. And we will drive significant shareholder value by continuing to focus on operating efficiently, investing wisely, and building our fundamentals for long-term growth. Thank you, again, for joining the call today. And now, I'll turn it over to Darin.

Darin Harris, Chief Executive Officer

Thank you, Tim, and good morning, everyone. As I look back at our quarter four and full fiscal year results, I am extremely proud of the ability of this brand to remain strong in our performance during these interesting times. The energy and perseverance of our restaurant staff and our franchise operators excelled during a challenging time in our industry. I'm truly grateful for the unwavering strength and agility with which our team members and company and franchise restaurants operate. This, in large part, thanks to them that we continue to see growth in sales and progress within our four strategic pillars. While our industry does have headwinds, we are laser-focused on mitigating their impact while we remain disciplined and centered on the long-term health of the business and our strategy. Now, diving into the results for the fourth quarter. We are pleased to report positive same-store sales for the quarter and a strong 12.3% comp on a 2-year basis as we navigated nicely through a unique and volatile top line environment within the industry. While we generated most of our sales from ticket, we remain focused on driving a balance of traffic and average check for the long term. I am confident that we are well positioned to achieve this objective as our operating environment normalizes, given our proven ability to offer both craveable food and value to customers that are seeking it. We are very fortunate to be a brand known for variety, which enables us to be agile with our promotional calendar and navigate the supply challenges many are facing in the industry. On the unit count front, we continued our process to selectively close stores as we optimize our footprint and position Jack for more profitable unit growth. We expect to close fewer stores in 2022 than we did this year. And as Tim mentioned, we continue to gain economics from many of the restaurants we closed via rent for an agreed royalty contribution. We are confident that our unique pricing power enables us to meet margin pressure head-on. And as we keep advancing on our strategic pillars, we will continue to be well equipped to take on any macroeconomic headwinds. Between our varied menu, best practice sharing among our franchisees, and the market share we have in our top markets, we believe we have the pricing power to operate from a position of strength. I will, as usual, categorize my comments within our strategic pillars. And in the fourth quarter, our team certainly continued to make impressive progress on each. This is what will truly position us to unlock the brand's true potential. Beginning with building brand loyalty. Our updated brand positioning and crave marketing strategy is significantly improving our brand awareness and perception, helping us achieve our highest creative metrics since 2019. From a product and promotional standpoint, both Triple Bacon Cheesy Jack and Bacon Barbecue Cheeseburger promotions performed well, driving what was a very good quarter for our burger category. And while burger performance was strong, you can never count out our tacos as spicy Tiny Tacos in quarter four was our highest volume limited time offering over the year and showed strong attachment and upsell into the loaded version. Finally, our all-day breakfast message, a good example of learnings from our guest feedback helped reinforce a brand strength and drove another solid performance from our breakfast daypart, which included strength from the Stacked Croissant limited-time offering as well as our core breakfast menu items. Our menu diversity, price point, and guests have allowed us to remain resilient and flexible to shifts in customer behavior, helping to diminish the impact of the recent volatility. Our ability to stay flexible and innovate systems while building a long-term product pipeline has me very confident that menu innovation remains one of our core strengths. Our progress within the e-commerce and loyalty space has enabled digital to become central to our guest experience and brand fabric. We had a tremendous year of digital growth achieving a 90.6% increase in digital sales in 2021 versus the prior year. We achieved a digital run-rate milestone during quarter four by exceeding 9% of sales via digital channels. Part of the success can be attributed to our first full quarter with our Jack Pack Rewards loyalty program, leading to a 61% increase in app downloads this quarter versus a year ago. We will continue to lean into investing and executing in this area of the business in 2022 via exclusive offers and experiences while optimizing the digital guest journey. This includes launching mobile web ordering and offering our loyalty program in-store during the