Relative to the potential value of Qdoba:
Roughly calculating the TTM EBITDA for Qdoba within JACK:
Seven Key Discussions from the Earnings Call:
- It was repeated that the strategic review had "made substantial progress…with respect to Qdoba, as well as other ways to enhance shareholder value". See our comments below regarding the potential value of Qdoba.
- Sales at Jack in the Box have firmed up in the eight weeks of their Q1 to date, with sales slightly positive vs. down 1.0% systemwide in Q4. Qdoba sales are still running down, as in Q4, which was down 2.1% systemwide. Transactions no doubt are still negative at both chains.
- Progress continues to be made toward franchising JIB locations, soon to be 90% of the system, ultimately 95%, and corporate G&A is being streamlined as this program continues.
- Going to emphasize value in the near future, along with a number of premium items such as the Ribeye sandwich. Not going to give up ground to competitors in terms of a value message, but will not go to the "discount drug".
- When questioned about commodity and labor expense expectations, analyst was "met half way" with an answer that commodity inflation would be about 3% in ’18 at JIB (higher than that in Q1) and about 1% at Qdoba. Wage inflation was not discussed, but we know the answer to that one.
- When questioned about unit growth within the JIB system, management said that first priority for franchisees is remodeling. New units will come later, perhaps a couple of years out.
- Which, aside from the possible (our italics) divestiture of Qdoba, leads to the last important element of the future equation, namely, in management’s words, "the JIB store system has to be remodeled". As the landlord in about half of the system, JIB will be "helpful" to franchisees with tenant allowances, which of course will be reflected in the new rents. Management provided no details on the potential plan, but indicated that it would generate an "acceptable" sales lift, "nothing like 20%. Our guess is in the range of 5%-10%, but time will tell. JIB, as the franchisor, appropriately views the remodel program as a necessity, even with only a modest sales lift and return on invested capital, if the chain is to remain competitive. The new element of the equation, however, is that if $300,000 is spent on 2,000 stores, that would be $600M of capital that has to be spent by someone, a lot of money even spread over five years. We can’t know how much would be provided by JIB, but, as the landlord on half the system, it will likely impact "free cash flow" in a significant way. Management stated that "tenant improvement allowance is not ‘capital’ as it affects the balance sheet", but there is no doubt of its effect on cash available for other strategic purposes.