Categories Consumer, Earnings Call Transcripts

Jack In The Box Inc (NASDAQ: JACK) Q2 2020 Earnings Call Transcript

JACK Earnings Call - Final Transcript

Jack In The Box Inc (JACK) Q2 2020 earnings call dated May. 14, 2020

Corporate Participants:

Rachel Webb — Vice President of Investor Relations and Strategic Analysis

Leonard Comma — Chairman of the Board and Chief Executive Officer

Lance Tucker — Executive Vice President and Chief Financial Officer

Analysts:

Brian J. Bittner — Oppenheimer & Co — Analyst

Gregory Francfort — Bank of America Merrill Lynch — Analyst

John Glass — Morgan Stanley — Analyst

Alexander Slagle — Jefferies — Analyst

Dennis Geiger — UBS — Analyst

Jeffrey A. Bernstein — Barclays Capital Equity Research — Analyst

Chris O’Cull — Stifel — Analyst

Eric Gonzalez — KeyBanc — Analyst

Lauren Silberman — Credit Suisse — Analyst

Robert Derrington — Telsey Advisory Group — Analyst

David Tarantino — Robert W. Baird & Co — Analyst

Jon Tower — Wells Fargo Securities — Analyst

Presentation:

Operator

Good day everyone and welcome to the Jack In The Box, Inc Second Quarter Fiscal 2020 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 Rachel Webb, Vice President of Investor Relations and Strategic Analysis for Jack In The Box. Please go ahead.

Rachel Webb — Vice President of Investor Relations and Strategic Analysis

Thank you, Cheryl, 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. We will refer to non-GAAP items throughout today’s call, including operating earnings per share, adjusted EBITDA, as well as Restaurant-Level Margin and Franchise-Level Margin. Please refer to the non-GAAP reconciliations provided 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 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 and while management will provide current thinking on this call around the potential impacts of COVID-19 on our business, given the unprecedented nature of this pandemic and the rapidly changing environment, any forward-looking statements should be considered with this elevated level of uncertainty. 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 the 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 website at www.jackinthebox.com.

A couple of calendar items to note this morning, Jack In The Box management will be attending Oppenheimer’s Consumer Conference virtually on June 16. Our third quarter ends on Sunday, July 5 and we tentatively plan to announce results on Wednesday, August 5 after market close. Our conference call is tentatively scheduled to be held at 8:30 AM Pacific Time on Thursday, August 6. And with that, I’ll turn the call over to Lenny.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Thank you, Rachel, and good morning. I’d first like to take a moment to express my heartfelt thanks to our restaurant team members for keeping everyone’s safety a top priority as we provide for the needs of our guests and first responders. I’d also like to thank our corporate employees, franchisees and suppliers for their partnership, flexibility and ingenuity during these unprecedented times. It has truly been remarkable to see the way the brand has rallied to meet the changing needs of our consumers.

Sales have rebounded to positive for the first four weeks of quarter three, improving each week to, most recently, positive 8-plus percent for the week ending May 10. Based on these results, I would describe our outlook going forward as cautiously optimistic and we will continue with an approach that will be careful and conservative. Lance will share more on this momentarily but as I contemplate the next chapter for Jack In The Box, it gives me great peace to know that sales and cash flow remain robust despite the challenges brought on by the coronavirus.

Beginning to look at quarter two, and as we outlined in our release in April, our business was on a positive sales trajectory in the second quarter, averaging over 5% versus prior year for the weeks preceding the impact of the coronavirus. This was on track to be our strongest quarter since quarter three of 2015, driven by the strong performance of our newest menu item Tiny Tacos. As I’ve shared on previous calls, Tiny Tacos is intended to restore some of the value related equity we lost, when we raised the price of our iconic 2 for $0.99 Tacos to $1.19 a few years back. Although, it is still too early to determine the staying power of our new Tiny Taco offering, we are seeing a great consumer response that is not only showing up in our Tiny Taco sales, but is also helping to bring attention to the entire Taco category. Tiny Tacos not only drove transactions, bringing back some of our lapsed users, but also bolstered check sizes as they’re frequently added on to guest orders.

COVID-19 had a significant impact on our operating results in the second quarter and Lance will recap this in a moment. Before we get to that, I’ll briefly mention some of the changes in consumer behavior we are seeing in our business today. First, consumers are utilizing delivery and our mobile app more than ever. Delivery sales have more than doubled in the quarter and we are experiencing record high usage of our mobile app with active users doubling since the start of the pandemic. As a reminder, over 95% of our restaurants are covered by at least one of the four major delivery providers, with 80% utilizing at least three of the major providers.

Second, occasions have shifted away from the traditional breakfast day part with consumers no longer commuting to work, but since we offer anything on the menu, any time of day, we are seeing plenty of breakfast items selling later in the day. And we believe this is one of the positive factors contributing to our sales at this time.

These shifts in consumer behavior have led to a significant increase in our check sizes as consumers are now placing larger orders, typically for multiple people. I want to thank the Jack In The Box team for their agility and rapid response to these changing trends. Within the first two weeks in March, restaurants swiftly moved to a new operating model to facilitate drive-thru and take-out-only. The corporate team shifted to working from home and our supply chain ensured restaurants were all receiving masks, gloves and sanitizer, while also making the appropriate adjustments to reduce supply risks. I also want to thank our marketing team for pivoting our menu offering to address current consumer needs for indulgent food that travels well and meals that provide great overall value.

