JACK continues to be on our Investment Ideas list as a long.
- UPSIDE DRIVEN BY COMPS MOMENTUM: +3.1% and +7.7% system comp growth at JIB and Qdoba, respectively, drove strong restaurant operating margin expansion at both brands. JIB outperformed the QSR sandwich segment by 330 bps due to strength in the breakfast and late-night dayparts. Qdoba strength was driven by the conclusion of its Mango Mayo campaign, the return of Queso Diablo as a permanent menu item and double digit growth in catering. Both concepts benefitted in the period from price increases and favorable product mix.
- TRADING AT A CONGLOMERATE DISCOUNT: We believe JACK continues to trade at a conglomerate discount despite the recent success, and long-term potential, of the Qdoba brand. JACK has transformed its business into a largely asset-light model possessing a significant growth driver. With only 638 restaurants, the Qdoba concept has a long runway for growth ahead of it and, this time, we believe management is prepared to roll the concept out successfully. Expect to see 50-60 new Qdoba restaurants next year and 70-110 new Qdoba restaurants annually from 2016-2018. Trading at 11.99x EV/EBITDA, we see several turns of upside assuming the strength of the Qdoba brand persists.
- 2015 GUIDANCE IS ACHIEVABLE: Considering notable comp momentum, continued margin expansion and cash remaining under the share buyback program, we believe management’s guidance of $2.73 to $2.88 EPS in FY15 is conservative. This implies a range of about 11-17% EPS growth, despite having grown EPS by over 30% in the prior two years. Commodity inflation (beef, free sides) and labor cost pressure in some markets is a concern moving forward, but we believe management has fully accounted for this making the guidance range achievable, at the very least.
The Good in 4Q14
- Beat top line and bottom line estimates by 64 bps and 163 bps, respectively
- +3.1% system same-store sales growth at JIB; +7.7% system same-store sales growth at Qdoba
- JIB system same-store sales outpaced the QSR sandwich industry by 330 bps, respectively
- JIB saw growth in both breakfast and late-night dayparts
- Qdoba strength was driven by the conclusion of its Mango Mojo campaign, return of the Queso Diablo, double digit catering growth and less discounting
- JIB restaurant level margins of 17.8% (+210 bps y/y) beat estimates of 17.1%
- Qdoba restaurant level margins of 18.5% (+130 bps y/y) beat estimates of 17.7%
- 1/3 of Qdoba restaurants generate over $1.3 million in AUVs and boast, on average, restaurant level margins of 23%
- Continuing efforts to improve cost structure, identify efforts to cut G&A and improve restaurant profitability
- $117 million remaining under two stock-buyback programs that expire in November 2015; additional $100 million stock-buyback program that expires in November 2016
- Strong 2015 guidance including +6-8% comp growth at Qdoba and system-wide consolidated restaurant level margins of 18.8-19.6%
- Management sounded clear, concise and confident in their plan moving forward, which includes better positioning the JIB brand and conscientiously growing out the Qdoba brand.
The Bad in 4Q14
- JIB traffic declined -2.6%; Qdoba traffic growth of +1.7% was slightly disappointing given the strong comp
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