Jack in the Box Pops on Qdoba Closures

NEW YORK ( TheStreet) -- Shares of Jack in the Box ( JACK) leaped nearly 3% following the news that the hamburger chain plans to shutter 10% of its Qdoba Mexican Grill restaurant locations by the end of September.

The second-largest fast-casual Mexican restaurant behind Chipotle Mexican Grill ( CMG), Jack in the Box said it will close 67 company-owned Qdoba locations by the end of its fiscal year (Sept. 29, 2013) following a previously disclosed review of market performance of the brand.

Qdoba's brand included 647 restaurants, about half of which were company operated.

Parent company, Jack in the Box, a fast-food hamburger chain based in San Diego, operates more than 2,200 company-owned and franchised in 21 states.

The decision to close the restaurants followed a comprehensive "unit-level analysis of sales, cash flows and other key performance metrics, as well as site locations, brand awareness and lease status," Jack in the Box said.

Shares of Jack in the Box were rising 2.7% to $37.99 on Tuesday.

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"By closing these locations and optimizing our company footprint, we can be more effective in focusing our advertising and marketing resources to support existing and planned restaurants in our core markets where we have high levels of brand awareness," says Qdoba's new president Tim Casey, who joined in March. "We also expect to provide an even better dining experience for our guests as our operations teams concentrate their efforts on supporting these markets."

Despite the closures, Jack in the Box CEO Linda Lang says the brand still has "tremendous potential" and plans to open a total of 70 to 75 new Qdoba locations in North America for its fiscal year, which includes roughly 40 company-owned locations and another 60 to 70 in 2014.

"These closures are expected to have a positive impact on the financial performance of our Qdoba brand, resulting in higher future earnings, average unit volumes, restaurant operating margins, cash flow and return on invested capital," Lang says. In 2014, we expect 60 to 70 new Qdoba restaurants to open, approximately half of which will be company locations."

The company estimates it will take pre-tax charges of approximately $40 million, which includes $28 million in non-cash impairment charges and approximately $12 million in charges related to cash lease obligations and employee severance costs. The company plans to update the estimate charges when it reports its third-quarter results in August.

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Miller Tabak senior analyst Stephen Anderson raised his price target on Chipotle by $5 to $400 on news of the Qdoba closings. He maintained his buy rating on the stock. Anderson does not cover Jack in the Box.

Chipotle shares were up 0.8% to $370.46 on Tuesday.

Anderson believes that Chipotle will gain market share as a result of the Qdoba store closings.

"Among fast-casual competitors, Qdoba most competes directly with CMG, and we think Qdoba's chronic underperformance vis-a-vis CMG led to the decision by JACK's management to close restaurants," Anderson writes in a June 18 research note. "We long have argued CMG has had stronger brand differentiation and operations execution relative to Qdoba, and anticipate CMG will gain market share at the expense of Qdoba as the latter chain retreats."

"Qdoba's recent history of underperformance against Chipotle will make it difficult for that chain to gain ground against the market leader, even as Qdoba has resorted to coupons and other discounting to attract traffic (unsuccessfully in our view, as we saw in our checks last summer in Chipotle's and Qdoba's home market of Denver)," the note said. "Qdoba's average unit volume (AUV) of $1 million is less than half of Chipotle's $2.1 million AUV."

Chipotle had 1,447 units in the U.S. (not counting its Asian spin-off ShopHouse) at the end of the first quarter, Miller Tabak reports.

Moe's Southwest Grill is also starting to close the gap. Moe's celebrated its 500th store opening in New York City earlier this month. It plans to open an additional 50 stores by year end.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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