Our $4.99 Spicy Popcorn Chicken has hit the mark by ensuring great value, portability, baked in temperature in a way that lends itself to delivery, take-out and drive-thru. Our Tiny Tacos are equally portable in a popular take-out box with high marks on value for the money and craveability. And we continue to generate success with our price pointed bundles, such as the $4.99 Triple Bonus Jack, which operate as a successful up-sell option to four patties. This up-sell option is not only easy for our crews to execute, it also supports the profitability of these promotions for us and our franchisees.

With major sporting events and concerts canceled and consumers commuting less, the team quickly shifted advertising both in placement and in messaging. We shifted media from events and billboards to streaming entertainment and digital content to help meet consumers where they are. The team also launched campaigns such as #StayInTheBox to promote sheltering in place and developed ads to communicate our dedication to safely staying open to serve the community through delivery, drive-thru and our mobile app. I believe all of these changes have allowed us to fare much better than we initially expected. We are feeling bullish about our current trajectory, especially in light of lapping our strongest quarter from last year. I’ll now turn the call over to Lance for a closer look at our second quarter results and current trends. Lance?

Lance Tucker — Executive Vice President and Chief Financial Officer

Thank you, Lenny, and good morning everyone. Before getting into the detail, as you’re undoubtedly aware, operating performance for the second quarter was largely negative versus the prior year, driven by the weeks impacted by the COVID-19 pandemic. Rather than mention this for every item I speak to, I wanted to just state this upfront.

Operating EPS for the second quarter was $0.50 as compared to $0.99 last year. The decline of $0.49 was primarily driven by lower sales versus the prior year and higher G&A costs during the quarter. Our system-wide comparable sales decreased 4.2% in the second quarter as we pre-announced. Company comp sales decreased 4.1% comprised of check increases of 6.4% and transaction declines of 10.5%. Franchise comp sales decreased 4.1% for the quarter. While system was off to a great start for the first seven weeks of the quarter as sales increased 5.2%, during this time, transactions were also positive for the entire system. As we felt the impacts of the COVID-19 pandemic later in the quarter, sales for that five-week period declined by 17%.

Now, allow me to give an update on what we’ve seen thus far in the third quarter. For the four weeks ending May 10, same-store sales have been positive, up around 1.6%. As Lenny mentioned, the sales have been accelerating with sales in the week ending May 10, up over 8%. This is versus the start of our strongest quarter last year and it’s a testament of the brands nimbleness during this time. During the second quarter, company Restaurant-Level Margin decreased to 20.6%, down from 27.6% last year. Most of this decline was driven by labor. Wage inflation was between 6% and 7% in the quarter as California moved to $13 per hour in January. We also maintained higher staffing in the restaurants during the weeks of the pandemic impacted sales to ensure a positive experience for our guests and consistency in employment for our employees.

Additionally, food and packaging costs increased 1.6% in the quarter, driven by commodity inflation of approximately 4.4%. Also, the company acquired eight restaurants in January, prior to any impacts from the pandemic. This had an unfavorable impact of approximately 70 basis points on company Restaurant-Level Margin.

Franchise-Level Margin decreased $2.7 million, when compared with the prior year quarter, primarily driven by the decrease in franchise same-store sales. As a percent of total franchise revenues, Franchise-Level Margin for the quarter was 38.6%. Without the changes from the new lease accounting standard, Franchise-Level Margin percent would have been 41.4%, very comparable to the 41.3% in the prior year.

To help ensure the financial stability of our franchisees during this unprecedented time, we provided rent, marketing and capital requirement relief. To give some color on our franchise base prior to the pandemic, our average franchisee owns and operates approximately 15 to 20 restaurants with strong unit volumes averaging approximately $1.5 million [Phonetic]. To help franchisees preserve their liquidity, we first postponed a portion of their rent payments. As we previously disclosed, we postponed collection of approximately 40% of our franchisees’ April rent payments. This totals roughly $9 million that will be collected beginning in July 2020. This does not impact our rental revenues on the income statement, but does impact our balance sheet and cash flows. Similarly, we have received relief from some of our landlords in a pass-through of over $10 million in savings to our franchisees for the months of April, May and June collectively.

Second, we provided marketing relief through marketing fee reductions and payment deferrals. In addition to the fee reduction for March from 5% to 4% we announced yesterday, we will also be reducing April’s marketing fee percentage to a range of 2% to 4% based on sales volumes. These fees are typically collected in the subsequent month so we have postponed collection of the remaining fees as described in our press releases.

Third, we delayed all 2020 development agreements by at least six months and suspended any other capital investment requirements. In the second quarter, franchisees opened five new units, bringing us to 16 opens through Q2. We anticipate much of the new unit development previously expected in the second half of 2020 will push into 2021. Given the sales performance since the start of the pandemic and the relief our franchisees have received, the liquidity of our franchisees generally remain strong.

As a reminder, we’ve had temporary or minimal temporary closures throughout the quarter with less than 1% of our restaurants closed on any given day, again a testament to the health of our restaurants. As the primary nature of the franchise relief, as to the extension of payment terms, these relief efforts do not have a material impact, rather, on our Franchise-Level Margin.

Moving on to the rest of our P&L, advertising costs which are included in SG&A were $3.5 million in the second quarter, compared with $3.9 million in the prior year. This decrease of $0.4 million was due to the reduction in marketing fees for the month of March and April within the quarter. In addition, the company did not make any incremental marketing contributions during the quarter. G&A increased $7 million during the quarter, driven primarily by mark-to-market adjustments related to company-owned life insurance policies or, as we refer to them, COLI policies. These policies are sensitive to swings in the stock market and the losses associated with these COLI policies were $4.4 million in the second quarter, given stock market declines. Legal reserves were also higher in the quarter by roughly $1.8 million. Both the COLI and legal reserve amounts are non-cash items.

