Jack in the Box Inc. (JACK, Financial) recently declared third quarter results and is poised to grow with fatter dividend and increased traffic. It is raking in higher sales and perceptions have changed in the way people eat out now. This stock has plenty of opportunities. It is one of the best performers in the restaurant industry.
Jack in the Box restaurants are listed among the largest hamburger chains, with more than 2,200 restaurants in 21 states and Guam. JACK also franchises in Qdoba Mexican Grill. Qdoba Mexican Grill (a leader in the casual dining industry), which was acquired by Jack in the Box Inc. in January 2003, is a leader in fast-casual dining – with more than 600 restaurants in 47 states as well as the District of Columbia and Canada.
As the first major hamburger chain to develop and expand the concept of drive-through dining, Jack in the Box has always emphasized on-the-go convenience, with approximately 85% of the half-billion guests served annually buying food at the drive-through or for take-out. In addition to drive-through windows, most restaurants have indoor dining areas and are open 18-24 hours a day.
Third quarter result
Earnings from continuing operations were $28.4 million, or 75 cents per diluted share, during the third quarter ($26.1 million or 64 cents per diluted share during the prior year quarter)
Operating earnings per share, a non-GAAP measure, were 76 cents during the third quarter of fiscal 2015 (which was 65 cents in the prior year quarter).
Jack in the Box system same-store sales increased by 7.3% for the quarter, and company same-store sales increased by 5.5%.
Qdoba same-store sales increased 7.7% systemwide and 6.6% for company restaurants in the third quarter.
Consolidated restaurant operating margin increased by 270 basis points and was 21.8% of sales in the third quarter of 2015 (19.1% of sales during the prior year quarter).
Restaurant operating margin for Jack in the Box company restaurants increased 360 basis points to 22% of sales. The improvement was due primarily to sales leverage, lower food and packaging costs, and the benefit of refranchising, which were partially offset by the impact of the increase in the California minimum wage in July 2014.
Restaurant operating margin for Qdoba company restaurants increased 80 basis points to 21.4% of sales.
Franchise costs as a percentage of franchise revenues improved to 47.9% in the third quarter (50.6% in the prior year quarter).
SG&A expense for the third quarter increased by $3.6 million and was 14.2% of revenues (13.6% in the prior year quarter).
Impairment and other charges, net, increased by $2.1 million in the third quarter due primarily to a $2.2 million (or approximately 3½ cents per diluted share) charge relating to the replacement of beverage equipment.
The tax rate for the third quarter increased to 38.2% (33.8% in the prior year quarter).
In the third quarter of 2013, following the completion of the company’s previously disclosed review of market performance for its Qdoba brand, 62 company-operated Qdoba restaurants were closed, and the results of operations, impairment charges, lease obligations and other exit costs for these restaurants are included in discontinued operations in the accompanying consolidated statements of earnings for all periods presented. Discontinued operations for the third quarter of fiscal 2015 include after-tax charges related to the Qdoba restaurant closures of approximately 4 cents per diluted share, as compared to 3 cents for the third quarter of fiscal 2014.
Capital allocation
The company repurchased approximately 862,000 shares of its common stock in the third quarter of 2015 at an average price of $86.98 per share for an aggregate cost of $75.0 million. Year-to-date through the third quarter, the company repurchased approximately 2,946,000 shares at an average price of $85.38 per share, for an aggregate cost of $251.6 million. This leaves $65.5 million remaining under a $100 million stock-buyback program authorized by the company’s board of directors in May 2015, which expires in November 2016.
Dividend
The company declared a quarterly cash dividend of 30 cents per share on the company’s common stock.
Fourth-quarter guidance
- Same-store sales increase of approximately 3.5% to 5.5 % at Jack in the Box company restaurants.
- Same-store sales increase of approximately 5.0% to 7% at Qdoba company restaurants.
Fiscal year 2015 guidance
- Same-store sales increase of approximately 5.0% to 5.5% at Jack in the Box company restaurants.
- Same-store sales increase of approximately 8.0% to 8.5% at Qdoba company restaurants.
- Commodity cost inflation to be around 1.5% to 2.0% for the full year.
- Consolidated restaurant operating margin to be around 20%.
- SG&A as a percentage of revenue to be around 14%.
- Impairment and other charges as a percentage of revenue of approximately 90 basis points, excluding restructuring charges.
- Approximately 15 to 20 new Jack in the Box restaurants opening systemwide.
- Approximately 40 to 45 new Qdoba restaurants, of which approximately 15 to 20 are expected to be company locations.
- Capex to be around $90 million to $100 million.
- Tax rate of approximately 37.0% to 37.5%.
(Source: Company's Web site)
Emphasis
The company is currently concentrating on the following:
- Driving same-store sales
- Improving restaurant margins
- Growing both the brands
- Returning capital to shareholders
Positive attributes
- Consumer research-driven brands
- Growing free cash flows
- Two strong brands with high AUVs, margins and returns
- Catalysts in place to drive same-store sales
- Annuity-like cash flows from rental income streams and royalty
Share repurchase program
On Sept. 21, the company announced that its board of directors has authorized an additional $200 million stock buyback program commencing in fiscal year 2016 and expiring in November 2017. Over the last five years, JACK demonstrated its commitment to returning growing free cash flow to shareholders through the purchase of $1 billion in stock and the initiation of a dividend in 2014.
A peek into the restaurant industry
Eating out has become a fashion now and perceptions have changed. There is a constant rise in the disposable income of people around the world, and eating out is comforting, too. There is an improvement in the economy.
According to reports, the U.S. economy surged by 5% in the third quarter of 2014 (since 2003, this was the strongest three-month period). Consumer behavior has changed and so the restaurants have come up with different marketing strategies – loyalty programs, ordering, etc. According to a market research firm NPD Group, restaurant traffic will increase 1% in 2015, an improvement over a flat 2014 guest count.
As per a report submitted by National Research Association, restaurant industry will reach some landmark numbers in 2015 – more than $709 billion in sales, one million locations and 14 million employees.
On a concluding note
It pioneered a number of firsts in the quick-serve industry, including menu items that are now staples on most fast-food menu boards, like the breakfast sandwich and portable salads. Today, Jack in the Box offers a selection of distinctive, innovative products targeted at the fast-food consumer, including hamburgers, specialty sandwiches, salads and real ice cream shakes. Hamburgers represent the core of the menu, including the signature jumbo Jack, sourdough Jack, ultimate cheeseburger and the 100% sirloin burger. Because value is important to fast-food customers, the company also offers value-priced products on “Jack’s Value Menu,” including tacos, chicken nuggets, a chicken sandwich and the breakfast Jack.
In addition to offering high-quality products, Jack in the Box recognizes that an increasing number of quick-serve customers also want the ability to customize their meals. Whether that means forgoing the bun and sauce in favor of a low-carb burger, or substituting ingredients to create the exact mix of flavors to suit an individual's personal tastes, customers have that flexibility at Jack in the Box.
This San Diego-based company has two of the strong brands with high margins and returns. Qdoba is the second-largest fast-casual Mexican concept. Jack in the Box is the second-largest QSR (Quick Service Restaurant) burger chain in most of its major markets.
JACK is a popular name in the restaurant industry and is growing fast. It has distinguished itself from its peers and has been able to carve a niche for itself. It is making continuous efforts to reposition itself in this fast-food industry. It is expected to create shareholder returns. Investors may consider adding this restaurant stock to their portfolio.