first half of 2022. Now, on to our next pillar, driving operational excellence. While we saw some continued improvement in our breakfast daypart, we continue to feel the impact of challenges related to staffing and hours of operations, as Tim mentioned. These factors have particularly impacted our late-night business. That said, I still remain very confident that late-night represents a tremendous opportunity for Jack and we continue to see strong demand. As these headwinds alleviate, we have an opportunity to not only take share and lead but dominate this daypart versus the competition. It was Tony Darden's first full quarter leading operations and his experience and insight have refocused us on three main areas where we see the strongest opportunity for near-term improvement. First, we've been rolling out our new guest experience and brand standards, significantly raising the bar on the expectations we place on ourselves in servicing our guests. Second, investing in our ops services team and tactics, which include refining process, systems, and technology to drive financial performance. We will also continue to enhance our restaurant-level technology and martech stack capabilities and down the road, automation to help with labor optimization. This will provide our guests with convenient interaction with the brand, especially for off-premise ease of use. And third, strengthening our training infrastructure, which will not only help us execute better but it will help us achieve a critical goal of developing our people and store-level culture. We have seen within the industry that it will take more than just money to acquire and retain talent. In addition to competitive pay, we will focus on better training and, most importantly, a strong culture and career path opportunity that will excite people more than ever to work in the Jack in the Box restaurant. Our third pillar, growing restaurant profits is certainly a highlight of 2021. And I'm excited about our upcoming investor event on December 14, where in addition to management and franchisees taking your questions, we will provide insight into our unit economics performance in 2021. If you haven't already marked your calendars, please do. It will be a great opportunity for you to hear from some of our franchisees directly. And lastly, our final pillar of expanding Jack's reach. We continue to get much closer to a consistent level of positive net unit growth and we are confident that we are well on our way to reaching our long-term net unit growth goal of 4% by 2025. As you have seen and I credit Tim Linderman and team for their house on progress against our top objective, we signed 23 development agreements committing to 111 future restaurant openings which is a record for Jack. Our 31 completed site approvals are the most since back in 2017, especially considering we spent a good part of the year repairing our franchisee relationship, mapping markets, and rebuilding a store pipeline. And now we are ready to succeed. We also spent time getting our franchise development program up and running which didn't really happen until late in the year. So, I'm extremely pleased with the progress so far. Now, we know this doesn't translate to immediate openings on paper but make no mistake, it is a clear leading indicator that our franchisees are as excited as ever about growing within this brand. And we will continue to keep you informed in these new development agreements with both existing and new franchisees throughout 2022. Closing out my thoughts on the quarter, a year like 2021 really makes me appreciate our franchisees, company leaders, and everyone in our restaurants working so hard to represent the brand and serve our guests. I feel extremely lucky to represent this management team, our corporate teams, and operators and our franchisees out there making it happen each and every day. Our people, franchisees, and the culture we are creating at Jack in the Box more than anything is what gives me tremendous excitement about our future. And one of my favorite highlights of 2021 won't show up on an income statement but it's something we're extremely proud of, tied to the critical objective of improved franchisee relations. A recent franchise relationship institute survey showed that our overall satisfaction score of franchisees improved 15.5 points compared to 2020, it is now at 72%, which is significantly above the sector benchmark. With more franchises than ever before noting that they are strongly satisfied with the relationship and 92% saying that they feel optimistic about the future of the brand. This is what it's all about serving others. And it gives me tremendous confidence that we are taking the steps that matter in accomplishing our strategy while helping Jack reach the potential that we all know exists. I look forward to further executing on this potential and on these goals in 2022. We appreciate you joining us today and we are happy to take your questions.

