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Executives

Carol DiRaimo - Investor Relations

Linda Lang - Chairman of the Board, Chief Executive Officer

Jerry Rebel - Executive Vice President & Chief Financial Officer

Lenny Comma - Senior Vice President & Chief Operating Officer

Carol DiRaimo - Investor Relations

Analysts

Joe Buckley - Bank of America

Chris O'Cull - SunTrust

Steven Rees - JP Morgan Chase

Larry Miller - RBC Capital Markets

Jeff Omohundro - Wachovia Securities

Jake Bartlett - Oppenheimer

Robert Derrington - Morgan, Keegan

Keith Siegner - Credit Suisse

Bart Glenn - D.A. Davidson

Tom Forte - Telsey Advisory Group

Steven Kron - Goldman Sachs

Robert Derrington - Morgan Keegan

Jack in the Box Inc. (JACK) F1Q10 Earnings Call February 18, 2010 11:30 AM ET

Operator

Good day everyone and welcome to the Jack in the Box Inc. first quarter fiscal 2010 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 Debbie and good morning everyone. Joining me on our call today are Chairman and CEO, Linda Lang; our Executive Vice President and CFO, Jerry Rebel; and Senior Vice President and Chief Operating Officer, Lenny Comma. During this morning’s session we’ll review the company’s operating results for the first quarter of fiscal 2010 and update 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 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 to the business.

The Safe Harbor statement in yesterday’s news release and the cautionary statement in the company’s Form 10-Q that will be filed later this week 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 few calendar items to note; Jack in the Box management will be presenting at the Bank of America/Merryl Lynch consumer conference in New York on March the 10, the Morgan Stanley Retail field trip in Dallas on March the 16, and the J.P. Morgan Gaming Lodging and Restaurant management access forum in Las Vegas on March 17. Our second quarter ends on April the 11, and we tentatively expect to announce results the week of May 10.

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

Linda Lang

That you Carol. Good morning. Our first quarter performance included mixed results that were generally inline with our expectations. Our results continued to benefit from an improved cost structure largely due to our ongoing re-franchising effort as well as steps we’ve taken to reduce overheads. This partially offset an 11.1% decrease in same-store-sale at Jack in the Box company restaurants compared with the 1.7% increase last year.

We believe high unemployment rates for our key customer demographic continue to be the biggest factor impacting our sales. In addition we are continuing to see aggressive discounting throughout all segments of the restaurant industry. Lower grocery prices are also prompting more consumers to eat at home.

During the first quarter we reallocated our media spend to allow us to reach multiple consumer targets with concurrent messages focusing on both value promotions and premium new products to drive traffic among a broader range of consumers. We are somewhat encourages to have seen steady sequential improvement in sales and traffic at Jack in the Box since the end of November when we adjusted our strategy.

Same-store sales for the first four weeks of this quarter were down approximately 9%, which have been impacted by harsh weather across the country. In addition to lapping difficult comparisons resulting from the launch of Teriyaki Bowls in last years first quarter, same-store sales in Texas where approximately 30% of our company restaurants are located were negatively impacted by rolling over the benefit of higher sales following Hurricane Ike last year as well as severe winter weather this year.

The decrease in traffic for the first quarter was less than the overall same-store sales decline, which reflected a lower average guest check for the first time since 2002. The lower guest check was primarily due to multiple value messages including two bundled valued combos, our Bonus Jack combo and the Jumbo deal. We also offered our Big Cheeseburger and Big Texas Cheeseburger for just $1 each and our real ice cream shakes were half priced during the afternoon hours of the holiday season.

In addition we extended the value message to our breakfast menu and promoted two chicken sandwiches for just $3, which helped to improve breakfast traffic from what we’ve seen in recent periods. During the first quarter we also promoted a new premium tier product the Southwest Chicken Bowl as a limited time offer. This product extended the platform of Rice Bowls we successfully launched a year ago.

In the second quarter our marketing strategy will continue to balance value and premium products. For example in early February, just in time for the lent season Jack in the Box began offering our Fish Sandwich for just $1.49 and on Super Bowl Sunday we launched Grilled Sandwiches as a new premium platform. These sandwiches are unique among QSR’s and feature quality you might expect from a fast casual restaurant, but at a lower price point and with a convenience of drive through services.

We are offering tow varieties of Grilled Sandwiches each featuring premium quality Deli meats and cheeses served on a new grilled artisan bread. To drive trial of our Turkey, Bacon & Cheddar and Deli Trio grilled sandwiches, which tested very well for us and have strong value in quality attribute. We are offering the sampling event on February 23. Guest will receive a free grilled sandwich with a purchase of a large strength. The sandwiches are regularly priced at $3.99.

