Good Business Models Gone Bad: Looking Back at a Few Mistakes
It’s helpful, highly instructive, and a sometimes painful to look back at times we were wrong. Fortunately, because investing is an area where being wrong is a certainty, we get plenty of chances to reflect on our mistakes. If you don’t view mistakes and misjudgments as a gift to improve you probably won’t last long in investing, or any other field. On the other hand if you don’t learn from these mistakes and keep repeating them, you also won’t last long.
Here I thought it would be helpful to look back at a few businesses that I thought had good potential but have instead ended up falling flat. Each company had competitors or peers that had proven that the business model could deliver superior results and gave me reason to wonder if the results could be recreated.
We write about businesses that we think meet our criteria for business quality and price, and even though we didn’t end up buying the businesses here, we came close a few times and wrote optimistically about them for a reason. There are plenty of businesses we have owned that disappointed, and we write about those regularly in our investor letters. Let’s see where I went wrong and what we’ve learned.
Do you have a “stranded” 401(k) from a past job that is neglected and unmanaged? Eagle Point offer separately managed accounts to retail investors, and 401(k) rollovers are often a good fit for our long-term approach. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
Jack in the Box (Profiled in June 2024)
We have studied and invested in a variety of franchise concepts (we are actually franchisees ourselves for Tommy’s Express Car Washes) for a few reasons. High quality franchisors tend to be asset light, earn high returns on capital, and have long-term predictable revenue growth.
We’ve long followed Domino’s and other QSR concepts, many of which have delivered outstanding returns over the years for investors. Hilton is another franchisor we’ve previously invested in and continue to follow. Because franchisees need to put up the capital for growth and the franchisor earns royalty fees that are almost pure profit, franchisors can simultaneously grow and return tremendous amounts of capital to shareholders. This combination of prodigious free cash flow and asset-light growth is why these businesses have done so well. In other words, the playbook was there for Jack in the Box.
In 2024 Jack in the Box was in the midst of attempting to reinvigorate growth and management laid out a plan to grow units by 2-3% annually and same store sales by a similar amount. The business was grappling with high labor costs in California, soft consumer demand because of general inflation, and general less than stellar execution at its restaurants. All of the problems seemed solvable.
On the bright side, management had repurchased tons of stock over the years, had a business model with 93% of its locations franchised, and an optically low valuation of around 8x free cash flow. This gave us reason for cautious optimism as the bar for success was low. Unfortunately, it wasn’t low enough.
In the ensuing 18 months the business significantly underperformed what I expected. Same-store sales were flat in 2024 and shrunk by 4% in 2025. Unit growth was flat in 2024 and shrunk by 3% in 2025. Del Taco, which was acquired in 2022 for $585 million was a disaster and was sold in 2025 for $115 million.
Part of the underperformance was company-related and part was out of their control. The company’s reliance on California was a major issue. High inflation in California, an extremely large minimum wage increase, and general economic malaise has made things exceedingly difficult for restaurants operating in that state. Leadership failed to invigorate its famously complicated menu enough to steal customers from competitors at a time when fast food wars were heating up with compelling value options from McDonald’s and others. The result was a collapse in operating margins and free cash flow, the latter of which has declined by 50% since 2024.
Combine these operational missteps and sluggish topline results with a massive debt load of 6x EBITDA and a whopping 50x trailing FCF (including lease obligations) and you’ve got yourself a recipe for disaster, and disaster is what shareholders got.
Shares are down about 50% since mid-2024 (and down 80% from 2021 all time highs) despite being well off their lows of 2025. By luck or prudence, the high debt load was the main aspect that kept us on the sidelines, and it’s a great reminder the fragility that highly levered companies face, regardless of what the tantalizing upside may be.
Aramark spun off Vestis, it’s uniform rental and workplace supplies segment, in late 2023 and I wrote about the newly listed business shortly thereafter. Like Jack in the Box, Vestis had a beast of a competitor that it was hoping to emulate.
Having returned an eye popping 25% per year, or 830% in total, over the past decade, Cintas has been a stock market darling. Cintas has combined optimizing route-based density, successful cross selling, and rigorous operational execution to drive high customer retention and increasingly attractive returns on capital. Since 2015 Cintas has boosted operating margins from 19% to almost 30%.
Vestis went public with low double-digit operating margins and quickly laid out a path to partially bridge the gap with Cintas and aimed to achieve 18-20% operating margins within a few years. Management believed it would deliver steady and predictable 5-7% revenue driven by pricing (1%), cross-selling base customers (2-3%) and adding new identified verticals (2-3%) which would provide attractive operating leverage on its high fixed cost business.
I thought Vestis represented a member of a stable oligopoly with a highly recurring customer base that sold low price to value items and had a huge opportunity to better utilize its drivers to cross sell high margin incremental items to an existing installed customer base. It seemed like the opportunity was right there for the taking and all it took was good old blocking and tackling. Once again, the high debt load with which Aramark saddled Vestis made me nervous and the valuation at the time of writing didn’t provide a margin of safety, but I still was optimistic the business would deliver.
I drank the Kool Aid because it appeared that the plan was credible, management cited a number of initiatives that were already delivering, and Cintas had demonstrated it was very doable with this business model. I was wrong.
Instead of delivering the kind of durable growth and margin expansion that management promised at the outset, the wheels fell off the bus (or the delivery trucks). The biggest issues have been self-inflicted.
