Jack in the Box Getting Focused

JACK: Convenience Store Sale Hones Focus on Restaurants

Jack in the Box Inc. (JACK - Snapshot Report) agreed to sell 55 of its 61 Quick Stuff convenience stores and gas stations, taking another step toward its goal of shrinking its capital base and focusing on its Jack in the Box and Qdoba concepts.

The all-cash sale is expected to result in a charge to earnings of $10-$14 million in the fast-food operator’s fiscal 3Q09 ended July.

The convenience store sale is part of a greater effort to reduce capital outlays and expand net margins, which are a small fraction of industry-leader McDonald's Corp. (MCD - Analyst Report). Following in McDonald’s footsteps, Jack in the Box is shrinking its capital requirements by refranchising huge chunks of stores, with a goal to be 70% to 80% franchised by 2013, up from 41% currently.

Another front in Jack in the Box’s effort to bolster comps and margins is taken from McDonald’s playbook. The hamburger chain is reinventing its menu to include healthier choices, including grilled chicken pitas, trendier premium offerings such as real fruit smoothies, and an expansive value menu.

Early indications are positive. The recent launch of mini-sirloin burgers boosted management’s same-store sales expectations for fiscal 2009.

Another growth lever for the Western-based fast food chain is unit expansion. Most of the company’s roughly 2,200 Jack in the Box restaurants are in the Western and Southern United States, providing opportunities to expand nationwide and internationally.

Shares of Jack in the Box have soared 99% since their November lows, out-performing competitors Burger King Holdings Inc. (BKC - Analyst Report) (+6.2% since November), Yum! Brands Inc. (YUM - Analyst Report) (up 60%) and McDonald’s (up 27%).

JACK’s valuation multiples remain attractive in our view, however. The stock currently trades at less than 10x forward earnings -- lower than its estimated growth rate -- versus 15x earnings or 1.8x estimated growth for the overall quick service sector.