Earnings Call: Q3 2021

Aug 4, 2021

Good afternoon, everyone, and thank you for standing by. Welcome to the Jack in the Box Inc. third quarter fiscal 2021 earnings conference call. My name is Jesse, and I'll be your conference operator for today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from Jack in the Box will conduct a question and answer session, and conference participants will be given instructions at that time. As a reminder, this conference is being recorded. A replay of the call will be available on the Jack in the Box corporate website starting today. I'll now turn the call over to Chris Brandon, Vice President of Investor Relations. Sir, please go ahead. Thank you, Jesse. Good afternoon, everyone, or evening, depending on where you are. We appreciate you joining today's discussion highlighting our third quarter 2021 results. On a side note, I am very excited to be a part of this earnings call, my first with Jack in the Box. Joining us today are Chief Executive Officer, Darin Harris, and Chief Financial Officer, Tim Mullany. Following their prepared remarks, we are happy to take some questions from our sell side coverage analysts. During our prepared remarks and the Q&A portion of today's call, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available in the investor relations section of our website at jackinthebox.com. We may also make forward-looking statements that reflect management's current expectations for the future, which are based on current information and judgments. Actual results may differ materially from these expectations based on risks to the business. The safe harbor statement in today's news release and the cautionary statement in the company's most recent 10-K are considered a part of today's discussion. Material risk factors, as well as information relating to company operations, are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC and are also available on the investor relations section of our website. A few brief housekeeping items before we get started. A reminder that the current year has a 53rd week, which will factor into our upcoming fourth quarter 2021 and its year-over-year comparison. We will provide more detail on this related to our results, and as a reminder, this will not have an effect on same-store sales, but will have impacts on, among other things, system-wide sales, revenues, and earnings. Next, hopefully this is good news, we will be changing our earnings release and call times going forward, beginning with Q4 in November. On earnings day, we will be putting out our earnings release at 8:30 AM Eastern Time. On that same day, our conference call will begin at 10:30 AM Eastern Time. In addition, Jack has historically had a quiet period of 1 month prior to the earnings calls. That will now change to a 2-week quiet period. Beginning in November, note that we will now be able to have analyst and investor interaction up to 2 weeks prior to our earnings release and call. Lastly, I'd like to quickly review our guidance updates included in this afternoon's earnings release. As a reminder, going forward, we will be providing new annual guidance each year for 4 items, CapEx and other investments, G&A, commodities, and labor cost outlook. These annual measures will be introduced at our 4th quarter earnings, typically around November, and updates to those annual measures will be provided at our 2nd quarter earnings, typically around May. In this afternoon's earnings release, we provided the following updates. 2021 CapEx of $40 million-$45 million, which was previously stated at Investor Day and does not include other investments which will be included beginning with our 2022 guidance. 2021 G&A of $71 million-$76 million. This G&A guidance omits our net COLI gains or losses, going forward, we will be providing this in a dollar range rather than a percentage of system sales. 2021 commodity outlook is up 4% to 5% compared to 2020, and 2021 labor cost outlook is up 7% to 8% compared to 2020. Our three to five-year outlook related to comps, unit growth, and system-wide sales, metrics which all factor into that outlook beginning in 2022, remains the same as what we provided at our Investor Day in June. As we stated then, all other outlook measures we had provided previously for 2021, particularly related to EBITDA, are no longer a part of our guidance going forward. Also this morning, for additional visibility, we provided a CapEx and other investments guidance range for 2022. Tim will speak to this further in his prepared remarks. With that detail out of the way, let's get started. I will now turn the call over to our Chief Financial Officer, Tim Mullany. All right. Thanks, Chris. Good afternoon, everyone. We're excited to discuss our third quarter results with you today. Overall, we had a very strong quarter of top-line results, helping us to continue to drive top-tier unit economics and store-level returns for our franchisees, positioning us for the future growth that Jack has been capable of for decades. We remain as focused as ever on getting our fundamentals into place to accomplish just that. Turning to our results. Overall, our franchisees, operators, and restaurant managers generated strong operating results, leading to a diluted EPS of $1.79 for the third quarter, a 26.1% increase from the prior year. I'll provide some detail on the components of these earnings. System-wide sales grew 10.6% as compared to Q3 2020. As a reminder, system-wide sales includes both comp and net unit performance. Our system-wide sales in Q3 were also benefited by restaurants that were temporarily closed for remodels a year ago, but contributed toward our results this quarter, as well as high volumes at our newly opened stores, which helped offset the negative store count. Our same-store sales performance in Q3 was outstanding, growing 10.2% while lapping a prior year increase of 6.6%. Breaking down the comp, our franchise business increased 10.3% in the quarter, while our company-operated stores were up 9.0%. The comp this quarter was driven by a balanced mix of both check and transaction growth. This was our second consecutive quarter of traffic gains, helped by our strong value platforms and LTO offerings. While average check growth came from premium menu items, maintained strength in items per check, as well as some price increases at the store level. Shifting to unit count, we opened four stores during the quarter and closed 13, most of which included agreements for offsetting locations as we continue to take the needed steps to make our system more efficient. Keep in mind that in most cases, these stores continue to pay both royalty and rent contribution until the offsetting locations become operational. As you may have seen in our 10-Q filing this afternoon, we stepped in to take over operations of 16 stores in a non-cash transaction, all of which are located in the state of Oregon. Our goal is to eventually have these stores back in the hands of franchise operators, but in the meantime, it's a prime example of our strategy to, when necessary, take in under-resourced stores in markets we know we can improve and grow. This process will continue as we get our fundamentals positioned for growth and is reflected within our three to five-year unit growth