Does Jack in the Box Inc. (JACK) Know Qdoba?

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Recently Jack in the Box Inc. (NASDAQ:JACK) disclosed that it would close 67 Qdoba stores for a cost of $40 million in impairment and severance charges. With a turnaround at the Jack in the Box concept, one has to wonder if management knows how to operate Qdoba.

The company operates and franchises Jack in the Box Inc. (NASDAQ:JACK) restaurants with more than 2,250 restaurants in 21 states. Additionally, the company operates and franchises Qdoba Mexican Grill with more than 640 restaurants in 44 states and Canada.

Jack in the Box Inc. (NASDAQ:JACK)

While the plan is to close the underperforming stores probably in regions with limited stores to improve profits, the company is taking substantial charges to close these stores. Especially considering the intent to continue opening new stores at a rate of roughly 10% per year.

Qdoba over stretched

The one point that really sticks out with Qdoba is that it only had 647 stores as of the end of April, but it was already in 44 states and Canada. That amounts to about 15 stores per state compared to nearly 100 Jack in the Box Inc. (NASDAQ:JACK) restaurants per state. If anything the company needed to do some infilling to support the stores in regions without brand recognition, but instead it had made the draconian decision to close the underperforming stores while opening new ones in different locations.

The company provided the following expected performance improvements at the Jefferies conference last week:

1). Improve Qdoba AUV’s by approximately 10%
2). Improve Qdoba ROM by approximately 500 basis points
3). Improve EBITDA by approximately $4.5 million
4). Improve operating earnings by approximately $7.0 million

Beating Earnings Yet Again

The stock is holding strong as the news of the Qdoba closing helps push up analyst earnings estimates for future quarters and especially next year. The company as well beat earnings estimates for Q2 2013 though the $0.02 beat was the smallest in over a year. In addition, that small beat suggests the current estimates for fiscal years 2013 and 2014 might be more inline with reality now. See table below:

* Data provided by Yahoo! Finance.

Conversely, competitors in both the hamburger and Mexican chain markets spent the majority of the last year struggling to meet estimates. Both Chipotle Mexican Grill, Inc. (NYSE:CMG) on the Mexican side and McDonald’s Corporation (NYSE:MCD) and The Wendy’s Company (NASDAQ:WEN) on the hamburger side missed earnings estimates at least twice during the last five quarters.

More interesting is that Jack in the Box Inc. (NASDAQ:JACK) trades at a similar if not cheaper valuation to all these stocks. Jack only trades at 18 times forward earnings while Chipotle Mexican Grill, Inc. (NYSE:CMG) tops the group at 28 times forward estimates. Even The Wendy’s Company (NASDAQ:WEN) has a high 25 times forward estimates multiple while meg-cap McDonald’s Corporation (NYSE:MCD) with a market cap approaching $100 billion has an earnings multiple of nearly 16 times.

Growth Plans

Even with the plans to shutter so many Qdoba stores, the company is moving forward with growth opportunities in other locations. Qdoba plans to expand by 70 to 75 new locations in fiscal 2013. In 2014, the goal is to open another 60 to 70 new restaurants placing the total at September 2014 larger than the current balance of stores prior to the closures.

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