Jack in the Box Inc. (JACK) CEO Lenny Comma on Q4 2019 Results - Earnings Call Transcript

Nov. 21, 2019 7:34 PM ETJack in the Box Inc. (JACK)
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Jack in the Box Inc. (NASDAQ:JACK) Q4 2019 Earnings Conference Call November 21, 2019 11:30 AM ET

Company Participants

Lenny Comma - Chairman and CEO

Lance Tucker - EVP and CFO

Rachel Webb - VP of IR and Strategic Analysis

Conference Call Participants

Brian Bittner - Oppenheimer

Gregory Francfort - Bank of America Merrill Lynch

John Glass - Morgan Stanley

Dennis Geiger - UBS

Katherine Fogertey - Goldman Sachs

David Tarantino - Robert W. Baird

Alex Slagle - Jefferies

Bob Derrington - Telsey Advisory Group

Jon Tower - Wells Fargo

Andrew Charles - Cowen and Company

Jeff Farmer - Gordon Haskett

Lauren Silberman - Credit Suisse

Matt DiFrisco - Guggenheim Securities

Peter Saleh - BTIG

Operator

Good day, everyone, and welcome to the Jack in the Box Inc. Fourth Quarter Fiscal 2019 Earnings Conference Call. Today’s call is being broadcast live over the Internet. A replay of the call will be available on Jack in the Box corporate Web site starting today. [Operator Instructions].

At this time, for opening remarks and introductions, I would like to now turn the call over to Rachel Webb, VP of Investor Relations and Strategic Analysis for Jack in the Box. Please go ahead.

Rachel Webb

Thanks, Jennifer, and good morning, everyone. Joining me on the call today are Chairman and CEO, Lenny Comma; and Executive Vice President and CFO, Lance Tucker.

In our comments this morning, per share amounts refer to diluted earnings per share. Operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis, excluding gains or losses on the sale of company-operated restaurants, restructuring charges, loss on early termination of interest rate swaps and debt extinguishment, the non-cash impact of the Tax Act and the excess tax benefits from share-based compensation arrangements.

Adjusted EBITDA represents net earnings on a GAAP basis, excluding discontinued operations, income taxes, interest expense, gains or losses on the sale of company-owned restaurants, impairment and other charges, depreciation and amortization, and the amortization of franchise tenant improvement allowances.

Our comments may also include other non-GAAP measures such as restaurant-level margin and franchise-level margin. Please refer to the non-GAAP reconciliations included in yesterday’s earnings release. Following today’s presentation, we will take questions from the financial community.

Please be advised that during the course of our presentation and the Q&A session, 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 most recent Form 10-K 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 Investors section of our Web site at www.jackinthebox.com.

A few calendar items to note this morning. Jack in the Box management will be attending Barclays Eat, Sleep, Play conference in New York on Tuesday, December 3 and our first quarter on Sunday, January 19. We tentatively plan to announce results on Wednesday, February 19 after market close. Our conference call is tentatively scheduled to be held at 8.30 AM Pacific Time on Thursday, February 20.

And with that, I will turn the call over to Lenny.

Lenny Comma

Thank you, Rachel, and good morning. Before Lance recaps some of our fourth quarter highlights and reviews guidance for the coming year, I’d like to acknowledge all we accomplished in 2019 and how we plan to build on the success into 2020.

2019 marks Jack in the Box’s return to being a single branded entity, now 94% franchise and asset-light. We exited our transition services agreement with Qdoba officially completing our restructuring efforts and establishing a lower cost structure.

We completed our strategic alternatives process leading to our new capital structure in a form of securitization and have now obtained our target debt to EBITDA ratio of approximately 5x. Since implementing the securitization this July, we’ve returned over 190 million to shareholders through share repurchases.

By the time and resources devoted to implementing these structural changes, the team remains focused on driving performance across the system of Jack in the Box restaurants. In 2019, we achieved our ninth consecutive year of same-store sales growth with the strongest performance since 2015.

Now as we look to 2020 and beyond, we plan to build on these achievements. The team and I are focused on the long-term growth of the Jack in the Box brand through same-store sales and net new units.

For same-store sales, we were encouraged by our performance improvement throughout the year, especially as it pertains to product innovation, compelling offers and operational executions, and we know there is a lot more room to grow in these areas.

In fact, just this week we launched compelling new LTOs in the form of value bundles and add-ons. Continuing our strategy of using bundles to appeal to value-oriented guests, we launched a white cheddar cheese burger combo.

To capitalize on past success with craveable snacks and sides such as Sauced & Loaded, we just launched our $3 Mini Munchies which featured guest favorites such as onion rings and curly fries as well as the return of mozzarella sticks. This promotion provides value to those seeking it and a nice add-on opportunity to support average check.

With breakfast top of mind, we’ve introduced a new Breakfast Jack featuring chicken with the offer to $3. This innovative new breakfast sandwich allows us to capitalize on the growing success of chicken while remaining relevant in the breakfast daypart.

As we look to future quarters, we are excited about the addition of a new menu item that will reestablish everyday value that we lost when we raised the price ceiling of our popular two for $0.99 taco offering. While these compelling menu additions and promotions bring guests into our restaurants, our single largest focus for 2020 is improving the guest experience.

As I mentioned on previous calls, our VP of Operations Services and Field Performance Support, Shannon McKinney and his team have really taken a fresh look at our operations.

Having made significant speed improvements at other brands, he and his team have already identified minor equipment adjustments such as retrofitting our holding cabinets to preserve temperature and quality longer and other back of the house changes such as simplifying build logic to build sandwiches more consistently, both of which removed complexity in the restaurant and improved speed of service for the guests.

We’ve quickly gone to test with these changes and have already seen speed of service improvements in these locations. We remain committed to becoming a minute faster on average by 2021.

In 2019, we tested many of the components associated with enhancing our drive-thru experience. We tested things such as new branding elements, digital menu boards and designated parking for pickup and delivery.

As we start to see the crossover between the benefits from this test combined with the speed enhancements we have been testing separately, we are getting to a point where they’re starting to converge. As we’ve said previously, we expect to finalize the elements of the upgraded experience and begin rolling that program out later this year.

While we are committed to low-single digit percentage unit growth for our long-term guidance, we’re working to accelerate new unit growth in the coming years. For 2020, we expect both our growth and net new units to exceed 2019.

We’re in the final stages of revisiting our capital plan that will give you more color on any changes in February. For now, we wanted to let you know how we’re thinking about capital allocation.

First, we are prioritizing return-oriented investments in restaurants mostly related to the guest experience, which I spoke a bit about earlier. Second, we are investing in drivers of same-store sales and particularly unit growth such as enhancing our unit growth incentives which we will discuss more in February.

In conjunction with these items, we remain committed to enhancing shareholder value. We expect to repurchase approximately 30% of our outstanding shares over the next five years.

With that, I’ll turn the call over to Lance for a more detailed look at the fourth quarter and our expectations for the new fiscal year.

Lance Tucker

Thank you, Lenny, and good morning, everyone. I’ll hit a few highlights from the fourth quarter and fiscal year 2019 and then move into guidance for 2020.

Operating EPS for the fourth quarter was $0.95 as compared to $0.77 last year. This 23% increase was driven primarily by lower G&A as well as share repurchases. Our system-wide comparable sales increased 3% in the fourth quarter, company comp sales increased 3.5% comprised of check increases of 280 basis points and transaction increases of 70 basis points. Franchise cost sales increased 3% for the quarter.

Completion of our refranchising initiative last year, fourth quarter of 2019 was the first quarter our year-over-year performance compares the same 137 company restaurants without any impact from refranchising.

Company restaurant-level margin decreased by 190 basis points to 24.2%, down from 26.1% last year. This decrease was due primarily to higher labor costs and commodity inflation. Remember, roughly 80% of our company-owned locations were in California and specifically in cities with higher wage increases leading the wage inflation increases in the mid to high-single digits. Additionally, commodities increased approximately 4% in the quarter.

Franchise-level margin increased by approximately $1 million compared with last year’s recast figures driven primarily by stronger sales performance. Advertising costs, which are included in SG&A, decreased $2.8 million versus 2018 due to funding contribution funded by the company in the fourth quarter of last year. The company did not make any incremental contributions this quarter.

G&A as a percentage of system sales in the fourth quarter was 80 basis points well below our targeted run rate after an unfavorable jury verdict in the third quarter. That verdict was reduced in the fourth quarter benefitting G&A in a one-time fashion by approximately $6.5 million.

For the full year, the impact on our financials from this litigation is now immaterial. We also benefitted from lower cost for insurance in the quarter as well as gains from our company-owned life insurance policies. Full year G&A came in at 1.6% of system sales, which was lower than our guidance of 1.8% to 2% and lower than the prior year of 2% using recast figures.

G&A was lower than 2018 due mainly to lower cost for a worker’s comp insurance of over $5 million, gains from our company-owned life insurance policies of over $3 million and lower incentive compensation.

Since implementing the securitization, we have repurchased approximately 2.2 million shares for over $190 million which includes 1.4 million shares for approximately $125 million in the fourth quarter. Excluding the fourth quarter of last year, we remain on track to return more than $1 million to shareholders by 2020.

Premium restaurants opened in the quarter bringing our year-to-date total to 19, all of which were franchised restaurants. Six new restaurants pushed into the first quarter of 2020. Several of these units have since opened and the rest should come online in the first quarter. Our closure rate in fiscal 2019 remains low at approximately 0.5%.

As noted in yesterday’s press release, we expect to report material weakness in our Form 10-K for fiscal 2019 relating to IT general controls. Allow me to stress, there have been no misstatements identified in our financial statements. We expect to receive a clean or unqualified audit opinion when the 10-K is filed later today. Our collective efforts have already begun and we expect to have the material weakness remediated within the fiscal year.

Now we’ll move on to guidance for 2020. Please keep in mind our fiscal year timing, Q1 of 2020 will be the first quarter without the lease accounting standard ASC 842. Please refer to yesterday’s release for more information on how this new standard impacts our financial statements. The guidance shared today reflects the adoption of this standard.

We expect same-store sales to grow between 1.5% and 3% for the year driven by a combination of product innovation, compelling and operational improvements. Guidance for restaurant-level margins is approximately 25%. This assumes commodity inflation of approximately 4% for the year, similar to what we experienced in the fourth quarter of 2019 as well as high-single digit wage inflation.

Guidance for SG&A as a percentage of revenues is approximately 8% to 8.5%. G&A as a percentage of system-wide sales is expected to come in between 1.7% and 1.9% in 2020. Guidance for adjusted EBITDA is between $265 million and $275 million as compared with $259 million for 2019.

For 2020, we are expecting higher commodity costs than we experienced in 2019 as well as continued single digit wage inflation. We also do not forecast any benefits from company-owned life insurance policies or worker’s comp adjustments, both of which significantly benefitted G&A in 2019.

Guidance for capital expenditures and tenant improvement allowances is approximately $45 million to $55 million on a combined basis. For 2020, we expect 25 to 35 gross new unit openings, all of which are likely to be franchise restaurants. With our relatively low sponsor rates, we expect both gross and net openings to improve versus 2019.

To help fuel the acceleration in unit counts that Lenny spoke to, we are currently retooling our incentive plans to further support our franchisees as they make investments in the brand. I’ll share more details around this enhanced incentive structure on upcoming calls.

We will go ahead and share however that we do not expect to spend more capital in total across CapEx and improvements and this new incentive that we have previously planned in our long-term guidance. However, you should really think of this as a redirect of dollars previously expected to go towards franchise and tenant improvements that will now be used to fuel unit growth.

