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Executives

Carol DiRaimo - Investor Relations

Linda A. Lang - Chairman of the Board, Chief Executive Officer

Jerry P. Rebel - Chief Financial Officer, Executive Vice President

Paul L. Schultz - President, Chief Operating Officer

Analysts

Lawrence Miller - RBC Capital Markets

Christopher O'Cull - SunTrust Robinson Humphrey

Steven Barlow - Bank of America/Merrill Lynch Research

Bob Derrington - Morgan Keegan & Company, Inc.

Jeffrey Omohundro - Wachovia Securities

Steven Rees - J.P. Morgan

Matthew DiFrisco - Oppenheimer & Co.

Steven Kron - Goldman Sachs

Keith Siegner - Credit Suisse

Jonathan Weight - Analyst

Matt Vendi - Stifel Nicolaus

F. Fitzhugh Taylor III - Thomas Weisel Partners

Joseph Buckley - BAS-ML

Jack in the Box Inc. (JBX) F2Q09 Earnings Call May 14, 2009 11:30 AM ET

Operator

Good day, everyone, and welcome to the Jack in the Box Incorporated second quarter 2009 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. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Carol DiRaimo

Thank you, Katherine and good morning, everyone. Joining me on our call today are Chairman and CEO, Linda Lang; our President and Chief Operating Officer, Paul Schultz; and our Executive Vice President and CFO, Jerry Rebel.

During this morning’s session, we will review the company’s operating results for the second quarter of fiscal 2009 and discuss guidance for the remainder of the year.

Following today’s presentation, we will take questions from the financial community.

Please be advised that during the course of our presentation and in 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. Actual results may differ materially from these expectations, based on risks of the business.

The Safe Harbor statement in yesterday’s news release and the cautionary statement in the company’s Form 10-Q filed with the SEC yesterday are considered a part of this conference call. Material risk factors, as well as information relating to company operations, are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC. These documents are available on the investor’s section of our website at www.jackinthebox.com.

A couple of calendar items to note -- Jack in the Box management will be presenting at the Goldman Sachs lodging, gaming, restaurant, and leisure conference in New York on June the 2nd and Wachovia Equity Conference in Boston on June the 23rd.

Our third quarter ends on July the 5th and we tentatively expect to release earnings the week of August the 3rd.

With that, I will turn the call over to Linda.

Linda A. Lang

Thank you, Carol. Good morning. We are very pleased with our performance in the second quarter, especially with the significant improvement in our operating margin compared to the first quarter, and continued same-store sales growth at our Jack in the Box restaurants, despite the challenging macroeconomic environment.

Jerry will talk more about margins in a few minutes. I would like to focus my comments on sales, menu and marketing strategies, and the progress we are making on our long-term strategic goals.

Looking first at sales, same-store sales for Jack in the Box company restaurants increased four-tenths of a percent in the quarter. On a regional basis, same-store sales remained positive in California, Texas, and Las Vegas. And our Phoenix market continued to show sequential improvement, although same-store sales remained negative for the quarter.

Overall sales trends at Jack in the Box were relatively consistent throughout the quarter and we are pleased with our sales thus far in the third quarter.

Economic pressures continued to impact Qdoba's system-wide same-store sales, which decreased 2.3% in the quarter compared to an increase of 2.4% last year. The economy also significantly impacted catering sales during the quarter, due to the more discretionary nature of that business.

As we discussed on our last call, during the quarter Qdoba tested a bundled meal in about 200 company and franchise restaurants that offered guests any full-sized chicken entrée with a small portion of chips and salsa and a regular fountain beverage for $6.99. We have completed the test, which was successful in some markets but not all, and we are using the learnings, as well as other initiatives, as we continue to identify profitable sales building opportunities in the near-term.

These include driving sales through ongoing menu innovation, with products like our seasonal mango salad, broadening the customer base for our catering by expanding its availability to smaller groups, and enhancing our loyalty card program.

As part of a longer term strategy to better communicate Qdoba's brand positioning and the attributes that make it unique and compelling, next week we will roll out new menu boards, marketing materials, and other brand elements. We will be showcasing to our guests our freshness cues through handcrafted preparation of items like our ham smashed guacamole, cilantro lime rice, and our unique and flavorful salsas, as well as the interactive guest service experience that we provide in our restaurants.

As for the sales growth we saw at our Jack in the Box restaurants over the first half of the year, we think that the wide variety of products that we offer, along with our multi-tiered menu strategy and breakthrough advertising, make us better able to weather these challenging economic times.

Among the innovative premium products that have been driving sales is our teriyaki bowls, which are available with chicken or steak. After launching teriyaki bowls in our western markets in October, we rolled them out in our eastern markets in January -- eastern meaning Texas.

