2015.02.15 sdsu cfa research challenge report

CFA Institute Research Challenge

hosted byCFA Society San Diego

San Diego State University

CFA Institute Research Challenge Student Research: This report is published for educational purposes

only by students competing in the CFA Institute Research Challenge.

February 12, 2015

USA ǀ Consumer Discretionary ǀ Restaurants Quick Service Restaurants (QSR)

Fast Casual

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Jack in the Box, Inc. (JACK: NASDAQ)

Target Price: $99.12Recommendation: HOLD

Current Price: $88.12Upside Potential: 12.5%

Highlights: A Cash Cow Hungry for Growth Increasing exposure to the fast casual segment: Jack in the Box is aggressively

growing its Qdoba brand, a fast casual Mexican restaurant acquired by the company in 2003. During 2009‐2014, 153 company‐operated Qdoba stores have been opened. In addition, the brand has achieved higher levels of profitability after an intensive period of brand positioning and expansion. Among the most recent transformations is its all‐inclusive price structure. We estimate that revenue growth will be primarily driven by the increase in Qdoba restaurants system‐wide. The company expects to open up to 60 restaurants in 2015 and 2,000 in the long term.

Annuity‐like cash flows derived from franchise business: 2009‐2014 has been a period of transformation for the Jack in the Box restaurant system. Through refranchising and closure of underperforming Jack in the Box restaurants, the company has managed to significantly reduce its exposure to the sluggish growth and intensive competition found in the QSR industry.

Increasing average unit volume (AUV) and same‐store sales in both segments:

The restructuring, rebranding, and renovation efforts done in the past six years are proving to be fruitful. The recent growth in the AUV and same‐store sales are a signal that the management initiatives have been effective.

Financing flexibility of its new credit facility: The Company has recently

refinanced its debt with a new credit facility. As a result, Jack in the Box’s management is optimistic about the flexibility and low cost offered by the new credit terms. Consequently, we believe this financing flexibility enables the company to pursue its Qdoba expansion, up to $90 million in capital expenditures is expected in fiscal year 2015, as well as remain committed to return cash to shareholders.

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Return On Sales (ROS) 5.3% 8.7% 8.0% 9.3% 10.9%

Return On Assets (ROA) 17.3% 10.2% 8.3% 9.9% 12.5%

Return On Equity (ROE) 27.0% 17.4% 14.1% 11.6% 24.4%

Return on Capital Invested (ROIC) 9.1% 10.5% 9.5% 11.1% 13.1%

Cumulative PV of FCF (2015‐2019) 669.4$

Terminal Value

Terminal Year EBITDA 339.4$

EXIT Multiple 14.6x

Terminal Value 4,967.0$

Discount Factor 0.77

PV Of Terminal Value 3,811.0$

% of Enterprise Value 85.06%

Enterprise Value 4,480.4$

Less: Total Debt (507.88)

Plus: Cash and Cash Equivalents 10.8

Implied Equity Value 3,983.30$

Fully Diluted Shares Outstanding 40.2

Value per Share 99.12$

DCF Valuation

Jack in The Box

Current Price $88.12

52‐week Price Range $51.23‐$88.55

Dividend Yield 0.9%

Beta 0.5

Debt to Market Cap 14.8%

Return on Equity 24.4%

Book Value per Share $6.65

Marginal Tax Rate 35.0%

CFA Institute Research Challenge February 12, 2015

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BUSINESS DESCRIPTION Jack in the Box (NASDAQ: JACK) established in 1951 in San Diego, California, operates and franchises Jack in the Box quick service restaurants (QSR) and Qdoba Mexican Grill fast casual restaurants. Jack in the Box system includes 2,250 restaurants in 21 states of the United States, while Qdoba’s system includes 638 restaurants in 47 states, the District of Columbia and Canada.

Product Portfolio Jack in the Box offers standard fast‐food fare, such as hamburgers, fries, and soft drinks, as well as salads, tacos, sandwiches and real ice cream shakes. Jack in the Box differentiates itself from the competition by serving breakfast items all day long and offering late night meals. According to Company’s data, 40% of its business comes from breakfast and late night sales. Qdoba offers fast casual atmosphere where, for a fixed price, customers can customize their orders with add‐ons. The bestselling Qdoba product is “Queso Diablo,” a warm cheese based dip served with tortilla chips.

Constant Innovation Jack in the Box constantly promotes its brand awareness in innovative and sometimes even provocative ways. The firm has been criticized for its “Munchies Meal” campaign. However, the brand image of “Jack” as being fun, entertaining, creative, and clever, explains the high level of customer loyalty and strong demand for its products. The company uses mass media such as TV, radio, print, social and digital media to increase Jack in the Box brand awareness and brand resonance. In contrast, Qdoba’s advertising decisions are less centralized and are determined by local management.

