Jack in the Box Springs Back
Jack is back--with relish.
Six years after a fatal outbreak of food poisoning at Jack in the Box Inc. restaurants nearly sank the company, the 1,515-store chain is thriving like never before, and its stock has firmly established itself as one of the hottest in its industry.
At a time when rivals such as Carl’s Jr. parent CKE Restaurants Inc. are struggling to stand out in the fiercely competitive, $52-billion U.S. industry for fast-food burgers and other sandwiches, San Diego-based Jack in the Box is posting strong gains in sales and earnings.
Credit improved food quality and an expanded menu, upgraded restaurants, better service, an avid team spirit among employees and the appeal of the company’s fabled, clown-headed leader, “Jack,” whose goofy commercials have built an increasingly strong brand identity for the company.
“Despite the fact that Jack’s not real, he’s very real to the customer,” said David Rose, an analyst with the investment firm Jefferies & Co. in Los Angeles. “Jack appeals to the heaviest fast-food user, the male 18 to 34, and Jack is telling a story--not about his personality, but about his better product.”
Moreover, Jack in the Box Inc.--which just changed its name from the mundane moniker Foodmaker Inc.--owns rather than franchises most of its restaurants. That means that as its chain of stores improves and expands, it gets a higher stream of revenue compared with chains composed mostly of franchisees that send royalty checks to the parent company.
And Jack in the Box has big expansion plans. The chain now operates in 11 states, mostly in the West, but it will soon open stores in three Southeast states, and it is “committed to becoming, over time, a national chain,” said Robert Nugent, Jack in the Box’s chief executive.
To be sure, its opening of about 30 stores next year in Tennessee, Louisiana and North Carolina--part of an estimated 120 restaurants it plans to open in 2000--is a question mark for the company: Can it repeat its success in those uncharted markets?
Nugent is unfazed. Those regions have strong economies, and the competition “is equal to or less than what we face in California,” the toughest fast-food market in the country, Nugent said.
Regardless, investors can’t get enough of Jack.
Over the last five years, the company’s stock has more than quadrupled in price, compared with a relatively paltry 34% gain in Standard & Poor’s index of 15 midsized restaurant stocks. Jack in the Box’s stock closed Friday at $25.31, down 50 cents for the day, in New York Stock Exchange composite trading. (The company has also changed its ticker symbol to JBX from FM.)
Jack in the Box’s fiscal year ended Sept. 30; results for the year aren’t yet available, but in the prior year its revenue totaled $1.2 billion. That made the company the nation’s fifth-largest hamburger chain, according to the trade publication Nation’s Restaurant News.
In its fiscal third quarter ended July 4, Jack in the Box’s profit soared 38% from a year earlier (excluding a one-time charge), and revenue rose 15%, to $1.1 billion.
But the most telling sign of Jack in the Box’s success is its same-store sales--that is, sales in stores open at least a year--a key gauge of retailing success. Jack in the Box’s same-store sales have increased for 18 consecutive quarters and, in the first three quarters of its just-ended fiscal year, the gains kept expanding each quarter, from 6.8% to 9.1% to 9.8%.
That means customers are coming back more often, and they’re buying more food when they return. Over the past year the chain’s average check has soared 40%, to $4.60. It also means Jack in the Box is “stealing market share from everybody,” said Jefferies’ Rose.
Six years ago, though, Jack in the Box was on the ropes. A strain of the E. coli bacterium, found to have come from burgers sold by some of the chain’s Pacific Northwest stores, caused four deaths and led to more than 600 others getting sick.
Although Jack in the Box’s delays in communicating with the public about its role in the crisis was widely criticized, Nugent and his management rapidly dealt with the resultant litigation and overhauled the company and its procedures.
The chain quickly hired a well-known food-safety consultant, David Theno, who designed a food distribution and preparation system that’s now considered one of the industry’s best. Jack in the Box took pains to bolster its employees’ battered morale, ultimately improved its public relations effort and brought back the mascot “Jack” as its spokesman.
The company and its insurers also spent an estimated $90 million to settle claims by the victims and their families, and another $44 million was paid to its franchisees. Jack in the Box, in turn, collected $58.5 million stemming from lawsuits it filed against the Vons supermarket chain (now part of Safeway Inc.) and other suppliers of the meat.
Now, though, Jack in the Box is on a roll, and a good part of the credit goes to the chain’s menu, analysts said. The menu ranges from 99-cent offerings for the value-minded to more expensive bestsellers, such as the Sourdough Jack sandwich, a new “bacon-bacon” cheeseburger and milk shakes made from real ice cream. The menu also has variety, including teriyaki bowls and chicken fajita sandwiches.
Jack in the Box also has installed “assemble-to-order” procedures in its restaurants to ensure that its meals are fresher. The “bacon-bacon cheeseburger and assemble to order are hits,” analyst Howard Penney of Morgan Stanley Dean Witter said in a recent bulletin to clients.
And Jack in the Box gets kudos for installing “order confirmation” display screens at its drive-through lanes--where 64% of its sales occur--which show customers exactly what they ordered, tallies how much it will cost and, importantly, instantly signals to diners whether they can afford to buy something more with their change.
But in the end, it might be the clownish Jack that makes the most serious difference. “The key to our success is not breaking any of the promises Jack makes” in his commercials, Nugent said. “And he’s made some bold promises about improving the quality of our food and our service.”
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Jumping Jack
Shares of Jack in the Box, formerly known as Foodmaker have rallied sharply on the heels of the fast-food chain’s strong operating performance in recent quarters. Weekly closes and latest: Friday: $25.31
Source: Bridge Information System.
