Jack in the Box: A Hidden Gem in the Fast-Food Shakeout

The fast-food sector is in the midst of a reckoning. Rising labor costs, shifting consumer habits, and the ghost of inflation haunt even the most iconic brands. But here’s the twist: Jack in the Box (NYSE: JACK) might just be the contrarian play to buy because of its recent stumble. Let me break down why the Q1 revenue dip isn’t a death knell—it’s a setup for a comeback.

The Revenue Decline: A One-Way Ticket to Lower Risk

Jack in the Box’s Q1 revenue fell 3.7% to $469.4 million, driven by refranchising at Del Taco. But here’s the catch: refranchising is a strategic move, not a failure. By shedding company-owned restaurants, Jack in the Box reduces operational overhead, labor liabilities, and real estate risks. For every restaurant handed to a franchisee, the company swaps volatile EBITDA for predictable royalty streams.

Take Del Taco: while its same-store sales dropped 4.5%, refranchising 13 company-owned units in Q1 alone created a pipeline for 12 new locations. This isn’t shrinking—it’s rebuilding. Franchisees are hungry to grow, and Jack in the Box is their landlord, not their chef.

Non-Cash Impairments: A Necessary Wound

The Q2 goodwill impairment charge of $203 million for Del Taco was brutal on the balance sheet, but let’s be clear: this is a write-down, not a cash burn. The GAAP loss of -$7.47 per share is a temporary hit to clear the deadwood. Management is saying, “We overpaid for Del Taco in 2016, and it’s time to face reality.”

The real story? The impairment forced a reset. Del Taco’s valuation now better aligns with its current performance, and the brand is now under review for strategic alternatives—a process that could unlock value through a sale or pivot. Meanwhile, Jack in the Box’s core brand remains strong, with same-store sales inching up 0.4% despite a brutal comp from 2024.

“JACK on Track”: The Playbook for Margin Recovery

The “JACK on Track” plan is no gimmick. It’s a three-pronged attack:
1. Cost Discipline: Food and packaging costs fell due to better contracts, and the POS system rollout (now in 1,000 locations) is slashing labor waste.
2. Franchise Growth: 3 new development agreements for 10 Jack in the Box locations, plus 8 new company-owned units in Chicago by summer 2025. Franchise margins are already at 40.9%, a cash cow.
3. Operational Focus: Closing underperforming restaurants (net loss of 1 Jack in the Box location in Q1) and redirecting resources to high-margin markets.

This isn’t just about cutting costs—it’s about owning the right restaurants. By mid-2025, Jack in the Box will have a leaner footprint with higher per-unit profitability.

Why the Market Misses the Macro Resilience

Quick-service dining isn’t a luxury—it’s a necessity. When times are tough, people don’t stop eating burgers; they just buy cheaper ones. Jack in the Box’s $5 menu and drive-thru dominance (accounting for 60% of sales) make it a recession-resistant powerhouse.

The stock trades at just 12.3x 2025E EPS, a discount to its 5-year average of 15x. The market is pricing in permanent Del Taco underperformance, but here’s the kicker: refranchising and cost cuts could boost free cash flow by 20%+ by 2026.

The Buy Signal: Act Now Before the Turnaround Clicks

The pain is priced in. The impairments are behind us. The refranchising is accelerating. And the core brand? It’s still serving up the Whopper with fries that Americans crave.

Bottom line: This is a stock to buy at $90, hold at $100, and sell at $120. The Q1 stumble isn’t a death spiral—it’s a clearance sale on a brand rebuilding its house. Don’t let the headlines fool you. This is a buy.

—Jim