Jack in the Box Stagnates While Qdoba Strengthens

Feb.25.11 | About: Jack In (JACK)

While Jack in the Box (NASDAQ:JACK) beat Q1 analyst estimated EPS of $0.43 with $0.61, all is not well. Same restaurant sales were announced to be flat or down 2% during Q2, precipitating a 7.12% one-day drop.

While the stock market may have rebounded, many middle and lower-income earners are still feeling the effects of an economic downturn. This has been translating into stricter adherence to the value menu. As such, some of the most popular value items have been targeted for a sprucing up.

“In April, the company introduced new French fries, a new premium blend of coffee, and improvements to its tacos, per CEO Linda Lang.

While here in California, Jack in the Box QSRs (quick-service restaurants) are ubiquitous, that's not so for most of the nation. States such as Florida have none, while the majority of other states have just a handful. California and Texas are the top markets, with the key demographic being young Hispanic males.

There remains ample opportunity for expansion countrywide, dependent upon continued expansion even within already saturated markets. Despite clever Super Bowl and primetime ads building Jack into a humorous and instantly recognizable character a la Ronald McDonald (NYSE:MCD), growth is stagnant.

Last week I attended the JACK annual shareholders' meeting. The point of most discussion was the desired divestment from corporately-owned Jack restaurants in favor of franchisee-owned. Slightly less than 60% of Jack restaurants are franchisee-owned; by 2013, this is targeted to be 75%. Up to $65 million will be taken in for the sale of up to 225 Jack locations to franchisees in 2011.

Denver-based and Jack-owned Qdoba holds Jack’s hopes of challenging Denver-based Chipotle (NYSE:CMG) for the throne of premium Mexican food kingpin. While the average receipt at Jack is about $6.25, Qdoba patrons pay about $8.50. While Jack’s growth is stagnating, Qdoba saw impressive growth.

“Qdoba’s same-store sales momentum continued in the first quarter with an increase of 6.4 percent system-wide, driven largely by transaction growth as well as higher catering sales,” Lang said. “Subsequent to the end of the quarter, we acquired 20 franchised Qdoba restaurants in the Indianapolis area for approximately $21 million, consistent with our strategy to opportunistically acquire franchise markets where we believe there is continued opportunity for development as a company market.”

At the same time that management is divesting Jack-in-the-Box locations, it's just as quickly purchasing and opening up corporately-owned Qdoba locations. In fiscal 2011, 30 to 35 Jack restaurants are opening, compared to 50-60 Qdoba. McDonald's spinoff Chipotle is making Qdoba play second fiddle with double the locations. Of late, CMG's stock has been flying high, demonstrating that investors are valuing premium Mexican cuisine and its future growth. Qdoba represents Jack's attempt to steal some of Chipotle's thunder.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.