Our tax rate in the second quarter was elevated at 32.3% with the biggest reasons being reduced income and that the COLI losses are not tax deductible. We anticipate the tax rate to remain elevated for the remainder of the year. Our 10-Q contains additional details on the tax rate.

Now, to turn to our business outlook and comment on our liquidity and debt, like many in our industry, we are seeing business performance change significantly and sales volatility increase and we do not know how long these trends will sustain. Because of this uncertainty, we have withdrawn both our 2020 and our long term guidance. Further, while our performance has held up relatively well, given the uncertainty around the magnitude and duration of the financial impacts caused by the pandemic, we continue to believe it is prudent to take actions that will maintain and bolster our current healthy liquidity position.

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To provide a quick update on cash, the company ended the second quarter with $169 million of cash on the balance sheet, of which $132 million was unrestricted. As of Monday of this week, that number is unchanged. We temporarily paused our share repurchase program and have $122 million of share repurchase authorization remaining. Similarly, we have temporarily paused our quarterly dividend, which is typically paid in June. While we remain committed to returning cash to shareholders, we are prioritizing maintaining financial flexibility in the near term. We will continue to monitor our capital allocation policy in each quarter with the goal of reinstating the dividend and returning to share repurchases as soon as we have more clarity around the scope and duration of the disruption to the business caused by COVID-19.

And as abundance of caution, we also drew down $108 million of our variable funding notes, which is effectively our line of credit. This, combined with EBITDA declines, increases our debt-to-EBITDA leverage ratio to slightly higher than the 5 times that we’ve targeted, but does not put us at risk with any covenants associated with our debt structure. As a reminder, our primary debt covenant is our debt service coverage ratio or DSCR and that must remain at the 1.75 times. While we do not typically disclose our actual ratio, at the end of the second quarter, our DSCR was roughly 2 times the covenant amount where we had a significant amount of cushion.

Lastly, we have scaled back capital spending for the year and are spending only on essential and sales driving projects at this time. That concludes our prepared remarks. I’d now like to turn the call over to the operator to open up the lines for questions. Cheryl?

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Brian Bittner of Oppenheimer. Please go ahead. Your line is open.

Brian J. Bittner — Oppenheimer & Co — Analyst

Hi, good morning. Thank you for the question. To be trending with your same-store sales up 8% currently and I think you said positive quarter-to-date, it is very impressive and it is outperforming the industry I think. So, you seem to be doing something right, but it also begs the question of, do you think there is now a tailwind in your business from this new environment we’re all living in? In other words, as States reopen and things start to normalize, how do you now think about how that will impact your business from here?

Leonard Comma — Chairman of the Board and Chief Executive Officer

Brian, this is Lenny. I think a couple of things, one, when you look at some of the guest-related feedback about our service, we’re actually seeing that the sentiment around our service is improving. And I think that combined with the food that we’re executing, it seems to be working on all levels, family bundles, the craveable sides and snacks that are add-ons and then also the LTOs that are driving great value. It just seems like all of those things are working exceptionally well at this time. And I can’t imagine that as the dining room is open and we have an opportunity for even more capacity, that we would lose momentum. I would expect that we’d be able to maintain what we’ve been able to achieve. And so we’re, like we said in my planned remarks, cautiously optimistic.

Moving forward, we think the team has done a great job of, sort of, setting us up to not only get through this time, but come out of it stronger. And again, I think a lot of it really comes down to its — a safe transaction for the consumer and the employee. It’s an efficient sort of convenience-oriented transaction right now and I think the team is executing really well on those fronts and then most importantly, the food that we’re putting in the marketplace right now is exceptional and I think that it travels really well. So for the take-out and drive-thru portion, which I would expect — and delivery, which I would expect would continue to be a growing trend. Having things that travel well seem to be playing well into our hands at this time. So, yeah, we feel good about, maybe a little bit of win in the sales but like we said earlier, we’ll just — we’ll remain cautiously optimistic going forward.

Brian J. Bittner — Oppenheimer & Co — Analyst

Thank you, Lenny.

Operator

Your next question comes from Gregory Francfort of Bank of America. Please go ahead, your line is open.

Gregory Francfort — Bank of America Merrill Lynch — Analyst

Thanks for the question. Just maybe, can you talk a little bit about operationally, because I would guess that the drive-thru right now is up 30%, 40% sales, it’s going to be doing breakeven and I am curious where you’re seeing that. Is that in boosted checks? Is that in more shoulder period sales? And I guess because of that and more of the business going to the drive-thru, are you able to manage labor a little bit more efficiently than you were in the past just because you don’t have the dine-in and does that change how you think about the timing of when to open dine-ins? Thanks.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah, good question, I think. Actually, as we meet with our Franchise Advisory Council, those are the exact kind of conversations that we’re having. It’s really a two-fold conversation. The first is about making sure that as we open dining rooms, we do it safely for the public and also for the employees. And then the second is, there’s a lot of efficiency right now through the drive-thru for multiple reasons. One is a lot of what we’re seeing in our sales being driven by much larger orders and a higher average check. As I said in my remarks earlier, these are entire families that people are purchasing for, and typically when you have that type of a transaction, it actually puts a toll on the drive-thru employees to meet the speed requirements because there’s just so much more food going through with each transaction. But I applaud the team for doing a great job and adjusting to this type of demand and as you mentioned, the labor efficiency associated with these transactions is rather high. So we would expect that our franchisees would be able to flow — a lot of cash flow to the bottom-line.

