JACK | THE SHARKS ARE CIRCLING

Jack in the Box (JACK) is on our Hedgeye Restaurants Best Ideas list as a SHORT.

 

JACK reports 4Q15 earnings after market close on November 17th followed by a call on the 18th at 11:30am ET, we are staying SHORT into the print.

 

 

HEDGEYE OPINION

The world is constantly changing. This fact is very apparent in the food space, where consumers can’t make up their mind about what or where to eat their next meal/snack. Hence the need for a quality media plan, coupled with a differentiated experience to drive people to your restaurant versus the other dozen on the same road.

 

Per Restaurant Research, October TV airings momentum diverged, with QSR picking-up momentum while FSR continued to slow.

 

10 national chains increased the number of TV airings by more than +33% y/y including: +120% Arby's (brisket & steak sandwiches), +78% Taco Bell (breakfast & The Boss Wrap), +61% Chick-fil-A ("Eat Mor Chikin" Campaign/Original Chicken Sandwich), +61% Ruby Tuesday's (Garden Bar Lunch Combos Under $10), and +58% Papa John's (Players' Choice Lg. Pizzas $12).

 

Five chains decreased the number of TV airings by more than -33% including: -61% Red Robin, -56% Jack in the Box, -51% Dunkin' Donuts, -41% Buffalo Wild Wings and -41% Cracker Barrel.

 

Given what RRGB, DNKN and BWLD said about October and the market reaction they received, we suspect JACK will say October is soft/choppy as well.

 

CONSENSUS EXPECTATIONS ARE TOO HIGH

On the Jack in the Box stores specifically, consensus estimates are calling for them to post a same-stores sales growth number of 5.7% versus 3.1% a year prior, a 260bps increase. On a two-year trend basis this represents a 40bps sequential slowdown to 4.4%. It is unrealistic to think a company playing in an increasingly competitive market with declining advertising spending is going to see differentiated growth that outpaces the competition.

JACK | THE SHARKS ARE CIRCLING - CHART 1 Replace

 

Moving onto Qdoba, which was highlighted in our recent BURRITO TRACKER, is looking destined for disappointment. All of our Macro Monitor data sets are headed south, and with correlations in the past looking good, we have to stick to our guns on this one. Chipotle suffered during their 3Q15 which they reported a couple of weeks ago, and given their 0.71 correlation to each other it appears that Qdoba is headed in the same direction.

JACK | THE SHARKS ARE CIRCLING - CHART 2

JACK | THE SHARKS ARE CIRCLING - CHART 3

 

 

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst