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Jack in the Box (JACK) Stock Up Despite Q3 Earnings Miss


Jack in the Box Inc. JACK recently reported third-quarter fiscal 2017 results, with both earnings and revenues missing the Zacks Consensus Estimate.

However, the company’s shares increased over 2% in afterhours trading on Aug 9, given improved sequential comparable-store sales (comps) at both the brands.

Meanwhile, Morgan Stanley & Co. LLC continues to assist the board in its assessment of possible alternatives with respect to the Qdoba brand coupled with other ways to boost shareholder value.

Notably, there is no guarantee that the evaluation process will result in any transaction and the company has also not set a timetable for conclusion of the evaluation process.

Earnings and Revenue Discussion

Adjusted earnings of 99 cents per share fell short of the Zacks Consensus Estimate of $1.05 by 5.7%. Further, the bottom line declined 7.5% year over year primarily due to lower revenues and restaurant operating margins.

Revenues of $357.8 million missed the Zacks Consensus Estimate of $360 million by 0.6%. Moreover, the top line fell 3% on a year-over-year basis on the back of lower company restaurant sales and franchise rental income, somewhat offset by higher franchises royalties and other revenues.

Behind the Headline Numbers

Comparable-store sales (comps) at Jack in the Box company stores declined 1.6%, comparing unfavourably with the prior-year quarter fall of 0.2% but better than last quarter’s decline of 2.4%. Notably, a 4.4% decrease in transactions was partially offset by average check growth of 2.8%.

Same store sales at franchised stores inched up 0.1%, comparing unfavorably with the gain of 1.5% in the year-ago quarter but better than 0.4% decline in the previous quarter. System same-store sales decreased 0.2% against rise of 1.1% in the comparable period last year, and prior-quarter comps decline of 0.8%.

Comps at company-owned Qdoba restaurants were down 1.1%, reflecting 2.8% decrease in transactions, partially offset by growth in average check and catering sales. This decline compared favorably with prior-quarter decrease of 5.9% but unfavourably with the prior-year quarter rise of 1%.

On the contrary, comps at franchised restaurants saw 2.3% increase during the quarter, which was better than the decline of 0.3% in the prior-quarter, and the year-ago comps growth of 0.1%. Also, system same-store sales were up 0.5% than a gain of 0.6% in the year-ago quarter, and fall of 3.2% in the last quarter.

The company’s consolidated restaurant operating margin was 18.1% of total sales, down 380 basis points (bps) year over year. Operating margin contracted 320 bps for the Jack in the Box company restaurants due to elevated labor costs, higher repairs and maintenance costs, an increase in food and packaging costs and sales deleverage, somewhat offset by the benefit of refranchising activities in 2017.

Also, at the Qdoba restaurants operating margin contracted 420 bps. The reduction was due to costs associated with new restaurant openings, an increase in food and packaging costs, impact of wage inflation and sales deleverage, partially offset by lower workers’ compensation costs.

SG&A expenses for the fiscal third quarter, as a percentage of revenues, were 10.7%. The reported figure was down 90 bps from the prior-year quarter. This reflects the impact of the company's restructuring activities, a decline in pension and postretirement benefits, reduced insurance costs as well as lower incentive compensation.

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

Fourth-Quarter Fiscal 2017 Comps Guidance

For the fourth quarter of fiscal 2017, the company expects same-store sales to be flat to down 1% against the year-ago comps growth of 2% at Jack in the Box restaurants.

For the Qdoba restaurants, same-store sales are projected to be flat to down 2% versus the year-ago quarter comps growth of 1.2%.

Fiscal 2017 Guidance Trimmed

Earnings per share, excluding restructuring charges and gains or losses from refranchising, are expected to be in the range of $4.00 to $4.15 in fiscal 2017. This projected range is lower than the previous guidance of $4.10 to $4.30 per share. However, the Zacks Consensus Estimate of $4.17 per share is pegged higher than the company’s expectation.

Currently, the company anticipates comps to grow approximately 0.5% at Jack in the Box system restaurants, down from around 1%, expected earlier. Meanwhile, comps at Qdoba company restaurants are now projected to decline in the band of roughly 2% to 2.5%. Earlier, comps were expected to decrease in the range of around 1% to 2%.

Consolidated restaurant operating margin is expected to be roughly between 18% and 18.5% compared with the previous expectation of 19%.

Going forward, the company anticipates 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 45 (earlier 50 to 60) new Qdoba restaurants are expected to be open, of which about 25 (earlier 30) are likely to be at the company locations.

Currently, Jack in the Box has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Releases

McDonald's Corp. MCD reported second-quarter adjusted earnings per share of $1.73, beating the Zacks Consensus Estimate of $1.62 by 6.8%. The bottom line also increased 19% year over year.

Chipotle Mexican Grill, Inc.’s CMG second-quarter 2017 adjusted earnings of $2.32 per share outpaced the Zacks Consensus Estimate of $2.16 by 7.4%. The figure also increased significantly from the prior-year quarter earnings of 87 cents, given a substantial rise in revenues.

In second-quarter 2017, The Wendy’s Company WEN posted earnings of 15 cents per share that outpaced the Zacks Consensus Estimate of 13 cents by 15.4%. Moreover, the bottom line jumped 50% year over year on the back of the company’s system optimization initiatives as well as a lower share count.

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