As we think about dining rooms reopening, yes, it’s a less efficient transaction, but my anticipation is that with Jack In The Box being only 15% dine-in, we won’t lose too much of our efficiency as we start to reopen dining rooms. Essentially, when you look at our trend prior to the pandemic, 70% going through the drive-thru and another 15% take-out. I would expect that even as dining rooms open up, the 15% remaining for dine-in would be much lower than that, lower than historic levels and we will likely maintain a lot of the current efficiencies that we’ve gained.

Gregory Francfort — Bank of America Merrill Lynch — Analyst

Thanks, Lenny.

Operator

Your next question comes from John Glass of Morgan Stanley. Please go ahead, your line is open.

John Glass — Morgan Stanley — Analyst

Thank you very much. First, just a follow-up, can you just unpack the quarter-to-date or the most recent trends between check and traffic and also just by day part? You mentioned people pivoted away from breakfast, I was expecting to see actually a negative and you’re actually achieving this despite that drag. And more broadly, Lenny, I know the company is in a very different position than it was in ’08 and ’09 but when unemployment spiked back then, your traffic didn’t suffer. Do you think you now have or do you need to make further adjustments to value going forward just cognizant of the fact that unemployment will be nearly 20% probably by the end of this quarter?

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah. So, a couple of things. The things that we have typically disclosed and stay away from the ones we haven’t, but I’ll address the last part of your question first. We actually are seeing that in the trends through the first four weeks of this quarter, most recent trends are actually showing transaction improvements, although, obviously most of our sales are coming from check. We’re actually seeing sequential improvement in — week-over-week in traffic. So feeling pretty good about that. And as you talked about the unemployment trend, we’ve got massive unemployment right now and Jack In The Box, I think, is in a great position just based on the offering that we have to drive a significant amount of sales and traffic going forward. And I think the business may shift during this period of time to higher check average and lower than historic transactions, but what we’ve been able to see over the last nine years is year-over-year same-store sales growth despite some of the transaction erosion that we’ve experienced. So we feel like we’re well suited to pivot the offering in a way that maintains the sales and flows through the profit, even if we have to sacrifice some of the traffic. But I don’t believe that the traffic will be sacrificed because of a lack of value.

When you look at what we’re providing today, both in the bundled deals and also in the sides and snacks, there’s actually a tremendous amount of value, and that’s just looking at it in the traditional sense where value is equated to price and quantity of food that you get for the price. But if you look beyond that, what we’re seeing from consumer information is that the consumer is starting to see value in a much broader way. They are looking at the digital component, the drive-thru component, the delivery component as also a component of value and they’re looking at the safety of the transaction as a component of values. So, when you look at family bundled deals that can be delivered through a drive-thru, take-out or delivery in a safe manner and at an overall reasonable price, that all seems to be on the table right now in the consumers’ evaluation of value. And based on what we’re seeing from our promotions and also our overall mix in sales, it does seem to be proving out in the way people are using the brand right now. So just — I think it’s going to be important that we not only look at some of the historic drivers of our business, but we’re going to have to pivot the way we think about the brand and the way we present product to the consumer to meet their current set of needs, which has evolved quite rapidly.

John Glass — Morgan Stanley — Analyst

Got it. Thank you.

Operator

Your next question is from Alex Slagle of Jefferies. Please go ahead, your line is open.

Alexander Slagle — Jefferies — Analyst

Thank you. Good to hear from everyone. I was wondering if you could talk about the speed initiatives and the target of getting a minute faster, but I was wondering just how this has impacted, given the franchisees’ tighter belt on capital spending and how much can be accomplished just through process changes and other changes.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Absolutely. So a couple of really good things. The operations team did a great job of identifying short term, relatively low cost process changes, minor equipment adjustments that could be made to significantly improve throughput in the drive-thru. And all of those things, not only were identified but also tested and sourced prior to the pandemic. What the pandemic has done is obviously not allow, just based on social distancing, for folks to actually come together for some of the installation and project rollout throughout the field. But we do have 300-plus locations that have already received those adjustments to their operation. And we have created some optionality for our franchisees to work directly with the suppliers to continue to move forward with that at their own pace even during the pandemic. But the main takeaway is, we are sort of standing at the starting line, very much ready to execute that the first minute that some of the restrictions are lifted and we can safely get folks into restaurants to make those adjustments to equipment.

And then on a long term basis, the team has already started to identify much, sort of, broader reaching changes that could happen operationally and to some of the equipment and procedures that would allow us to go the next step in reducing the complexity and taking out many seconds from the drive-thru transactions. So feeling good both on a short term and long term basis that we’ve actually identified the path forward. The biggest impact is that in some of the longer-term things that we’ve identified, the pandemic disrupted our ability to go into restaurants and test those adjustments and new pieces of equipment at this time. So when we come out of the restrictions, we will start to be able to test some of the longer-term things going forward. But main thing I would want the shareholders to know is that as we look at some of the short term low cost adjustments, and we couple that with some of the operating procedural adjustment and just more accountability and training that has been all identified, that whole part of the system is actually what generates that first minute and all of that is what I’m saying we can quickly continue with, once the restrictions are lifted.

Alexander Slagle — Jefferies — Analyst

That’s great, thank you.

Leonard Comma — Chairman of the Board and Chief Executive Officer

You got it.

Operator

Your next question is from Dennis Geiger of UBS. Please go ahead, your line is open.