Another premium product that has contributed to an increase in beverage sales is our line of real fruit smoothies. Since launching smoothies as a new product platform last year, they have remained very popular among our guests. In late April, we expanded our line with a new tropical flavor.

We think it’s more important than ever to continue offering a mix of products that appeal to consumers trading down from other restaurant segments, as well as those who are more focused on value. For example, late in the second quarter we added mini sirloin burgers as a new premium product. Mini burgers and sandwiches are increasing in popularity in various segments of the restaurant industry but we think the quality and value that we offer is unsurpassed at the QSR level. And based on initial results since we introduced mini sirloin burgers six weeks ago, we believe this will be a very successful new product for us. Our mini burgers represent a new platform for Jack in the Box, from which we can launch additional menu items.

And for our guests focused on value, in late January, we added Taco Nachos as a new product to our permanent value menu. We also began running a new TV spot in late April that reminds guests of our most popular everyday value menu item, two tacos for $0.99.

Moving on to advertising, in marketing, in February, Jack in the Box launched a brand campaign that saw Jack, our popular advertising spokesman, hit by a bus on Super Bowl Sunday. I am happy to report that Jack emerged from his coma in March and has resumed his prominent place in our advertising. This brand campaign is intended to differentiate Jack in the Box from our competition by promoting the fact that our full menu is available all day, every day. This is especially important as we continue to enter new markets, where guests may be unaware that they can, for example, order breakfast any time of the day or night. Since launching the campaign, we’ve seen a significant increase in our ad awareness in all of the major market areas we track.

Our media strategy remains focused on communicating to various audiences multiple messages pertaining to new product introductions, our value proposition, and branding. Service is another major focus of our Jack in the Box brand reinvention initiative, and our investment in employee training to reinforce the six key tenants of guest service is resulting in better execution at our restaurants. By focusing on hot food, a clean environment, friendly employees, order accuracy, a hassle free experience, and speed of service, our restaurants received noticeably higher guest satisfaction scores in the second quarter.

We are also continuing to successfully execute our refranchising strategy. In the second quarter, we sold 46 company restaurants. Our system is now 41% franchised and we remain on pace with our goal to be 70% to 80% franchised by the end of fiscal 2013.

Our restaurant reimage program also remains on track with our goals. We have now completed exterior enhancements at more than 55% of the Jack in the Box system, including franchise locations, and expect to be substantially completed with this element of our reimage program system wide by fiscal year-end.

And now I will turn the call over to Jerry for a closer look at the financial side of our business. Jerry.

Jerry P. Rebel

Thank you, Linda and good morning, everyone. We were pleased with our second quarter earnings from continuing ops, which totaled $0.51 per diluted share versus $0.44 last year. We were also pleased [with the] sequential improvement in restaurant operating margin, which increased from 14.6% of sales in the first quarter to 16.5% of sales in the second quarter, and equal to prior year.

Of the 190 basis point improvement in margin versus the first quarter, 180 basis points were due to a decrease in food and packaging costs. Year over year commodity cost inflation moderated to approximately 3.3% in the quarter versus nearly 8% in the first quarter, with beef increasing 6.6% versus 20% in Q1.

The 80 basis point improvement in food and packaging costs versus last year resulted from favorable product mix, including the addition of margin friendly products like Teriyaki bowls, the benefit of the 2.5% price increase we took in November at Jack in the Box, and margin improvement initiatives.

Restaurant operating expenses were 51.3% of sales, down 10 basis points from Q1 but up 80 basis points versus last year. Higher rent, depreciation, and sales deleverage accounted for about half of the unfavorable variance, with the remainder due primarily to higher depreciation costs resulting from the kitchen enhancement program we completed last year and our ongoing restaurant re-image program at Jack in the Box.

Compared to last year, consolidated restaurant labor was slightly favorable and utility costs were essentially flat. Labor costs continued to benefit from lower turnover, reflecting the soft overall labor market and the internal benefits we provide to our employees, such as access to affordable healthcare and opportunities for career advancement.

Our restaurant operating margin is expected to improve for the second half of the fiscal year, due primarily to lower anticipated food cost inflation, lower utility costs, the benefits of margin friendly products, like our new mini sirloin burgers, and margin improvement initiatives. Those initiatives include minor product modifications, packaging changes, and reduction in costs for certain supply items and small wares.

SG&A was 50 basis points higher than last year, reflecting impairment charges of approximately $3.2 million. Unlike the first quarter, mark-to-market adjustments on the cash surrender value of insurance products supporting our non-qualified retirement plans were not significant in the quarter versus prior year.

