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Financing

Jack in the Box targets more unit growth, even as franchisees close locations

The company has a new franchise sales effort and is opening in REEF Kitchens, but it allowed operators to close underperforming locations last quarter.
Photograph: Shutterstock

Jack in the Box has generated strong sales recently, including 16.4% two-year same-store sales in the quarter ended April 11. It hopes this will prompt operators to add new locations, and indeed the chain is taking aggressive steps to spread its Tiny Tacos into more communities.

But first the burger chain is closing some units. Franchisees closed 19 restaurants last quarter, more than they did in the same period a year ago.

Executives credited improved relations between the company and its franchisees for those closures, and said the closures are needed to improve the “overall quality” of the system.

“We did see some elevated closures in the quarter,” CFO Tim Mullany told investors on Wednesday, according to a transcript on the financial services site Sentieo. “A lot of that is due to the improved relationship, frankly, with the franchise system and corporate. We’re dialoguing 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.”

“It’s really a way for us to cultivate our portfolio and in the long run improve the overall quality,” he added.

Jack in the Box does have big growth plans under CEO Darin Harris, who arrived at the company last year and instantly repaired relations with franchisees that had soured under his predecessor, who had undertaken an aggressive strategy of cutting corporate overhead costs.

With sales having already starting to turn around when he arrived, Harris has quickly shifted its strategy to unit growth, something that Jack in the Box hadn’t done for a long time. The unit count entering last quarter was 2,241 in the U.S., roughly the same as it was a decade earlier.

The San Diego-based burger chain has concentrated first on existing operators. Harris said this week that two-thirds of existing franchisees have expressed interest in expansion and the company has new development agreements with eight franchisees to build 23 new stores.

The company has also launched new recruitment initiatives and has started advertising for new operators. The company said the number of leads has doubled in the first four months of 2021 from the same period as a year ago.

It is also looking to ghost kitchens. The company has a deal with REEF Kitchens to open in eight facilities in three states this summer.

Harris said that it will be “at least 18 to 24 months before we begin to show meaningful new store growth.”

“We’re seeing tremendous response from our existing base,” Harris said. “We’re excited about what we’re seeing in the pipeline.”

While expansion could take the company out of its predominantly West and Southwest markets, the company said those existing markets have plenty of space for unit growth. He said the company could add 180 locations in California, 110 in Texas and 90 in Colorado, along with 52 in Utah. “the key is to focus where we have awareness and the building concentric circles around that core and pursue a few new markets,” Harris said.

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