Jack in the Box Inc. 's JACK increased focus on franchising, menu and delivery innovation as well as other sales-building initiatives is likely to drive growth. However, escalating costs act as a constant drag.
Franchising to Drive Earnings
Jack in the Box, one of the largest hamburger chains, believes that majority of its new unit growth will be driven by franchise restaurants. In the third quarter of fiscal 2018, the company refranchised 42 units, reaching the year-to-date number to 127, which shows 94% franchised restaurants.
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, over the long haul, it would generate a higher return on equity by lowering capital requirements.
In fact, the company's earnings grew 26.6% on a year-over-year basis in the third quarter of 2018. Consolidated restaurant operating margin was 23.9%, up 460 basis points (bps) year over year. Restaurant-level EBITDA rose 430 bps from the year-ago quarter to 27.5% on benefits from refranchising, partially offset by wage inflation as well as higher repairs and maintenance costs. The company also sold its Qdoba brand this March to reduce general and administrative expenses.
Menu Innovation in Focus
Jack in the Box constantly innovates the menu and provides limited period offers (LPO) at its flagship restaurants to drive customer loyalty. With the current focus on premium products like Buttery Jack Burgers, sauced & Loaded Fries, munchie mash-ups and teriyaki bowls, the company is seeing considerable comps growth. Reflective of this, in the fiscal third quarter, comps grew 0.6%.
The company is also increasingly focusing on third-party delivery channels to boost sales. Currently, three-fourths of its restaurant system is served by major delivery companies like DoorDash, Postmates and Grubhub. 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 line with the company's developmental plans.
Jack in the Box operates in the highly competitive retail restaurant space. While leading American restaurateurs like Yum! Brands YUM , McDonald's MCD and Domino's DPZ are continuously expanding in the fast-growing emerging markets, Jack in the Box seems to be slow on this front. Thus, limited international presence might 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.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportJack In The Box Inc. (JACK): Free Stock Analysis ReportMcDonald's Corporation (MCD): Free Stock Analysis ReportDomino's Pizza Inc (DPZ): Free Stock Analysis ReportYum! Brands, Inc. (YUM): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research