Jack in the Box's Management Presents at 2013 Consumer & Retail Conference (Transcript)

Mar.13.13 | About: Jack In (JACK)

Jack In The Box Inc. (NASDAQ:JACK)

March 13, 2013 8:50 am ET

Executives

Leonard A. Comma - President and Chief Operating Officer

Carol A. DiRaimo - Vice President of Investor Relations & Corporate Communications

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Bank of America Merrill Lynch's restaurant analyst. We're very pleased to continue the restaurant portion of our consumer conference presentations today with Jack in the Box. We welcome Carol DiRaimo, Head of Investor Relations; and Lenny Comma, the President and Chief Operating Officer.

With that, I'm going to turn it over to Lenny. Lenny, thank you for joining us.

Leonard A. Comma

Thank you, Joe. Before we begin, I want to remind you that this presentation includes plans and estimates for the future, which are subject to various risks and uncertainties that may cause actual results to differ from these plans and estimates. I encourage you to review the risk factors outlined in our recent 10-K and 10-Qs on file with the SEC and available through our website.

During today's presentation, we will refer to non-GAAP measures for which a reconciliation is posted on the Investors section of our website at www.jackinthebox.com.

All right. So here's what we'll cover today. First, I'll take you through our investment thesis then we'll talk a little bit about driving sustainable sales at Jack in the Box. We'll talk a little bit about our annuity-like cash flows from franchising and our Qdoba initiative.

All right. So for those of you who are less familiar with the company, we actually operate 2 brands; Jack in the Box and Qdoba. Jack in the Box is the nation's fifth largest QSR burger chain. We have a little more than 2,200 restaurants operating in 21 states, and we are 76% franchised. Qdoba Mexican Grill is the second-largest brand in fast-casual Mexican segment. There are more than 600 Qdoba locations operating in 44 states and the District of Columbia and Canada. At the end of fiscal 2012, Qdoba represented nearly 37% of our company store base, as compared to only 6% 5 years ago, and is now 50% company-operated.

If you take a look at our investment thesis, there's essentially 3 sources of earnings and cash flow: first, our Jack in the Box company operations; second, our Jack in the Box franchise revenues, which have 2 annuity-like cash flow streams; and third, our Qdoba operations. Let's talk a little bit about Jack in the Box and sustaining our sales growth.

Most folks look at Jack in the Box and consider us to be a relatively small player in this space. But if you look at Jack in the Box through the lens of the market where we do business, we're actually the #2 player in those markets. And so if you look at us just where we play the game, we're actually right up there with the likes of Taco Bell, Burger King and Wendy's. Taking another slice at it, if you take a look at our 10 major markets for Jack in the Box, we're actually #2 in 9 out of the 10 major markets with the exception of Dallas, and this is 70% of our overall sales for Jack in the Box.

So what's Jack in the Box been focusing on? Well, essentially, we're taking a holistic approach to growing our sales through various initiatives. If you go back to the early 2000s, essentially everyone in QSR was focusing on food. It was basically LTOs and new items that you were putting on to the menu. The clear winner from that time forward has been McDonald's. And if you look at what they have done, they have essentially focused on the entire brand experience, everything from the image, to the service, to the menu. Very few players took that holistic approach, but Jack in the Box in the mid 2000 really started to invest in the business this way.

So as you know, we have reimaged our restaurants. We're largely complete with that, with just a few restaurants that have not been reimaged, essentially because of either some type of lease issue or we're not looking at that restaurants as being a long-term player in our chain. But essentially, we're complete with our reimage. We have our logos up at all of our company stores and largely complete at our franchise locations, and we should be complete throughout the system by April. We've improved our food. We've invested in improving french fries, hamburger patties, our tacos, our coffee, our bacon, and we'll continue to invest in our food both with the improvement of existing items as well as LTOs and new items to the menu. And then back in 2010, we started a major service initiative, focusing really on all elements of service, but focusing largely on cleanliness, accuracy, speed of service and things that we knew could drive sales by improving traffic.

So we've found a fair amount of success in investing in the overall brand experience, but we do need to drive people into the restaurants so that they can experience all of these things that we've improved. And this is really where probably our #1 equity comes in, and that's with our ad campaign. We've had a successful campaign with Jack, our founder, being the voice and spokesman of Jack for about the last 17 years. We are an irreverent or edgy brand, and so we do a great job of sort of cutting through all the noise in various media spaces and having our voice heard, even on a national basis, although we're not a national player. So what I'm going to do is share with you one of our commercials, which really kind of brings to life the type of brand and personality that we have.

