Jack in the Box Inc. said Monday that it plans to close 67 company-operated locations of Qdoba Mexican Grill by September, about 10 percent of the fast-casual chain’s system.
The move comes after the company conducted a comprehensive review of market performance for the Denver-based Qdoba, which has struggled in certain markets in recent years. At the end of the company’s April-ended second quarter, the chain had 647 locations, of which 340 were company owned.
The closures are scheduled to take place before the company’s fiscal year ends on Sept. 29, but officials did not say which restaurants would close or where.
Tim Casey, who was hired in March as president of Qdoba and tasked with reinvigorating the brand, said the company analysis included a review of unit-level sales, cash flows, and other key metrics, such as site location, brand awareness and lease status.
Ridding the system of the underperforming units will allow the fast-casual Mexican chain to emerge as a stronger brand as the company focuses more on markets with higher brand awareness, he said.
“By closing these locations and optimizing our company footprint, we can be more effective in focusing our advertising and marketing resources to support existing and planned restaurants in our core markets where we have high levels of brand awareness,” Casey said in a statement. “We also expect to provide an even better dining experience for our guests as our operations team concentrates its efforts on supporting these markets.”
Though the company is expected to take a $40 million hit in estimated pre-tax charges this year as a result of the decision, Linda Lang, chair and chief executive of Jack in the Box Inc., said the closures are expected to have a positive impact on the brand overall and will result in increases in future earnings, average store volumes, margins, cash flow and return on investment.
Jerry Rebel, Jack in the Box Inc.’s executive vice president and chief financial officer, offered more detail on the move at the Jefferies Global Consumer Conference in Nantucket, Mass., on Tuesday.
Strengthening in key markets
The company has not yet revealed where the closures will occur because employees are still being notified. However, Rebel said, “They were all cash-flow negative and I would say only a handful were in markets that were even modestly cash-flow positive.”
The 67 units generated about 13 percent of company-unit sales during the first half of the year, he said.
Based on results for the first half of the year, Rebel said the estimated pro forma impact of the closures would be a 500 basis-point increase in margins; earnings before interest, taxes, depreciation and amortization, or EBITDA, would improve by about $4.5 million; operating earnings would climb by $7 million; and general and accounting expenses would be lowered by about $750,000.
Going forward, the strategy will be to focus on markets where Qdoba’s position is strong, said Rebel.
In the last couple of years, the company has been strategically acquiring high-performing franchise units in certain markets, he said, “and that’s where we’ll continue to focus growth.”
Jack in the Box is expecting to open 70 to 75 new Qdoba restaurants systemwide in fiscal 2013, including approximately 40 company units. In 2014, however, the company plans to modestly back off on growth for Qdoba, opening 60 to 70 new locations, about half of which will be company owned.
Rebel said the focus on select markets is already showing traction. Newer restaurants that have opened during the first half of 2013 are showing annual sales volumes higher than the system average, he said.
Meanwhile, Casey also plans to look for ways to leverage synergies between Qdoba and its quick-service sister brand Jack in the Box, Rebel said. Like at Jack in the Box, Qdoba may see organization and structural changes, he hinted, but he declined to offer specifics.
For its April 14-ended second quarter, San Diego-based Jack in the Box Inc. reported a 39-percent decline in net income, weighed down in part by negative trends at Qdoba brand.
For the quarter, Qdoba reported a same-store sales decline of 1.5 percent systemwide, including a 2-percent drop among company units. At Jack in the Box, same-store sales rose 0.1 percent systemwide.
Chipotle could gain from closures
Analysts said the closures would benefit Jack in the Box Inc. overall — and would also benefit competitor Chipotle Mexican Grill.
Applauding the planned closures in a report Tuesday, analyst Conrad Lyon of B. Riley & Co. LLC raised his expectations for Jack in the Box Inc.’s earnings in 2014 to $2.05 per share from $1.97.
“We view this as smart decision in not only enhancing cash flows to shareholders, but redirecting assets away from underperforming units,” he said.
Lyon said poor real estate has plagued the chain since it was acquired by Jack in the Box in 2003, which contributed to awareness issues. “Thus, we would expect awareness to improve simply through better sites,” he wrote.
Meanwhile, analyst Stephen Anderson of Miller Tabak + Co. LLC wrote Tuesday that Qdoba’s “chronic underperformance” compared with Chipotle likely contributed to Jack in the Box’s decision to close the 67 units.
With 1,447 units at the end of the first quarter, Chipotle has a 3-to-1 lead over Qdoba in U.S. market share in the $6 billion fast-casual Mexican category, Anderson wrote.
“We have long argued CMG (Chipotle) has had stronger brand differentiation and operations execution relative to Qdoba, and anticipate CMG will gain market share at the expense of Qdoba as the latter chain retreats,” he wrote.
Chipotle’s units average about $2.1 million in sales, while Qdoba’s average unit volume is about half that at $1 million, he said.
Assuming that about 25 percent of Qdoba’s former customers will become Chipotle customers, Anderson projected that Chipotle will see an incremental $14.2 million increase in sales from the fourth quarter 2013 through the third quarter next year.
Meanwhile, Rebel said no additional closures are expected.
“Neither Tim, nor I, want to be up here talking about this next year,” Rebel told the Jefferies audience.