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Jack In The Box Inc  (NASDAQ:JACK)
Q1 2019 Earnings Conference Call
Feb. 21, 2019, 11:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day everyone and welcome to the Jack in the Box Incorporated First Quarter 2019 Fiscal Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today.

(Operator Instructions) At this time, for opening remarks and introduction, I would like to turn the call over to Carol DiRaimo, Chief Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Carol DiRaimo -- Chief Investor Relations & Corporate Communications Officer

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

In our comments this morning, per share amounts refer to diluted earnings per share and operating earnings per share is defined as diluted earnings per share from continuing operations on a GAAP basis excluding gains or losses on the sale of Company-operated restaurants, restructuring charges and the impact of tax reform on the Company's deferred tax assets, as well as the excess tax benefits from share-based compensation arrangements, which are now reported as a component of income tax expense versus equity previously.

Adjusted EBITDA represents net earnings on a GAAP basis, excluding discontinued operations, income taxes, interest expense, gains or losses from the sale of Company-operated restaurants, impairment and other charges, depreciation and amortization, and the amortization of franchise tenant improvement allowances. Our comments may also include other non-GAAP measures such as restaurant-level EBITDA and franchise EBITDA. Please refer to the non-GAAP reconciliations included in the earnings release as well as the prior year results recast for the adoption of the revenue recognition accounting standard. Following today's presentation, we'll take questions from the financial community.

Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in yesterday's news release and the cautionary statement in the Company's most recent Form 10-K are considered a part of this conference call. Material risk factors, as well as information related to Company operations, are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com.

A few calendar items to note this morning, our second quarter of fiscal 2019 ends on April 14th, and we tentatively plan to announce results on Wednesday, May 15th, after market close. Our conference call is tentatively scheduled to be held at 8:30 AM Pacific Time on Thursday, May 16th.

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

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Thanks, Carol, and good morning. Before reviewing our first quarter performance and providing some perspective on the future, I want to briefly address our December announcement that our Board of Directors and management team with the support of legal and financial advisors are exploring a range of strategic and financing alternatives to maximize shareholder value. These alternatives could, among other things, include a sale of the Company or executing on our previously announced plans to increase leverage.

Our Board has not set a timetable including this process nor has it made any decision related to any strategic or financing alternative at this time and we do not intend to comment further on this until it is appropriate to do so.

Now, let's move on to our first quarter performance. All in all, it was a pretty solid quarter for us and we are pleased with how we're positioning the brand to execute on our long-term strategy. As I mentioned during our call in November, the quarter got off to a slow start with system same-store sales tracking down 1% to 2% after the first seven weeks.

After majority of our system pivoted to a more value-oriented approach, same-store sales turned positive remainder of the quarter. Historically, our primary marketing event at the beginning of Q1 is a premium product. So, we chose to go with the formula that's worked for us in the past and the strategy that our franchisees have grown accustomed to.

The 100% Ribeye Burger was a great product, continue that tradition. But we've learned that in the current environment, we must promote our premium products along with competitive bundled price points in order to be successful. Value for us is different than what others are selling. Unlike many competitors, we continue to avoid deep discounting, which we believe is not in the best interest of long term health of the brand, particularly in the face of rising labor cost.

At Jack in the Box, value includes items on our permanent value menu like Two Tacos, the Breakfast Jack and Junior Bacon Cheeseburger, as well as margin-friendly combos and bundled products priced below $5. Even at $6 Munchie Meal, is value priced considering everything that comes with it, non-tray fries, drink and tacos.

Last year, half our marketing calendar featured promotions that we would define as value priced. For fiscal 2019, more than 80% of our marketing calendar features value-priced promotions. Along with our marketing calendar, it's imperative that we evolve our brand in other areas to meet the ever-changing needs and behaviors of consumers.

Earlier this month, we chose not to place an ad during the Super Bowl and instead invested in a social media campaign that still made us heart of the conversation before, during and after the big game, while generating a lot of attention for our Super Jack'd Monday Box and our partnership with a leading delivery service DoorDash. Expect us to continue bucking convention and targeting advertising dollars in non-traditional media to reach our core customers, wherever they may be focusing their attention.

Speaking of DoorDash, delivery continues to generate an incremental lift in sales in Q1 with sales growing an additional 30 basis points in the fourth quarter. The average check for delivery order is consistently higher than other dining modes with nearly two-thirds of all delivery orders placed during the dinner and late-night dayparts. More restaurants began working with delivery services in Q1, including a new delivery partner we added in December, Uber Eats.

At the end of the quarter, over 85% of our system was served by at least one delivery service. Guests can also now place orders to pickup through our new app, which we launched in the first quarter. Already more than 100,000 unique users have placed at least one order via the app, and we began partnering with Apple Pay to enable guests to securely pay for their in-restaurant orders using their iPhone or Apple Watch.

Our marketing outreach and use of technology are great examples of how we're investing in areas that can grow sales, improve operations consistency and maximize our returns. This mindset is at the core of our long-term strategic plan, which balances the interests of all our stakeholders including franchisees, employees, shareholders and our guests.

To improve operations' accuracy, need of service and consistency in our restaurants, we're simplifying operations by reducing redundant SKUs and streamlining operating procedures. We've been testing menu deletion and modified operating procedures at about 180 Company and franchise restaurants with no detrimental impact on sales from the deletions or changes.

Based on test results, we plan to roll out the final program across the system beginning this summer. We believe that our expanded use of technology and efforts to simplify restaurant operations help improve efficiency and consistency and help us meet consumers' expectations for a near zero wait time.

Finally, we are targeting investments in restaurants, where we can optimize returns like remodeling many of our oldest locations, enhancing the drive-through experience. Improving our restaurant facilities is one of the best ways to ensure repeat guest visit. More than 50 restaurants have been remodeled since beginning of last year, including 12 that were remodeled in Q1 and construction is under way at 17 additional locations, all franchise.

