Qdoba franchisee same-store sales lagging

Aug. 10, 2012 | by Alicia Kelso

Jack in the Box Inc. reported results for its third quarter, which included a 3.3 percent jump in same-store sales at company-owned Qdoba locations. Systemwide same-store sales at Qdoba were up 2.1 percent, with franchised same-store sales lagging.

During Thursday's earnings call, Linda A. Lang, chairman and CEO, attributed the variance between company and franchise restaurants to more promotional activity in company markets, as well as continued strong performance of restaurants in markets that were recently acquired from franchisees.

"Importantly, the promotions at company Qdoba restaurants did not negatively impact restaurant operating margins as we saw significant margin expansion versus last year," she added.

The Qdoba system was approximately 50 percent company operated at the end of the quarter, compared to 41 percent a year ago. The company acquired 53 restaurants throughout the past 12 months as part of its continued brand expansion.

"We are very selective on those acquisitions. So we're looking for solid performance in terms of sales and sales growth, higher than average AUVs, as well as opportunities to develop out the market," Lang said. "And in each of the cases of these acquisitions, that has occurred. Some of the difference between company and franchise sales is a result of those acquisitions of the stronger performing franchise market."

Promotional activity, product news expected in Q4

During the quarter, Qdoba ramped up its promotional activity a bit and expects to continue that effort in Q4. Lang said there was a delay on one of the digital promotions that was introduced in Q3, and not every franchisee participated. She expects to get franchisees on board with fourth quarter activities.

Additionally, Qdoba just rolled out a whole wheat tortilla systemwide and will have more product news in Q4.

"An objective moving forward is really to get traffic back in the restaurants at Qdoba. So fourth quarter, we'll have additional advertising expense at Qdoba, and we would expect to see additional promotional activity," Lang said.

Distribution business

Jack in the Box Inc. announced an agreement to outsource its distribution business to MBM Food Service Distribution. The transaction is expected to be complete by the end of Q1 2013.

"This agreement is expected to provide long-term price stability for both company and franchised restaurants. MBM distributes to many in the restaurant space, including key brands in QSR. The outsourcing of distribution will free up approximately $60 million in working capital currently tied up in franchise receivables and distribution center inventories that we can deploy to further enhance shareholders returns," said Jerry Rebel, CFO.

Financial highlights

Jack in the Box Inc. reported net earnings of $11.6 million, or $0.26 per diluted share, for the third quarter ended July 8, compared with net earnings of $18.7 million, or $0.38 per diluted share, for the Q3 2011.

Gains from refranchising contributed approximately $0.05 per diluted share for the quarter as compared with approximately $0.13 per diluted share in the prior year quarter.

Throughout fiscal 2012, the company has been reviewing its organization structure, including evaluating opportunities for outsourcing, restructuring of certain functions and workforce reductions. As a result, restructuring charges of $11.3 million, or approximately $0.16 per diluted share, were recorded during the third quarter which relate primarily to costs resulting from employees electing to participate in the company's voluntary early retirement program. Additional restructuring charges are expected during the fourth quarter.

Seven new Jack in the Box restaurants opened in the third quarter, including two franchised locations, compared with five new restaurants opened systemwide during the same quarter last year, of which one was franchised.

In the third quarter, 11 Qdoba restaurants opened, including five franchised locations, versus 17 new restaurants in the year-ago quarter, of which 11 were franchised.

At July 8, 2012, the company's system total comprised 2,247 Jack in the Box restaurants, including 1,661 franchised locations, and 614 Qdoba restaurants, including 310 franchised locations.

CMO transition

Chief marketing officer Terri Graham, who has been with the company for 22 years, is leaving the company. She will assist the team during the transition.

Read more about operations management.

Topics: Business Strategy and Profitability , Food & Beverage , Franchising & Growth , Marketing / Branding / Promotion , Operations Management

Alicia Kelso / Alicia has been a professional journalist for 15 years. Her work with FastCasual.com, QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine.
View Alicia Kelso's profile on LinkedIn

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