This concludes our prepared remarks. I’d now like to turn the call over to the operator to open the line for questions. Jennifer?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question is from Brian Bittner with Oppenheimer. Sir, your line is open.

Brian Bittner

Thanks. Good morning. A question on the same-store sales guidance for 2020. Could you provide us with how you’re thinking about the cadence of comps throughout the year? Obviously your first half faces a lot of different comparison than your second half. And I have a follow up.

Lance Tucker

Brian, good morning. I’ll start with this one and let Lenny jump in if he’d like. So really we’re going to be focused on our long-term guidance and on our annual guidance only. So we’re going to say it’s 1.5% to 3%. We’re not going to go into a lot of details as to what that looks like. Clearly the compares are a little bit easier in the first half of the year than they are in the second half of the year. But as far as actually getting cadence beyond that, we feel like giving quarter-to-quarter guidance or kind of giving you a cadence would take away from the long term way and the way we’re trying to look at running the business.

Brian Bittner

Okay. And on the acceleration in unit growth both openings and improved closures, Lenny is this the product of just naturally what happens post-refranchising as franchisees still want to grow or is there any changes with how they’re thinking about the unit economics and the opportunity that’s actually driving this unit acceleration, any more color on how this is shoring up? I appreciate it.

Lenny Comma

Thanks, Brian. I think that is the natural sort of evolution when you have gone through a lot of structural changes and also have had a lot of franchisees investing capital to buy existing units. But now that that effort is completed, some of that capital will go towards new units. But we think there’s a lot more we can do. And so the teams are focused on how to continue to drive or accelerate growth into the future, some of which Lance talked about and some of the work that’s being done by Shannon and team around operational simplicity as well as their developing group on building sites efficiently I think will also enhance the new unit growth rate over time.

Operator

Our next question comes from Gregory Francfort with Bank of America. Your line is open.

Gregory Francfort

Hi, guys. Thanks for the question. It seems like there has been a bit more focus on franchise or franchisee relationships recently and you talked in some of your comments on cost pressure and margins being down a bit this year, suggest maybe there’s a little bit of more pressure on franchisee cash flow but that’s clearly not Jack specific. That’s industry based. How do you think this plays out and what guidance are you giving franchisees in terms of an approach to pricing that might be different or an approach to investment or equipment that might be different? How are you thinking about that going forward? Thanks.

Lenny Comma

We actually meet with our franchisees just about once a quarter to have road shows and engage them on the things that are most important. We’ve actually got a road show coming up here in the next couple of weeks where this will be the topic of conversation. Because we think that we as franchisor need to be just as concerned about this as franchisees are and obviously a high percentage of our overall profitability comes from our company-owned stores. And so we’re all sort of in the same boat when it comes to the competitive pressures that are out there as well as the increased minimum wage that puts some strain on the overall profit margins. So I think the way we’re looking at this is, is focus not on just the rate but also the penny profit associated with whether it be the promotions that we’re running and/or pulling labor out of the back of the house associated with either reducing time and motion or changing product and procedures in a way that eliminates some of the labor that’s currently required. So we got a lot of work going into this right now. Like I said, we’re going to engage the operators even more here in the next couple of weeks to make sure we’re hearing from them. But I think we are largely aligned in what needs to get done and there’s such urgency around doing that. We’ll make sure that not only we’re looking at it from an internal lens but that we have the appropriate eyes from the outside also taking a look at this to sort of keep us all honest in our efforts and make sure that we and the franchisees stay aligned in trying to bolster margins as well as same-store sales going forward.

Gregory Francfort

And maybe just a follow up to that. Some of your competitors are running 5%, 6%, 7% average check growth and you guys are clearly a ways below that. Are you thinking about maybe that is an opportunity to be a little more aggressive in taking pricing up or is that not factoring in?

Lenny Comma

I think that’s a little dangerous right now. If you look throughout the industry, transactions are really choppy. Most of the growth that’s happening is happening through check and at the same time we’re seeing still extremely competitive offers out in the marketplace, in fact, very recently that have entered the marketplace that tell us that this price sensitive environment has not gone away. And I think that for the long term health of the brand we’ve gone many years attempting to grow through check. I don’t think that’s the overall healthy way to grow business over the long term. You can maybe do that short term. I would like to see a healthy balance between price and other activities that drive transactions so there’s a good mix between both. I don’t want to sacrifice some of the momentum that we’ve seen most recently around transaction growth, because I think that’s probably the best indication of overall brand health.

Operator

Thank you. Our next question comes from John Glass with Morgan Stanley. Your line is open.

John Glass

Thanks. Can I just confirm? Historically you have provided some more color on the current quarter comps. It’s been a longstanding practice. Is it – going forward that’s not the case and why chose now to do it? Is it just new fiscal year, new policy?

Lance Tucker

John, it’s Lance. I’ll take that one. I think it’s comps historically. We’ve kind of done it [both ways] [ph]. But really as you start getting into giving guidance over 4, 5, 6 [indiscernible] quarter really takes the focus away from what we’re trying to do on a longer-term view and annual type view and it really knocks it down into very short-term kind of view how the business is doing. So we made a decision that we’re just going to stick to our annual guidance and focus on driving the business long term, which we think makes more sense.

John Glass

Okay.

Lenny Comma

As you look at the completion of 2019, so many structural changes have been completed now and internally we’re focused on the long term. I think one of the outcomes of kind of just putting a lot of those distractions behind us is also to make a commitment internally that we’re going to focus on that’s for the same reasons why we’re going to try to keep the Street focused in that direction.