guidance. We remain very confident in our target of 4% unit growth in 2025, and in the meantime, continue to develop and prove out the fundamental strength and best-in-class unit economics to get us there. Revenues for the third quarter were nearly $270 million, up just over $27 million or 11.2% from the prior year quarter. This increase was primarily driven by higher system-wide sales, led by strong same-store sales across the board. Restaurant level margin remained flat at 25.4%, or $23.4 million, while franchise level margin improved to 43.3%, or $76.9 million. Sales leverage was offset by increases in wages, commodities, packaging, delivery fees, and maintenance costs in our company-operated restaurants. While higher royalties and rent revenues from strong comps contributed toward the increase in our franchise margin. G&A expenses increased approximately $7.4 million as compared to Q3 2020. This is due to increases in litigation accrual, insurance costs, and lower net COLI gains. Excluding net COLI gains of $2.6 million in Q3 versus a $3.9 million gain last year, G&A increased by $6.1 million. As Chris mentioned, our annual G&A guidance measures assume a neutral or zero net COLI impact. Our reported effective tax rate as a percentage of earnings from continuing operations before income taxes was 23.1% for the quarter as compared to 27.9% in Q3 2020. This was primarily due to a decrease in the impact of certain non-deductible expenses, an increase in non-taxable gains related to COLI policies, and a release of reserves on certain state tax credits and losses. When you combine all of these elements, net earnings increased to $40 million for the third quarter, compared with $32.6 million a year ago. Adjusted EBITDA was $79 million in the third quarter, compared with just under $73 million from the prior year quarter. Our diluted EPS in Q3 was $1.79 versus $1.42 in the prior year, an increase of 26.1%, or $0.37 per share. Breaking down that $0.37 increase a bit, most notably, earnings from operations benefited us by $0.18. A lower diluted share count driven by share repurchases benefited us by $0.05. I'll provide more detail on share repurchases in a moment. Net interest expense positively impacted us by $0.02, mostly related to our VFN activity a year ago. The lower effective tax rate positively impacted us by $0.11. Lastly, other various items impacted EPS make up about $0.01 of positive impact. Now shifting to cash. Our top-tier economic model remains strong. It continued to generate significant free cash flow throughout the quarter. Year to date, we have generated attractive net cash provided by operating activities of approximately $150 million. After deducting for CapEx, we have generated free cash flow of approximately $115 million. Year to date, we have spent approximately $35 million on CapEx, primarily toward lease right of first refusal transactions and remodel refresh of company-operated restaurants. During Q3 and including the first week of Q4, we repurchased approximately 577,000 shares for $67 million, or approximately $116 per share on average, bringing our total 2021 year-to-date repurchases to $132 million. As of today, there's $68 million remaining under the board authorized stock buyback program. During Q3, we returned $9.8 million to our shareholders in the form of a $0.44 quarterly dividend payment, bringing our 2021 year-to-date total dividend payments to approximately $28 million. I also wanted to touch briefly on the CapEx and other investments guidance range we provided this morning of $65 million-$75 million for 2022. As a reminder, beginning with this guide, all annual CapEx and other investments guidance will include 2 main items. That will be capital expenditures and franchise tenant improvement allowances and incentives. To help visibility, we thought providing this guidance earlier than expected, as it will typically come at our year-end earnings, would be helpful in framing up a focal point of our investment outlook for next year. I would like to summarize by noting our performance related to the four-box financial strategy I talked about at our Investor Day in June. Driving operational excellence. I am particularly pleased at our ability to deliver strong operational and margin performance, yet again demonstrating the strength of our proven free cash flow model in Q3. System-wide sales growth. This will be the key metric to measure our progress against balanced top-line sales plus unit growth performance. We had an outstanding quarter driving double-digit system-wide sales growth, and our future upside opportunity within unit growth has me optimistic that we can continue to perform well in this area. Third, funding investments. As we discussed at Investor Day, we are leaning in where needed, which will be necessary in getting our fundamentals to a meaningfully improved place where unit development and growth are delivered on a consistent basis. Look for us to continue to be disciplined, yet front-footed in this area. Lastly, returning capital to shareholders. We will continue to manage the balance sheet and our use of cash efficiently, whether in the form of dividends, repurchases, or incremental business investments, always through the lens of strengthening franchisee profitability and maximizing shareholder return. In closing, our business continued its strong performance during the third quarter, demonstrating the strength of our economic model at both the company and store level. We continue to focus on operating efficiently, investing wisely, and building fundamentals for long-term growth. Thank you again for joining the call today, now I'll turn it over to Darin. Thanks, Tim, and good afternoon, everyone. Appreciate you joining us today. Our earnings call today marks one full year of reporting our performance and results each quarter as CEO of Jack in the Box. What a year it's been. I'm extremely pleased with our accomplishments over the last year. We've built a talented new management team. Our sales performance has been impressive. Our digital business has grown. We've proven our ability to drive strong earnings as a company, and most importantly, we've driven increased profits for our franchisees. Our relationship with our franchisees continue to strengthen as our alignment with them about the brand's direction solidifies. With that said, today is a good opportunity for me to reflect on some of my thoughts and priorities in my first year leading Jack in the Box. Before discussing the quarter specifically, there are a few things I'd like to highlight. First, I've thoroughly enjoyed the time spent developing relationships with our franchisees, and I truly feel that the partnership between our franchisees and our new management team is off to an outstanding start. Our strategic foundation of serving our people and franchisees well is really beginning to take hold. Although we still have opportunities, our entire team is energized by re-engaging with our franchisees and treating them as partners in strategy. Recently, we attended the National Jack in the Box Franchisee Association event in Nashville. It was a great opportunity to connect with franchisees in person and meet their families. This month, we have the opportunity to bring the Jack family back together