Shortly after the spinoff Vestis started losing customers at an increased rate. The company began missing deliveries, inflation caused customers to scrutinize uniform costs and eroded pricing power, and drivers failed to meaningfully cross sell existing customers. New customer adds didn’t offset a decline in the core business and a shift from core uniform rentals to lower margin workplace supplies weighed on margins. In 2023 customer retention dropped from 93% to 90%. While it doesn’t seem like a huge drop, losing customers in a high fixed cost business can quickly spiral due to operating deleverage. The CEO and CFO were fired and the ship is still not righted. The stock is down about 65% from the spinoff with no obvious catalyst in sight.
The most surprising aspect of watching the Vestis trainwreck has been the deterioration in free cash flow. The company generated $200 million of free cash flow in 2023 and currently is generating close to zero free cash flow. This is a direct result of sales deleverage – the exact opposite of the promised operating leverage. Instead of delivering 5-7% revenue growth revenue shrunk 1% in 2024 and 2.5% in 2025.
It’s even more surprising the company has failed to grow given how fragmented the industry is and the plethora of opportunities that exist to persuade customers from laundering in-house to outsourcing to a dedicated uniform business. It’s not an industry problem; Cintas has grown revenue by 9% and 8% over the same two years.
It appears to me that the company took its eye off the ball after the spinoff. With grand plans to grow faster than they had over the previous years as an in-house segment of Aramark, management forgot to take care of its core customers. Management bit off more than it could chew and it came back to haunt them. Combine poor execution with a massive debt load and you find yourself in crisis mode. The company had to restructure its credit agreements, fire its management team, and suspend dividends and buybacks. Ouch.
Takeaways
These are far from the only times I’ve misjudged a business, and unfortunately they won’t be the last. We keep close track of stocks like Jack in the Box and Vestis that we thought would do well even if we don’t buy them because we a) might end up owning them at some point and b) want to learn from what we were right and what we were wrong about.
There are some clear commonalities among the times we were wrong. In both of these instances the poor results were a direct result of a poor culture of execution and poor capital allocation/capital structure.
Fortunately, Vestis and Jack in the Box publish quarterly business metrics that are easy to track; customer retention and same-store sales being two of the most important. We always want the businesses we own to have identifiable, unit-level, KPIs that demonstrate the direction the business is headed. We don’t overreact to one quarter, but it’s good to keep a pulse on the operations.
Both of these businesses are in industries that historically have delivered winners, and they had every opportunity to do the same. They (so far) have ruined a good thing by failing to make customers happy. When you don’t get the basics right and there aren’t massive switching costs protecting you from customers leaving, they flea to competitors. The company’s capital structures only exacerbated things.
Both Jack and Vestis have tremendous debt loads. This was obvious from the outset and is the one thing that probably saved us from making a bad investment. When you need to divert too much operating cash flow to service your debt, it hampers your ability to reinvest in your operations and can contribute to the aforementioned execution issues. This causes profitability to decline, which causes the debt to eat an even higher percentage of your profits, and a death spiral can ensue.
We always remind ourselves to follow the cash flow. If a stock we own or are following experiences a share price decline it means nothing in a vacuum. If the cash flow is holding up or growing, there might be an opportunity. Jack in the Box and Vestis were examples of stocks that got cheaper for are reason; their stock prices followed their cash flow downwards.
Every business runs into hiccups. No one executes perfectly, and it’s usually during these one-time blips that good investment opportunities can arise. It’s the job of the investor to try to differentiate a one-time but solvable mistake against a culture of mis-execution.
The other learning from watching situations like these unfold is to be very wary when management teams aim to deliver results in the future that have not previously been demonstrated. Jack in the Box did not have a history of delivering mid-single-digit revenue growth. It had long been a very low-growth business. It also had a checkered history of acquisitions. Likewise, Vestis aimed to achieve a level of revenue growth and profitability inconsistent with its historical results. Both plans seemed plausible but I should have been more concerned about the lack of precedence.
It’s often better to look for businesses who have previously demonstrated attractive results and are going through a rough patch. Reversion to the mean is one of the most powerful forces in investing (looking at you Dollar General), so harness it when you can. Sure, other franchisors and Cintas have demonstrated what’s possible, but we’d have been better off just buying the businesses that were already performing than messing around with disadvantaged competitors. Sometimes turnarounds do turn and achieve a new level of performance, but wagering on this means you’re swimming against the tide and betting against base rates.
I can’t finish this post without wondering what kind of potential these businesses still have. The price is a lot lower than when I wrote about them, but so is the free cash flow. We likely won’t wade into these situations because the cash flow is not there, so they’re currently representing high-risk, high-reward scenarios. If and when Vestis and Jack in the Box turnaround, shareholders will make a killing from here. On the other hand, bankruptcy or a dilutive restructuring isn’t out of the question given the leverage and lack of profitability.
We prefer situations where the cash is already there and ideally being returned to shareholders. When a company’s stock price declines while it’s business and cash flows do not – usually from operational missteps that are blown out of proportion or general macro-related negativity towards a company or industry – that’s when we usually see asymmetric opportunities. Until and if that happens, we’ll continue to watch these from the sidelines.
Do you have a “stranded” 401(k) from a past job that is neglected and unmanaged? Eagle Point offer separately managed accounts to retail investors, and 401(k) rollovers are often a good fit for our long-term approach. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
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