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Jack in the Box isn't springing back from downturn

The nation's No. 5 burger chain has upgraded its restaurants and menu, but sales have not rebounded from before the recession and its stock growth lags behind other fast-food firms.

May 27, 2011|By Sharon Bernstein, Los Angeles Times
  • Jack in the Box Inc. reported last week that second-quarter earnings fell 62% from the same period last year. Above, customers at a Jack in the Box in Covina.
Jack in the Box Inc. reported last week that second-quarter earnings fell… (Gary Friedman, Los Angeles…)

What ails Jack in the Box?

The nation's fifth largest burger chain has upgraded its food, remodeled its stores and trained its employees in the fine art of customer service.

But even though consumers forked over $3 billion for sandwiches, tacos, churros and other food last year, sales are still way below pre-recession levels. Jack in the Box Inc.'s stock remains sluggish and last week the company said its profit in the three months ended April 17 dropped 62% from the same period last year.

Customers are starting to return to its stores, but it's a trickle, with same-store sales up 0.8% over the second quarter of 2010.

"They need to find a way to differentiate themselves," said Darren Tristano, restaurant analyst for the research firm Technomic Inc. "If you think of Jack in the Box, I'm not sure what you think of anymore."

Jack in the Box is caught in the same fix as many other venerable fast-food brands: Their key customers — working class men in their 20s — are still hugely affected by unemployment. And an onslaught of competition from high-quality new chains like Chipotle Mexican Grill Inc. has put a particular squeeze on older restaurants that let their menus and their stores become tired.

Shares of Chipotle are up 36.8% this year, as of Thursday.

But even other vintage brands were doing better than Jack in the Box, whose share price has risen 3.9%.

Yum Brands Inc. — which owns Taco Bell, Pizza Hut and KFC — is up 14.3% so far this year on the strength of its large global presence. And AFC Enterprises Inc., which owns Popeye's Chicken, is up 12.2%, partly because the price of poultry has, unlike beef and cheese, remained somewhat stable.

Jack in the Box's chief nemesis, McDonald's Corp., had a major push to renovate its stores in recent years, and its marketing — such as the campaign for the limited-time-only McRib sandwich — has helped keep the chain in the limelight. It's shares were up 7.4%.

Jack in the Box's problems are exacerbated by its heavy presence in California, where unemployment remains stubbornly high, said Chris O'Cull, restaurant analyst for SunTrust Robinson Humphrey in Atlanta. Store upgrades and menu changes have not yet significantly affected the company's results, he said.

The chief executive of the 2,200-restaurant chain, Linda A. Lang, has been on a campaign since July to push franchisees and store managers to clean up restaurants. Employees were pressed to be friendlier to customers, and food preparation was more strictly scrutinized, down to making sure that there was enough cheese in the tacos and that the oil used for fried items was properly filtered.

"We spent a lot of time in the restaurants ourselves," Lang said. "We tried to go out with a very objective eye to look at exactly what we were delivering."

Among the tools: a special text-messaging system to let store managers — and their bosses — know immediately of problems company inspectors found during unannounced visits.

"The messages were as specific as, 'The front parking lot needs to be swept,'" Lang said. "'The garbage cans are overflowing.'"

In recent years, Jack in the Box has tried to position itself as a premium player in the fast-food world, with fresher food and greater variety than some burger chains. It offered higher end salads, Mexican fare and teriyaki bowls.

But there are drawbacks to such an approach, analysts said. For one, the chain's prices have climbed. Higher prices make the chain less attractive to core customers, yet may not win over the upscale customers that the company wants, Tristano said. Diners with more money to spend might prefer one of the newer chains like Chipotle or Panera Bread.

"It would be foolish not to think that Chipotle is taking money away from Jack in the Box," Tristano said.

In addition, while having a varied menu can mean there's something for everyone, it also makes it difficult for consumers to get a simple picture in their minds of what the restaurant really offers, he said.

The company's improvements to its restaurants and food have not been cheap, and that might also account, in part, for the plunge in the chain's profits, said Steve West, restaurant analyst for Stifel, Nicolaus & Co. in St. Louis.

But he is optimistic the investments will pay off as the economy recovers.

"They hung on longer than anybody ever thought they could," West said. "They're going to do fine once consumers in their states start rebounding."

The one thing the company is not changing is it's TV advertising, which features a man in a business suit with a huge ping-pong ball for his head. The company believes the 16-year old campaign to be very effective, and it has won many awards.

But marketing expert Ira Kalb, an associate professor at USC, said viewers could easily focus more on the jokes than the food, and might not come away wanting to go to the restaurant.

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