Following the closure of 62 Qdoba Mexican Grill locations in the third quarter, parent company Inc. said Thursday the fast-casual chain is undergoing a comprehensive brand review to reset plans to move forward.
In an earnings call with analysts following the report of third-quarter results, Linda Lang, Jack in the Box Inc. chair and chief executive, said the previously announced closures of the underperforming locations have improved the unit economics of the remaining 592 locations.
Qdoba’s systemwide same-store sales rose 1.3 percent during the quarter, and the expectations for the year of a zero- to 1-percent increase remains unchanged, despite the significant loss of revenue from those units.
Average unit volumes at company locations improved by about 10 percent, from about $1 million to $1.1 million, the company said.
And Qdoba’s margins also improved by about 4.1 percent during the quarter to 17.9 percent, despite increased labor costs as the company held on to managers from the closed restaurants and redeployed them at existing locations — a move that Lang said would further improve guest-service execution.
The San Diego-based company has said it will close a total of 67 Qdoba units before the end of the year. During the fourth quarter, three Qdoba units were sold to an existing franchisee and two more will close when their leases expire before the end of the calendar year.
Jack in the Box Inc. took a $36.7 million hit in charges related to the closures, recording a net loss of $5.7 million, or 13 cents per share, for the July 7-ended quarter, compared with net income of $11.6 million, or 26 cents per share, a year ago.
The company’s report from continuing operations offered a better picture: a 37-percent increase in earnings to $17.3 million, or 38 cents per share.
Largely as a result of the closures, however, the company upgraded its outlook for the year, expecting earnings to be between $1.72 and $1.78 per share, increasing from a previous projection of $1.55 to $1.65 per share.
“By optimizing our company footprint, we believe we can be more effective in focusing our advertising and marketing resources to support existing and planned restaurants and markets where we have a high level of brand awareness,” Lang said. “And we expect to provide an even better dining experience for our guests as our operations team concentrates its efforts on supporting these markets.”
Targeting key markets, customers
The decision to close the locations came after the chain’s new president, Tim Casey, who was hired in March, conducted a comprehensive review of market performance.
Work on the brand, however, isn’t done. Lang said the company has hired The Boston Consulting Group to conduct a comprehensive brand review that will “help us determine how to best position Qdoba and develop a strategy to implement key initiatives to further differentiate the brand and strengthen our customers’ connection to the brand.”
The review, which the company expects to complete before the end of the year, will cover elements ranging from restaurant design and menu innovations, to the loyalty and catering programs, she said. Research will also focus on who Qdoba’s core customer is and who the brand should potentially target in future, she said.
“We need to have a clear position that we are able to articulate in the marketplace to our customers,” she said. “We need to have a target consumer that’s identified, and we need to have a brand that executes against what that brand strategy is.”
Casey has also been working on development strategies for the brand, including revamping site selection tools and tweaking how the chain looks at markets and penetration, said Lang. The goal, he said, is to accelerate growth for Qdoba.
The company is expecting to open 65 to 70 new Qdoba restaurants this year, about 35 of which will be company owned.
Most of the underperforming locations that closed were in major metropolitan areas where Qdoba lacked brand awareness and was up against stiff competition, said Lang. Going forward, growth will be focused on “markets where we are already successful and we already have brand awareness versus trying to go head-to-head in those large urban metropolitan markets,” he noted.
In reports Friday, Wall Street analysts had mixed reviews of Qdoba’s positioning. “We are skeptical of Qdoba’s growth potential given our view higher sales will probably require increased staffing levels and better site locations, which may not change the return profile meaningfully,” wrote Christopher O’Cull of KeyBanc Capital Markets.
With unit economics improving, however, Conrad Lyon of B. Riley & Co. LLC suggested that the brand review could introduce other possible outcomes. “Another potential outcome is, instead of growing the chain, they could monetize it,” by spinning it off or selling it, he said.
Contact Lisa Jennings at email@example.com.
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