The following commentary originally was sent to Action Alerts PLUS subscribers on Feb. 17, 2016, at 6:20 p.m. ET.
After Wednesday's close, Jack in the Box (JACK) reported severely disappointing fiscal first-quarter results. Its earnings per share of 93 cents missed consensus by 10 cents and its revenues of $470.8 million, while up 0.5% year over year, fell short of consensus expectations of roughly $475 million.
The company also issued downside guidance for fiscal 2016; it sees EPS of $3.50 to 3.63 versus consensus of $3.63 and expects same-store sales to rise 1% to 2% at Jack in the Box company restaurants and to increase 2% to 3% at Qdoba company restaurants.
We see little reason to defend the shares at this point in time after poring through the entire report. There are blatant issues at the operational level and we have no appetite for CEO Lenny Comma's excuse-riddled explanation for the weak results, which he blamed on the aggressive competitive environment.
We always will be transparent with our subscribers and refuse to dig in our heels when we have made a mistake. We clearly made a mistake in this case and misjudged the situation; by every measure, JACK's results, guidance and commentary are indefensible.
We feel misled by Comma's assurances around the strong, sustainable growth trajectory at both of his businesses (Qdoba and Jack in the Box, or JIB). As we reflect on the earnings release, we realize that we should have been more critical and skeptical of management's consistently optimistic commentary around the state of its business. We truly did believe Comma's recent statements in which he confirmed that both businesses were well-positioned to deliver sustainable, 20%-plus annual overall EPS growth starting in 2016.
In the release, Comma specifically cited several competitors' aggressive promotions and value offers as the main obstacles preventing his company from reaching its sales targets. In particular, Comma implied that the all-day breakfast launch at McDonald's (MCD) had some impact on JACK's results, especially in the 10:30 a.m.-to-noon time period.
Digging deeper into the release, same-store sales (SSS) at JIB stores came in at 1.4% (up 0.5% at company stores). Average checks actually increased by 3.4% year over year, which indicates that the slower-than-expected SSS growth -- consensus called for 2.1% comps growth overall -- was mainly due to lower-than-expected traffic, which is likely what Comma referred to in his remarks that we mentioned above. We are disappointed by this, as Jack in the Box system same-store sales growth for the quarter lagged the QSR sandwich segment by 2.4% for the comparable period, according to The NPD Group's SalesTrack Weekly for the 16-week time period that ended Jan. 17.
Qdoba SSS increased 1.8% (1.5% at company-owned stores), which outpaced consensus estimates for a 1.2% increase at company-owned stores. The increase at company- owned stores reflected a 1.3% jump in overall transactions.
The bottom line miss is seemingly due, in part, to some nonrecurring items at Qdoba, although that does not excuse the miss by any means. First, the company ramped up its advertising costs in the quarter, driving cost three cents per share higher than the prior year. In addition, there were two cents per share of higher pre-opening costs due to a greater number of store openings and another drag of two cents per share due to new company uniforms and a brandwide conference. We note that JACK has been revamping the Qdoba brand, especially with its store remodeling, so this is in line with the overall company strategy.
Along with the disappointing results, the company also chose inopportune times to repurchase its stock, buying back 1,274,000 shares at an average price of $78.48. This is yet another sign of bad management, and we are left to wonder what the heck executives were thinking when they decided to chase their shares as they witnessed weakening conditions.
We never like to see management blaming poor performance on the actions of their competitors, as we believe it is their own job to implement changes and promotions to combat those pressures. Once management's credibility is lost, it is incredibly difficult to reclaim, at least at any point in the near future. We do not intend to defend shares, and believe the extreme selloff is a proper reflection of how much investors feel misled by management's prior commentary.