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Jack in the Box: Increased Franchising Boosts Franchisee Revenue

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Sources of revenue from franchising

The Jack in the Box (JACK) brand earns its franchise revenue from two revenue streams: franchise rental revenue and franchise royalties and others.

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Franchise rental revenue

From 2011 to 2015, the revenue from the franchise rental segment increased by 40.5% to reach $226 million from $161 million. This increase is due to an increase in the number of franchisees, from 1,592 to 1,836, and an increase in same-store sales.

Most Jack in the Box restaurants operate on leased lands or land purchased by the company and subsequently sold to developers in a leaseback transaction. A sale and leaseback transaction involves a seller, Jack in the Box, selling an asset and leasing it back from a buyer. This kind of transaction will help Jack in the Box use an asset without actually owning it. Leaseback transactions have helped the company reduce its initial investments. The company leases restaurant space and other facilities to franchisees. Some leases include provisions for contingent rentals and rent escalation clauses.

After selling an asset in a leaseback transaction, Jack in the Box would have to pay rent to the owner of the property. The company then leases the property to the franchisees and charges them 9.5% of their total sales. Therefore, the revenue generated from this segment increases with a rise in same-store sales.

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Franchise royalties and others

Between 2011 and 2015, the revenue from franchise royalties rose from $102 million to $136 million, an increase of over 33.5%. This is due to an increase in franchisees and same-store sales. The company charges royalty fees of 5% of a franchisee’s total sales.

Peer comparison: Revenue growth

Between October 2011 and September 2015, McDonald’s (MCD) franchisee-operated restaurant revenue rose by 4% and The Wendy’s Company’s (WEN) franchisee-operated restaurant revenue rose by more than 33.3%.

The Consumer Discretionary Select Sector SPDR ETF (XLY), which invests about 10% of its portfolio in restaurant stocks, has 4.8% of its portfolio invested in McDonald’s (MCD) and 3.8% invested in Starbucks (SBUX).

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