With respect to our distribution business, in April we announced the outsourcing of the transportation services portion of our supply chain to JB Hunt. This will reduce our risk associated with the transportation business without increasing our costs. We expect the vast majority of our affected employees will be offered positions with JB Hunt.

On refranchising, we sold 46 company-operated Jack in the Box restaurants to franchisees in six transactions with gains totaling $17.2 million in the second quarter compared with $11.6 million in the year-ago quarter from the sale of 23 restaurants. The average gain in the quarter was lower than in recent quarters due to lower-than-average sales volumes and cash flows relating to the restaurants sold.

For example, nearly half of the restaurants sold in the second quarter had average sales volume approximately $300,000 lower than system average. While in the first quarter, more than half of the restaurants sold had average sales volumes more than $250,000 higher than system average.

We provided $3.3 million in financing during the quarter on two of the six transactions. At quarter end, we had about $9.3 million of outstanding notes receivable related to refranchising transactions, of which $1.6 million has been repaid thus far in the third quarter.

Before I review our guidance for the third quarter and fiscal 2009, I would like to provide an update on our commodity cost outlook for the remainder of the year. On beef, for the balance of the year, we anticipate beef costs to be favorable, with the biggest benefit in Q4 as we lap the spike in [50s] that we saw last summer. We have 100% of our 90s covered through July and 75% of our 90s covered through August at about $1.27 a pound.

We have fixed price contracts for 100% of our chicken needs through March of 2010 and are looking for opportunities to extend our contracts further. Chicken costs for the year are projected to be approximately flat versus the year ago.

On bakery, we have fixed price contracts for 65% of our needs through the end of the fiscal year. Current thinking for bakery is up 9% for the full year, rolling over a 1.8% increase in fiscal 2008.

Cheese costs were 20% lower in Q2 versus a year ago -- better than the 5% decrease we experienced in Q1. We are expecting our cheese costs to be 13% lower for the full year, as our forward positions roll off.

Dairy and eggs were down 11% and 10% respectively in the quarter and we expect continued favorability for the rest of the year.

Putting all that together, our full-year forecast now calls for commodity costs to increase approximately 3% versus our prior outlook of 3% to 4%. And for modeling purposes, we expect Q3 to be up less than 1% and Q4 down approximately 4% versus last year -- I’m sorry, 2% versus last year in the fourth quarter.

Now let’s move on to the rest of our guidance for the balance of the year on some key line items -- we expect same-store sales for Jack in the Box company restaurants to range from flat to plus 2% for both the third quarter and full year. We anticipate system-wide same-store sales for Qdoba will decrease 2% to 4% in the third quarter and 1% to 3% for the full year. Restaurant operating margin for the full year is now expected to be in the 16% to 16.5% range, compared with 16.1% in fiscal 2008. And we raised the low-end of the range of our guidance forecast and now expect $2.08 to $2.20 in EPS from continuing operations, including franchise gains of $60 million to $70 million.

And now I would like to turn the call back over to Linda for some final comments.

Linda A. Lang

Thank you, Jerry. I would just like to reiterate how pleased we are with the company’s overall performance during the quarter. Our teams are doing a great job of executing on the four major initiatives of our long-term strategic plans, and along with the tremendous support of our franchisees and their hard work, our business continues to perform well despite a difficult economic environment.

And now I would like to turn the call over to the Operator to open it up for questions. Katherine.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Larry Miller.

Lawrence Miller - RBC Capital Markets

Thanks. Maybe I can squeeze in my follow-up in advance, too -- can you just give us an update on the credit markets and maybe if you have an idea when you may not have to be a bridge lender?

And then, I was just curious about also the stimulus -- was that a benefit last year for you guys? Thanks.

Jerry P. Rebel

Let me take the credit markets first -- we are seeing some easing in the credit markets. I think that’s evidenced by the fact that we only offered the financing assistance on two of the six deals in this quarter. I think it’s a little too soon to say that’s a trend though. I’m not sure exactly when we will back off of that, but we are pretty pleased with the ability of our -- of many of the franchisees to get the financing for the full deal at fairly reasonable rates with reasonable amounts of equity in.

Linda A. Lang

Regarding the stimulus -- you are talking about the stimulus last May, was it?

Lawrence Miller - RBC Capital Markets

That’s correct, yeah.

Linda A. Lang

We really didn’t see much of an impact or benefit from that, Larry.

Lawrence Miller - RBC Capital Markets

Great. Thanks, guys.

Operator

Your next question comes from Christopher O'Cull.

