Jack in the Box Inc. (JACK) announced recently that it is planning to shut 40 company-owned underperforming restaurants before the end of its current fiscal year 2010 on October 3, 2010.
The fast-food chain plans to close the restaurants situated across 7 states, mostly in the Southeast and Texas, places hard-hit by the economic downturn. The bleak economic scenario resulted in weak labor and tight credit markets, which slashed discretionary spending.
Jack in the Box, based in San Diego, stated that it expects about $8.5 million to $9.5 million as impairment charges related to the closings and approximately $21 million to $25 million in lease-related costs for the fourth quarter of 2010.
Management believes that the closing of restaurants will benefit the company’s future profit and improve the cash flow position, as the restaurants were running into losses. Continuous decline in traffic, stemming from rising unemployment and lower consumer spending, was the primary reason behind these losses.
Jack in the Box’s third quarter earnings of 50 cents were also below the Zacks Consensus Estimate of 53 cents, resulting from sluggish sales and higher overhead costs. During the quarter, the company’s restaurants sales dropped 17.8% year over year mainly due to the company’s strategy to sell company-owned restaurants to franchisees. In the same quarter, the company sold 50 restaurants to franchisees.
The company expects to increase its percentage of franchise ownership at current 54% to the 70% to 80% range, by the end of fiscal year 2013. Moreover, Jack in the Box plans to achieve its future unit growth through franchising, which requires little capital investment and generates income in terms of fee.
The company also reduced its fiscal year 2010 guidance from the range of $1.85 to $2.05 to the $1.65 to $1.75 range, given that same-store sales for Jack in the Box restaurants are expected to decrease approximately 9% year over year.
The company’s primary competitors are Biglari Holdings Inc. (BH), AFC Enterprises Inc. (AFCE) and Krispy Kreme Doughnut Inc. (KKD).
Jack in the Box currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
Jack in the Box operates and franchises more than 2,200 Jack in the Box quick-service restaurants across 18 states in the U.S. The company, through a wholly owned subsidiary, also operates and franchises Qdoba Mexican Grill fast-casual dining chain, with more than 500 restaurants in 43 states and the District of Columbia.
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