Jack in the Box May Be Sold Amid Franchisee Revolt

Burger chain Jack in the Box (NASDAQ: JACK) is considering selling itself, according to recent reports. And while a franchisee revolt against management may not have directly caused the company to explore a sale, the restaurant operators certainly aren't standing in the way.

The trade group representing the burger joint's franchisees told Nation's Restaurant News, "We welcome any change in ownership and leadership that recognizes the critical role that franchisees play in the overall success of the brand."

A stormy relationship

Relations between Jack in the Box and its franchisees have deteriorated considerably as performance has lagged at the fast-food chain. Franchisees issued a rare lack of confidence vote regarding management ahead of the annual shareholders' meeting in July. They raised the stakes in October, calling on the CEO to resign.

Although Jack in the Box reported higher-than-expected revenue for the fourth quarter of fiscal 2018, comparable sales inched up just 0.5% and earnings missed expectations. Franchisees blame management for lackluster product development and marketing executives who don't have the requisite experience.

On Tuesday, a franchisee group filed a lawsuit against the company, alleging breach of contract over (among other things) a failure to fix faulty restaurant roofs that the group says Jack in the Box promised to fix. It also claims the company doesn't "have a cohesive brand strategy," which has allowed the chain to be eclipsed by rivals.

Industry in consolidation

Activist investor Jana Partners has a 7.3% stake in Jack in the Box and could be the main force pushing for the sale of the company. It has also come down on the side of the franchisees in their dispute with management, sharing their "concerns about Jack in the Box's performance and the lack of urgency in addressing it."

A sale of Jack in the Box would be just the latest example of restaurant industry consolidation, which has accelerated in recent years as competition has become more intense and consumers have been dining out less frequently.

Sonic was recently acquired by Arby's parent Inspire Brands, which also bought Buffalo Wild Wings earlier this year. Jack in the Box completed the sale of its Qdoba chain in early 2018 as well. In 2017, JAB Holdings bought Panera Bread, while Burger King parent Restaurant Brands International acquired Popeyes Louisiana Kitchen, two years after it bought Tim Hortons. Other chains, including Joe's Crab Shack and Ruby Tuesday, were also sold last year.

According to the industry watchers at TDn2K, restaurants posted their fifth consecutive month of higher comparable sales in October, but traffic continues to be negative. In fact, October was the weakest month for traffic since May. That means price hikes have been fueling the recent comp sales gains, though some chains are also using promotions to lure customers in.

Jack in the Box, however, has resisted being promotional. On last month's earnings conference call, chairman and CEO Leonard Comma said the restaurant "would not erode the brand's equity by jumping into the value wars." While that serves to protect the profit margins of the chain and its franchisees -- something the franchisees have been concerned about, according to Comma -- it also takes Jack in the Box out of consideration for the large group of consumers looking for extra value from their fast-food meals.

As a result, Jack in the Box's comp sales growth of 0.5% last quarter lagged that of McDonald's (up 2.6%), Wendy's (up 1.9%), and Burger King (up 1.8%).

Key takeaway

The franchisee unrest at Jack in the Box isn't likely to quiet down until the franchisees see the management changes they have been demanding or a full sale of the company. The relationship between the two sides seems too fractured to ever be repaired. With Jana Partners also clamoring for the restaurant to go a different path, we may see the burger joint join the long list of restaurants under new ownership sooner rather than later.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.