Christopher O'Cull - SunTrust Robinson Humphrey

Good morning, guys. Linda, Jack has introduced obviously several new or really unique items, like the teriyaki bowls, so would you comment on how that has affected your customer mix? And on the flip side, what risk you are monitoring as you expand the base?

Linda A. Lang

You know, for really several years now, we have been on our multi-tiered marketing strategy, which is really about introducing the unique, more premium products like the teriyaki bowls, even the new mini sirloins, and so we have seen a benefit in reaching those more moderate customers. And that’s been growing over the last several years and continues to grow as we launch these premium products.

But I can tell you we also are seeing a little bit of an increase in our -- what we call the bottom tier mix or dollar menu mix, so this multiple -- multi-tiered strategy is really working for us, Chris, in terms of bringing in those lighter users but also appealing to the more frequent users with the value messaging, both the bundled deals and products like the taco nachos and the pita snacks.

Christopher O'Cull - SunTrust Robinson Humphrey

Great, thanks.

Operator

Your next question comes from Joseph Buckley.

Steven Barlow - Bank of America/Merrill Lynch Research

It’s actually Steven Barlow for Joe. Were there other regions that offset the positive comps in California and Texas beyond Phoenix? And was there any swine flu impact in Southern California and Texas?

Linda A. Lang

We have not seen an impact from the swine flu and there really -- from a regional standpoint, we were solid in California now, third quarter, where we’ve had positive comps. Phoenix, as we mentioned, sequentially has improved but still negative. And Texas remains strong. Northwest was affected by the weather in the quarter slightly.

Steven Barlow - Bank of America/Merrill Lynch Research

Okay. Could you also talk about performance by day part, and specifically breakfast in California, given unemployment and breakfast significance to comps over the past --

Linda A. Lang

We don’t provide details on day part by region but we can tell you breakfast remains stable, so we did not -- we saw about the same mix on breakfast, so no weakness in breakfast.

Steven Barlow - Bank of America/Merrill Lynch Research

Great. Thank you.

Operator

Your next question comes from Robert Derrington.

Bob Derrington - Morgan Keegan & Company, Inc.

Thank you. Linda or Jerry, I’m not sure who to direct the question to -- kind of thinking about, as you go through your refranchising strategy over time, ultimately that will affect the number of dollars, I would imagine, that you need on your G&A line. And you’ve given us some directional color on a percent of revenue but I am just wondering as we go forward, as you peel back more stores back out to the franchise community, how will that line change longer term?

Jerry P. Rebel

Let me take a stab at that -- if you go back -- if you look back at fiscal 2008, for the -- during the two years ended fiscal 2008, we actually reduced our SG&A costs by almost $11 million in that timeframe, at about 120 basis points. Now, in that timeframe, we also closed two regional offices that saved about $2.5 million in total as a result of that, which we were able to close regional offices as we get a significant number of restaurants refranchised in a single geographic area. So we would expect to see more of that going forward.

Now, if you look at this year, we haven’t had the same rate of reduction this year as we have in the prior two years. Part of that is because we have not yet been able to close an additional regional office. And the other thing that I will add is kind of clouding the numbers this year is the fact that we’ve had about $3 million of additional impairment charges this year versus last year, and then we’ve also had the mark-to-market issues that we talked about, particularly in the first quarter.

So when you factor both of those out, we are seeing a little G&A leverage this year, although not nearly as significant as in the past. However, we remain committed to continue to reduce G&A and we will be able to provide more color on that in later calls -- probably not the next call but later calls after that.

Bob Derrington - Morgan Keegan & Company, Inc.

Great. Thank you.

Operator

Your next question comes from Jeffrey Omohundro.

Jeffrey Omohundro - Wachovia Securities

Thanks. I wonder if you could provide a little more color on the initial consumer response to the mini sirloin burgers -- how mix has tracked, and also a little bit more on the margin implications around the product, and what you are thinking of regarding evolving it into a platform for future growth? Thanks.

Linda A. Lang

Sure. Well, you will have heard that other QSR chains indicated a weakening in March and April and we did not see that trend, and in fact, with the launch of mini sirloins the last six weeks, we do feel very positive about the initial response to that product, consistent with the findings that we had in our test markets and feel very comfortable that we will be well within the range of our sales guidance.

It is a product that is favorable to our food -- in terms of food costs and favorable from a margin perspective, and does create a platform for other products or line extensions, and those products are already in development and actually in test.

Jeffrey Omohundro - Wachovia Securities

Excellent. Thank you.

Operator

Your next question comes from Steven Rees.

Steven Rees - J.P. Morgan

Thanks. In addition to the slow down in March, which it doesn’t sound like your concept experienced, we are also seeing some pressure on menu mix in the quick service industry. Can you just comment on how your mix held up in your quarter, if you are seeing any pressure on average check?

