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Jack in the Box Divests 22 Restaurants

Zacks Equity Research

As a part of its re-franchising initiative, Jack in the Box Inc. (JACK) recently completed re-franchising of its 22 company-owned restaurants to two franchisees, Ameen Poonja and TLIG Restaurants, LLC. The financial terms of the transaction were not disclosed.

In early February, Amen Poonja – a popular franchisee of Dunkin' Brands Group, Inc.’s (DNKN) Dunkin’ Donuts and AFC Enterprises Inc.’s (AFCE) Popeyes Louisiana Kitchen –got hold of four Jack in the Box restaurants located in the city of Indianapolis. The rest of the 18 restaurants in Beaumont, Texas were acquired by the company’s existing franchisee TLIG Restaurants at the end of second-quarter fiscal 2013. These franchisees will boost the brand’s presence in key markets of Indianapolis and Beaumont, going ahead.

Jack in the Box also plans to franschise 10 of its new company-owned restaurants based in Tulsa, Indianapolis and Cincinnati. In this regard, the company is looking for potential and efficient franchisees in the Southeast and Midwest region.

Previously, in Sep 2012, the company re-franchised seven restaurants in Oklahoma. We believe this re-franchising initiative would help boost the company’s royalty and franchise revenues in the coming quarters. 

In order to reduce its financial obligations and shift toward a franchise-based model, this Zacks Rank #2 (Buy) company remains focused on the strategy of re-franchising its company-owned units. In this regard, the company has implemented a ‘seeding strategy.’ The strategy focuses on expanding into the emerging markets and improving brand recognition, which in turn will help the company strengthen its franchise-based model.

Beginning in 2007, the re-franchise program transformed Jack in the Box’s business to a 76% franchise-centric model. The company now aims to achieve 80% - 85% franchised model. Burger King Worldwide Inc. (BKW) is also walking the re-franchising route and is working diligently to become 100% franchised.

Operating and expanding through franchising is less capital intensive, which in turn enhances free cash flow generation. Further, the revenue stream also remains fixed in the form of fees. We believe that the re-franchising of a large chunk of its stores will provide another opportunity for margin expansion for Jack in the Box.

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