JACK - IN A DEEP HOLE WITH NO LADDER

Conclusion: While the company conference call may shed some light on how management is going to turn things around, right now what JACK is doing is not working.

 

For 4QFY10 Jack in the Box company same-store sales declined 4.0%, with the same excuse of the concept continuing to be impacted by high unemployment in key markets for the key customer demographics.

 

One a two years basis same-store sales improved only 20bps as the company strategy of quality improvements to signature products are not gaining traction.  The strategy for 2011 will include a substantial completion of the restaurant re-imaging program, which will continue to penalize EPS in 2011.  The company is currently guiding to same-store sales of -1% to +1% at Jack in the Box company stores for 1QFY11, which implies things get worse on a 2yr basis from 4QFY10.

 

Yet management hopes that these initiatives will increase the customer appeal of the Jack in the Box brand and provide a catalyst for sales growth when unemployment and consumer spending begin to improve.  Additionally, getting the system to look good is getting incrementally more expensive too.  Diluted earnings per share guidance of $1.41 to $1.68 (consensus at $2.01) includes approximately $0.10 to $0.12 of incremental re-image incentive payments to franchisees in fiscal 2011 as compared to fiscal 2010.

 

It’s expensive to hope and pray things get better?

 

Consolidated restaurant operating margin was 12.5% in 4Q10 versus 15.8% last year - sales deleverage negatively

impacted margins by approximately 110 basis points in the quarter. 

  1. Food and packaging costs were 90 bps higher - overall commodity costs were approximately 3% higher, driven by higher beef, cheese and pork costs which were partially offset by lower costs for poultry, shortening and bakery products.
  2. Payroll and employee benefits costs were 29.9% vs. 29.6% the same quarter one year prior. 
  3. Occupancy and other costs increased 210 bps primarily to sales deleverage, higher depreciation resulting from the company’s ongoing restaurant re-image program, increased repairs and maintenance, and additional costs relating to guest service initiatives.

I completely understand why the company wants to refranchise the store base down to 20% company owned, but getting from A to B continues to be a struggle.  The 4Q10 gains on the sale of company-operated restaurants included the sale of an entire market with lower-than-average sales and cash flows.  To get the sales done, the company provided $23.1 million in financing during the quarter for two of the six refranchising transactions, including the entire market sale.  Importantly, $18.7 million has been repaid thus far in the first quarter of 2011.

 

The penalty the company is paying right now to fix the business and get the business model is a big drag on EPS and the confidence level that things will improve is low.  To make my point I have included the matrix chart for JACK and for MCD.  When there is any expectation that JACK can get to Nirvana, with positive same-store sales and expanding operating margin, the stock will move accordingly.

 

JACK - IN A DEEP HOLE WITH NO LADDER - jack sss

 

JACK - IN A DEEP HOLE WITH NO LADDER - JACK MATRIX

 

JACK - IN A DEEP HOLE WITH NO LADDER - MCD MATRIX

 

Howard Penney

Managing Director

 

 


GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more