Linda A. Lang

Our mix was flat, so we did not see pressure on mix.

Steven Rees - J.P. Morgan

Okay. And then just to follow-up on that, it sounds like the mini sirloin burgers are off to a good start and you’ve been successful with a lot on the premium side this year -- are you seeing any increased competitive discounting that concerns you in any of your major markets where you think you might have to move towards more explicit price points?

Linda A. Lang

You know, Steve, we’ve seen a lot of discounting and it continues, but I would say it’s not anymore aggressive than what we have seen in the last couple of quarters. There was a lot of couponing, a lot of discounting, but it’s probably on par with what we have seen.

Steven Rees - J.P. Morgan

Okay, perfect. Great, thank you very much.

Linda A. Lang

However, I will add though, we have seen a lot more discounting from the bar and grill, or the casual dining concepts.

Operator

Your next question comes from Matthew DiFrisco.

Matthew DiFrisco - Oppenheimer & Co.

Thank you. Can you give us some color on what you look like right now as far as your franchise base, how much you have in the pipeline, given the recent sale of stores year-to-date versus where you were last year in the pipeline? So I’m just trying to forecast what the 15 or so opening for ’09, how big that could get in 2010 and beyond as we look at you becoming more of a franchise concept.

Paul L. Schultz

We currently have 30 active development agreements that encompass 73 restaurants that are committed to be built through 2012 and a very significant number of those have already -- are already approved sites.

Matthew DiFrisco - Oppenheimer & Co.

Okay, that’s great -- and what does that look like -- how much did that get added to by the recent sales, that 73? What did that look like a year ago - ballpark?

Paul L. Schultz

I’m not sure. I don’t have that at my disposal.

Matthew DiFrisco - Oppenheimer & Co.

Okay. Thank you.

Operator

Your next question comes from Steven Kron.

Steven Kron - Goldman Sachs

The refranchising of stores -- it seems as though this quarter in particular, the economics of those stores that were sold were maybe certainly underperforming the system. Should we expect that that’s the makeup of the stores that will be refranchised going forward? More of them were underperformers and I guess the question is what kind of impact should we expect that’s going to have on restaurant level margins at the existing company stores on a go-forward basis?

Jerry P. Rebel

A couple of things there -- what we have said in the past is that -- and I think it holds true in this quarter and I think it will hold true going forward, is that we haven’t been focusing on selling under-performing units recently, and in the past, we hadn’t been focused on selling the higher performing units. We have market level plans that we are executing against currently to sell restaurants in those markets that we had chosen to exit from a company operations perspective.

If you look at last year, the AUVs of the restaurants that we sold were essentially equal with the AUVs for the entire company. I would expect that we will see going forward the sales of restaurants that behave a lot like the system average.

Now, having said that, we will see quarters where we have an accumulation of the lower performing units being sold and we will also have quarters like we had in the first quarter where we have an accumulation of higher performing restaurants being sold.

So I don’t know if that helps you a whole lot, but that’s the truth.

Steven Kron - Goldman Sachs

That’s fair. And one other question, just related to the gross profit margins, Jerry -- you gave us basically three areas where the gross profit margins, the contributors to the improvement, and particularly on a year-over-year basis, the 80 basis points. You talked about the commodity inflation versus price, you talked about mix of products and you talked about margin improvement initiatives. Can you maybe, on a year-over-year basis, bucket where the -- really, what was the greatest contribution? And as we think about it going forward, it seems like commodity deflation is going to start to play a bigger role, certainly as we get into the fourth quarter and maybe into 2010. Do we start to cycle a lot of these margin improvement initiatives such that the focus is going to be a little bit more on the commodity costs coming down?

Jerry P. Rebel

The other thing I would add to that, Steve, would be pricing also had an impact, so if you look at 2.5% pricing and a 3.3% commodity cost inflation, not quite offsetting one another but somewhat offsetting, then I would look at this in terms of the product and the margin improvements being about equal, give or take a little bit. But we have a very robust margin improvement process that we have in place every year. This year, we’ve been making a lot of progress on a lot of key changes here, so I think that may be the key change versus prior years.

Steven Kron - Goldman Sachs

Okay, thanks.

Operator

Your next question comes from Keith Siegner.

Keith Siegner - Credit Suisse

During the SG&A discussion, you talked about how last year you were able to close some of these regional centers and this year there haven’t been any -- I’m just wondering if you could remind us maybe how many regional centers you have in place right now, maybe how close you are to potentially being able to close anymore? For example, are there any additional closures kind of factored into guidance for the rest of this fiscal year at this time?