[Presentation]

So we've ran a lot of ads. That was actually our Super Bowl ad. We got a lot of attention for that. And what you can expect to see us do moving forward is this equity that has built so much sort of loyalty and affection for the brand, you're going to see us wheeze more of that personality into the overall brand experience going forward.

So I've spoken a little about our strengths. Let's talk about some of our opportunities. And one of the #1 opportunities we're focusing on is speed of service, major focus on this starting back in May 2010. Taking a look at how we've improved, over the last 8 quarters, we've actually seen sequential improvements in speed of service. We believe that this is driving sales really in 2 ways. One, we're frankly putting more people through the drive-thru. And two, we're gaining the trust of our guests, so they can depend on our speed times, we know that they will choose us on more occasions. So there's still room for improvement. We have spoken publicly about a 45-second improvement that we've experienced from March of 2011. We think that we have at least another minute or so to go over the next 2 years, and so we will take that time to make those continued improvements. And the reason we want to take our time about it is we don't want to sacrifice any of the other guest service elements that we need to execute on while we're also trying to pursue speed. So things like quality, accuracy simply can't be sacrificed as we ramp up the speed time.

So what have been the results of all these initiatives? Well, Jack in the Box has experienced same-store sales growth at our company stores for the last 9 consecutive quarters. For fiscal 2012, company restaurants improved 4.6% for the year and most importantly, half of that was driven by traffic growth. 2012 was our best sales performance since 2007, and we do believe that our strategies that are in place will continue to drive sustainable sales growth and grow market share for Jack in the Box in the long run. In quarter one, fiscal 2013, same-store sales at company restaurants increased 2.1%. This increase exceeded that of QSR sandwich segment for the comparable period according to NPD. And the number of stores, or the type of stores that are included in NPD includes 15 of the top sandwich and QSR burger chain competitors.

Let's talk a little bit about annuity-like cash flows that we're getting from franchising. All right. Most franchise branch generate one cash flow stream from franchise operations as royalties. Our Jack in the Box brand generates 2, both royalties and rental income. In fiscal 2012, we generated $326 million in franchise revenues, of which $196 million was from rent.

So let's take a look at EBITDA generated from royalties and franchise fees in FY '12. EBITDA from royalties and fees after franchise support costs totaled $116 million. EBITDA margin was 89%, including royalties and fees, net of incentive payments for reimages to franchisees.

So moving on to the rental stream. The number of Jack in the Box rental-producing properties has continued to grow, resulting from our refranchising strategy. And as of the end of 2012, we had over 1,500 Jack in the Box locations that we leased to franchisees, that's nearly 90% of Jack in the Box franchise locations.

So what differentiates our Jack in the Box franchise model from others is the EBITDA and operating earnings generated from rent. The way you can think about that is we generally charge franchisees rent based upon the greater of 9.5% of sales or underlying rent costs. The rent that we pay on these properties is generally fixed, so this generates for us a 3% to 3.5% spread. In FY '12, we generated $75 million of rental income EBITDA, with an EBITDA margin rate of 38%. It's important to note that our franchise revenues increased from rising franchisee sales. Our costs do not increase as a result, so this provides significant operating earnings flow-through.

Let's move on to Qdoba. First, you should have seen an announcement last week that we did hire Tim Casey as our new President of our Qdoba brand. Tim comes to us with more than 30 years of experience. He's had great experience with brands like TCBY, Mrs. Fields, Coffee Bean & Tea Leaf and 8 years at Starbucks. I've interviewed Tim. I've spent some time with him. I think he's going to be a great fit for the team out in Denver. I think that Tim brings both operational and branding experience to the team, and so we look forward to the contributions he'll make. We also added to the team Jeff Wood, who is the Qdoba Vice President and Chief Development Officer. And this really just points out our commitment to the growth of the Qdoba brand.

So let's talk a little bit about the Qdoba initiative. Essentially, it's all about brand awareness for Qdoba. We will achieve that basically in 2 ways. Number one will be unit growth, and we spoke a little bit about the hire of Jeff Wood, who will focus on that. And then number two, we really need to tell our story. And the way we'll tell our story is through our new campaign. The new campaign will focus on the 2 elements that really differentiate Qdoba, and that's our innovative menu and also our fresh preparation. So you see a few things up here that really point out that story, and we'll continue to campaign in that way.

Bridging on the innovative menu, a few things that are points of differentiation for us. One, our Craft 2 menu features smaller portions of our customer favorites. We also have seasonal offerings and we have variety such as quesadillas, Mexican Gumbo, tortilla soup, nachos and Kid's Meal.

When you talk to people about the Qdoba brand, the one thing that they will say about our menus that differentiates us from the rest is the 3-cheese Queso. People absolutely love it. And so recently, we ran a Quesofy event, where you could Quesofy any burrito at no extra charge.

And we'll continue to invest in menu innovation at Qdoba. We recently added to the menu brown rice. Now brown rice can sound pretty boring, but the way that we executed that was with-- seasoned it with garlic, fire-roasted tomatoes and a hint of red chilis. So when we add things of the Qdoba menu, we won't go bland. It will always be flavorful. And the brown rice, by the way, complements very well the adobo-marinated steak, chicken and the slow-simmered pork, as well as other items.

Lastly, one of our key initiatives to drive sales at Qdoba is really to increase catering sales. We've spoken about catering in the past. It represents 6% to 7% of the Qdoba sales. And our catering program is a variety of self-service items, like hot tacos, naked burritos and nacho bars. And so we have hired recently a new catering director. This individual will focus solely on growing this category. And just so that you understand the impact that catering has on our business, if we can add one additional catering order per week, we can grow our same-store sales in excess of 1%.

So our long-term outlook for Jack in the Box really reflects the balance of growth from all of our segments, including the Jack franchise business, which have the annuity-like cash flows; our Jack company operations, which, in general, are higher AUV set of stores with great margins; and the growth of our Qdoba brand, both in units and overall awareness.

So with that, I think we will conclude the prepared remarks and open it up for questions.

Question-and-Answer Session

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I think everyone knows our system here. We encourage questions from the audience. Please wait until the microphone reaches you before you ask your question. I'm happy to kick it off with a couple of questions but, again, I encourage questions from the audience. I'd like to start on Qdoba, not because it's the most critical part of the story, but if we don't start with it, you'll perhaps even get to it from a Q&A standpoint. So could you elaborate a little bit on the hiring of Tim Casey and what in his background attracted you to him and why he was the choice? And maybe elaborate a little bit more on Jeff Wood, his background and how recently he joined Qdoba?

Leonard A. Comma

Yes. So let's talk about Tim Casey first. If you look at what Qdoba really has to achieve, you've got these 2 major things going on. One, which we talk about all the time, which is growth in units. And so some of that reflected in the hiring of Jeff Wood. But Tim Casey needs to be able to lead that, all right? So if you look at that part of the story and just sort of put it on a shelf for a second, that's one of the reasons we hired Tim Casey is because we think he has the leadership abilities to grow the chain, both in what's going to take to open all those stores with the infrastructure, as well as what it's going to take to drive that to our real estate and development group to find those sites and build those sites on time. So you kind of put that on a shelf. I think the other part of the story, which is just as compelling, is that Tim's a brander -- he's a guy who knows how to tell the story of a brand and bring the brand story to life in a way that's compelling to the consumers. So if you look at what he has done with TCBY, if you look at what he has done with Mrs. Fields and you look at his operational experience with Starbucks, let alone, some of the coffee and drink experience that he has, he's a guy who really knows how to take the story and present it in a compelling way. So I think you're able to marry up both the operational pieces of it, which is unit growth and driving same-store sales through great execution in the operation, with also the more strategic and branding side of it, which is, okay, well, is this thing really even compelling to the consumer and how do you ensure that, that happens. So I think he will bring those perspective in a balanced way that will really help Qdoba. And then as far as Jeff Wood, his background really is development and growth of major brands. So we need a guy who understands that business and can really run with it, who doesn't need a babysitter. He's going to be the kind of guy who's out there making the connections to get into those major developments where we want to be with Qdoba.

Carol A. DiRaimo

And Jeff had several years at Brinker, in their high development growth phase back at Brinker, just from his background perspective. I'll just add on Tim, Tim has -- is a self-professed fan of the brand. What we see with Qdoba customers is Qdoba customers tend to be very brand loyal. So it all goes back to the research about what differentiates the brand for those customers and how do we get that awareness with other customers.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. Maybe one in Jack in the Box -- definitely more than one on Jack in the Box, right? All right. Curious, your reading of the competitive environment, when you put the slide up, showing how Jack is the #2 player in so many markets, 2 of your competitors that are close in size to Jack are Taco Bell and Sonic, both of which have bumped up their national advertising contribution this year. How do you respond or react to that, and what you perceive any risk or opportunities around those competitive actions?