Moving on to Qdoba, although system same-store sales for the first quarter fell 1.7% on top on the year ago decrease of 1.1%, we are pleased that system same-store sales improved sequentially thought the quarter and turned positive in the second half. Same-store sales remained positive for the first few weeks of this quarter until severe weather swept across the country.

As for Jack in the Box we’ve taken steps to strengthen Qdoba’s positioning while responding to change in consumer needs. Qdoba’s higher income core customer responded favorably to the December introduction of [craft] two, a new menu initiative that features more variety as well as more affordable price point. Craft two lets guest mix and match smaller portions of Qdoba most popular item, like a Naked Burrito, Taco, [Inaudible] for just $5.99 in most markets.

Early in the second quarter Qdoba rolled out an online promotion that leverages the craft two campaign. Qdoba also enhanced its kid’s meal in the first quarter and took steps to strengthen its catering business and increase return visits. Sales have responded nicely and our expanded loyalty program remains very popular among Qdoba’s core customer and is a big driver of return visits.

We’ve seen reports of a boost in confidence among the more affluence segment of the population while consumer confidence among those with lower income levels have remained depressed. We think this helps explain the divergence in sales trends at Qdoba verses Jack in the Box.

To improve the level and consistency of service at our restaurant our employee training remains focused on the fundamental of guest service, and our investment along with lower turnover is favorably impacting service execution. Last years guest satisfaction scores improved significantly over the prior year and we continue to build upon that improvement in the first quarter.

The Jack in the Box system was more that 47% franchised at quarter end and we expect to cross over the 50% mark later this year. We are pleased with the progress we are making to achieve our goals of being 70% to 80% franchised by the end of fiscal 2013. We are already realizing the benefit of lower capital spending, G&A costs and advertising expense resulting from our re-franchising strategy.

Jack in the Box is continuing to expand and during the quarter we broke ground on two new contiguous markets in Oklahoma, Tulsa and Oklahoma City and expect those locations to open later this year. Sales volumes in new markets continue to exceed our overall system average. In these difficult times we believe it’s more important that ever for us to maintain our charitable support of organizations that support the community.

In November we launched a system-wide fundraiser that offered guest a limited edition in [Inaudible] for a $1 donation with all proceeds benefiting Big Brothers, Big Sisters. I’m happy to announce that this fundraiser, raised more that 340,000 for this organization. I’d like to thank our guests for the tremendous generosity and express my appreciation to all of our employees and franchisees for their tremendous support of this event.

Not only did our franchisees play a major role on the success of fundraiser, they have been very supportive of our overall business strategy as well. Our relationship with our franchises community remains very strong as we work through the difficult macro environment together for the long-term help of the brand.

Now I’ll turn the call over to Jerry, for closure look at the financial side of our business. Jerry.

Jerry Rebel

Thank you, Linda and good morning. First quarter earnings were $0.43 per diluted share compared to $0.49 last year. Refranchising gains were lower than last year by approximately $0.09 per share. Restaurant operating margin was 14.3% of sales compared to 14.6% last year.

Our focuses on cost control help to mitigate the sales deleverage, which we estimated negatively impacted first quarter margins by approximately 250 basis points. Food and packaging costs improved by 230 basis points as year-over-year commodity costs were approximately 7% lower in the quarter, despite higher produced costs resulting from unusually cold weather and key growing regions of the country.

As remainder commodity costs were up nearly 8% in the first quarter of last year. Beef was down about 19% and cheese was down approximately 18% from last year’s first quarter. In addition to benefit of price increases and margin improvement initiatives positively impacted margins.

Franchises margins were lower than last year due primarily to franchises sales deleverage. We control the leases on a majority of our franchises locations and charge the franchisees rent based upon the greater of a percentage of sales or a fixed minimum rent. As our underlying group rent expenses fixed significantly lower franchise sales compressed the margins.

SG&A decreased by $17.4 million due to several reasons that we described in the press release. It is probably worth running through these to get a gauge and what we believe is more ongoing in natured to help you get a more realistic run rate.

Our refranchising strategy and planned overhead reductions results in about $4 million of the decrease. You probably recalled that in the fourth quarter of last year we implement the plans reduce our support center and field staff by approximately 6%.

This reductions should result an annualize savings of approximately $6 million of which we expect $4 million to be realized in fiscal 2010. Roughly half of the $5.5 million decrease in advertising costs was due to be franchising and these savings should continued.

