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Jack in the Box (JACK) Banks on Menu Innovation, Hurt by Costs

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Jack in the Box Inc. (JACK - Free Report) is likely to benefit from menu innovations, digital initiatives and franchise business. Also, focus on unit expansion bodes well. A decline in restaurant-level margin due to wage and commodity inflation along with coronavirus-related woes is a headwind.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Growth Catalysts

Menu innovation is one of the company’s primary aspects. Jack in the Box is continuously working on maintaining the uniqueness of its brand, menu and premium food offerings. Sales in the fiscal fourth quarter were primarily driven by solid breakfast daypart offerings (including Stacked Croissant and core breakfast menu items) and high volume LTO’s (Spicy Tiny Tacos). It not only regained the trust of its customers but also witnessed repetitive guest ordering. Also, the company benefitted from strength in burger performance owing to Triple Bacon Cheesy Jack and Bacon BBQ Cheeseburger promotions. Given the menu diversity, price points and positive customer feedback, the company remains flexible and resilient against shifts in customer behavior. Going forward, the company intends to build a long-term product pipeline to drive growth. Also, it is shifting toward travel-indulgent food that offers great overall value.

To respond to the high demand for its services, Jack in the Box is focused on its delivery channels. The company has undertaken third-party delivery channels to bolster transactions and sales by partnering with DoorDash, Postmates, Grubhub and Uber Eats. It is expanding its mobile application in a few markets that support order-ahead functionality and payment. During fourth-quarter fiscal 2021, digital sales increased 90.6% year over year. Enhancements in digital ordering and off-premise channels added to the upside. The company benefitted from the Jack Pack Rewards loyalty program owing to a 61% increase in app downloads on a year-over-year basis. The company is concentrating on this area of business through exclusive offers and optimization initiatives. Jack in the Box intends to launch mobile web ordering and loyalty program offerings in store during the first half of 2022.

Jack in the Box continues to focus on repairing its franchisee relationship, mapping markets and rebuilding its store pipeline to drive growth. Recently, the company awarded seven development agreements to open 47 new restaurants. With this initiative, the company will boost presence in existing markets including Los Angeles, Dallas and Houston as well as new ones like Salt Lake City and Louisville. The company also mentioned expansion plans with the involvement of veteran multi-unit franchisees like David Beshay (one of the brand’s largest operators). The franchisee expects to open at least 30 additional locations within the next five to eight years. It is worth mentioning that the company awarded 23 development agreements (year to date) to build 111 stores over the next several years.

We believe that franchising a large chunk of its system will lower Jack in the Box’s general and administrative expenses, boosting earnings. In the long term, it would generate a higher return on equity by lowering capital requirements. This would also boost free cash flow and boost shareholders’ returns. The company aims to effectively manage costs and improve guest experience by striving toward operational excellence. Notably, the company believes that the majority of Jack in the Box’s new unit growth will be through franchise restaurants.

Concerns

Zacks Investment ResearchImage Source: Zacks Investment Research

Shares of Jack in the Box have declined 8.1% so far this year against the industry’s 8.9% growth. The downside was mainly due to the coronavirus pandemic. Going forward, the company intends to evaluate the situation on a quarterly basis to gauge the impacts of COVID-19. Moreover, it expects the impact of COVID-19 to continue through 2021. Due to the crisis, it is unsure whether restaurant traffic will return to the pre-COVID-19 level.

The company is persistently shouldering higher expenses, which have been detrimental to margins. During the fiscal fourth quarter, restaurant-level adjusted margin came in at 20.1% compared with 27% reported in the prior-year quarter. This was due to the take-back of lower-volume franchise restaurants, higher food and packaging costs, wage inflation of 9.8%, and rise in utilities and maintenance and repair costs. Commodity costs during the quarter increased 11.8% year over year. The increase was due to a rise in pork, beef and beverages costs. Selling, general and administrative expenses accounted for 7.7% of total revenues compared with 5.8% in the prior-year quarter.

Zacks Rank & Key Restaurant Picks

Jack in the Box currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Papa John's International, Inc. (PZZA - Free Report) , Noodles & Company (NDLS - Free Report) and McDonald's Corporation (MCD - Free Report) .

Papa John's currently carries a Zacks Rank #2 (Buy). The company benefits from its off-premise business model. Sales at off-premise business model have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.

Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 142.9%. PZZA stock has gained 55.1% in the past year.

Noodles & Company carries a Zacks Rank #2. Robust comparable restaurant sales growth and increase in average unit volumes is favoring the company. In third-quarter 2021, average unit volumes climbed 16% year over year.

The Zacks Consensus Estimate for Noodles & Company’s current financial year sales and earnings per share (EPS) suggests growth of 22.5% and 196.6%, respectively, from the year-ago period’s levels. NDLS has returned 28.1% in the past year.

McDonald’s carries a Zacks Rank #2. A robust drive-thru presence and investments in delivery and digitization in the past few years have helped the company to tide over the pandemic. The company has a trailing four-quarter earnings surprise of 6.8%, on average.

The Zacks Consensus Estimate for McDonald's current financial year sales and EPS suggests growth of 20.9% and 54.9%, respectively, from the year-ago period’s levels. MCD has rallied 24.6% in the past year.