JACK has a Growth Problem
The previous CEO, Leonard Comma, tried this strategy with little success.
In early March, JACK closed the $825 million acquisition of Del Taco, so it's early in the assessment of that decision, but we are skeptical of the rationale. Now JACK wants its franchisees to build more restaurants and said it would cut royalties on new units if operators agreed to build at least three locations by March of 2023 and comply with development schedules. The company will give those locations a discounted royalty, typically 5% of a unit's revenue, if they dos. Royalties would start at 1% the first year, 2% the second, 3% the third, and 4% the fourth before getting to 5% for the remainder of the agreement. Jack in the Box said this could save operators up to $180,000 in payments over the first five years of a restaurant's operation. Unfortunately, operators are building more locations because of the low returns. The company has been largely stuck on 2,200 restaurants since 2009. Since then, the company has been refranchising its store base, opting to shift from a primarily company-run model to one in which 93% of its restaurants are franchised. As such, new and existing franchisees took on leverage and bought company stores rather than open new ones. In addition, the company's sales challenges and franchisee unrest over cuts to marketing and corporate overhead kept franchisees from developing new units. And some markets further from Jack in the Box's California base didn't perform well, such as St. Louis. The lack of development has been a problem for a decade. It has built a franchise sales department and has re-acquired stores in weaker markets to sell them to franchisees later as part of development packages. The company has signed 30 agreements with franchisees to build 106 locations in the first half of this year, but that will not move the needle on growth. It recently signed a letter of intent with a franchisee that will acquire seven stores in Oregon, though Jack in the Box is closing some locations in the state. "We're excited and encouraged to be placing Oregon, a territory that I'm confident can grow over time, in the hands of a top operator in our system," CEO Darin Harris told analysts last week, according to a transcript on the financial services site Sentieo. Harris also said the company had made some inroads into developing new units. "We've approved more sites in the last six quarters than we have in the prior three years," he said. "So we're building the pipeline."
Consumer Staples 2H Themes Update and Q2 Earnings Season Wrap-Up Call
We recently made several changes to our Consumer Staples position monitor following the Q2 earnings season and looking out towards the 2H of the year.
Our Macro Team calls for three more quarters of Quad 4, a favorable backdrop for the Consumer Staples sector. The competitive and inflationary environments are always changing, and base effects have a tendency to reshuffle the winners and losers. We will review where we see inflection points in the Q2 results. Our call will focus on the companies on our position monitor, their competitors, customers, and suppliers. We will highlight changes in the competitive dynamics, pricing plans, and price elasticity. We will provide a summary of the earnings results, where we project estimates will be revised lower or higher, and key inflection points.
We hope you can join us.
Call Details:Date & Time: Monday, August 22 @ 2 PM ET. Webcast & Slides: CLICK HERE. Add to your Outlook Calendar: Click Here. |
PFGC Earnings
PFGC 4Q22 Non-GAAP EPS of $1.07 beats by $0.03 and Revenue of $14.6B (+57.0% Y/Y) beats by $40M. Organic, independent cases increased 4.7% in 4Q22.
The company reported Q4 EPS and revenue above consensus; guides 1Q23 above at midpoints but Q2 below at midpoint; guided FY23 adjusted EBITDA above at the midpoint. "The difference in adjusted EBITDA expected between the first and second quarter is primarily driven by the timing of purchasing cost gains, mainly in tobacco and candy. Not only do we anticipate higher rates of inventory gains in the fiscal first quarter, but we are also lapping sizable gains in the second quarter of last year, impacting the year-over-year comparison. Inventory gains in these categories are not unusual. However, over the past year, we have seen much larger and more frequent pricing actions by consumer goods companies driving additional benefits. And with our strong balance sheet and combination of Core-Mark and Eby-Brown"
Inflation - "As you know inflation remains elevated; however, there have been some signs of moderation, particularly due to declines in some commodity proteins. This may continue in the short term. However, we believe inflation will remain high for the next several quarters, particularly as shortages in certain grains, seeding, fertilizer impact the supply of center-of-the-plate items. We will continue to work with our customers to find alternatives to keep costs down, but allow for the same high-quality meals that their consumers are looking for."
An interesting call-out on labor costs - "The labor market has also been a tailwind for our business over the past few months. In fact, the fourth quarter represented the first time in 2022 that we saw a benefit in year-over-year costs associated with the temporary and contract workers. In the quarter, our temporary and contract labor costs decreased by $21 million compared to the prior year, including both direct contract labor costs and associated travel costs. This reflects some improvement in the external labor market but was also driven by the tireless efforts of our team in the field in recruiting and retention, which continues to improve. Also, note that this figure includes the impact of the 53rd week in the fourth quarter of last year. Excluding that extra week, our contract labor costs were down about $17 million compared to last year."
