JACK - Capex is Coming Down

Sales Update: Jack in the Box same-store sales declined 1% in fiscal 3Q09 (ended July 5).  Sales deteriorated rather significantly in mid-June and were actually down 4.4% for the entire month of June.  The company said a big portion of the decline stemmed from decreased sales of breakfast, side items, carbonated beverages and shakes, which it said is “indicative of consumers continuing to cut back on discretionary spending.”  JACK saw somewhat of a lift in numbers beginning in July with comparable sales running at about the midpoint of its Q4 guidance of -2.5% to -4.5%.  It is important to note that the company is lapping an easier comparison in Q4 of -0.8% versus -0.4% in Q3. 

 

Competitive landscape:  Management commented on its earnings call that its QSR competitors continue to get increasingly more aggressive with their couponing.  Although we already know that the 4-week period ending July 13 was particularly weak for CKR with reported same-store sales down 5% on a blended basis, and -6.1% at Carl’s Jr., a higher level of competitive discounting will only put further pressure on Carl’s Jr.’s premium-focused menu strategy. 

 

Management also said that when it initially experienced such a dramatic slowdown in June that it suspected sales were being hurt by the significant discounting by casual dining operators.  CEO Linda Lang said that with casual dining offering such compelling price points (meals for under $7 and 2 for $20), she would not have been surprised by some share shifts to casual dining but that relative to what she has been hearing from QSR and casual dining competitors, alike, she does not think this is the primary cause of the fall off in sales.  Rather, she thinks it is a sign of the difficult macro environment.  I always say that the restaurant is a zero sum game so when one company loses share, another wins.  And, although some restaurant operators are faring better than others, it would seem based on what we are hearing across the board that the overall pie got smaller in June…less people are dining out.

 

Following the Cash:  I pointed out in June (see my June 24 post titled “Following the Cash”) that the biggest negative for JACK has been the rapid growth in capital spending over the past two years, which has contributed to the decline in JACK’s return on incremental invested capital (ROIIC).  Importantly, I said the real turnaround in returns could come in 2010 depending on the company’s growth plans going forward.  Management had said that it would ramp up the growth of its Qdoba company units to 30-40 units per year, which I think is aggressive in this challenging environment.  To that end, I was encouraged to hear the company say that it will slow Qdoba growth a bit in fiscal 2010 because “the downturn in the development cycles and the ability of developers of shopping centers and the like to get credit is still difficult.”   Management did not quantify by how much it will slow Qdoba new company unit growth in 2010 following its targeted 19% new unit growth in 2009, but it did say that it expects capital expenditures to be down about $25 million from its planned $175 million in capital spending in 2009 (down 14% YOY).  I would like to see this growth cut rather significantly but it appears that JACK is at least headed in the right direction from a capex standpoint.

 

While top-line demand will typically take center stage for any restaurant company, JACK was not penalized today for missing same-store sales.  If you are taking the longer term perspective, following what JACK does with its cash will generate the most incremental return for shareholders over the next 12 months.