Jack in the Box

Today we want to analyse Jack in the Box, a company we have been discussing for several weeks and which is surely one of the most iconic fast food chains in the US. Jack’s shares have suffered a 60% drop from their highs of 3 years ago (and more specifically, a 50% drop in recent months) and are currently trading at really attractive multiples. Today’s goal is to understand the company, its economics, and try to determine if the market is overreacting and the current price represents a tremendous opportunity.

Introduction

Jack in the Box is a fast food restaurant chain specializing in hamburgers, known for its extensive menu and opening hours – ranging from breakfast to late night. Founded in 1951 in San Diego (California) – a state that represents more than 40% of its restaurants and from which it has expanded throughout the rest of the country – and public via IPO since 1987, they have managed to grow the business to currently exceed the number of 2,300 restaurants. It has a model primarily focused on franchises (asset light) and has a presence in 23 states (mainly California, Texas, Arizona, Washington, and Nevada).

In addition to Jack in the Box, the company also owns the Del Taco brand, which has nearly 600 restaurants. Jack acquired Del Taco in early 2022. Del Taco is not the first Mexican restaurant chain that Jack has owned, as from 2003 to 2018 (when it had 700 restaurants), it owned Qdoba.

 

The company has gone through several phases in recent years, characterized by the franchising of its restaurants in the early 2010s, although the total number of restaurants not only did not increase but slightly decreased from 2250 in 2012 to 2186 at the end of 2023. Similarly, their SSS barely grew above inflation during this period. As if that were not enough, they lagged far behind their peers in the digital transformation process and experienced deteriorating relationships with franchisees

On the positive side, throughout this period, the company has been repurchasing shares, reducing their number by almost 70% in the last 16 years – although it must be taken into account that there have been years when the cost of repurchases has exceeded the OCF, financing these with debt.

On the other hand, since 2020, the CEO and management of the company have changed, and after a few years of internal restructuring (making the much-needed investment in technology & brand image), they have managed to reach 15% of its sales via digital channels (it was barely 1% in 2019) increase considerably its SSS and return to unit growth. Furthermore, they published their new strategic plan in January of this year to focus on growth in the coming years (2.5% annual unit growth)

The company currently capitalizes at just $1000MM and has a debt of $1750MM (with an average interest rate of 4% – fixed) and barely $50MM of cash. That is, it has a multiple of 8.1x, which for a franchising company with EBITDA margins above 20%, is a very low metric (comparables around 17x).

Today’s goal is to analyze the main risks and uncertainties (debt, expansion plan, minimum wage in California, Del Taco, …) that the company faces and to make an objective assessment ( with a focus on economics) to see if the market is offering us a tremendous buying opportunity or if, adjusted for risk, we could be looking at a value trap like we identified with Denny’s at the time.

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