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JACK Fails to Meet Estimate

Zacks Equity Research

Jack in the Box Inc. (JACK) recently posted second-quarter 2012 adjusted earnings of 27 cents per share, which fell shy of the Zacks Consensus Estimate of 32 cents. Reported earnings, however, improved from the year-ago quarter earnings of 12 cents per share. However, including gains from refranchising, GAAP earnings per share came in at 48 cents compared with 13 cents in the year-ago period.

Quarter Performance

During the quarter, total revenue dipped 0.3% year over year to $506.6 million. The decline in revenue was attributable to a 9.5% plunge in restaurant sales to $290.8 million, resulting from the company’s strategy of selling company-owned restaurants to franchisees. However, distribution revenue and franchised restaurant revenue increased 15.3% to $140.1 million and 21.1% to $75.7 million, respectively.

Jack in the Box comparable store sales (comps) increased 4.2%, driven by a 5.6% upside at company-owned restaurants and a 3.6% rise at franchised restaurants. Comps were 410 basis points (bps) better than the year-ago quarter level of 0.1%. Higher customer visitation arising from the company’s continued focus on efficiency including improving the quality of food and service is attributed to this growth. Additionally, enhanced guests’ dining experience after the completion of the restaurant re-imaging program aided to traffic growth.

Moreover, same-store sales at Qdoba’s restaurant were up 3.0% compared with 6.0% in the year-earlier quarter, driven by a 3.8% upside at company-owned restaurants and a 2.2% rise at franchised restaurants. In the year-earlier quarter, comps grew 6.0%.

Consolidated restaurant operating margin spiked 320 bps to 15.5%. The expansion in margin was due to 80 bps cut in food and packaging costs, 120 bps reduction in payroll and employee benefits costs, and 130 bps fall in occupancy and other costs.  Overall commodity costs were approximately 3.0% higher in the quarter, owing to increased prices of several commodities, except poultry and produce. The company restaurant operating margin performance at Qdoba was notably higher during the quarter.

Store Update

As of April 15, 2012, the company had a total of 2,242 Jack in the Box and 605 Qdoba restaurants in its systems of which, 1641 and 605 were franchised, respectively.

Financial Position

At quarter end, Jack in the Box had cash and cash equivalents of $11.3 million and long-term debt of $460.7 million.

The company did not buy back any shares during the second quarter. The company currently has a share repurchase program worth $100 million, expiring in November 2013.


For the third quarter of 2012, the company expects same-store sales to increase in the range of 3%–4%, both at Jack in the Box and Qdoba company restaurants.

For fiscal 2012, the company forecasts same-store sales to grow 3.5% to 4.5% at Jack in the Box restaurants. Overall commodity costs are expected to increase 3.0 to 4.0% for 2012. However, inflation is expected to ease at the latter half of the fiscal year.

Earnings per share are estimated in the range of $1.28 and $1.50, but excluding gains from refranchising, earnings are estimated between $1.00 to $1.15 per share.

The company plans to open 30 to 35 new Jack in the Box restaurants and 60 to 70 new Qdoba outlets in 2012. Of the total expected openings, 15 locations will be company-owned Jack in the Box properties and 25 to 30 will be Qdoba company-owned units.

The company expects to incur capital expenditure of $85 million to $95 million.

Our Take

San Diego-based Jack in the Box is on a restructuring mode. We expect the company to perform better on the back of unit growth, closure of underperforming units, significant refranchising activities, and transformation of ownership at higher-margined Qdoba units from franchised to company level. Its cost containment efforts also deserve a special mention. Additionally, the share repurchase program should bode well for the investors.

However, continued lag in revenue figure remains a cause of concern. Jack in the Box faces competition from the companies like Panera Bread Co. (PNRA). Currently, Jack in the Box retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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