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Jack In The Box: What Worries Me?

Mar. 05, 2018 2:54 PM ETJack in the Box Inc. (JACK)1 Comment
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  • Despite recent positive developments, I am concerned about the company’s prospects.
  • I find management’s commentary on SSS inconsistent.
  • Altering capital structure and increasing leverage ratio may not be good strategy for the company.
  • Valuations are expensive.

Jack In The Box (NASDAQ:JACK) is receiving quite a bit of positive commentary of late. Goldman Sachs's analyst has upgraded the stock twice since the beginning of this year; activist investor JANA Partners has reported a 7.3% stake in the company last month; and the company reported better-than-expected Q1 results. Inspired by these developments, I began analyzing the company as a prospective long candidate. However, after a closer look, I was forced to change my mind. In this article, I am discussing two of my major concerns about the company.

Inconsistent Commentary on Same Store Sales

Jack In The Box reported a slight decrease in 1Q18 same-store sales. Management commented that it saw sequential improvement in sales and traffic as the quarter progressed. Here are the relevant excerpts from its last quarter earnings call,

"System same-store sales decreased slightly in Q1 as we rolled over a 3.1% increase last year, which is our best quarter of fiscal 2017. But we saw sequential improvements in both sales and traffic in Q1."

Now, going forward, the comparisons are easing, and according to bulls/management, the company will end up posting 1% to 2% increase in SSS for the full year. While on the face of it, this argument makes sense, the numbers do not add up. Here is my math.

In November, on Q4 2017 earnings call, management provided a brief commentary on how the first eight weeks of Q1 2018 looked like,

"Through the first eight weeks of our first quarter, Jack in the Box system same-store sales are running approximately flat to slightly positive, despite lapping year-ago same-store sales growth of 4.7% for the comparable eight weeks and our competitors' ongoing focus on extreme value."

Now, Jack's 1Q18 consisted of 16 weeks ended January 21, 2018. Since first eight weeks comp sales were

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

Thanks for your work. I agree that buying back significant stock at the wrong time will be bad for shareholders. JACK isn't as pricey as some but valuing any of these companies when the industry is such a disaster is tough to do. Even now there is far too much expansion by almost every concept. It just won't work and I believe the worst is yet to come. We need to see concepts shrinking or going completely out of business and we just aren't there yet. Jana may be able to make a quick profit but like you said, that would hardly be good for LT investors.
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