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JACK Beats Earnings, Misses Rev

Zacks Equity Research

Jack in the Box Inc.’s (JACK) third-quarter fiscal 2013 adjusted earnings of 41 cents per share, beat the Zacks Consensus Estimate of 38 cents by 7.9% and comparable year-ago quarter’s earnings by 5.1%. Earnings in the quarter received a boost from the company’s margin expansion at Jack in the Box restaurants.

Quarterly revenues fell 1.1% year over year to $350.3 million and also missed the Zacks Consensus Estimate of $366 million by 4.3%. Revenues in the quarter were under pressure due to  muted comparable restaurant sales (comps) growth.

Behind the Headline Number

Jack in the Box operates through its quick-service restaurant chain, Jack in the Box, and fast-casual restaurants, Qdoba Mexican Grill.

System-wide comps at Jack in the Box restaurants were 0.1%, with a 1.2% upside at the company-owned restaurants, offset by a 0.3% decline at franchised restaurants. Comps in the quarter were much lower than the year-ago comps of 2.8%. System-wide comps were adversely affected by the adverse weather and slowdown in consumer spending.

System-wide comps at Qdoba’s restaurant increased 1.3%, gaining from 0.5% and 2.1% rise comps at company-owned and franchised restaurants, respectively. The company’s set of sales-driving initiatives boosted the comps during the quarter.

The company’s consolidated restaurant operating margin expanded 40 basis points (bps) year over year to 17.9%, led by an 80 bps dip in payroll and employee benefits costs and better menu pricing, offset by a 40 bps rise in  food and packaging costs.

Restaurant operating margin at Jack in the Box were up 110 bps to 16.9%, driven by comps growth and refranchising activities. However, Qdoba’s restaurant operating margin was down 270 bps to 20.6% resulting from lower top line, higher commodity costs and unfavorable impact of product mix.

Store Update

During the quarter, three Jack in the Box and 11 Qdoba restaurants were unveiled. The company has also acquired 12 Qdoba restaurants from its franchisee while closing down 63 Qdoba stores.

At the end of the quarter, the company had 2,255 Jack in the Box restaurants and 592 Qdoba units, of which 1,729 were franchised. The company plans to unveil 20 Jack in the Box restaurants and 65-70 Qdoba outlets in fiscal 2013.

Balance Sheet

At the end of the quarter, cash and cash equivalent was $9.8 million versus $10.2 million in the second quarter. Long-term debt, net of current maturities was $359.5 million versus $369.7 million in the previous quarter.

Share Repurchase

The company bought back 1.4 million shares worth $50.8 million during the second quarter. Currently, $84.7 million worth of shares remain under the existing $100 million share repurchase programs. Jack in the Box has also approved an additional share repurchase program worth $100 million in Aug 2013.

4Q13 Guidance

Jack in the Box’s company restaurants are expected to post positive comps growth for the fourth quarter of fiscal 2013. Comps at the Qdoba restaurants are expected to be up 1% as compared with 1.1% in the year-ago quarter.

2013 Guidance

The company has increased its earnings guidance for fiscal 2013. Adjusted earnings per share are estimated to be within $1.72 to $1.78, up from the previous range of $1.55–$1.65. Earnings in the quarter are expected to get a boost from the company’s higher margin and closure of Qdoba units.

The company has reduced its guidance for overall commodity costs to 2% from 2%–2.5%. The restaurants operating margin is estimated to be 17.0%–17.5%, higher than the previous estimate of 16.0%. Lower commodity costs and refranchising strategy is expected to boost margin in fiscal 2013.

However, the company has slightly lowered its comps guidance for Jack in the Box restaurants due to sluggish industry sales trend. The company expects comps to grow by 1% at these restaurants, lower than the previous estimate of 1.5%–2.5%. However, the company continues to expect that Qdoba company restaurants’ comps will be flat to up 1% in fiscal 2013.

Our Take

After a weak quarter, Jack in the Box has succeeded to post earnings growth thanks to its cost-effective strategy and the trend is expected to continue ahead. Further, this Zacks Rank #1 (Strong Buy) company is trying effortlessly to improve its sales through a series of initiatives. We expect the company to perform better benefiting from its refranchising activities and the transformation of ownership at the higher-margined Qdoba units from franchised to the company level.

Some other players in the restaurant industry which are expected to perform well, going ahead, include Burger King Worldwide, Inc. (BKW), Buffalo Wild Wings Inc. (BWLD) and Cracker Barrel Old Country Store, Inc. (CBRL). All these companies carry a Zacks Rank #2 (Buy).

Read the Full Research Report on CBRL

Read the Full Research Report on BWLD

Read the Full Research Report on JACK

Read the Full Research Report on BKW

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