Future Intentions Company management anticipates growth opportunities for Jack in the Box restaurants given its current presence in only 21 states. In 2015, the company plans to open about 10‐15 Jack in the Box restaurants system‐wide, while maintaining its proportion of franchises in the 80‐85% range. The management sees significant growth opportunities for Qdoba, given its casual format and unique pricing strategy. The company plans to open 50‐60 new restaurants system‐wide, with a long‐term goal of 2,000 new restaurants, while maintaining a 50% ratio of company‐owned restaurants. According to management, Qdoba restaurant development costs can range from $0.4‐$1.1 million depending on type, square footage and geographic region.

Corporate Information

Headquarters

9330 Balboa Avenue, San Diego, CA 92123

CEO CFO

Leonard A. Comma Jerry P. Rebel

CMO VP IR

Keith M. Guilbault Carol A. DiRaimo

Leonard A. Comma Michael W. Murphy

David L. Goebel James M. Myers

Sharon P. John David M. Tehle

Madeleine Kleiner John T. Wyatt

Founded Employees

1951 19,150

Source: Company Information

Board Members

Key Officers


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Share Distribution Currently, 97% of JACK’s outstanding shares are held by Institutional and Mutual Fund Owners. Approximately, two percent (1.7%) of shares are held by individual owners. The top five institutional and individual shareholders are displayed in the tables below.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING The QSR segment of the restaurant industry is maturing and highly competitive. Most of the QSRs offer very similar products and compete on price. The average customer profile for a QSR is an adult who is used to eating fast food, is not very health conscious, or someone with limited time and a low budget to cook breakfast, lunch or dinner at home. Commodity Prices: Commodity Prices Continue To Increase Beef accounts for 20% of the company’s commodity purchases. According to the Company’s Annual Report, the price of beef is expected to increase 15‐20% in 2015. In 2014 Jack in the Box and Qdoba have been affected by a 1.8% and 1.4% increase in commodity prices, respectively. The company expects a rise of 3% in overall commodity costs in 2015. The company is exposed to commodity price risk as these prices can shift unexpectedly due to several factors. Beef and pork costs represent 26% of their supply chain; it is more difficult to hedge against price volatility because these commodities do not engage in forward pricing agreements. However, Jack in the Box’s refranchising strategy helps the company transfer this risk to franchisees. Employee Costs: Healthcare Benefits And Minimum Wage Recently, President Obama has announced his plan for raising the minimum wage by 39% from $7.25 to $10.10. Employee costs are also subject to increase, because starting in 2015 the Affordable Care Act requires employers with 50 or more employees to offer health insurance, or face potential penalties. Changing Consumer Tastes: Health Conscious Trend Consumers are increasingly adopting healthier life style and food options. Customers are becoming more health conscious and are watching their diets. In addition, the law requires that restaurant chains with 15 or more locations publish detailed nutritional information of their menu offerings. The QSR industry is managing this trend by introducing lower calorie options and enticing menu innovation. Strengthening US Dollar & Interest Rates: Interest Rates On The Rise? The European Central Bank’s recent quantitative easing announcement, and the resulting depreciation of the Euro relative to the US Dollar, may prevent US interest rates from rising. Many believe that the U.S. Federal Reserve will not raise interest rates due to low consumer confidence numbers and weak wage inflation. A rising US Dollar combined with relatively higher interest rates in the US will increase demand for US Treasury bonds abroad, because they will offer higher yields relatively to European bonds. The law of supply and demand will cause US bond prices to increase and interest rates to decline. Jack in the Box has recently refinanced its bank debt and entered into interest rate swaps to hedge against rising rates. Therefore, we do not believe rising interest rates represent a great threat to the company in the near term. Dropping Oil Prices: More Cash For Consumers; Improved Operating Environment The S&P500 Restaurant Index has increased by 6% since November 2014 in conjunction with the sharp decrease in oil prices. Low to middle‐income consumers spend a proportionally larger portion of their income on gas and will benefit the most from dropping gas prices, which will free up cash for discretionary spending such as entertainment and eating out. We think that fast‐casual restaurants, such as Qdoba, might benefit the most from the increase in discretionary spending. However, according to Blackstone’s Market Commentary by Byron Wien, the demand for oil from the developing world is expected to increase this year, driving the oil price back up and moderating consumer spending.

