In my mind, one of Jack in the Box Inc. (NASDAQ:JACK)’s primary challenges is differentiating Qdoba from Chipotle. Their Q1 promotion allowing guests to add queso to their burritos for free was a good first step, as it emphasized the fact that Chipotle does not have something comparable.
During the Q2 earnings call, management predicted Qdoba will have flat same-store sales for the remainder of FY 2013. In a growing fast-casual market, that isn’t great news. EPS is also somewhat concerning, as $1.26 per share for FY 2010 grew only marginally to $1.29 for the trailing twelve months, while EPS of $.30 for Q2 of 2013 was significantly less than the $.48 reported for Q2 of 2012. Management notes that, when restructuring and franchising costs are removed, EPS actually grew from $.30 in Q2 of 2012 to $.33 in Q2 of 2013, so this partially offsets my concerns.
The P/E of 24.9 makes this the cheapest chain of the three – but given concerns with same-store comps and the flat EPS, I’m not as confident in this investment paying off. Management blames their recently reported drop in Qdoba’s margins and same-store sales on weather, which may be a legitimate reason. However, I would wait to invest until we see whether Qdoba can bounce back from those losses for the remainder of the year. Since we are considering the company (and not just the Qdoba concept), observe how the refranchising strategy for the Jack in the Box Inc. (NASDAQ:JACK) concept affects EPS and margins before buying shares.
Final thoughts
My investing style is on the more conservative side – I prefer companies who have proven their ability to grow margins and post meaningful increases in EPS and revenue, and I favor them even more if they are trading at a comparatively cheap P/E ratio. Chipotle Mexican Grill, Inc. (NYSE:CMG) isn’t cheap from a P/E standpoint, but the company has a great balance sheet, superb growth opportunity, and a business model that is improving sales, revenues, and EPS.
For the more adventurous investor, Fiesta Restaurant Group Inc (NASDAQ:FRGI) would be another excellent choice – but keep an eye on the debt and the P/E ratio, and watch for any lagging in same-store sales. Jack in the Box Inc. (NASDAQ:JACK) is a potentially stronger chain for a value investor and still has opportunities for growth, particularly with the Qdoba brand, but I am less confident in its prospects and would not recommend buying it.
The article Fast-Casual Part 2: One to Own originally appeared on Fool.com and is written by Michael Douglass.
Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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