After Jack in the Box's
The company turned in a tepid third quarter, reporting a 9% drop in revenue and a 27% decline in earnings. Most notably, same-store sales at company-owned restaurants were down 9.4% year-over-year.
Its wholly owned Qdoba Mexican Grill concept, with over 500 locations, turned in a respectable 4.6% growth in comparables. However, since Qdoba is such a mirror image of Chipotle
Management had eloquent excuses for the earnings decline, noting continued high unemployment and "low consumer confidence" in the key markets of California and Texas, where the lion's share of its locations can be found.
Management also notes that commodity costs are back on the rise after easing the past few quarters. Prices are figured to rise by 4% in the current quarter, and signs point to a troubled road ahead given the recent insanity of wheat prices, a key catalyst for food products further up the chain.
While there's some credence to the excuses, more reasonable is the fierce competition from goliaths like Yum! Brands
Jack in the Box is taking a page out the book of their larger peers by selling off company-owned locations to franchisees. Over 50% of total stores are currently in the hands of franchisees, toward a company goal of 70%-80% by 2013.
The strategy of selling off company-owned properties is part of a theoretical "asset light, cash flow rich" business model based on franchise fees. But that only works if sales figures are good enough to drive lucrative incentive payments back to corporate headquarters.
The silver lining of the recent stock weakness -- shares are down nearly 10% in the last three months -- is that the stock is beginning to show up on the radars of value investors and private equity firms. There have been some rumors of a private-equity takeout swirling for months, and Jack's recent debt refinancing and ongoing franchise shift certainly makes the company more appealing to potential suitors.
After all, even with the updated EPS guidance, shares trade for just 12 times year 2010 profit and sport an EV/EBITDA multiple just above 6, well within the range that lights up private equity screens. Rival operator CKE Restaurants got bought out earlier this year at higher multiples, and they had a higher debt load to boot.
For now, investors can safely watch this stock from the sidelines until the end of the year. Let's see how management copes with modest commodity cost hikes and an unemployment needle unlikely to move much before year's end. But assuming we aren't on the warning tracks of a double dip recession by 2011, opportunistic investors and value aficionados might be interested in this fast-food play with good leverage to any broad economic recovery.