For many companies in the QSR space, what should be the best of times has been anything but. Higher inflation and pressure on consumers historically have led to trading down – whether from dining out to eating in, or to moving down the away-from-home price ladder, often to fast food chains, like Jack in the Box. Indeed, this is largely what happened during the 2008-09 financial crisis, when McDonald’s was one of the few large-cap stocks to provide positive returns.
This time around, however, amid a ‘K-shaped economy’ and resurgent inflation packaged food majors are struggling, and so are many of the players in quick-service. Certainly, McDonald’s is still largely getting it done (though even its stock is down 3% over the past year), and Burger King has posted a solid turnaround. But, as with their counterparts in packaged foods, the expected tailwind from trading down simply hasn’t really arrived.
The likes of Wendy’s, KFC, and Popeye’s all have seen declining sales of late, and while the external environment is not the only problem, it has not been much of a help, either.
At least in terms of the stock market, Western-focused chain Jack in the Box has been perhaps the biggest loser. At the end of March, shares hit their lowest level since 2004.
An effort to force out the company’s chairman led to a bitter battle which ended in something of a stalemate: activist Bigliari Capital (whose Bigliari Holdings owns Steak ‘n’ Shake, and Western Sizzler) lost the shareholder vote, but chairman David Goebel resigned anyway. In mid-May, chief executive officer Lance Tucker followed Goebel out after a tenure of just thirteen months.
The financial results show why shareholders are frustrated and leadership is getting canned. System-wide same-restaurant sales dropped 1.3% in fiscal 2024 (ending September) and another 4.2% the following year.
So far this fiscal year, the figure has dropped another 5.5%. Management sees improvement in the back half, leading to a modest decline for the full year. But Jack in the Box still is tracking for a three-year comparable sales decline in the range of 8%, which likely suggests visits during the period will be down double digits. (The company doesn’t break out the figure, but it has noted over the period that it has taken pricing.)
Inflation Batters Jack in the Box
The combination of inflation and falling traffic means that profitability is taking a huge hit. Adjusted EBITDA in FY26 is guided to about $230 million. That’s down nearly 30% from the figure five years earlier (excluding the benefit of an extra week in that year). On the first quarter conference call in February, Tucker admitted that franchisees were getting stretched between lower traffic and (much) higher beef prices. Later on the same call, he noted that some franchisees were opting out of company-wide promotions – no doubt because those owners saw those promotions as unprofitable (either in terms of the actual sale and/or in driving future traffic).
And while in some cases management believes the trend will change, Jack in the Box has looked to close some restaurants where profitability simply is no longer high, with the aim of recapturing some of those sales from nearby locations. At least 100 restaurants are closing, which suggests that corporate sees more than just some short-term issues with the business.
That’s not to say that there haven’t been short-term missteps, as well.
The 2022 acquisition of Del Taco was one of the worst this century in the industry: Jack paid $575 million (including debt), only to sell the business for just $115 million barely three years later. By management’s own admission, a number of promotions haven’t quite hit, particularly since a well-received “Smashed Jack” rollout in 2024.
Even the core menu needs work: before his exit, Tucker was trying to re-focus on more consistent value. The product may need help as well: a week before the Del Taco sale closed, review site TastingTable added insult to (financial) injury by calling Jack burgers the worst in the country.
But there have been factors outside of the company’s control as well: the company’s geographic and demographic focus has left it disproportionately exposed to recent trends. As of September, 44% of the total restaurant base, and 64% of the company’s 150 owned restaurants, were located in California. The hike in the state’s minimum wage has significantly affected economics; franchisees have been forced to put in price increases which in turn likely have dented traffic.
Jack in the Box over-indexes to a Hispanic population whose spending has come down in multiple categories across the last eighteen months, with many companies across food and beverage highlighting more aggressive efforts around immigration as a factor. Jack’s trends in that demographic are improving, but still weak. More broadly, Jack historically generated heavy traffic from lower-income customers who clearly have been hit hardest by inflation.
At the very least, management can’t be blamed for all the company’s problems. Jack has been simultaneously hit by broader macroeconomic trends as well as regional and national policy decisions. Uneven promotions and execution have hurt Jack in the Box’s response to those external factors, but this is not a case where the blame falls entirely on leadership.
QSR Debt Sinks Jack in the Box
And so there is a path here in which Jack in the Box improves execution, optimizes its footprint, and either sees broader headwinds mitigate and/or benefits from lapping easy year-prior comparisons. (The latter is already happening, one reason why same-store sales are getting better, with an expectation for a positive print in the calendar third quarter.)
But there are two core concerns here. The first is yet another similarity to packaged food: a concern that management is misreading secular trends as short-term problems. Again, Jack’s struggles are not necessarily unique to the industry. As we noted in February, Wendy’s has seen a similar trajectory in terms of sales and profits.
The bear case for both chains is that the industry simply isn’t big enough for companies who lack scale and a compelling value proposition. The rise of fast casual, steady expansion of food options at gas stations, and clearly higher-for-longer beef prices all mean that overall quick-service hamburger demand is likely stagnant at best. If Jack and Wendy’s are fighting with McDonald’s and an improved Burger King for share of a pie that isn’t growing, the path to success simply is a lot narrower.
For Jack in the Box, there’s a pressing problem: debt. The company’s balance sheet is the worst in the entire restaurant sector.
Net debt is just over $1.5 billion, more than six times the current value of the company’s equity. It’s more than seven times EBITDA (earnings before interest, taxes, depreciation and amortization), which is a hugely concerning ratio. (In most sectors, anything over four times is cause for concern, though franchisors like Jack sometimes can run a little higher, at least when trends are positive.)
Jack already is making short-term moves to pay down debt, including selling off real estate under existing restaurants. But those sales obviously create future rent expense, pressuring profitability down the line. A recent refinancing saw the company’s interest rate jump more than three full percentage points (though, to be fair, broader interest rate trends are the core factor there).
But at the same time a management team might consider renovating restaurants or other investments to improve the business, the capital simply isn’t there: the consistent focus from management over the past few quarters has been on reducing debt.
And so Jack in the Box simply doesn’t have that much time to get its problems fixed, at least as far as its shareholders and stock price is concerned. There is the potential for a vicious cycle in which franchisee revenues keep falling, which has an outsized effect on corporate cash flow (those lost revenue dollars of course are almost pure profit), which in turn leads to lower investment from corporate and less room to help struggling franchisees.
It’s a vicious cycle the restaurant industry has seen, in various forms, many times over the years. The primary task of Jack’s next CEO will be to avoid that outcome – and to do so quickly.
Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade; he’s currently the lead writer for Wall Street & Main. As of this writing, he has no positions in any companies mentioned.
Food for Thought Leadership
Food retail is undergoing a fundamental transformation, and few people have a better vantage point than the SupermarketGuru Phil Lempert. In this episode of Food for Thought Leadership, Lempert joins FI’s Chris Campbell to discuss the forces reshaping grocery, from inflation and private label growth to changing consumer expectations around health, wellness, and transparency.