John Glass

Okay. And then just to clarify or follow up in your comments on CapEx, so you said it’s not going to be different from the ranges you put out in your goals over the next couple of years of CapEx and TI but you’re going to change the way you’re allocating the money. So specifically you’re going to incent – is it in incentives for new development or are you actually going to lead by example? I know you just finished refranchising, but is it more like CapEx to build company stores? And if you’re reallocating that way, are you rethinking the way you want to spend on remodels or are you asking franchisees to put more into that as you sort of reallocate your resources to unit development? Can you just maybe – I know you’re going to talk more about it, but conceptually or philosophically how do you think about it?

Lance Tucker

It’s Lance. I’ll start with that and let Lenny jump in if he’d like to. First of all, as we noted and as you alluded to, we’re going to give a little more guidance around this in February after we have completed our planning in this area. But what I would tell you is worst case we’re not going to spend any more than we’ve already said we were going to spend across all the capital categories. With that said, we have made some changes in expectations due to remodels and are kind of deploying some of those dollars into more unit growth most likely in the form of incentive programs that will really allow us to support the franchisees as they invest in their businesses.

Operator

Our next question comes from Chris O’Cull with Stifel. Your line is open.

Unidentified Analyst

Hi. Thanks. It’s actually Alec [ph] on for Chris. Just a question on how do you anticipate your value strategy performing given the margin pressures next year? Are you seeing any sort of similar add-on or attach rates, any noticeable shift in the makeup of an order? Thanks.

Lenny Comma

Thanks, Alec. We are still seeing that having the value bundles and the add-ons out there is driving the type of behavior from the consumer that we like. We often times see that our snacks and sides that we promote are sold more than add-ons than they are as an à la carte item but they do allow the consumer that’s looking for value to get a decent quantity of food at a reasonable price. We also have some snacks and sides out there that are $1 add-ons like our donut holes and those allow the operators to bolster their average check with suggestive selling that’s proven to be very successful. And then the value bundles are a way for us to be in a very competitive marketplace that often has à la carte sandwiches and other items that are very discounted that allows us to be in that marketplace, be competitive, offer value but do it in a way that’s not really deteriorating the margins. And so overall we think this is the right thing to do. Any profit associated with these types of offers and the up-sells that typically accompany these offers we definitely believe in the strategy and we’ll continue to deploy it this way throughout the year.

Unidentified Analyst

Great. Thanks. That’s helpful. And then last question is you’ve guided to pretty precise food cost inflation, but given a large portion of your basket is floating what kind of gives you the confidence in that outlook?

Lance Tucker

Alec, it’s Lance. I’ll start with this one. I guess we’ve kind of ranged it a little bit. We would expect to be kind of a little bit either side of four. But I think we know based on today’s figures what we think it looks like. If something went drastically up or down, first we’re going to reserve the right to adjust that guidance. But based on our basket and where our spend is going, we feel reasonably comfortable that around 4% is the right kind of commodity inflation number.

Unidentified Analyst

Okay, great. Thanks. I appreciate it.

Operator

Our next question is from Dennis Geiger with UBS. Your line is open.

Dennis Geiger

Hi. Thanks for the question. Lenny, just wondering if you could talk or Lance a bit more about the thoughts around 2020 comp guidance, basically just some of the drivers that you outlined. Any incremental detail I guess on the innovation, on the value bundles, maybe the operations and the speed of service when we’d start to see some of those benefits coming through and impacting sales if that happens this year, anything more maybe on the permanent value item, Lenny, that you alluded to? And I guess just last to all that, just curious how important the trends and the momentum that you’ve seen in recent quarters, be it sales trends, be it customer feedback, franchisee feedback, how important all of that has been in kind of shaping the '20 guidance? Thanks.

Lenny Comma

Thank you, Dennis. I think the first thing is – to answer your last question first. What’s shaping what we’re doing is essentially two things and that is what the consumer is requesting and secondly what’s happening in the competitive environment. So everything that you’ll hear me talk about for 2020 is really associated with that. Because ultimately if we want to have a healthy brand, we’re going to have to focus on those things more than anything else. As far as the drivers of same-store sales, I think you’ve got one particular part of the 2020 lineup that looks a lot like 2019 and that’s having competitive LTOs in the marketplace in the form of various daypart focuses, value bundles and add-ons snacks and sides. So you’ll see that as a continuation of what you saw in 2019. What you’ll see in 2020 I think that is a new area of focus and ramped up focus will be essentially two things. One is the restoration of some of the everyday value that we lost as we implement a new product line early next calendar year. And then in addition to that we have looked at the operational improvements that we need to make really as two sides of a coin. The one side is focused on making the operation simpler for our franchisees and their crews and the other side of the coin is driving performance through better execution. And so we are communicating all the changes to our standards, some of the new training elements early in the year and we would expect to see those things helping to drive performance through better execution in restaurants as we progress throughout the year.

Dennis Geiger

Thank you.

Operator

Our next question comes from Katherine Fogertey with Goldman Sachs. Your line is open.

Katherine Fogertey

Great. Thank you. With regards to your next year guidance for same-store sales growth, how much of that have you guys reflected and given yourself a benefit for new product innovation? And kind of how are you thinking about – if that’s the case, how are you thinking about measuring that potential impact? Are you looking at test markets and extrapolated results, anything on that? And then I have a follow up.

Lenny Comma

Yes. So as we look at the lineup of products and initiatives for this year we have looked at either 2019 tests and sort of extrapolated how we believe the system should perform from a product perspective. We’ve also looked at some of the operational improvements that we’ve achieved in the past and how those were able to drive performance as well. We extrapolated that for some of the operational improvements we expect to see this year. So definitely the approach that you sort of assumed is the approach that we’re using and that’s what gives us confidence that the year should shape up pretty well.

Katherine Fogertey

Okay, great. And then on the commodity guidance with so much floating here, 4% for the year, with what you’re seeing right now should we expect kind of a crescendo or a building headwind that then eases throughout the year? Any cadence on that front would be helpful?

