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Bear of the Day: Jack in the Box (JACK)

Tracey Ryniec

Jack in the Box (JACK) is still trying to exit the Mexican food business, as it continues to seek a buyer for its QDOBA brand. However, this Zacks Rank #5 (Strong Sell) isn't seeing great sales on the burger side either.

Jack in the Box operates two restaurant franchises: Jack in the Box, one of the largest hamburger chains in the United States with 2,200 restaurants in 21 states and Guam and QDOBA Mexican Eats, with 700 restaurants in 47 states, the District of Columbia and Canada.

A Miss in the Third Quarter

On Aug 9, Jack in the Box reported its fiscal third quarter results and missed on the Zacks Consensus by 6 cents.

Earnings were $0.99 versus the consensus of $1.05.

During the quarter, the company took over 31 franchised Jack in the Box restaurants from an under performing franchisee. This caused it to incur costs of $4.4 million, or about $0.10 per share, which likely resulted in the earnings miss.

Jack in the Box system same-store sales fell 0.2% which lagged the QSR sandwich segment by 1.9%. QDOBA's actually rose 0.5% system-wide.

Company same-store-sales fell 1.6% at Jack in the Box and 1.1% at QDOBA, however. Company sales saw a 2.8% decrease in transactions.

Jack in the Box also got hit by higher labor as well as repair and maintenance costs. Additionally it saw the return of commodity inflation.

Refranchising Initiative

The company is operating a Jack in the Box refranchising initiative. It sold 58 restaurants in the third quarter and has now sold 118 year-to-date.

As of the end of the third quarter, it also had non-binding letters of intent with franchisees to sell 63 additional restaurants.

The Sale of QDOBA?

Jack in the Box let it be known earlier in the year that it had hired Morgan Stanley to assist the Board in finding alternatives for QDOBA to enhance shareholder value.

The company hasn't made it a secret that it wants to return to its roots and focus solely on burgers.

There's no timetable for the possible sale, however. This is still just hanging over the company.

Disappointing Guidance

Once again, Jack in the Box provided disappointing guidance which led to the analysts cutting estimates.

Same store sales in the fiscal fourth quarter are expected to be flat to down 2% at Jack in the Box and at QDOBA. Both saw increases a year ago.

Similarly, for the year, Jack is expected to increase just 0.5% while QDOBA is projected to be down 2-2.5%.

As a result, the Zacks Consensus Estimate for 2017 has fallen to $4.06 from $4.23 in the last 90 days with 7 analysts cutting and none raising for the year.

That's earnings growth of just 5% versus fiscal 2016.

Shares Down on the Year

The restaurants are a tough industry right now. Many are struggling to attract consumers in a crowded market place.

Jack in the Box shares are down 10% year-to-date but they're not exactly a value.

They still trade with a forward P/E of 21.

You will, however, get a dividend for your troubles, which is yielding 1.6%.

For investors who are looking for a restaurant stock with hot same-store-sales, they should consider Domino's (DPZ). It's a Zacks Rank #2 (Strong Buy).

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