Jack in the Box turns 70 this year, but the chain is aging like fine wine.
During Q3, the legacy brand expects to cross $4 billion in systemwide sales on a trailing 12-month basis for the first time in company history. In the second quarter, same-store sales increased 16 percent on a two-year stack, and average weekly sales per store grew 17 percent to $35,000. In addition, average check rose 27 percent on a two-year basis and transactions increased year-over-year for the first time since Q4 2019.
The bolstered sales volumes come as Jack embarks on what promises to be an aggressive, multi-year franchise growth strategy. The chain ended Q3 with 2,228 restaurants, including 2,097 franchised stores.
To date, more than 66 percent of existing franchisees have expressed interest in growing in the coming years, according to CEO Darin Harris. Jack recently signed agreements with eight operators that call for 23 new stores, or more than 6 percent growth of their 358 combined units. New franchisees will join the fold, as well. Jack launched several franchise recruitment initiatives in late March, including the filing of an updated FDD, opening a new franchise development website, and starting its first paid ad campaign in late April. Harris said the brand has received double the number of inbound franchise leads compared to this time last year.
THE COVID TRAIL FOR JACK IN THE BOX
One of Jack’s main draws is the finalization of a modular “restaurant of the future” design that expands access to a suite of options, including drive-thru only, in-caps, smaller and streamlined narrow sites, and nontraditional outlets such as airports, convenience stores, and college campuses. Within this work, Jack developed an upgraded kitchen for smaller drive-thru only units, which lowers costs by 20 percent.
“We’re working on all fronts, putting the building blocks in place to drive brand loyalty and franchise opportunities that will fuel future growth and category-leading performance,” Harris said during the chain’s Q2 earnings call. “We’re pleased with the progress we’re making and with enthusiasm of existing and prospective franchisees.”
Jack closed 19 stores in Q2, but CFO Tim Mullany attributed the elevated levels to the improved relationship between franchisees and the company.
“We’re dialoging very frequently with them and allowing them to exit out of underperforming locations in anticipation of our expansion into new offsetting units within existing markets,” the CFO said. “So it’s really a way for us to cultivate our portfolio and in the long run improve the overall quality.”
As Jack announced previously, it has room to build another 950 to 1,200 locations in its existing core markets—plenty of whitespace compared to its competition. For example, in California Jack has 945 locations, but it could add another 180. Meanwhile, McDonald’s has roughly 1,270 stores in the Golden State. In Texas Jack has 600 locations, but Harris said it could build 110 more. At the same time, McDonald’s has 1,183 in the state and Sonic has 943. Colorado is another underpenetrated market. Jack has 17 in the state, but could add 90, while McDonald’s boasts 200. The strategy is to focus on those core areas and then venture into adjacent markets. Harris used Salt Lake City—and Utah overall—as an example. Jack has three units in the state, but could open another 52.
“Jack has been able to successfully hold on to these new higher income customers that we acquired at the start of the pandemic,” said CEO Darin Harris. “So that’s also creating some encouragement on our part on how do we continue to comp.”
Although exciting growth is ahead, Harris wanted to manage expectations, especially with COVID impacting site selection, financing, permitting, and build out. Jack anticipates at least 18 to 24 months before it starts to show meaningful net new unit growth.
“We have new leadership in the development group with Tim Linderman who was recently hired,” Mullany explained. “We recently rolled out a new franchising website and then launched some of these early initiatives to get out and start getting interest for new franchisees coming into the system. As those development agreements get signed in the future, that’s sort of the canary that indicates when that 18- to 24-month clock starts so to speak for those units that are announced in each development agreement. So we’re actively pursuing it and are really optimistic about the early results.”
Some expansion plans are coming sooner than others. Jack recently finalized an agreement with REEF Kitchens to open up to eight ghost kitchens in three states this summer. The move is another step toward bolstering the chain’s digital business, which now features in-app ordering and a loyalty program. The digital channel mixed 7 percent in Q2, or a 150 percent increase year-over-year, and the customer database has grown by more than 60 percent in the past year and a half. More than 95 percent of restaurants are covered by at least one of the four major third-party delivery providers, and 80 percent are using at least three.
Harris said the loyalty program and growing database—along with a new digital marketing technology platform—unlocks an opportunity to offer more personalized messages and timely offers. In the past year, data indicates that Jack is attracting consumers with a higher income even as dining restrictions loosen.
“So we’re in the very early stages of our digital strategy as we connect with our guests and enable one-to-one marketing, but we’re seeing tremendous growth from digital,” Harris said. “We also are seeing some shifts—as we’ve talked about before on these calls—with our new customers. And what we’re seeing is some of the higher income customers are holding steady, meaning, when we measured churn of customers compared to last year at this time and the rollover of COVID impacts, we’re seeing that it implies that Jack has been able to successfully hold on to these new higher income customers that we acquired at the start of the pandemic. So that’s also creating some encouragement on our part on how do we continue to comp.”
Jack’s Q2 results were driven by mix shift toward premium menu items including Chicken Strips, the Bacon & Swiss Buttery Jack, and Supreme Croissant. Mix shift was also lifted by LTOs like the Cluck Chicken Sandwich and the return of the Triple Bonus Jack. The premium offerings—in addition to strong attachment and add-ons—outperformed year-over-year, which includes a lap of the successful Tiny Tacos. Jack was positive across all parts of the day, with the late-night daypart experiencing the highest improvement and accounting for two-thirds of transaction growth. The brand saw strong sales across all geographies, including markets that have been reopened for several months. In Texas—a state that lifted restrictions in early March—the chain saw its best transaction trends, and stores are posting solid sales during the first few weeks of Q3.
In terms of the labor shortage, Mullany said Jack isn’t seeing a material impact on sales. Under 10 percent of company stores have been impacted, and he estimated a similar proportion for franchised units.
In Q2, operating earnings of $64.9 million increased 37.7 percent compared to $47.1 million in 2019. Net income of $35.9 million rose 43.2 percent compared to $25.1 million two years ago. Adjusted EBITDA of $75.8 million lifted 23.9 percent compared to 2019.
For the fiscal year, Jack expects high single-digit system same-store sales growth, adjusted EBITDA between $320 million and $330 million, and labor cost inflation of 5 to 6 percent.