In the economic climate that has hurt lower-income consumers, fast-food companies have served up some mixed earnings news lately. Wendy's
But sometimes, even good execution doesn't cut it on the Street. Take Jack in the Box
So what happened? Well, investors seemed to be concerned about margins and company guidance in the upcoming fourth quarter. However, I think these worries are overblown, given the company's long-term thinking, its lower risk profile going forward, and especially its current success.
In an earnings report that was refreshingly easy to read and understand (thank you, Jack in the Box!), the company broke down its earnings surprise: $0.08 came from higher sales, better franchise revenues, and downward pressure on controllable expenses, while another $0.04 was from higher gains from refranchising Jack in the Box restaurants, and $0.07 came from an insurance gain.
The company also reported that same-store sales at company-owned restaurants increased by 7.4%. At its Qdoba Mexican Grill chains, systemwide comps grew 5%. Considering that both chains were facing fairly difficult comparisons from a year ago, this was a very good-looking quarter -- and it happened despite markedly higher food costs, which squeezed margins. Beef costs increased 9%, and those for egg and cheese rose substantially as well. And those pinched margins were what spooked investors -- they came in 17.4% lower than the company's internal forecast of 17.9%, which followed up an 18.7% showing a year ago.
Jack in the Box has done well by offering new menu items such as innovative salads and an all-sirloin beef burger -- a first in the industry. This company is showing innovation, and it's being smart about its future, so investors shouldn't be too worried about a couple of cents being knocked off fourth-quarter guidance. In fact, with the stock being slammed yesterday, hungry investors may want to order up some shares.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at email@example.com. He doesn't have any positions in the companies mentioned.