As far as drive-through the future initiative, throughout most of fiscal 2019, we will be testing the initial elements of what we expect to be a major overhaul of the drive-through experience. We plan to begin rolling out these enhancements across the system later this year. By the end of fiscal 2021, we believe that we can touch more than 80% of our systems. As we pursue our plans for improving sales in the current hyper competitive environment, we intend to do so in a way that drives profitability at franchise and Company restaurant.

Just last week, at our most recent series of roadshows, our executive team and I met with more than 80% of our operators and discussed with them how we can collectively drive success throughout the brand. As I mentioned earlier, we're starting to see some traction in the form of increased sales. We're hopeful that as our franchisees experience these benefits, they will increasingly participate in and reap the benefits of this strategy.

With that, I'll turn the call over to Lance for more detailed look of the first quarter and expectations for the full fiscal year. Lance?

Lance Tucker -- Executive Vice President and Chief Financial Officer

Thanks, Lenny, and good morning everyone. I'll provide an update on our first quarter operating results and our performance so far in the second quarter. But first as a reminder, effective this year, we adopted the new revenue recognition accounting standard, which adjust the timing of recognition of upfront franchise fees received from our franchisees.

In addition, it grosses up revenues and expenses related to marketing fees received from the franchisees and also, under the standard certain amounts previously classified SG&A are now reflected as franchise expenses. Beginning in 2019, we also adopted the new pension accounting, which moved certain costs related to pension expense out of G&A and into a separate line item on the P&L. Neither of these new standards will have an impact on cash. We will compare this quarter's results to recast 2018 figures where appropriate given these two accounting changes.

Please refer to the press release for more detail pertaining to these adjustments.

And now, let's discuss first quarter results. Operating EPS for the first quarter was $1.35 as compared to $1.23 last year. This 10% increase was driven primarily by lower G&A costs, the impact of tax reform and lower shares outstanding, which more than offset dilution from refranchising. Our systemwide comparable sales decreased 10 basis points from the first quarter. Company comparable sales increased 50 basis points, comprised of pricing of approximately 2.6%, while mix increased 1.2% and transactions declined 3.3%.

Franchise comparable sales decreased 10 basis points for the quarter. We were pleased with the turnaround in sales within the quarter. As Lenny mentioned in his comments, our sales got off to a bit of a slow start, but by transitioning to more value-oriented offerings in the $4.99 BLT combo, our sales turned positive. Company restaurant level EBITDA increased by 20 basis points to 26.2%. This increase was primarily driven by the refranchising and was in line with our full year guidance of 26% to 27%. Franchise EBITDA increased by $6 million in the quarter when compared to last year's recast figures due primarily to refranchising.

Rent and royalties were both 9% higher than in the prior year. G&A in the first quarter decreased to approximately 1.6% of systemwide sales as compared to 2.2% as recast for the prior year. This $8.4 million decrease was driven by $3.7 million in transition services income related to the sale of Qdoba, which is reflected as a reduction in G&A.

In addition, G&A benefited from a $3.3 million decrease in incentive compensation, a reduction in share-based compensation and workforce reductions related to refranchising. These decreases were partially offset by mark-to-market adjustments and an increase in legal fees. Advertising costs which are included in SG&A were $7.2 million in the first quarter compared with $8.8 million in the prior year. The $1.6 million decrease was due to a $3.6 million decrease from refranchising, was partially offset by incremental advertising spend of $2 million in the quarter.

This incremental contribution helped to support the $4.99 BLT combo message throughout the quarter. At this time, our guidance does not anticipate further incremental Company contributions to the marketing fund. While our tax rate expectations for 2019 remain between 26% and 27%, our first quarter tax rate actually came in at 23.1% due to a $1 million reduction in state taxes recorded in the first quarter. Statutory federal rate for fiscal 2019 is 21% as compared to our blended statutory federal rate of 24.5% in 2018. We did not repurchase any shares of common stock in the first quarter due to the strategic alternatives process. We currently have approximately $101 million available for share repurchases and as of the end of the quarter, our leverage ratio was approximately 4 times.

We opened nine new restaurants within the quarter, all of which are franchised. We remain on track to achieve our full year guidance of 25 to 35 new restaurants in 2019. Now on to second quarter performance and our full year expectations; so far through the second quarter system same-store sales are approximately flat despite record snowfall in the Northwest. We have seen trends improve over the last couple of weeks with the introduction of our $4.99 Sourdough Patty Melt Combo and the $4 Fish Sandwich Combo, as well as the weather in the Northwest normalizing.

We reaffirm our full-year guidance for 2019, including same-store sales of flat to up 2%. Please refer to the detail of our full year expectations in the press release. Our adjusted EBITDA expectation remains between $260 million and $270 million. As a reminder, our EBITDA sensitivity for 2019 is as follows; we estimate that every 1% change in Company same-store sales impacts EBITDA by just over $1 million and every 1% change in franchise same-store sales impacts EBITDA by just over $4.5 million.

Every 50 basis point change in Company restaurant margins impacts EBITDA by approximately a $1.5 million and every 10 basis point change in G&A as a percentage of systemwide sales impacts EBITDA by approximately $3.5 million.

As Lenny mentioned earlier, we continue to evaluate strategic alternatives. If the alternative chosen is to increase our leverage as was previously planned, we will do so as quickly as it is practical upon the conclusion of the strategic alternatives process. At this time, however, we cannot say with certainty whether this will occur in the first half of fiscal 2019 and has had been previously communicated.

That concludes our prepared remarks, I'd now like to turn the call over to our operator to open the call up for questions. Amber?

Questions and Answers:

Operator

Thank you. Due to time considerations, we ask that you please limit yourself to one question and follow-up per turn. If you do have additional questions, you may requeue at that time. Thank you. Our first question will be from Brian Bittner of Oppenheimer. You may proceed.

