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Jack in the Box Inc. (JACK - Snapshot Report) recently posted second-quarter fiscal 2013 adjusted earnings of 30 cents per share, missing the Zacks Consensus Estimate of 31 cents by 3.2% and comparable year-ago quarter’s earnings by 37.5%. Earnings in the quarter were under pressure due to a lower top line and higher commodity costs.

Quarterly revenues fell 2.8% year over year to $355.6 million and also missed the Zacks Consensus Estimate of $360 million by 1.2%. Revenues in the quarter were affected by a 4.7% decline in company restaurant sales, sluggish comparable restaurant sales (comps) and tepid macroeconomic conditions, as well as lower consumer expenditure, which in turn resulted in lower traffic.

Behind the Headline Number

Jack in the Box operates through its quick-service restaurant chain, Jack in the Box, and fast-casual restaurants, Qdoba Mexican Grill.

System-wide Comps at Jack in the Box restaurants were essentially flat, with a 0.9% upside at the company-owned restaurants, offset by a 0.2% decline at franchised restaurants. System-wide Comps were adversely affected by the slowdown in consumer discretionary spending.

System-wide Comps at Qdoba’s restaurant declined 1.5% due to bad weather conditions. Both company-owned and franchised restaurants contributed, declining 2.0% and 0.9%, respectively.

The company’s consolidated restaurant operating margin expanded 30 basis points (bps) year over year to 15.8%. The expansion in margins was attributed to a 10 bps plunge in food and packaging costs, a 90 bps dip in payroll and employee benefits costs and a 60 bps decline in occupancy and other expenses. The company’s better menu pricing and positive product mix also helped enhance the margin during the quarter.

Store Update

During the quarter, three Jack in the Box and 15 Qdoba restaurants were unveiled. The company has also acquired six Qdoba restaurants from its franchisee.

At the end of the quarter, the company had 2,256 Jack in the Box restaurants and 647 Qdoba units, of which, 2,017 were franchised.

Balance Sheet & Cash Flow

At the end of the quarter, cash and cash equivalent were $10.2 million versus $9.5 million in the first quarter.

Cash flows from operating activities is amounted to $1.2 billion as compared with $69.6 million in the year-ago quarter. 

Share Repurchase

The company bought back 0.4 million shares worth $14.4 million during the second quarter. Currently, $35.6 million worth of shares remain under the existing share repurchase programs.

Guidance

For the third quarter of 2013, comps will be up 1%-3% at the Jack in the Box’s company restaurants whereas comps at the Qdoba restaurants will remain flat year-over-year.

The company has updated its guidance for fiscal 2013. Earnings per share (restructuring charges and gains from refranchising excluded) are estimated to be within $1.55 - $1.65, up from the previous range of $1.48 - $1.63. The company expects comps to grow by 1.5% - 2.5% at the Jack in the Box restaurants. Qdoba company restaurants’ comps will be roughly flat to up 1%.

The company has reduced its guidance for overall commodity costs to 2% - 2.5% from 2% - 3%. The restaurants operating margin is estimated to be 16.0%.

The company plans to unveil 20 new Jack in the Box restaurants and 70-75 Qdoba outlets in fiscal 2013.

Our Take

Due to weak industry sales, the San Diego-based Jack in the Box restaurant chain is witnessing continuous decline in its company sales and lower comps growth both at Jack in the Box and Qdoba restaurants for the past two quarters. Commodity inflation and a tepid macroeconomic outlook, which might affect footfall at the restaurants, are expected to remain headwinds in the coming quarters.

However, Jack in the Box is in a restructuring mode. We expect the company to perform better on the back of significant refranchising activities and the transformation of ownership from franchised to the company level at the higher-margined Qdoba units.

Currently, Jack in the Box retains a Zacks Rank #2 (Buy). Some other restaurateurs like McDonald’s Corp. (MCD - Analyst Report) missed our estimates on both lines this season while Yum! Brands Inc. (YUM - Analyst Report) beat earnings but missed out on revenues. Another company, The Cheesecake Factory Inc. (CAKE - Analyst Report) was ahead of estimates on both counts.

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