U.S. Markets open in 4 hrs 39 mins

Jack in the Box Rides on Franchising Amid Stiff Competition

Zacks Equity Research

Jack in the Box Inc. JACK is constantly focusing on regular menu innovation, delivery channels and franchisee business to drive top-line growth. Also, the sale of the Qdoba brand, which had become quite a liability in the past few quarters, helped it cut down on expenses to a certain extent.

However, decelerating comps growth, limited international presence, increase in costs along with stiff competition in breakfast and lunch day offerings continue to hurt margin.

Key Positives

Jack in the Box’s premium and value offerings and focus on breakfast menu to combat competition bode well. It witnessed comps growth of 0.5% in first-quarter fiscal 2019 compared with 0.2% gain in the prior-year quarter. The company has started to set value-based prices on single menu items instead of bundled products. For fiscal 2019, more than 80% of the company’s marketing plans will focus on value-priced promotions.

Meanwhile, Jack in the Box focuses on third-party delivery channels in order to lower general and administrative expenses and boost earnings. In the long run, it would generate a higher return on equity by lowering capital requirements. It believes in deriving the majority of new unit growth through franchise restaurants. One of its partners, DoorDash contributed 30 basis points of sales growth in the first quarter of fiscal 2019.

In fiscal 2018, it remodelled 50 restaurants and expects to double the count by fiscal 2019 and complete nearly 80% remodelling by fiscal 2021. Moreover, in the near future, it plans to invest in drive-thrus which would derive 70% of total sales.

Jack in the Box also continues to effectively manage costs along with improving guest experience by striving for operational excellence. The largely franchised company intends to open 25-35 franchised units in fiscal 2019.

Concerns

Jack in the Box has been facing declining comps of late. In fact, it began first-quarter fiscal 2019 on a disappointing note. Comps for the first seven weeks of the fiscal first quarter declined 1-2% due to Ribeye Burger’s dismal performance. For fiscal 2019, the company expects comps to be flat to up 2%.

In fact, declining comps have substantially affected earnings as well. Notably, the bottom line lagged the consensus estimate in five of the trailing seven quarters, the average miss being 1.8%. Due to this lower-than-expected earnings trend, shares of Jack in the Box have gained 3.6% over the past three months, underperforming the industry’s rally of 11.4%.


Moreover, increased labor costs and expenses related to marketing initiatives, unit expansion and opening of call centers for catering services are expected to keep profits under pressure.  Meanwhile, unlike Yum! Brands YUM, McDonald’s MCD and Domino’s DPZ, Jack in the Box has limited international presence that might be a big disadvantage. Moreover, the company is experiencing increased competitive pressure on breakfast and lunch day offerings as many other restaurateurs have come up with aggressive value offers.

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.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
 
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

See Latest Stocks Today >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
McDonald's Corporation (MCD) : Free Stock Analysis Report
 
Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
 
Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
 
Jack In The Box Inc. (JACK) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research