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.


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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.)

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