again at our upcoming franchise business meeting, where we have the opportunity to celebrate our 70th anniversary. You heard directly from our franchisees at our Investor Day last month and hopefully got a sense for their excitement. The alignment, the positive energy, and store-level returns, combined with excitement around our new store prototypes, strong marketing, our digital and loyalty innovation, have our franchisees, operators, and management team as ready as ever to execute on our growth potential. I'm impressed every day by our energy and culture, both as a brand and as an organization. We know what we are here at Jack, unexpected and out of the box, and I love that. The fun and enthusiasm you sense from our marketing, communications, and brand identity externally is exactly the same as what I observe from our talented teams internally. The teams are scrappy. We're a challenger brand, a street fighter in a boxing match, if you will. This persistence and determination make us unique, and it truly energizes me and my team. Lastly, I'm thrilled at the team we are building and the way we have aligned on the need to take a step back and think about our fundamentals for growth. We are attacking the elements of the business that need to be improved for us to meet our growth potential. We realize the importance of mending a broken franchisee relationship and immediately went to work on repairing it. We realize the importance of unit economics and providing such strong returns that franchisees can't wait to build more restaurants. We realize the importance of a clear brand position and a focused long-term strategy, and most importantly, communicating this clearly both internally and externally. We realize it's time to lean in on investments, innovation, and listening to our guests more. We're committed to investing aggressively in store improvements and new store builds, innovating via digital operations and menu, and we're building out a much stronger, more robust data and analytics team to ensure we never take our eye off the ball in putting the feedback and insights from our guests before our own. Lastly, I am determined to make sure it's clear that Jack in the Box is anything but just another burger player, whether it be an existing market or territory, a new market that we may be entering for the first time. The uniqueness of our brand, our menu, our day part, value, and premium offerings, and most notably, the uniqueness of our overall guest experience is something we can never let ourselves or most importantly, our existing potential guests lose focus on. I can't express enough how pleased I am with the progress we have made on all of these fronts. We couldn't have made so much progress in such little time without outstanding leadership, a team energized and committed to a new path forward, and a group of franchisees willing and ready to roll up their sleeves and help us get better. All in all, to say I'm excited about the opportunity to lead this brand is a tremendous understatement. While we are just getting started and there's tremendous amount of work still to do, I'm encouraged by what we've accomplished thus far in our journey of getting our fundamentals in a position to expand. We're extremely optimistic that the time has truly come for this brand to reach its full growth potential. Our next step is to execute on the show me story related to unit growth and prove it, something I am fully committed to achieving. Now turning to a few quick thoughts on the quarter itself. Overall, we had a very strong quarter of top-line results, which only helps our effort to continue to drive top tier unit economics and store level returns for our franchisees. Our double-digit same store sales performance is certainly a credit to Ryan Ostrom and his marketing team, which in what I would consider their first full quarter executing as a team, delivered very strong sales via a nice mix of traffic and ticket. I'm excited about what this team can continue to accomplish, not just for our existing guests and markets, but in introducing the Jack brand experience to unfamiliar markets and new potential guests. In addition to the breakfast day part, late night performed well yet just again, a trend we have seen in the business as things have started to reopen and people have started to get out and about more like usual. Late night is a tremendously exciting opportunity for our business, an area where we can truly differentiate and establish category leadership. It is a compelling way to prove out our not just another burger player philosophy, and it's something we will continue to dedicate energy and focus on going forward. On the promotional front, our Popcorn Chicken offering was a definite highlight, only offset by the fact that it almost performed too well. As a former operator, it drove me crazy that we weren't able to continue with a product that our customers were clearly craving. I was pleased to see our team responded. We made a very nice pivot to our biscuit sandwich platform, which also performed well and maintained our top-line momentum. This was yet another reminder of how well equipped we are to continue to activate against innovation of platforms around chicken. Expect more of this in the future. We saw particular strength in our dine-in and carryout businesses as things continue to open, all highlighted by the reemergence of traffic gains, which as Tim noted, marked our second consecutive quarter of positive transactions. It may not sound like a lot, but considering the trends of behaviors and much of the industry's reliance on ticket to create sales growth, I was pleased to see this be more of a balance. This is not only something we are very capable of accomplishing consistently due to our ability to provide both value and premium offerings to guests who want it, but it is also certainly the most sustainable way for us to grow sales and compete. Before we wrap up and take your questions, I'd like to introduce a new way for us to best summarize and gauge quarterly performance against our long-term strategy that was presented at Investor Day. Expect each quarter for me to review our performance against our 4 pillar strategy. First, building brand loyalty, highlighted by the launch of our The Jack Pack rewards program during quarter 3, something simple to opt into, simple to earn, and simple to redeem. In addition to the experience and uniqueness we offer our already existing loyal fan base, the loyalty program hopes to take this important pillar to the next level. This is also a strong boost to our digital ordering experience as a whole, where we see a better guest experience, higher frequency, a stronger food add-on, helped by the visibility and interaction with our unique menu. Digital remains a strong opportunity for us in maximizing guest satisfaction, as well as creating sticky, frequent customer behavior. We have grown our digital database 30% thus far in 2021 alone, and are excited to soon hit the mark of 10% sales coming from digital channels. Next, driving operational excellence. Tony Darden, who joined us for our Investor Day Q&A, is up and running and spent a significant portion of his time training in our local restaurants recently. I'm very excited about what his leadership can bring