Company overview
Jack in the Box Inc. (NASDAQ:JACK) operates the hamburger chain Jack in the Box Inc. (NASDAQ:JACK) and Qdoba Mexican Grill. The Jack in the Box hamburger chain has more than 2,200 locations in 21 states, while Qdoba Mexican Grill has more than 600 locations in 45 states, the District of Columbia and Canada.
The hamburger chain’s locations have drive-thru windows, indoor dining and are open 18 to 24 hours a day. Hamburgers are the core of the menu, but the restaurants also offer chicken sandwiches, breakfast, portable salads and have a value menu.
Qdoba Mexican Grill was acquired by Jack in the Box Inc. (NASDAQ:JACK) in January 2003. Its fast-casual dining locations offer a Mexican kitchen where each meal is prepared fresh right in front of the customer. Its menu items include burritos, nachos, quesadillas, tacos, taco salads and breakfast burritos.
Outlook
For the Jack in the Box Inc. (NASDAQ:JACK) hamburger chain, the strategy is like many other fast-food chains. The plan is to get out of owning its restaurants and instead franchise. In the last quarter, the company completed the sale of 18 restaurants. The company also decided to refranchise more than 50 additional locations, hoping to complete the sale of about 40 of them by the end of the fiscal year. The typical refranchising scenario for a company has a positive effect on sales volumes, restaurant operating margins, earnings per share, cash flow and returns. According to CFO Jerry Rebel on the company’s last earnings call,
When we’ve completed our refranchising, we expect to operate roughly 400 company Jack in the Box restaurants, and for the brand to ultimately be between 80% and 85% franchised.
For Qdoba, the restaurant chain is in the middle of a restructuring. In March, the company brought in a new President with a renewed focus on market performance, overhead structure, brand development and growth strategies. A performance review has already been completed, and the company will close 67 (10%) of its Qdoba Mexican Grills by the end of September. By closing these underperforming restaurants, the company can redirect its resources elsewhere and will open 60 to 70 new stores next year.
Comparison
With all the success that McDonald’s Corporation (NYSE:MCD) and Chipotle Mexican Grill, Inc. (NYSE:CMG) have had, it’s safe to say that every hamburger chain wants to be like McDonald’s Corporation (NYSE:MCD) and every Mexican grill wants to be like Chipotle Mexican Grill, Inc. (NYSE:CMG). This is especially true for investors where both companies have been great stock performers over the long-term.
In terms of McDonald’s Corporation (NYSE:MCD), the company has faced its stiffest competition in recent memory. Its competitors like Wendy’s, Burger King, and Jack in the Box Inc. (NASDAQ:JACK) have all taken a page out of its playbook by offering value menus and breakfast. To better compete, McDonald’s Corporation (NYSE:MCD) is continuing to update its menu and offer new items such as wraps, smoothies, and new burger variations and flavors.
McDonald’s Corporation (NYSE:MCD) goal is to invest in its business and return excess free cash flow to shareholders. In the second quarter, McDonald’s returned $1.2 billion to shareholders in the form of dividends and repurchases. The company now pays an annual dividend of $3.08 per share for a yield of 3.1%. It is 81% franchised, a factor that has helped to keep cash flow high. Franchise margins contribute 70% of all profits, and gives McDonald’s a stable and predicable income stream.
For Chipotle Mexican Grill, Inc. (NYSE:CMG), it is in the fortunate position in that no company has yet come close to replicating its unique culture and dining experience. The company has a devoted customer base that love its fresh and tasty food. Second quarter results pretty much summed up Chipotle’s story: revenues increased by 18.2%, comparable restaurant sales increased 5.5%, and net income increased 7.6%.
There appears to be no slowdown in sight for the Chipotle Mexican Grill, Inc. (NYSE:CMG) business model. The company is on track to open 165 to 180 new restaurants this year. There are now over 1,500 locations, and international markets are untapped. To boost same-store sales, Chipotle is starting to rollout catering in select locations which have thus far seen catering account for 1% of total sales. As more locations offer this option and customers become aware of its availability, look for catering to boost same-store sales further.
Foolish assessment
It remains to be seen if Qdoba can be the driver of growth for Jack in the Box. There has been talk for years about spinning off the Qdoba chain. Now that a new President is in charge, it remains to be seen the next moves for the Qdoba business.
In looking at Jack in the Box Inc. (NASDAQ:JACK), it trades at an enterprise value/earnings before interest, taxes, depreciation and amortization of 9.79. Its forward price-to-earnings multiple is 19. While both metrics are reasonable, shares are up almost 55% in the past year. The company is a long way from giving McDonald’s and Chipotle Mexican Grill, Inc. (NYSE:CMG) a run for their money, however. I’d advise waiting on the results of the company’s move to a franchise model for Jack in the Box and restructures its Qdoba operations.
The article There’s More Than Just Jack in the Box originally appeared on Fool.com and is written by Mark Yagalla.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s. Mark 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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