Brian Bittner -- Oppenheimer & Co -- Analyst

Thank you. I hope you guys can hear me OK. My question is, as the Board evaluates whether to create value by either sale or create value by staying public and (inaudible) gives a long-term plan. How do your sales trends play in this evaluation process? I mean, based on Lance's comments, it sounds like sales are positive currently, if there's anything you can say on that point, I'd appreciate it?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Hey, Brian, not too much we can say about that. But we've obviously been through a similar process with evaluating strategic alternatives for the Qdoba business at one time. And what I can tell you is that the Board will be very careful to not only compare the alternatives outside of what we're currently doing in the publicly traded markets and what our current performance is, but they'll also evaluate -- execution risk as one of the things that they're going to need to dig into, to figure out what the best option is. And then make what they believe is, is the overall best decision for the brand. So I know that's process to follow, but ultimately beyond that couldn't comment on how they'll actually weigh out those risks and options at this point in time.

Brian Bittner -- Oppenheimer & Co -- Analyst

Okay. Just a follow-up question is, what are the top two things, Lenny, you think need to change or initiatives that need take hold to start narrowing results gap versus the industry or should we all just assume it's unlikely to narrow until this value environment eventually softens at some point?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

I think if you take a look at the remainder of the year calendar and the fact that now, we've got over 80% of our remaining calendar targeted toward value-oriented promotions, that is probably one of the key things that we need to execute at this time. And what we're seeing is when we do bundled value along with these sort of indulgent fire from snacks that hover around three bucks, we're actually finding a fair amount of success doing those things and so I think between finding the smart way to participate in value and then also improving the consistency of our operations, which I think can be fueled by some of the simplification and efficiency measures that our new COO has put in place. I think those are the top two things we can do right now. I believe that the organization is not only doing some of those things today, but the plan that we would be implementing throughout the remainder of the year, I think, will only make that stronger.

Brian Bittner -- Oppenheimer & Co -- Analyst

Okay, thank you.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. The next question will be from Jeffrey Bernstein of Barclays.

Jeffrey Bernstein -- Barclays -- Analyst

Great, thank you. Lenny, you mentioned that I guess at some point over the past couple of months, you met with, I think greater than 80% of your operators. I took that to me and I guess, kind of your entire franchise community. So, I am just wondering bigger picture kind of how you think about those relations, obviously, your success and the team's success is based on theirs. I'm just wondering what you see as the, maybe the biggest new initiatives to improve those relations obviously beyond comps which tend to help?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah, I think -- I'll address the last part , you say that first, Jeff, and that is that comps help to build a lot of great relationships in this business. So I think our Number 1 priority is comp and it's also driving profitability for our franchisees because more so than anything that's what they need right now and we are sensitive to some of the business pressures that they are experiencing, some of the pressures we're also experiencing in our Company, our business. So our focus will essentially be two-fold; one, it will be to drive sales profitability for our franchisees and two, to spend as much FaceTime with our franchisees as possible, helping them to understand what's going on in the industry, how specifically our business can respond to industry and other pressures positively and I'm hoping that they will take those interactions and the facts that we are sharing along those interactions to heart and use those things to make rational decisions going forward.

I don't think that when you have strained relationship, you can fix it overnight. But I do think that profitability, sales and an open dialog in FaceTime are going to be key to our success. So our management team is committed to that. We've already done three of these road shows this year. We expect to do several more and so I think with the success that we're experiencing right now and with the open dialog, I can only anticipate and hope that things will continue to get better.

Jeffrey Bernstein -- Barclays -- Analyst

And on that front, I mean presumably in talking to those franchisees, remodels clearly help and obviously that requires investing back in the business. I think you mentioned you did maybe 50 remodels over the past year. I'm just wondering what the franchise acceptivity is to something like that whether there is acknowledgment of that that would help or whether maybe require some incentive on your part or how we should think about the time frame of the roll out of these remodels? Thank you.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yes. So, today we have a remodel program in place that really targets the oldest 600 locations in our chain. There is about 150, maybe just north of 150 of those that for sure will be touched with some type of capital investment that will improve the site. The remainder of the sites have some optionality as to what level of investment the franchisee would like to put into those businesses or not. But, I think the way that I would look at this holistically is that the business for us is primarily through the drive-through with 70% of our business flowing through that channel. And then when you look at the remainder of our business, through the dining room, about half of it is takeout.

So, if I would look at our strategic priorities, I would say the drive-through enhancement is probably the number 1 area of focus for capital investments. And then, a more holistic approach to investing in the entire facility, I think is met with a mixed bag from the franchise community. Some are anxious to remodel their entire sites and they are experiencing a significant amount of success in driving sales and profitability and getting a nice return on those investments, and others are a little more hesitant to make that type of investment or place a bet that big.

And so, I think we will be really careful to target their investments first in the drive-through where we believe we'll be the most of efficient investment. But then secondly, as we look at the remainder of the facility, we will need to make sure that the size of the investment and the targeted areas of the facility that we invest in, I think that our franchise community is largely bought into.

So again, right now we have a drive-through initiative that addresses the entire system, that is currently being tested and we would expect to finalize that test later this year and start to move into a roll out mode. But for any more significant investment in the entire facility, at this point we only have a program in place for the oldest 600.

Jeffrey Bernstein -- Barclays -- Analyst

Understood. Thank you.

Operator

Thank you. And our next question will be from Jeff Farmer of Gordon Haskett.

Jeff Farmer -- Gordon Haskett -- Analyst

Thank you. The promotional pivot to greater value in the mid-first quarter did drive that improved same-store sales, but was that improvement driven by increased traffic? Did the check go up or was it a combination of both?

Lance Tucker -- Executive Vice President and Chief Financial Officer

This is Lance, Jeff. So, I'll start with that, but both traffic and check did increase when we made that pivot.

