Good morning, everyone. My name is Jeff Bernstein, and I'm the restaurant and food service distribution analyst here at Barclays. Thank you all for joining us in the room and on the webcast. Our next presenting company this morning is Jack in the Box. With us this morning from sunny San Diego, California, we have Darin Harris, their CEO, and Brian Scott, their newly named CFO. By way of background, for those not familiar, Jack in the Box is a quick service portfolio company consisting now of two brands, specifically the namesake Jack in the Box, with 2,200 primarily franchise units, and Del Taco, the newer addition with 600 units that is now north of 50%, approaching 60% franchised, and plans to increase that mix to 90% over the next few years.
With both of those brands still regional and focused more on the West, unit growth is accelerating and ultimately moving east. So for those of you here in New York, a little patience. Thank you all for joining us. With the fourth quarter of fiscal 2023 earnings actually reported just last week, I figured I would start with a few questions that we've heard from investors in recent days, and then obviously touch on some bigger picture topics. I will kick it off, and then, towards the end, I'll open it up to any audience Q&A. So if you have a question, please raise your hand at that point. With that said, I want to thank Darin and Brian for joining us from California.
Thanks for having us.
Thank you. Happy, happy holidays.
Thank you.
So being that you did just report a week ago, it's very timely. So I made sure to insert a couple of questions right at the top of things that I've heard from investors just over the past week that we thought would be helpful for clarification or further color. And the first one that's gotten a lot of attention, I guess, is around the CapEx spend for fiscal 2024. That they have a September year-end, so we're now in their fiscal 2024. Just wondering if you could provide a little bit more color on the CapEx guidance. I believe it's $110 million-$120 million. The questions have been: Is this a new run rate? Because it is up from where it was this past year, or maybe there are some short-term investments or one-timers.
How should we think about the buckets of that CapEx spend for fiscal 2024 relative to future years?
Right. Yeah. Yeah, I'll, I'll kick off on that, and Darin, I'm sure, will sweep anything I miss here. So, yeah, we've heard a couple of questions on that as well. And it's, you know, we're- it is an increase, but, you know, we're excited about the opportunity that those investments are gonna bring to the organization. They are paramount to our, our growth strategy that we've articulated. If you look at fiscal 2023, we had about $75 million of CapEx. There's another about $5 million of investments that go on the balance sheet. They're gonna run through amortization. So kind of put that together, you've got about $80 million of, of spend actual in 2023. The guidance, as you said, was $110 million-$120 million.
And the largest part of that increase is a little over $20 million of investment in new restaurant growth. So, you know, as Darin and the team kinda kicked off this growth strategy several years ago to really start to, you know, plant flags in new markets and really get the brands growing, we're starting to really see the inflection point of that happening. So we opened two company restaurants in 2023. We've got more, significantly more opening in 2024, and so really now we're in that build mode. And so again, a little over $20 million of that increase is squarely focused on one of our most important initiatives, which is, which is growing the brand.
The success we've seen already in Salt Lake City and Louisville, which I'm sure we'll touch more on, is I think a great reflection of the opportunity we have in front of us, and so that type of spend on a go forward, we do expect it to be, to run at a higher level. It's gonna be somewhere in the range of $30 million this year. That's probably a decent proxy, 30-35 for the next couple of years. And at the same time, though, as we get further into this and we really get some development agreements in place in these markets, we'll be able to franchise those corporate-led stores and be able to basically recycle those investments.
So it is a step up, but I think it's actually a pretty good sense of, like, the run rate going forward, and potentially could come down as we start to be able to sell those company stores. So it's kind of item number one, but the most important one of that increase. Another really important part of our, our brand growth strategy is making sure that our- we have brand standards and the quality of all of our restaurants, and so we are seeing a pickup in the investments again in the, this initiative around remodeling older stores. So that kicked off last year, and so as you've now gone from, you know, kind of approval for the- for company stores, getting through the design and the approvals, now we're actually gonna be doing more remodels during 2024.