to the table. Encouraged by the way he fully understands the uniqueness of our brand experience and has already dialed in and focused on how we maintain it. At the same time, he's thinking about how we create simplification where needed to boost service and profitability. His arrival is also timely, since much like the remainder of the industry, we continue to be pressured by labor and hiring, which has impacted store hours and service levels. I am pleased with the way we are managing through this. Certainly keeping a close eye on ensuring our consistent execution and service levels remain as strong as possible considering the headwinds. Third, growing restaurant profits. As I stated at Investor Day, this is an obsession for our management team, which is why it will now be a transparent annual disclosure going forward. Unit economics are key to our unit growth potential, no question about it, and it's a big part of the job that I have that excites me, which is seeing our franchisees generate strong returns. Building fundamentals to support and sustain these four-wall economics and get to a place where franchisees grow organically within our system is certainly our end goal, and we are on our way. Lastly, and on that note, our fourth and final pillar is expanding Jack's reach, which is undoubtedly something everyone on this call shares as a priority and a focus toward our future. We have now completed signed development agreements for 64 restaurants thus far in 2021. We announced at Investor Day our plan to reach 4% unit growth in 2025 and our aspirational goal of operating in 40 states by the year 2030. We will get there by learning from our past to improve fundamentals, solidifying our unique brand position to potential guests in a strong fashion, and most importantly, providing a franchisee opportunity like no other in QSR. In closing, I've personally never been more energized in my entire career than I am about this team that we have built, the franchisees and operators I'm fortunate enough to partner with, and this brand that, in its 70-year history, has never been in a better position to grow and bring its unique experience to all who want it. With that, we are happy to take your questions. Thank you, speakers. Participants, we'll now begin the question and answer session. To ask a question over the phone, you may press the star key followed by the number 1 from your telephone keypads. To withdraw your request, please press the pound key. Once again, that's star 1 to ask a question or the pound key to withdraw your request. Lastly, we ask all of the participants to limit themselves to 1 question for each turn. Thank you. Speakers, our first question is from the line of Brian Bittner of Oppenheimer. Your line is now open. Thanks. Good afternoon, Darin and Tim. I appreciate the color on the 2022 CapEx and other investments, as I know it's been a topical discussion in the investment community. When we think about the 2022 CapEx and other of $65 million-$75 million, how much of this is tenant allowance and incentives, and how much of this is core CapEx, kind of as it relates to the 2021 guidance of $40 million-$45 million? I think the best way to look at that is we gave guidance relative to 2021 at $40-$45 of core CapEx, and that's exclusive of tenant improvement allowances and incentives, with 2022 being $65-$75 inclusive of those items. On Investor Day, we also gave a range of unit growth over the 5-year long-term span going from 1%-3% on a long-term CAGR. What that's suggesting is that there's a process and a timeline of building up the pipeline, which you wouldn't anticipate a sizable or a radical increase in corporate store CapEx in 2022 contributing to that $65-$75. I think the company CapEx will be relatively consistent with prior years. As we roll out next year this new franchise tenant improvement allowance and incentive program, you'll see that slowly start to ramp up as well. Okay. Thank you. Next question is from the line of Lauren Silberman of Credit Suisse. Your line's now open. Thanks so much. My question's on average check. I think it's up about 25% on a two-year basis. Can you expand on the dynamics that continue to drive that check higher and how you're thinking about the sustainability into next year? You've talked about making gains with the higher income consumer throughout the pandemic. To what extent are those gains contributing to the average check growth, and does that give you added confidence in the ability to retain the check? Thank you. Average number of items per check has been holding steady from comparative growth that we saw early in the pandemic. We're staying pretty consistent and steady between that 4.2 to 4.3 items per check. Our core premium items such as Sourdough Jack and Buttery Jack continue to help sales. Our value items such as tacos and Jumbo Jack support growth. We've seen good movement to back to normal levels of checks under $5 and continued improvement for the check over $5. What we're seeing now with the overall performance from a standpoint of a higher income demographic, is we're holding onto that customer and we're seeing less churn. We are holding onto those new customers that we've acquired since COVID. Although rising somewhat the churn, what we're really pleasantly surprised by is that we're still net positive for these new customers. The other thing that we find interesting is frequency of these new and lower frequent guests. We're seeing it grow. Our high frequency guests, we're holding steady on. Thank you. Next question is from the line of Gregory Francfort of Guggenheim Partners. Your line's now open. Hey, with the risk of Chris killing me for this, but just a clarification on what the guidance implies for fourth quarter G&A specifically. Just there's a lot of moving pieces, and that would be helpful. My question is, there was a lot of concern that limited service would lose share back to full service as the economy opened up or fast casual players. That doesn't seem to be happening in the U.S. through this earning season. What are your thoughts, Darin Harris, on just why trends in QSR have maintained where they are on a 2-year basis, even as the rest of the economy's come back, and where that share may be coming from? Thanks. I'll take the first piece of that. Relative to our guidance on G&A, we're providing 2021 full year fiscal year G&A in a range of $71 million-$76 million. That's net or excluding net COLI gains and losses in that forecast. Just to note, we have shifted how we provide this guidance. Year to date, we're at $46 million, that'll give you some context for Q4. We are shifting how we provide this guidance from a % of system-wide sales to this dollar range to help you kind of hone in with a little bit more precision there. Hopefully what we provided kind of gets you there. Then to the second part of the question, I think you kind of referenced more industry wide as far as the shift of consumers back to higher income, or not higher income, but more to casual or upscale restaurants. I think there's been a fundamental shift overall in behavior, and that is with digital, and our business continues to grow from a digital standpoint. I definitely have seen, I think we've created some behaviors by bringing some customers back. As