Paul L. Schultz

Can’t comment on the future but we currently have 12 regional offices.

Jerry P. Rebel

And there’s no additional closures forecasted in our guidance for this year.

Keith Siegner - Credit Suisse

Okay. If I could sneak in one more question then -- you know, cash flows and proceeds from refranchising remain very much on track with the plan. It looks like it is mostly being allocated towards debt reduction. Could you just remind us maybe about what the plan is for how you are going to allocate the cash flow and proceeds going forward? Should we continue to expect it to go towards debt reduction, et cetera?

Jerry P. Rebel

I don’t know, Keith, that I would classify us as using refranchising proceeds to pay down debt. We actually drew up the revolver at the end of the fiscal year because we were concerned -- if you think back to the September timeframe, we were concerned about a number of the banks [that were in] a credit facility, so we purposefully drew up that revolver.

We are just paying that back down to a level that we feel comfortable with from an operating perspective, so I would classify the debt reduction more around that area.

With respect to additional uses of refranchising cash, we still do have $100 million worth of share repurchases authorized by the board and we said this year that we intend to offset dilution from stock options, and we haven’t yet purchased any shares this year, so we still have some availability for that. But I’ll reiterate -- we are not focused on paying down debt, particularly not with half of our debt being at LIBOR plus one-and-an-eighth.

Keith Siegner - Credit Suisse

Great, thanks.

Operator

Your next question comes from Jonathan Weight.

Jonathan Weight - Analyst

Quick question on your comp guidance for the third quarter -- it looks like on the Qdoba, you obviously put that at a lower rate than what you were tracking in the second quarter, and your comparison is easier. And then Jack in the Box, you were kind of a little above where you were tracking in the second quarter and your comparison is about the same. Is that more a factor of kind of how well the mini burgers are tracking, or is there something else?

Linda A. Lang

Yeah, I think that’s fair, that we really did consider the launch of the mini burgers in setting our guidance.

Jonathan Weight - Analyst

Okay. Can you talk at all about your refranchisee pipeline for the third quarter?

Jerry P. Rebel

We are very comfortable with our guidance for the full year, which we said 120 to 140 units. And one of the reasons that we stopped providing quarterly guidance on our refranchising activities is they can get a little lumpy, but we are very comfortable with 120 to 140 so far for the full year and remember, we have already completed 75 such of those deals, or 75 restaurants, I should say.

Jonathan Weight - Analyst

Okay, one last quick question then -- how long do you anticipate providing financing as part of these refranchising deals?

Jerry P. Rebel

We don’t have a definitive timeline on that. What we have said though when we began the program, which was just this fiscal year, is that we did not anticipate this to be a long-term program. It was really just to be used as a tool until the credit markets return to some degree of normalcy. But it’s not something that we want to continue to carry on indefinitely.

Jonathan Weight - Analyst

And you would think the credit markets at this point not quite back to normal yet?

Jerry P. Rebel

Not quite back to normal yet -- I think banks have a lot of cash on their balance sheet. They are still not lending it at anywhere close to what would be a normal rate of lending at this point.

Jonathan Weight - Analyst

Okay. Thanks a lot.

Operator

(Operator Instructions) Your next question comes from Matt [Vendi].

Matt Vendi - Stifel Nicolaus

Just a quick question on the Jack in the Box comps -- was there any trending in any of the other regions that was significant? Since California and Texas are making up most of the system remain positive, were there any regions like the rest of the Midwest or the Southeast, maybe, that were trending negatively or at least sequentially worse than the first quarter?

Linda A. Lang

You know, we covered most of the markets in terms of the Texas and California. We indicated that the Northwest was hurt by weather -- that’s really -- those are probably the key areas.

Matt Vendi - Stifel Nicolaus

Okay, and then just one more -- on Qdoba, was there anything in terms of day part mix or less catering that drove the comp a little worse than maybe previously expected?

Linda A. Lang

Yes, catering did absolutely have an impact, a negative impact on the sales trends.

Matt Vendi - Stifel Nicolaus

Okay. Thank you.

Operator

Your next question comes from Larry Miller.

Lawrence Miller - RBC Capital Markets

Hey, guys. I just wanted to follow-up on the competitive environment question and how you might approach it. A lot of people are out there doing a lot of bogo offers and I have a friend in Hawaii and it sounds like in that market, you’ve been offering a free slider. Is that an approach you might take on the mainland here in the rest of the system? And is that a -- how do you balance profits and sales in that regard? And then I have two other quick ones I’ll slide in after that. Thanks.