Operator, Operator

And your first question will come from Andrew Charles. You may ask your question.

Andrew Charles, Analyst

Thank you, everyone. I apologize for breaking the one-question rule right away, but I need a quick clarification due to some inquiries from investors. Is the low double-digit growth mentioned in your comparison for the first quarter to date consistent with the 12.3% growth you experienced in the fourth quarter? Or is the first quarter potentially tracking a bit above or below that figure? My main question is regarding pricing. Darin, you mentioned your confidence in the brand's ability to implement higher pricing. Given that the industry is experiencing the highest pricing percentage in the last 30 years, could you provide more specifics on your confidence that consumers will accept mid-to-high single-digit price increases in 2022? I understand that you will continue to innovate with add-ons and snacks to promote value, but you still need to attract customers with premium items at attractive price points to maintain those margins.

Darin Harris, Chief Executive Officer

I'll address the second question first and then pass it to Tim. Looking at last year's data, we implemented less price increases than our competitors in the industry. This gives me confidence in our capability to raise prices. Our pricing tests indicate potential for increases in our core menu, where we typically implemented price changes in our promotional menu. The data suggests we have room to raise prices, but the challenge is how quickly we can do that to alleviate some of the margin pressure. Tim, do you want to share your thoughts on this?

Tim Mullany, Chief Financial Officer

Yes. On the first one, as we reported, just first in Q4, we reported a 12.3% 2-year stack. And what we're saying is in the first weeks, we are trending at a low double-digit 2-year stack which is consistent with Q4 performance with comps in the low to mid-single-digit range.

Andrew Charles, Analyst

Okay, got it. Consistent with that 12.3%. Okay, got it. Thank you very much.

Darin Harris, Chief Executive Officer

Thank you, Andrew.

Lauren Silberman, Analyst

Thank you so much. I wanted to ask about the development commitments, the 111 new site. What markets are those units in? Anything you can expand there, whether there was new or existing franchisees or any additional color that could be helpful. And then what's your visibility into the timing of the opening of those locations? Thank you.

Darin Harris, Chief Executive Officer

Yes, Lauren. Our focus during the rollout of our franchise development program was mainly in the latter half of the year. We prioritized our existing franchisees, offering them the first chance for growth, and we are currently navigating that pipeline of interest. Most of the franchise agreements were signed in existing markets, except for a few new areas, notably Salt Lake City, which we have mentioned in previous calls. We have two agreements signed in Salt Lake City, aiding our expansion into a nearby market, as part of our wagon wheel strategy. We are enthusiastic about the company's investment alongside franchisees in Salt Lake City to facilitate growth. The remainder of the agreements originated from existing markets. In terms of timing, we are constructing a pipeline that will support growth over the next two years. Typically, from signing to finding real estate and opening, it aligns with what we have previously discussed—around 24 months for those openings to materialize.

Lauren Silberman, Analyst

Thank you.

Brian Mullan, Analyst

Yes. Hi guys, this is Brian on for John. Maybe just one on the supply chain challenges. If you could provide more detail on that. Was it kind of specific items where availability was low? And I guess, are you getting past those issues? And what have you been doing to kind of get over that hurdle?

Darin Harris, Chief Executive Officer

Yes. Unfortunately, we had a challenge with one of our large distribution centers where they had a staff walkout. And so for about 8 to 12 weeks of the quarter, we were working tirelessly with our franchisees to make sure that we could supply our existing restaurants. So we definitely felt that was the biggest challenge during the quarter which we think is a one-time event, not a thing that is normal. It's related to this whole environment we're in. And with that, both our partner at the distribution center and us, we learned about ways to mitigate that for the future. We've put multiple layers of protection in place, so we didn't have to go through that challenge again. But it was definitely something we didn't anticipate, and now we're prepared for beyond the shadow of a doubt.

Tim Mullany, Chief Financial Officer

Yes. Brian, to expand on that, the industry is facing supply chain pressures and challenges. As Darin mentioned, due to our diverse menu and its flexibility, we are managing this situation more effectively than many of our competitors. The main issue we experienced this quarter was related to distribution challenges rather than product challenges. To proactively address this headwind, our key strategy is to build capacity and enhance specification flexibility. We are doing a few things to tackle these issues directly. First, we are increasing our use of the reverse auction system, which allows us to conduct RFP cycles much more quickly as we explore opportunities. Additionally, we have adopted new technology that introduces automation, helping us manage specification compliance more efficiently. This enables us to assess alternative suppliers and approve new production lines much faster when we face supply challenges. We have seen great success with these measures, and overall, we are taking significant action to enhance our supply chain.

Unidentified Analyst, Analyst

Thank you.

Jeff Farmer, Analyst

Thank you. Your guidance for mid-to-high single-digit menu price increases for 2022 aligns closely with the levels of commodity and wage rate inflation you mentioned for the year. My question is about your expectation of a 400 basis point margin pressure at the restaurant level. You indicated that acquiring franchise restaurants contributes to this pressure. However, since your menu pricing is relatively close to the inflation rates for both commodities and wages, could you explain why you're anticipating a nearly 400 basis point headwind on the restaurant level margin?

Tim Mullany, Chief Financial Officer

Yes. There are mainly two factors at play. First, as you pointed out, we're acquiring certain markets with lower margins that are affecting our overall restaurant level margin. This is creating a negative impact. Second, in addition to pricing, limited operating hours also contribute to this issue. Until we observe improvements in the labor market, we're factoring this into our forecasts for comparable sales and margins. Reduced labor hours are having an effect here. Regarding our approach to this challenge, we're putting several strategies into action. In our company stores, we've had success using mobile and app-based application portals, which streamline the hiring process and reduce the time our restaurant managers spend reviewing applicants. The volume of applications has increased significantly compared to pre-COVID levels, and this tool has proven to be effective and efficient. We're also leveraging social media and online platforms to broaden our outreach, aiming to attract more employees to our restaurants. Additionally, we've implemented shift differential pay to attract and retain staff, particularly during late-night shifts, in an effort to fully staff our locations. By employing these three strategies moving forward, we hope to achieve better results in closing the margin gap.

