Jack in the Box (JACK) to Sell Qdoba Brand for $305 Million
Jack in the Box Inc. JACK announced yesterday that it’s selling its Qdoba subsidiary to private equity firm Apollo Global Management, LLC for $305 million. The all-cash deal, subject to customary closing conditions and adjustments, is expected to be completed by April 2018.
Shares of the company closed 3.1% higher at 103.45 yesterday. However, year to date, shares have lost 7.3% against the industry’s gain of 15.3%.
Numerous Challenges Mar Qdoba’s Growth
At the time of its acquisition by Jack in the Box in 2003, this fast-casual Mexican food chain had 85 locations across 16 states. Since then, this number has increased to 700 and spread across 47 states, the District of Columbia and Canada. It is currently the second largest fast-casual Mexican food brand in the United States with more than 700 locations.
Despite this notable growth, Jack in the Box decided to get rid of Qdoba probably because of the fact that the fast-casual Mexican space has been slowing down in recent years with rising avocado prices dampening profits.
In fact, in the last reported quarter, revenues declined 15% on a year-over-year basis owing to lower Jack in the Box and Qdoba brand sales. Comps at company-owned Qdoba restaurants were down 4%, reflecting 6.4% decrease in transactions.
Jack In The Box Inc. Revenue (TTM)
Jack In The Box Inc. Revenue (TTM) | Jack In The Box Inc. Quote
Also, at the Qdoba restaurants, operating margin contracted 610 basis points (bps) due to costs associated with new restaurant openings, an increase in food and packaging costs, impact of wage inflation and sales deleverage as well as commodity inflation.
The company has been exploring strategic alternatives regarding Qdoba for the past several months.
Seeking a Less Capital Intensive Business Model
Jack in the Box stated that it will use the proceeds from the sale to pay off outstanding debt under its term loan. We believe that this sale is in line with Jack in the Box’s efforts to shift to a less capital-intensive business model and focus more on core operations.
Additionally, asset sales will help the company in terms of strengthening its liquidity and protecting its current liabilities with a combination of cash and liquid assets.
Zacks Rank and Stocks to Consider
Jack in the Box has a Zacks Rank #5 (Strong Sell).
Some better-ranked stocks in the same space are Famous Dave's of America, Inc. DAVE, Arcos Dorados Holdings Inc. ARCO and Good Times Restaurants, Inc. GTIM.
While Famous Dave's of America sports a Zacks Rank #1 (Strong Buy), Arcos Dorados and Good Times Restaurants carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
One estimate for the current year moved north over the past 60 days versus no southward revisions in case of each of the three companies.
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