Jack in the Box closed more locations than it opened last quarter. The company and its franchisees closed 12 locations and opened just two in the three-month period ended Jan. 23. The system has just more than 2,200 locations total.
Despite such numbers, company executives said they’ve taken serious steps toward returning the company to unit growth.
Most notably, the San Diego-based chain signed 26 development agreement last quarter for nearly 100 new locations. All told, franchisees have agreed to open 201 new units in the coming years. That is the highest level of such commitments in company history, CFO Tim Mullany told investors on Wednesday, and it comes only months after the company announced its new development strategy.
“The strong pace and enthusiasm from our franchisees has me very encouraged about our ability to maximize our long-term growth potential,” CEO Darin Harris said on the company’s fiscal first quarter earnings call.
The goals are ambitious. Jack in the Box wants to get to 4% annual restaurant growth by 2025. By 2030, the company wants its restaurants in 40 states, up from 27 states now.
That would be a considerable jump from recent vintage. Jack in the Box hasn’t added locations on a consistent level since the Great Recession, and currently operates about the same number of U.S. locations as it did in 2010. It also operates fewer overall locations than it did in 2020 thanks to the company’s targeted closures.
The brand has largely been preoccupied with refranchising in recent years. The company has been gradually selling restaurants to franchisees and today operates just 165 total restaurants—at one point it had been 80% franchised and during the recession operated about 1,000 such locations.
Consequently, franchisees spent too much of their money buying restaurants from the company rather than just build their own.
Yet the lack of unit growth from franchisees was a sign of some underlying concerns. For one thing, some of the brand’s locations in outer markets struggled, notably St. Louis, where Jack in the Box closed six locations last quarter.
And general concerns with the franchisee base manifested themselves in an operator uprising in 2018—franchisees held a vote of no confidence in then-CEO Lenny Comma and sued the brand. Comma stepped down in 2020 and was replaced by Harris, who immediately worked to repair the relationship.
The company then started building a sales staff and began working with operators to improve profits. Store-level EBITDA, or earnings before interest, taxes, depreciation and amortization, improved by 20% last year, executives said. It also began closing some underperforming locations—thus the decline in unit count.
It has also been acquiring some locations. Jack in the Box has purchased about 30 locations, intent on fixing them and reselling them to other franchisees.
To be sure, development agreements often go unfulfilled as franchisees struggle. Yet the agreements show the company is convincing operators to start pushing toward expansion. “We’re confident based upon the increased activity of our real estate team, working with franchisees, going out into the market and really driving sites into the process,” Harris said. “The pace is picking up from a development activity standpoint.”
More to the point, he said, “this is just with our existing base.” He noted that Jack in the Box is talking with new franchisees to come into the brand.
Harris sold investors that the company has been working to clear some hurdles between franchisees and building new locations. For instance, the company has been using data to map markets, which has helped lead to an increase in site approvals. It is also preordering items required for growth, such as HVAC and other equipment, that might otherwise take months for franchisees to get because of supply chain problems.
Executives said there has been no such problem finding sites for drive-thrus. Such sites have been in high demand as all sorts of restaurants look for new drive-thrus. “We’ve seen plenty of sites coming into the pipeline,” Harris said. “All have drive-thru ability.”
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