Jack in the Box Inc. JACK is likely to benefit from its unit expansion efforts, reimaging program and Del Taco Restaurants’ business. Also, the emphasis on digital initiatives bodes well. However, commodity and labor inflation pose concerns.
Let us discuss the factors that highlight why investors should retain the stock for the time being.
Jack in the Box focuses on repairing its franchisee relationship, mapping markets and rebuilding its store pipeline to drive growth. During fourth-quarter fiscal 2021, the company mentioned expansion plans with the involvement of veteran multi-unit franchisees like David Beshay (one of the brand’s largest operators). The franchisee expects to open at least 30 additional locations within the next five to eight years. In fiscal 2022, the company awarded 68 development agreements to open 267 new restaurants, of which 22 have already opened and 245 are in the pipeline for future development. The company also announced the addition of the Salt Lake City and Louisville markets. Given the substantial progress in terms of the franchise development program, the company anticipates achieving a long-term net unit growth goal of 4% by 2025.
Emphasis on the reimaging program bodes well. During the fiscal fourth quarter, the company stated that franchise owners submitted 366 reimaged forms and that 13 have been approved to begin construction. During the quarter, the company reported traffic-led sales gains at reimage locations. With solid participation from its franchisees, the company anticipates the program to be a driving factor of sales in the upcoming periods.
The company emphasizes on the Del Taco Restaurants acquisition to drive growth. During the fiscal fourth quarter, the company stated to have benefitted from the execution of the barbell menu strategy, highlighted by the 20 Under $2 value platform, focus on signature Del Taco and the launch of Epic Tortas. Also, the company reported strength in beverage sales backed by the increased level of combo meal offerings. During fourth-quarter fiscal 2022, same-store sales rose 5.2%, comprising franchise same-store sales growth of 6.4% and company-operated same-store sales growth of 4.1%. Going forward, the company anticipates the momentum to continue in the upcoming periods. For fiscal 2023, the company anticipates Del Taco Restaurant Level Margin to be in the range of 14-16%.
Jack in the Box is focused on its digital platforms for enhancing overall guest experiences and customer satisfaction. During the fiscal fourth quarter, the company stated benefits from the digital-focused business, courtesy of its growing loyalty platform, newly updated e-commerce app and new mobile website. In fiscal 2022, the company’s digital sales increased 32% year over year, with contributions of more than $500 million from Jack and Del Taco digital. Going forward, the company continues to integrate its POS systems with third-party vendors to enhance restaurant operations. Also, it emphasized on technological investments covering applications, software and tools (like digital menu boards), AI and personalized in-store ordering. The company anticipates the enhanced operational capabilities to drive guest experience and higher store level margins in the upcoming periods.
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Shares of Jack in the Box have declined 12.1% in the past year compared with the industry’s 2% fall. The downside was mainly driven by double-digit commodity and labor inflation, aggressive competition around promotions and value and a challenging staffing environment. Although the company reopened most of its restaurants, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.
The company is persistently shouldering higher expenses, which have been detrimental to margins. During the fiscal fourth quarter, restaurant-level adjusted margin came in at 16.2% compared with 20.1% reported in the prior-year quarter. The downside was driven by higher food and packaging costs, wage inflation of 11.3% and higher utilities and maintenance and repair costs. However, this was partially offset by menu price increases. Food and packaging costs (as a percentage of company restaurant sales) fell 10 bps year over year to 30.9%. Commodity costs during the quarter increased 14.9% year over year. The upside can be attributed to a rise in the price of proteins, sauces and oil. The company stated concerns of a challenging inflationary environment in 2023.
Zacks Rank & Key Picks
Jack in the Box currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Retail – Restaurants industry are Wingstop Inc. WING, Chuy's Holdings, Inc. CHUY and Chipotle Mexican Grill, Inc. CMG.
Wingstop sports a Zacks Rank #1. WING has a long-term earnings growth rate of 11%. Shares of WING have declined 3.5% in the past year.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the comparable year-ago period’s levels.
Chuy’s Holdings currently carries a Zacks Rank #2 (Buy). CHUY has a trailing four-quarter earnings surprise of 18.6%, on average. Shares of CHUY have increased 6.7% in the past year.
The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 8.6% and 11.7%, respectively, from the corresponding year-ago period’s levels.
Chipotle currently carries a Zacks Rank #2. CMG has a trailing four-quarter earnings surprise of 4.1%, on average. The stock has declined 5.5% in the past year.
The Zacks Consensus Estimate for Chipotle’s 2022 sales and EPS suggests growth of 15.1% and 31%, respectively, from the corresponding year-ago period’s levels.
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