Financing

Jack in the Box reaches a 'turning point' in its bid for growth

The fast-food burger chain has new deals to open restaurants in Florida and Arkansas, bringing the first new franchisees into the brand in years. And it is turning around its restaurants in St. Louis.
Jack in the Box growth
Jack in the Box believes it is on pace to start adding units again for the first time in years. / Photo courtesy of Jack in the Box

On Wednesday, the fast-food burger chain Jack in the Box announced two new development agreements. One will result in the first restaurants in Arkansas in its history. The other, in Florida, represents a return to a state it left three decades earlier.

Perhaps more important, both were with new franchisees. The chain in recent months has brought three new operators into the system, its first new franchisees in more than a decade. To company executives, it represents a “turning point” in its aggressive, two-year effort to spread its restaurants well beyond its home markets out West.

“We’re incredibly excited about the strategies we put in place to expand Jack’s reach,” CEO Darin Harris told investors this week, according to a transcript on the financial services site Sentieo/AlphaSense. “We think this is part of the turning point that we’ve been talking about the last couple of years, focusing on a return to net unit growth on a consistent basis.”

Jack in the Box under Harris has made adding locations its mission. The quick-service chain has been stuck at around 2,100 to 2,200 units for more than a decade, a stagnation that has largely kept the chain west of the Rocky Mountains.

The company has taken numerous steps to get the brand ready to add locations. It built a development team, closed weak locations and bought out struggling markets to get them ready for franchisees to build restaurants. It is working to build sales and has a new, flexible prototype it believes will convince franchisees to open new locations.

Executives believe the first quarter represented a key moment in that effort. Franchisees did not close a single location during the quarter and the chain finished the quarter with 2,186 restaurants, five more than it had at the beginning of the period.

In addition to the franchise agreements in Florida and Arkansas, Jack in the Box signed four development agreements in the quarter for 36 restaurant commitments, including deals in Hawaii, Nashville and St. Louis. While commitments can be broken, executives note that they’ve been aggressively approving sites.

“Starting essentially from scratch, we have built our new restaurant pipeline by accelerating existing and new development commitments and approving more sites over the past year than we did in the prior three years,” Harris said. Jack in the Box has 72 agreements for 303 restaurants.

The St. Louis development agreement is particularly notable. The company closed 17 restaurants in the market last year because of weak performance, leaving it with 47 restaurants in the market. Those restaurants generated a 10.1% increase in total sales in the quarter, despite the drop in unit count.

Same-store sales rose 25.5% while transactions increased 9.8%. “Our market optimization strategy is working here,” Harris said. “The franchise business is healthier now and we have a commitment to build new restaurants in the area.”

Sales growth could certainly help. Same-store sales in the company’s fiscal first quarter, which ended Jan. 22, rose 7.8%.

That said, profitability on a per-unit basis is down. “All of us in the industry have faced these dramatic headwinds with commodities,” Harris said. “And we’re not able to take enough price to overcome it.”

Still, the company is working to improve store profit margins, which Harris said could save each individual restaurant $50,000 to $55,000 through new equipment, supply chain synergies and “process improvement.”

As for unit growth, Harris said Jack in the Box’s focus is on giving existing operators an opportunity to add new units. He said two-thirds of franchisees in the current system have agreed to add restaurants in existing markets. That has the company turning toward new franchisees.

“We feel good about where we are in the process,” Harris said. “This is an early indication of what’s in front of us.”

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