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Jack in the Box Misses Estimate

Zacks Equity Research

Jack in the Box Inc. (NasdaqGS:JACK - News) has recently posted third quarter 2011 earnings of 38 cents per share, which fell short of the Zacks Consensus Estimate of 40 cents and deteriorated from the year-ago quarter earnings of 44 cents.

Quarter Performance

During the quarter, total revenue dipped 0.8% year over year to $519.3 million. The revenue declined as restaurant sales plunged 13.3% to $326.0 million mainly due to the company’s strategy of selling company-owned restaurants to franchisees. However, distribution revenue and franchised restaurant revenue increased 33.7% to $125.7 million and 27.1% to $67.5 million, respectively.

Jack in the Box comparable-store sales (comps) increased 3.2%, driven by a 4.7% upside at company-owned restaurants and a 2.4% rise at franchised restaurants. Comps saw a drastic improvement from a decline of 9.5% in the year-ago quarter. 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, to enhance guests’ dining experience, the company plans to complete its restaurant re-imaging program by 2011. Moreover, same-store sales at Qdoba’s restaurant were up 5.1%, driven by transaction growth and higher catering sales. In the year-earlier quarter, comps grew 4.6%.

Jack in the Box’s restaurant operating margin declined 170 basis points (bps) to 6.3%. The margin contraction was due to higher food and packaging costs (up 210 bps), occupancy and other costs (up 50 bps) and franchise costs (up 200 bps).  Overall commodity costs were approximately 6.5% higher in the quarter, owing to higher costs for beef, cheese, dairy and eggs.

Store Update

During the quarter, the company opened 11 new company-owned and 10 franchised Jack in the Box restaurants. The company also refranchised 226 restaurants and closed 7 units among which 6 were company operated. The company also closed 8 Qdoba restaurants during the quarter and opened 47 Qdoba restaurants, of which 30 were franchised.

Financial Position

At quarter end, Jack in the Box had cash and cash equivalents of $12.0 million and long-term debt of $426.4 million.

During the quarter, Jack in the Box repurchased shares worth $2.99 million, at an average price of $21.65. The company currently has $60 million remaining under its existing $100 million share repurchase program, which expires in November 2012.

Guidance

For the fourth quarter of 2011, the company expects same-store sales at Jack in the Box restaurants and Qboda restaurants to increase in the range of 1%–3% and 3%–5%, respectively. The company also foresees cost inflation of 7% given higher costs for most commodities but poultry.

For fiscal 2011, the company forecasts same-store sales to grow 2% to 3% (previously 1% to 3%) at Jack in the Box restaurants and 5% to 6% (previously 4% to 6%) at Qdoba restaurants. Overall commodity costs are expected to increase 5% for 2011. Earnings per share are estimated in the range of $1.46 and $1.60 (previously $1.40 and $1.65).

The company plans to open 30 to 35 new Jack in the Box restaurants and 60 to 70 new Qdoba outlets in 2011. The company expects to incur capital expenditure of $120 million to $125 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 with unit growth, closure of underperforming restaurants and completion of the refranchising program. Management anticipates gains from refranchising to contribute from 71 cents to 78 cents to earnings per share in 2011 compared with 65 cents realized in 2010. Additionally, the share repurchase program should bode well for the investors.

One of Jack in the Box’s primary competitors, Buffalo Wild Wings Inc. (NasdaqGS:BWLD - News), posted second quarter 2011 earnings of 58 cents per share, which also missed our estimate.

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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