Jack in the Box Inc. (JACK) has recently posted fourth quarter 2011 earnings of 49 cents per share, which surpassed the Zacks Consensus Estimate of 41 cents and improved from the year-ago earnings of 7 cents. In fiscal 2011, the company recorded full-year earnings of $1.61 versus $1.26 in the year-earlier period.
In the comparable period of last year, Jack in the Box shut down 40 company-operated units that resulted in a pre-tax charge $28.0 million. This in turn, diluted the earnings by 33 cents in both the fourth quarter and fiscal 2010.
Quarter Performance
During the quarter, total revenue fell 10.5% year over year to $504.2 million. However, total revenue came ahead of the Zacks Consensus Estimate of 492.0 million. The revenue declined as restaurant sales plunged 24.4% to $296.1 million. Distribution revenue and franchised restaurant revenue increased 26.3% to $137.2 million and 13.1% to $70.9 million, respectively. For full-fiscal 2011, total revenue declined 4.5% year over year to $2,193.3 million.
Comparable-store sales (comps) at Jack in the Box increased 3.1% in the fourth quarter of 2011, driven by a 5.8% upside at company-owned restaurants and a 2.0% rise at franchised restaurants. Comps saw an improvement from a decline of 3.3% in the year-ago quarter. This was the fifth consecutive quarter of sequentially improving comps at company-owned units. Higher customer visitation resulting from the company’s continued focus on efficiency, including menu improvement as well as a re-imaging program can be attributed to this growth.
However, comps at Qdoba’s restaurant registered a decelerating trend with an increase of 3.7% as against 5.6% witnessed in the year-ago quarter. Company-owned Qdoba comps were up 4.3% while franchised units increased 3.3%.
Jack in the Box’s restaurant operating margin spiked 100 basis points (bps) to 13.5% driven by lower Payroll and employee benefit costs (down 110 bps), occupancy and other costs (down 180 bps) as well as selling, general and administrative expense (down 40 bps). However, higher food and packaging costs (up 190 bps), unemployment taxes resulting from rate increases in several states and rent expense resulting from the greater proportion of company-operated Qdoba restaurants compared with last year partially offset the gain.
Cost inflation was noticed for most commodities other than poultry, resulting in a 7% rise in overall commodity cost structure in the quarter.
Store Update
During fiscal 2011, the company opened 15 new company-owned and 16 franchised Jack in the Box restaurants. The company also refranchised 332 restaurants and closed 16 units among which 10 were company operated. With the sale of 332 restaurants in fiscal 2011, the Jack in the Box system became 72% franchised.
The company also closed 9 Qdoba franchised restaurants during the quarter and opened 67 Qdoba restaurants, of which 42 were franchised.
Financial Position
At quarter end, Jack in the Box had cash and cash equivalents of $11.4 million and long-term debt of $447.4 million.
During the quarter, Jack in the Box repurchased shares worth $2.64 million, at an average price of $20.42 per share. In October 2011, the company completed the repurchase of the remaining $6.4 million authorized by its board of directors in May 2011. In November 2011, the company once again authorized a $100-million buyback program, which expires in November 2013.
Guidance
For the first quarter of 2012, the company expects same-store sales at Jack in the Box restaurants and Qboda restaurants to increase in the bands of 4%–5% and 2%–3%, respectively.
For fiscal 2012, the company forecasts same-store sales growth of 2% to 4% at Jack in the Box restaurants and 3% to 5% at Qdoba restaurants. Overall commodity costs are expected to increase 5% for 2012 with higher inflation in the first half of the fiscal year. Earnings per share are estimated in the range of $1.10 and $1.43.
The company plans to open 25 to 30 new Jack in the Box restaurants and 70 to 90 new Qdoba outlets in 2012.
Our Take
San Diego-based Jack in the Box is grappling with its ongoing restructuring program and rising cost inflation. The company’s earnings performed well in 2011, but this came on the back of a higher gain (78 cents) from refranchising activity compared with the last year (65 cents). We remain concerned on the sales front as the total revenue number continues to lag. Additionally, management anticipates lower year-over-year gains from refranchising (20 to 30 cents) in 2012.
Jack in the Box is resorting to various measures like unit growth, closure of underperforming outlets, restaurant reimaging and most importantly a refranchising program to bring about stability to its adjusted earnings. Within the next couple of years, its system will become 80% franchised.
However, we believe that the company’s upside potential will be fully realized once all its growth initiatives are completed and start to pay off. Till then, we prefer to remain on the sidelines. Jack in the Box, which competes with the likes of Dominos Pizza Inc. (DPZ) and Kona Grill Inc. (KONA), currently retains a Zacks #4 Rank that translates into a short-term Sell rating. We are also maintaining our long-term Underperform recommendation on the stock.
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