Linda A. Lang

You know, we will continue to do more of the bundled meal deals that we have. If you’ll recall, the big deal and so forth -- those kind of bundled meal deals work for us from a value standpoint. We do some couponing when we launch a new product and then we have our everyday value menu. We are actually on air right now with two tacos for $0.99, which is a very compelling value offering. But every once in a while, you will see a franchisee like the franchisee in Hawaii do their own value promotion but system wide, generally we’ll stick with the bundled meals, the reinforcement of our value menu, everyday offerings, and of course the way we position like the mini-burgers, is actually a very good value relative to what you can get at the casual dining restaurants.

Lawrence Miller - RBC Capital Markets

Great, that’s helpful. And then just two things -- Jerry, when you guys outsourced the transportation part of the distribution business, how does that affect the P&L? Is it also a revenue reduction and a cost reduction? Or is it just one or the other?

Jerry P. Rebel

We would expect costs to be pretty neutral on that for at least the first couple of years and then we would start to get a little benefit on that as some of our truck leases roll off and we were able to take advantage of JB Hunt’s leasing rates. So you should really see no change in that at all. We’re just outsourcing the transportation element of our supply chain services.

Lawrence Miller - RBC Capital Markets

Okay, that’s helpful. And then last thing -- is there any directionality you can provide us based on the contracts you have in terms of beef and how much you might be a benefit or is it still a headwind for you for Q3 and Q4? Thanks.

Jerry P. Rebel

Beef -- on the 90s, what I said is that we have all of our 90s needs through the third quarter at about $1.27 and 75% of ours through August at about $1.27 also. They were in the -- you know, versus the prior year, call it in the $1.40 plus range versus the prior year. And we’d expect that the non-covered portion of the beef to be probably in the mid $1.30 range for the 90s for the balance of that fourth quarter.

50s, we’re looking at probably mid-80s, both in the third quarter this year versus third quarter last year. The real benefit will be in the fourth quarter as they were mid-80s this year, or we expect them to be mid-80s this year, versus about $0.95, $0.96 a pound last year.

Lawrence Miller - RBC Capital Markets

And that’s in the fourth quarter but not the --

Jerry P. Rebel

Right.

Lawrence Miller - RBC Capital Markets

Okay. Third quarter was about 80, 85, if I remember correctly -- is that about right?

Jerry P. Rebel

Third quarter was -- yeah, mid-80s; 85, 86, in that range.

Lawrence Miller - RBC Capital Markets

Okay. Thank you very much. Appreciate that.

Operator

Your next question is from Christopher O'Cull.

Christopher O'Cull - SunTrust Robinson Humphrey

Thanks -- just a quick follow-up; Jerry, the company has been incurring a lot of accelerated depreciation at the restaurant level. I am assuming that’s associated with the remodel program. If you exclude these project related write-offs, it appears the restaurant margin target for this year is only about 100 bps lower than your peak margin. Is there any structural reason why a Jack operator shouldn’t expect margin improvement beyond your prior peak levels?

Jerry P. Rebel

Chris, actually the accelerated -- let me draw a distinction here -- the accelerated depreciation or what we would normally call the write-off, is really part of our G&A costs. The depreciation that is increasing at the restaurant operating margin level is due primarily to the kitchen enhancements, which we completed last year, and the ongoing reimage program.

Christopher O'Cull - SunTrust Robinson Humphrey

Okay, so the -- okay, so that’s the permanent depreciation going forward, the write-offs are at the G&A line?

Jerry P. Rebel

Correct.

Christopher O'Cull - SunTrust Robinson Humphrey

Okay, that’s helpful. Thank you. And then Linda, maybe talk a little bit about the decision to feature the mini burgers or promote the mini burgers as a premium product rather than a cheaper product like your competition is doing right now -- do you feel like you’ve got a better -- you have less competition on the premium side of the mini burgers?

Linda A. Lang

At the QSR level, absolutely -- it’s such a compelling product and it’s not available at any other QSR, but it is available at casual dining and so I would put the quality on par with what you are getting at casual dining but it’s at a much more compelling price point and of course, we have the convenience of drive-thru.

Christopher O'Cull - SunTrust Robinson Humphrey

Great, thanks.

Linda A. Lang

Thank you.

Operator

Your next question comes from Fitzhugh Taylor.

F. Fitzhugh Taylor III - Thomas Weisel Partners

Thanks. I just had one more question about kind of the near-term G&A run-rate -- the mark-to-market in the second quarter, was that a slight extent, albeit non-cash, or was it a reversal of some of the expenses you had in the first quarter?

Jerry P. Rebel

No, when you look at it versus last year, it was a slight improvement versus last year. And we had benefits in each of the last -- in the second quarter this year and last year, but it wasn’t material.

