How Jack in the Box Is Flipping Its Business Model

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In this segment from MarketFoolery, host Mac Greer and senior analysts Andy Cross and Ron Gross discuss Jack in the Box‘s (NASDAQ:JACK) latest earnings, which outperformed estimates and sent the stock higher. The big takeaway from the report appears to be that the fast-food chain’s strategy of refranchising stores and pivoting away from the corporate-owned model is working for it. Same-store sales rose, too.

The trio consider the pros and cons of both business models, and weigh the future of this company. They also discuss its controversial new teriyaki bowl commercials, which lean heavily on some low-brow humor.

A full transcript follows the video.

This video was recorded on Aug. 9, 2018.

Mac Greer: Jack in the Box, I’m so excited about this.

Ron Gross: You love Jack in the Box.

Greer: It’s true. I was watching old Jack in the Box commercials, just taking a trip down memory lane. Shares of Jack in the Box up more than 8% at the time of our taping on earnings. Ron, what’s going on here? I have this irrational love of Jack in the Box.

Gross: You do.

Greer: Should I love these earnings?

Gross: They’ve been doing a nice job. The thing here is they beat expectations, which always helps a stock. The big thing for Jack in the Box is, they’ve been undergoing refranchising. They’re taking company-owned stores and selling them to franchisors. They’re about to really complete what’s been quite a process for them, having completed about 50 refranchising opportunities this year. They’re about to finish that.

That’s really changed the way the business looks and the model of the business. It seems to be paying off. In addition to that, they’re very shareholder-friendly from a capital return perspective. Purchased about $100 million of stock in the quarter, $200 million of stock this year. Pay a nice dividend, 1.7% yield. From a shareholder yield perspective, you have both the dividend and the buybacks. That’s really nice to see. The company is doing a nice job.

Andy Cross: Their operating profit margin boosted mostly because of what’s been going on with the refranchising mix. A few years ago, five or ten years ago, the story was, you want company-owned stores. Chipotle tried their franchising, they didn’t like it, so they went to company-owned stores. Buffalo Wild Wings was buying back their companies. But the franchisee mix is so profitable. It can really boost profits and the margins. Capital requirements aren’t nearly as high. The strategy that Jack in the Box is doing, they sold Qdoba back in March for $300 million. They’re plowing that into buying back stock. Same-store sales were an improvement over a year. The direction of the business overall, 2,200 stores, like Ron said, moving in the right direction, it’s been good for shareholders.

Greer: As investors, I want to come back to this refranchising, do you have a bias, in terms of company-owned vs. franchised? Or does it really depend on the company? The argument, of course, for company-owned is, in theory, you could have more consistency across all your different franchises.

Gross: I like the franchise model, but you have to be very careful. Going back to somebody like Domino’s Pizza, they had a franchise model and they had the wrong people owning those stores, and the company was really suffering. At the same time that they revamped their menu, they also took back stores from franchisers that were underperforming and sold them to people that were stronger. We’ll call them A instead of B or C franchisees. That really catapulted the business at the exact right time they were changing the menu, and the stock skyrocketed as a result. If you’re going to go the franchise route, make sure you have the right people.

Cross: I was going to say, from the capital allocation perspective, it’s a more profitable business to franchise. Again, going back to Chipotle, we had a bias of, if you own your stores, you can control a lot more, your employee base, your culture, all that kind of stuff. Clearly, Chipotle ran into some struggles with that. But, over the next four years, Jack in the Box expects to return more than a billion dollars to shareholders in buybacks and dividends. The ability to generate cash through a franchise business, which, around 90-95% of stores will be franchised now. The cash flow dynamics are really attractive, and that can be good news for shareholders, as we’re seeing.

Greer: Guys, I want to wrap this up by talking about the dynamics surrounding one of their new commercials. I forced you to watch this commercial before our taping. I apologize for that. It’s the commercial where Jack in the Box is highlighting their Teriyaki bowls. It’s generated a lot of controversy. I’ll give you the first line, the first line of the commercial. “While other burger places serve the same old stuff, I’m the one with the bowls to serve something different.” End quote, full stop, and they keep hammering it home. You have known me for a long time. You know, on occasion, I have trafficked in lowbrow humor. Fair?

Cross: On occasion?

Greer: Is that a fair assessment?

Gross: That’s fair.

Greer: I have a low bar for Jack in the Box, but they just got under it. What are they doing?

Gross: I actually thought it was funny.

Greer: Really?

Gross: Yeah, I really did. Watching the guy with the head, the Jack. I kept saying to myself, I know everyone doesn’t live in a diverse community, in metropolitan areas, but are we really going for teriyaki food at a Jack in The Box? That’s where we’re going for Japanese food?

Greer: So, you’re opposed to the teriyaki, as opposed to be multiple references to bowls.

Gross: I know they can do Mexican food, and that’s where you go — I actually thought the bowls reference worked.

Greer: Andy?

Cross: At first, I thought it was a little bit of a slap at Chipotle and their business. But then, I watched the commercial. I will say, it does end with a lawyer. Whether it’s an actor playing the lawyer or not, I don’t know, I hope so. To Ron’s point, Jack himself with the big bulby head, it’s funny.

Greer: Listeners should watch the commercial, obviously, make your own decision here. When I look at that, part of the reason why I’m disappointed is, when I think Jack in the Box, I think 1970s commercials with Rodney Allen Rippy.

Gross: Classic.

Greer: He was the incredible child actor. If there’s a Mount Rushmore of 70s television commercials with children, you have Mikey from Life, and you have Rodney Allen Rippy. I don’t even care about the other two or whatever else you etch in the stone. Those two.

Gross: Those are classic commercials.

Cross: I don’t even know who you’re talking about.

Greer: Oh, Andy, come on!

Gross: The big hamburger, the little face, it’s too big for him to eat.

Cross: Oh! Yes!

Greer: It was all about the Jumbo Jack being too big to eat.

Cross: Jack in the Box?

Greer: Jack in the Box. Rodney Allen Rippy. He just celebrated his 50th birthday.

Gross: I thought he was older than that.

Greer: No! So, instead of this lowbrow teriyaki bowl humor, why don’t you have something about Rodney Allen Rippy turning 50?

Gross: We could do both. It’s not either/ or.

Greer: That’s a free idea. I’m not even going to charge you for that.

Gross: I think you’re too invested in this.

Greer: You think so?

Gross: Yeah. You need to calm down.

Greer: I love Jack in the Box. We talked about this, we would eat it after church in Houston on Sundays. The “tacos” were so full of grease. It was the most perfect meal I can imagine.

Gross: We would hit the drive thru, for sure.

Greer: What was your go-to order?

Gross: It was burgers and fries. I don’t think we were adventurous as you, with tacos.

Greer: Do you remember they had a fish sandwich?

Gross: I would never order their fish sandwich. You guys were lucky. I go to their site, they have a “find your Jack in the Box,” I type in my old zip code. There’s nothing. I type in max, and they’re all over the place, every other block.

Gross: We had one in the New York suburbs that I grew up in. It went out of business at some point.

Greer: You were grilling me about all the Jack in the Boxes in Houston, but the problem is, when I go home now, I’ve taken another lover, and its name is Whataburger.

Gross: I’ve never had that.

Greer: Oh, Ron! There’s just no reason to go to Jack in the Box anymore. And it kills me to say that. But maybe the teriyaki bowls, I’m not sure.

Cross: There’s a commercial for that, Mac.

Andy Cross owns shares of CMG. Mac Greer owns shares of CMG. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CMG. The Motley Fool has a disclosure policy.