Leonard A. Comma

So if -- when we look at the competitive environment, the way we see it is whatever action they're taking doesn't necessarily need to be met with the mirrored action from Jack in the Box, but it certainly needs to be met with some action. So if we look at all the value messaging, for example, that's going on, we're not going to pursue that in the market place with emphasis on $0.99 or $1 items. We're going to pursue that with bundling value deals, which has been really successful for us. So we will react or respond, but we won't respond exactly the way they will. If you look at what Sonic and Taco Bell are doing, I think Taco Bell has done a great job with their new Doritos Locos Tacos. It's a great new product for them and it's obviously driving sales. Jack in the Box is going to respond with our own innovation that's going to drive our loyal guests back into our restaurants more often. But we're not going to necessarily try to copycat what they're doing with their tacos, and especially because tacos for us is our #1 selling item. We sell more units of tacos than any other item on the menu. And even with the Doritos Locos Tacos launch, we haven't lost any of our sales in our tacos. So we wouldn't want to mirror exactly what they're doing, but we'd want to respond in a way that's just going to drive traffic sort of Jack's way.

Unknown Analyst

I just want to ask what are your plans with where the Qdoba company franchising mix should go? I know you've been buying in units. How far do you think that could go or would go? How far would you feel comfortable with?

Leonard A. Comma

Yes. Well, I think the way to look at it is taking a step back. The Qdoba franchise, if you look at who they are as compared to, as for example, the Jack in the Box franchisee, the Qdoba franchisee is a huge investment-type community that has operators. They've taken this investment on over a number of years. And at some point, a good portion of those investors are looking to cash out. And so we've had an opportunity to purchase those units, and it's been accretive to our earnings each time that we've done it. So I think that as long as we can continue to make purchases that are accretive, you'll see us continue to push that. We probably won't ever purchase back units that are not accretive to earnings, or if we did, it would be for some other opportunistic reason. But strategically, the growth in company units is really to drive profitability in areas where we think we can grow out that market faster than the franchisee would. And purchasing those units is accretive to earnings. So you kind of have the double bonus of immediate improvement to overall performance and then growth and awareness should actually drive AUVs up over time and allow us to grow overall sales, not the in-store sales but total sales.

Carol A. DiRaimo

So right now, we're about 50% company franchise mix at Qdoba. And what we've said going forward, we expect the company to grow at about 50% a year and franchisees to add 30 to 40 stores a year. So while we haven't given that ultimately, we want it to be ex-company, ex-franchise. So you can kind of do the math and kind of figure out where that would be supplemented by opportunistic acquisitions.

Unknown Analyst

Okay. I just have one more. Just on the -- can you talk about what your perception is of how the Qdoba has done from an EBITDA performance standpoint? And just sort of -- just because you're buying back units, I'm just wondering compared to Jack or compared to the rest of the environment.

Carol A. DiRaimo

So if you look at our overall portfolio of Qdoba restaurants, and this slides up on our website, our entire company portfolio generates about a 25% cash-on-cash return. So if you were an investor in the audience, say I can go invest in something generated 25% cash-on-cash return, you would probably do that. And what we see at Qdoba is in the early years and in underpenetrated markets, those returns are significantly less. But as they put more maturation from those markets and they grow in size, those EBITDA numbers accelerate pretty dramatically because of the fixed cost leverage they get. On average, it only cost about $700,000 to build a Qdoba restaurant. So clearly a much lower investment of capital than it is to build a Jack in the Box restaurant, so it, I think, explains our strategy of why are we devoting more capital for the Qdoba side. And the other point I'll mention is at $1 million AUV, Qdoba still has very nice cash flow margins in that 18% kind of range. As they accelerate, the stores that can get into $1.3 million, $1.4 million, those EBITDA margins accelerate into the mid '20s pretty dramatically, again, because of the fixed cost structure.

Unknown Analyst

Qdoba is #2 brand or #2 Mexican player. There's a #1 player that I've heard something about. And how do you approach new stores related to distance from the #1 player? Is it like a gas station, where you want to be across the street, or have you found lower productivity when you are within a mile of the #1 player? How do you approach that elephant in the room?

