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Here's Why Investors May Find Jack in the Box Appetizing Now

Zacks Equity Research

The year 2019 has so far been pretty encouraging for the Retail-Restaurants industry. Year to date, the industry has rallied 30.3% compared with the S&P 500’s 13.8% increase. However, Jack in the Box Inc. JACK, which belongs to the same industry, has gained only 11.5%. Although this Zacks Rank #2 (Buy) company has underperformed the industry, we believe it is likely to reverse the trend in the near term backed by better-than-expected third-quarter fiscal 2019 earnings and upbeat comps view. Let’s delve deeper into the other factors that are working in favor of this stock.

Robust Earnings Trend

Jack in the Box has an impressive earnings trend. Recently, the company reported third-quarter fiscal 2019 results, wherein earnings surpassed the Zacks Consensus Estimate for the third straight quarter. Adjusted earnings from continuing operations came in at $1.07 per share, which exceeded the consensus estimate of 99 cents and increased 7% on a year-over-year basis. Total revenues of $222.4 million marginally beat the consensus mark of $219 million and improved 18.3% year over year. Following the results, the company raised its fiscal 2019 comps guidance. Comps at Jack in the Box’s system restaurants are envisioned to increase at least 1% compared with the prior guided range of flat to up 1%.

Let’s look at Jack in the Box’s earnings estimate revisions in order to get a clear picture of what analysts expect from the company’s upcoming release. In the past 30 days, the Zacks Consensus Estimate for current quarter and year earnings has increased 13 cents and 11 cents to $4.34 and $4.84, respectively.

Menu Innovation & Solid Delivery System Aid Top Line

Jack in the Box makes regular innovations in its menu to drive the top line. The company comes up with limited period offers at its flagship restaurants to ensure long-term customer loyalty. This highlights the company’s focus on achieving operational excellence and product innovation through offering a value menu and rolling out limited-time offerings. As a result, the company reported system-wide same store sales growth of 2.7% in the last reported quarter, its highest since first-quarter fiscal 2017.

Thanks to menu innovation around premium products like Buttery Jack Burgers, sauced & Loaded Fries, munchie mash-ups and teriyaki bowls, the company is witnessing robust comps growth. In addition, the company combats intense competition in its breakfast range by offering value through bundling products. It also plans to price single menu items in order to better tackle competition.

Jack in the Box is also looking to ramp up delivery channels for the convenience of its customers. The company has partnered with third-party delivery channels like DoorDash, Postmates, Grubhub and Uber Eats to bolster transactions and sales. It also continues to expand its mobile application in few markets that support order-ahead functionality and payment. Notably, in the fiscal third quarter, more than 90% of Jack in the Box’s system was catered to by at least one delivery service.

Refranchising Strategy Boosts Earnings

Jack in the Box operates on a full-fledged franchise model. We believe that refranchising a large chunk of its system reduces the company’s capital requirements and drives earnings per share.

Meanwhile, the company aims to open 25-35 units in fiscal 2019. This will help it lower general and administrative expenses and thereby boost earnings, free cash flow and shareholders’ return. Markedly, the company has 94% franchised restaurants, up from 79% in fiscal 2013.

Other Key Picks

A few other top-ranked stocks that warrant a look in the same space are Chuy’s Holdings Inc. CHUY, Red Robin Gourmet Burgers, Inc. RRGB and Dunkin’ Brands Group, Inc. DNKN. While Chuy’s Holdings and Red Robin Gourmet sport a Zacks Rank #1 (Strong Buy), Dunkin’ Brands has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chuy’s Holdings, Red Robin Gourmet and Dunkin’ Brands have an impressive long-term earnings growth rate of 17.5%, 9.7% and 10.9%, respectively.    

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