At last year’s Value Investing Challenge, Ryan Fusaro took the top spot with a recommendation to go long on Jack in the Box Inc. (NASDAQ:JACK). In a moment of clarity, I agreed with his original position. Since the time when Fusaro originally authored his recommendation — around the end of the first quarter last year — Jack’s stock has risen 69%, beating the S&P 500 by more than 75 percentage points. Well done, Mr. Fusaro.
What lurks beneath
For those of us on the East Coast, Jack in the Box Inc. (NASDAQ:JACK) isn’t really a household name. The company operates more than 2,200 locations, but 70% of them are in Texas and California. Over the past year, the company has effectively pulled back on the construction of new Jack’s locations, with just eight added to the footprint since July 2012. The focus for Jack in the Box has been, instead, on two other growth drivers.
The first is a shift to franchise locations. In his original thesis, Fusaro said the company was hoping to hit close to 80% franchise locations by the end of 2012, but he thought they could push as high as 90%. At the end of last quarter, the company had gotten to 77% of locations franchised. That has helped out both costs and the bottom line, and quarterly operating costs dropped 3% over last year.
In addition to the franchise shift, Jack in the Box Inc. (NASDAQ:JACK) is also focusing on its Qdoba brand of restaurants. Over the past year, the company shut underperforming locations and brought Qdoba’s footprint down to help get the most out of its branding and marketing.
Where the strength lies
In his original thesis, Fusaro saw Qdoba as a major growth driver for Jack in the Box Inc. (NASDAQ:JACK). The brand is comparable to Chipotle Mexican Grill, Inc. (NYSE:CMG) offering made-to-order burritos. Unfortunately, since this time last year, comparable-store sales have slowed at Qdoba. Last quarter, they increased only 1.3% over the previous year. In the same quarter last year, comparable sales had grown by 2.2%.
Chipotle Mexican Grill, Inc. (NYSE:CMG), meanwhile, grew comparable sales by 5.5% over the same period. Even so, Qdoba is doing better than the company’s eponymous brand. Jack in the Box Inc. (NASDAQ:JACK)’s comparable sales grew by just 0.1% last quarter. Chipotle was already in the catbird seat, and the wide gap in comparable sales is only making things worse for Jack.
Problems on the horizon
That’s the new emerging problem with Jack in the Box Inc. (NASDAQ:JACK) — growth is slowing. While the company is still growing sales, the rate is declining. In its public statements, it seems management has resigned itself to an economic slowdown and is now focused on getting through that slowdown without getting hurt. Oddly, Chipotle Mexican Grill, Inc. (NYSE:CMG) is managing to continue its strong growth, so maybe Jack in the Box could be doing more.