Lance Tucker

This is Lance. So if you look at where the fourth quarter was, the fourth quarter was in that 4% up kind of range. So unfortunately I don’t think there’s going to be a build. It’s already kind of built. It’s in our business right now. So what I’ll expect is to start off at 4%. We don’t see necessary a lot of variations throughout the year. But as I said earlier, reserve the right to adjust that if we start seeing things move against what we’re expecting right now.

Operator

Our next question comes from David Tarantino with Robert W. Baird. Your line is open.

David Tarantino

Hi. Good morning. I guess first I think there’s maybe some concerns about the pullback and disclosure on the quarter-to-date comps and I understand sort of the philosophy around that. But I was wondering, Lenny, if you could talk qualitatively about how you’re feeling about the business as you enter this year? And I know several have asked about this, but just your overall degree of confidence in being able to sustain the type of comp momentum you’ve seen in recent quarters as you move through the year? And then I have a follow up.

Lenny Comma

Certainly could understand the consternation around quarter-to-date comps and it sort of exemplifies honestly why we need to make a change. I think the marketplace is hyper-focused on what happens on a week-by-week basis, credit card data, quarter-to-date reviews and it is taking the eye off of some of the things that we and other players in the industry need to do over the long term that will positively impact the consumer and make the operation more efficient. When we look at the lineup for 2020, as I stated to the previous person, we’ve looked at the tests from prior years, we’ve looked at some of the equities that we have lost and need to regain and we’ve also looked at operational improvements that have historically driven comps. When we layer those things in, it gives us the confidence that the year has been planned well. So, as we look at all things that we need to do going forward, my concern – the leader of the organization has actually way too much energy being put into the week-by-week rollovers based on last year’s coupon drop compared to the data of this year’s coupon drop or what holiday didn’t roll over in the exact week as the prior year. And what I need people focused on is to develop great new innovative products and go to market and sell the hell out of them and increase our sales and increase our profit and stop wasting time with the stuff that quite frankly isn’t going to make the business successful over the long term. So I’ve got to get folks to focus there and that’s the reason why we’ve sort of drawn a line in the sand that we’re going to focus on the annual numbers versus the quarter-to-date.

David Tarantino

That makes sense. Thank you. And then my follow up is about the operations improvements that you’re undertaking and I think you’ve mentioned a goal of improving speed of service by 1 minute. So could you provide some context on what that might mean from a sales perspective or any way to think about that in terms of the benefit other than just the customer experience being better?

Lenny Comma

Yes, we haven’t shared in the past numbers associated with, for example, speed of service improvement. So I’m going to stay away from that. What I will say is this. We are one of the slower players in the industry and we need to make significant improvements, drive the overall throughput of our drive-thru business and we do see the comparison of our best restaurants, top quartile for example, as compared to the other three quartiles and there is a significant difference in transaction growth, sales growth and overall customer satisfaction. So we can extrapolate what the improvement will lead to in overall comp and we’ve build in some cushion. We’re not expecting every restaurant to perform like top quartile restaurants do. But what we’ve done this time around that’s a little different than the way we’ve looked at it in the past is our operations services team has actually studied each component that they would like to change and how many seconds improvement that will lead to in the business. And so as we put that together, we can already see where the improvements will happen and we began the test just in the last couple of weeks those changes in a handful of restaurants and we are seeing the immediate change in their speed of service. So kind of proved positive some of the science that went into this is actually working out. So we’ll test that over the next couple of weeks just to make sure that it didn’t lead to any operational disruption or got negative consumer impact. But barring that, we will then begin to layer those changes out to the rest of the field. So feeling pretty good about how it’s designed and how it’s testing so far and it’s just really a matter of being diligent so that we don’t make any mistakes as we move forward.

Operator

Our next question comes from Bob Derrington with Telsey Advisory Group. Your line is open.

Bob Derrington

Thank you.

Rachel Webb

Bob, are you there?

Operator

His line just disappeared. The next question comes from Alex Slagle with Jefferies. Your line is open.

Alex Slagle

Thanks. I was wondering if you could provide some commentary on how you plan to respond increased competitive activity during the breakfast daypart next year and if you could remind us the percentage of sales during that period for breakfast sales that come outside of the morning daypart?

Lenny Comma

So we’re very – we’ve got our eye on not only what’s going on at the breakfast daypart but quite frankly late night and also certain product categories that seem to be trending. And so I won’t say that we’re looking at breakfast any different than the way we’re looking at all the other sort of competitive activity. There is certain competitors that I think would have a more direct impact on us than others, so we want to balance our approach and not just throw everything at breakfast out of fear. But at the same time we’ll likely have breakfast promotions marketplace that are being advertised so that we make sure that our breakfast offering remains relevant and top of mind. For Jack in the Box we are one of the few players that actually has decent contribution from all five dayparts. Some of that is because we sell everything on the menu 24/7 which really is a differentiator for our brand, but I think also in some of the prep for the food, particularly at breakfast, we’re cracking fresh eggs and making fresh breakfast sandwiches and other items made to order for the consumers. So we’re feeling pretty bullish about our ability to compete in that space but we are definitely going to have the promotional offers, just the advertising in the marketplace to make sure that we stay top of mind.

Alex Slagle

That’s helpful. And just wanted to clarify on the high-single digit wage inflation outlook, what’s driving the increased – I guess I expected more the same inflation in '20, not necessarily a step up.

Lance Tucker

Alex, I think in fairness it’s going to be fairly similar. So it won’t be a significant step up first of all. But it’s being driven by the fact that we have 80% plus in our restaurants in California. So when you’re looking at a system kind of number versus company, remember we’re more heavily weighted than our franchisees are. I’m not sure how to spread that number across the whole system as you think about impacts. With that said, when you got 7%-ish or 8%-ish even just doing the straight math on what minimum wage looks like for California, that is going to draw significant wage inflation. And in addition to that you’ve got an economy where you got very low unemployment which simply compounds that issue a little bit. You’ve heard others in these chairs and on these calls speak to that industry wide. So I don’t know that I expect a big step up. Think of it more as a smaller step up if there is one. But that said, 80% of our restaurants are in California. So we’re going to be subject to a lot of wage inflation.