Top 5 Institutional Shareholders (as of 02/07/15) Top 5 Individual Shareholders (as of 02/07/15)

Holder Name Position Percent Outstanding Holder Name Position Percent Outstanding

1. Blackrock 3,851,938 9.33% 1. Linda Lang 277,284 0.71%

2. Vanguard Group Inc. 3,080,474 7.94% 2. Jerry Rebel 99,664 0.26%

3. T Rowe Price Associates 1,734,790 4.47% 3. Leonard Comma 88,530 0.23%

4. FMR LLC 1,639,361 4.23% 4. Phillip Rudolph 82,268 0.21%

5. Invesco LTD 1,500,639 3.87% 5. Michael Murphy 55,156 0.14%


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FIVE FORCES ANALYSIS Threat of New Entrants (4) Threat of new entrants presents a risk for Jack in the Box. Currently, the overall industry includes more than 200,000 restaurant firms, and among its main players are McDonald’s, Yum! Brands, Wendy’s and Doctor’s Associates (Subway). Furthermore, the industry is very saturated and concentrated. Given the saturation of the industry the firms cannot fully enjoy those economies of scale that they achieve. New entrants offering healthier and quick food options would be able to compete with current large players.

Customer Bargaining Power (5) QSR industry customer switching costs are very low. Restaurants are usually chosen based on location and convenience, not because of brand loyalty or product quality and taste. Because of low product differentiation, menu similarity and industry saturation, customers enjoy high bargaining power and large variety of choices. Bargaining Power of Suppliers (2) Large QSR chains have thousands of suppliers to choose from. Suppliers can be chosen and changed via competitive bid process. Suppliers have a high interest in working with chains due to high volumes and competition is high. Suppliers have limited negotiating ability due to the QSR buying power. Threat of Substitute Product (5) Hamburgers and fries food product offerings are close substitutes. Most QSRs are beginning to offer sandwiches, healthy wraps, fresh salads and smoothies to retain their customers due to changing consumer eating habits and changing perceptions of health. QSR product differentiation with healthy options is very limited. Therefore, consumer switching for the substitute products remains high. Competition Among the Existing Firms (4) Industry competition is high. Firms compete in a saturated market with low sales growth. Franchising

models are used to transfer most business risks to franchisees. QSR firms compete with marketing and

promotion strategies, product bundling and customer loyalty programs. Additionally, economic recovery

increases consumer purchasing power and makes consumers switch to fine dining restaurants.


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Source: The Statistics Portal Customer Research

COMPETITORS The QSR industry is highly competitive and concentrated with the top five firms controlling 46% of the industry market share. Most companies compete on price and product bundling options, such as “Munchies Meal” from Jack in the Box or “Happy Meal” from McDonald’s. Jack in the Box competes on innovation in advertising and strong brand value and brand image. In addition, strong differentiators of Jack in the Box are its late night meal options and breakfast items served all day. None of the major competitors offer the same options to its consumers. To maintain brand value and strengthen customer loyalty, JACK continuously monitors and analyzes customer feedback and evaluation surveys, available in stores and online. As a result of these initiatives, Jack in the Box average unit volume increased 2.2% and Qdoba’s 5.2% in 2014.

Due to high concentration and saturation of the industry, as well as similarities in product offerings, main competitors of Jack in the Box are: McDonald’s Corporation, Wendy’s Co, Sonic Corp., Panera Bread Co, Domino’s Pizza Inc. and others.

McDonald’s Corporation (NYSE: MCD) McDonald’s is the largest fast food chain in the world and currently a market leader representing approximately 22% of the market. McDonald’s successfully competes on price offering and its “Dollar Menu” helps the company to remain a cost leader. Also, McDonald’s continues to target their core audience, children (ages 2‐11) with their “Happy Meal” menu. Wendy’s Co (NYSE: WEN) Wendy’s is also a successful hamburger chain with about 6% market share in the QSR industry. Wendy’s core target audience is very similar to that of Jack in the Box (adults between ages 18 and 34). However, Wendy’s differentiates itself by offering large salad variety and promoting higher quality of their ingredients and healthier eating habits. Sonic Corp (NYSE: SONC) Sonic is a drive‐in fast food restaurant chain that has been operating since the early 1950s. The main menu items are hamburgers, fries, onion rings, corndogs and milkshakes. The company has similar franchising strategy to JACK’s. At the end of 2014, 89% of Sonic’s locations were franchised and only 11% were company –owned. Panera Bread Co (NYSE: PNRA) Panera bread is a chain of fast casual restaurants, offering primarily soups, salads, sandwiches, pasta, and bakery menu items. Panera bread is closely comparable to Qdoba because of the sit‐down, casual atmosphere and store layout. The company strongly positions itself on the market and easily adapts to changing consumer tastes by offering healthy food options at an affordable price. Domino’s Pizza Inc. (NYSE: DPZ) Domino’s is an American restaurant chain mainly serving and delivering pizza, pasta, sandwiches and salad. Domino’s is the second largest pizza chain in the US, with franchising locations worldwide. Domino’s was an innovator in introducing mobile ordering, pizza tracking options (real time progress bar) and customizing options. In response to changing customer perceptions and preferences, Domino’s removed the word “Pizza” from their logo to emphasize that they are serving healthier food options such as salads, pastas and sandwiches, while pizza is still their best seller.


