One of the hottest quick-service restaurant operators out there has to be Jack in The Box (JACK). With the acquisition of Qdoba Mexican Grill in 2003, the previously sleepy burger chain kicked its growth into high gear by getting into the Mexican quick-serve business. Today, JACK is seen as one of the fastest-growing restaurant chains in the country.
Fiscal 2010 was a disaster. Same-store sales fell 8.2% for Jack in The Box and Qdoba reported weak 2.8% comps. Management re-focused the company, closed unprofitable stores, franchised company owned restaurants, re-configured the menu, and launched new advertising campaigns. As a result of those efforts, same-store sales began to grow again. It didn't hurt that JACK owned one of two fastest-growing Mexican restaurants either. By 2011, investors took notice of the company's turnaround efforts, and the stock turned into a monster, rising over 320%.
Jack in The Box ended fiscal 2014 with same-store sales of 2%, and Qdoba reported a sales increase of 6%. The fourth quarter was the third quarter in a row that Qdoba posted a sales increase of 7% or better. For the year, JACK reported sales of $1.4 billion and earnings of $2.26. Management guided fiscal 2015 earnings to be up between 11% and 18%, on a same-store sales increase of 2%. Investors were particularly excited by the company's first-quarter guidance of 9% revenue growth for Qdoba.
Yesterday, the stock rose 4.5% on optimism over the effect that lower gas prices would have on JACK. Besides betting that lower gas prices will drive sales, there's another way to win with Jack in The Box. Qdoba's sales have been driven by increases in the average check, not increased traffic. The company has been increasing prices, rather than the number of customers coming in.
Increased traffic at just one-third of the restaurants has forced average unit volumes from $1 million per restaurant to over $1.3 million per unit. In fact, the company will build 50 to 60 of the new restaurant prototypes in the coming year. Half of the units will be franchised, and half will be company owned. As the new formats roll out, JACK investors think the company can keep increasing average unit volume by 30%, for a number of years. In addition to tinkering with the restaurant format, management discovered that not charging extra for queso or guacamole actually increased traffic. The simplified pricing structure is rolling out over the entire system.
If the company is successful at these enhancements, restaurant level margins could go from 18.3% to over 23%. That 4.7% difference drops right to the bottom line.
I guess the other way to win with JACK is by expansion. Huge parts of the United States do not have a Jack in The Box or a Qdoba. The entire Northeast is pretty much a Jack in The Box-free zone. The company could add restaurants for years.
I think JACK will go higher, but I would be careful. Like I wrote on Tuesday, quick-serve restaurants have become the new hot momentum stocks. Investors are chasing them as gasoline prices go lower. If gas prices stop falling or bounce higher, JACK doesn't have the characteristics of a great momentum stock to keep the shares this high. JACK has single-digit revenue growth (2%), and it is dependent on customer traffic for continued growth. Lower-than-expected same-store sales will put an end to the burger party.