Lenny Comma

Jennifer, if Bob is back in the queue, can you have him as our next question?

Operator

Yes, absolutely. Our next question comes from Bob Derrington with Telsey Advisory Group. Your line is open.

Bob Derrington

Thank you. Lenny, I figured my question must not have been one you liked, so unfortunately I dropped off. I apologize. To take another shot at it, you’ve spent a lot of time and effort and you’ve talked about the drive-thru enhancements and it sounds like something that’s going to have certainly a positive benefit on the business. Can you give us some kind of color around what you’ve seen in test and kind of some thoughts about the quarterly cadence of that as you look at this year and the potential rollout of that? And then I’ve got a quick follow up.

Lenny Comma

The last part of the question as far as the cadence of that, I’m going to stay away from only because I want Shannon’s team to be able to complete the speed side of the equation and be able to merge that with the other components of the overall experience that we think are necessary. But what I will say is that as we search the coupons, we won’t wait to get those things out into the field. What we did last year was essentially – that’s a couple of things. One, we needed to make sure that the digital equipment, particularly the digital menu boards that we tested, would actually hold up to both hot and cold or extreme weather. We also had some new branding elements that we put out there and wanted to make sure that from [indiscernible] perspective, those were good. We will take what pieces of that test from 2019 we think make the most sense and are most sort of economical to move forward with, things that we know we can get a return on. We will bring those together with the back of the house improvements that lead to overall faster speed of service. And then when those two things come together, we’ll start to roll. I think what’s important and this is probably the biggest learning in 2019 is that we don’t want to just try to impact the consumer with bells and whistles without handling some of the basics. We’re improving some of the basics. I think our drive-thru speed service is in desperate need for improvement is moving faster on behalf of the guest. And so when we launch the other branding elements I think the consumer should feel like they’re getting more of their needs met when they go through a Jack in the Box drive-thru. So that’s what we’re trying to achieve. I think we’re getting closer and I would expect that throughout the year as the components come together we’ll be able to say more on the quarterly calls.

Bob Derrington

Should we expect that – there will be a number of stores that come out of production during the conversion of this process.

Lance Tucker

Bob, this is Lance. Wouldn’t expect a lot to come “out of production.” If I’m understanding what you mean, I think you mean are there changes we’ve made that we would actually undo? If I’m reading your question wrong, let me know that. But I think we’re going to be focused on rolling out the components of the tests that are going to generate the return. As Lenny said, I don’t see a lot of backtracking if that’s what you’re asking. But why don’t I come up for air and let you tell me if that’s what you’re asking to make sure that I understand the question here.

Bob Derrington

I apologize. What I’m curious about is will you need to close some stores for a period of time while this conversion goes on?

Lenny Comma

I don’t suspect that we would have to close restaurants to achieve what we’re trying to achieve. And if we do, it’s something that’s hours not days. So if we have to do some digital component, for example, and reboot the POS system to sync things up and bring them online, there could be minor disruptions with those types of things but it shouldn’t be anything that’s material.

Bob Derrington

Thank you for that. And as it relates to your same-store sales guidance, certainly breakfast is an important daypart for Jack in the Box. Do you anticipate a change within the cadence of that piece of the business as you focus on other pieces, as we potentially seen new competition come into the marketplace?

Lenny Comma

One thing about the breakfast daypart for us that it’s positive is it’s probably the time of day where our drive-thru performs the best. It has the fastest overall speed of service and breakfast is the most habitual purchase, and we also have a really great lineup of fresh breakfast items that we sell. So we would say that we’re one of the stronger competitors in that space. And although we’re not just going to roll over and give our business to the competition, what I would say is that history has sort of taught us that it is one of the harder dayparts for someone to take a significant piece out when it comes to Jack in the Box.

Operator

Our next question comes from Jon Tower with Wells Fargo. Your line is open.

Jon Tower

Great. Thanks. A couple if I may. First, I understand the preference not to give quarter-to-date commentary going forward. But I think it’s important for your shareholder base to understand that you’re not assuming a hockey stick ramp in comps – that hit your comp guidance for the full year. So is it safe to say at a minimum you’re running within your comp guidance currently?

Lance Tucker

Jon, I appreciate your effort but we’re going to give annual guidance. We certainly wouldn’t want to deviate from that given what we’ve just said several times throughout the call. So what I’m very comfortable saying and I think you’ll hear it in Lenny’s voice and I hope you’re hearing in mine is we’re confident in our full year 1.5 to 3 year number.

Jon Tower

So just kind of following up on that, we don’t have access to the data but alternative data sources pointed to a sharp slowdown in the fiscal third quarter and the fourth quarter. And frankly, my understanding is it’s a much weaker quarter-to-date. I’m just curious if you have any thoughts that you could share on how this data clearly in the third and fourth quarter was wrong? Is it tied to perhaps a higher cash tender mix of your business versus what these alternative data sources might be?

Lance Tucker

That’s a good question, Jon. It’s one that we’re certainly aware it’s out there. From a perception standpoint, we don’t see the credit card data firsthand. What I can tell you and I don’t know what all our competitor mixes are, we think we are probably a little bit higher cash tender than some of our competitors are. But I have to be honest with you. That’s an assumption we’re making not based on me knowing what their past versus credit mix is.

Operator

Our next question comes from Andrew Charles with Cowen and Company. Your line is open.

Andrew Charles

Thank you. Lenny, you talked about evaluating coming back in 2020 to repair the erosion and everyday value perceptions. I was curious, is the plan for this to be a limited time offer or something more longer term? And if it is in fact something that’s planed as an LTO, what would you need to see before making it a longer-term item?