We've also opened that up for franchisees and so now added Del to that mix. And so there, there's another $5-$10 million tied directly to remodeling our older stores. For those that we have remodeled, we're seeing a really good return, anywhere between, you know, upwards of 10%-15% increases in AUV in those stores. So again, a great return on investment for the organization and really important to our long-term brand strategy. And then the last piece where we're seeing some investment increases is in our IT side. We've mentioned, we've kinda come to a final decision on our new POS. We're running with a 20+-year-old point-of-sale system in the Jack brand.
We need to upgrade that, obviously, not only just to have a more modern system for our team members, but it's really foundational to a lot of the things we're doing around digital and AI and automation. We need to have a modern POS to support that. So part of the increase in 2024 is tied to starting to roll out those POSs in our corporate stores. And then the other area of IT investments is around digital. We've seen great success. You know, we're up to now 12% digital mix. We think we continue to grow that, but we need to invest in our digital capabilities around loyalty as well. So those are, like, those are the biggest drivers. Some of those are more episodic, like the POS and increasing our company store counts.
I think from a kind of future, if you were thinking out the next 2-3 years, I think somewhere around $100 million-$110 million is a reasonable place to be. Probably a little bit higher in 2024 because of the POS rollout, and then other areas we want to continue, because again, it's really about driving the growth of the business.
Well, Darin, for Brian, having just joined the system, it seems like you've thrown him in deep here.
Absolutely.
He seems to know a lot of the details, so he passed that test. It's good. And then the other topic that comes up a lot is the refranchising, which-
Yeah
Having covered Jack in the Box for a while, that was something that you went through with the Jack in the Box system, and now obviously it wasn't too much pain, or you felt like the reward was worth it because now you're doing it with the Del Taco system. So how do we think about-- I know a year ago or close to a year ago at the ICR conference, you gave some specifics around the mechanics of it. Has there been any update in terms of the financials or the dilution related to the refranchising in general? I know you did, I think just north of 110 last year, but now the guidance is for another 110 or so, but now that's spread out over three years.
Yeah.
So how do we just think about the repercussions of that? And is there a... I already heard this morning, people say, "Well, if you did 110 last year, why couldn't you do 110 this year?" So just how you think about the ability to go faster and get to that 90% target before fiscal 2026.
So the way I think about it is, we're gonna do the right deal at the right time with the right buyer who can grow. And so, you know, we have plenty of interest. The demand is increasing, not decreasing, for buying Del Taco. So we wanna just make sure we do the right deals with the right partner, and I think that's gonna be our gauge of speed, more so than anything. We want people who can come in and invest capital and grow. We, you know, invest in these restaurants, make sure they're successful, and they have the operational capability to do that. So we have demand to do that. We'll continue to focus on it.
We just wanna make sure from a standpoint that we're balancing between, you know, the timing of these transactions with the right partner, so they're not overly dilutive as we're giving up, you know, EBITDA. We need to have some growth starting to come in from some of the development agreements, so we can, you know, balance this by giving up the EBITDA and making sure it's not overly dilutive, even though we're buying back shares.
Anything you would add to that?
Yeah. No, like I said, we, the interest is very strong. So, you know, the, I think the, the point of saying that we would, you know, move to the kind of fully refranchise or franchise model by 2026 is just, I think, it's just a reiteration of our strategy. It's not that, that's our target, is to, you know, not finish it until 2026. We're just saying we are... We had a great first year in refranchising, strong appetite, and, you know, it could go quicker, but we want to at least give some kind of bookend around, you know, it's not a, not a five-year journey. It's, it could happen sooner, but we absolutely are committed to making sure we move to that asset-light model. I think it's, it's worked really well thus far.
We've definitely heard strong positive reaction from our investors, and we have great interest from our existing franchisees, as well as new ones, to get these assets because they're—it's a great brand. We think there's a huge amount of growth potential that we're just really in the early stages of unlocking. And so to Darin's point, we wanna make sure we get the right partners in place to help us on that growth strategy long term. And so we have the benefit of this case of, you know, we can use time as a kind of as our ally here. If we can strike deals more quickly that we think work for us that help drive our long-term strategy, we absolutely will do that, but we also don't feel any imperative to get it done immediately.
