JACK Jack in the box

Sector financial performance:

This company, who primarily operates and franchises hamburger-quick-service and as well fast-casual restaurants, has been grouped into quick service restaurants sector in food service industry.

It seems that the slowing down traffic was the major reason contributing to slowing down increase in comparable sales of fast-service restaurants between 2015 and 2017. Data indicates that the average increase in comparable sales all across this sector went down from around 5% of 2015 to around 1% of 2017 except the Mexican restaurants, which presents consistent 5-6% increase in comparable sales during this period. (Hamburger-QSR went down from 5% to 1%; chicken-QSR down from 4% to 2%; sandwich-QSR down from 4% to -2%; pizza-QSR down from 4% to 0%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015. For example, our data indicates that the average decrease in traffic of hamburger restaurants was 2% and 1% in 2016 and 2017.

Since 2017, it seems that traffic all across this industry has continued to decline but present signals of slowing down. Traffic in Mexican restaurant started to decrease in 2018 following the trend seen frequently in other types of QSR before 2017.  Comps turned into negative range and were down largely in Pizza sector in 2018, which, with sandwich companies present the worst decline among QSR sector in the past two years. Comps in chicken related QSR restaurants seem least impacted by generally slowing down in traffic all across industry probably due to relatively stronger demand and thus the ability to raise price. Decreasing Hamburgers’ comps seem to be hitting the bottoms as traffic rebounds and price rises.

It seems that the impacts from decrease in traffic have been offset partially by raising menu price/products mix. This is probably why we are seeing positive growth in their comparable sales from many restaurants while decrease in traffic.

For under-performed companies in this industry, franchising their company-operated restaurants obviously has been a better business strategy in dealing with decreasing sales and cash flow. However, all industry has been suffering from general decline in sales. Data indicates that the average cash flow/share of companies in this sector has been declining since 2017.

Our data indicate that, while slowing down comparable sales, there are general improvements in companies’ gross margins in the past several years benefiting from shifting of revenue to re-franchising, rising menu price, and decreasing commodity costs.

Different types of food styles present different gross margins depending on how easy/difficult they can find franchisees for their restaurant concepts. It seems that chicken-QSR demonstrates the best abilities to franchise their concept and thus present the highest average sector gross margin (average 47%). Hamburger QSR then follows, which presents average 36% gross margin. The typical gross margin for Mexican and pizza QSR is around 17% with a low proportion of franchised revenue. Sandwich sector presents the lowest gross margin of about 13%.

Correspondingly, chicken-QSR presents, according our data, the highest operating margin of average 30% with a SG&A as percentage of sales of 16%. Hamburger-QSR has an average 22% operating margin with a SG&A as percentage of sales of 13%. Mexican and Pizza -QSR has an average 8-9% operating margin with a SG&A as percentage of sales of 8-9%.

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Company performance:

It seems that, based on comparable data, the growth in demand for service/products of this company( including both quick-service and fast-casual restaurants) has slowed down since 2015 and turned into negative number in 2017 as indicated by decrease in customers’ traffic number, which down from  0-1% for 2015 to -5-(-4)% of 2017. While, as indicated by our data, the company has still been able to raise the price/lower discounts serving the loyal customers, its comparable sales has decreased due to failure to offset decrease in traffic. Comps number turned to be positive in 2018 as a result of slower decrease in traffic offset by increased price.

First nine months of Fiscal 2018 compared with 2017(ended 20180708)

Growth in comparable sales (quick-service): 0.5% (including increase in check size: 2.6% and decrease in guest counts: 2.1%.

Increase in price: 2.5%

Fiscal 2017 compared with 2016

Growth in comparable sales (quick-service): -1.3% (including increase in check size: 4.2% and decrease in guest counts: 5.5%.

Increase in price: 2.2%

Growth in comparable sales (fast-casual): -3% (including increase in check size: 1.1% and decrease in guest counts: 4.8%)

Increase in price: 0.3%

Fiscal 2016 compared with 2015

Growth in comparable sales (quick-service): 0% (including increase in check size: 2.9% and decrease in guest counts: 2.9%)

Increase in price: 3%

Growth in comparable sales (fast-casual): 1.7% (including decrease in check size: 0.4% and increase in guest counts: 1.5%)

Increase in price: 1%

Fiscal 2015 compared with 2014

Growth in comparable sales (quick-service): 5.1% (including increase in check size: 4.2% and increase in guest counts: 0.9%)

Increase in price: 2.2%

Growth in comparable sales (fast-casual): 8.3% (including increase in check size: 7.3% and decrease in guest counts: 0.1%)

Increase in price: 0.2%

Its gross margin (including company-operating expenses, commodity, wages and rent and franchising rental expenses) went up by 100 basis points to 27% in 2017 as a result of lower commodity costs and higher food margin(raised price and favourable mix) offset by the increased wages. Its SG&A as percentage of sales has been down significantly to about 11% and its operating margin went up to about 16% in 2017. As a result of sales of its fast-casual restaurant chain, which has lower margin, its gross margin was improved to about 29% and operating margin to 18% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 20. We think that its stock is being relatively undervalued compared with its peers and ability to grow its cash flow.

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