Finance | December 2017 | By Danny Klein

Jack in the Box Quiet on Qdoba's Future

The quick-service chain is turning to value-based deals, digital innovations, to turn around sagging sales.
Jack in the Box's new burgers: the All American Ribeye and the Havarti & Grilled Onion Ribeye
Jack in the Box's Ribeye Burgers have been a hit so far. Jack in the Box C/O Marissa Wallace
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Jack in the Box CEO and chairman Lenny Comma began a conference call Thursday by addressing Qdoba’s murky future. He then put the issue to rest. For now, at least.

“There can be no assurance that the evaluation process will result in any transaction or other specific course of action. We will not be taking any questions on this matter today, and I appreciate your continued patience,” he said.

With “substantial progress” being made in the company’s evaluation of potential alternatives for the more than 600-unit fast casual, Jack in the Box also decided to hold off on offering guidance for fiscal 2018 until the matter is resolved. Reports late last week, which have continued in recent days, surfaced regarding a potential deal with Apollo Global Management LLC, a private-equity firm that took Chuck E. Cheese private for $1.3 billion in 2014. The company also made billions off CKE Restaurants before selling Carl’s Jr. and Hardee’s to Roark Capital in 2013. Reuters and other outlets reported that Apollo was nearing a $300 million deal to add Qdoba to its portfolio.

Jack in the Box has owned Qdoba for 14 years, and grew the brand by more than 600 units to the 47-state, $800 million system it is today

The company was mum on the process following its fourth-quarter earnings, which provided enough talking points on their own. The company’s earnings from continuing operations were $30.3 million, or $1.02 per diluted share, in the fourth quarter, versus $32.6 million and 98 cents per diluted share the previous year.

Same-store sales decreased 1 percent across the Jack in the Box system in the quarter, lagging behind the sandwich segment by 2.9 percentage points for the comparable period, according to The NPD Group’s SalesTrack Weekly. Company same-store sales were down 2 percent. Qdoba’s same-store sales dropped 2.1 percent systemwide and 4 percent at company restaurants.

For Qdoba, transactions fell an alarming 6.4 percent. Comma admitted the evaluation has been distracting for the brand, but the company won’t lean on it as a crutch.

“At the end of the day, we'd never use that as an excuse. They certainly are distracting, but at the end of day, we're expected to perform that's where our folks are focused on,” he said.

Comma added that Qdoba is experiencing similar headwinds as other fast casual brands. “To help drive transactions and sales, we know we need to increase awareness of our flavorful food and use of high-quality ingredients,” Comma said.

Qdoba launched an integrated campaign called “United by Flavor” that explores the brand’s differentiators and also promotes unity over division.

“You'll see this tagline on digital media, social media, email as well as in-store merchandising,” he said. “The first product promotion to incorporate the new flavor's messaging is our quesadillas. It's been several years since we promoted quesadillas on a systemwide basis. With the new campaign celebrating our mission to bring flavor to people's lives, we thought quesadillas were a great way for guests to express themselves by adding ingredients they love, including [guacamole] and queso at no extra charge.”

In the fourth quarter, Qdoba expanded third-party delivery to 62 additional corporate-run restaurants and increased the total number of locations to more than 200. Including franchised stores, nearly 45 percent of the system is under contract with UberEATS, GrubHub or DoorDash.

Comma said Qdoba has grown through non-traditional sites. It opened 14 new units in fiscal 2017 and now has more than 50 restaurants inside airports, colleges, medical facilities, shopping malls, military installations, and travel classes.

But the question remains: Will this be Jack in the Box’s challenge moving forward?

The fact Jack in the Box isn’t sharing its 2018 guidance has many investors holding their breath on a sale announcement. Shares were up about 2 percent Friday and did trend upward Thursday, despite the financial struggles shown in the report, highlighted by a revenue drop of nearly 15 percent, year-over-year, and a net income decrease of more than 6 percent.

As for Jack in the Box, much of the call’s focus centered on value-based pricing and a turn to items below $5. In January, Comma said, the brand will launch single and bundled products with multiple price points ranging from $1–$5.

“We won't completely stray from our higher quality positioning like the 100 percent Ribeye Burger, which was introduced in October, but our value promotion will be our primary message on media,” Comma said.

Jerry Rebel, executive vice president and chief financial officer, commented on the value-based trend affecting quick service.

“If you go back to some of the major promotions that the larger competitors in our space have run around value or when they've run promotions that were directly, sort of in our face or against our equities like breakfast all day, when we see those major competitors putting the lion's share of their marketing strength behind those promotions, we tend to see a negative impact within that particular quarter and then bounce back shortly thereafter,” he said. “As we look at January going forward, we don't want to be in a position where we're reacting after the fact. So you will see us have similar price points in the marketplace in January in anticipation of what's to come from some of our major competitors, and we will put the value-oriented messaging as the primary messaging, which means it will be getting the lion's share of the advertising during that time.”

Items such as the Munchie Mash-Ups, as well as Jack in the Box’s Breakfast Platter and the Really Big Chicken Sandwich, have done well in that under-$5 price point, he added.

Comma said Jack in the Box is making progress on the company’s “holistic plan to transform our business “addressing key strategic imperatives to accelerate service improvements, leverage innovation to further differentiate Jack in the Box, elevate our brand image and enhance our digital experience.”

Jack in the Box is testing a mobile app that supports order-ahead functionality and payment in a few markets, and plans to roll out mobile and web ordering across the system in 2018. It also expects to expand delivery. More than 100 additional units came onboard in the fourth quarter and Jack in the Box is being delivered in about 42 percent of the system. Comma said he expects about 58 percent to offer the serve by the end of January, which would amount to more than 1,300 restaurants

Jack in the Box continues to progress on its goal of 90–95 percent franchised units by the end of fiscal 2018. The company sold 178 Jack in the Box restaurants to franchisees during the year, bringing the system to 88 percent franchised. There are also nonbinding letters of intent with franchisees to sell 32 additional units.