JACK
Jack in the Box Inc. JACK is likely to benefit from franchise developments, digital initiatives and menu innovation. Also, its focus on the CRAVED reimage program bodes well. However, dismal comps and wage inflation are a concern. Let us discuss the factors that highlight why investors should retain the stock now.
Growth Catalysts
JACK continues to collaborate with its franchisees and leverage guest insights to ensure value remains a competitive advantage for both brands. During second-quarter fiscal 2024, JACK announced its inaugural restaurant in Mexico and reported solid performance regarding the same. The success of the initial opening sparked interest from other operators across the country. The trailing 12-month Average Unit Volume (AUV) for all new market restaurants, including those in Mexico, averaged nearly $100 million in weekly sales. It intends to launch its second restaurant in Mexico in June, 2024.
In line with the goal of increasing Average Unit Volumes (AUVs), the company initiated a new CRAVED reimage and refresh program to their franchise system, along with a $50-million commitment to support it. The response from franchisees has been highly positive, with requests submitted to remodel more than 500 restaurants. Given the strong performance of newly remodeled restaurants, the company is optimistic and anticipates the initiative to boost same-store sales in the upcoming periods.
Efforts to maximize unit economics and reduce build costs are crucial in achieving the goal of a sub-five-year payback and achieving net unit growth of more than 2%. The design and construction teams are actively finding ways to optimize the CRAVED prototype and have made substantial progress in meeting build cost targets for its brands. Although realizing the new restaurant payback objectives will take time, there is a clear strategy in place. On the development front, 88 restaurants are in various stages of design, permitting and construction. This aligns with the company’s gross-opening expectations for both brands throughout 2024.
Jack in the Box focuses on menu innovation to drive growth. During the fiscal second quarter, the company stated benefits from the Smashed Jack burger. It reported a high single-digit mix and increased the average check by 200 basis points. The product resonated well with premium guests, receiving exceptional consumer scores. It plans to innovate further with new builds using the popular burger patty.
The company emphasizes simplifying its operations through equipment, technology and process enhancements. During the fiscal second quarter, JACK registered significant progress related to the expansion of three-in-one toaster cheese pumps and Hydro-Rents machines. The company anticipates the initiatives to reduce complexity and improve efficiencies with the capability of 30% annual savings. It expects the initiatives to support the long-term goal of 15% EBITDA for franchise restaurants and a payback period of under five years for new restaurants.
Concerns
In the past six months, Jack in the Box’s shares have declined 21.7% compared with the industry’s 2% fall. Dismal comps, along with wage and utility inflation, caused the downside.
During the fiscal second quarter, comps at Jack in the Box’s stores fell 0.6% year over year against 10.6% growth reported in the prior-year quarter. Systemwide same-store sales fell 2.5% year over year against 9.5% growth reported in the year-ago quarter. Reduced transactions, an unfavorable mix shift and a delay in the Smashed Jack launch caused the downside.
The company has been bearing the brunt of high expenses for some time. During second-quarter, Del Taco restaurant level margin contracted 50 basis points (bps) year over year to 16.8%, due to increased labor, utilities and technology support costs. Labor (as a percentage of sales) in the reporting quarter increased by 140 bps year over year to 34.9%, mainly due to wage inflation, amounting to approximately 4.7% in the quarter. Occupancy and other operating expenses rose by 110 bps year over year to 22.8%, primarily driven by higher utility and technological costs. The company anticipates the inflationary pressures to continue for some time.
Zacks Rank & Key Picks
Jack in the Box currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
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