F. Fitzhugh Taylor III - Thomas Weisel Partners

Okay. Thank you.

Operator

Your next question comes from Steven Rees.

Steven Rees - J.P. Morgan

Thanks. I just wanted to follow-up on the decision to slow down a bit on Qdoba, sort of what were the drivers behind that? Was it just development delays? Were these units getting pushed back into 2010? Or was it more a function of slower returns as a result of slowing comps and margins?

Linda A. Lang

All of the above -- it’s really -- you know, the pressure on the margins and the sales and in terms of the franchisees, difficulty with getting credit, access to credit, and then development delays, slow down in development.

Steven Rees - J.P. Morgan

Okay, so how should we be thinking about that growth for the brand in 2010 at this point?

Linda A. Lang

You know, we haven’t provided guidance yet on 2010 but you would expect it to be lower in terms of what we had originally expected for Qdoba in 2010. But we will give more color on that later this year.

Steven Rees - J.P. Morgan

Okay, and then just finally for Jerry on the operating expense side, I think you said about half of it was from pressure from Qdoba. And then of the other half, part of that was due to the kitchen enhancements. When do those wrap up in 2008 and sort of if you can quantify that piece of it, that would be helpful.

Jerry P. Rebel

The kitchen enhancements wrapped up near the end of the year, so we should be lapping those depreciation numbers in the Q4.

Steven Rees - J.P. Morgan

In Q4, and can you quantify the base point impact, or was that -- was that 25% of what you saw this quarter or less?

Jerry P. Rebel

No, what I’ll say on that is if you look at the overall restaurant depreciation that we’ve been talking about hurting margins versus prior year in both Q1 and Q2, that should have much less of an impact without giving you an actual basis point number -- that should have much less of an impact when we get into Q4.

Steven Rees - J.P. Morgan

Okay, great. Thank you.

Jerry P. Rebel

-- operating costs say in Q4 versus Q1, they were pretty darn similar.

Steven Rees - J.P. Morgan

Okay, perfect. Thanks.

Operator

Your next question comes from Joseph Buckley.

Joseph Buckley - BAS-ML

Just a quick follow-up on Qdoba -- last quarter you highlighted the New York market as being a drag. Could you provide any kind of an update there?

Linda A. Lang

It continues to be weak, the Manhattan market. But what we are focusing on is local store marketing, trying to get through on the catering, and then we have really worked hard on improving the cost structure of the restaurants as well. And we are also negotiating with the landlords at this point in time for rent reductions, lease reductions.

Operator

Your next question comes from Keith Siegner.

Keith Siegner - Credit Suisse

One quick question on the rebranding program -- could you just give us a little bit of information about maybe what the cost was, particularly from a CapEx perspective? Has interior and exterior signage all been replaced at this point, or is there more to go? And then just one last kind of soft question on it -- I mean, it’s a pretty material rebranding. How have your customer surveys shown the response has been to that thus far?

Linda A. Lang

You’re talking Jack in the Box?

Keith Siegner - Credit Suisse

Yes.

Linda A. Lang

With the new logo?

Keith Siegner - Credit Suisse

Yes.

Linda A. Lang

The signage has only been replaced in the Houston market where we lost signage due to the hurricanes. And the rest really we’re not doing massive re-signage other than what we did in a few test restaurants. We are looking at changing out signage over the next three to five year timeframe, so there isn’t a big capital investment with regard to that. The response has been very, very positive though in terms of the new logo that we are showing, showcasing on our packaging and in our advertising.

Keith Siegner - Credit Suisse

Thank you.

Carol DiRaimo

Operator, we’ll take one more question.

Operator

Matthew DiFrisco.

Matthew DiFrisco - Oppenheimer & Co.

Thank you. I’m sorry if you said this already but I didn’t catch it -- on Qdoba, what current price increase do you have? And then also, if you could just give us a little bit more detail on rolling out -- why are you not rolling out the new bundling nationally? What are the actual characteristics you are seeing that might be troubling from different regions or different places and different tests that you have seen so far?

Linda A. Lang

Right -- well, the pricing is 1.7% and due to competitive reasons, we are really not giving a lot of detail on the promotion at Qdoba but I can tell you it did work in some of the markets, some of the more depressed markets. In other markets, it did not drive enough incremental traffic to compensate for the declines in margins.

Matthew DiFrisco - Oppenheimer & Co.

Okay. Understood. Thank you.

Linda A. Lang

Thank you very much. That concludes our call. I appreciate the time. Thank you.

Operator

Today’s call has concluded. All parties may disconnect.

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Source: Jack in the Box F2Q09 (Qtr End 4/12/09) Earnings Call Transcript
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