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Jack in the Box Gains From Franchising, Competition Hurts

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Jack in the Box Inc. (JACK - Free Report) is continuously banking on menu innovation, catering, delivery and marketing to drive sales. However, high costs of restaurant operations and limited international presence are concerns.

In the third quarter of fiscal 2018, the company’s earnings grew 26.6% on a year-over-year basis. With the sellout of its Qdoba brand, which was more of a drag in the past few quarters, the company witnessed a decline in its general and administrative expenses.

Moreover, Jack in the Box posted better-than-expected earnings in two of the trailing four quarters, with an average beat of 1.2%. Further, earnings estimates for the current year have inched up 1.3% over the past month, reflecting analysts’ optimism surrounding the company’s future earnings potential. Backed by impressive earnings, shares of Jack in the Box have gained 9.5% in the past three months, outperforming the industry’s collective growth of 2.1%.


Sales-Building Efforts Bode Well

Jack in the Box highly focuses on menu innovations and provides limited period offers (LPO) at both of its flagship restaurants to drive long-term customer loyalty. With focused menu inventions around premium products like Buttery Jack Burgers, sauced & Loaded Fries, munchie mash-ups and teriyaki bowls running currently, the company is witnessing comps growth. Consequently, it saw comps growth of 0.6% in the fiscal third quarter. It continues to combat heightened competitive activity around breakfast day part.

The company is also increasingly focusing on delivery channels, which is a growing area for the industry. It has undertaken third-party delivery channels to boost transactions and sales. Currently, three-fourths of the restaurant system is served by major delivery companies like DoorDash, Postmates and Grubhub. Meanwhile, Jack in the Box plans to invest in drive-thrus as those derive more than 70% of total sales. Further, the implementation of digital menu board and menu board canopies is in the company’s developmental plans.

Increased Focus on Franchising Boosts Earnings

Jack in the Box restaurants are currently 94% franchised and the company plans to close its refranchising initiative, with the sale of another restaurant in the fourth quarter of fiscal 2018. We believe franchising a large chunk of its system will lower its general and administrative expenses and thereby boost earnings. Moreover, in the long term, it would generate a higher return on equity by lowering capital requirements.

Notably, the company believes that the majority of Jack in the Box’s new unit growth will be through franchise restaurants. In fact, in the third quarter of fiscal 2018, the company refranchised 42 units, bringing the year-to-date number to 127.

Concerns

Jack in the Box operates in the retail restaurant space that is highly competitive. American dining brands are keen on expanding in the fast-growing emerging markets. While several other restaurateurs, including Yum! Brands (YUM - Free Report) , McDonald’s (MCD - Free Report) and Domino’s (DPZ - Free Report) , have opened their outlets in the emerging markets; Jack in the Box seems to be slow on this front. Thus, limited international presence might be a big disadvantage for the company and hurt its competitive position.

Meanwhile, the company has been under pressure from nationwide wage increases, which is negatively impacting its operational results. Also, costs related to marketing initiatives, unit expansion and opening catering call centers are expected to keep profits under pressure.

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.

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