Jeff Farmer -- Gordon Haskett -- Analyst

Okay. And then unrelated, any additional opportunities or opportunities as it relates to regional menu pricing structures given that growing spread and wage rate levels from state to state? Any opportunity there to price a little bit more specifically state by state?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

What I would tell you is, when we evaluate pricing state by state today, particularly in a mode where we're largely franchised, we already see that the franchisees have made adjustments to price that are regionally based. So, if you look at California pricing versus, for example, pricing in the Midwest or Southeast, you're going to see some pretty big disparities. But those disparities are largely in alignment with what we see from the competitive set, where their franchise basis are also taking similar price increases. Labor is probably the biggest driver with average wage going up, it's probably the biggest driver of that increase in check.

Jeff Farmer -- Gordon Haskett -- Analyst

Okay, thank you.

Operator

Thank you. Next question is from Gregory Francfort of BAML. Your line is open.

Gregory Francfort -- Bank of America-Merrill Lynch -- Analyst

Hey, guys. I just had two quick ones. One is, is there any weather or calendar shifts in that quarter-to-date number that it makes sense to call out? And then the other question I had was, I think one of the, maybe issues with the franchisees was around the Chief Marketing Officer position and leadership there and any update on a search or sort of I think the last time you'd spoken, the plan was to kind of split the responsibilities across the two individuals in that role right now and I guess I'm curious what the plan is on that position?

Lance Tucker -- Executive Vice President and Chief Financial Officer

Thanks, Lance. I'll take the first part of your question, and then pitch it over to Lenny for part two. So, as it relates to quarter-to-date sales, there has been unusually high snowfall in the Northwest that has had an impact on us. That's just under 10% of our franchise sales and so while I'm not going to put an exact number on what that impacts in, certainly we would have been positive without that snowfall and now that the snowfall and the weather has eased a bit, our trends have improved in conjunction with the offers that we put out there.

There have also been heavy rains in California as you're aware. You know that's such a big part of our system. We are not calling that out separately, other than to tell you that it's probably slowed things down a little bit. Again, I'm not going to try to put a number on that though.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Greg, just to comment on the CMO search, we've been active with the search. Let me give you a little bit of feedback on how we are addressing it and what we think is important. First off, from the standpoint of just evaluating leadership within the Company today and whether or not I have a solid base of leadership to drive the marketing front, I have that already. So, there is zero desperation or anxiety around need to bring a CMO in at this point in time.

In fact, I would say that the two leaders I have in place that are running marketing today, are equivalent to just about everyone that I brought in here to interview for the CMO position. This sort of match up with a more traditional CMO within our space. And I'd say what I have today, the individuals who are leading have a little bit more of a progressive knowledge base, particularly when we look at the activities around social and digital media and the need for a greater emphasis in that space. And also a need to be significantly more agile around not only product -- new product development, but also within the quarter, potentially pivoting to new promotional activities.

So, what I have today is, two leaders, who are probably more agile and more knowledgeable of what I need than what I've been seeing in the marketplace. So, when I look at, who should join our team as the Chief Marketing Officer, they're going to need to bring an incremental set of skills to the team that, that's largely is going to be around communication digitally and socially and that's not prevalent in the industry today. What I'm seeing a lot of folks who have lot of traditional knowledge. So, I'm going to hold out for someone who can be additive and until I can find that, I've got more than enough talent to lead this organization right now.

So, we'll approach it that way. We're not in a rush. We want the right person versus just a bigger head. I know there's been lots of questions around that, maybe an assumption that in some way, shape or form we are lacking. But I would just say, when we look at our sales performance and the adjustments we've made in our strategy and the way we approach the business, I think it's more than clear that I have competent leadership in place.

Gregory Francfort -- Bank of America-Merrill Lynch -- Analyst

Thanks. Thanks, I really appreciate the thoughts.

Operator

Thank you. Our next question is from Alex Slagle of Jefferies. Your line is open.

Alexander Slagle -- Jefferies -- Analyst

Thanks. Wondering if you guys could talk a bit more about your under-performance versus the peer group and why you think it's getting wider? I mean clearly there is a good bit of discounting across the industry. But is there something else also driving the share loss perhaps competitors more focused on certain dayparts like breakfast or late night or something else you can put your fingers on?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yes, Alex. Good question. I think, and you probably heard this from or read about it. As others are assessing this, I think value is probably the number 1 situation that we're dealing with. There may be small increments of impact in other places in our business. But the most significant thing that we're dealing right now -- dealing with right now is the amount of value in the marketplace. And when you look at who is winning, they are essentially doing one of two things. They're selling a lot of a la carte items very cheaply and they have a lot of brand equity in that space with the consumers who come to know them or those value-oriented offers where the consumer can stretch their button or they're selling abundant value where it is a significant amount of food for the dollar.

And when we look at the value consumer, those are the two places that they play. And I think oftentimes, we look at the business through then categories, how is QSR versus fast-casual versus casual dining, but when you look at it as just one industry what you'll see is that abundant value and cheap a la carte items are actually prevalent across all segments of our industry. And when it comes to the value consumer, we're all actually competing against each other.

So where the shares being lost, it's being lost to those players who I think are speaking loudly and playing well to the value-oriented consumers that's who is winning today. And those of us who are trying to sort of walk the fine line, not going too far into the value space, but at the same time not losing too much ground, where we are giving up some transactions right now as those value consumers are going elsewhere. But I think Jack in the Box, is making the right decision long-term to attract some of those customers back with our abundant value and add on strategy while at the same time not eroding brand's equity. So, I think that's probably the right space for us, but certainly would expect those who have a significant amount of equity in the value space to continue to push on that while it's proving to be successful for them.

