Jack in the Box Inc. JACK benefits from a robust delivery channel, Del Taco merger and menu innovation. These efforts will continue to drive the company’s performance in the coming period. The company has an estimated long-term earnings growth rate of 17%. However, high costs remain a concern in the near term. Let’s delve deeper.
Factors Likely to Drive Growth
Jack in the Box is increasingly focusing on delivery channels, which is a growing area for the industry. Given the high demand for this service, the company has undertaken third-party delivery channels to bolster transactions and sales. The company partnered with DoorDash, Postmates, Grubhub and Uber Eats. It is expanding its mobile application in a few markets that support order-ahead functionality and payment.
Going forward, the company continues to integrate its POS systems with third-party vendors to enhance restaurant operations. In the third quarter of fiscal 2022, the company’s digital sales increased 30% year over year. During the fiscal second quarter, the company expanded its Jack pack rewards loyalty program beyond the mobile app to drive-thru as well as in-store guests. This resulted in a 25% increase in loyalty program users during the quarter.
The acquisition of Del Taco Restaurants is likely to drive growth. The move is in sync with the company’s strategy of expanding its customer base. Del Taco, which has nearly 600 restaurants, serves more than three million guests every week. Following the deal, the companies have more than 2,800 restaurants in 25 states with similar guest profiles, menu offerings and company cultures.
It is worth mentioning that 99% of Del Taco restaurants have a drive-thru, which helps the company in achieving robust off-premise sales. The acquisition will enable Jack in the Box to tap into the robust Mexican QSR category, where Del Taco is a major brand with a track record of steady performance.
The company believes that Del Taco’s addition will not only pave the path for improvement in restaurant margins, store-level profitability and strengthening of capital structure but will also help to mitigate macroeconomic headwinds. Jack in the Box anticipates the deal to be accretive to earnings per share (excluding transaction expenses) in the mid-single-digit range in the first year. In the second year, the company expects meaningful accretion of earnings, once full synergies are realized. With this integration, the company anticipates realizing run-rate cost synergies of roughly $15 million by 2023-end.
The company is also focusing on menu innovation to attract customers. With focused menu innovations around premium products like Buttery Jack Burgers, sauced & Loaded Fries, munchie mash-ups and teriyaki bowls running currently, the company is witnessing comps growth. The company is continuously working on maintaining the uniqueness of its brand, menu and premium food offerings.
Shares of Jack in the Box have gained 31.9% in the past three months compared with the industry’s 4.3% growth.
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Hurdles to Cross
High costs remain a major concern for the company. During the fiscal third quarter, restaurant-level adjusted margin came in at 15.8% compared with the 25.4% reported in the prior-year quarter. The downside was led by a rise in food and packaging costs, wage inflation of 13.2%, and higher utilities and maintenance and repair costs.
Zacks Rank & Key Picks
Jack in the Box currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Retail-Wholesale sector are Tecnoglass Inc. TGLS, Cracker Barrel Old Country Store, Inc. CBRL and Potbelly Corporation PBPB.
Tecnoglass sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 24.4%, on average. Shares of the company have increased 10.2% in the past three months.
The Zacks Consensus Estimate for Tecnoglass 2022 sales and earnings per share (EPS) suggests growth of 28.2% and 47.7%, respectively, from the year-ago period’s levels.
Cracker Barrel carries a Zacks Rank #2 (Buy). Cracker Barrel has a long-term earnings growth of 6.9%. Shares of the company have increased 14.2% in the past three months.
The Zacks Consensus Estimate for Cracker Barrel’s 2022 sales and EPS suggests growth of 16.3% and 15.4%, respectively, from the year-ago period’s levels.
Potbelly carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 22.2%, on average. Shares of the company have declined 18.8% in the past three months.
The Zacks Consensus Estimate for Potbelly’s 2022 sales and EPS suggests growth of 17.5% and 100%, respectively, from the year-ago period’s levels.
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