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Jack in the Box (JACK): Prospects Bright, Comps Outlook Dull

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On Jun 17, we issued an updated research report on leading quick-service hamburger restaurant chain Jack in the Box Inc. (JACK - Free Report) .

The company reported better-than-expected second-quarter fiscal 2016 results on May 11, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Going forward, the company’s sales initiatives and enhanced focus on franchising is expected to drive top-line growth.

Positives

Notably, Jack in the Box operates and franchises through Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants.

The company’s Qdoba brand has been driving growth over the past few quarters. It is helping the company enhance core growth and balance the risks associated with growing solely in the highly competitive hamburger segment of the QSR industry under Jack in the Box brand. In fiscal 2016, the company plans to open 50-60 Qdoba restaurants, of which roughly half are expected to be company-operated restaurants.

Interestingly, Jack in the Box restaurants are currently 75% franchised which the company plans to increase to around 90% by 2018. We believe franchising a large chunk of its system will lower general and administrative expenses and thereby boost earnings.

The company makes regular menu innovations and also provides limited period offers (LPO) at its flagship restaurants. Moreover, the company’s focus on boosting catering sales should drive the top line. Also, the company is promoting new menu additions through television and digital advertising, point-of-purchase advertising, packaging, uniforms and menu boards, making it easier for guests, which is resulting in increased product mix.

Meanwhile, in fiscal 2015, the company began testing various design elements at its new restaurants. The initial response to these remodeling efforts has been positive and recently the company added more franchise restaurants and remodels to the tests.

Risks

Of late, the company has been experiencing moderated comps growth at its Jack in the Box restaurants due to increased competitive pressure. In fact, for third-quarter fiscal 2016, the company expects comps at the Jack in the Box restaurants to be flat to down 2%, compared with the year-ago comps growth of 5.5%. The company cut down its comps guidance for the Jack in the Box restaurants for full-year fiscal 2016 as well.

Meanwhile, increased marketing initiatives might keep profits under pressure. Also, the company’s limited international presence and weak sales in breakfast and lunch day parts due to stiff competition remain potent headwinds.

Zacks Rank & Stocks to Consider

Jack in the Box currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Papa John's International Inc. (PZZA - Free Report) , BJ's Restaurants, Inc. (BJRI - Free Report) and The Wendy's Co. (WEN - Free Report) . All three stocks carry a Zacks Rank #2 (Buy).

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