Jack In The Box Pulls Back Into A Buying Opportunity
Jack In The Box (NASDAQ: JACK) reported a blowout quarter and we are not surprised. The company has been working hard over the past two years to improve focus, profitability, and growth, and those efforts are paying off. Among them is the push toward a more-franchised centric model, a push we’ve seen throughout the restaurant industry. This change is aiding not only organic growth but profitability as well and that is always a good thing. In our view, the selloff in Jack In The Box is not only without merit but overblown and offering a great entry into an undervalued dividend-growth stock with rapidly improving fundamentals.
Jack In The Box Beats Top And Bottom Line Consensus
Jack In The Box had a great quarter in which growth not only beat the consensus it also accelerated from the previous quarter, and that’s versus a fairly tough comp in the prior year. The $257.22 million in consolidated revenue is up 19% from last year and beat the consensus by 300 basis points even with the consensus figure up 65% from its low last year. Internally, the company reports comps are up 20.6% versus the 16% expected with a 14.5% gain at company-owned stores and a 21.3% increase at franchised stores. Company-owned comps were driven by a 19% increase in check average slightly offset by a decline in ticket counts.
Business improvement was not limited to revenue. The company experienced a 530 basis point YOY improvement in the restaurant-level margin as well. The gross margin came in at 25.9% versus the 24.5% expected by the analysts due to a favorable mix, price increases, higher sales, and lower SG&A costs. These were slightly offset by rising commodity costs but it looks for now as if the company is firmly ahead of that problem. Moving down, the operating margins also showed a substantial increase and came in 320 bps above the consensus to drive solid gains in both GAAP and adjusted earnings.
On the bottom line, the GAAP $1.58 is up 200% from last year and beat the consensus by $0.29 while adjusted earnings grew at a slightly slower pace and beat by a narrower by a no less impressive $0.19 margin. Altogether, the results are strong but there’s more. The company felt it prudent to increase the guidance and to a range above the consensus as well. The company is now expecting FY revenue growth in the high-single-digits (we think this is cautious) and for adjusted EBITDA of $320 to $330 million versus the $318 expected by analysts.
Jack In The Box Returns Capital To Shareholders
Jack In The Box bought back about $65 million worth of its shares over the quarter and still has $135 million left under the current authorization. That includes $35 million that expires this fall so there is an impetus for the company to use the money. In total, the $135 million is worth about 5% of the float and is a significant tailwind for price action. The company is also paying a dividend and decided to increase it by 10% with the Q3 declaration. The $1.76 in annualized payments is worth about 1.51% and the payout is relatively safe. The company has some debt to be aware of but it’s coming down and free-cash-flow is on the rise.
The Technical Outlook: Jack In The Box Falls Into Correction
Shares of Jack In The Box were moving lower ahead of the earnings release and are extending those losses in early trading. The stock is down about 4.5% in premarket action and trading below the short-term moving average where it may begin to pick up bearish momentum. The caveat is that this stock trades a deep discount to its peers and is now sitting on a key support level. Support buying should be strong in the range of $109 to $112, a range that is consistent with the previous all-time highs and a recent breakout. Once support begins to show itself we will consider this name a high-probability target for big gains in the second half of the year.
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