Jack in the Box is bringing value front and center in 2018. Lenny Comma, chairman and chief executive officer of the 2,250-unit chain, said the brand would shift some of its menu innovation and messaging this year in an effort to connect with customers flocking to lower price points across quick service.
“When it comes to value, we typically offer value bundles that are promoted via second tier messaging within the marketplace,” Comma said in a February 22 conference call. “However in January, we began promoting several bundled offerings ranging from $1 to $5 price points, as our primary media metrics.”
“Most of the traffic loss in Q1 continued to be driven by the transactions less than $5, but our value promotions including the $2 Breakfast Pockets helped to drive an incremental improvement in under $5 transaction versus Q4,” he added.
Jack in the Box reported a mixed quarter, muddied by a few factors, including the impending sale of 700-unit Qdoba to Apollo Global Management, LLC, for about $305 million in cash. The deal, first announced in mid-December, is expected to close April, Jack in the Box said. The company won’t discuss the brand’s performance in the meantime, but Comma said Jack in the Box would still need to provide services to the fast casual following the sale until it becomes completely independent.
“When that happens, we'll be in a better position to continue restructuring the company and focus exclusively on the Jack in the Box brand,” he said.
Jack in the Box’s same-store sales decreased 0.2 percent in the first quarter. Company same-store sales were up 0.2 percent driven by average check growth of 2.6 percent, partially offset by a 2.4 percent in transactions. At the end of the quarter there were 255 corporate stores and 1,995 franchised. The chain also reported adjusted earnings of $1.23 per share, which beat the Zacks Consensus Estimate of $1.06 by 16 percent. Jack in the Box’s bottom line boosted nearly 15 percent, year-over-year, on margin improvement driven by refranchising. Revenues of $294.5 million exceeded the Zacks estimate of $285.9 million. The top line fell 16.6 percent on a year-over-year basis owing to lower comps, however.
Returning to value, Comma said Jack in the Box would benefit from a single-price point value model moving forward. “I would call it a tactic more than strategy,” he said. “…We had some major competitive activity, particularly in January, that we wanted to make sure we were proactive in addressing versus wait till the end of the quarter to see how it played out. I think the tactic worked well for us, something that we'll repeat if necessary in the future, but it won't be the only tactic.”
Comma hinted at two new value offerings coming down the pipe. One will be a completely new product Jack in the Box has tested—a snack item that comes in at a lower-price but “it's a nice quantity of food with pretty exciting packaging and also a very indulgent line of products.” On top of that, Jack in the Box will introduce a bundle item the brand has put together. Comma said specific details would emerge later.
Comma also noted that Jack in the Box wouldn’t fade into the crowd with these offerings.
“We're going to do things that are differentiated and that make us stand out, and we're going to actually extend one of the offerings that we currently have to bring some new news and excitement to an old product. [We’re] really excited about that. We're going to bundle that as well in a combo meal, and again, when you look at what will be in that combo besides for the drink the other items that will be in that combo are unique to Jack in the Box. So, when we look at a lineup like that and engagement from our operators, this is where we get excited about the back half of the year.”
Much of it simply has to do with positioning. For example, in the past Jack in the Box focused much of its menu innovation around premium products, like the Ribeye Burger. Now, value-based offerings will garner the same attention.
On the digital front, Jack in the Box is working on rolling out its app, complete with order, pickup, and pay capabilities, systemwide by the end of the year. Since the end of Q4 2017, Jack in the Box expanded delivery to include an additional 478 restaurants and now offers the service at nearly 63 percent of stores. “We're expecting additional restaurants to begin offering deliveries over the course of the year. We continue to see an incremental sales lift in markets where delivery is offered,” Comma said.
The company is also working through a remodel program. About 600 restaurants, Comma said, he would “kindly describe as mature.”
“These restaurants typically have rooflines more than 40 years old that date the brands and really need to change,” The investments that we'll make will largely be tiered depending on sales levels, meaning locations with lower AUVs will get less investment than those with higher AUVs. You'll see us in partnership with our franchisees implemented over the next four years.”
Jack in the Box sold 22 restaurants to franchisees during the first quarter to bring its system to nearly 89 percent franchised. About 60 have signed letters of intent. Comma said the company expects to reach the 95 percent mark by the end of fiscal 2018.
In addition to these changes, Jack in the Box’s leadership structure has shifted dramatically in recent months. Earlier in February, brand president Frances Allen resigned as part of an “opportunity to flatten our organizational structure following the expected sale of our Qdoba brand,” Comma said. Allen led the brand for more than three years.
At the same time, Jack in the Box announced that Marcus Tom was joining the company as vice president and chief operating officer. He most recently served as senior vice president of operations at JAB Beech Inc.’s Caribou Coffee brand from January–December 2017. He was senior vice president of operations at Einstein Bros. Bagels from July 2015–December 2016. Comma also noted during the call that Jerry Rebel, Jack in the Box’s chief financial officer, was sitting on his final earnings review as he preps for retirement. Lance Tucker will take the CFO reins at the end of March. Tucker comes over from a senior vice president, CFO, and chief administrative officer role at Papa John’s International, Inc.