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Jack in the Box (JACK) Poised for Growth Despite Risks

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On Oct 6, we issued an updated research report on leading quick-service hamburger restaurant chain Jack in the Box Inc. (JACK - Free Report) .

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

Notably, 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.

The company makes regular menu innovations and also provides limited period offers (LPO) at both its flagship restaurants. Jack in the Box is promoting new menu additions through television and digital advertising, point-of-purchase advertising, packaging, uniforms and menu boards, thus making it more accessible for customers and resulting in increased product mix.

Moreover, Qdoba is developing a mobile app which will enable online ordering and mobile payment. The company is also redesigning its affinity program to bring back guests more often and to provide them with better control over reward points. Both the products are expected to be rolled out in fiscal 2017.

Meanwhile, 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. Notably, the company plans to open around 20 Jack in the Box restaurants in fiscal 2016, majority of which will be franchise locations.

However, the restaurant chain loses out in terms of international presence. While several other restaurateurs including Yum! Brands, Inc. (YUM - Free Report) , McDonalds Corporation (MCD - Free Report) and Papa John’s International, Inc. (PZZA - Free Report) are capitalizing on the emerging market potential, Jack in the Box seems to be weak on this front.

Moreover, the company’s muted comps guidance, costs related to increased marketing initiatives along with weak sales in breakfast and lunch day parts due to stiff competition remain potent headwinds.

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