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Investment Summary Recommendation Our team’s “Hold” recommendation is derived from our optimistic expectations about Jack in the Box’s operations management and its industry’s growth prospects. However, most of the intrinsic value resulting from Jack in the Box’s business transformation is already incorporated into the current stock price. From fiscal year end to the day of this writing, Jack in the Box’s stock price rose 34.1% from $65.73 to $88.12. We expect that in aggregate from 2014‐2019, Jack in the Box sales will have a compounded annual growth rate (CAGR) of 4.7%. Additionally, our sales projections are going to generate year‐over‐year EPS growth of 6.9%, 5.0%, and 5.5% for the next three years, and a CAGR of 5.1% for the period of 2014‐2019 (Appendix 1 & 7).

Our target price of $99.12 reflects the growth in Qdoba revenues, as well as the steady revenue stream from Jack in the Box franchised restaurants. Due to the cash‐based nature of the restaurant business, Jack in the Box strong sales translate into strong free cash flows which are expected to have a CAGR of 4.9 % during 2014‐2019. Lastly, with the new Jack in the Box stock price highs, we assume that management will be less inclined to repurchase shares as during fiscal year 2014. However, we assume that the company will return cash to shareholders in the form of dividends on a quarterly basis (Appendix 1 & 2).

Growth Rates

Sales EBITDA FCF EPS

Historical (2012‐2014)

1‐year ‐0.4% 8.5% ‐8.8% 22.8%

2‐year ‐0.8% ‐0.2% ‐6.9% 22.1%

Estimated (2014‐2016)

1‐year 2.5% 0.2% 1.8% 6.9%

2‐year 4.7% 2.9% 2.5% 6.0%

Long‐term 13.7%

Source: Team Estimates and Bloomberg


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Valuation Our target price of $99.12 is based on a Discounted Cash Flow approach. In addition to our DCF results, we used two multiple‐based valuation alternatives in Appendix 11. Our analysis using the EV/EBITDA multiple yielded a target price of $91.10, which represents a 3.4% increase relatively to the current price. In contrast, our P/E multiple valuation indicated a much lower valuation at $76.30––a potential price decline of ‐13.4%. Appendix 12 presents a sensitivity analysis of our DCF valuation results for different levels of weighted average cost capital (WACC), exit multiple and growth. The results from the sensitivity analysis are then compared with the results from our comparable multiples in Appendix 13 by ranking the results that fell within the 25th and 75th percentile.

DCF Valuation We performed an in depth analysis of Jack in the Box and Qdoba revenue drivers to forecast free cash flows for the next five years. Furthermore, sales for company operated and franchise restaurants are estimated based on expected Average Unit Volume (AUV) and projected average number of restaurants. In aggregate, from fiscal year 2014 to 2019, the compounded annual growth rate (CAGR) is 5.2% and 2.9% for company operated sales and franchise revenues, respectively. Due to the strong similarity of our comparables’ fundamentals and business model, our exit multiple is based on this population’s median 2015 estimated EV/ EBITDA multiples. Assuming an exit multiple of 14.6x and a $339.4 million terminal year EBITDA, adjusted for impairments, Jack in the Box is valued at $99.12 a share (Appendix 1, 5, 6 & 11).

0

Alternatively, when assuming a 2.0% perpetuity growth rate and 5.4% weighted average cost of capital, Jack in the Box is valued at $105.5 a share. The forecasted free cash flows are discounted by a weighted average cost of capital of 5.4%. Cost of equity is calculated using the Capital Asset Pricing Model (CAPM), where beta is computed by regressing the weekly returns of Jack in the Box on those of the S&P 500 Index for the last three years. In addition, cost of debt was based on the most recent information provided by Bloomberg. (Appendix 10).

