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Jack in the Box Refranchises Further

Zacks Equity Research

San Diego, Calif.-based fast casual restaurant chain, Jack in the Box Inc. (JACK), has recently declared that to date in the fourth quarter of fiscal 2013 (ending Sep 29) it has completed the refranchising of 27 company-owned restaurants. Jack in the Box has also signed a deal with its franchisees to divest 29 more company-operated stores by the end of fiscal 2013.

Earlier in May, the company divested 18 company-owned restaurants, located in Beaumont, Texas, to TLIG Restaurants, LLC. These refranchising initiatives will help the company to speed up its domestic franchise expansion in key markets.

Jack in the Box also plans to refranchise 10 of its new company-owned restaurants based in Tulsa, Indianapolis and Cincinnati. In this regard, the company is looking for franchisees in the Southeast and Midwest U.S. Apart from this, the restaurant chain has inked franchise development agreements to expand in several locations including Louisville, Cleveland, Wichita, Omaha, Little Rock, Fayetteville and Champaign.

Since 2007, Jack in the Box has shifted its focus on franchised operations from company-owned restaurants to reduce the volatility in earnings and increase cash flow generation amid an anemic economy. 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.

Presently, nearly 77% of this Zacks Rank #2 (Buy) company’s restaurants are franchised. Following the sale of 29 company-operated stores, Jack in the Box plans to transform its business to a 79% franchise-centric model by the end of fourth quarter of fiscal 2013. The company also aims to achieve 80%–85% franchised models by fiscal 2014.

Some other restaurateurs including McDonald’s Corp. (MCD) and Burger King Worldwide Inc. (BKW) are also walking the refranchising route. Currently, around 81% of McDonald’s’ total restaurants are franchised while 97% of Burger King’s restaurants are owned and operated by independent franchisees.

Operating and expanding through franchising is less capital intensive, which in turn, enhances free cash flow generation. Moreover, the restaurant margin of Jack in the Box is also improving due to a change in the revenue mix attributable to fewer company-owned stores and increased franchise royalty revenues. During the third quarter of fiscal 2013, the company’s restaurant operating margin was up 110 basis points to 16.9%, driven by comps growth and refranchising activities.

Another player in the restaurant industry which is expected to perform well, going ahead, is Buffalo Wild Wings Inc. (BWLD) with a Zacks Rank #2 (Buy).

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