Fast-food operator Jack in the Box (Nasdaq:JACK) closed out a tough year by reporting disappointing fourth-quarter and year-end results on Monday. It continues to see diverging performance of its two restaurant concepts and should consider setting its popular Mexican-food franchise, Qdoba, free from the corporate fold.

IN PICTURES: 8 Ways To Lose Money On Bonds

Fourth-Quarter Review
JACK's total sales improved 4.2% to $563.2 million, while company-owned restaurant sales fell 7% to account for 70% of sales. The company is in the process of selling its stores to franchisees and sold 108 stores during the quarter, which served to reduce reported sales. Same-store sales fell 4% at the company-owned namesake stores and a less severe 3.3% in the entire system of company-owned and franchised locations. Comparable sales increased a robust 5.6% across the Qdoba system.

The company ended the quarter with 2,206 namesake stores, 57% of which were franchised; 64% of the 525 Qdoba locations were franchised as of quarter end. The company has a goal of having 70-80% of its namesake stores under franchisee control by 2013.

Reported profitability fell as the company took a $28 million charge to close 40 underperforming stores. It also deducts proceeds from the sale of company-owned stores from operating costs, both of which served to mask the true profitability of the underlying store base. Net reported earnings came in at $4 million, or 7 cents per diluted share.

Full Year Results and Outlook
There were 219 stores sold during the year, which brought in $55 million or 65 cents per diluted share. Reported net income including the store closing charges was $70.2 million, or $1.26 per diluted share.

For the coming year, management currently projects namesake company store comps to range within a 2% fall or 2% rise. Qdoba comps should increase between 2% and 4%. Analysts currently project full-year sales will fall nearly 8% to $2.1 billion. Company earnings guidance is for $1.41 in $1.68 per diluted share, which includes 66 to 78 cents in gains from selling off stores.

Should It Spin Off Qdoba?
Based off the earnings base on the existing base of company-owned stores, Jack in the Box trades at a hefty forward P/E ratio. There is obvious value to shareholders as the company receives cash for selling off stores, but this is likely reflected in the high multiple. Management is using the excess capital to repurchase shares and bought back about $100 million in stock last year, or about 10% of its total stock market capitalization. It is also paying down debt.

Given the continued struggles of the existing store base, the company could look to enhance shareholder value by spinning off Qdoba. It doesn't break out Qdoba stores, but the value is apparent at Chipotle Mexican Grill (NYSE:CMG) that was also spun out a number of years ago. Chipotle trades at a forward P/E above 40. Tim Horton's (NYSE:THI) has also experienced impressive stock returns since it was spun off from parent Wendy's/Arby's (NYSE:WEN).

This could make the legacy Jack in the Box stores more appealing to private equity groups that might find its stable cash flow worthy of a takeover. Burger King and CKE Restaurants, owner of the struggling Hardee's/Carl's Junior stores, were recently taken private. This could also enhance shareholder value.

Bottom Line
For the time being, management will keep both concepts under one corporate umbrella and focus on selling struggling stores while growing it the successful Qdoba franchise. This is a similar tactic being taken by Yum! Brands (NYSE:YUM) as it expands in China and is selling off U.S.-based stores. (Don't put your money on the table before getting a taste for analyzing this sector. Check out Sinking Your Teeth Into Restaurant Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center