With Jack in the Box, Sell Into the Pop
After the close Wednesday, Jack in the Box (JACK) - Get Report reported better-than-expected second-quarter results and the stock soared almost 11% in premarket trading Thursday.
Last week I thought the company was having trouble competing with Chipotle (CMG) - Get Report , since Jack in the Box's Qdoba brand had been posting disappointing same store sales. In fact, on the first-quarter conference call, management said sales during the first four weeks of the second quarter were lower than anticipated.
But Wednesday, that all changed. Total companywide same store sales jumped 3.7%, driven by an increase in transactions as well as growth in catering. Recall, last quarter, Jack in the Box burned investors with a disappointing comp.
Same-store sales from Jack in the Box branded stores, or JITB, were flat as compared to an increase of 8.9% last year. Companywide comps at Qdoba rose 2.1%.
The company posted adjusted earnings of 85 cents, 15 cents ahead of the Wall Street consensus estimate. Revenue rose 0.9% to $361.1 million vs. the $360.2 million estimate. The better-than-expected earnings mostly came from a lower tax rate and lower expenses. Selling, general and administrative expenses fell 170 basis points to 13% of sales. The tax rate fell 120 basis points to 36.7%.
Operating margins decreased 70 basis points to 19.9% and restaurant operating margin fell 70 points to 20.7% of sales. Higher wages and higher costs related to equipment upgrades were partially offset by favorable costs for food and packaging.
For the third quarter, the company expects same-store sales at Jack in the Box company locations to be down 2% to flat, with the low end of the guidance reflecting the heavy rainfall and flooding in Houston, where 17% of its storefronts are located.
Same-store sales from Qdoba company locations are expected to be down 1% to up 1%.
Despite the good quarter, I still don't think Jack in the Box can continue to pop.
Most of the quarter was filled with one-time items, like a lower tax rate, that are unlikely to be repeated. And the company really hasn't been able to generate sustainable increases in same-store sales. Last year, Qdoba was putting up mid- to high-single-digit same-store figures, but now comps hover between up 1% and down 1%. That's not enough to drive the stock. Third, management really hasn't been able to turn around JITB. The chain revamped the menu and gave out a million burgers, but all that didn't seem to have improved the situation. Management said it expects third quarter comps at JITB to be flat to up 1%.
While the bulls feel the valuation is compelling, I don't think the company is generating enough top-line growth to get excited about the shares.
The consensus is forecasting fiscal 2016 revenue of $1.61 billion and about the same for next year. Earnings per share estimates of $3.51 still peg the stock trading at over 18 times this year's figure and 16 times next year's $3.98. I would sell into the pop.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
