JACK Tops, Guides Up

Jack in the Box Inc. ( JACK - Snapshot Report ) , recently posted third-quarter 2012 adjusted earnings of 37 cents per share, outpacing the Zacks Consensus Estimate of 35 cents and the year-ago quarter earnings of 25 cents per share. However, including gains from refranchising and restructuring charges, GAAP earnings per share came in at 26 cents compared with 25 cents in the year-ago period.

Quarter Performance

During the quarter, total revenue dipped 3.4% year over year to $501.8 million. The decline in revenue was attributable to a 12.5% dip in restaurant sales to $285.4 million, resulting from the company’s strategy of selling company-owned restaurants to franchisees. However, distribution revenue and franchised restaurant revenue increased 10.4% to $138.8 million and 14.9% to $77.6 million, respectively.

Jack in the Box’s comparable store sales (comps) increased 2.8%, driven by a 3.4% upside at company-owned restaurants and a 2.6% rise at franchised restaurants. In the year-earlier quarter, comps grew 3.2%. Higher customer visitation arising from the company’s continued focus on efficiency including improving the quality of food and service is attributed to this growth.

Moreover, same-store sales at Qdoba’s restaurant were up 2.1% compared with 5.1% in the year-ago quarter, driven by a 3.3% upside at company-owned restaurants and a 0.9% rise at franchised restaurants.

Consolidated restaurant operating margin spiked 400 bps to 16.5%. The expansion in margin was due to a 160 bps dip in food and packaging costs, 100 bps cut in payroll and employee benefits costs and a 140 bps fall in occupancy and other costs. Overall commodity costs were approximately 1.0% higher in the quarter. The company restaurant’s operating margin at Qdoba was notably higher during the quarter.

Store Update

As of July 8, 2012, the company had a total of 2,247 Jack in the Box and 614 Qdoba restaurants in its systems, of which 1661 and 310 were franchised, respectively.

Financial Position

At quarter end, Jack in the Box had cash and cash equivalents of $10.8 million and long-term debt of $430.4 million.

The company did not buy back any shares during the second quarter. The company currently has a share repurchase program worth $100 million, expiring in November, 2013.

Guidance

For the fourth quarter of 2012, the company expects same-store sales to increase in the range of 2%–3% at Jack in the Box company restaurants and 1%–2% at Qdoba system restaurants.

For fiscal 2012, the company forecasts same-store sales to grow 4.0% to 4.5% at Jack in the Box restaurants and 2.5% to 3.0% at Qdoba system restaurants. Overall commodity costs are expected to increase 3.5% for 2012. Restaurants operating margin is estimated to be 15.0%.

Earnings per share are estimated in the range of $1.48 and $1.58, but excluding gains from refranchising, earnings are estimated to be in between $1.12 and $1.22, higher than the previous guidance of $1.02 to $1.17 per share.

The company plans to open 35 new Jack in the Box restaurants and 60 new Qdoba outlets in 2012. Of the total expected openings, 20 locations will be company-owned Jack in the Box properties and 25 to 30 will be Qdoba company-owned units.

Our Take

San Diego-based Jack in the Box is in restructuring mode. We expect the company to perform better on the back of unit growth, closure of underperforming units, significant refranchising activities and the transformation of ownership at the higher-margined Qdoba units, from franchised to company level.

Its cost containment efforts also deserve a special mention. Additionally, the deal to outsource its distribution business by the end of the first quarter of 2013 bodes well for the investors.

However, continued lag in revenues remain a concern. Currently, Jack in the Box retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Outperform recommendation on the stock.