Mark-to-market adjustments on investments supporting the company’s non-qualify retirement plans positively impacted SG&A by $2.1 million in the first quarter this year as compared to a negative impact of $5.8 million in last year’s first quarter, resulting in a year-over-year decrease in SG&A of $7.9 million.

Our full year guidance does not reflect any additional mark-to-market adjustment. The insurance recovery related to Hurricane Ike resulted in a $1 million benefit, and while we do expect more Ike recoveries the timing and amounts are uncertain. They should not be considered recurring and additional recoveries are not included in our full year guidance.

Facility charges declined by $4.3 million and these may fluctuate from quarter-to-quarter depending largely on capital spending and impairment charges in each quarter. Pension expense increased by approximately $5.2 million due primarily to lower discount rates, higher pension expenses is expected to continue throughout the year, but is non-cash is it relates to largely to change in discount rate or pension measurement date and will not impact our funding levels.

It is important to note that as of January 1, 2010 our pension plan is considered fully funded based on the IRS funding calculation. As the refranchising we completed the sale of 23 company operated Jack in the Box restaurants to franchises in five transactions with gains totaling $9.4 million in the first quarter compared with $18.4 million in the year ago quarter in the sale of 29 restaurants. Average gains were $408,000 in the quarter lower than last year’s average of $633,000 due to the sales volumes and cash flows of restaurant sold.

The first quarter of 2009, included the sale of the entire Santa Barbara market, which had substantially higher than average sales, cash flow and resulting gains. All the proceeds for the quarter related to refranchising including cash and notes receivable were $14.3 million on an average of $622,000 per restaurant.

Notes receivable from refranchising activities are now approximately $7.8 million down from $10.6 million at the end of the first quarter. We currently expect Q2, 2010 gains to be lower than Q2 of last year due to the timing of refranchising transactions, but we continue to expect full year gains on the sale approximately 150 to 170 Jack in the Box restaurants to total between $60million and $70 million with total proceeds resulting from the sales of $85million and $95 million.

We will purchase 2.1 million shares of our stock in the quarter at an average price of $18.98 per share and about $57 million remains available for repurchases under the terms of our current credit facility under the board authorization, which expires in November of this year.

We also repaid approximately $25 million under our term loan during the quarter as required while borrowing $17 million on our revolver. Before I review our guidance for the second quarter in fiscal 2010, I would like to provide an update to our commodity costs outlook for the remainder of the year.

Overall, we expect commodity costs for the full year to decrease approximately 1% reflecting the approximate 7% decrease experienced during the first quarter. Commodity costs in the second quarter are expected to decline by approximately 1% and an increased in the third and fourth quarters as compared to prior year.

Specific to our major commodity purchases, these which accounts for approximately 20% of our spend, for the full year we are anticipating these costs to be about 3% lower than 2009 with the biggest benefit already experienced in Q1 and prices were 19% lower than last year.

We have 100% of our import 90s cover through April as a $1.30 to $1.38 per pound versus approximately $1.37 last year. We expected the 50s to average in a $0.75 to $0.85 per pound ranged in Q2 versus approximately $0.80 per pound in Q2 last year and beef prices have been moving up over the last few months and so we would expect that favorable year-over-year benefit in beef to end in the second quarter.

Chicken is our second largest commodity accounting for approximately 10% of our spend, we have renegotiated and extended our contracts to March of 2012 at prices that are lower in our previous agreements and now let’s move onto our guidance for the balance of the year.

For the second quarter we expect same sort of sales for Jack in the Box company restaurant to decrease 8% to 10% and system-wide same-store sales over the range from flat to down 2%.

Our guidance reflects the sales trend we’ve seen thus for in a quarter, which has included from unfavorable weather in many of both brands markets particularly in Texas for Jack in the Box we have 30% of our company restaurants. I want repeat all of the full year guidance included in the press release, but here’s our current thinking on some of the line items that have change since our last guidance.

Same-store sales in the Jack in the Box company restaurants are now expected to decrease 5% to 8% with trends improving in the second half of the year. SG&A expense as a percent of revenues is now expected to be in the mid 11% range a little higher than our prior guidance as a result of lower than originally expected sales.

Diluted earnings per share are expected to range $1.85 to $2.05 per share with same-store sales volatility being the biggest wild card.

As a reminder for every 1% change in Jack in the Box system same store sales, we estimate the annual impact to earnings at $0.06 to $0.08 pretending on flow through and assuming stable costs, where the 10 basis point change investor operating margins the estimated annual ETS impact is approximately $0.02.