Dennis Geiger — UBS — Analyst

Great, thanks. And thanks, Lenny, best of luck, of course. Just wanted to ask another one looking into the — your recent sales trends and kind of the learnings. Specifically, just thinking about the customer segmentation, anything more on kind of new customers you’re seeing, how you’re thinking about that, if so, related kind of on the new product value bundle mix, any comments on kind of what’s been most impactful there and how that might shape the mix of those two going forward. And then I’d just be curious on the geographic split, if you guys care to provide any commentary. Thank you.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah. So a lot there, I would say a couple of things. When we look at the trend in general, I think the agility of the marketing team, operations team, supply chain, as far as the impact of the consumer and to the operation, those were the things that clearly put us in a position of strength as we entered into the pandemic. When I look at, for example, working with delivery providers, our team, very quickly, even the week prior to some of the social distancing really started to sweep the nation, they started to create family bundles and also delivery — third-party delivery promotions that would allow us to attract new consumers, particularly when you look at the purchase occasions shifting dramatically during the pandemic, right. Folks weren’t driving to work so they’re not going through the drive-thru for breakfast. But those same folks are looking for an opportunity to order in or take out for lunch and dinner and even early evening and until late night. So when you look at some of the family bundles, I think, that sort of hit the mark there.

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But also what we’re seeing is that, during times like these, folks are looking for craveable items that they can trust. They want to know that when the food is taken home or brought home through a delivery provider, the products are still going to be hot, they’re going to be crunchy, they’re going to be fresh, whatever they need to be. When you look at the Popcorn Chicken and the Tiny Tacos, for example, those products pulled really well many minutes after they’re cooked and I think using the packaging that our team put together and also selecting those products to be featured is a big deal. And even when they looked at the burger promotions that they were going to promote, they tried to focus on products that traveled well, that didn’t have an abundance of produce on them, because those are the types of things that water down the product and make the bread soggy and don’t make the experience so great, once the consumer actually indulges.

So I think all of this, sort of, foresight going into the pandemic and, sort of, insight about what the consumer would need is really what’s sort of paying off for us. And I think to your question around how the product sort of line up in drive, the outcome, it kind of goes back to what I was saying before. I think convenience and the definition of it is being expanded and although — and in value, the definition of that is being expanded and you’ve got to bring all of these things together around portability and the way the food is going to taste whether it’s eaten immediately or 20 minutes later. You have to bring all of that along with price into your sort of position when you present it to the consumer or else I don’t think they’re going to be repeat customers.

And then from a day part perspective, I think it is important today more than ever, that Jack In The Box is offering the entire menu 24/7 because the consumer is buying a lot of breakfast items, sort of, later in the morning and early afternoon because their patterns have changed, right. They’re not commuting to work, but folks still, at times, want to go out and grab some breakfast. So they’re not doing that at 6:30 in the morning, they’re doing it more like 10 o’clock in the morning or 11 o’clock in the morning, early afternoon, those types of things. So we’re seeing that the 24/7 menu is really helping. And when you look at the post, sort of, 9:00 PM timeframe, so many restaurant companies are struggling right now financially and with cash flows that they’re cutting their hours, so even offerings that would typically be open until 10 o’clock at night are shutting down early and oftentimes it’s just drive-thru businesses, particularly Jack In The Box that are available. So lot of things playing into our hands right now that are helping.

From a regional perspective, maybe I’ll let Lance share a few, sort of, tidbits on that.

Lance Tucker — Executive Vice President and Chief Financial Officer

Thank you, Lenny. We traditionally haven’t shared a lot on the regional side. What I can tell you, and looking back at this last week, we’ve really seen very similar types of regional performance and every region, this past week, was up at least mid-single-digits. So we’re seeing pretty consistent performance across those regions and thankfully, no region looks like it’s, sort of, necessarily being left behind, as we continue to drive the results.

Dennis Geiger — UBS — Analyst

Thank you.

Operator

Your next question is from Jeff Bernstein of Barclays. Please go ahead, your line is open.

Jeffrey A. Bernstein — Barclays Capital Equity Research — Analyst

Great. Thank you very much. Just question related to the franchise system. One, Lenny, I’m just wondering if you’d offer any thoughts on the sentiment evolution, whether there’s any feedback on — from franchisees on the support management as offered in terms of abatements and deferrals, or perhaps anything on their current financial leverage position. And then as you think post-pandemic and, Lenny, I recognize this probably wouldn’t be under your watch, but how do you think franchisees will think about the significant geographic growth opportunity? I think you mentioned lower cost, maybe there’s opportunity for to go only restaurants or you said changes in operations and equipment as a potential catalyst. I’m just wondering on the other side of this, whether this opens up franchisees to increasing interest if you were able to bring the cost down despite holding the sales quite well. Any thoughts would be great. Thank you.

Lance Tucker — Executive Vice President and Chief Financial Officer

Jeff, it’s Lance. I’ll start with this one and I’ll turn it over to Lenny. Related to franchisee health, first of all, as I said, kind of, in my prepared remarks, we feel like they were in good shape going into the pandemic with AUVs, if I may, half on average. And like all brands, we do have some units that struggle more than others. But generally we felt like the system was strong and we continue to feel that way. We have not closed any units permanently due to the pandemic. As we said, we’ve had less than 1% even temporarily closed and those were due to low sales at the time, that wasn’t for anything related to the pandemic, other than just reduced sales. And then when you look at the performance, the support that we provided, the support landlords have provided and the fact that many of our franchisees, we believe, have received PPP loans, either received them or awaiting on them, we feel like their cash position remains quite strong. So overall, we feel very good about the health of the franchisees.

I know some of the questions I have seen, some of the notes are around franchisee debt levels and that’s something that we haven’t disclosed and we’re not going to do so at this time. But I think it’s fair to say, from a liquidity standpoint, our franchisees are in good shape. Some of them have probably taken on a little more debt due to the PPP loans, but a lot of that’s going to ultimately be forgiven. But we feel like we’re going to emerge from this in pretty good shape, which leads to your development question.

