Lower Commodity Prices Expand JACK’s 2Q16 EBIT Margins
You Don't Know JACK until You've Seen the Fiscal 2Q16 Results
EBIT margins
In fiscal 2Q16, Jack in the Box (JACK) posted EBIT (earnings before interest and tax) of $52.8 million and an EBIT margin of 14.6%, as compared to 13.4% in 2Q15. Analysts were expecting JACK’s EBIT margin to be 12.9%.
EBIT margin drivers
With favorable commodity prices, the cost of sales as a percentage of total revenue declined from 31.2% in fiscal 2Q15 to 30.2% in fiscal 2016. These margins were affected by lower G&A (general and administrative) expenses, which declined from 14.7% to 13% YoY (year-over-year) due to lower pension expenses, lower incentive compensation, and lower same-store sales growth.
However, the increase in labor wages increased labor expenses as a percentage of total revenue from 27.2% to 28%. Occupancy and other operating costs also increased from 21% to 21.9%.
Peer comparisons and outlook
In the first quarter of 2016, McDonald’s (MCD), Wendy’s (WEN), and Restaurant Brands International (QSR) posted EBIT margins of 30.2%, 16.9%, and 38%, respectively, compared with 25.3%, 11.3%, and 27.4%, in 1Q15.
JACK’s management is expecting deflation of 2% in commodity prices for its Jack in the Box brand in the remaining two fiscal quarters of 2016, and for Qdoba, they are expecting deflation to be at 4%. This may have compelled analysts to forecast EBIT margins of 14.5% for fiscal 2016, as compared to 12.8% in 2015. Analysts also forecast EBIT margins of 15.8% and 15.6% in 1Q17 and 2Q17, respectively, as compared to 13.2% and 14.6% in 1Q16 and 2Q16.
Notably, JACK makes up 0.18% of the holdings of the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio ETF (PRFZ),
In the next part, we’ll discuss JACK’s EPS (earnings per share) and revised EPS estimates for the next four quarters.
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