CONCLUSION: JACK stock is reasonably priced statistically, but the Company is operating in a very competitive segment. Its unit growth has been unimpressive in recent years for the simple reason that the return on investment for newly built locations in today’s real estate environment is not high enough to encourage franchisees. The chain is here to stay, especially with its strong geographical presence in California and Texas, but most of the financial levers (re-franchising, balance sheet leverage, stock buybacks) are already utilized to create value for shareholders. We have difficulty picturing a catalyst, from an operational standpoint, that could ignite the fundamentals and improve the franchisee or the investor attitude toward Jack In the Box. However, a significant development that could provide great comfort to all stakeholders would be recruitment of a replacement for Leonard Comma with an outstanding reputation. No doubt the Board of Directors will do their best in this regard and, on that basis, the reward/risk relationship becomes interesting at this point.
THE COMPANY: Jack in the Box operates and franchises 2,243 Jack in the Box QSR restaurants with corporate headquarters based in San Diego, CA and originating in 1951. Jack’s top ten markets, located principally in California and Texas, comprise approximately 70% of their total system. Noteworthy also is that Jack in the Box is at least the second largest QSR burger chain in eight of these ten markets. As of September 29, 2019, the Jack in the Box system included 2,243 restaurants in 21 states and Guam and 137 are Company operated. Jack in the Box initiated its re-franchising program over five years ago and as of September 29, 2019 they have increased franchise ownership to 94% from 81% in 2014. There has been periodic interest from activist investors over the years, less so recently as Qdoba has been sold (in March, 2018), most of the re-franchising has been completed, and the balance sheet is already levered to 4.7 times trailing EBITDA. In recent news, Lenny Comma, with JACK for 15 years and CEO since 2014, turned in his resignation on December 11, 2019. His resignation is in the wake of well publicized tension between corporate and the franchise community, and a search for a new CEO has begun.
UNIT LEVEL ECONOMICS COMMENTARY: The AUV at Company stores rose 5.7% in fiscal 2019 and was primarily driven by the decrease in the average number of Company restaurants which was a combination of the re-franchising initiative of 135 locations and to a lesser extent a decrease in traffic. The AUV for franchise stores rose less than 1 basis point in fiscal 2019. Cost of Goods Sold at company stores increased in 2019 by 20 basis points primarily due to the shift in product mix and higher ingredient costs. This was partially offset by menu price increases. Labor and Related Expenses increased 90 basis points in 2019 due primarily to higher average wages. Occupancy and Other Related Costs decreased in 2019 by 100 basis points primarily driven by the decrease in the number of locations from re-franchising and the subsequent reduction in maintenance and repair expenses. Store Level EBITDA decreased 10 basis points primarily as a result of the increase in Labor and COGS but offset to some degree by the lower Occupancy and Other Related Expense of 100 basis points.
DEVELOPMENT COMMENTARY: During Fiscal 2019 the Company did not have any unit development activity. However, the franchisees opened 19 new locations and closed 13 under performing units for a net new store growth of 6 restaurants.
SAME STORE SALES COMMENTARY: Jack in the Box same store sales increased 1.3% in 2019 driven by menu price increases and a favorable shift in product mix that offset the decrease in traffic.
Fourth quarter same store sales were the best in four years, up 3.5% driven by average check growth of 2.8% and transaction growth of 0.7%. Diluted EPS from continued operations (GAAP) was $0.86 vs $0.68 for the quarter, $3.52 vs. $3.62 for the year. Non-GAAP Operated EPS was $0.95 vs. $0.77 for Q4, $4.35 vs. $3.79 for the year. Adjusted EBITDA (non-GAAP) was $66.9M in Q4, vs. 54.0 in ’18, $269M for the year, vs. $264M in ’18. Restaurant level margin (EBITDA) at company stores was down 190 bp in Q4 to 24.2%, as a result of wage and commodity inflation (4.4% in Q4), partially offset by menu price increases. The Company reports “Franchise Level Margin” as a percent of franchise revenues, which was relatively flat at 41.1% vs. 41.3% in ’18. The company repurchased about 1.4M shares in Q4 at an average price of $87.33 and purchased another 0.7M shares as of 11/20/19. An additional $100M had been authorized on 11/15.
Guidance has been provided for the year ending 9/27/20, calling for systemwide same store sales of 1.5-3.0%, restaurant level EBITDA margin of about 25.0% with commodity inflation of about 4% and high single digit wage inflation. SG&A will be 8-8.5% of revenues and 1.7-1.9% of systemwide sales. There are expected to be 25-35 new franchised locations.
Management emphasized on the conference call their focus on the “guest experience”. Involved in this effort is faster drive thru service, new digital menu boards, designated parking for pickup and delivery. Better “value bundles”, snacks and side items are helping sales and will continue to evolve. The breakfast daypart continues to be an important focus and delivery service is available at 90% of the system through various providers. Guidance for EBITDA in fiscal 2022 is about $300M, up about 9-10% from Adjusted EBITDA of $265-275M in the current year.
It should be noted that Leonard Comma’s retirement was announced in early December, just weeks after the conference call on 11/21. A CEO search has begun and Comma’s departure date is not established.
CONCLUSION: Provided at the beginning of this article