QSR - Action Call: Jack in the Box

2023-10-04 10:45:13 ET

Summary

• Jack in the Box Inc. offers an attractive investment opportunity due to stabilizing food prices, the acquisition of Del Taco, and successful market debuts.
• Del Taco plans to increase refranchising and has seen record-breaking commitments in the third quarter.
• Jack in the Box's new CRAVED brand image and expansion plans contribute to its potential for increased valuation.

Jack in the Box Inc. ( JACK ) is a restaurant company that operates and franchises Jack in the Box®, one of the nation's largest hamburger chains with more than 2,180 restaurants across 21 states, and Del Taco®, the second largest Mexican-American QSR chain by units in the U.S. with approximately 600 restaurants across 15 states. The Company was founded in 1951 and is headquartered in San Diego, California. As a result of stabilizing inflation on food prices, the Company’s acquisition of Del Taco, JACK’s successful Salt Lake City debut, and a new CRAVED brand image, we believe JACK offers an attractive investment opportunity.

Investment Thesis

According to the Commerce Department’s September 29th Personal Consumption Expenditures ((PCE)) index release, the PCE index, excluding food and energy, increased by 0.1% for the month, lower than the 0.2% gain from the Dow Jones consensus of economists. This increase was the smallest since November 2020. Food prices increased 0.2% for an annual rate of 3.1%

On August 23rd, Del Taco announced its first Fresh Flex restaurant in Mississippi. The new Fresh Flex restaurant model has a double drive-through lane and pickup lockers with QR code capabilities. On their latest earnings call, the company guided for an increase of refranchising 90-120 Del Taco’s in fiscal 2023, up from the previous guidance of 65-85. Del Taco also announced 57 new commitments in the third quarter, which is the most commitments in a three-month period for the Company’s 50+ year history .

On August 9, JACK announced record-breaking first-month sales in Salt Lake City, the Company’s first new market entry in over one decade. The store outperformed its previous first-month record by 66%. Salt Lake City is the first to showcase Jack in the Box’s new CRAVED image. This fall, JACK plans to introduce the first CRAVED drive-through, walk-up-only store in Ogden, Utah. The brand plans to open four CRAVED units this year, with two being in Louisville, Kentucky, which is also a new market. The Company is planning to open three more restaurants in Salt Lake City in 2023 and six more in 2024.

From June 16 to August 6, Jack in the Box partnered with Snoop Dogg and introduced Snoop’s Munchie Meal. According to Business Insider, that meal was a hit .

In their fiscal Q3 earnings report, JACK reported same-store sales up 7.9% and up 17.5% on a three-year basis. Del Taco had same-store sales up 1.7% and up 12.3% on a three-year basis. Year-over-year sales were flat for the three-month period and were up 24% over the same 40-week period in the prior year. The Company plans to execute $80 million in share repurchases for fiscal 2023. It is important to note that the quarter was negatively affected by higher commodity costs and wage and advertising expenses. Commodity costs increased 5.2% and 10%, year-over-year and year-to-date, respectively. JACK expects commodity cost inflation to be up 8-10% year-over-year in fiscal 2023 .

Investment Risks

• Inflation does not cool off, leading to higher food prices.
• The United States falls into a recession, and the demand for eating out declines.

Valuation

We have provided an analysis of JACK’s common stock to show how it is undervalued relative to its peers, as seen in the table below, which compares the Company to its peer average EV/EBITDA, P/E, and P/S ratios to its peer group. The group includes Domino's ( DPZ ), Chipotle ( CMG ), Wendy's ( WEN ), Texas Roadhouse ( TXRH ), Brinker International ( EAT ), Cheesecake Factory ( CAKE ), Papa John's ( PZZA ), McDonald's ( MCD ), and Restaurant Brands International ( QSR ).

Over the next twelve months, it is reasonable to assume (barring any sudden shocks to the economy) that demand for Jack in the Box will increase from new stores both in Jack in the Box and Del Taco and their new brand CRAVED image, thus increasing JACK’s valuation multiples. If we assume JACK’s EV-to-EBITDA ratio expands to 75 percent of its peer group average, we forecast a price of $89.15. If we assume JACK’s Price-to-Earnings ratio expands to 50 percent of its peer group average, we forecast a price of $90.73, and finally, if we assume JACK’s Price-to-Sales ratio expands to 50 percent of its peer group average, we forecast a price of $111.14. The average of these three price targets is $97.01, which we round down to $97.00, 40% higher than JACK’s closing price of $69.06 on September 29, 2023.

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