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Jack in the Box's Franchisee Model Strong Amid Coronavirus Woes

Zacks Equity Research

Jack in the Box Inc. JACK is poised to benefit from focus on menu innovation, delivery channels and franchisee businesses. Moreover, the company’s cost-saving initiatives and implementation of digital menu board as well as menu board canopies bode well. 

 

However, the company’s limited international presence and coronavirus-related woes are adding to the downside. Also, rising commodity costs and wage inflation continue to hurt margins.  So far, shares of the company have plummeted 69.8% compared with the industry’s decline of 31.3%.

 

Let us discuss the factors that are currently making an impact on this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

 

Growth Catalysts

 

Jack in the Box restaurants are largely franchised. During the first quarter of fiscal 2020, the company had 94% franchised restaurant, flat year over year. In fiscal 2020, the company plans to open 25-35 units. We believe that franchising a large chunk of its system will lower general and administrative expenses and thereby boost earnings.

 

The company also makes regular menu innovations and provides limited period offers (LPO) at its flagship restaurants to drive long-term customer loyalty. With alterations around premium products like Buttery Jack Burgers, sauced & Loaded Fries, munchie mash-ups and teriyaki bowls running currently, the company is witnessing comps growth. Evidently, Jack in the Box witnessed comps growth of 2.9% in first-quarter fiscal 2020, following a 0.5% gain in the preceding quarter.

 

Meanwhile, Jack in the Box is increasingly focusing on delivery channels. Given the high demand for delivery services, the company has undertaken third-party delivery channels to boost transactions and sales. At the end of second-quarter fiscal 2019, approximately 95% of Jack in the Box’s system was catered by at least one delivery service. Furthermore, the company partnered with DoorDash, Postmates and Grubhub. Recently, it also added Uber Eats to its portfolio.

 

Moreover, the company is expanding its mobile application in a few markets that support order-ahead functionality and payment. Management is reaping benefits in terms of higher ticket from mobile orders.

 

Concerns

 

The recent outbreak of coronavirus in China has now become a global crisis. The Retail - Restaurants industry is currently grappling with the situation and Jack in the Box isn’t immune to the trend. The company’s 2020 guidance does not include any impact of the coronavirus outbreak and there have been no reported cases of COVID-19 at any Jack in the Box property. However, uncertainties arising from the outbreak may affect results going forward.

 

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.

 

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Jack In The Box Inc. (JACK) : Free Stock Analysis Report
 
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