Leonard A. Comma

I think a couple of things in general. One, recognize that hiring Jeff Wood, part of the reason we hired him is so that some of those insights will become more apparent and that we would apply that learning over time. So probably more to come to answer the details on where we want to be versus the #1 player, do we want to be across the street, those types of things. But in general, when you look at markets where we have penetration, we can grow pretty steadily in those markets and get to maturation of sales much faster. So what I would say is that will become -- what you ask will become more complex when we're entering into new spaces than it will be in markets where we already have some penetration. So a lot easier to do where we have the awareness.

Carol A. DiRaimo

And keep in mind, Qdoba was -- we acquired it in 2003. It was primarily franchise. The franchisees may take a slightly different view of real estate than the company would. They may take a different site from an investment perspective than a company-operated site might do.

Unknown Analyst

If I could ask a company-wide, big picture question. The company has been very successful. You're converting from a company-operated model to primarily a franchise model. And my perception now is that you're in a stage where you're adjusting the cost structure, the operating structure, the corporate structure to fit that franchise business model. So could you address that in where you think you are in the scheme of things in doing that and what the opportunities going forward might be?

Leonard A. Comma

Sure. Maybe I'll address sort of what's happening and I'll let Carol address whatever guidance we've given on G&A, for example. But if you take a look at what happened, we essentially had an infrastructure built to run 1,600-plus company-operated stores. And over the last 6 years, as we've sold the stores, in field operations, we've been able to essentially turn those human resources over to our franchise community. So in large part, our company operations employees have gone to work for the franchisees. And that includes all the way up to VPs in the companies that have actually become franchisees or gone to work for franchisees. So when we look at our system today, it's made up of probably 80-plus percent of the folks have, at one point or another, worked for Jack in the Box. So pretty close knit group of folks that in some ways allows us to go through some of the change process with a little more ease because of the relationship and the trust that's been built over the years. And I'd say that's sort of what the field is experiencing. When you look at what corporate is experiencing, dramatic change, right? We have all of these human resources that were allocated toward company operations that have been rationalized over that time frame. Certainly, whenever you have those types of restructuring efforts, you feel that pain. And again, long-tenured individuals at Jack in the Box, so not a situation where folks who have shown up 2 years ago were being asked to leave. Situations more like 20-plus year employees that we've had to rationalize because of the restructuring that was necessary. But what we've done is we've taken a look at everything that we think is core to growing the business, same-store sales and new units, and that's really where we're focusing, putting all the infrastructure. And in the areas that we don't think actually help us directly grow the business, that's where we're either outsourcing or rationalizing the infrastructures. So you've heard about some of the changes, for example, to distribution. We are also making some changes to call centers and things like that, as to how we might outsource. We've made some changes with maintenance in the field. We used to have a lot of in-house maintenance. We've now outsourced all of that. So the areas that we think we don't need to control, they don't directly grow the business, those are the areas that we're really taking a new look at. And that's where largely the changes have happened. So on the one hand, painful. It's always painful to go through those things. On the other hand, I would say that we decided to feel the pain sharply and quickly rather than have it sustained over a long period of time. So 2012, we made a significant number of changes that we've kind of got to the point now where people can look forward and aren't looking sort of over their shoulders to see what's the next load that's going to drop.

Carol A. DiRaimo

And part of that was we offered an early retirement program. We've talked about annualized G&A savings of about $10 million. We've also seen in the first quarter, for example, our franchise support cost went down because we outsourced one of those key functions in terms of the inspections, if you will. So there's savings kind of throughout the P&L, and I think the distribution really cleans up the whole system. Jack historically was very vertically integrated, going back to the days when Ralston Purina owned the company and we manufactured our own tacos at one point. So it's evolved from this very vertically integrated, we must own everything, to what Lenny said is one of the core competencies that we want to own and outsourcing everything else.

Unknown Analyst

Yes. Can you talk about sort of dual -- owning 2 different brands? And are there anything you can leverage off of one of the brands that you can take -- apply to the other ones what you're doing there?

