Will Jack in the Box sell Qdoba?

May 18, 2017

"Below our expectations," is how Jack in the Box Inc. Chairman and CEO Lenny Comma described the compay's Q2 performance, according to a news release. Comma also suggested that the company's Qdoba brand is dragging down overall performance and may be considered for sale.

The company last year analyzed its organizational structure and brand performance to create a more efficient operation. Since the launch of initiatives to pare down administrative costs and workforce redundancies, while consolidating some functions and technologies while boosting refranchising initiatives, the company recorded $2.2 million of restructuring charges $0.04 per diluted share in the quarter that just ended in April. But Comma said still more action is needed. 

"While operating earnings per share increased 15 percent versus last year, driven primarily by lower G&A, our second quarter performance was below our expectations," Comma said in the news release. "After a sluggish start to the quarter — which we believe was attributable to delayed tax refunds and record rainfall in California — Jack in the Box system same-store sales improved to positive territory as these transitory issues passed and we pivoted our advertising towards value messages. 

"However, same-store sales at Qdoba company restaurants worsened in the latter two months of the quarter, as we lapped more aggressive discounting in last year's second quarter. While margins at Qdoba were still disappointing, they improved to over 16 percent in the final month of the quarter as we were able to manage labor and food costs more effectively than in the first quarter, despite the larger decline in same-store sales. We are also encouraged that Qdoba company same-store sales have improved thus far in the third quarter."

Comma said that a May 2016 investor meeting concluded that the company's Qdoba "strategy" might need to be reconsidered if the brand's valuation proved problematic. That, he said, has indeed become the case. 

"It has become more apparent since then that the overall valuation of the company is being impacted by having two different business models," he said. "As a result, we've retained Morgan Stanley & Co. LLC to assist the board in its evaluation of potential alternatives with respect to Qdoba, as well as other ways to enhance shareholder value."

Comma added that the refranchising initiative that sprang out of that meeting a year ago has progressed, allowing the Jack in the Box brand to sell 60 location in Q2 as well as the signing of non-binding letters of intent with franchisees to sell about 70 more restaurants.

Other financial highlights for the 12-week period ending April 16, 2017, include:

  • Q2 Jack in the Box system same-store sales fell 0.8 percent, lagging behind overall QSR sandwich segment performance by 1.5 percentage points.
  • Company same-store sales fell 2.4 percent, driven by 7.1 percent fewer transactions. 
  • Q2 Qdoba same-store sales fell 3.2 percent system-wide and 5.9 percent for company-owned properties. 
  • Company same-store sales fell 8.2 percent in transactions, though average check and catering sales grew.
  • Q2 consolidated restaurant operating margin (non-GAAP measure) fell 240 basis points to 17.5 percent of sales from 19.9 percent last year Q2.

Jack in the Box restaurant operating margin (non-GAAP measure) fell 100 basis points to 19.7 percent of sales, due mostly to greater labor costs, more repairs and sales deleverage. The decrease was due primarily to higher labor costs related to wage inflation, higher repairs and maintenance costs, and sales deleverage, which were partially offset by a decrease in food and packaging costs. 

Qdoba restaurant operating margin (non-GAAP measure) fell 480 basis points to 13.5 percent of sales, mostly due to sales deleverage, new restaurant openings, wage inflation and higher food and packaging costs.  

The company's board approved $100 million in stock buybacks, leaving $181 million remaining in the program until expiration in November next year. The board also declared a 40-cent per share quarterly cash, payable on June 12 to shareholders of record on May 30, 2017.

Q3 and annual guidance includes: 
•    Jack in the Box same-store sales of up 1.0 to down 1.0 percent from 1.1 percent increase in the year-ago quarter.
•    Qdoba same-store sales of up 1.0 to down 1.0 percent versus a 1 percent increase in the year-ago quarter.
•    2017 Jack in the box same-store sales increase of 1 percent.
•    2017 Qdoba same-store sales decrease of 1 to 2 percent. 
•    Flat commodity costs for both brands.
•    19 percent consolidated restaurant operating margin.
•    Approximately 20 to 25 new Jack in the Box restaurants, most franchise locations.
•    Approximately 50 to 60 new Qdoba restaurants, about half company-owned. 
•    Operating earnings per share of $4.10 to $4.30, excluding costs to restructure and refranchise, ranging from $4.10 to $4.30.
 


Topics: Operations Management

Companies: Jack In The Box, Qdoba


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