Jack in the Box (JACK 83.35, +3.02, +3.76%) shares are springing higher today after the company announced that it is exploring a range of strategic and
financing alternatives. Jack in the Box has grown over the years to become one
of the nation's largest hamburger chains, now operating more than 2,200 locations.
In recent years, JACK has undergone some major changes, and perhaps the largest
among these was its shift from a company-owned model to a franchise model. Over
the last five years, JACK has increased franchise ownership from comprising 79%
of its business at the end of fiscal 2013 to 94% at the end of fiscal 2018.
JACK has also been spending money modernizing its restaurants through such changes as back-of-the-house simplification, including upgrading equipment and technology with the goal of driving higher throughput; improved quality; and labor cost benefits. It has been reducing redundant stock keeping units (SKUs) and has been simplifying its operating procedures. Equipment and technology updates have been applied to areas from kitchen technology to mobile app improvements. The company has also prioritized remodeling its restaurants in order to elevate its brand image, including by enhancing the drive-thru experience its locations provide. Because nearly 70% of JACK’s sales are transacted at drive-thru windows, drive-thru remodels, which can be achieved at lower costs than those required for full-location remodels, can have a meaningful impact on results. The company plans to either fully remodel or provide drive-thru enhancements to over 600 mature restaurants during the next three years. Furthermore, in March 2018, the company completed the sale of its Qdoba Mexican Grill segment.
Despite these improvement efforts, JACK has been struggling of late with mediocre same-store sales and earnings results. The company’s competitive environment has been extremely aggressive, but JACK continues to avoid deep discounting, which it believes is not in the best interests of the long-term health of the brand.
Turning to today's news, JACK says that potential alternatives could include, among other possibilities, a sale of the company or execution on the company's previously announced plans to increase its leverage. The company's Board has not set a timetable for the conclusion of this process. Of note, the company disclosed today that it has had discussions with potential buyers.
However the company’s exploration plays out, Jack in the Box needs to find a way to improve results. Among its burger chain peers, points of focus have included prioritizing value and deal pricing. Wendy's (WEN) 4 for $4 deal has been very successful; McDonald's (MCD), too, has been offering more aggressive deals, such as its current $6 Classic Meal Deal, and Burger King also has a $6 meal deal currently. JACK has been bucking this trend and has decided to avoid deep discounting. For now, this decision seems to be hampering results as consumers are privileging value meals.
It will be interesting to see what happens here. We would not be surprised to see the company go private, turn itself around, and then return to the public markets again. Perhaps a new owner would shift JACK's pricing strategy to focus more on value pricing. Briefing.com thinks this would be a wise move. The stock has been struggling and trending lower, now having diminished from $110 in May 2017 to an $80-90 range, within which it has mostly been contained over the past ten months. With that said, JACK will be a name to watch in the coming months due to potential developments on its strategic review.
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