Jack in the Box (JACK) announced on Oct. 18 that it had launched an off-premise-only restaurant prototype in Tulsa, Oklahoma. The first-of-its-kind is 1,350 square feet and is available only for takeout and delivery orders. There is no in-restaurant seating.
“The introduction of this new prototype is a huge boost to our nationwide growth efforts,” said Tim Linderman, Jack in the Box chief franchise and corporate development officer. “With the benefits of increased drive-thru efficiency and streamlined operations, this new model makes the Jack in the Box franchise opportunity more appealing for customers and franchisees alike.”
Jack in the Box’s stock has not faired well in recent years. Over the past five years, it is down more than 20%, compared to a 47% gain for the S&P 500 and 54% for McDonald's (MCD), the world’s second-largest restaurant company.
JACK has a lot of ground to recover. This new prototype will help.
Why the New Prototype?
One of the ways the company hopes to grow is by existing franchisees building more locations. For that to happen, management felt a footprint catered to takeout-only would make it more efficient and, importantly… more profitable.
The Tulsa location has a double-y-lane drive-thru, a walk-up window for takeout, and another window dedicated to mobile and third-party delivery orders. As I said in the beginning, there is no seating.
Although this new prototype is intended for free-standing locations, it can be adapted for convenience stores, travel plazas, and other specialty uses.
The company has failed to grow significantly over the past decade.
In fiscal 2012 (September year-end), it had 2,250 locations system-wide, with 76% franchised and 24% company-owned. In fiscal 2021, it had 2,055 locations, with 93% franchised and 7% company-owned.
The good news is that Jack in the Box followed the industry trend to move away from company-owned locations to a more asset-light business model. McDonald’s set out in 2015 to achieve a global target of 95% franchised locations by 2018. It hit the target in Q2 2022.
Jack in the Box estimates that this prototype reduces buildout costs by as much as 23%.
If you’re trying to get franchisees to pry open their wallets to build more stores, providing them with lower upfront costs and ongoing operational costs is undoubtedly a start.
The company’s already been on a bit of a roll when it comes to new locations. In August, CEO Darin Harris said, “We have had more site approvals in the past six quarters than the previous three years combined,” Restaurant Business reported.
The new prototype ought to accelerate this number.
What’s the Prototype Mean for Jack Stock?
It should go a long way to delivering real growth for the burger chain, pushing its share price into the $100s. It hasn’t seen triple digits since May 2021 and December 2016, before that.
It’s been seven months since the company completed its $585 million acquisition of Del Taco, the Mexican restaurant with more than 600 locations in 16 states. The move gives Jack in the Box two potential growth vehicles.
In Q3 2022, Jack in the Box had two-year same-store sales growth of 9.6%, while Del Taco’s was 10.6%. As of July 10, it had 62 development agreements for 220 future restaurants.
The company said in August that its Jack in the Box restaurant margin for 2022 -- excluding four states: Oregon, Kansas City, Oklahoma City, and Nashville, whose franchise situations are evolving -- should be 19%, down 100 basis points from its original 20% estimate. The lower guidance had to do with higher food and wage costs.
For the first nine months of 2022, Del Taco’s restaurant-level margin was 17.6%, down from 21.2% a year earlier. Much of that decline had to do with high food and wage costs.
As a result of the lower restaurant-level margins across the board, its non-GAAP operating earnings per share were $1.38, down from $1.64 a year earlier.
On an annualized basis, the average Jack in the Box franchised location generates nearly $2.8 million. The company’s royalty on those revenues is 5.1%. Based on these numbers, the 220 franchised restaurants opening in the future would result in an additional annual revenue of approximately $31.4 million.
That’s not insignificant.
The Bottom Line
I don't think there's any doubt that CEO Darin Harris is doing everything he can to accelerate the company’s growth. While it’s yet to deliver meaningful profits, there’s ample evidence that it’s growing the top line organically and through increased restaurant openings.
Ultimately, the prototype will deliver higher restaurant-level margins and overall profits to the company. Unfortunately, until the food and labor costs remain elevated, it will be difficult to upset the apple cart.
The 16 analysts covering JACK stock give it a Moderate Buy and a mean target price of $90.44. That’s a sign they’re waiting to be convinced that Jack in the Box’s growth plans will materialize.
Its new prototype says it will.
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