News
Bundle meals provide some lift for Jack in the Box
May 13, 2010
Jack in the Box customer traffic and same-store stores continue to be negatively impacted by high unemployment in its key markets, although there was some improvement over the previous quarter, the company reported during its second quarter earnings results.
"California experienced continued stabilization and was our best performing market for the second quarter on both a one- and two-year basis," said Linda A. Lang, Jack in the Box Inc. chairman, CEO and president. "Although both transactions and average check improved from the first quarter, we don't expect significant improvement in underlying fundamentals until high unemployment rates in our major markets for our key customer demographics begin to improve."
Jack in the Box company same-store sales were down 8.6 percent for the second quarter ended April 11 compared with a year-ago increase of 0.4 percent.
The company is addressing the decline in traffic and comps with a media plan that focuses on its barbell strategy.
"In this environment, we continue to believe the best way for us to drive traffic is by targeting our advertising to reach multiple consumer segments with concurrent messages focusing on both value promotions and premium products," Lang said on the company's earnings call. "To continue our ad reach, we plan to increase our ad spend in the back half of the year. Throughout the economic slowdown, we've continued to reinforce our position as a premium brand with one of the most varied and innovative menus in QSR."
On the value front, Jack in the Box continued to offer its Jumbo Deal through February, which included a Jumbo Jack hamburger, two tacos, a small order of fries, and a small drink for $3.49. For the last six weeks of the quarter advertising featured a breakfast value message – two biscuits with sausage or bacon and cheese for $3. In addition, during Lent, Jack in the Box offered a Fish Sandwich for $1.49.
Lang told analysts during the call that the company continues to face a very competitive environment, not only from QSR but also the casual dining. Both segments are offering bundle and BOGO deals as well as a lot of couponing. Discounting also continues and is heavier in California but has improved compared to previous quarters. Breakfast also is very competitive, with McDonald's rolling out its value menu.
"However, I can say our breakfast actually held up pretty well. It was the best performing daypart that we had, and we actually increased our sales mix at the breakfast daypart," she said.
To keep its value products from significantly eroding margins, the company is promoting bundled meals, such as the Pick 3 for $3 introduced in April. The bundled meals are providing good results in terms of the mix and are "margin-friendly because we've added in the side items which have the higher margin," Lang said.
The company's marketing strategy will focus on three areas: premium, top-tier products and introductions. Promotions will include Grilled Sandwiches and potential extensions on the line as well as value messaging around bundled meals including the Pick 3 for $3 and breakfast bundled meals. Media also is supporting the brand's new Kona coffee.
On the premium side, the company debuted a new platform of grilled sandwiches in early February. To drive trial, Jack in the Box featured a bundle meal, offering a free grilled sandwich with the purchase of any large drink.
"Guest response (to that promotion) was very good, and there was a high attach rate," Lang said on the call. "Our Grilled Sandwiches continue to sell well after the promotion and sustained a high percentage of our product sales mix."
In March, Jack in the Box introduced new, crispier French fries, which have a shorter cook time and maintain their temperature longer. Also in March, Jack in the Box expanded its line of entreè salads by adding a Grilled Chicken Salad.
"Our marketing strategy is to target multiple dayparts and balance our advertising and promotions to feature innovative premium products along with value-priced offerings," Lang said.
Jack in the Box launched two new products in April including a Grilled Breakfast Sandwich that leverages the new Grilled Sandwich platform and a new premium blend of coffee made with Kona coffee beans. The new Kona Classic coffee blend is being brewed for the chain's hot and iced coffee drinks.
This week, Jack in the Box expanded its beverage platforms by introducing a Raspberry Smoothie and a Raspberry Shake made with real ice cream. Going forward, Jack in the Box continues to have a robust pipeline of new products that are in various stages of development and test.
The company also is focusing on improving the guest experience. At both Jack in the Box and its fast casual Qdoba brand, the "focus on training is favorably impacting service execution and guest satisfaction scores at our restaurants. We saw continued improvement in guest satisfaction scores in the second quarter compared to both the first quarter and a year-ago period," Lang said on the call.
Restaurant openings
Jack in the Box remains on track with its growth plans including continued expansion of into new markets. Eleven new Jack in the Box restaurants opened in the second quarter, including four franchised locations, compared with 18 new restaurants opened system-wide during the same quarter last year, of which four were franchised locations.
The company sold 30 company-operated Jack in the Box restaurants to franchisees during the quarter, below its internal expectations due to the timing of one transaction involving 21 restaurants. The closing of that sale to a new franchisee was delayed until early in the third quarter.
