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Jack in the Box (JACK) Banks on Franchising Efforts & Expansion

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Jack in the Box Inc. (JACK - Free Report) is likely to benefit from its franchise business, unit expansion and digital initiatives. Also, emphasis on Del Taco Restaurants’ addition bodes well. However, a decline in restaurant-level margin due to wage and commodity inflation along with coronavirus-related woes pose concerns.

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

Growth Catalysts

Jack in the Box continues to focus on repairing its franchisee relationship, mapping markets and rebuilding its store pipeline to drive growth. During fourth-quarter fiscal 2021, the company stated 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. In first-quarter fiscal 2022, the company awarded 26 development agreements to open 98 new restaurants. Also, the company announced the addition of the Nashville market, joining the likes of Oregon, Kansas and Oklahoma. JACK awarded 50 development agreements (year to date) to build 201 stores over the next several years. Given the substantial progress in terms of the franchise development program, the company anticipates achieving a long-term net unit growth goal of 4% by 2025.

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 the guest experience by striving toward operational excellence. JACK believes that the majority of Jack in the Box’s new unit growth will be through franchise restaurants.

The company emphasizes on the Del Taco Restaurants acquisition to drive growth. On Mar 8, 2022, the company completed its previously-announced acquisition of Del Taco Restaurants for approximately $585 million. The move is in sync with its strategy of expanding the customer base. It is worth mentioning that 99% of the Del Taco restaurants have a drive-thru, which helps the company achieve strong off-premise sales. The acquisition will enable Jack in the Box to tap the robust Mexican QSR category, where Del Taco is a major brand with a track record of steady performance. Per JACK, the Del Taco addition will not only pave the path for improvement in restaurant margins, store-level profitability and strengthening of capital structure but will also help to mitigate macroeconomic headwinds. Jack in the Box anticipates the deal to be accretive to earnings per share (excluding transaction expenses) in mid-single-digit in a year. In the second year, the company expects meaningful accretion of earnings once full synergies are realized. With this integration, the company anticipates realizing run-rate cost synergies of nearly $15 million by 2023-end.

Jack in the Box is focused on its digital platforms for enhancing overall guest experiences and customer satisfaction. To date, the company’s digital database has grown 52% year over year, while digital channels have contributed nearly 10% to all sales. During the fiscal first quarter, digital sales increased 38% year over year. Enhancements in digital ordering and off-premise channels added to the upside. The company benefited from the Jack Pack Rewards loyalty program, thereby contributing 95% to mobile orders. The company stated that it focused more on this area of business through exclusive offers and optimization initiatives. Going forward, the company intends to expand its offerings by launching its in-store Jack Pack Program by second-quarter 2022. The initiative is likely to boost accessibility for online ordering in the upcoming periods.

Concerns

Zacks Investment Research
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Shares of Jack in the Box have declined 19.7% in the past year compared with the industry’s 11.7% fall. The downside was mainly due to the coronavirus crisis. The company intends to evaluate the situation on a quarterly basis to gauge the impacts of COVID-19. Moreover, the company expects the impact of COVID-19 to continue for an extended period of time. Also, 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 first quarter, restaurant-level adjusted margin came in at 18.3% compared with 25.5% reported in the prior-year quarter. The downside was driven by rise in food and packaging costs, wage inflation of 10.9% as well as higher utilities and maintenance and repair costs. The decline was marginally overshadowed by lower incentive-based compensation and menu price increases. Food and packaging costs (as a percentage of company restaurant sales) rose 300 bps to 31.3% year over year. Commodity costs during the quarter increased 10.5% year over year. The upside can be attributed to a rise in the price of beef, pork, sauces and oil. The company anticipates operating margin pressures due to labor and supply chain challenges to persist in fiscal 2022.

Zacks Rank & Key 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 Zacks Retail-Wholesale sector include Dave & Buster's Entertainment, Inc. (PLAY - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Tapestry, Inc. (TPR - Free Report) .

Dave & Buster's sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 218.3%, on average. Shares of the company have gained 7.1% in the past six months.

The Zacks Consensus Estimate for PLAY’s 2022 sales and EPS suggests growth of 203.5% and 149.2%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth of 24.7%. Shares of the company have surged 49.4% in the past six months.

The Zacks Consensus Estimate for ARCO’s 2022 sales and EPS suggests growth of 10.3% and 54.2%, respectively, from the year-ago period’s levels.

Tapestry carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.2%, on average. Shares of the company have declined 6.1% in the past six months.

The Zacks Consensus Estimate for TPR’s 2022 sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s levels.