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Jack in the Box Inc. (JACK) posted second quarter 2011 earnings of 13 cents per share, below the Zacks Consensus Estimate of 22 cents as well as the year-ago quarter earnings of 21 cents. Quarterly results included a gain of 1 cent per share from the sale of 26 restaurants to franchisees; however, excluding the gain, earnings stood at 12 cents per share in the quarter.

Quarter Performance

During the quarter, total revenue of the company slipped 4.6% to $505.1 million from $529.7 million reported in the prior-year quarter. However, the company outperformed the Zacks Consensus Estimate of $481.0 million.

The revenue declined as restaurant sales plunged 17.3% to $321.2 million mainly due to the company’s strategy of selling company-owned restaurants to franchisees. However, distribution revenue and franchised restaurant revenue increased 33.7% to $121.4 million and 23.5% to $62.5 million, respectively.

Jack in the Box same-store sales inched up 0.1%, driven by a 0.8% upside at company-owned restaurants, partially offset by a 0.3% dip at franchised restaurants. Despite adverse weather conditions in the first four-week period of the reported quarter, comps remained positive attributed to higher customer visitation arising from the company continued focus on efficiency including improving the quality of food and service. Additionally, to enhance the guest’s dining experience, the company plans to complete its restaurant re-imaging program by 2011. Moreover, same-store sales at Qdoba’s restaurant were up 6.0%, driven by transaction growth and higher catering sales.

Jack in the Box’s restaurant operating margin plummeted 290 basis points (bps) to 12.3%. The margin contraction was attributable to higher food and packaging costs (up 190 bps), payroll and employee benefit costs (up 30 bps) and occupancy and other costs (up 70 bps).  

Store Update

During the quarter, the company opened 2 new company-owned and 6 franchised Jack in the Box restaurants. The company also opened 10 Qdoba restaurants, of which 5 were franchised.

Financial Position

As of April 17, 2011, Jack in the Box had cash and cash equivalents of $14.7 million and long-term debt of $38.7 million compared with $10.6 million of cash and cash equivalents and $352.6 million of long-term debt at the end of October 3, 2010.

During the quarter, Jack in the Box repurchased shares worth $1.1 million, at an average price of $22.23. The company currently has $25 million remaining under its existing $100 million share repurchase program. In May 2011, the board approved an additional $100 million buy back program, which expires in November 2012.

Outlook

For the third quarter of 2011, the company expects same-store sales at Jack in the Box restaurants and Qboda restaurants to increase in the range of 2%–4% and 4%–6%, respectively. The company also anticipates a cost inflation of 6% to 7%.

For fiscal 2011, the company forecasts same-store sales to grow 1% to 3% at Jack in the Box restaurants and 4% to 6% at Qdoba restaurants. Earnings per share are estimated in the range of $1.40 and $1.65. The Zacks Consensus Estimates for fiscal 2011 is pegged at $1.60 per share.

The company plans to open 30 to 35 new Jack in the Box restaurants and 60 to 70 new Qdoba outlets in 2011. The company expects to incur capital expenditure of $125 million to $135 million.

Jack in the Box also remains on track to achieve its long-term goal of increasing its percentage of franchise ownership to 70% to 80% by the end of fiscal 2013.

Our Take

The company continues to struggle as revenues slipped and cost inflation continues. Thus, we expect estimates to go down in the coming days. 

One of Jack in the Box’s primary competitors, Buffalo Wild Wings Inc. (BWLD), posted first quarter 2011 earnings of 81 cents per share exceeding the Zacks Consensus Estimate of 73 cents on the back of higher same-store sales growth and lower wing costs.

San Diego-based Jack in the Box is a restaurant company that operates and franchises more than 2,200 Jack in the Box quick-service restaurants across 19 states. The company, through a wholly-owned subsidiary, also operates and franchises Qdoba Mexican Grill fast-casual dining chain, with more than 500 restaurants in 43 states including the District of Columbia.

 
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