Now, I’d like to turn the call back over to Linda for some final comments.

Linda Lang

Thank you, Jerry. As Carol mentioned at the beginning of the call, our new Chief Operating Officer, Lenny Comma is joining us this morning. Lenny was previously Vice President of Operations for all Jack in the Box restaurants in the Western half of our system and took over as Chief Operating Officer after Paul Schultz retired last month.

Lenny has been with the company for more than nine years and brings a wealth of experience and leadership to our executive team. We are looking forward to his continuing contributions in the years ahead. Welcome to the call Lenny.

Now, I would like to turn the call over to the operator to open it up for questions. Debbie.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Joe Buckley - Bank of America.

Joe Buckley - Bank of America

I am going to start with two questions. Talk a little bit about what’s your research is showing on brand attributes, given the sizes of same sort of sales declines. How confident are you that its macro with a little bit weather headed on there that have you done double digit and as oppose to some slippage in brand attributes?

Linda Lang

Do you want to ask the first question, and then you have a follow-up question?

Joe Buckley - Bank of America

Yes.

Linda Lang

We have really believed that the challenges that we have had with regard to Jack in the Box is macro related and that’s related to the high end employment among the court consumer, both the general market consumer that younger lower income consumer as well as the Hispanic consumer.

From our research we are executing very well in terms of the guests experience from our attribute ratings and our new product research, they are scoring very well. I can tell you that the grill sandwiches, the early indication is that the consumer is very positive with the launch and scored very high in terms of quality ratings as well as valuating.

So we know that from a consumer standpoint that value is very critical, not only for the bundled meal deal, but also the premium products.

So we purposely re-recipe the grill sandwiches so that we could launch them at a 399 price point and we think that’s really key to delivering a great product that’s differentiated, premium positioned, but also get values. So, we do not believe that this a brand issue whatsoever.

Joe Buckley - Bank of America

Second question, kind of an unrelated and may be more directed to Jerry. Talk about the confidence in the full year re-franchising targets and maybe talk about the wisdom of executing the plan with comps down so much. Whether the buyer’s appetite diminished or the valuation is diminished and should you be proceeding as aggressively as originally planed?

Jerry Rebel

Need to make a couple of comments on that. We took a hard look at all the components of our fiscal year outlook at the end of the first quarter and we did change many, and including sales and earnings, which we guided down we did not feel a need to change our expectations on our re-franchising outlook at all.

A couple of reasons for that, one is franchisee demand remains quite strong and we’re also getting a lot of interest from outside franchisees as well, we feel very good about that.

Clearly, the franchisees know what the sales terms are, the lenders know what the sales terms are, we were pretty transparent with that back in November and we’re transparent with that again today and of course they certainly look at the individual deals under restaurant that they are going to lend again.

We completed five transactions in the first quarter, only one of which required some financing assistant from this on part of Jack in the Box and that has already been fully repaid by the franchisees securing some additional outside financing.

So we haven’t seen anything yet in the demand, the willingness of the lenders to lend or in our ability to get the price that we think is the right price that calls us to temper our outlook on re-franchising on all this year.

Linda Lang

I would add also that the franchisees, they understand that this is an economic headwind for us and that they feel very confident in the leadership of the brand, the health of the brand and the positioning of the brand as the economy improved. So even those in Texas where the economy is really weakened in the last couple of quarters, they’re very interested in expanding their business, because they see the long-term opportunities for the brand.

It’s a 20 year commitment versus just having to deal with the current economic situation so that’s why; I believe that’s also a factor in keeping the demand levels up from our franchisees.

Jerry Rebel

Joe, I just want to add on there is, remember what we said in the past is that we do not have to re-franchise, we do not have to pay down debt to be able to have three quarters to re-franchise and that so as a result we are not discounting these transactions, due to the levels that we do not think make sense for us.

Operator

Your next question comes from Chris O'Cull - SunTrust.

Chris O'Cull - SunTrust

Jerry my question relates to the new stores, the companies have a fairly sizeable investment in new Jack units. So would you update us on just a financial performance of some recent openings?

Jerry Rebel

Yes, Chris we haven’t talked about what the returns are on those locations, what we have said is that the restaurant, clearly new restaurants in new markets where we have a new proto type have had higher than system average AUVs and they’re higher than existing market new restaurant AUVs also. So we’ve been quite pleased overall with new restaurant growth.

