Dismal 4Q for Jack in the Box

Jack in the Box Inc. (JACK) recently posted fourth-quarter 2012 adjusted earnings of 27 cents per share. The result missed the Zacks Consensus Estimate of 36 cents but was ahead of the year-ago quarter earnings of 20 cents. However, on a GAAP basis, including gains from refranchising and restructuring charges, earnings per share came in at 39 cents compared with 50 cents in the year-ago period.

For full-fiscal 2012, adjusted earnings per share were $1.20 versus 85 cents in the prior year while on a GAAP basis earnings were $1.40 per share compared with $1.63 in the year-ago period.

Behind the Headlines Number

During the quarter, total revenue dipped 2.5% year over year to $357.6 million. The decline in revenue was attributable to a 5.8% dip in restaurant sales to $278.9 million. Total revenue also fell short of the Zacks Consensus Estimate of $467.0 million. However, franchised restaurant revenue increased 11.0% year over year to $78.7 million. For full-fiscal 2012, total revenue declined 7.1% to $1,545.0 million.

Jack in the Box’s comparable store sales (comps) increased 3.1%, driven by a 3.1% upside at company-owned restaurants and a 3.0% rise at franchised restaurants. In the year-earlier quarter, system-wide comps grew by the same magnitude.

However, same-store sales at Qdoba’s restaurant slackened to 0.4% from 3.7% recorded in the year-earlier quarter. A meager 0.8% upside at company-owned restaurants and flat comps at franchised restaurants retarded comps growth at Qdoba.

Consolidated restaurant operating margin spiked 160 basis points (bps) to 15.1%. The expansion in margin was due to a 150 bps plunge in food and packaging costs and a 40 bps dip in payroll and employee benefits costs. A 30 bps increase in occupancy and other costs provided the partial offset.

Store Update

At quarter end, the company had a total of 2,877 units in its system, of which 2,250 were Jack in the Box and 627 were Qdoba restaurants. Out of the total number of units, 2,014 were franchised.

Liquidity

At quarter end, Jack in the Box had cash and cash equivalents of $8.5 million and long-term debt of $405.3 million.

Share Repurchase

The company bought back 883,000 shares of its common stock during the fourth quarter. Subsequent to the quarter, the company repurchased approximately 985,000 shares of its common stock leaving $50.0 million remaining under the current repurchase program expiring in November, 2013.

Guidance

For the first quarter of 2013, the company expects same-store sales to increase in the range of 1%–2% at the Jack in the Box company restaurants and 1%–2% at the Qdoba company-owned restaurants.

For fiscal 2013, the company forecasts same-store sales to grow 2-3% at the Jack in the Box and Qdoba company restaurants. Overall commodity costs are expected to increase 2-3%. Restaurants operating margin is estimated in the range of 15.5-16.0%.

Earnings per share are estimated in the range of $1.45-$1.60. The company plans to open 20-25 new Jack in the Box restaurants and 70-85 new Qdoba outlets in 2013.

Our Take

San Diego-based Jack in the Box underperformed on both counts in the fourth quarter. Continued lag in revenues remains a concern for the company. Comps growth at Qdoba was particularly lackluster.

However, Jack in the Box is in a restructuring mode. We expect the company to perform better on the back of the closure of underperforming units, significant refranchising activities and the transformation of ownership at the higher-margined Qdoba units, from franchised to company level. Additionally, the deal to outsource its distribution business by the end of the first quarter of 2013 should bode well for the investors.

Currently, Jack in the Box carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term ‘Neutral’ recommendation on the stock. One of its close peers Panera Bread Co. (PNRA - Analyst Report) currently carries a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.