Cumulative Present Value of FCF 669.4$

Terminal Value

Terminal Free Cash Flow 178.6$

WACC 5.4%

Perpetuity Growth Rate 2.0%










Intrinsic Value Share 105.35$

DCF Valuation (PGM)


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Comparable Multiples Our comparable sample population contains ten companies from the Quick Service Restaurants (QSR) and Fast Casual industries. Half of the population consists of mid‐cap QSRs while the remainder is comprised of different sizes QSRs and Fast Casual restaurants. During our analysis we noticed that the population multiples for EV/ EBITDA was positively skewed, while P/E population of multiples was negatively skewed. Therefore, we decided that the median EV/ EBITDA and P/E multiples would offer a more accurate representation of the population than the mean. With an EV/ EBITDA multiple of 14.6x and a P/E multiple of 31.6x, Jack in the Box’s 2015 target share price is valued at $91.10 and $76.30, respectively. These lower figures may be an indication that our 2015 EBITDA and earnings expectations are insufficient to price the stock at its current level. Alternatively, they may be a reflection that Jack in the Box is perceived by the market as having superior prospects compared to its Quick Service Restaurant (QSR) and Fast Casual comparables (Appendix 11). Valuation Risk Our Jack in the Box share value estimation is derived from a range of forward‐looking market and firm specific assumptions. Moreover, any significant deviations from our assumptions could have a substantial effect on our projections. Some of our assumptions include the increased growth in Qdoba restaurants average unit volume (AUV), ongoing shift of consumer preferences to fast casual dining, and our weighted average cost of capital estimation. Similarly, our comparable multiple valuation is subject to behavioral factors such as market sentiment and it may not be a fair representation of the underlying industry fundamentals.

Financial Analysis: Growth Opportunities, Cash Stability & Financing Flexibility Revenues & Development Our sales forecast is founded on our assumptions concerning the company’s new business model, as well as the management’s intent to keep expanding its fast casual business segment. Even though Jack in the Box’s last three years sales growth were negative (‐9.2%, ‐1.3%, and ‐0.4% during 2012‐2014, respectively), we believe the company is due to reach the inflection point. Qdoba system has increased by 153 new company‐operated restaurants (97.5% increase) during 2009 – 2014.

Total sales were affected by the reduction in company‐operated Jack in the Box restaurants. Despite the increasing number of Qdoba units, the resulting sales from the fast casual segment were not enough to offset the sales lost caused by transformation in the Jack in the Box system. The decreasing rate in negative year‐over‐year (YoY) sales growth reflects this relationship, and we expect that for 2014‐2015, year‐over‐year sales growth will be 2.5%. Since Jack in the Box management has shown strong commitment to develop the fast casual brand, we believe that Qdoba’s performance will continue to improve allowing the company to monetize from the strong demand for fast casual dining. As mentioned previously, we anticipate positive year‐over‐year sales growth in the foreseeable future and 4.7% sales CAGR (2014‐2019) system‐wide. During the period of fiscal years 2009‐2014, the number of Jack in the Box franchises increased 78.0% while company operated restaurants decreased 63.8%. These refranchising efforts have created a steady revenue stream comprised of rents, royalties and franchise fees. Consequentially, only about 20% of Jack in the Box system‐wide restaurants are operated by the company. By focusing on keeping the profitable units, closing underperformers, and refranchising, Jack in the Box managed to significantly reduce the risks associated with the revenues from its QSR brand. As a result of the conservative growth and development associated with Jack in the Box, we expect rent revenue to have a 1.2% CAGR for the period projected. On the other hand, royalties’ revenues, are expected to yield 5.0% CAGR (2014‐2019). This growth is a reflection of our expected increase of 177 new Qdoba franchised restaurants, as well as improvements in Qdoba’s franchises’ average unit volume (AUV), which we estimated to have 8.0% CAGR (2014‐2019) (Appendix 4, 5 & 6).


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Financing Flexibility Jack in the Box $600.0 million revolving credit facility offers the company significant convenience to support its financing needs at relatively low cost, currently a 1.75% spread over the 3 month US Dollar LIBOR. One of the advantages of having a revolving credit facility stems from its flexibility regarding debt issuance and settlement. Since Jack in the Box is able to make principal payments on a regular basis, the gross cash inflows from this revolving credit facility can exceed the $600 million credit line limit. We assume that this credit facility will play a key role in supporting Jack in the Box capital expenditures needs, as well as offering enough financial slack for management to remain committed to its recent dividend policy. Shares Buybacks and Dividends Jack in the Box spent $319.7 million in share repurchases in fiscal year 2014. In addition, another $117.1 million and $100.0 million are still available for share repurchases, which will expire in 2015 and 2016. In fiscal year 2014, Jack in the Box paid for the first time, $0.40 per share in dividends. Judging by the contrasting decrease in the share repurchase budget and approximately a 31.4% increase in share value, we assume that Jack in the Box will likely decrease its budget for its shares repurchases plan and most likely keep returning cash to shareholders in the form of dividends (Appendix 2 & 7).