Lenny Comma

I think we’ve seen enough in tests to know that it will be a long-term item. So the promotional period will behave a lot like a limited time offer from a standpoint of being on air and having the social and digital support as well. But we are planning for that item to stick around.

Andrew Charles

That’s helpful. Okay, great. And then Lance, you called out plans to return over $1 billion of cash to shareholders by 2022. But the release and the script didn’t make any reference to the other aspects of 2022 guidance. So I just want to confirm. Are targets for – I think what implies to be about low-single digit annual system sales growth and $300 million of adjusted EBITDA in 2022, are those two elements still intact?

Lance Tucker

We have not made other changes to our long-term guidance and we certainly would have called those out had we expected to. I will say as we’ve referenced a couple of times, there will be some additional guidance given in upcoming calls around some of the long-term plans, but no changes to the current long-term guidance.

Operator

Our next question comes from Jeff Farmer with Gordon Haskett. Your line is open.

Jeff Farmer

Thanks. I have actually two follow-up questions. So the first one just goes back to that longer-term EBITDA guidance. So right now you’re sitting at about 270 million on the middle of the EBITDA guidance range, pointing to 300 million by the end of 2022. So that’s about a $30 million bridge in EBITDA over just a two-year period. So you touched on it briefly that there may be more to come soon in later quarters, but can you at least share some of the larger components of the expected bridge of that $30 million of EBITDA from where you have guided to in FY '20 to where you expect it to be in FY '22, which is $300 million?

Lance Tucker

Jeff, it’s Lance. I’ll start with that. So we haven’t given a lot of details, if you look back at the kind of longer-term guidance when it was put out in August of '18, you’re going to see that. So I don’t want to go into a lot of that. But I think what you should expect though and again hopefully what you’re hearing from both Lenny and myself is confidence in what we’re doing on the sales line. That’s obviously got to be the primary driver of any change we’re going to have is going to take us from the current guidance to where we expect to be in a few years. In addition to that, we have kind of noted that we’re going to be putting a bigger focus on units. So I don’t want to go into a lot of details beyond that. But as you would imagine, most of financial engineering stuff is done at this point. So we’re going to be focusing operationally driving the Box unit economics and sales.

Jeff Farmer

Okay. And then just one more follow-up and this goes back to sort of what the promotional calendar looked like in the fiscal fourth quarter. I do think you pivoted somewhat down to the $3.99 Really Big Chicken Sandwich Combo, if I’m correctly phrasing that. I think it was the $3.99 combo in the fiscal fourth quarter. There was a lot more $4.99 combos in the fiscal third quarter. So in terms of thinking about the consumer response, the potential add-on purchases for any of these promotions, was there something different about the fiscal fourth quarter versus the fiscal third quarter or is there something we should be aware of in terms of how the consumer responds to some of these bundled value promotions versus the response to other bundled value promotions? Are ones that resonate a little bit better and drive traffic in add-ons? And if you don’t have those in play then you do see traffic fall down a little bit on you guys.

Lenny Comma

So we wouldn’t say that there is a shift from quarter-to-quarter. The Really Chicken Sandwich is something that we ran in the past and we changed this time around. And this was something that we did to sort of create the Instagrammable offer as we allowed up-sell up to four patties. And it’s pretty incredible how many people actually ordered four patties and took pictures of this giant, Really Big Chicken Sandwich. So that was kind of fun. But I’d say the way that we’ve gone about it; second, third, fourth quarters looked very similar and we’ll continue with bundles that look a lot like this. We are generally in that $4.99 range, but there are certain products, particularly when you have up-sell potential that may start out at a slightly lower retail. And then you look to build that up with the added proceeds.

Operator

Our next question comes from Lauren Silberman with Credit Suisse. Your line is open.

Lauren Silberman

Thanks for the question. I wanted to ask about the unit growth strategy. You spoke to accelerating growth going forward. So where do you see the greatest opportunities? Is it new markets or existing markets? And then any color on where payback periods have been trending on some of the new classes.

Lenny Comma

First, new unit growth rate, right.

Lauren Silberman

Yes.

Lenny Comma

We’ve got enough infill opportunities here in the next couple of years to be able to drive type of growth that we are guiding to without expansion into new markets or completely filling out markets that are underpenetrated. But as we get beyond the next couple of years, we’d really like to see more development in the newer markets or completely new markets as well. And I didn’t catch the second half of you question. It was a little broken up on this side. If you could repeat it, I’d appreciate it.

Lauren Silberman

Sure. If you can just provide any color on where the payback periods have been trending in the new classes?

Lance Tucker

Lauren, it’s Lance. We haven’t gone into that level of detail. What I can say with a high degree of confidence is the new stores have been opening pretty strong. But as far as payback periods, indoor comparing one vintage to another, we haven’t given that level of detail.

Lauren Silberman

Okay. And then just on your tech spending, are you comfortable with the level of tech spending we’ve seen some competitors, the investments on their digital ecosystems? And then just what are your main focus areas as it relates to technology in fiscal '20?

Lenny Comma

We’ve actually seen a pretty mixed bag out there. We see some brands that are really focused on hospitality, particularly in the drive-thru. And some of their tech investments might be associated with loyalty or consumer relationship management, but they’re not going high tech at the drive-thru and not very high tech even in the dining room, but they are driving some of the highest AUVs in the industry. And then we’ve seen the exact opposite. Some other big players are investing a lot in tech, both in acquisitions that can fuel some of the things they want to do as well as the tech that’s currently going into their restaurants. The way we look at it is the QSR business in general is going to need a healthy dose of tech likely through apps that allow the consumer to view your menu, order ahead and pick up and pay. And then they’re going to need the continued relationship management over time that allows them to have incentives and other communication that they will be afforded, if they’ve stayed engaged in the brand. That is likely the level of investment that’s going to garner the return over the long term. We are looking at other technology, but at this time we don’t think it’s best place for us to invest. But we’ll see how those sort of technologies and consumer acceptance of it emerges over time before we’ll commit to. Overall, you’re looking at a convenience-oriented business.