From a development standpoint, I think there are likely to be some opportunities. We’ve got to get a little further along in this and make sure franchisee balance sheets look the way we expect and hope they’ll look coming out of this situation. But with that said, we do have a lot of work underway to make sure that we’re providing a really effective affordable cheaper unit to franchisees and various iterations of that would include very minimal seeding and walk up windows and some of those things. So I don’t want to get too far ahead of that with that as there is some stuff that is in process now and frankly wasn’t processed prior to this and we think we could hopefully have some ability for franchisees to get out and want to grow units in an effective way. Lenny, anything you’d add there?

Leonard Comma — Chairman of the Board and Chief Executive Officer

I think you pretty much summed it up, Lance.

Jeffrey A. Bernstein — Barclays Capital Equity Research — Analyst

Best of luck, Lenny.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Thank you. Appreciate that.

Operator

Your next question is from Chris O’Cull of Stifel. Please go ahead, your line is open.

Chris O’Cull — Stifel — Analyst

Thank you. Good morning. And I also wish you the best of luck Lenny. And, Lenny, I apologize if I missed this, but has consumer behavior changed in markets where restaurants have been allowed to reopen like, let’s say, Texas over the past couple weeks or even Tennessee? And just curious if you’ve seen any kind of change in day part usage or any other change in behavior in those markets.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah, it’s really too soon to tell. We still have the majority of our restaurants working in the format that we had to move to when social distancing started and so vast majority are drive-thru with take-out and delivery being the primary drivers of the business. Just this past week, we started working with the franchise community and company operations on procedural things that they need to put in place and signage packages that we prepared for them for sort of the eventuality of dining room openings. But even in states like Texas, where they have allowed sort of loosening of those restrictions, there are certain cities or market areas where the franchise community decided not to immediately open those dining rooms as they want to sort of be cautious about the phased approach in getting those dining rooms back open. And mainly what they’re concerned about is health and safety, first and foremost, and then keeping the operation efficient with some of the changes that we’ve all experienced.

So definitely too soon to tell, but it’s something that we’re looking at almost daily and we meet with our Franchise Advisory Council via conference call every week to talk to them about these types of things and to make sure that we’re gathering, sort of, their feedback and sentiment about it. And in the last call, we had a lot of great feedback and, as you can imagine, various opinions, but the dominant opinion was, let’s sort of slow walk the reopening of these dining rooms and we’re going to give our franchisees some optionality on the pace in which they move so that they can ensure that they do things safely.

Chris O’Cull — Stifel — Analyst

Great, thank you.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Welcome.

Operator

Your next question is from Eric Gonzalez of KeyBanc. Please go ahead, your line is open.

Eric Gonzalez — KeyBanc — Analyst

Hey, thanks. So it seems like the national chains, they’re a little bit more focused on core menu items and value. And it’s clear that Jack had a big win with Tiny Tacos and the Popcorn Chicken, but I’m just wondering how the pandemic has changed your ability to test new products and what your view is on LTOs going forward, whether there’s been any changes to your innovation pipeline. And then — and maybe if you can comment on beef costs as well, that’d be helpful. Thanks.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah, good question. So prior to the pandemic, our product marketing teams had created a pipeline of products that was almost a couple of years long and they had tested many of those products already. So we don’t believe that the pandemic is actually going to impact our ability to rollout successful LTOs just based on the fact that most of what we’d be rolling out was already tested and sourced prior to the pandemic. But you did mention about core products and focusing in on that, the adjustments we’ve made which was based on what we believe the consumer would be looking for, was to make sure that, whether it was an LTO or it was a core product, we’re focusing on things that were familiar and things that traveled well. And I think that’s what we’ll continue to do until we’re in a place where some of the pandemic-related consumer, sort of, changes start to weigh in a bit. And so, at this time, I think we’ve got a great pipeline, we are not concerned about our ability to utilize our pipeline going forward successfully, but we’ll likely lean more into the products that are in that pipeline, like I said, that would travel well and that are more familiar.

So Popcorn Chicken is a perfect example of that. If we were going to do something that was less familiar like a — maybe a new Italian-inspired chicken sandwich that it — it’s been forever since we’ve done anything like that at Jack, probably not the right time to do that, right, but Popcorn Chicken, right down the middle of fairway, the consumer really knows what to expect before they get the product and then they’re pleasantly surprised to know that we have a spicy option, as well as, a regular option and when you look at the quantity of food and the packaging and portability in a way that keeps it hot, it really all works quite well, but again, focusing on the familiar.

Eric Gonzalez — KeyBanc — Analyst

Thanks…

Lance Tucker — Executive Vice President and Chief Financial Officer

Eric, it’s Lance. I’ll jump in on the beef stuff, real quick. Just to give you a feel, obviously we’ve pulled our guidance, but our initial guidance this year, relative to commodities, was to be about 4% up for the year. And commodity markets are showing a lot of volatility, but I don’t think, overall, unless protein markets go crazy, that we would expect to be really any worse than that kind of 4%, specific to beef. We’re in constant contact with our suppliers. As of right now, we’re not expecting to have supply issues. Our formulation does use a little over half 90s and the remainder is fresh 50s and then our supply chain team definitely has done a wonderful job of buying forward on the 90s which kind of protects against cost pressures on the 50s side. So I’m not going to share exactly how much we have forward contracted but we do feel like we’re in a good strong position, certainly, for the rest of 2020 on the contract side as well.

Eric Gonzalez — KeyBanc — Analyst

Very helpful, thank you.