Investment Risks

Macroeconomic Environment Jack in the Box, like all restaurant businesses, is exposed to macroeconomic risks. If the company wants to continue growing and opening new restaurants, economic indicators such as consumer confidence, unemployment, discretionary spending, and interest rates must stay at adequate levels. Sales within the fast‐casual and quick‐service restaurant industries will be most affected by decreases in discretionary spending. In its latest statement, the Federal Reserve noted that labor market conditions have improved further, household spending is rising moderately, and lower gas prices have boosted household purchasing power. This macroeconomic outlook is favorable to Jack in the Box. The company is also exposed to interest rate risk as they have $800 million of variable short‐term debt tied to LIBOR. Interest rates are currently low given the recent decision by the European Central Bank to begin their quantitative easing program. They could eventually rise as the Federal Reserve considers increasing the Federal Funds rate due to wage inflation. Risks pertaining to the macroeconomic environment should be closely monitored to ensure that the factors above remain at adequate levels. Risks relating to Competition and Menu Innovation Risk of losing market share will increase as Jack in the Box continues with their expansion plans. This growth can develop price competition as incumbent competitors try to maintain their market share. Price competition is less of a threat for the Qdoba brand as consumers in the fast casual industry are less price sensitive. Qdoba’s new all‐inclusive pricing structure has not met much resistance and customers are more satisfied with it over the old pricing structure. Jack in the Box continues to introduce new products and discontinue older menu items; however, there is no assurance that these offerings will generate sufficient interest and increase same‐store sales. Current food trends and consumer tastes affect the menu and profitability of Jack in the Box and Qdoba. Jack in the Box has to adapt to trends quickly to avoid declines in sales. With an industry that is highly competitive on price, service, location, personnel, advertising, brand identification, and menu innovations, Jack in the Box must maintain an edge on competitors within the market they expand into. This can be challenging as some of Jack in the Box’s competitors have greater financial resources, and have greater advertising abilities. Competition and Menu Innovation should be watched closely because of the sensitivity of the Restaurant Industry to trends and consumer tastes. Growth and Development Risks There are several risks that can constrain company’s growth and development. The first one is the issue of finding quality franchisees. Jack in the Box has been increasing its dependence on franchisees to run their restaurants. Jack in the Box cannot guarantee franchisee success and their ability to operate the stores efficiently and effectively. Therefore, as development and dependence on franchises increases, the risk of underperforming franchises and lower revenues from royalties and rents also increases. Investors should focus on the current status of expansion plans when reading company filings, as this is a key area in our valuation.


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Appendix 1

DCF Valuation Jack in the Box, (NASDAQ: JACK) Source: 10k & Team Estimates

CAGR CAGR

FY 2011 FY 2012 FY 2013 ('11‐'13) FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E ('14‐'19)

Sales Company Operated 1,380.3$ 1,183.5$ 1,143.8$ ‐9.0% 1,120.9$ 1,148.7$ 1,245.2$ 1,347.7$ 1,376.2$ 1,444.5$ 5.2%

% Growth ‐17.3% ‐14.3% ‐3.4% ‐2.0% 2.5% 8.4% 8.2% 2.1% 5.0%

Franchise Royalties/Fees 282.1 325.8 346.1 10.8% 363.2 372.0 381.3 389.7 405.6 419.0 2.9%

% Growth 22.1% 15.5% 6.2% 5.0% 2.4% 2.5% 2.2% 4.1% 3.3%

Total Sales 1,662.4$ 1,509.3$ 1,489.9$ ‐5.3% 1,484.1$ 1,520.7 1,626.5$ 1,737.4$ 1,781.8$ 1,863.5$ 4.7%

% Growth ‐27.6% ‐9.2% ‐1.3% ‐0.4% 2.5% 7.0% 6.8% 2.6% 4.6%

COGS 1,245.0 1,062.0 1,026.0 ‐9.2% 1,005.2 1,036.3 1,112.3 1,192.3 1,221.4 1,278.7 4.9%

% of Sales 74.9% 70.4% 68.9% 67.7% 68.1% 68.4% 68.6% 68.6% 68.6%

Gross Profit 417.4 447.3 463.9 5.4% 478.9 484.4 514.1 545.0 560.4 584.8 4.1%

% Margin 25.1% 29.6% 31.1% 32.3% 31.9% 31.6% 31.4% 31.4% 31.4%

SG&A 224.7 224.9 220.6 206.8 211.9 226.6 242.1 248.3 259.6

% of Sales 13.5% 14.9% 14.8% 13.9% 13.9% 13.9% 13.9% 13.9% 13.9%

Adj. EBITDA* 266.4 284.4 261.3 ‐1.0% 283.5 284.1 300.0 316.2 325.7 339.4 3.7%

% Margin 16.0% 18.8% 17.5% 19.1% 18.7% 18.4% 18.2% 18.3% 18.2%

D&A 96.1 98.0 96.2 91.4 95.4 100.9 105.9 110.0 114.0

% of Sales 5.8% 6.5% 6.5% 6.2% 6.3% 6.2% 6.1% 6.2% 6.1%

Adj. EBIT 170.3 186.4 165.1 ‐1.5% 192.1 188.7 199.1 210.3 215.8 225.5 3.3%

% Margin 10.2% 12.4% 11.1% 12.9% 12.4% 12.2% 12.1% 12.1% 12.1%

Taxes 46.5 33.8 40.3 51.8 66.1 69.7 73.6 75.5 78.9

EBIAT 152.6$ 124.7$ 140.3$ 122.7$ 129.4$ 136.7$ 140.3$ 146.6$ 0.9%

D&A 98.0 96.2 91.4 95.4 100.9 105.9 110.0 114.0

CAPEX (80.2) (84.7) (60.5) (82.9) (92.5) (91.1) (92.3) (93.6)

Change in NWC (8.3) 17.7 (30.8) 7.7 9.9 13.1 (5.1) 11.7

Unlevered Free Cash Flow 162.1$ 154.0$ 140.4$ 142.9$ 147.7$ 164.6$ 152.8$ 178.6$ 4.9%

% of FCF to EBIAT

WACC 5.4% Discount Period 1 2 3 4 5

Present Value of FCF 135.53 132.83 140.43 123.58 137.04

*Adjusted EBITDA was calculated by adding back impairments resulting from the sale of PP&E.

Projection PeriodHistorical Period

Cumulative Present Value of FCF 669.4$

Terminal Value

Terminal Free Cash Flow 178.6$

WACC 5.4%

Perpetuity Growth Rate 2.0%










Intrinsic Value Share 105.35$

Implied Exit Multiple


Terminal Year EBITDA 316.2

WACC 5.4%

Implied Exit Multiple 17.7x

DCF Valuation (PGM)

Cumulative PV of FCF (2015‐2019) 669.4$

Terminal Value

Terminal Year EBITDA 339.4$

EXIT Multiple 14.6x










Value per Share 99.12$

Terminal Year Free Cash Flow 164.6$

WACC 5.4%


Implied Perpetuity Growth 1.8%

DCF Valuation

Implied Perpetuity Growth Rate


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Appendix 2

Forecast Assumptions Jack in the Box, (NASDAQ: JACK) Source: 10K & Team Estimates

FY 2015 E FY 2016 E FY 2017 E FY 2018E FY 2019E

Operating Variables

% of Company Operated Jack in The Box 19.2% 19.2% 19.2% 18.0% 17.0%

% of Company Operated Qdoba 48.6% 48.6% 48.6% 48.6% 48.6%

Franchise AUV Jack in the Box $1.4 $1.4 1.40$ 1.42$ 1.44$

Growth Rate 1.5% 1.5% 1.5% 1.5% 1.5%

Franchise AUV Qdoba $1.1 $1.2 1.34$ 1.42$ 1.51$

Growth Rate 10.0% 10.0% 8.0% 6.0% 6.0%

Company Operated AUV Jack in the Box $1.7 $1.7 1.76$ 1.78$ 1.80$

Growth Rate 1.0% 1.0% 1.0% 1.0% 1.0%

Company Operated AUV Qdoba $1.2 $1.3 1.46$ 1.54$ 1.64$

Growth Rate 10.0% 10.0% 8.0% 6.0% 6.0%

% Change in Food And Beverage Costs 0.0% 0.0% 0.0% 0.0% 0.0%

% Change in Payroll and employee benefits 0.0% 0.0% 0.0% 0.0% 0.0%

Occupancy & Other Operating Expenses 0.0% 0.0% 0.0% 0.0% 0.0%

SG&A 0.0% 0.0% 0.0% 0.0% 0.0%

Tax Rate ‐35.0% ‐35.0% ‐35.0% ‐35.0% ‐35.0%

InvestingNEW Jack in The Box (System Wide) 15 15 15 15 15 NEW Qdoba (System Wide) 60 75 70 70 70 New Restaurant Development Cost (Jack)* 0.3$ 0.3$ 0.3$ 0.3$ 0.3$