Gains on refranchising transactions totaled $3.0 million in the second quarter compared with $17.2 million in the year-ago quarter from the sale of 46 restaurants. Average gains were $100,000 for the second quarter of fiscal 2010 as compared to $375,000 in the second quarter of fiscal 2009. The restaurants sold in the second quarter had lower-than-average sales volumes and cash flows; however, the company expects these transactions to be accretive to future operating earnings while generating $7.5 million in cash proceeds from the sales.
"More than 48 percent of the Jack in the Box system is now franchised, and we expect to cross the 50 percent mark later this quarter," Lang said. "We remain on track to achieve our long-term goal to increase the percentage of franchise ownership to 70 to 80 percent by the end of fiscal year 2013."
In the second quarter, four Qdoba restaurants opened, including three franchised locations, vs. 15 new restaurants in the year-ago quarter, eight of which were franchised.
At April 11, the company's system total comprised 2,233 Jack in the Box restaurants, including 1,080 franchised locations, and 505 Qdoba restaurants, including 345 franchised locations.
Financial results
For Q2 Jack in the Box Inc. reported revenues of $529.7 million, down 8.4 percent compared to $578.4 million in the same period last year. Year to date, revenues were down 11 percent at $1.2 billion, compared to $1.35 billion last year.
Net earnings for the quarter were down 40 percent at $17.7 million, or 32 cents per diluted share, compared with earnings from continuing operations of $29.6 million, or 51 cents per diluted share, for Q2 fiscal 2009. Year to date, net earnings were down 28 percent at $41.9 million vs. $58.3 million last year.
System same-store sales at Qdoba Mexican Grill were up 3.1 percent for the quarter vs. a year-ago decrease of 2.3 percent.
Lang said, "After beginning the quarter with negative same-store sales resulting from severe winter weather, Qdoba's same-store sales improved steadily throughout the quarter, and benefited from both our new Craft menu and increased spending by consumers in the fast-casual segment."
Q3 FY 2010 guidance
- Same-store sales are expected to decrease 7 to 9 percent at Jack in the Box company restaurants vs. a 1.0 percent decrease in the year-ago quarter.
- Same-store sales are expected to increase 2 to 4 percent at Qdoba system restaurants vs. a 2.8 percent decrease in the year-ago quarter.
- Refranchising gains are expected to be higher than the year-ago quarter.
Fiscal year 2010 guidance
- 6.5 to 8.5 percent decrease in same-store sales at Jack in the Box company restaurants.
- 1 to 3 percent increase in same-store sales at Qdoba system restaurants.
- Overall commodity costs are expected to decrease by approximately 1 percent for the full year, reflecting the approximate 4.5 percent decrease experienced during the first two quarters of the year. Commodity costs are expected to increase by approximately 2 percent in the third quarter and 3 percent in the fourth quarter as compared to prior year.
- Restaurant operating margin for the full year is expected to range from 15 to 16 percent, depending on same-store sales.
- 45 to 50 new Jack in the Box restaurants, including approximately 30 company locations.
- 30 to 40 new Qdoba restaurants, including approximately 15 company locations.
- $60 to $70 million in gains on the sale of approximately 200 Jack in the Box restaurants to franchisees, with $85 to $95 million in total proceeds resulting from the sales.
- Capital expenditures of $125 to $135 million. Capital expenditures are expected to remain in this range through fiscal year 2012. Following the planned completion of the Jack in the Box re-image program, annual capital expenditures are anticipated to be approximately $110 million or less.
- Diluted earnings per share of $1.85 to $2.05. The impact of the 53rd week is estimated to contribute approximately 4 cents per diluted share.
Conference call
A replay of the company's second quarter conference call will be available through the Jack in the Box Inc. corporate website for 21 days.
New board member
Earlier this week, Jack in the Box Inc. announced the addition of John T. ("Tom") Wyatt to the company's board of directors. Wyatt is president of the Old Navy division of Gap Inc.
Wyatt's career spans more than 35 years, including nearly 30 years in the intimate apparel business. He joined Gap Inc. in 2006 as president of the company's GapBody division and 11 months later was named president of the company's Outlet division.
Wyatt has served as president of the Old Navy division since 2008. Prior to joining Gap Inc., Wyatt was president and CEO at Cutter & Buck Inc. He also served as chairman and CEO of specialty department store chain Parisian and was previously president of Warnaco Intimate Apparel. Additionally, Wyatt spent more than 20 years with Vanity Fair Corp.
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