Alexander Slagle -- Jefferies -- Analyst

Great, is the higher mix -- menu mix in the course, is that more of a function of a focus on add-on types in that $2 to $4 range. Maybe you're seeing more frequency?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

One of the things that we're seeing, when we do the add-on strategy, which really is sort of this indulgent snack or side item, behaviorally what we see from the consumer is that they will oftentimes buy a la carte as that snack or side or value-oriented things, but more often it's actually an add-on to some other combo or a entree. And so it tends to be an average check driver when we see that behavior from the consumer and essentially what we're doing is, we're given, -- if you look at our brand equity, I've talked about this before, we are an odd Company in that half of our brand equity is associated with the value-oriented consumer and the other half of our equity is associated with the more craveable, indulgent desires from consumers and so.

When we put the indulgent snack or side out there, the value consumer has a high take rate because it's cheap, but the more crave hunting consumer takes it as an add-on, because they're not so price sensitive, they're just looking for that indulgent item that fills that need. So we kind of play in two spaces there. And again, it's an interesting dynamic for us as a brand. We have been able to bring things into the marketplace that maybe other QSRs have not been able to, and we've been able to do that successfully because of this equity around craveable food, but at the same time, half of our consumers are value-oriented and we've got to present something to them or essentially we will erode that part of our business.

Alexander Slagle -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Next question is from David Tarantino of Robert W. Baird. Your line is open.

David Tarantino -- Robert W Baird -- Analyst

Hi, good morning. Lenny, just a couple more questions on the value strategy. I know it's helping the same-store sales, but can you comment on whether those offerings are accretive to profitability as well.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yes, let me start with the answer to your question is yes. They are accretive to profitability and its profit dollars that we're seeing flowing through to the bottom line at a greater rate when we initiate this and so we spoke about in my prepared comments that we had been out speaking to over 80% of our franchise system in the recent round of road shows. And I said earlier in the Q&A, that I would anticipate and hope that our franchisees would pay attention to the facts that are being presented, more so then potential politicizing of agendas and what we went out to share with the franchisees was just that. We shared the pivot that we made to the BLT Combo, and we share the specific results that it drove in sales and transactions and more importantly, the incremental profitability associated with it.

So, I would hope they'll pay attention to that. I think that at the end of the day, money talks and that's really what we're out to share with them. So we are -- we feel like it's the right strategy, we don't see a huge negative impact to our margin rate, while at the same time, we do see a nice positive impact to our margins dollars.

David Tarantino -- Robert W Baird -- Analyst

Great, thank you for that. And then on the operations, simplification tests that you're running. I know you mentioned there hasn't been a lot of pushback on sales, but can you elaborate on what you think the big benefits of that will be and what you're starting to see in tests either from an execution standpoint or sales standpoint?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yes. So couple things, first to note oftentimes when you do tests, particularly if you are doing tests in Company operations, there's always this sort of industry question around, will Company operations give you that type of feedback that you really need, because they sort of oftentimes aim to please. Let me say that within the 180 stores that we're testing, the vast majority of stores are franchised.

And actually the benefits that we're looking for there is an improvement in speed of service, accuracy and reduction in waste and our franchisees as well as our Company stores that are involved in the tests are very pleased with how much easier we've made it for their crews, and as a result of that ease, we're seeing certain products sell at a higher rate. We believe that's because the crew buy-in is there as we've made those products or product categories easier to implement, and then the redundant SKUs that we've reduced have really worked favorably to reduce our waste and make it easier for the crews to execute, because oftentimes they're making mistakes and the setups or the individual soft bottles or ingredients are so similar that they end up putting the wrong ingredient into a product.

So it's been received very favorably by the field and in fact just yesterday, I met with a cross functional team that gave the plant, its blessings, so that we can move forward right around the July time-frame with implementing this throughout the rest of the system. So again, speed of service, accuracy, reduction and spoilage and really just making the job easier for the crew, so that we can reduce turnover -- crew turnover and make their work experience more positive. Those are the types of things that we're after.

David Tarantino -- Robert W Baird -- Analyst

Right. And just to be clear on the speed of service side, is that translating to higher transaction growth or better transaction growth or are you not seeing that yet?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

We will see more about that when we get closer to implementation. But what I can say is that in all the areas that we're looking for improvement, we are either seeing that we are improving or at a minimum, we're not getting any worse.

David Tarantino -- Robert W Baird -- Analyst

Right. Thank you.

Operator

Thank you. Next question is from Chris O'Cull of Stifel. Your line is open.

Chris O'Cull -- Stifel -- Analyst

Thanks. I just wanted to get some clarification on the last comment, Lenny, about the margin comment with -- regarding value. How did the store level margin percentage change after you guys pivoted to value during the quarter?

Lance Tucker -- Executive Vice President and Chief Financial Officer

Chris, this is Lance. I am not going to put an exact number out there, but I can tell you that margin percentage change was very slight, whereas as Lenny mentioned rather than the dollar margins actually, we are not going to go so far to say significant, but certainly there were nice improvements.

Chris O'Cull -- Stifel -- Analyst

Okay, that's helpful and then Lenny, I appreciate the improvement in the comp from offering more bundled value, but do you think the core menu or maybe categories within the menu have a value perception issue. And if so, are there any plans to maybe address that issue?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

I think as I look across the menu, probably the chicken category is one that I think needs to be addressed and I shared some of that with the franchise community when I sat with them as well as other folks on my team. Essentially, if I were to look at how we've treated chicken over the past call it 10 years, the truth is, as we refranchised a lot of businesses and franchisees, have taken these operations with now I need to pay royalties and rents. They need a way to immediately balance out that purchase and generate the type of profitability and return on investment that they would expect and then large part, where I have seen -- we've taken price pretty aggressively even the chicken category.

And so how that translates for us, we're not obviously not a huge chicken play, but we do sell out chicken sandwiches. but what it means is that a few offerings within the chicken category really generates the majority of the sales. I think if we were to reevaluate the chicken category and get it to sort of right size and price and right offering. We could potentially generate a nice increase in that category. So, I've been working with my product marketing teams to really start to investigate what we can do to overhaul the chicken category.