Darin Harris, Chief Executive Officer

Yes. Let me add that we have also implemented daily pay along with premium differential pay. While we are in the process of rolling this out across all company restaurants, where we have implemented it, we have noticed a 25% increase in operating hours, and we are beginning to see not only stabilization but improvement as well. During the quarter, our staffing challenges were most significant in the Northwest and the Midwest, while California and Texas were less impacted. We are seeing some positive signs and improvements, particularly regarding our late-night staffing issues.

Brian Mullan, Analyst

Hey, thank you. Just a question on company-owned store development. Looks like over the next two years, targeting anywhere from 12 to 20 units; it's good to see. When you think about the targeted AUVs for those stores, should we be thinking about the current overall system-wide average which is in that high $1.8 million, $1.9 million range? Or should we be thinking about kind of the current AUVs of your company-owned store base which are for some of your highest volume units?

Tim Mullany, Chief Financial Officer

Yes. I would think that the former is what you would be evaluating. Some of our recent performance of our units that we opened in 2018 and 2019.

Darin Harris, Chief Executive Officer

Yes. And as we talked about in December, we'll provide overall details around our economic model and how those have improved over the last year.

Tim Mullany, Chief Financial Officer

Yes. And really the best, I think, referenced for this is to go to the Investor Day materials. We scope out what the unit economic models are in that as well as our drive-through only unit economics and what the AUVs are for each of those formats.

Darin Harris, Chief Executive Officer

Our 2018 and '19 openings were averaging $1.8 million and $2.1 million in AUV.

Unidentified Analyst, Analyst

Thank you. Got it. And in terms of the geographies where you plan to open the stores over the next couple of years? Is it kind of even between sort of California, Texas, and some of the less penetrated markets? Is it more concentrated in the less penetrated markets?

Darin Harris, Chief Executive Officer

It's definitely true that we have significant opportunities in California and Texas, but we've observed growth in many underpenetrated markets where we are signing development agreements. This is happening across various geographies within our current footprint. Additionally, with some development of company stores, we plan to enter one or two new markets, which includes Salt Lake City as one of those new markets along with another market.

Unidentified Analyst, Analyst

Got it. And then, just can you update us on where we are with remodels? What percent of the system is remodeled now? What percent of company-owned units are remodeled? What the remodel cadence going forward is going to look like?

Tim Mullany, Chief Financial Officer

Yes. So just high level, we know we've got 400 and change locations that could use refresh remodels. We're really going to pace out how this goes. We've allocated last quarter, we discussed having roughly $20 million of annual capital sort of earmarked for these remodel refreshes. And like I said, we're going to ensure that there are guardrails in place so we don't go meaningfully beyond that on an annual basis. And really, it's more or less a first come first serve type approach with our franchise system. But generally speaking, we're evaluating these on a one-off basis. So there's various programs in place that they can choose from and it's going to be site-specific. So we'll look at the need, we'll look at the term of the lease, the term of the franchise agreement, ensure that an ROI is appropriate and that they don't select a remodel package that doesn't provide something that surpasses a return hurdle rate associated with that and then move forward that way. But this is, again, this will be the first year that we're rolling this out. So we'll be cautious in how we deploy our capital.

Unidentified Analyst, Analyst

Thank you very much.

Gregory Francfort, Analyst

Hey, hi. It's Gregory. Just one question. You guys have talked a lot about the pipeline for franchise stores in the next couple of years. Can you maybe talk about what that might look like from a gross opening perspective in '22? I would imagine the pipeline as you work with franchisees is pretty well built for what you know is going to open in '22 and roughly what that number could look like.

Tim Mullany, Chief Financial Officer

Yes, I think the key point we want to emphasize is the significant increase in new sign-ups. The company has lacked a strong pipeline for some time, but in the last two quarters, we have secured commitments from three-digit numbers of restaurants to open. This indicates that we are successfully demonstrating our growth strategy from Investor Day, which aims for a 4% net unit growth run rate by 2025. The pipeline Darin referred to is on track to help us reach that goal. We are pleased with the performance of Tim Linderman and the development team so far, and we are excited that the franchisees share our enthusiasm for driving growth.