Leonard A. Comma

Yes, absolutely. So first kind of relates to Joe's question on structure. We -- when we first purchased Qdoba, they were their own entity out in Denver. The corporate office for Jack in the Box is in San Diego, and they pretty much ran everything: IT, finance, accounting. Whatever they needed, they had their own infrastructure for it. As we've gone through all the changes in the last couple of years in our business model, we've actually consolidated a lot of those function. So the way we're structured today is you got the Qdoba brand president and then you got me. And each one of us have the core function that it takes to execute against our strategy. So for Qdoba, they've got some development folks, like Jeff Wood and his team. They've got marketing, they've got operations, they've got R&D, the types of things that it's going to take to really grow that brand. I have similar infrastructure on the Jack in the Box end. But then there is a shared services group that really is everything from legal to HR, to finance and accounting, to IT, to purchasing, to distribution that all is supplying both brands with their needs. So we leverage all of those things and then brand to brand, myself and the Qdoba President, as well as their direct reports, we actually meet quarterly. And more often when necessary, we actually share everything that we're doing, whether it be service initiatives or new items that we're bringing to the menu. And so it allows us to sort of leverage some of the things we do. One of the interesting examples we always give is that when it comes to purchasing, we purchase a Jack in the Box white chicken meat and they at Qdoba purchase dark meet from the chicken, and so we're now able to buy the entire chicken and then sell back the wings. So in the past, we wouldn't have been able to do that, but we actually get a much lower cost on chicken by being able to do it that way. So it's those types of things that we can leverage and more.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I've got kind of a big picture question. Lenny, as an operating guy, what are the changes in managing a largely franchise system versus what was predominantly company-operated?

Leonard A. Comma

Yes. It's interesting. One of the things that we went through with our infrastructure changes, Joe, is that folks who had run company operations for 20-plus years had no perspective on what it would take to run franchise operations. So we've had to invest a lot on our folks to get them to that point, and some haven't made it quite frankly and we've had to bring in some talent from the outside along the way. But essentially, franchise is all about influence. You have to have a compelling reason that a franchisee should invest in their business or move forward with an initiative. If you don't, they're not going to do it willingly. And if you look at the best franchisor-franchisee relationship, they're the ones with their franchisees who are doing things willingly because it makes sense, you've proven it out and you've been inclusive and allowed them to bring their thoughts and opinions into the process. With company operations, I actually think company operations can benefit from some of the same behavior, but because it's not necessary, which you often see in company operations as a top-down mentality. And in company operations, hey, it's my job, I got to do what they say, so we do it. Completely different way of approaching it with franchisees. So we just had a franchise conference last week. We had all of our corporate folks together along with all of our franchisees and their partners, over 800 people. And it was all about where we're going strategically and why it makes sense for us to do what it is we're going to do. And then the whole next day, we have break-out sessions with corporate folks and franchise folks just collaborating and asking questions and challenging each other on how we're going to make these things happen. Because if you don't start those conversations at the inception of these initiatives, you find that you're 10 steps down the road and franchisees are going, "Wait a second. You forgot about this or you forgot about that," or "What about this challenge that I'm going to have?" So I would say good example of where that's worked out for us in the past is the reimage program. We launched the reimage program as a company-operated -- primarily company-operated company. We transitioned to franchising along the way, and we actually brought them into the process. We're able to improve the reimage program, make it more efficient from a cost perspective and the time that it took for construction. We put a financing package or vehicle in place for the franchisees and also an incentive, so they could see all the reasons why it made sense to do it. They also had some skin in the game from the franchisor. We moved very quickly to then finalize that program. And that's really, I think, the model going forward.

Carol A. DiRaimo

And then the Jack in the Box franchise system is different than a lot in QSR because we only have about a little over 100 franchisees. They operate on average over 16 restaurants, and only 5% of the whole system is what I would call true mom-and-pop less than 5 restaurants. So they're a lot larger, more sophisticated franchisees, with a lot of capital invested. And all our history, the average franchisee tenure is over 25 years with the company.

Unknown Analyst

I have a question about advertising. You have a long relationship with Secret Weapon marketing. How do you -- how could you survive if they went -- decided to go to work for your competition, and do you have a contractual relationship with them? And how do you protect that, and is there an opportunity to extend that to Qdoba?

