Technology Upgrades And New Restaurants Will Drive Future Success

Key Takeaways

• Strategic investments in technology and menu optimization are driving enhanced customer engagement, revenue growth, and improved margins through digital sales and increased check sizes.
  
• New restaurant openings and focus on capital allocation are set to bolster market penetration, improve cash flow, and enhance overall financial performance.
  
• Leadership changes and economic pressures threaten stability and performance, while reliance on non-recurring benefits raises concerns over future revenue and margin growth.

Catalysts

Operates and franchises quick-service restaurants under the Jack in the Box and Del Taco brands in the United States.

• Jack in the Box has made significant investments in its technology stack, enhancing digital capabilities that can drive future revenue growth through improved customer engagement and digital sales.
  
• The company intends to open 35 to 45 new restaurants in FY 2025, which is expected to contribute to future revenue growth and geographical market penetration.
  
• There are plans to optimize capital allocation and leverage reductions, which should improve free cash flow and potentially enhance net margins by decreasing interest expenses.
  
• Del Taco's system-wide menu optimization initiative has shown early signs of success, expected to increase average check sizes and potentially improve revenue and margins.
  
• The company's emphasis on value leadership and menu innovation, combined with digital evolution, is expected to reaccelerate comparable sales, positively impacting future earnings.

Jack in the Box Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jack in the Box's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.7% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $110.8 million (and earnings per share of $5.83) by about May 2028, up from $-41.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from -12.0x today. This future PE is lower than the current PE for the US Hospitality industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 2.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Jack in the Box Future Earnings Per Share Growth

Risks

• Recent leadership changes and interim executive appointments could lead to instability, affecting strategic direction and decision-making, potentially impacting future earnings and investor confidence.
  
• Negative same-store sales expected for both Jack in the Box and Del Taco in the second quarter indicate ongoing macroeconomic pressures and traffic declines that could hit revenue and margins.
  
• A significant portion of first-quarter restaurant-level margin improvement was due to a one-time benefit from a beverage partner contract, suggesting future margin growth may be less certain, impacting net margins.
  
• Planned reductions in share repurchases and capital expenditures hint at a need to address leverage issues, which may limit opportunities for revenue growth and expansion.
  
• The challenging consumer environment, marked by low consumer confidence, presents risks to sales strategy and the ability to reaccelerate comparable store sales growth, potentially impacting overall revenue and earnings.

Valuation

• The analysts have a consensus price target of $35.765 for Jack in the Box based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $110.8 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $26.59, the analyst price target of $35.76 is 25.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.