Earnings preview: Refranchise to hurt Jack in the Box Q1 revenue

Jack in the Box (JACK) is set to report its first quarter 2019 operating results on Wednesday after market close. The refranchising growth could hurt the company’s top line and average check growth could drive the same-store sales higher. This comes in the midst of the company exploring strategic and financing alternatives to maximize shareholder value.

Wall Street estimates the company to post higher earnings and lower revenues compared to the prior year’s first quarter. EPS is expected to be $1.29 on revenues of $271.52 million, representing an annual increase of 4.90% and decline of 7.80%, respectively. In comparison, during the previous year quarter, the company posted a profit of $1.23 per share on revenue of $294.46 million.

The top line is expected to be hurt by the increase in refranchising. As of September 30, Jack in the Box has refranchised 135 restaurants making the franchise mix at about 94%. The company had already said that it would open system-wide about 25 to 35 new restaurants, the majority of which will be franchise locations.

The same-store sales could increase marginally helped by the average check growth. The company’s long-term goals included the emphasis on improving operations consistency and targeted investments for maximizing returns.

In the first quarter, the company agreed to sell Qdoba, a subsidiary of the company, to certain funds managed by affiliates of Apollo Global Management LLC. The transaction closed on March 21, 2018, and operating results for Qdoba are included in discontinued operations.

Growing no of refranchised restaurants likely to reduce Jack in the Box’s topline in Q4

For the fourth quarter, the company posted a 41.5% dip in earnings due to higher costs and expenses. Revenue dropped by 23.5% due to the increase in refranchising. The company same-store sales increase of 0.8% was driven by average check growth of 2.8%. Jack in the Box completed its refranchising initiative during the quarter with the sale of 8 restaurants in Q4, and now the franchise mix stands at 94%.

For fiscal 2019, the restaurant operator has expected system same-store sales of about flat to up 2%. Also, the company has anticipated returning more than $1 billion through fiscal 2022 to its shareholders in the form of share repurchases and dividends. Capital expenditures were predicted to be $30 million to $35 million.

During mid-December, Jack in the Box said its board of directors and management team is exploring a range of strategic and financing alternatives to maximize shareholder value. Potential alternatives could include, among other things, a sale of the company or executing on the company’s previously announced plans to increase its leverage.

In the absence of a strategic transaction, the company remained committed to its prior plan to have a new capital structure in place by the end of the first half of fiscal 2019. That capital structure could include a securitization or bond issuance.

The company has remained the favorite dish of the analysts as the majority of them recommended a “strong buy” or “buy” rating. Wall Street analysts expect the stock to reach $93.69 per share in the next 52 weeks.