I mentioned, our new customers and our infrequent customers, we're seeing their frequency go up, which is hopefully we've introduced them to new flavors and new experiences at Jack that keep them wanting to come back and trade some of their former dining dollars into QSR because of the experience and the flavors and the quality that we've given them. That's part of our overall crave strategy here at Jack in the Box, is to drive guests to our restaurants that have craveable products that keep them coming back. I think that's a part of it, between digital and just making the right product introductions through innovation and value. Yeah, just to follow up, a note on the year-to-date G&A, that $46 million number year-to-date includes gains, COLI gains of $9 million. Excluding those, $54 million leading into that $71 million-$76 million full fiscal year guidance. Thanks. Next question is from the line of Jared Garber of Goldman Sachs. Your line's now open. Great. Thanks for the question. I wanted to flip back to the unit growth side, Darin Harris. I appreciate you guys giving us some of the color on the development pipeline and those 60 units, or those 60 agreements that you signed. Can you help frame for us, I guess, a couple things with respect to unit growth? I guess, what's the timeframe that we should be thinking about those 60 units opening? Is that something that we should expect to see, 60 units at least, open in 2022? Can you comment a little bit further on the pace, or what you're seeing on the closure side and how we should be thinking about the net growth in 2022? I know you've given us sort of that 1-3 unit guidance, but want to just get a better sense of what you're seeing maybe on the ground with franchisees. Sure. As far as the potential development agreements, those are more to start to create a lead indicator for future growth. That's not designed to say by next year all of those will open. Those are spread out over time. We haven't provided guidance yet on what our opening goal will be for next year. What I can tell you is that with the improvement in our economics, year to date, we're up about $90,000 in just overall unit economics. The franchisees are aligned. They're showing the desire to grow. I anticipate another good quarter with more development agreements coming. They're expressing it through showing their interest in developing, and that time to build that pipeline, as you all know, is natural. We've already been building it. We've already seen an increase in the sites coming in, but it takes a good 18-24 months to really start to see that come to fruition. I anticipate we'll see the start of that next year. All those 60 are not in 1 year. We will also be announcing development agreements as they occur. I think the other thing that you'd mentioned about closures, and I think this is a good one to make sure we address very clearly, we don't anticipate outpacing our historical averages. We've seen, as we've mentioned on prior calls, a discussion around anticipating closures to increase this year as we work through opening up communication lines with franchisees. What you can't see is, I think Tim described it in his description of the call, is that a lot of these have offsets where we're getting royalty and revenue until future units open. That's part of the overall discussion as we think about portfolio optimization. What is the right thing to do for the franchisee, and what is the right thing to do for the brand for the long term? That doesn't mean we can just close a unit and not expect that we lose the royalty and/or revenue from rent. We're working hand in hand with franchisees to make good decisions for the future of this brand. Just to follow up on that. Again, of the 13 units that closed in Q3, 7 of those included those future offsetting locations that Darren mentioned we continue to see economics from until those offsetting locations open. The remainder of those 13 closures are relative to agreement expirations on the franchisee side. I think we're, again, leaning in to curating the portfolio and allowing some of these locations that are either older or where the market's moved away from them to move into locations and markets with our new prototypes that could contribute greater royalties to us upon opening. Thanks. I appreciate the color on the offsetting unit growth and also the franchise economics. Appreciate that. Thanks. Next question is from the line of Dennis Geiger of UBS. Your line is now open. Great. Thanks for the question. Darin, I wanted to follow up on a couple of the earlier sales questions. Maybe just wondering if you could talk a bit more about maintaining and then growing some of the sales volumes that you've seen, even as behaviors perhaps shift a bit going forward. Really strong top-line performance in the quarter, obviously. Just how you're thinking about some of the brand specific drivers that you touched on earlier going at looking forward, what's most impactful if it's new items, digital, the operations, just contextualizing that. The other piece, thinking about the macro drivers potential pandemic impacts, anything based on what you've seen to date that you can share there as it relates to the go forward. Thank you. Sure. What I've seen since being here is, we have mentioned this before, is we took a lot of time and effort to listen to our guests, do segmentation work, and really dial into what it is that they want from Jack in the Box. The strategy that we've implemented has continued to resonate with our guests, and that strategy around our promotional lineup with innovation. We've seen sustained check growth during Q3 more than other QSRs, and it really comes down to our strategy. One is the promotional strategy I mentioned related to innovation and what we're promoting. Our upsells. We promoted Popcorn Chicken, but we have an upsell of Popcorn Chicken that did extremely well. We had the pivot to our Cheddar Biscuit that also had chicken that was an upsell. Our upsell strategy is working with craveable items that guests want. Our add-ons, our $3 to $4 add-ons with Mini Munchies, our Mac & Cheese Bites, the Loaded Fries, and Chocolate Croissant Bites. Those are helping our overall check averages increase. Lastly is with this new and infrequent customer, we're seeing a huge trend towards the shift to premium items. That's a part of what's working is our menu strategy, our overall strategy of listening to our guests and giving them the offers they want. Lastly, what I would add to that is our day parts. We're seeing growth across all day parts, and it's specifically at late night. We continue to know that that's a huge opportunity for us to take share if we can continue to service it well. The last part I would mention is digital. Our digital continues to grow. We were behind when we started. We're now starting to catch up. We've seen digital grow to close to 8% of sales. We've got a strong team that's behind it that are working on the right digital initiatives to continue to grow our unique user base that we can communicate and do one-to-one marketing with. We're doing all the right things that give me confidence that we'll continue to find ways and levers to build this business over time. I can tell you, it's just a lot of exciting things happening here with the way we're building the tools to prepare us for your ongoing growth. Thanks very much. Next question is from the line of John Glass of Morgan Stanley. Your line is now open. Hi, thanks. I wanted to ask about traffic sort of over longer term. Even though it has turned positive, if you look on a 2 and 3-year basis, it is still down significantly over the last couple of years. I realize that is a hard metric now because the shifting in ordering patterns. When you look at your traffic, do you think, 1, are you losing a lower end consumer as you push the brand up? Maybe that is a good thing from a margin and profitability standpoint, or do you feel like you have to address a value piece now in the business? Maybe if you just look at the traffic by day part, where have you lost the most traffic counts and maybe where have they picked up, just so we can better understand the dynamic in traffic. Thanks. I think naturally throughout the pandemic, and I don't think it's just a unique thing to Jack in the Box, we saw the check that was under $5 start to decline. We've been very sensitive to finding ways to balance premium and value. In this quarter, we saw continued improvement in that less than $5 check, which is exactly what we wanted to have, and we wanted to balance between promoting items with upsells that would drive people into our restaurants, but also balancing the value consumer. I think we did a nice job of that in this quarter, and the numbers reflect it. The last part I would say about that is all of our day parts have been positive. I think that speaks to the strength of Jack in the Box with our strategy and positioning of having all menu items available all day, every day. We continue to see that contribute to our success. Thank you. Next question is from the line of Chris O'Cull of Stifel. Your line is now open. Thanks. Good afternoon. This is actually Alec Estrada on for Chris. I was hoping you could speak a bit more about the 2022 CapEx investments. At your Investor Day, I believe you mentioned remodels would be the majority focus over the next few years. Can you maybe help outline how much of that core spend will be on remodels and roughly how many of those 400-450 locations are company owned or maybe expected to be completed in 2022? Yeah. High level, we're putting the finishing touches on our incentive program for the franchise system. That's going to roll out in 2022. I think if you're able to compare our guidance again on 2021 core CapEx guidance of $40 million-$45 million versus 2022's combination of CapEx and other investments, which include these franchise TI allowances and incentives, that guidance of being $65 million-$75 million, you can see the incrementality there. A majority of that is again, going to be more so on this remodel refresh program that we anticipate to roll out in 2022. I kind of leave it there. I think that gives you a pretty good look at what our sort of funding expectations are for that new remodel refresh program. Got it. Thank you. Next question is from the line of Jeffrey Bernstein of Barclays. Your line is now open. Great. Thank you very much. Big picture question on the cost outlook. From both a commodity and a labor cost standpoint, it seems like with only one quarter remaining, you boosted both inflation guidance for this fiscal year. I'm wondering, first and foremost, if you could just share with us what the implied fourth quarter is for each of those, just so we get a sense where we are now and maybe whether or not you think directionally that's a reasonable expectation for fiscal 2022 in terms of inflation. Obviously not giving specific numbers yet, whether that feels reasonable for the out year, just based on what you're seeing from both commodities and labor, and whether or not you feel like you have the pricing power to, or franchisees have the pricing power to offset it. I'm not sure whether you'd share what kind of the average or the range of pricing is for the system or for the franchisees. That was kind of a private question. Just to clarify, you didn't mention EBITDA for FY 2021. I know you had given guidance before, but now with one fiscal quarter remaining, just wondering where you stand on providing an updated FY 2021 EBITDA guidance. Thank you. I'll start with pricing. What I'm seeing from our pricing strategy and looking forward is we're being consistent with what the industry is with food away from home and what we're seeing from an inflationary standpoint. I think that's a good way to think about how we've managed pricing going forward, or last quarter, I should say, not going forward. We anticipate offsetting some of the increases through price and maintaining kind of industry norms. I'll let Tim answer your question related to some of the wage inflation and commodity costs. In Q3, we had commodity inflation of 5.7%, and that was an increase from Q2, which was 1.7%. As you'll recall, in Q1, we were right around the same level of 1.6%. Those 3 figures, combined with our guidance for 2021 outlook of 4%-5%, that should kind of give you a good range backing into what Q4 is. Relative to 2022, it's hard to say. We are keeping an eye on this. Obviously, there's continued pressure in supply chain pipelines, with a multitude of variables that are driving that, labor being 1 of those as well. It's early for us to give guidance on 2022 right now, but we will look to provide that in November to this group. The last thing I'd add is, the benefit of Jack in the Box, because we're not just in burgers or one protein, we have the benefit of a supply chain structure that enables us to focus on different product lines that have different causes of price pressures. We can pivot in and out of different promotions to really focus on how to run our business effectively and profitably. Can you share those same metrics for the labor in terms of the first three quarters of the year relative to full year guidance? Yeah, sure. Q3 labor inflation was 8%, and that was an increase from prior quarter of 6.3%, which was an increase from the Q1 inflation of 4%. Again, marrying that against our labor 2020 guidance of 7%-8%, you can get into what Q4 is. That 7%-8% is an increase from our previous guidance of 5%-6%. As we saw in the last several weeks, the labor pressure continues. We'll be keeping an eye on that, and again, in November, we'll provide 2022 outlook on that as well. Next question is from the line of Brian Mullan of Deutsche Bank. Your line's now open. Hey, thank you. Tim, in your prepared remarks, you referenced taking over 16 stores, and I think it was Oregon, in a non-cash transaction. Can you maybe just elaborate a bit on the circumstances there, why that was non-cash? If you'd be willing to give some sense of the average unit volumes and margins of those stores, if it's safe to assume those are coming into the company on base lower than the current average. I think it's about a 10% or 11% increase to the size of that store base. Any color would be helpful. Thank you. Yeah. I'd say high level, this folds really nicely into what we communicated at Investor Day as far as leaning in and acquiring or taking possession of markets or locations that we feel are valuable and attractive but have an operator in place that either doesn't have