THE JACK OPTION: PART II

We continue to believe that the long-term potential of JACK is underappreciated, particularly with respect to the future growth of Qdoba.  The company’s recent announcement to restructure enhances this view.

 

Looking Back

On May 8, 2012, we published our SOTP analysis describing Qdoba as the “Jack Option” and suggesting significant upside.  Since that time, Qdoba’s performance has stagnated while Jack in the Box has performed quite well.  The recent Qdoba announcement included a strategic review of store-level market performance, geared toward correcting growth related issues and setting the stage for stronger performance moving forward.  We have seen similar initiatives before, where concepts have successfully shrunk to a core base of stores, establishing new platforms and leading to significant value creation.

 

Sometimes Less Is More

The announcement included the planned closure of 67, or 21% of, Qdoba company-owned stores by the end of FY13.  The vast majority of these stores are cash flow or EBITDA negative and only represent 13% of Qdoba brand company sales.  Yesterday, JACK disclosed the following estimates of the pro forma impact the closures would have had on Q2 fiscal year-to-date results:

  1. 500bps increase in Qdoba restaurant operating margin
  2. $4.5mm increase in EBITDA
  3. $7mm increase in operating profit
  4. $750,000 decrease in G&A

Updated Development Plans

The strategic decision to close these unprofitable stores represents a meaningful positive for the stock and the overall operating performance of the enterprise.  Management also reiterated its FY13 development plans and suggested that there will be approximately 12% unit growth at company and franchised stores in FY14.  We believe these recent actions, coupled with the analysis of consumer insights and a new brand positioning, should allow for continued improvement in Qdoba’s performance.

 

Potential Upside In The Stock

In our view, the company’s aggressive move to restructure Qdoba is likely to improve the brand’s profitability and should provide investors with the confidence to assign the brand a growth multiple.  In the past we have described Qdoba as a call option for shareholders given the concept’s long-term growth potential.  Due to this renewed growth profile, we see approximately 30% potential upside in the stock over the next 2-3 years from current levels.

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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