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JACK is scheduled to report fiscal 4Q09 earnings after the close today.  Similar to its competitors, I am expecting margins to improve YOY despite the continued deceleration in same-store sales trends on both a 1-year and 2-year basis.  When JACK reported 3Q09 sales trends below its targeted range at Jack in the Box, management attributed the weakness to unemployment and significant industry discounting.  Those comments set the stage for Q4 results as those pressures remained throughout the quarter. 

We know that July comparable sales at Jack in the Box were running down about 3.5% and the street’s full quarter estimate of -4.2% implies further sequential declines from that level.  Management highlighted on its 3Q earnings call that it would be lapping the successful Smoothie rollout in August, but we also lapped the Hurricane Ike impact in September, which negatively impacted 4Q08’s same-store sales growth by 1%, so I am expecting same-store sales growth to hold steady with the July level and come in slightly better than the street’s expectations.  We will learn today whether the company’s newly offered bundled meal called the Big Deal, which was launched in mid-July continued to drive traffic throughout the quarter as it did help to improve same-store sales trends in July from -4.4% in June. 

Margins should be up fairly significantly on a YOY basis as the company is lapping its lowest reported restaurant level margin in over 5 years; though management did say that margins would come down on a sequential basis from Q3 as a result of normal seasonal trends.  In 4Q08, JACK faced significant food cost inflation of +7% with beef costs up 18% YOY, and the hurricane hurt restaurant margins by about 50 bps as well.  To that end, commodity costs should prove favorable in 4Q09 with food costs expected to be down about 2%-3% (based on management’s full-year +2% guidance) after being down only 0.8% in Q3.  

From an earnings standpoint, my EPS estimate of $0.54 falls one penny short of the street’s estimate but based on recent restaurant earnings reports, over delivering on earnings despite continued sales misses would not be a surprise.

Even more important than reported Q4 sales and earnings results will be what management says about early fiscal 1Q10 sales trends and FY10 sales guidance.  Based on the comments and results we have gotten about October trends from SONC (“seen more challenging weather”), MCD (-0.1% or -1.1%, excluding the estimated benefit from the calendar shift), WEN (-4%), CKR (-7% at Carl’s Jr. and -3.4% at Hardee’s), JACK’s October trends will most likely not be good.  Management will provide full-year sales and earnings guidance based on recent trends so if October was not a good month, the guidance will most likely be extremely conservative.  For reference, a -3.5% to -4.0% Q4 comp at Jack in the Box implies that 2-year average growth declined -2.2% to -2.4%.  Assuming that level of 2-year average growth for all of 2010 yields a 3% to 3.5% decline on a 1-year basis, which I think is a reasonable range to expect.  

Going forward, I continue to think JACK is well positioned to outperform over the long term.  And, as I have said in the past, following what JACK does with its cash will generate the most incremental return for shareholders over the next 12 months.  I know that JACK is a California-centric concept with more premium offerings, but it has significantly underperformed its peers, down nearly 19% in the last 6 months relative to the QSR average performance of up 15.5%.  In that same timeframe, even CKR, which has seen its trends fall off more significantly than JACK, is up 4.4%.  It is only in the last 3 months that JACK has outperformed CKR, up 1.2% vs. -7.5%; though its peers on average still significantly outperformed, up 8.2%.