Two just clarifications. One, when you said there's tremendous demand, that's from existing Del Taco franchisees as well as Jack in the Box franchisees, or is it primarily Del Taco?
Primarily Jack franchisees.
Primarily Jack.
And then third party outside-
Yeah.
Interesting.
The idea that you did over 100 this past year, you didn't sacrifice all the things that you mentioned at the beginning, that all these things need to get... It just, the stars aligned, and you got a lot done in fiscal 2023, and you're just saying: You know what? That we can't always assume that's gonna be the case.
Correct.
We'll tell you, over three years, we'll get the other 100 and some.
Yeah, I think it's the right deals at the right time. You know, we have the demand to execute on our strategy, but we wanna make sure that we're doing it timely.
Yep. Understood. You know, a couple of questions we've been posing about the broader consumer environment, which I'm sure you get every day, and your thoughts on the state of the consumer going into 2024. There was, investors have been pleasantly surprised with how resilient the restaurant industry has been throughout this year, with all the headwinds that have been talked about. There was a little bit of a slowdown for the industry in August and September, and that was really the first sign of panic, but is it really the headwinds that are hitting the consumer? Which in the end, might actually help quick service by not, who knows, but on-
Right
... the lower end, it might help. Or is it just a return to some normal seasonality, where some companies said, "You know what? It's not so bad," and actually things got better in October, so it gave some people a sigh of relief. But if you weren't looking at all the macro headlines and you were just looking at your business of two brands, what you see in the numbers, is there any change, for better or for worse, from a consumer standpoint?
Well, I mean, look, it's, it's been the most interesting environment in my career, over 20 years in the industry, where you take, you know, double-digit price increases, you have inflation, you know, double, you know, high, high double digits, and sales grow. You know, and, you know, gas prices recently, $6-$7 in California, now $20 wages. These are things, you know, we haven't experienced. And so I think from a standpoint of trying to predict the consumer is very challenging. What we focus on is: What is the consumer? Why do they come to us? Why do they leave? How do we meet their demand? How do we make sure we have the right offerings at the right place at the right time? And then leave the rest to, you know, speculation.
But I think, you know, we always go in with the idea that we're going to try to drive traffic despite heavy increases in price, in this case, specifically in California with AB 1228. But knowing that that's a risk, and so how do we mitigate that and have a good balanced offering between a barbell strategy of premium offerings? And then for those who want checks under $8, making sure we have an offering that meets people that are really on a budget.
That 8 used to be 5, so.
Right. Well, yeah, three years ago, it was $5.
Yeah.
Yeah.
Okay. And being that you're a month or so into fiscal 2024, you've got a lot of things going on between two brands. What would you say you're most excited about that you think maybe is underappreciated, but what's the-- If you were prioritizing the things that really could drive the business and the growth going forward, what's top of the list for fiscal 2024?
Well, I always believe it's people and culture, so I'll start there. I think with the leadership team we've put in place at Jack and Del Taco, and I'm excited because I don't think the market has had a chance to really hear from the entire team, and we'll do that at our investor conference in January. I think that's key. I think getting the chance to see this leadership team, what their capability is, how they interact, how they engage, is gonna be critical to our growth success in the future, and both with the new Del Taco team. I think that's one. And I think, two, we have some really breakthrough items coming from an innovation standpoint, that we're excited to launch in fiscal 2024, that we've been talking about. I think it's a breakthrough item for us.
I think last is just the fact that we're seeing a lot of the things we're doing from a margin management stuff, you know, come to fruition and improve the P&L. So all three of those things, I think, are critical for where this business is today.
The new product news you said you wanted to share today, is that-
Not, not yet. We're almost there.
Okay. We'll wait.
Talk about boba.
Yeah. Well, we did just launch boba. That wasn't the breakthrough product. But boba just launched. It's the first in the industry to launch boba tea, and it's outperforming everything we expected it to do, and so we're excited. It's having, you know, similar impact that maybe Red Bull did when we launched Red Bull.
Interesting. And the Jack in the Box character being the Sexiest Man Alive-
Yeah
... still have some legs to it?
It absolutely does.
Okay.
I mean, you know, part of the strategy has been to really make Jack a pop icon and, you know, with all his friends in the industry, it's definitely coming to life from everything from the Snoop Dogg partnership to Ryan Reynolds, and then now Sexiest Man Alive, you know, we're seeing Jack becoming, you know, really relevant.
Yep.
I think it's really. If you think about our growth strategy, too, going into new markets and just the ability to connect across the country through social, you know, Jack being such an iconic figure, I mean, they're it. You know, we're kind of preceding these markets with more and more interest in the brands 'cause they know... a lot of people know them already, but then it's just getting it top of mind, and it's so much easier to kinda get that full reach. So as we're coming into a new market, it's, you know, we're not having to kind of, you know, build that loyalty or that knowledge. They consumers know us already.
We'll definitely talk about new geographies, but just so you know, people on the East Coast have had tastes of it in the past-
Yeah
... but it hasn't sustained, so there's some excitement about that. But you mentioned what I call the FAST Act, but I guess has a new and better name, but all about the wages in California. Being that we don't have too many companies with the degree of penetration and reliance that you guys have on California, I'm sure you get tired of talking about it, but if you could maybe just frame how you think about wages, primarily for your franchisees at Jack in the Box, your own company stores as well, but then Taco, I would think that is quite daunting for a franchisee to think about having to pay $20 per person per hour, starting April first. So what are those conversations like, and how do you think Jack in the Box responds to this unprecedented potential increase?
You know, I think when we talk to franchisees, and we have the conversations, I think, you know, for them, the moment where their eyes get large and concerned is when you're looking year-over-year, having to take 8%-10% price. And I think that's something they haven't experienced in their careers, and so I think that's the bigger concern is, we know we have to take price, but it's pretty, pretty alarming that we've never done this before, so what does that look like? So I think that's their biggest concern. Now, they know we have to do it. We're giving them great guidance. We've got new tools and pricing discipline that enables us to go in and look store by store, market by market and find out what the competition is doing and how are we stacking up, are we pricing accordingly?
And so that's giving them some confidence. Then on the back end, we're making sure we have things that will help them save money, how to manage their labor differently, some technology tools and equipment that all these things together will add up to, to make sure that, they're in a healthy place going forward. But their, their fear is more about, you know, how can the consumer, you know, absorb another 8%-10% after we just took that last year?
What do you tell them in response to that? Because it does seem like it would be daunting-
So-
... but if every restaurant, I guess, is doing the same thing-
Absolutely
... and you wanna eat, hopefully, the wages are going up enough so that that consumer has the dollars to come in the front door, but.
Yeah, and I think that's the critical component is, our competition is gonna have to do the same thing. They're gonna have to take the same price increase. And so, you know, for us, what we at least have is some experience when labor was short, and going into the market and saying, in L.A. and other California markets, we immediately, you know, listed $20 an hour for pay, and our stores staffed very quickly. So we do know it helps staffing, and those restaurants that struggle with staffing, it we've seen it retain our staffing as well. So we do know that we get the benefit of that, and that helps sales-
Mm-hmm
... it helps throughput, it helps all the things that can make our model run more efficiently and effectively. So we do think there's some benefit there, and we have some time-tested, you know, strategies that we've already utilized to move to those kind of wages. It's really about how quick will the rest of the competition have to go there with their wages, meaning casual dining or fast casual or retail, who are competing for the same employees. How fast will they have to move to the same wage rates? And I think that's the critical component.
... Is there a thought, this would be a pessimistic thought for you guys, presumably, but if a national brand said, "You know what? Instead of raising wages by 8%-10% in California, we'll just raise it by 1.5% across the country." Well, raise prices by 1.5%, but obviously, you couldn't do that, because franchisees in California need-
Correct
to manage their own cost structure. But I would think there's some gamesmanship going on among all different brands to how do we handle this and maybe win out on something like this, maybe the independents close or?