One other things that you can look at in terms of the wisdom of building new restaurants in new markets is what our franchisees doing and we continue to have franchisees build new restaurants in new markets and that’s with their own cash obviously and so they continue to see returns there as well.

Chris O'Cull - SunTrust

One other question related to just the follow-up on CapEx and investments. When you look at the, in I know guys remodeled lot of stores and sold some of those to franchisees and still received higher funds, because they’ve been fully remodeled. Is the reduction in CapEx largely attributable this year to selling these stores before they’ve been remodeled? So shouldn’t we expect kind of a lower proceeds for these stores that have been sold?

Jerry Rebel

There a couple of things, the reduction in CapEx this year is due primarily to a large effort that we had on our exterior re-imaged asset program lat year. We did every single one of those stores, whether we were going to be franchise them or not.

So we’re rolling off of that. We are being more cautious with respect to CapEx on those locations that we intend to refranchise over the course of next year or so, that’s also having an impact there as well.

On the other hand, we do know that on our restaurants that have been re-imaged that they are seeing less of the sales decline in restaurant that have not re-imaged, and so we still believe it’s very important for us to continue with that re-image strategy, be it on the part of the franchisees or on the part of the company.

Operator

Your next question comes from Steven Rees - JP Morgan Chase.

Steven Rees - JP Morgan Chase

Linda, maybe you could talk about just the overall QSR environment, the discounting that I think we saw really accelerated in calendar fourth quarter, and I think you highlighted Burger King specifically last quarter. Are you seeing the discounting and the impact from the discounting lessening at all, and then how do you plan on tackling value as the year-over-year benefit from commodities starts to wane as the year progresses?

Linda Lang

Yes, I don’t think currently that the discounting has been reduced. I think there’s still aggressive discounting on the part of Burger King still promoting the dollar double Cheeseburger. Although I understand that they are going to be moving off of that in mid-April, so I think that will help the QSR segment, but we continue to see aggressive discounting and a lot of value messaging by McDonald’s with their breakfast value menu and other QSR players. So haven’t really seen a decrease in discounting.

With regards to our value messages, we really are not moving into the aggressive discounting. What works for us is the bundled meals where we can put together unique items that are differentiated unique to Jack in the Box and sell them at a compelling price point.

Example is the Jumbo Deal; where it is the Jumbo Jack, two tacos, small fries, and a drink for $3.49; pretty margin friendly, but also very, very good value for the consumer and that was an effective promotion for us. We’ll continue to do those types of bundle deals going forward and we’re very, very cognizant of the impact to the margin. We do not want margin eroding deals.

Steven Rees - JP Morgan Chase

Then you mentioned that average check was weaker and so the traffic decline was less in the comp. Can you just provide some more color, some magnitude around that, if you saw it sort of decelerate throughout the quarter; if you’re seeing some stability in your average check piece?

Linda Lang

Well, we did see throughout the quarter an improvement in the two year traffic numbers. So because of the number of discounted, but the Jumbo Deal really we believe had the most impact on the average check with a fairly decent mix, but we moved off of that in terms of media, and we’re moving to the grilled sandwiches, which should help lift and restore the average check. It’s really early in the promotion right now, but we know that it’s a balance.

So we want to get the traffic in, we want to drive traffic with those value promotions, but we also know that having the innovative top tier product is important to driving business as well as improving the average check.

Operator

Your next question comes from Larry Miller - RBC Capital Markets.

Larry Miller - RBC Capital Markets

Yes, I’ll stick to the one follow-up and one question as well. On a follow-up question, can you guys talk about how franchisee finance markets stand today? Specifically, what percent of equity are the franchisees being required to put end, is it still north of 30%?

Can you talk about and related to that, do you find that the franchisees are having to make a decision between, ‘I want to buy some stores, but I want to remodel. I’m on a remodel program right now, and I have so much equity requirement to be in these deals,’ that is preventing them from actually or limiting the number of your buyers?

Carol DiRaimo

Let me address the first one first, that amount that they’re putting. Honestly it varies, it depends on what other kind of collateral the franchisees putting up, but on average the 30% number is in the ballpark. Some will have a little less than that some will have a bit more, but 30% is a pretty good number.

On the decision making process or what can the franchisees do, I think that entered into some, but I think it’s also important to note that the franchisees have to re-image based upon the schedule that we have, and it’s in the franchisee agreement that they have to do so.

Also just because they’re buying restaurants doesn’t mean necessary that they can borrow that same money to re-image, because the lenders are much happier about lending for cash flow than they are about equipment and remodeled CapEx. So I’m not sure that this is some game that they’re fundable with respect to the use of the proceeds.