We'll be doing some things later this year in the form of some promotional activity that LTOs that touch on chicken. But I think that the way we will approach that will actually teach us a lot about what can be achieved in chicken. So, stay tuned for that. But at the end of day, that would be my area of focus where I think we have the most significant opportunity for improvement.

Chris O'Cull -- Stifel -- Analyst

Great, thank you.

Operator

Thank you. Next question is from Andrew Charles of Cowen & Company. Your line is open.

Andrew Charles -- Cowen & Company -- Analyst

Great, thank you. Lenny, in your conversations of franchisee roadshows, what were the most constructive takeaways the franchisees offer you to help improve relations? Certainly a profitable improvement in sales is most desirable, but did you get feedback on ways to tangibly achieve this?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah, I think, look, there is -- and I would say that there's really a couple of different camps within the franchise dialog. There's sort of one camp that says, hey look, we're just -- we want things to be the way they were. We want to promote premium items and we want to innovate against premium items. That's been a core part of the strategy we are concerned that we're potentially not going to do enough of that. And I think that group is probably most vocal about what they want and the way they want it.

And I don't know that those conversations quite frankly are all that productive, but they are necessary. I think there is sort of another camp that looks at the current business environment. They look at what the competitors are doing and they look at how Jack in the Box has, I think, arrived at an elegant solution to walk a fine line between value and premium, and to get into the marketplace and compete while at the same time protecting the long-term brand equity. And I think those individuals understand what we're doing and although they're feeling business pressures, I think there are appreciative of performance improvements that we've started to experience and so they're signing up to participate in that.

What I think we need to do to make the dialog productive regardless of what camp of franchisee falls into is present compelling business cases around what we should be doing and helping the franchisees to be the type of performance expectations they could have with those various strategic initiatives and as a result of that dialog, hopefully get everybody sort of realigned to what we should be doing as a brand.

So, look, I'm committed to that. I'm spending the FaceTime with the franchisees and there are times that, that goes very smoothly and there are times that, that is less smooth. But at the end of the day, I think, it's my responsibility to be in front of franchisees, posturing open dialog and trying to make improvements around relationship, which I think are largely going to be connected to performance. And so, at the end of the day, performance is going to be the number 1 driver of this.

Andrew Charles -- Cowen & Company -- Analyst

That's helpful. And then you guys talked about the slight improvement in margin dollars with the value initiatives. Are you embedding a more material improvement in margin dollars sort of help reach longer term remodel targets?

Lance Tucker -- Executive Vice President and Chief Financial Officer

Andrew, it's Lance. Most of our remodel targets are based largely, if not solely, on sales increases and don't really build in a big margin impact of some of those sales improvements, maybe contingent as Lenny has spoken to on the way we offer value and the way that we are responsible with how we go to market. But, as far as margin improvements themselves, those are not required in order for us to hit the return requirements we have set.

Andrew Charles -- Cowen & Company -- Analyst

That's helpful. Thank you.

Operator

Thank you. The next question is from Dennis Geiger of UBS. Your line is open.

Dennis Geiger -- UBS -- Analyst

Thanks for the question. Lenny, wondering if you could touch a bit more on the initiatives to drive comp in '19 as we think about how we consider trends moving potentially toward the midpoint of the full year range. And just what might be impactful this year beyond the bundled value and beyond the consistency of operations that you highlighted? I guess anything you'd highlight as it relates to digital and delivery expectations? Any excitement you may have around premium launches, the product pipeline beyond bundled value? And then you just maybe, is there any way that we should think about low price non-bundled value items? Will there be some of that sprinkled in throughout the year? Just anything beyond the bundled value? Thanks.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah, good question. So Dennis, let's talk about low priced non-bundled value. Strategically, it doesn't make a whole lot of sense for our brand to do that broadly. So, when you see that, it will largely be associated with our overarching digital strategy where as we look at capturing consumers as part of our long-term plan for one to one digital marketing, we will have the type of offers that will entice those individuals to use our app and participate with us through that digital platform. But, outside of that, we won't see sort of a mass media effort toward low-priced full-priced single item entrees.

When it comes to the bundled value, let me just give a point of clarification there. When we look at bundled value, we don't look at it through the lens of just discounting a bunch of our existing core items and putting them into a bundle. Throughout the remainder of this year, some of the items that you will see within bundled value will actually be brand new items in the form of pretty exciting premium LTOs that have traditionally hit the menu. But when we marketed them, we did it in an un-priced fashion and what we'll do -- when we -- generally market them as a la carte items.

And all you will see the shift to be is that we will take those very same items and we will incorporate them into bundled value versus unpriced a la carte. So, you should still see some premium stuck at the menu like Jack in the Box would typically do. You should still see some new news. It's just that the consumer really needs to evaluate the value of your offering upfront and it doesn't matter if it's hovering around five bucks, six bucks whatever that number is, they need to evaluate it upfront because there are so many offers in the marketplace that they're going to assume that without that price point there is likely to be paying a lot more than they would at a competitive set.

So, that's really what this is aiming to do. But I think there will be a fair amount of innovation and exciting new news within those bundles that I think, are not only our consumers will like, but I think that our other stakeholders, franchisees as well will also appreciate those things at the menu.

Dennis Geiger -- UBS -- Analyst

Great, thank you.

Operator

Thank you. Next question is from John Glass with Morgan Stanley.Your line is open.

John Glass -- Morgan Stanley -- Analyst

Thanks. Thanks very much. Lenny, can you talk a little bit about -- little bit more about digital strategies in '19? Specifically, you had delivery for a long time or you've had a lot of your stores on delivery now? So, can you talk about what you're seeing from incrementality and specifically and what it contributes to comps? How are franchisees reacting to this? Some franchisee systems are a little bit ambivalent given that they're paying some of the take rates and so profitability is in question. How do you share expenses with them? Do you let the delivery agents, for example, mark up the menu and therefore, the burden is less on the franchisees? So, how do you think about the cost associated with delivery to the franchisees and how is it contributing to comps? I thought there was also going to be an -- I may have this wrong, but an app relaunch sometime this year. I don't know if that's happened or it's going to happen, but how impactful do you think that is to the business?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah, couple things. So, let's talk about delivery first. We haven't disclosed bunch of specifics about how delivery is impacting our business. However, we have disclosed that sales are largely incremental and they need to be largely incremental in order for it to make sense for us. As we work with the franchisees and with the strategic partners, third-party partners, our biggest concern is really the incrementality of the sales and the fees associated with the relationship.

