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Per our most recent post on JACK, describing the upside opportunity in the stock over the next two-and-a-half years, Qdoba is the key component of the long-term story. In fact, we saw no near-term upside from a fundamental perspective as the stock has outperformed the S&P 500 by 18% year-to-date. With Qdoba failing to inspire confidence following 2QFY13 earnings, we believe the upside will take time to materialize. We would advise taking a step back from JACK at these levels.

Discipline Warranted

While JACK reported an in-line quarter, management raising FY EPS guidance was a bright spot for shareholders. However, on aggregate, the quarter was disappointing as the continuing soft performance of Qdoba, underscored by negatively revised unit growth and comp guidance, was the most important takeaway.  With respect to many of the tenets of our long thesis, (valuation, fundamentals, sentiment), we believe that the investment community consensus has caught up with reality. Our confidence in Qdoba’s ability to drive an additional 30-40% in upside has diminished significantly following last night’s earnings release.

With this in mind, we are stepping away from our bullish call on the stock (initiated February 2012). That said, we don’t see much downside in the stock as the core Jack in the Box concept continues to perform strongly.

Solid Quarter But Qdoba Outlook Weak

Over the past year, the valuation gap between JACK and its QSR peers has narrowed significantly. While the stock still trades at a discount, we believe further margin expansion at JACK will come from incremental execution – particularly at Qdoba.

The company reported operating EPS of $0.33 versus expectations of $0.31.  Same-restaurant sales at Jack in the Box grew 0.9% at company-owned stores. Qdoba comps came in at -2% versus consensus of -1.4%. Management raised guidance slightly to EPS of $1.55-1.65 vs prior guidance $1.48-1.63 and consensus of $1.61.  In addition, management reiterated Jack in the Box same-store sales of +1.5-2.5% and lowered Qdoba  same-store sales to between flat to +1.0% vs prior guidance +1.0-2.0%.

The crux of our now-cautious view on Qdoba is that the company had to heavily discount to get to -2% comps.  While, adjusting for weather, the print was within the guided range, the 340 basis point margin decline was a negative indicator of the sustainability of current trends.  

Howard Penney

Managing Director

Rory Green

Senior Analyst