the financial resources to grow or the interest in expanding and running a market. It just happened to come fairly quickly after our Investor Day. These 16 restaurants, we find very appealing. We think we can bring operational efficiencies and resources to improve the four-wall EBITDA there, as well as drive growth in that market. Again, something that is in line with our long-term strategy. I think we won't provide color as far as regionality and AUV specific to Oregon, but again, it's a market that we think has a lot of potential. Thank you. I'll just add to Tim. We had strong performance across all geographies, and the handful that we didn't are where we had these ops concerns, like Portland and St. Louis. Next question is from the line of Andrew Charles of Cowen and Company. Your line's now open. Great. Thanks, guys. On the 2Q call, you talked about the lens that you'll be looking at same-store sales in the back half of the year is on a three-year basis and trending probably in line or hopes to trend in line with where you were in 2Q. The business accelerated nicely. You really beat that in 3Q, very impressive same-store sales performance. As we go from here, is that still the right lens that you guys will be looking into the business to kind of gauge the underlying health of sales, kind of on a three-year basis from 3Q levels? Thanks. Yeah. I'd say that it's fair to look at 3-year stack or even 2-year stacks. As you look at how our quarters have progressed, in Q1, we had a 2-year stack of 14.2%. Q2, that increased to 16.4%. Now Q3, that increased a little bit to 16.8%. We think that's a fairly consistent and healthy way to look at our forecasting. We won't reiterate annual guidance, but we think that trend is a strong one for us. Thank you. Next question is from the line of David Tarantino of Robert W. Baird. Your line's now open. Hi. Good afternoon. My question is on the investments that you're leaning into. I think you mentioned your plans, now is a good time to lean in, and we see that in the CapEx and other investment line for next year. 1, first to clarify, Tim, is it your expectation over this 3- to 5-year horizon that continues to move higher as you sort of ramp up the development engine? I just want to directionally understand how you're thinking about the capital side. Then, Darin, I was hoping you could comment on whether part of the investment includes G&A and what your outlook is for that over this kind of 3- to 5-year horizon. I think as you look at the nature of the various, so you have CapEx, and then you have these other investments, which are effectively the franchise remodel and refresh program. On raw CapEx, we have sort of what I'll call is our continued core operational CapEx. Year to date, we're currently at $35 million, as an example, half of that being purchases of sale leaseback assets. Excluding that, we expect that that sort of core CapEx would continue. In line with what we communicated as a company store growth trajectory, as Darin mentioned a few minutes ago, there's sort of a gestational period involved in that. Once we identify sites, it takes 18 or so months to get those units open and in the ground. That'll take time to build up. I wouldn't imagine, as we communicated at Investor Day as well, any immediate meaningful increases in company CapEx spending relative to company stores. Now, on the other investment side, with the tenant improvement and franchise remodel refresh program, that's something that we're looking to roll out and operationalize in FY 2022 and will be made available to the franchise system fairly immediately at that point in time. While that is more accessible and more immediate, there is still a ramp-up time involved with that as well. While the funds would be in the program accessible to the franchise system, the franchisees still need to line up their contractors and the programs and projects, et cetera, and timelines. It's not going to be a dramatic, immediate increase. We will, over the next 4 to 5 years, see 1%-4% or so growth in capital. You see it, to Darin Harris's point, the parallel strategy of as the business is growing, some of our capital investment is growing. That continues to create a really nice flywheel effect to the business, and that's the intent here. Our free cash flow is still great and will continue to be great and allows us to do what we need to do from a capital allocation standpoint. Darin, on the G&A outlook, are you also planning to lean in there or I guess, what are your thoughts on that line? I think we're obviously not providing guidance there, but what I would tell you, as I've said in past calls, is that with all the investments we're making in G&A, these are all items that we think generate a return in and of themselves, whether it's in cost savings or in revenue top line. I don't see substantial change, but we will definitely provide guidance in November to 2022. Great. Thank you. Next question is from the line of Jon Tower of Wells Fargo. Your line is now open. Great. Thanks for taking the question. I guess this is for Ryan. I am curious, going back to the commentary earlier about seeing higher frequency of higher income customers. Are you communicating differently with this group than you have in the past, or have you found better ways to reach them than perhaps what the company was doing previously? Clearly digital is a new avenue, so maybe that is the primary difference between now and what you have done previously. On top of that, aside from seeing a higher check from this group, are you seeing them use your brand differently, say, across day parts or ordering channels relative to your core customers? John, I know that Ryan would nail that question, but he's actually not in the room. Darin, do you want to take that one? Yeah. I'll take some of it. What I would say is, Ryan rolled out at the Investor Day the crave strategy. What I would tell you, we are doing things to become more culturally relevant on social and digital. Just some examples of hearing from our guests, the collaboration we did with Jason Derulo and being more consistent in how we communicated the brand, doing some fun things like the Munchie Meal and the Burger Rocco or the TikTok hack, where we did things with taking products that we already have in store and what you saw with people doing the hack on TikTok, where they're folding up a tortilla with a churro cheesecake caramel. I'm telling you, it's an outstanding product. A lot of it is the way that we're thinking about the business and engaging our consumers and communicating to our consumers, and then giving them offers that are compelling. Digital is definitely reaching our guests. We're definitely seeing some trends there with the different types of consumers. As I mentioned earlier, from a frequency standpoint, these new and lower frequent guests continue to increase their frequency. The way we're communicating the clarity we have around our customers and the offers we're making that are more one-to-one type offers, we're seeing it resonate. Got it. Are they coming at different times, maybe doing more breakfast, late night, using delivery channels more so than your core guests? Well, It's. It's an interesting dilemma because clearly breakfast and late night are significant