Negative Trends Could Hit Jack in the Box's Bottom Line

Jack in the Box (JACK) is a fast-food restaurant company with 2,670 locations across the U.S. The vast majority (82%) operate under the Jack in the Box banner in 18 states primarily in the West and Midwest regions. About 60% of these stores are company-operated. JACK derives franchise fees and royalties from the remainder.

Jack in the Box restaurants offer burgers, fries, breakfast items, snacks, soft drinks, shakes, and smoothies. It offers a value menu as well as premium products such as entrée salads and specialty sandwiches. Most locations provide drive-thru service, which accounts for about 70% of companyowned store sales. The remaining 18% of stores operate under the Qdoba Mexican Grill banner. The Qdoba menu includes a broad selection of premium Mexican-inspired food items such as tacos, burritos, and nachos. Food is prepared in front of the customer and the focus is on fresh ingredients. Qdoba also provides professional catering services.

JACK operated 61 Quick Stuff convenience stores/gas stations. They are now classified as discontinued operations. It announced the sale of 55 of these stores and plans to divest the rest by September. Fiscal 2008 was negatively impacted by weakening economic conditions. Higher gasoline prices, rising unemployment, and tumbling household budgets led to deteriorating same-store sales growth at Jack in the Box and Qdoba restaurants. Same-store sales growth at the former fell from +1.5% in Q1 to -0.8% in Q4. For the latter, it went from +4.5% in Q1 to -1.0% in Q4.

Management responded by updating store interiors and exteriors, expanding menu options, and increasing promotional efforts. It also increased efforts to capitalize on the current trend of consumers trading down from higher-priced casual-dining chains.

For example, it launched the Mini Sirloin Burgers in March. These premium burgers take aim at similar higher-priced burgers offered by competitors. JACK also benefited from the general increase in consumer confidence and sharply lower gasoline prices seen earlier this year.

Fiscal Q2 revenues fell 1.6% to $578.4 million largely due to fewer company-owned stores and more franchised locations. Jack in the Box same-store sales were up 0.4%, but Qdoba same-store sales slid 2.3%. The consolidated restaurant operating profit margin was flat year-over-year at 16.51%, but improved 196 basis points sequentially. However, due to a greater proportion of franchised locations, net income grew 12.5% year-overyear to $29.6 million or 51 cents per share.

Despite improvements, the economic recession remains our primary investment concern. After hitting recent lows, gasoline prices have started to creep up again. The unemployment rate is also rising. A continuation of these negative trends would be particularly troublesome for Qdoba and could hurt JACK’s bottom line. Competition poses another challenge as casualdining restaurants promote value-priced menu items in order to increase traffic.

Despite such challenges, we believe near-term prospects remain promising for JACK. We are also encouraged by new menu options including the Mini Sirloin Burgers, the Mini Buffalo Ranch Chicken Sandwiches, and the Teriyaki Bowls. Customers appear to have embraced these products. Such innovative offerings should help drive sales and profits in coming quarters.

Comments

[John Gordon:]

Jack in the Box (JACK) HQ is here in my hometown of San Diego, and we watch their test stores closely.

JACK's concentration of units in CA, particularly inland CA regions that have experienced the greatest housing fallout, is a factor to watch. In addition, JACK is refranchising many company units, to flip its 30/70% franchisee/company unit ownership mix, and credit market conditions mean that will play out for some time.

John A. Gordon
pacificmanagementconsu... group.com

Chain Restaurant Earnings and Economics Experts

Jul 09 11:18 AM

[Bubbabear:]

Then there is a bad seed that Jack in The Box doesn't want to get rid of. His name is Abe Alizadeh, the largest franchisee in the Jack in The Box system with over 71 locations in California and he may acquire more stores in Oregon very shortly. Abe owes the state of California close to six million dollars in business taxes. Abe seems to get his hands into too many things as well. Last week his TGI Friday's locations in Washington, Oregon, and California were shut down after being in court ordered not to operate under the TGI Friday's name anymore. Seems he forgot to pay his franchise fees. His real estate portfolio in California is in bad shape as well. Now he declares chapter 11 to keep Jack in The Box opened. Weather he brings the whole company down or not remains to be seen. Meanwhile share at Jack in The Box continue to dip close to $20.00 a share after unfavorable ratings.

Sep 24 02:01 AM