If we can find a nice balance between fee structure and we can maintain incrementality associated with sales, then this then make a whole lot of sense. But if those things stop making sense, it really at that point would be better for us to pivot our time and attention toward other ways of driving same-store sales. So, we are spending a lot of time with various third-party providers to make sure that the relationship moves forward in a productive way and we're also spending a lot of time with our franchisees, making sure that we continue to invest and making delivery, part of our business more operationally efficient. And so, we're working one strategic partner at a time and incorporating them into our POS network. So that it's sort of seamless for the operation and like I said, we will -- we'll take that sort of one step at a time because the relationship needs to be productive in order for us to continue to invest in it.

But what we're seeing today is largely incremental sales. So, it certainly makes sense for us to continue to sort of march down this road. We just are cautious not to run down the road. Because like I said, it need to financially be productive. As far as the mobile app, we've already launched systemwide in Q1 and really what, what the effort will be behind this now, will be to drive users into this platform because long term having these loyal guests as part of our platform allows us to market to them pretty effectively.

I will say though that the jury is still out in our space as to the take rate of mobile/digital type applications in driving overall sales. I think that we will need to have this, I think it will be necessary because the consumer is sort of redefining convenience and they will let these types of applications for pay and order ahead, and pickup and viewing your menu and facilitating delivery. So, there's certainly a utility associated with having it, but I think we will evaluate what we think is the right investment levels based on what we think the return rate will be within our space.

John Glass -- Morgan Stanley -- Analyst

Thank you very much.

Operator

Thank you. Next question is from Jon Tower of Wells Fargo. Your line is open.

Jon Tower -- Wells Fargo -- Analyst

Great, thanks. Just a couple on advertising actually, just Lance, I think you mentioned earlier that the Company is no longer going to provide that incremental contribution to the ad fund for the balance of '19. So how are you thinking about that impacting your share of voice and perhaps this might risk some of the same-store sales recovery that you're seeing in the business or are you more effectively buying media, so that the impact on same-store sales shouldn't be as great. And then second, my question is on that, I think the last call you had mentioned using the Jack character and getting a little bit more edgy with him in the advertising, has that actually taken place in the current advertising that's out there? Thank you.

Lance Tucker -- Executive Vice President and Chief Financial Officer

Jon, it's Lance, I'll take the first part and I'll throw it over to Lenny for part two. So first of all, how we used the $2 million contribution we made in the first quarter. We had already dedicated our marketing dollars to the promotions that we had in place. So what we really used that $2 million to do was to make sure we have sufficient funding to be able to run the promotion of the $4.99 (inaudible), we had to make sure --

Leonard Comma -- Chairman of the Board and Chief Executive Officer

BLT.

Lance Tucker -- Executive Vice President and Chief Financial Officer

BLT, excuse me. To run the BLT, because we had already committed dollars elsewhere. As far as what we'll do going forward, what I said it's not contemplated in our guidance as we've done in the past. If we make a strategic decision that we need to do that, we will certainly be willing and ready to do so.

But don't really think we're going to need to, as of right now because so much of our upcoming marketing calendar already we feel like is laid out, particularly with the right types of value promotions that we would not need to get in and make that kind of pivot.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Just kind of follow up on the second part of your question how we use Jack, yeah, we had gotten to the point where Jack's voice had somewhat been muted. And we had purposefully avoid other voices as we were trying to focus on the improvement in quality in our hamburgers, and other parts of our menu. I think we probably swung this pendulum too far and Jack, the use of that character, his voice has proven to be successful in really breaking through a lot of the noise and clutter that's out there from a voice perspective, and so we needed to pivot back to him.

Being a little more irreverent, which is what he's typically been, but at the same time focusing on food. So, I think we're at the right place now and I think even more important than that is that, that voice needs to translate into social and digital space, and we need to meet the consumers where they are, right, whether they're in social media or video gaming or streaming, that's where the consumer is and that's where we need to meet them. So, the effective ways for us to have not only Jack's voice, but Jack in the Box's voice and our promotions within that space are also equally important.

Carol DiRaimo -- Chief Investor Relations & Corporate Communications Officer

Next question.

Operator

Thank you. (Operator Instructions) The next question is from Karen Holthouse with Goldman Sachs. Your line is open.

Karen Holthouse -- Goldman Sachs -- Analyst

Just a question on the mobile order and pay which I am happy to hear that's launched. Is that something that's fully integrated into the POS and what's the franchisee feedback just operationally thus far and then you also mentioned 85% usage, but is there any sort of initial things you can share on customer experience or repeat usage?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

I don't -- you said 85% usage. I'm not quite sure what you are -- what kind you are referring to, I'll make sure there is nothing was misinterpreted there.

Karen Holthouse -- Goldman Sachs -- Analyst

There was a comment there was a percentage of app users I thought that had used it, which maybe I misheard. Yeah, that was indicative of trial or something. If you could clarify that and then anything about just sort of your customer experience with the usage?

Carol DiRaimo -- Chief Investor Relations & Corporate Communications Officer

Karen, I'll take the the first one, 85% of the system was served by at least one delivery service.

Karen Holthouse -- Goldman Sachs -- Analyst

Okay.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah, so just point of clarification there. The, -- so the app has been working well within the operation and our operators have found that the app itself is not creating, which is and largely has rolled out pretty smoothly. And so from that standpoint, we are pretty good about it and we did take a long time trying to get this right, so that we wouldn't negatively impact their operation, knock on wood, right. We're going to see certainly things pop up now, but so far so good.

