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Why Jack in the Box’s EBITDA Margin Will Likely Expand in 1Q16

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EBITDA margins

Sales leverage and lower commodity prices are expected to expand Jack in the Box’s EBITDA margin from 19.6% in 1Q15 to 19.9% in 1Q16. EBITDA margins are defined as the ratio of earnings before interest, tax, depreciation, and amortization to total sales.

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Cost and expenses

During the 4Q15 earnings call, the company stated that it would incur a non-recurring cost in 1Q16 due to expenses from a Qdoba general manager conference, which was held in October 2015. The conference was held to align both company-operated and franchise-operated restaurants on the position of Qdoba and the launch of its “Knockout Tacos.” Other non-recurring costs for 1Q16 include spending on training and the launch of new products for both brands. These costs are expected to negatively affect EPS by $0.05 for 1Q16.

Also, the cost increase due to the rise in minimum wage is expected to be offset by sales leverage and lower commodity prices. The company management has estimated the commodity inflation at 1%.

The SG&A (selling, general, and administrative expenses) costs for fiscal 2016 are expected to come down to 13.5% from 14.4% in 2015 due to the decrease in pension expenses. However, interest expenses are expected to go up due to increased leverage.

You can also gain exposure to JACK by investing in the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ), which invests 0.18% in JACK. PRFZ has also invested 0.21% in Domino’s Pizza (DPZ), 0.18% in Dunkin’ Brands (DNKN), and 0.11% in Texas Roadhouse (TXRH).

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