Yeah, I've heard a lot of those arguments from our franchisees, from other franchisees, like, "What if we-- you give us some benefit on royalty, and we'll not price as much, and we'll win over the competition," and all those things. I think at the end of the day, we know it's a competitive market, and anytime the competition is gonna put out price, somebody in the market is gonna come close to it and compete. And so I think at the end of the day, the reality is, that the consumer, your natural, you know, demand characteristics, are what's gonna win the day. And so we have to make sure we meet customers with the right product at the right time. The pricing is gonna be the pricing, and then let it, let it settle.
So now, this is gonna be the most anticipated and exciting event in recent restaurant history, so look forward to that. When you think about the top line, you know, from a comp perspective, and we were talking about it earlier today, you gave guidance for fiscal 2024 for low single digit to mid single digit. And as we spoke about, that's inclusive of 6%-8% pricing at the national level.
The company-owned stores.
The company-owned stores, right. Franchisees make all their own pricing decisions.
Right.
But with that said, the simple math would imply that there's some modest negative traffic assumed within there. So how do you... I'm assuming that's, correct me if I'm wrong, but if that is the case, why are you assuming modest negative traffic in fiscal 2024? Is there anything that's concerning you, or is it just, you know, conservatism?
Yeah. No, you go forward. Kick it off.
Yeah, I mean, I think naturally, when you're looking at a year of, after taking double-digit price increases, and the market also with the California, with such a large restaurant base, we think there's some natural... You know, we have such a high percentage of our restaurants there, if we're taking that kind of price, to assume that it's gonna be a positive traffic year is hard to speculate. And so we're being, you know, cautious, and we're looking at it and trying to say, as we run our algorithms and our models, that, you know, what is a reasonable assumption of negative traffic, considering two years straight of, you know, 8%-10% price? I think that's the key-
Yeah
... is trying to make the right assumption around that.
Yeah. Yeah, so I think outside of California, we expect traffic trends will improve versus the last year. But in California, that's the wild card. As we take price, probably have some you'll have more, obviously, more impact on traffic. So that's the overall assumption we've made for the company stores. And then for the franchisees, again, we've kind of left we not kind of speaking for them. We think we'll see what they end up doing. We would expect there to be a significantly different outcome in terms of consumer behavior. But we think the traffic trends have been improving, and so kind of ex this impact may be AB 1228. Yeah, we're feeling pretty good about 2024. On the traffic side, it's just California is a bit of an unknown at this point.
So two, two quick follow-ups. One, I'm assuming investors are gonna ask, all right, starting in April, May, June, will you share your California traffic versus your re- I mean, you guys will have some troves of data to showcase what this implication has had. So whether or not you plan on doing that is just an interesting sidebar, but separate from that-
We'll see what the numbers show.
We'll see what the numbers show. So we know if you share, then-
Right.
Okay. Well, the other thing is just, I know franchisees make all their own pricing decisions, and that is a key component of the franchise model. But I'm guessing there are lots of conversations, and they look to you for some guidance because you're overseeing a couple of thousand restaurants, and you have decades of data. So how do you go about handholding without crossing the line? Like, what tools do you share with them, if any, that would really help them, rather than them making their own knee-jerk reaction, potentially?
Yeah. Over the last year, we made quite a bit of investment in a pricing team, and data, and modeling tools that enable them to get insight into what's the competition doing item by item, store by store, region by region. And so we give them guidance from a standpoint of where do we think on their specific store, should they take price? More surgical than we've done in the past, and we've also given them tools with, you know, ranges of saying, min-max, here's where we think you should be for this store in this market. And so we're able to guide them without, you know, doing anything that's, you know, a challenge, you know, from a pricing standpoint. But, but, but giving them real clear guidance to say: We think, you know, breakfast and these specific items, you have opportunity.
You know, chicken, you may need to dial it back or keep it as is. So we can give guidance around where we think there's opportunities, and then they have to decide what is that range within a min-max.
Do you find franchisees are receptive to the guidance and implementing those type of things?
Yeah, I think they have because they haven't had this type of data or insight in the past. And so as we're backing it with the data to support them, they've been very willing to work on the pricing and actually, you know, grateful for what we've done to give them this insight that they haven't had in the past.
Yeah, and we can share what we're seeing. So when we're making pricing changes in the company stores, what's the impact to traffic? We can share that. We can share general best practices because we have. We can see the overall system, what's performing, what's working, what isn't working, and we provide that insight back. So, you know, a franchisee in maybe one market, they are only seeing their data, which is really important, but we can also see, you know, what's working elsewhere. It's also this whole, you know, with AB 1228, it's kind of recatalyzed a lot of these operational improvements that these teams have been working on and driving through the system for the last year, couple of years now.
Really working closely with them now, you know, with each franchise to say, "You know, have you implemented these system changes yet?" you know, whether it's, you know, different, you know, cooking systems or labor strategies... really making sure that they're diving in and pushing all those now, so that when they get to April, it'll minimize the amount of price take because they've been able to find other cost efficiencies as well. The last thing I'd say is that, you know, bringing Del Taco into the fold now, we're able to take all these tools on pricing and operational efficiencies, and now we're kind of rolling those out into the Del Taco.
They just now got access to a lot of the same pricing tools that we've got for Jack, so that they're able to make more informed decisions as well.
The economies of scale of having a multi-brand portfolio-
Exactly
at its finest. Got it. Brn, obviously, pricing falls within comp, and comp gets a lot of attention just because it demonstrates the health of your business and whatnot. But the unit growth is, I think, what people are most intrigued by in terms of your top-line drivers, which, for many years, it hadn't been much in the way of new unit growth. There were fits and starts, but it does seem like we're reaching an inflection point. I think you actually said for this year, it'll be the first year of, well, confidence in net positive unit growth at both of your two core brands. And I know there was prior guidance for accelerating upwards of 4% at a certain point in time.
So if you could just share your confidence in that acceleration, and maybe how much of it is new market versus existing markets, we can kind of gauge. Because I know you have a couple of new markets, which, as Chris and I were talking about earlier, is super exciting because that was always the pushback was, in a new market, if nobody knows your brand, you can talk about it, but it's not gonna work. And if you're actually starting to see some success, that would give people a whole lot of confidence that this ramp can really happen, which I think would be a big boon for the company.
Yeah, you know, we talked about when I first joined, trying to get in and understand the pipeline and assuming that the pipeline was gonna continue, we went out there and said, "You know, we think we can double what's been happening and get to maybe 4%." Well, I think that's probably, with everything that's occurred in the marketplace, unrealistic, with everything from supply to, you know, challenges with COVID and all the different challenges we've seen over the last three years. So at our Investor Day, we'll update that guidance, give you a better long-term feel for what that should be. But this is a brand that can be a growth brand. And, we've seen the pipeline start to get full.
We've tried to get information related to the number of commitments, because that's the starting point, and then now, how many, how many locations are actually in the process of being built. So people can get a feel that this is a growing pipeline, this is real, that this is coming to fruition, that there's enough new units happening. Now it's about limiting closures and then making sure that net new unit growth happens year over year over year. And we were excited to see that we had net new unit growth in 2023. We think that will continue to build into 2024 and beyond, as we have a better line of sight into the future pipeline.
How many of those units would you say are higher risk because they're in markets that you don't yet have the brand recognition, or you don't have the data for, versus this is just another one going into a very successful region of California?
Yeah, our primary focus has been in our core markets, and let's go out and fully penetrate those. And so that's the majority of where we started with our pipeline. Let's get that built. We know they'll be successful, they're in core markets, and so that's the majority of the pipeline currently. Now, we've been building into new markets, and we're starting to see those come to fruition. Like Salt Lake City, we'll have... You know, we went from, you know, 0 units a year ago to what will be 15 within 2 years. We've already have 4 open there now, and they're all performing extremely well. We have Louisville, we just opened as a new market. We went in with company in, in both in Salt Lake and in Louisville, we partner with our franchisees to grow. They're growing at the same time we are.
We opened our second store, or our second store in Louisville opened tomorrow, and they're all performing over $100,000 a week in sales. And, you know, that's been phenomenal for this brand. They haven't seen this kind of performance out of a new market, in its history.
Yeah, and then this year, we'll have Mexico, or the border Mexico opening, I think another couple of states as well. So it's, it's... To Darin's point, you're starting to see more of that growth coming from, from new markets. It's very early innings. There's, there's a few other states that we'll talk about, probably at the Investor Day as well, that we'll be seeding here over the next couple of years, and we think there's tremendous opportunity to, to fill out these other markets.
Yeah, as Brian mentioned, we have Florida, Montana, Idaho, Arkansas, all opening as well. So we have a lot of new markets, but the majority of the early growth is coming by filling in our existing and supplementing it with new markets.
I would assume when you talk to your franchisees in some of these new, newer markets, that your competition probably doesn't make it easy for you. I assume if they see you coming, and there's one, two, three stores, they immediately try and attack. Other brands have talked about that with different day parts, where the competition is not really friendly and whatnot. So you've been able to- you've seen that and been able to withstand it. It seems like the brand is... It's, it's not like it's the first month pop. I mean, this is-
Right
... there's some months behind it.
Yeah, there's definitely some time behind this. This isn't just a first-month pop and then drop. These are sustaining. These type of sales are sustaining. So, you know, our first store in Salt Lake opened close to $200,000. It's still performing $140-$150 a week, and we just turned digital back on. So, you know, you're talking about substantial performance, and we're seeing, you know, across all the new stores that we've opened, not just in these new markets. The new markets are really performing. The existing stores or existing markets that are not in the new markets are still performing above system average, north of $2 million. And, so we think overall, we've got a story to tell, that this model works.
I hate to do math in my head on stage, but 140, 150 thousand on 52 weeks would be like a $7 million store-
Correct
... when your system's doing $2 million.
Correct.
Mm-hmm. Pretty good.
We've built, but that continues.
Yeah. Presumably, those are examples that give other franchisees of the potential margin-
Right
... or getting the fixed cost leverage can get pretty good on some-
Very, very good, very quick. Just even over $100,000 a week, right, is tremendous, so.
And the refranchising, which I guess is more specific to the Del Taco side of things, it creates some noise and uncertainty. Obviously, your guidance you gave for fiscal 2024 does not assume any refranchising because you don't, can't do it with certainty, but we know that over the next few years, so I'm guessing the sell side community is taking stabs at how many they think each year. But how should we think about, you know, best guess? Should we therefore just be assuming a third, a third, a third over each of those three years, and what line items would have the greatest diluted impact? And I'm assuming net-net it's diluted because you're trading away a company-operated store for a franchise.
Yeah. There's some near-term dilution. As you said, the best way to offset that is through share repurchases, but there's even a lag effect from when we sell the store to when we take those proceeds and be able to repurchase shares. So it has some modest dilution in the year. As we've talked about, with every one of these, we're also adding development agreements. So, you know, if you look ahead in a few years, then as we take out more G&A, we then add more royalties from new development that comes along with these refranchisings, then we can turn it into a, you know, neutral to an accretive system. And along with that, all the benefits of being asset-light that we are really focused on.
So it's not just about the EPS impact, but it's really about our long-term strategy of being more of a franchise model. And so, I think it's at this point, again, we've said on the call, we are fully committed to getting there. We don't have an exact number to be able to provide because we don't have, you know, these aren't under contract yet. We could go faster. I think for now, using that equal weight is probably the best we can give. I think as we get to either ICR or next call, we'll have a much better line of sight to what the year looks like, and we'll be able to give a more wholesome update. And that'll be probably the best time to give a checkpoint on what to do for 2024 in terms of changing models.
But for now, I'd say probably use something like 40. And there is some modest dilution. Again, you're trading off the EBITDA you're selling. We're obviously picking up royalties. We're, you know, taking out usually about $35,000 per restaurant for D&A is going away, and then there's some incremental G&A that goes away as well. And so kind of those are the main components of kind of how it impacts our P&L. And then again, with the proceeds, I think for now, modeling that we would use it to repurchase shares is probably the right way to think about it for 2024.
Understood. And I know you mentioned a key component of that, which is, someone buys a store from you, there is a promise to open up. Is there a ratio that you've historically seen or... Because that seems like the linchpin. You'd be willing to sell it at a certain multiple if you promise to open up X number of stores, because that'll behoove you over time. So how do you think about-
Yeah.
- discussions?
We want a minimum of one store per store bought. So we want them to build at least one per store bought. And then also, these typically come with some type of remodel commitment, although our goal is more development. There is some kind of remodel capital commitment that we're, you know, less focused on, but happens and when we provide a lot more time for that to occur versus just the new build. So we should get benefit both in remodel and development.
Right. And again, that's to get back to why we want to make sure we get the right partners to refranchise, so that these are known commodities, either existing franchisees that have a track record of kind of living up to their commitments, or working with large, established new franchise operators that maybe have other brands, where they've proven their ability to, you know, move from an agreement to an actual, you know, build and opening up a restaurant. So that's fully critical. I think as we've shown the unit economics improving, I think it also is encouraging more franchisees to come and want to work with us. I think that also, I think, is gonna strengthen our conviction that we can turn those agreements into actual restaurants.
I've got another 20 questions for our last 2 minutes, but-
Right
... that probably doesn't work. But I figured I would open it up to the audience and see if there were any questions, or we have a mic runner that can- oh, there's one up in the front over here.
Do you have franchisees from Jack in the Box wanting to open franchisees of Del Taco and vice versa?
Yes.
Yeah, some of the deals that we've already transacted are Jack franchisees that have bought stores that have signed up to build both Jack and Del Taco. And then we had a Del Taco franchisee buy some stores and also sign a development agreement to do, as part of when he bought Del Taco stores, signed up to do both Del and Jack.
Was this in Salt Lake City?
No, this was in Idaho, but Paul, if you probably know, Paul Hitzelberger has been around the industry for years. He’s committed to, to Del right now. He’s strong. He’s a great guy-
Yeah.
and a great operator.
Yeah.
I would assume he's doing both?
I think he's getting closer to retirement, if he ever retires. But, his focus is on continuing to build Del Taco, but he's been one of our biggest fans as far as, you know, the whole transaction of Jack buying Del Taco.
Yeah.
Good.
Yeah.
My last question was just on the restaurant margin line. So you gave guidance initially for fiscal 2024, actually for both restaurant margin and EBITDA margin. The two brands, there's a pretty wide gap between them. Is there any reason why, like, over time, under your ownership, that the Del Taco restaurant margins wouldn't be more similar to the Jack in the Box restaurant margins? Or is there something structurally different about the Mexican category versus burgers? Because it seems like it's a wide gap and presumably an exciting opportunity if Del met Jack up here rather than-
Yeah
Jack coming down to there.
There's a couple things going on there. I think when Jack did refranchising, they cherry-picked the best performing stores in California to keep. So he already had a good built-in, you know, margin base. I think that's one thing, so just different off the top. So separating that, there's definitely opportunity at Del for us to improve margins through synergies, through our purchasing supply chain, through just better use of what we would call our operation services team, to find ways through equipment, technology, and process to take costs out of the model. So we know there's opportunity there-
Mm-hmm
... to improve the margins at Del Taco, and we're excited about that. And then also, just the way we, you know, do menu management and look at the menu board and how we can drive better margin, from the menu alone, there's opportunity. So we know that, there's future opportunity for Del to improve margins.
The EBITDA margin, I guess, is a little bit more deceiving because of the different level of franchise versus company ownership, but I assume it's something similar. A similar story there, the very wide gap. There's no reason why that couldn't close materially once... Del Taco was at 90% franchise?
Correct.
Correct.
We look forward to that.
Look forward to the investor day. Is that in January in San Diego?
Yes.
Sounds fantastic.
Great. Thank you.
Great. We want to thank Darin, Brian, and the Jack in the Box team for joining us today. Hope you have a good day of meetings.
All right, great.
Thank you.
Thanks, Jack. Appreciate it.