And the bigger piece of feedback is really around what the overarching digital strategy. How much do we want to invest in it and as we put these discount offers through the digital space, through the app to try to attract the users there's always going to be the question around what are the appropriate offers and how do we -- how do we make sure that we're getting returns on -- the investment of those offers.

So, at the most recent roadshow, we actually got some great advice, particularly from some operators in our Houston roadshow, who talked about how we can effectively put those offers into this space and do it in a way that doesn't negatively impact their margins, something that they can really buy into. So we'll make those pivots. We really appreciate that feedback. I think people generally understand why it's important to capture consumers through this vehicle and they just want to make sure that we're doing to responsibly and we're more than happy to make those adjustments.

Lance Tucker -- Executive Vice President and Chief Financial Officer

Fair enough. I just want to add on just one thing. Real quickly, one of the other important things about mini active is not only how the operator see that how are the consumers receiving it. The feedback has been good and the ratings both in the Apple and the Android app stores have been very strong as well.

Karen Holthouse -- Goldman Sachs -- Analyst

And then one just quick clarification on guidance, you've indicated that guidance doesn't include incremental ad spend contributions for the balance of the year. Does that mean that spending has already been turned off?

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah, I think the way to look at, is not so much the spending has been turned off or on. I think the simple way to look at it is, we had allocated a spend in Q1 toward, the Ribeye and other promotions. We wanted to make a pivot to the BLT $4.99, but we didn't want to have to negatively impact markets that either weren't going to make that pivot or we also didn't want to necessarily be in a place where we planned to sell these products we brought in inventory and then essentially we turn them off cold and stop selling them.

But instead of doing that, we just ran a third marketing initiative and we paid for it. And it was the $4.99 BLT and what we saw through the result is that, that actually -- what the consumers responded to. So, all of the rest of the year, the primary promotions will look a lot like the $4.99 BLT in nature and so if that's where the consumer is going to respond, that's where we'll spend the money. So, it's another way of saying it is, we don't think the performance in Q1 generated by incremental advertising spend, it was generated by having something on air that the consumer would actually respond to and that's what you'll expect to see the rest of the year.

Karen Holthouse -- Goldman Sachs -- Analyst

Okay, thank you.

Carol DiRaimo -- Chief Investor Relations & Corporate Communications Officer

Operator, I think we have time to squeeze in one more question here.

Operator

Thank you. Our last question on queue will be from Robert Derrington of Telsey Advisory Group. Your line is open.

Robert Derrington -- Telsey Advisory Group -- Analyst

Yes, thank you. Lenny, as we look at the Company's test of the simplification of the menu, how does the Pannido that you ran during this past quarter, how does that fit in? Is it considered -- was it considered to be a premium product or it -- was it more of a one-off, will we see more things like that? Any kind of color would be helpful.

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Yeah. So, what's interesting about the Pannido, we ran that years ago. This was a new and improved Pannido. It was absolutely fantastic. The consumer response to it was very favorable and the sales associated was largely incremental. So, we will definitely continue to do things like Pannido. It was a relatively easy product to execute within the operations simply because of the way that we brought in the cold cuts. If we were slicing them ourselves and we were then having to create set ups to facilitate the creation of the sandwiches, that would have been pretty difficult. But we didn't do that, we actually had the suppliers do a lot of work on our behalf, so that the product would show up at least the protein portion of the product would show up in a way that was sort of ready to assemble within a sandwich. And then we spent the time essentially on the bread.

And so, when you look at items like that, they can play really well in our operation as LTOs and some can play well over the long term. So, we certainly will continue to do things like that. In addition, when we launched the Pannido, we gave operators the opportunity to put the Pannido in a bundled deal or to simply sell it a la carte. And this was again another indication of what's working in the marketplace. Those individuals who sold this in a bundled deal, saw the same type of improvements in their business compared to those who didn't, that we saw in the BLT markets compared to the ones who didn't go BLT and essentially it did drive wholesales and transaction and when you look at the comparison of those who did the bundled deals versus those didn't, there was a significant differences and gap between them on final sales and transactions as well.

So, again, this is -- makes sense for us to do. If we were doing it again within this environment, we would want to do see first, do it as a bundled deal simply because that helps their sales and transactions and bottom line. But, then long term, if the environment changes, we will continue to do premium items, but less likely to do it in a bundled deal.

Robert Derrington -- Telsey Advisory Group -- Analyst

Terrific. Thank you.

Lance Tucker -- Executive Vice President and Chief Financial Officer

Thanks everyone for joining us today and we'll look forward to speaking to you on the next call in May.

Operator

Thank you, Speakers. And that concludes today's conference. Thank you all for participating. All parties may disconnect.

Duration: 65 minutes

Call participants:

Carol DiRaimo -- Chief Investor Relations & Corporate Communications Officer

Leonard Comma -- Chairman of the Board and Chief Executive Officer

Lance Tucker -- Executive Vice President and Chief Financial Officer

Brian Bittner -- Oppenheimer & Co -- Analyst

Jeffrey Bernstein -- Barclays -- Analyst

Jeff Farmer -- Gordon Haskett -- Analyst

Gregory Francfort -- Bank of America-Merrill Lynch -- Analyst

Alexander Slagle -- Jefferies -- Analyst

David Tarantino -- Robert W Baird -- Analyst

Chris O'Cull -- Stifel -- Analyst

Andrew Charles -- Cowen & Company -- Analyst

Dennis Geiger -- UBS -- Analyst

John Glass -- Morgan Stanley -- Analyst

Jon Tower -- Wells Fargo -- Analyst

Karen Holthouse -- Goldman Sachs -- Analyst

Robert Derrington -- Telsey Advisory Group -- Analyst

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