Jack Exceeds by a Penny

Zacks

Jack in the Box Inc. (JACK) recently posted first quarter 2012 adjusted earnings of 25 cents per share, which surpassed the Zacks Consensus Estimate by a penny. Reported earnings, however, deteriorated from the year-ago quarter earnings of 61 cents per share. However, excluding gains from refranchising, earnings per share were 25 cents compared with 27 cents in the year-ago period.

Quarter Performance

During the quarter, total revenue dipped 1.8% year over year to $652.7 million. The decline in revenue was attributable to a 16.7% plunge in restaurant sales to $364.1 million, resulting from the company’s strategy of selling company-owned restaurants to franchisees. However, distribution revenue and franchised restaurant revenue increased 32.8% to $194.8 million and 15.7% to $93.8 million, respectively.

Jack in the Box comparable store sales (comps) increased 3.6%, driven by a 5.3% upside at company-owned restaurants and a 2.8% rise at franchised restaurants. Comps were 250 basis points (bps) better than the year-ago quarter level of 1.1%. Higher customer visitation arising from the company’s continued focus on efficiency including improving the quality of food and service is attributed to this growth. Additionally, enhanced guests’ dining experience by completion of the restaurant re-imaging program will further drive traffic. Moreover, same-store sales at Qdoba’s restaurant were up 3.8%, driven by a 3.5% upside at company-owned restaurants and a 4.0% rise at franchised restaurants. In the year-earlier quarter, comps grew 6.4%.

Jack in the Box’s restaurant operating margin enhanced 90 bps to 13.5%. The margin contraction was due to higher food and packaging costs (up 110 bps), payroll and employee benefits costs (up 120 bps), partially offset by occupancy and other costs (down 80 bps).  Overall commodity costs were approximately 8.0% higher in the quarter, owing to higher costs of most commodities.

Store Update

During the quarter, the company opened 5 new company-owned and 11 franchised Jack in the Box restaurants. The company also opened 15 Qdoba restaurants, of which 9 were franchised.

Financial Position

At quarter end, Jack in the Box had cash and cash equivalents of $13.6 million and long-term debt of $472.8 million.During the quarter, Jack in the Box repurchased 327,000 shares worth $6.4 million, at an average price of $19.43. The company has completed its previous share repurchase program of $100 million and currently has another share repurchase program worth $100 million, expiring in November 2013.

Guidance

For the second quarter of 2012, the company expects same-store sales at both Jack in the Box restaurants and Qboda restaurants to increase in the range of 4%–5%.

For fiscal 2012, the company forecasts same-store sales to grow 3% to 4% at Jack in the Box restaurants and 4% to 5% at Qdoba restaurants. Overall commodity costs are expected to increase 5% for 2012. Earnings per share is estimated in the range of $1.15 and $1.43, but excluding gains from refranchising, earnings are estimated between 95 cents to $1.10 per share. The company also foresees cost inflation of 5% in 2012, with higher pressure in the first half of 2012.

The company plans to open 30 to 35 new Jack in the Box restaurants and 70 to 90 new Qdoba outlets in 2012. The company expects to incur capital expenditure of $90 million to $100 million.

Our Take

San Diego-based Jack in the Box continues to struggle due to its ongoing restructuring and rising cost inflation. However, we expect the scenario to improve gradually on the back of unit growth, closure of underperforming restaurants and completed refranchising program. Management anticipates gains from refranchising to contribute 20 cents to 33 cents to earnings per share in 2012 compared with 78 cents realized in 2011. Additionally, the share repurchase program should bode well for the investors.

One of Jack in the Box’s primary competitors, Panera Bread Co. (PNRA) recently posted fourth quarter 2011 adjusted earnings of $1.42 per share, which surpassed the Zacks Consensus Estimate by a penny.

Jack in the Box currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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