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Jack in the Box's Solid Growth Efforts & Comps Trend Bode Well

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The year 2019 has turned out to be an encouraging one for the Restaurant industry. Year to date, the industry has rallied 30.5% compared with the S&P 500’s 15.8% increase. Meanwhile, Jack in the Box Inc. (JACK - Free Report) , which belongs to the same industry, has gained only 12% so far this year. However, the stock might take a U-turn as it reported better-than-expected third-quarter 2019 results. Let’s delve deeper.

Factors Likely to Drive Growth

Jack in the Box is the nation’s one of the largest hamburger chains. The company makes regular menu innovations and provides limited period offers (LPO) at both its flagship restaurants to boost 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 at present, the company is witnessing comps growth. As a result, system-wide same-store sales improved 2.7% in the last reported quarter — its highest level since first-quarter fiscal 2017.

Additionally, the company is on track to achieve same-store sales growth for the ninth straight year. The company’s same-store sales so far for fourth-quarter fiscal 2019 are quite impressive. For fiscal 2019, comps at Jack in the Box’s system restaurants are envisioned to improve at least 1% compared with the prior guided range of flat to up 1%.

In fact, the third quarter of fiscal 2019 witnessed solid transactions in almost four years. Although it has been offering value by bundling products, Jack in the Box plans to value price single menu items to compete more effectively going forward. For fiscal 2019, more than 80% of the company’s marketing calendar will feature value-priced promotions.

This Zacks Rank #3 (Hold) company is also increasingly focusing on delivery channels, which are lucrative for the industry. Given the high demand for this service, the company has undertaken third-party delivery channels to bolster transactions and sales. At the end of third-quarter fiscal 2019, more than 90% of Jack in the Box’s system was served by at least one delivery service. The company also partnered with DoorDash, Postmates and Grubhub. Recently, it collaborated with Uber Eats. DoorDash delivery continued to generate an incremental lift in sales.

Currently, the company is expanding its mobile application in a few markets that support order-ahead functionality and payment. Management is reaping benefits in terms of higher ticket from mobile orders.

Concerns

Margin, an important financial metric that gives an indication about the company’s health, decelerated in third-quarter fiscal 2019. Restaurant-level adjusted margin contracted 50 bps to 27% in the third quarter from the year-ago quarter. The downside can primarily be attributed to wage and commodity inflation, which benefits from refranchising and decline in maintenance and repair expenses. Further, food and packaging costs increased 90 basis points owing to higher ingredient costs.

Key Picks

Some better-ranked stocks worth considering in the same space include Starbucks Corporation (SBUX - Free Report) , Dunkin' Brands Group, Inc. (DNKN - Free Report) and McDonald's Corporation (MCD - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Starbucks, Dunkin' Brands Group and McDonald's have an impressive long-term earnings growth rate of 12.8%, 10.9% and 8.7%, respectively.

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