Having said that, we’re still getting pretty good interest from lenders, both from regional and local banks in the part of the franchisees with the lending institutions and of course the GE capital’s been back in the game, and have been very helpful with us continuing to execute the re-franchising strategies.

Larry Miller - RBC Capital Markets

I was wondering, your thoughts on pricing, it sounds like the pressure on check is new for you guys. Does that cause you to change your thoughts on how much price you want to take specifically as commodity is going to be a little bit less favorable over the next several quarters coming up?

Linda Lang

Right, we still are very cautious about taking price Larry, and we do use the consultant who has the pretty sophisticated model in determining our price opportunities. So we continue to evaluate and analyze with our consultants.

Larry Miller - RBC Capital Markets

Can you share with us what kind of pricing you’re running now and what you think you might run in the balance of fiscal 2010?

Linda Lang

Yes, we’re running at about 2%.

Operator

Your next question comes from Jeff Omohundro - Wachovia Securities.

Jeff Omohundro - Wachovia Securities

Jerry, you mentioned the sequential improvement in comp, slightly off of fiscal Q1 with fiscal Q2 tracking around down 8% to 10%, and it sounded like that’s what you’re seeing in the market now, but I think you also commented that there might have been some weather in that. I’m wondering if you care to quantify it and perhaps a little color on the Texas market as well.

Jerry Rebel

It’s tough to quantify what the weather is. I’ve seen others that have gone out there and actually put a number out there, it’s very difficult. Yes some weather last year, we have weather this year, but clearly Texas, particularly South Texas is not used to snow and so to steal one of Carol’s lines, a white Christmas in Texas is not a positive sales catalyst.

Of course we had rains in California, the Pacific Northwest has had some inclement weather and we’re all seeing what’s going on across the country. I think last year we had snow on the ground in 49 out of 50 states, so that hasn’t helped either the Jack in the Box brand or the Qdoba brand.

Linda Lang

Just to add on, I mean we always hate to talk about weather and blame weather. I think weather probably was somewhat of a factor. I can tell you though, in terms of the deceleration in sales between the fourth quarter and first quarter, that really was a result of the weakening Texas market. It feels like California has perhaps stabilized. So that’s a little bit of encouraging news, but it hasn’t gotten any worse in California. Texas is challenged with the economy there.

Operator

Your next question comes from Jake Bartlett - Oppenheimer.

Jake Bartlett - Oppenheimer

I had a follow-on question on the re-franchising, and then had another question. You’re comments about the franchisee is understanding this is a difficult environment, they’re still willing to come to the table, are you implying that you’re getting a higher multiple now kind of considering that your interests have troughed in operating result. It would seem you need to get a higher multiple now to kind of justify not holding off until an improved environment.

Then also if you could give us an update on the 70 stores that were being sold in Sacramento and how that option went, whether you participated at all, and then I have a follow-on.

Jerry Rebel

On the refranchising, no we’re not getting a higher multiple on that. The way that we price the restaurants is based upon a 20 year franchise relationship, and so as an example when sales were up 6.1% three years ago, we weren’t modeling in those kinds of sales increases going forward, and we’re surely not modeling into our pricing formula right now with sales down 11%. So it’s a more normalized sales growth over a 20 year timeframe, is how we baked it into the model.

With respect to the bankruptcy update, the court has approved the purchase rules and the process that is underway now. We would expect to have that completed sometime over the next couple of weeks. Really can’t comment about our willingness or ability to participate in that, but you’ll learn more as soon as all that becomes public.

Jake Bartlett - Oppenheimer

Okay, and I just had a one modeling question on G&A. It looks like fairly lumpy, and it’s a little bit lighter than you expected it to be for the average in this quarter. That was partly due to the investment changes, but I’m wondering if you can just give us a little more insight into the progression throughout the year, with facilities charges and all those kind of moving parts. Just what you expect to do throughout the year on a quarterly basis?

Jerry Rebel

First of all let me speak about the facility charges. It is difficult to give quarterly guidance on facility charges, because often times you don’t know what they are until they’re there; and if we knew what they were right now, we would already had to reported them, but I would say, we’re not expecting our facility charges knowing what we noted them to be higher than what they were last year.

A couple of other things that I will talk about on the annual SG&A to give you some impact, there’s three things that I think I would want to point out, that are driving fundamental lower G&A cost. One is the corporate overhead and some associated field staff that we reduced at the end of the fourth quarter and into the first quarter this year. We said that was about a $6 million annualized number, $4 million this year.