Lauren Silberman

Okay, all right.

Operator

Our next question comes from Matt DiFrisco with Guggenheim Securities. Your line is open.

Matt DiFrisco

Thank you. I just had a couple of follow ups. With respect to delivery, can you give us some color on what you’re seeing as far as the growth of that? Some other brands have mentioned that it’s starting to settle into a little bit more of a steady state of growth rather than a hyper-growth initially. And then also just in the context of all the questions about the comp, wonder if you could just sort of comment on the volatility. I know in prior quarters a lot of – you guys as well as your peers have said the consumer volatility was maybe a little bit more than historically normal. Are you seeing that similar type of volatility as well? Is that somewhat factoring into moving away from some of the more near-term guidance?

Lance Tucker

Matt, it’s Lance. So I’ll start with this and I’ll let Lenny jump in. On your delivery question, I’ll start with that one. We have continued to see growth. We have – over 90% of our units are covered by the delivery providers. We do continue to see some growth in that area and a couple – and I don’t want to go into specifics over who’s who, but we do have some additional delivery coming online as couple of providers grow unit count. Meaning, as we have certain providers that now have a higher percentage of our units that deliver on their platforms than used to. So we are seeing continued ramp and delivery. From a current volatility standpoint, I’m going to turn that one over to Lenny and let him…

Lenny Comma

We’re mostly seeing comp volatility and consumer volatility. It’s associated with what we see in the competitive space. We’ve been asked often times, do we see the same hyper-competitive marketplace out there where there’s a lot of value and discounting in the market and we’ve sort of maintained that. It continues. And even in some quarters, we’ve seen it ramp up even after everyone thought it was waning. So I’d say the biggest component of volatility right now is likely associated with some of the performance that you see from various competitors where they’re seeing some transactions decline and trying to have a healthy – establish a healthy trend of traffic over time and that’s leading to pretty, pretty big swings quarter-by-quarter in what we’re seeing in the marketplace from a promotions standpoint. We’ve seen competitors come out with sandwiches that are high quality and very high food costs that are significantly discounted. There can’t be a lot of penny profit associated with that, but those things certainly drove transactions and sales. And so still what we would consider to be a hyper-competitive marketplace, our biggest caution both internally and then also with our other stakeholders like our franchisees is to just stay very attuned to what’s going on in the marketplace, because no one in the marketplace is slowing down. They are very aggressively trying to intrude on various dayparts as well as product categories with very aggressive offers. I’d say more than anything that’s what drives the volatility.

Matt DiFrisco

Okay. And then just to follow up on – I think you said 1 minute faster. Typically when other brands have talked about speeding up service, Dunkin comes to mind. Simplification usually means menu simplification. Are there going to be some SKU rationalizations or has that been already reviewed and that’s not really an alternative? I know in the past, some people have been observing that you guys have a larger menu than your peers and that might be a reason for some of the slowdown or slower times as well?

Lenny Comma

Yes. We definitely will rationalize some of the SKUs, particularly when we look at sauces, bread carriers, cheeses, things that don’t necessarily have a positive impact on a consumer. Even the consumer doesn’t necessarily recognize all these things that we’ve built into these products. We can still have great variety in our menu without having some of the ingredient counts to get there. So we’ll see some SKU rationalization. But also what we’re seeing is that just procedurally, as we brought some folks in from the outside and they look at the way we’re running our operations, although we are close to a cook-to-order type entity, some of the ways that we cook our products, formulate our product, hold our product; our proteins, for example, we’re kind of going about it the hard way. And with some tweaks both to equipment and procedure, we can make it a lot easier on our crews. And those are the things I was referring to earlier that we are already testing in a handful of restaurants and seeing positive results. So we feel really good about this effort. It’s probably the one thing I’m most bullish about going forward because I think that bringing in this outside perspective has been – it’s necessary and it’s also been refreshing to the operators.

Rachel Webb

All right. I think we have time for one more question.

Operator

The last question comes from Peter Saleh with BTIG. Your line is open.

Peter Saleh

Great. Thanks. Lenny, I think you alluded to considering other menu items for 2020 and maybe what’s trending. So give us your thoughts on adding plant-based burger to the menu in 2020. Is that something you guys are considering? Have you tested it? Just some of your thoughts around that.

Lenny Comma

We are certainly open to plant-based. And it may or may not come in the form of a hamburger. We are testing some things currently and we’re formulating various ideas, but Jack in the Box is not just a burger player. We’ve got a lot of variety on the menu and there is some great product categories for us that are very high mix. And it may make more sense for us to go to the marketplace with plant-based versions of those product lines versus doing what everybody else is doing in the burger side of things. So, I’d just say that we are totally open to it. We think it’s important. I do think plant-based will be here to stay. But for Jack in the Box because we really look at these craveable snacks and sides just as importantly our à la carte or combos with sandwiches, we want to explore plant-based across multiple categories and/or items versus just the hamburger.

Peter Saleh

Got it, okay. And then just a follow up on the wage side. I know you said a meaningful step up. I’m just curious, is the inflation that you’re expecting next year a high-single digit, is that all from wage inflation or does that include any incremental labor hours that you may be adding to the stores to improve service?

Lance Tucker

Hi, Pete. It’s Lance. I’ll take that one. So the lion’s share of it certainly is going to come from the mandated minimum wage increases that we see with such a heavy concentration in California and you’ll also see some probably continued pressures just with low unemployment, as I’ve already said. As far as actual labor deployment within the restaurants, we don’t see any material changes there.

Rachel Webb

So thank you all for joining us this morning and I hope you have a great holiday season. We’ll talk to you in February.

Operator

This concludes today’s conference. Thank you for your attendance. You may disconnect your lines.

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