Gregory Francfort, Analyst

All right, thanks.

Jared Garber, Analyst

Hi, thanks for taking the question. Kind of wanted to tie a couple of threads together here but we have record franchisee free cash flow in, I guess, 2020 and 2021. But obviously, next year in '22, the margin outlook would suggest that the cost environment is going to materially pressure those restaurant level margins not only for the company stores, but franchisees. But at the same time, you're developing this increasing pipeline for development demand. So can you just walk through? And I guess maybe we'll hear about this a little bit more in a few weeks but what those conversations are like with franchisees now and how they're thinking about managing through the cost environment in the somewhat near term, hopefully, and maybe what's underlying some of the longer-term unit growth pipeline developments?

Darin Harris, Chief Executive Officer

Yes. I think there's a few things here. The conversation we're having with our franchisees are really critical around our pricing discipline and how do we take price on our core menu. And so that's been a lot of the discussion. And it's been healthy dialogue and people not only learning from the company and the data that we're generating but from each other and the moves that are being made around the country. So that's a key component of it. And it's been that spirit of partnership. Beyond that, we've presented to our franchisees our strategy around financial fundamentals and where we find opportunity within process and technology to remove cost from the model. So there's a lot of encouraging bridges of how we can take additional points or improve additional points in labor. So the franchisees are healthy. Their cash flow is healthy. They've expressed their desire to reinvest in the brand because we know these headwinds are a period in time and that we've shown that through pricing and through margin improvement initiatives that we can overcome some of the challenges that we're facing in the short-term environment.

Jared Garber, Analyst

And just one quick follow-up. I'm not sure if you gave this earlier but any mix on the franchisees that are signing up that incremental development demand. Can you remind us of the mix there between current and new franchisees?

Darin Harris, Chief Executive Officer

Yes. All the numbers we reported are from existing franchisees because our main focus initially was on them, and we continue to have interest from other existing franchisees who want to develop. We're only about six months into this program and provided our existing franchisees with the first opportunity. Therefore, the figures we've shared reflect only our current franchisees, and we are still gauging their level of interest. We are examining each market and territory individually. We've analyzed every market in the country and gathered relevant data, enabling franchisees to collaborate with our real estate team to identify areas for growth. We have only made limited progress with existing franchisees so far. Additionally, we've initiated our marketing efforts for new franchisees. We have a solid pipeline and are currently prioritizing the demands of existing franchisees before we begin onboarding new ones.

James Sanderson, Analyst

Hey, thanks for the question. Just wanted to talk about some of the technology you're investing in and how that could potentially improve labor productivity going forward, but also if there's an opportunity to have franchisees participate in that investment potentially with some sort of technology fee that they would pay on a per-store basis?

Darin Harris, Chief Executive Officer

Yes. Go ahead, Tim.

Tim Mullany, Chief Financial Officer

Yes. We are actively working on several initiatives aimed at improving in-store labor. We are developing robotics, especially for the fry station, and will soon begin testing this technology. We are optimistic about its long-term benefits. Additionally, we are exploring automated drink machines to reduce labor requirements, as well as self-cleaning milkshake machines. We believe these technologies could significantly impact our economic model in the long run by decreasing the average labor hours required per week.

Darin Harris, Chief Executive Officer

We have introduced a software technology for restaurants that helps manage labor and food more efficiently. We are in the early stages of using this technology to reduce costs, which allows us to make better labor projections and manage food costs more aggressively. These are tools that the brand has not historically used, but they can significantly enhance our restaurant-level economics. Additionally, we have invested in an operations services team focused on improving restaurant-level economics through process systems and technology. They have developed a plan aimed at reducing at least two points from the profit and loss statement. Recently, we hired a new CIO, Doug Cook, who has introduced ideas for improvement through AI tools and cost reduction. In response to your question about tech fees, we currently charge these fees and have the ability to increase them over time, but we would need to work with our franchisees to help them understand the roadmap and involve them in the process. We have shared our tech roadmap with them and started collaborating on the technology integration.

Chris Carril, Analyst

Hi, good morning. So, just as a follow-up on pricing. Can you talk a little bit more about how and when the anticipated mid-to-high single-digit pricing gets phased in? Sounds like franchisees have already begun to take more pricing, but any additional detail on the pacing of pricing actions at the company-owned restaurants would be helpful.