Operator

Your next question is from Lauren Silberman of Credit Suisse. Please go ahead, your line is open.

Also Read:  Quhuo Limited (QH) Q2 2020 Earnings Call Transcript

Lauren Silberman — Credit Suisse — Analyst

Thanks so much and hope all is well. You mentioned delivery as a driver of recent trends. Are you willing to quantify the current delivery mix? And then a large competitor of yours recently announced to make a sizable incremental advertising investment, so how are you thinking about any incremental corporate contributions to supplement the advertising fund? Thank you.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah. Thank you. So we haven’t commented on the delivery mix. I’m going to stay away from that one. We don’t feel like we need to incrementally invest in marketing at this time. We think that the most important thing that we did was to adjust the marketing to target the offerings that consumers were more likely to purchase. So for example, we’re not spending a whole lot of time advertising breakfast items right now. And then also we adjusted away from the channels that would be sort of irrelevant. Like for example, we do a lot of advertising on live sporting events that doesn’t exist for us today, but people are streaming video more so than they ever had. They’re playing video games, more so than they ever have. And they are spending a ton of time on social media. So we pivoted the advertising to those spaces. And we think that it wasn’t necessarily an incremental investment that was needed, but it was more so, make sure you know where the consumers are and go attract them in those spaces.

So when you look at our sales results, which is far outpacing the competition, there just doesn’t seem to be a compelling reason why we would throw more marketing dollars at this time. But certainly in the future, if we were to see some volatile trends, we’ll keep our minds open. Right now, we feel like we’ve got the formula ready.

Lauren Silberman — Credit Suisse — Analyst

Okay. Thank you.

Operator

Your next question is from Robert Derrington of Telsey Advisory Group. Please go ahead, your line is open.

Robert Derrington — Telsey Advisory Group — Analyst

Yeah. Thank you. Lenny, listen, we’re going to really miss the transparency and all the color you’ve provided over time and helping us understand the business. So, best of luck to you in the future. My question — a couple of things, one, I’m just wondering what the company’s view is on the need for additional funding. We’ve seen a number of other companies essentially look towards outside sources to provide additional liquidity and I’m just wondering the perspective of management and the Board about the need for that. And then I have a quick follow-up.

Leonard Comma — Chairman of the Board and Chief Executive Officer

I’ll let Lance address that one. As you can imagine, he’s been spending a lot of time paying attention to it.

Lance Tucker — Executive Vice President and Chief Financial Officer

Hey, good morning, Bob. Couple of things, first of all, we’re not actively raising. It doesn’t mean we’ll rule that out. But given our current performance and the fact that our cash flow has actually been positive, it’s not something that we have needed to pursue in any kind of aggressive fashion, so won’t rule it out, but I don’t think it’s something we need to be doing at this time. Turning back to you, Lenny.

Robert Derrington — Telsey Advisory Group — Analyst

[Technical Issues] for you. I’m just wondering about your perspective on the QIP [Phonetic] bonus depreciation opportunity and how much additional liquidity, cash flow that could ultimately provide the company in a recapture of past taxes paid.

Lance Tucker — Executive Vice President and Chief Financial Officer

Hey, Bob. That’s something the team is still working out so I’m not prepared to give a number on this today. But when we have one identified, we’ll certainly make it known to the entire investment community.

Robert Derrington — Telsey Advisory Group — Analyst

Got you. Okay. Again, best of luck and thanks, Lenny, for everything you’ve helped us with over the years.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Thank you. Best of luck to you too.

Operator

Your next question is from David Tarantino of Robert W. Baird. Please go ahead, your line is open.

David Tarantino — Robert W. Baird & Co — Analyst

Hi, good morning. Hope you both are doing well. I had a question, just philosophically about kind of how you’re thinking about investments in the business and I definitely appreciate the uncertainty of the current environment, but just curious about the decisions to pull back on dividends and pull back on capital spending and actually lower the advertising fund contributions in light of the recent turn to positive sales momentum. It seems like those two are a little bit disconnected or those decisions are a little disconnected, so I’m just curious why those decisions now. Is it that you are questioning the sustainability of the trend you’re seeing or is it some other reason? And then I guess secondly, when would you be comfortable starting to lean in on investments and bringing back the dividend, etc? Thanks.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah, good question. So I’ll start and then I’ll hand it over to Lance to provide a little more color. But what I would share is this, when you look at the volatility that we’ve experienced in the business in essentially six to seven weeks, to us it seemed prudent to take a very conservative approach at this time. Obviously, with our performance, it could be very easily justified to go ahead and loosen up the reins at this time and certainly if the trend continues, and as I said earlier, we’re cautiously optimistic about it, then I would anticipate the reins will certainly loosen. But the last thing that we would want to have happen, particularly when we want to be in a position of strength to support our franchise community, as well as, to make sure that the employees are supported through this time to come out on the other hand even stronger, the last thing we would want is to make some aggressive moves or loosen the purse strings at this time only to find ourselves, six weeks, eight weeks later, being in a position where we are now having to raise cash. We can’t — we don’t foresee that.

But this is probably the most unprecedented time that we’ve ever had to manage through in our history. And it just seemed like, with the amount of volatility and sort of unknowns about this thing, the last thing we should do is to loosen the reins with only six weeks or so under our belt. So just wanted to share that. And also we’d certainly anticipate that the trends continue and we become more, sort of, secure in the future and our ability to sort of forecast things that we will not only loosen up the reins but also look to do the types of things that would show our shareholders that this was just a temporary adjustment and that long term we’re certainly committed both on the share repurchase and dividend side to returning lots of cash to our shareholders. With that, I’ll pass it over to Lance for any additional color.

