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Why Jack in the Box Has Turnaround Potential

- By Robert Stephens, CFA

The performance of quick-service restaurant company Jack in the Box Inc. (JACK) over the last year has been disappointing. Its stock price has declined by 7%, which is significantly behind the S&P 500's gain of 4% during the same time period.

The company is putting in place a revised strategy in order to boost its financial outlook. It is seeking to become increasingly efficient, while also ramping up its delivery orders. It is focusing on its value proposition, while investment in its restaurants could improve the guest experience and boost customer engagement.

With the stock having impressive financial forecasts and a fair valuation, it could generate improving stock price performance versus the S&P 500.


Value focus

An increasing focus on a value proposition could enhance Jack in the Box's sales growth. It is seeking to promote its premium products alongside competitive bundled price points in order to offer a value proposition to customers. As part of this, it is aiming to ramp-up sales of margin-friendly combos, while also avoiding deep discounting in order to maintain the health of its brand.

Its value proposition is being communicated more effectively through a refreshed marketing program. In fiscal 2019, over 80% of its marketing plans feature value-priced promotions. It is also investing to a greater extent in digital media, rather than traditional marketing such as a Super Bowl advert. This is helping it have more effective one-on-one relationships with its customers. Over time, this could strengthen customer loyalty and lead to a better competitive position for the business in what is a saturated market.

Refreshed strategy

Delivery orders continue to offer a growth catalyst for the business, adding an extra 30 basis points to sales in the fourth quarter of the previous year. The average check for delivery order is consistently higher than for other dining modes. Sales from deliveries are expected to rise following the introduction of Uber Eats as a new delivery partner. Over 85% of its system is now served by at least one delivery service.

The release of a new app means that the company's customers can now order directly through mobile, with over 100,000 unique users having done so already. A partnership with Apple Pay, which allows customers to use their iPhone or Apple Watch to pay for delivery, could act as a further tailwind on the segment in the future.

Jack in the Box is set to target further investments in its restaurants. For example, it will remodel many of its oldest locations and improve its restaurant facilities. These changes have so far led to increased guest engagement and optimized returns. Over 50 restaurants have been remodelled since the start of fiscal 2018, with construction underway at a further 17 locations. Alongside this, there will be additional investment in its drive-through experience, with the company seeking to overhaul the process in order to improve customer satisfaction levels.


Jack in the Box faces an uncertain future following the announcement that it is exploring a range of strategic and financing alternatives to maximize shareholder value. This could include a sale of the company, or may involve it seeking greater leverage. With there being no timetable for such changes to take place, the stock could experience a volatile period.

This comes at a time when rising labor costs and increasing competition could hurt the prospects for the quick-service restaurant sector. This contributed to a rise in comparable store sales of only 50 basis points in the most recent quarter, with transactions declining by 3.3% compared to the same period of the previous year.

In response, the company expects to simplify its business model in order to improve efficiency. As part of this, it is reducing redundant products and streamlining its operating procedures. It has been testing menu deletion and modified operating procedures at 180 restaurants with no detrimental impact on sales from the changes. It will now roll out the final program of efficiency changes across its system. Alongside this, greater use of technology could help to make the company more competitive and offset higher labor costs.


Strategy changes being made by the company are forecast to lead to earnings-per-share growth of 12% in the next financial year. This suggests that its focus on a value proposition alongside an increasing move towards delivery and greater investment in its restaurants could improve its financial outlook.

Trading on a price-earnings ratio of 15, the stock appears to offer good value for money when its financial prospects are factored in. Although there are risks ahead, such as rising labor costs and a competitive environment, as well as the potential for major strategic and financing alternatives, it could generate improving stock price performance having underperformed the S&P 500 over the last year.

This article first appeared on GuruFocus.