Tim Mullany, Chief Financial Officer

Yes. So we're fully cognizant of how the price is being taken across the industry today. We've got a lot of dry powder built up given that we've had sort of moderate price increases in 2021 for company stores. As an example, for 2021, we took roughly 3.5% on price, with only 3.9% coming in the fourth quarter. So the typical cadence would be roughly the opportunities that we've historically taken to increase our prices. We're likely looking to see how we can accelerate that pacing in 2022 and we're also actively evaluating how much we can take within the various sensitivity bands that we have for the consumer. So this is something that's clearly a top priority for the company. We understand that the margin pressures and headwinds we have and we understand our ability to mitigate those by taking price. And again, that we have dry powder to do that. So we're actively evaluating that acceleration.

Jake Bartlett, Analyst

Great. Thanks for taking the questions. My question is on the margin guidance for the restaurant level margin guidance. And I'm hoping you can give us a little more detail on how much of those acquisitions, the 20 stores you acquired are pressuring the margins. And it sounded like the other part of it is potentially negative company same-store sales and there's a big differential in the fourth quarter between company and the franchise. But I also look at the company footprint is more Californian, and you mentioned that California is not seeing the sort of hours and the labor pressures, I think that you cited are more the Midwest and the Northwest. So one is why is the company same-store sales being so pressured, if in California, not seeing the impact there? And then just digging in a little bit more into how those acquisitions impact margins.

Darin Harris, Chief Executive Officer

Yes. I'll let Tim answer some of it. But one of the things to keep in mind is the acquisitions that we made are outside of California and Texas; they're in Oregon, Kansas City, and Oklahoma. So those are areas that are outside that kind of core, and it's pretty meaningful the number of stores that we bought in those markets.

Tim Mullany, Chief Financial Officer

Yes, absolutely. So for those units, ballpark, we're looking at about 130 basis points of margin pressure due specifically to that.

Darin Harris, Chief Executive Officer

The other thing we've been able to do in the meantime since the quarter is we've been in a process of renegotiating leases with some of our Oregon stores that we will see improved flow through as a result.

Jake Bartlett, Analyst

Great. And maybe just a detail on why the company same-store sales are underperforming so much given it seems like they did have less of the hour pressure?

Tim Mullany, Chief Financial Officer

Yes. So well, there's two things. Typically, the franchisees certainly have, again, been more aggressive and have moved faster in taking price. So that's been significant. They've also taken a different approach and had different success with retaining hourly workers and staffing their stores and then perhaps more nimble on that in Q4. And then also, as you mentioned, there's geographic disparities between where our company stores are located and the franchisees as a whole. And then lastly, I would say for company performance, the late-night mix versus what the franchisee late-night mix also has some degree of impact as well.

Jake Bartlett, Analyst

Great. Thanks a lot.

Gregory Francfort, Analyst

Okay. Just one follow-up. I think you all haven't discussed the debt situation in a while. I believe you have a make whole scheduled for early next year. Can you remind us about your thoughts on leverage and debt? If you were to increase your total debt amount, how would you consider using those proceeds? Thanks.

Tim Mullany, Chief Financial Officer

Yes, we bought $70 million in shares during the fourth quarter. For the fiscal year 2021, we repurchased $200 million, which we consider a robust share repurchase program compared to our past. We have just received Board authorization for another $200 million, set to expire in 2023. This allows us to continue repurchasing shares in a way that we believe provides the best total return to our shareholders. Additionally, it enables us to allocate capital, whether it be organic or debt capital, towards opportunities that drive ROI within our business. We've discussed significant investments in technology today. We will concentrate on that, along with exploring other avenues to grow the overall business, such as developing company stores or refreshing remodel programs for franchisees.

Gregory Francfort, Analyst

Can you just remind us what the targeted leverage is for the business right now?

Tim Mullany, Chief Financial Officer

Yes. So we gave a range of 4x to 5.5x. So we'll look to obviously stay within that band and maintain flex for our long-term strategy.

Operator, Operator

And this concludes today's Q&A. I'll now hand it back over to Darin Harris for the closing remarks.

Darin Harris, Chief Executive Officer

Thank you all again for joining today. We will see you on December 14 for our franchisee event, and we look forward to speaking with you in February to discuss our first quarter 2022 results.