Lance Tucker — Executive Vice President and Chief Financial Officer

That’s well said, Lenny. I really don’t have anything to add there.

David Tarantino — Robert W. Baird & Co — Analyst

And thank you Lenny. That was a great explanation. On the advertising fund contribution, specifically, I’m curious why you chose to do that. It sounds like you made that decision very recently. So I guess, why allow for a lower contribution at this stage?

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah, it’s interesting, I know for a lot of folks, what we’ve seen is — and heard from competitors and the way they’re approaching it, it’s simply not what we believed was necessary and we certainly didn’t believe it was the right way to utilize cash. So some folks are going out and saying, look, we’re going to invest a whole bunch of extra dollars in advertising. But the question that we really should be asking is, what eyeballs are going to actually see all of that advertising, because television is still the largest driver on the advertising side for what we do. So when you remove that television programming, you are removing those eyeballs and even though you’re converting a lot of your spending and your attention to streaming and digital and gaming and all the rest, there are not as many eyeballs in those platforms that are easy to attract as you can do in television.

So from our standpoint, it made more sense to adjust that spending for both ourselves and our franchisees and do a more targeted approach with the spend than to essentially throw money against the wall that we didn’t think was actually going to generate returns. So that’s the reason that we looked at it that way and I would say that based on the results that we’re getting that it was the right call. I truly believe that the more targeted approach was the right call this time, and I think it’s not only sort of saved our franchisees some money, but it’s also allowed us to, at the same time, still maximize the number of eyeballs that would respond to the things that we’re putting in the marketplace.

David Tarantino — Robert W. Baird & Co — Analyst

Great. Thanks, Lenny. And good luck.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your last question…

Leonard Comma — Chairman of the Board and Chief Executive Officer

We have time for one more question.

Operator

Certainly. Your last question is from Jon Tower of Wells Fargo. Please go ahead, your line is open.

Jon Tower — Wells Fargo Securities — Analyst

Great, thanks for taking the question. I appreciate it, Lenny, and I hope you enjoy the golf. Just a couple ones from me. First, following up on the marketing piece. How much do you think of this shift that’s taking place right now away from traditional television media and towards kind of these digital channels will end up sticking after we kind of return to some sort of normal, meaning, say, sports are back on television? Do you think there is a permanent shift that’s taken place right now, especially for you guys or do you think it will all kind of revert back to pre-crisis levels? And then I have a follow-up question as well.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah, I have to believe that there’s a certain percentage of this that will stick. It’s hard for me to predict how much, but I’ll just — I’ll use my own personal behavior. It has changed dramatically during the pandemic, I’ve downloaded more apps, I’ve participated more in social media. It’s really the most convenient way to get a lot of things done, particularly when you don’t have access to the traditional means or mode that you use.

And so, I think many consumers are behaving similarly and forming new habits. And I think there’s got to be a percentage of those new habits that are going to stick. So I would imagine that as our marketing teams evaluate where to target the spend, they’ll likely continue to focus on some of the areas that they’re focused in now and at a higher rate than they did prior to the pandemic.

Jon Tower — Wells Fargo Securities — Analyst

And with that, do you expect potentially dollar spend to go down over time if it’s essentially more efficient through these channels? And then the additional question on top of that piece of the story pre-crisis was the remodel of the drive-thru’s across the system, and obviously this crisis has emphasized that channel even more so, some of your competitors have also talked about doing a lot more curbside. So has this crisis maybe accelerated plans to remodel, once things reopen again or even altered the way you’re thinking about how the remodels are going to take place, given what you’ve experienced right now?

Leonard Comma — Chairman of the Board and Chief Executive Officer

Yeah. So I think that, it is obvious to me that the drive-thru will need to be a focus going forward. And obviously what you’ve heard from me in the past is that it was a huge focus for me and I believe that needed to be a huge focus for our brand and our franchisees. I won’t speak for our incoming CEO, Darin, but he does have a fair amount of experience in the food industry and I think as he looks at those trends he’ll be able to help lead the team, I mean, the direction that he thinks is best. But, I’d imagine that in some shape or form, there’ll be heightened focus on the drive-thru business.

Jon Tower — Wells Fargo Securities — Analyst

Yes.

Leonard Comma — Chairman of the Board and Chief Executive Officer

And then you had asked about advertising dollars and whether or not we thought the overall spend would go down. I don’t believe so. I think that Jack In The Box — when we have an opportunity to go back to television advertising and also some of the out-of-home billboard and other advertising, that’s proven to be effective for us over time. We’re going to want to utilize dollars in that space and likely, as usual, always find ourselves in a place where we believe it’s more about balancing than it is lowering the overall spend. And today just with, as I said that, some of those channels not being available, it just didn’t make sense to just spend, but certainly not a trend that we would expect to continue.

Operator

We have completed the allotted time for questions. I will now turn the call over to Lenny Comma, CEO of Jack In The Box for closing remarks. Please go ahead.

Leonard Comma — Chairman of the Board and Chief Executive Officer

Thank you. As this will be my last earnings call, I wanted to take a moment to personally thank the investment community for their time and investment over the past six-plus years. I enjoyed the candid conversations and very much appreciated the respect you always offered to me and my team. I have a tremendous amount of confidence in the future of the Jack In The Box brand and all of its wonderful people. And I will think of you often while I’m sleeping in, surfing and golfing in my retirement. All kidding aside, I will miss this place and all that it offered to me and my family. I hope all of you and your loved ones stay safe and I wish you all a very bright future. Thanks again for joining us today and this concludes our call.

Operator

[Operator Closing Remarks]

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