We also sold 194 company units to franchisees last year. We said in many meetings and conferences that that’s about $24,000, $25,000 per restaurant reduction, offset by $3,000 or $4,000 worth of added G&A related to the franchising side. Those will be ongoing, and we continue to expect to have that shift in the advertising cost as we saw franchise locations from company to franchise, those will be ongoing.

The other two things I want to talk about are the pension expense. The pension expense we do expect that to continue throughout the year. We said it was about $5 million in the quarter. I’ll tell you, we think it’s about $17 million increase year-over-year, again to the change in the discount rate as of our measurement date. It’s an accounting thing, its non-cash and then the other think I want to mention is the mark-to-market.

While it was extraordinarily negative first quarter last year, by the time we got at the end of the year, it was less than $300,000 worth of a change. So we'll be rolling over some positive mark-to-market in the next three quarters.

Having said all of that, even with the additional pension expense, we expect a significant dollar reduction in SG&A this year versus last year, even after covering that $17 million in additional pension expense.

Operator

Your next question comes from Robert Derrington - Morgan, Keegan.

Robert Derrington - Morgan, Keegan

Linda, if could ask questions specifically; on your last call you talked about a reallocation of your media spend, to reach multiple consumer targets with concurrent messages. Given the trend that we’ve seen this most recent quarter after you made those comments, are you rethinking that strategy any, and if you are or aren’t, can you tell us how it’s effected your; last quarter you talked about weakness in breakfast day part and mid-tier category, how has that change in strategy effected the sales within those different components if you saw last time?

Linda Lang

We do believe that the strategy makes sense, and that it is working to allow us with some changes in the media allocation to target multiple messages, and specifically having a breakfast message, so we know that our breakfast deal, the two for three croissants did improve the breakfast day part. We also know that the Jumbo deal was effective in term of improving traffic. It did impact the average check and there was a good mix on that.

In terms of the Southwest Chicken Bowl which was our premium product, that was not one our stronger product, the mix was not as high as some of our other new product introductions, and there was a little bit of weakness there; however, we still believe that is important to continue to have many new innovations, to have that compelling new product, both premium products as well as those bundled deals. So we will continue to go forward with that strategy if we believe it makes sense.

Robert Derrington - Morgan, Keegan

Linda as a follow-up to that, given that your company generally is pretty sophisticated about testing products before you roll them out, did you know in advance that the Southwest Bowl wouldn’t do as well, and if so why did you proceed with it?

Linda Lang

Yes, we did know that it was a more of a niche product, and it didn’t play out as well in some of the markets where it was not tested. I mean, we test in limited markets, and we get consumer response and we know what the feedback and mix is. It is okay, but not a seller, it wasn’t a home run, and I would compare that to the Grilled Sandwiches that we’re seeing, a significantly higher menu mix on the introduction with the Grilled Sandwiches.

I also think the value of the pricing had an impact. The Southwest Chicken Bowl that was priced at $4.29 was above $4, and many other franchisees priced it significantly above that. Whereas I think we’ve been very successful in maintaining and holding the $3.99 price point on the Grilled Sandwiches.

Operator

Your next question comes from Keith Siegner - Credit Suisse.

Keith Siegner - Credit Suisse

I just had a question on the franchise expense that you talked about a little bit before. Could you tell us a little bit about the rent situation: number one, it sounds like there’s a floor price; it’s a percent of sales with a floor price. Where is the floor price relative to what you would have to pay to lease the property if you’re actually the primary lease, and then how many of the franchisees right now are at the floor?

Jerry Rebel

Let me answer the first one. The way that we price the restaurant is if their minimum rent is almost entirely above our minimum rent. We also get to pass on scheduled rent increases that we would receive under the underlying master lease; we get to pass those on as well. So there is a baked in spread anyway, but that spread is depressed somewhat or diminished somewhat as they have significant sales reduction.

So clearly on a double-digit type of same-store sales reduction, they’re going to starting paying lower rent and get closer to that minimal level than where they are today. Can’t really answer for you exactly how many restaurants are at the minimum. I probably wouldn’t disclose that if I had that right at my fingertips anyway, but we’re not in the habit of providing large scale rent relief to our franchisees. So we expect to see this turnaround as we see sales turnaround.

Keith Siegner - Credit Suisse

So it sounds like a fairly linear relationship, both on the way down and on the way up. So in the recovering sales environment, historical normal levels can still be applicable given the change in sales?

