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Why Did JACK’s EBIT Margins Expand in Fiscal 2Q17?

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Fiscal 2Q17 EBIT margins

In fiscal 2Q17, Jack in the Box (JACK) has EBIT[1. earnings before interest and tax] of $60.1 million, which represents an EBIT margin of 16.3%. Comparatively, in fiscal 2Q16, the company had posted EBIT margins of 14.6%.

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Factors that led to expansion of EBIT margins

The decline in SG&A (selling, general, and administrative) expenses and refranchising of company-owned restaurants led to the expansion of JACK’s EBIT margins in fiscal 2Q17. However, the rise in the cost of sales, labor, and occupancy expenses offset some of the expansion in EBIT margins.

During the quarter, the SG&A expenses declined from 13% of the total revenue in fiscal 2Q16 to 9.7% due to refranchising. However, the cost of sales increased from 22.4% to 22.7% due to sales deleverage from negative SSSG at Qdoba restaurants. The labor inflation of 6% increased the labor expenses from 22.1% to 22.4%. The occupancy cost also increased from 16.5% to 17.5% due to sale deleverage.

Peer comparisons

During the same period, McDonald’s (MCD), Wendy’s (WEN), and Restaurant Brands International (QSR) posted EBIT margins of 35.8%, 21.1%, and 39.1%, respectively. In fiscal 2Q16, the companies had posted EBIT margins of 30.1%, 17.8%, and 43.3%, respectively.

Outlook

For next four quarters, analysts are expecting JACK to post EBIT margins of 18.1% compared to 16% in fiscal 2Q16. The expansion is expected to be driven by refranchising of Jack in the Box company-owned restaurants and a decline in SG&A expenses.

However, some of the expansions are expected to be offset by the rise in commodity prices. The management expects commodity prices to rise in the third and fourth quarters of 2017.

Next, we will look at JACK’s fiscal 2Q17 earnings.

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