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(Updated - October 24, 2016 8:33 AM EDT)
Goldman Sachs initiated coverage on Jack In The Box (NASDAQ: JACK) with a Sell rating and a price target of $88, implying downside of 11%. Analyst Karen Holthouse sees near-term risk to comp outlook at Jack In The Box, and she noted that Qdoba struggles to continue.
"We believe Taco Bell’s emphasis on entry level value and growing breakfast creates near-term risks to JITB comp trends given geographical overlap and similar Millennial positioning," said Holthouse. "At the same time, rising CA unemployment could start to offset demand benefit of wage increases. We also believe Qdoba could continue to struggle in an increasingly competitive fast casual field; our propriety analysis of customer reviews suggests it resumed losing ground after an initial “all-in” pricing benefit. Valuation suggests room for compression if comps disappoint and, unlike other refranchising stories (e.g., WEN), Qdoba capex prevents a compelling out-year FCF story."
The analyst said, "We believe Taco Bell’s emphasis on $1 price points (an entry point a burger company would struggle to replicate) and the breakfast business both present traffic risks. CA macro tailwinds could also be dissipating with rising unemployment starting to offset wage increases. (2) Qdoba brand losing ground after “all-in” push: Customer reviews and our own survey data both suggest the initial benefit from the “all-in” pricing switch has started to fade. We also have questions about platform introductions creating complexity issues and how offensive vs. defensive the remodel program proves to be. (3) Less support on out-year FCF than other refranchising stories: We estimate a 2018 FCF yield of 3.8%, weighed down by Qdoba capex."
Shares of Jack In The Box closed at $98.50 yesterday.
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