Leonard A. Comma

So let's talk a little bit about the relationship we have with Secret Weapon. They're a very unique firm out of Santa Monica, California that only covers or represents 3 companies at a time. And our relationship with them has been exceptional over the years. So we don't believe that there's much risk that they're going to take on someone else and drop Jack in the Box. There are some contractual obligations that both of us would have to work through if they wanted to do something like that. But each year, we do sit down and have conversations with Secret Weapon about where we are and what the future holds. And obviously, our folks are always diligent in having a backup plan if there was something else that we need to do. But we don't spend a significant amount of time on that because so far, so good. The Secret Weapon folks have wanted to really stay committed to the Jack in the Box brand, even to the point that for the creative, Secret Weapon will bring in new creative talent periodically just to continue to invest in the campaign and allow it to evolve, rather than staying with the same set of creative folks throughout and potentially getting to a place where the campaign would get a little stale. So we've seen a continued commitment and investment on their part and feel very strongly that they're the right partner for the long term. As far as Qdoba, Qdoba really is not in a place where television advertising will be part of their sort of near-term strategy. And if it is, I don't know if Secret Weapon would be the right one for them because Secret Weapon, first of all, only carries 3, represents 3 companies. And so by default, we may need to look elsewhere for support for Qdoba if we ever decided to go television.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Lenny, can you comment on this speed of service initiative? What do you focus on to try to improve that metric?

Leonard A. Comma

Yes, so we started back in May of 2010. It was kind of a wake-up call to the company, where we basically stated publicly and internally that we're just not fast enough. And we even showed some of our competitors when we spoke about the fact that even with 1-minute improvement, we still wouldn't be in the set of the fastest QSR chain. So it was first sort of a shock to the system that we need to fix this. And then we kind of focused on bright spots. So we took the best locations, performing locations in our chain and sort of extracting from them all the lessons. And why do we do it that way? Because it's not that we didn't know what it took to move faster, but we needed other folks, franchisees, company like to believe in it. And when they're seeing that other folks can do it, then they start to believe in it. So we've actually had several franchisees that have -- they're in excess of 90 seconds of improvement and speed of service who have presented at our franchise conferences and actually spoke about all the ways that they became believers, that you could actually achieve the speed of service, which was the first hurdle. And then the second hurdle was to actually then go and execute against it. So, Joe, in the beginning, a lot of basic blocking and tackling. It was things like making sure you have the right amount of product available during the shift. Things like continuous cooking throughout the heaviest day part. Things like making sure that the build-to information which tells the cook how much product to prepare was actually posted and available and they were using it. A lot of basic blocking and tackling. I wish I could say it was more sophisticated than us really just kind of waking ourselves up and saying, "Wait a second. We're not using the systems that are available to us. We're not maximizing our performance. We've got all go to make a commitment to this." I think some of the second steps, though, to get the additional one-minute improvement will involve maybe some more scientific looks at our kitchen operations, what -- time and motion studies, things like that, that will allow us to sort of cut away some of the fat and find efficiencies that way. But I think we're still largely in a basic blocking and tackling mode, where that's where you -- that's what's driving the performance.

Carol A. DiRaimo

And if you look at Jack in the Box menu, we serve anything on the menu any time of day, and the menu is very broad. So I think there was a built-in excuse factor, if you will, that we can't be as fast as XYZ competitor because of that. I think it's really looking at things like the products that we introduce. If we're introducing a product that all of a sudden has a 5-minute cook time, it's probably not going to fly in the system, unless you can do something to prepare that in advance.

Leonard A. Comma

Yes. And I'd say one of the things that's helped with that, to Carol's point, is when we restructured, we took everything that impact the brand's ability to execute and put it under one person. So that's me for Jack in the Box. In the past, they were functional, almost like silos. And so you could have someone creating a product that, yes, they were somewhat collaborating with the operation on how it will be executed, but not really in an open environment that allows to break down some of those hurdles that might have been in the way of execution. Today, those groups are all one team. So they won't even bring anything to the operation unless they're sure it's going to work.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. I realize your fiscal year is a little different. Your quarters are a little bit different, but it's been a long laundry list of items affecting sales throughout the industry this quarter. And could you comment of what you think is significant or not in terms of the social security tax increase or gasoline or weather?

Leonard A. Comma

Yes. So I do -- I think that it was maybe the perfect storm of a lot of things that led to maybe lower consumer confidence, and I think that's what we experienced back in January. But I do think that it was temporary. And we stated in our conference call that we had the same impact that everyone else experienced, but that we started to see week-on-week improvement since then. So we feel that based on what we're experiencing, it was a temporary phenomenon and I would expect consumer confidence to increase from here. And I've even heard that gas prices are starting to trickle back down, so there may be some reasons for folks not to sort of hold back as much as we saw back in January. And certainly, as we stated in our call, it does seems to be a temporary thing based on our trend.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. Lenny, Carol, thank you very much.

Leonard A. Comma

Thank you.

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