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Jack in the Box (JACK) Gains on Q2 Earnings & Revenue Beat


Shares of Jack in the Box Inc. JACK rallied over 10% in afterhours trading on May 16, after the company reported better-than-expected second-quarter fiscal 2017 results.

Moreover, given that the overall valuation of the company is being impacted by having two different business models, management has retained Morgan Stanley & Co. LLC to assist the board in its assessment of possible alternatives with respect to the Qdoba brand coupled with other ways to boost shareholder value.

We note that though Qdoba aided the company’s top-line growth and enhanced its geographic presence earlier, but it had become more of a drag in recent quarters. Thus, the news of management considering alternatives to the brand was received positively by investors and also led to the jump in the stock price.

Earnings and Revenue Discussion

Adjusted earnings of 98 cents per share beat the Zacks Consensus Estimate of 90 cents by 8.9%. Further, the bottom line surged over 15.3% year over year primarily due to lower G&A expenses.

Sales of $369.4 million surpassed the Zacks Consensus Estimate of $368.8 million by 0.2%. Moreover, the top line grew 2.3% on a year-over-year basis on the back of higher company restaurant sales and franchises royalties and other revenues, partially offset by lower franchise rental revenues.

Behind the Headline Numbers

Comparable-store sales (comps) at the Jack in the Box company stores were down 2.4%, comparing unfavourably with the prior-year quarter fall of 1% and last quarter’s rise of 0.6%. Same store sales at franchised stores fell 0.4%, also comparing unfavourably with the gain of 0.3% and 3.9% in the year-ago quarter and previous quarter, respectively. System same-store sales decreased 0.8% against flat comps in the comparable period last year, and prior-quarter comps growth of 3.1%.

Comps at company-owned Qdoba restaurants were down 5.9% reflecting 8.2% decrease in transactions, partially offset by growth in average check and catering sales. Notably, the comps decline compared unfavorably with prior-quarter decrease of 1.4% as well as the prior-year quarter rise of 3.1%. Comps at franchised restaurants saw 0.3% dip during the quarter, which was better than the decline of 0.5% in the prior-quarter, but compared unfavorably with the year-ago comps growth of 1.2%. Also, system same-store sales were down 3.2% compared to a gain of 2.1% in the year-ago quarter and fall of 1% in the last quarter.

The company’s consolidated restaurant operating margin was 17.5% of total sales, down 240 basis points (bps) year over year. Restaurant operating margin contracted 100 bps for the Jack in the Box company restaurants due to higher labor costs, higher repairs and maintenance costs and sales deleverage, somewhat offset by favorable food and packaging costs. Moreover, operating margin contracted 480 bps at the Qdoba restaurants. For Qdoba, costs associated with new restaurant openings, an increase in food and packaging costs, impact of wage inflation and sales deleverage resulted in the deterioration in operating margin.

SG&A expenses for the fiscal second quarter, as a percentage of revenues, were 9.7%. This was down 330 bps from the prior-year quarter. The decrease reflects the impact of the company's restructuring activities, a decline in pension and postretirement benefits, reduced advertising and insurance costs as well as lower incentive compensation.

Fiscal Third-Quarter 2017 Comps Guidance

For the third quarter of fiscal 2017, the company expects same-store sales to be up 1% to down 1% as against the year-ago comps growth of 1.1% at the Jack in the Box restaurants.

For the Qdoba restaurants, same-store sales are also projected to be up 1% to down 1% compared to the year-ago quarter comps growth of 1%.

Fiscal 2017 Guidance Trimmed

Earnings per share, excluding restructuring charges and gains or losses from refranchising are expected to be in the range of $4.10 to $4.30 in fiscal 2017. This projected range is lower than the previous guidance of $4.25 to $4.45 per share. The Zacks Consensus Estimate of $4.36 per share is pegged higher than the company’s expectation.

Currently, the company anticipates comps to grow approximately 1% at Jack in the Box system restaurants, down from around 2% expected earlier. Meanwhile, comps at Qdoba company restaurants are now projected to decline in the band of roughly 1—2%. Earlier, comps were expected to remain flat.

Consolidated restaurant operating margin is expected to be roughly 19% as compared with the previous expectation in the range of 19.5% to 20%.

The company continues to anticipate opening of approximately 20 to 25 new Jack in the Box restaurants system-wide, the majority of which will be franchise locations. In addition, roughly 50 to 60 new Qdoba restaurants are expected to be opened, of which about 30 are likely to be company locations.

Jack in the Box has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Jack In The Box Inc. Price, Consensus and EPS Surprise

Jack In The Box Inc. Price, Consensus and EPS Surprise | Jack In The Box Inc. Quote

Peer Releases

McDonald's Corp. MCD reported first-quarter adjusted earnings per share of $1.47 beating the Zacks Consensus Estimate of $1.32 by 11.4%. Earnings also increased 18% year over year.

Chipotle Mexican Grill, Inc.’s CMG first-quarter 2017 adjusted earnings of $1.60 per share outpaced the Zacks Consensus Estimate of $1.28 by 25%. Also, earnings compared favorably with the year-ago quarter figure of a loss of 88 cents per share, given a substantial rise in revenues.

In first-quarter 2017, The Wendy’s Company WEN posted earnings of 9 cents per share that outpaced the Zacks Consensus Estimate of 8 cents by 12.5%. However, earnings declined 18.2% year over year mainly due to lower sales.

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