Jack in the Box Inc. (JACK - Free Report) can't seem to make its Mexican chain, QDOBA, work even though its main competitor, Chipotle, has been struggling. This Zacks Rank #5 (Strong Sell) is looking to sell QDOBA to focus back on what it does best: burgers.
Jack in the Box operates two restaurant franchises: Jack in the Box, one of the largest hamburger chains in the United States with 2,200 restaurants in 21 states and Guam and QDOBA Mexican Eats, with 700 restaurants in 47 states, the District of Columbia and Canada.
Weather and High Labor Costs Hit in Q2
On May 16, Jack in the Box reported fiscal second quarter 2017 results and beat the Zacks Consensus by 8 cents. Earnings were $0.98 versus the consensus of $0.90.
But the real story with restaurants is really in the comparable sales.
Jack in the Box company owned comparables were down 0.8% but they were worse at QDOBA, which fell 3.2%.
The company said that the second quarter started off sluggish due to delayed tax refunds and the record rainfall in California. Jack in the Box is headquartered in San Diego and the chain has a huge presence in California.
As the quarter went on, Jack in the Box recovered its sales but QDOBA slipped further as it lapped aggressive discounting in the year ago quarter.
Both chains saw higher labor costs due to wage inflation, but Jack in the Box was more heavily impacted due to the increase in minimum wages in California.
Considering a Sale of QDOBA
In the May 16 second quarter press release, Jack in the Box announced that it had hired Morgan Stanley to find a buyer for QDOBA.
“At our investor meeting last May, we said one of the factors that would cause us to reconsider our strategy with respect to QDOBA was valuation,” said CEO Lenny Comma.
“It has become more apparent since then that the overall valuation of the company is being impacted by having two different business models.”
The analysts were downbeat on Jack in the Box following the second quarter report.
Full year Jack in the Box comparables are now expected to be up 1% at company-owned stores while they're guided down 1% to 2% for QDOBA. Commodity costs are expected to be flat for both chains.
9 estimates for 2017 were cut in the last 60 days pushing the Zacks Consensus Estimate down to $4.23 from $4.38. That's still earnings growth of 9.5%, however.
Shares Pop On Hope for a Sale
Shares have been surprisingly resilient, despite the decline in comparable sales. Many investors are hoping for a QDOBA spin-off to unlock value.
But shares remain pricey with a forward P/E of 25.
If you must buy a restaurant stock at this time, you should consider the leader in the industry, Domino's (DPZ - Free Report) . It has the best comparable sales growth in the industry and is a Zacks Rank #2 (Buy).
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