A Jack in the Box franchisee operating roughly 70 stores in Missouri and Illinois filed for bankruptcy Tuesday, citing increased pressures with market share and labor availability.
According to JIB’s FDD, the locations belong to Kelly Kuhlman, who’s been a JIB franchisee since July 2011. He runs the restaurants through limited liability companies Missouri Jack and Illinois Jack, which each submitted a filing. About 80 percent of the units are in Missouri, and the remaining 20 percent are housed in Illinois. The stores employ more than 1,650 people.
Court documents said an increase in fast-food competition in 2018 contributed to the issues. The competition led to rising labor costs and a corresponding decrease in sales.
Missouri Jack and Illinois Jack fell behind on payments to lender City National Bank starting in 2018. In March 2020, the bank filed a complaint, seeking more than $15 million under several loans.
The COVID pandemic made the situation even worse.
“Shortly after the CNB Complaint was filed, the pandemic reached a critical point in the United States, resulting in ‘stay at home’ recommendations and orders that citizens refrain from unnecessary activities outside their homes in an effort to curb transmission of the disease,” the filing said. “These restrictions had a further impact on the Debtors’ businesses at many locations.”
JIB and the brand affiliates have negotiated out of court for nearly a year. The negotiations resulted in a proposal in which the companies will be able to close seven or eight unprofitable locations without defaulting. The chain has also agreed to “additional modifications” to the franchise documents that will enhance the companies’ efforts to reorganize.
Of the 68 restaurants, JIB subleases 50 locations and owns the land at 18. The brand said that through bankruptcy proceedings, a number of leases may get rejected, resulting in potential impairment costs. The restaurants continue to operate and the franchisee has remained current with obligations, except for certain ones that weren’t due yet as of the filing date. JIB said it could see negative impacts to results as it works through the bankruptcy.
“It’s too soon to determine how many leases and franchise agreements the franchisee may reject in bankruptcy or any impact on our future financial results,” said CFO Timothy Mullany during the brand’s Q1 earnings call. “In the event of a sale, we have the right to approve any new franchisee.”
Meanwhile, the companies haven’t reached an agreement with City National Bank. However, the two sides have tentatively agreed to attend mediation.
The companies didn’t want to file bankruptcy until reaching an agreement with both JIB and City National Bank, but mounting financial and landlord pressure, aggressive litigation from City National Bank, and other factors have accelerated the process. Because of the quicker timeline, the companies requested additional time to file schedules and statements of financial affairs.