Jack in the Box Inc.JACK has been grappling with declining sales for quite some time. Despite economic growth, consumers increased their spending only modestly on dining out, which resulted in low consumption and decreased demand in the U.S. restaurant space.
The company's shares have lost 2% in the last six months as against the industry 's gain of 4.3%.
Over the last 60 days, the Zacks Consensus Estimate for the bottom line has moved down 10.6% and 7.8% for the first quarter of fiscal 2018 and full year 2018, respectively. This reflects bearish analyst sentiments.
Declining Sales Pose Concern
The U.S. restaurant space has not been too enticing for investors over the past few quarters as continued softness in consumer spending on dining out has dented sales. Resultantly, comps growth has been weak. Foot traffic also declined lowering profits at many restaurants. Resultantly, Jack in the Box's sales are under pressure.
The company recorded total revenues of $1.55 billion in fiscal 2017 as compared with $1.6 billion in fiscal 2016. Moreover, comps at the company-owned stores were down 1.1% in fiscal 2017, comparing unfavorably with the prior-year's flat comps. Comps at company-owned Qdoba restaurants were down 3%, comparing unfavorably with the prior-year rise of 1.7%.
We note that the consensus estimate for fiscal 2018 revenues is pegged at $1.3 billion, reflecting a 14.9% year-over-year decline.
Sales Deleverage & Other Expenses
Notably, persistent decline in comps has dented Jack in the Box's sales. Capital expenditure has also been high. Moreover, rise in labor wages and commodity inflation are also adding to the woes. This has reduced the company's restaurant operating margin by 210 basis points (bps) in fiscal 2017.
In order to drive margins, the company plans on shifting to a less capital-intensive business model and focus more on core operations to pay off debt under term loan. Toward this end, Jack in the Box recently sold its Qdoba subsidiary to a private equity firm. The company believes that the sale will help strengthen liquidity.
However, sales deleverage from negative comps are expected to weigh on profits.
Refranchising Yet to Pay Off
In order to drive margins, the company's Jack in the Box brand has been refranchising company-owned restaurants for quite some time now. Jack in the Box restaurants are currently 88% franchised, which the company plans to increase to around 95%. The company believes that the refranchising will considerably lower the general and administrative expenses and in turn boost earnings. Moreover, over the long term, such measures will generate a higher return on equity (ROE) by lowering capital requirements. This will also boost free cash flow, thereby enhancing shareholders' return.
However, contrary to the desirable effects of refranchising, we note that the company's trailing 12-month ROE is -30.5% as against the industry's 6.9%. This reflects management's inability to reinvest shareholder's money effectively.
Limited International Presence, Stiff Competition
American dining brands are keen on expanding in the fast-growing emerging markets. While several other restaurateurs including Yum! Brands, Inc. YUM , McDonalds Corporation MCD and Domino's Pizza, Inc. DPZ have opened outlets in emerging markets; Jack in the Box seems to be slow on this front. Thus, limited international presence might be a big drag for the company and hurt its competitive position. Moreover, the company is experiencing increased competitive pressure in breakfast and lunch day parts as many other restaurateurs have introduced aggressive value offers.
To conclude, we believe that a Zacks Rank #5 (Strong Sell) and the above reasons underscore the fact why you should steer clear of Jack in the Box.
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