contributors of transaction improvement in this quarter. That just makes common sense considering rolling over the pandemic. The good news is that that's who we are at Jack, is we're all items, all day, every day. We've definitely seen the day part change. I think the breakfast day part change, I think that's going to change in the mind of consumers for a long time. Consumers are behaving differently when they come for breakfast, and with the difference in the way that they work. We definitely see that trend continuing. We see the late night trend continuing. Workers are just working differently as a whole. If they decide to work late at night versus getting up early in the morning, Jack in the Box is there for them, and it doesn't matter if they want a breakfast item at lunch or a breakfast item in the middle of the night, we'll find a way to get what they want. Thank you. Next question is from the line of Eric Gonzalez of KeyBanc Capital Markets. Your line's now open. Hey, thanks for the question. I'm just curious how much you might be leaving on the table as a result of some of these staffing issues. I'd imagine the late-night hours might be particularly hard to staff. Is there any way you can quantify how much of a drag that might be, or speak to your average staffing level today versus maybe three months ago? I don't think we'll provide specifics, but like everyone in the industry, I would love to be making sure we could service and keep our stores staffed at all levels of the day, because we would take these results and even improve them even more than what they already are. The industry as a whole, as you know, are challenged by this. Where we've spent the majority of our time is if we know that we can staff late night for hours when our business is there and the demand is there, we want to make sure we're staffing it. We're getting smarter about the way we support our franchisees in staffing at the right time when their business is there by location, versus if we have to shut down a certain hour or two, so that we can make sure it's staffed, then let's do it at the right times versus just when it's convenient. We spend a lot of time on coaching and working with franchisees on the right times to remain open and make sure they're staffed appropriately, and then also supporting them through tools for marketing to hire and maintain the current staff that they have. Thanks. Next question is from the line of Jake Bartlett of Truist Securities. Your line's now open. Thanks for taking the question. I just had 1 I want to start with a follow-up from that last question. I think in the script, you mentioned that staffing was negatively impacting sales as well as service. Maybe just if you can kind of quantify how much it might be impacting and whether that should be 1 material driver of sales going forward as the staffing issue improves. The second question I have is just about your stance on marketing in 2022 or maybe in the fourth quarter. As you emerge from COVID, whether there's going to be any sort of more weighting on premium items, now that you have this kind of new cohort, new consumer, that can spend a little bit more. Do you expect your approach to value and premium products and innovation to change going forward? I think I answered the first question related to how we think about sales impacted by both labor and/or operating hours. We're always looking at making sure our restaurants are staffed, whether it's during this time or not. We'll continue to focus on staffing them appropriately, but providing our franchisees the tools to do it the right way. As far as the question about premium, like I said, as we listen to our guests and understand them better and know different ways to reach them, that Jack in the Box necessarily hasn't in the past, we can do both premium and value, and we're making sure that we balance that equation. We've proven it with the results that we have here and seeing many different check sizes perform. Got it. Thanks a lot. Next question is from the line of Jeff Farmer of Gordon Haskett. Your line's now open. Thank you. I just wanted to clarify an earlier point you guys made. If I understood this correctly, you're not providing an update on 2021 same store sales and EBITDA guidance this late in the year because moving forward in 2022, those are items that you will not be providing guidance for. Is that a correct way to think about it? Yeah, that's correct. On a go-forward basis, the annual guidance, we will be providing our CapEx, G&A, commodity, and labor costs, and we'll also be giving an annual franchise four-wall EBITDA update. Outside of that, we're relying on the three to five-year long-term guidance that we provided at Investor Day. Okay. Thank you. Next question is from the line of Alexander Slagle of Jefferies. Your line's now open. Hey, thanks. Darin, you talked about providing, I guess, more regular discussions around the progress against the four pillars, and I know franchisee profitability is a key focus. I'm just wondering if you'll be able to provide sort of more regular metrics around franchisee profitability as we're sort of going forward, and if you have any sort of updates at this point. Yeah. Typically, we get that data a quarter behind. We plan on every January fiscal year providing an update to being very transparent with the data that we're receiving on how we're performing about improving four-wall economics. Okay, thanks. Last question is from the line of Nick Setyan of Wedbush Securities. Your line's now open. Thanks. Okay Clarification. On the labor guidance, does that include hourly wage growth or hourly employee growth as well, or is that just the wage inflation portion? That's just the wage inflation portion. It doesn't account for hour restrictions, which you'd see more so in our financial results. Okay. In terms of just company-owned unit growth, obviously that's something that's going to become more prominent going forward. Does that CapEx, I mean, it just seems like the CapEx guidance implies just a very slight increase in new unit development, not necessarily a big leg up in 2022. Is that fair? Yeah, it is fair. I mean, and keep in mind, we're an asset-light model, right? A majority of our units are franchise, and we'll be looking to, we just announced year to date, we have 64 unit commitments or awards, rather, to the franchise system. We'll be looking to expand Jack's reach primarily through the franchise system. At the same time, as we alluded to in our strategy on Investor Day, to help seed some of that growth and push the pace, we will opportunistically look to deploy company capital through CapEx to open company units. Again, from a unit count growth point of view, that will be a smaller fraction of our overall growth. Great. Thank you. Thank you, participants. I'll now hand the call over to Chief Executive Officer, Darin Harris, for final remarks. Thank you all again for joining us today, and I'm excited to meet many of you on the road in the coming weeks and months. We look forward to speaking with you in late November to discuss our fourth quarter and full year 2021 results. Thank you again for your time today, and look forward to speaking soon. That concludes today's conference. Thank you all for joining. You may now disconnect.