Jerry Rebel

Yes, completely linear on the upside, it has a floor on the down side though.

Operator

Your next question comes from Tom Forte - Telsey Advisory Group.

Tom Forte - Telsey Advisory Group

I wanted to know if you could talk a little about, this quarter I think you’re lapping the hang in there Jack promotion and in the year ago you did at lease on a regional basis some Super Bowl advertising. So is that going to be a tough lap, and then did you do a regional Super Bowl advertising this year?

Linda Lang

We did do Super Bowl advertising this year. We launched the Grilled Sandwiches on Super Bowl; plus its last year’s kind of branding message. So no, I think we have sold introduction, we had good reaction to our Super Bowl ad, so we’re feeling optimistic.

Operator

Your next question comes from Steven Kron - Goldman Sachs.

Steven Kron - Goldman Sachs

Just a couple of follow-ups at this point; going back to the question on media, where you guys are a little bit more balanced in your messaging. You guys planned your marketing windows and your promotional schedules at least a couple of quarters I would think, ahead of the actual launch of these things. What are the metrics that you’re looking at real time, to kind of figure out what’s going to be appropriate three, six, nine months from now, and when might you think that that balance and shift in media spend might change, that’s the first follow-up.

Then secondly, you touched a bit on Texas and California. I recognize that’s a big proportion your storage, but are there any other geographies that you’re seeing more robust improvement?

Linda Lang

I’ll answer the second quarter. No, I would say Phoenix is still a very weak market. Like I said, California, the good news is it hasn’t gone any worst. So nothing really, no big changes other than the Texas weakness.

Then in terms of our promotional and marketing calendars, it’s a very analytical approach to how we layout our marketing calendar. We generally try to have one platform a year, so we just launched the balance platform. We then layer new products, premium products along with what we call average check, so that might be a side item that could be a new and improved side or beverage, and then we have learned that we now have to also have a pretty compiling value message; some kind of bundled deal, as well as a breakfast message; either a new breakfast news or breakfast bundled deals.

So we lay those out, and depending on seasonality we factor in commodities, we factor in the sequencing of events what were rolling over in the prior year, so is the pretty comprehensive and sophisticated way in that we layout our marketing calendar. So it’s not one particular factor, but a lot goes into setting up the calendar for the year.

Operator

Your next question comes from Bart Glenn - D.A. Davidson.

Bart Glenn - D.A. Davidson

I was just curious if, given your view on the economy you’ve made any changes to the time line of the product development schedule, and then just a second question sounds like you are seeing some results with more of a bundled message, and was wondering if we’ve seen an increase in attachment of stuff like soft drinks and fries.

Linda Lang

I’m sorry, I missed the last part of your question.

Bart Glenn - D.A. Davidson

Yes, the second question was regarding more of a focus on the bundling, and was wondering if we’ve seen an improvement in the attachment of soft drinks and fries as a result?

Linda Lang

Yes, it was something like the Jumbo deal, which was in facts we made a change to that bundled meal deal to include the drink, which is different than what we did last year to improve the attachment rate, and that worked well for us. We raise the price, we included the fry and the drink in that; a pretty good discount, but also pretty margins friendly as well, so yes, we do see an improvement there.

Then in terms of timelines we are moving much more aggressive to try to get things out to the market more quickly in response to really a greater need for new products, for news and for promotions.

Operator

Your final question comes from Robert Derrington - Morgan Keegan

Robert Derrington - Morgan Keegan

Linda when we look around the industry we see some of your competition doing things; for example one your competitors added a new branded coffee product, coffee line. When you look at the beverage piece your business, I know that you would test it during the, I guess the afternoon day part, some happy hour or some ice cream based products. How do you look at that piece of the business? Are there other ways that you can get additional leverage on your beverages; whether its coffee at breakfast or smoothies in the afternoon, how do you see that piece?

Linda Lang

Yes, I think it’s all of the above. I think its new flavors, both with shakes and smoothies, some limited promotions around beverages, and then I think these bundled deals that include a drink as well. We’re also looking at our coffee program, so more news on that later.

Robert Derrington - Morgan Keegan

Would you consider a branded product or do you need a branded product?

Linda Lang

I don’t think you necessarily need a branded product, but we’ve looked at the different options and will be talking about that soon.

Carol DiRaimo

Thanks everyone for your time today and we will talk to you in May.

Operator

Thank you. This concludes today’s presentation. You may disconnect at this time.

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Source: Jack in the Box Inc. F1Q10 (Qtr End 01/17/01/10) Earnings Call Transcript
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