New Restaurant Development Cost (Qdoba) 0.6$ 0.6$ 0.6$ 0.6$ 0.6$

Other Facility Expenditures 23.3$ 24.0$ 24.6$ 25.3$ 26.0$

Other expenditures, Including Corporate 21.7$ 22.3$ 23.0$ 23.6$ 24.2$

Financing VariablesInterest Rate on Long‐Term Debt 1.91% 1.91% 1.91% 1.91% 1.91%

Proceeds from revolver $689.1 $690.2 $678.0 $683.8 $650.7

Payments to revolving facility ($640.0) ($652.7) ($703.9) ($698.5) ($650.7)

Proceeds from term loan ‐$ ‐$ 200.00$ ‐$ ‐$

Principal payments on term loan (10.87)$ (15.90)$ (197.50)$ (10.87)$ (15.90)$

Increase in treasury stock (Budget) (117.08)$ (100.00)$ (50.00)$ (50.00)$ (50.00)$

Distribution of Dividends ($28.00) ($35.00) ($42.00) ($45.00) ($50.00)

*Estimated by dividing historical capital expenditures related to new Jack in the Box restaurants by total new restaurants.

**Dollar figures are represented in millions of USD.

Financing Variables

Investing Variables

Operating Variables

Forecast Assumptions Input


SDSU| 12

Estimation of Net Working Capital(in Millions of USD) FY 2011 FY 2012 FY 2013 FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E

Total Sales 1,662.4 1,509.3 1,489.9 1,484.1 1,520.7 1,626.5 1,737.4 1,781.8 1,863.5 Sales Company Operated 1,380.3 1,183.5 1,143.8 1,120.9 1,148.7 1,245.2 1,347.7 1,376.2 1,444.5

COGS (Excludes Franchise Cost) 1,108.9 895.9 852.4 822.3 849.4 920.7 996.5 1,017.6 1,068.1

Current Assets

Accounts Receivable 86.2 78.8 41.7 50.0 51.2 54.8 58.5 60.0 62.8

Inventories 7.5 7.8 7.2 7.5 7.7 8.4 9.1 9.3 9.7

Prepaid Expenses & Other 56.0 63.8 20.1 36.9 37.8 40.5 43.2 44.3 46.3

Total Current ASSETS 149.7 150.3 69.0 94.4 96.8 103.6 110.8 113.6 118.9

Current LiabilitiesAccounts Payable 94.3 94.7 36.9 31.8 32.9 35.6 38.5 39.4 41.3

Accrued Expenses 167.5 164.6 153.9 163.6 167.7 181.8 196.7 200.9 210.9

Current Portion of Long‐Term Debt 21.1 16.0 20.9 10.9 15.9 15.8 18.2 10.9 15.9

Total Current Liabilities 283.0 275.3 211.7 206.3 216.4 233.2 253.4 251.1 268.1

Net Working Capital (133.3) (125.0) (142.7) (111.9) (119.6) (129.6) (142.6) (137.5) (149.2)

% of Sales ‐9.7% ‐10.6% ‐12.5% ‐10.0% ‐10.4% ‐10.4% ‐10.6% ‐10.0% ‐10.3%

(Increase)/Decrease in NWC (8.3) 17.7 (30.8) 7.7 9.9 13.1 (5.1) 11.7

Assumptions

Current Assets

Days Sales Outstanding 18.9x 19.1x 10.2x 12.3x 12.3x 12.3x 12.3x 12.3x 12.3x

Days Inventory Held 2.5x 3.2x 3.1x 3.3x 3.3x 3.3x 3.3x 3.3x 3.3x

Prepaid Expenses & Other (% of Total Sales) 3.4% 4.2% 1.3% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Current Liabilities

Days Payables Outstanding 31.1x 38.6x 15.8x 14.1x 14.1x 14.1x 14.1x 14.1x 14.1x

Accrued Expenses (% of Sales company Operated) 12.1% 13.9% 13.5% 14.6% 14.6% 14.6% 14.6% 14.6% 14.6%

Projection PeriodHistorical Period


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Appendix 3

Historical Income Statements Jack in The Box, (NASDAQ: JACK) Source: 10k & Bloomberg

(In Millions of USD)

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Restaurant Sales/Food And Beverage 1,975.8 1,668.5 1,380.3 1,183.5 1,143.8 1,120.9

Franchised Restaurant Royalties/Fees 193.1 231.0 282.1 325.8 346.1 363.2

Other Revenue 302.1 398.0 ‐ ‐ ‐

Total Revenue 2,471.0 2,297.5 1,662.4 1,509.3 1,489.9 1,484.1

Food And Beverage Costs (640.4) (530.6) (460.8) (389.2) (372.7) (357.3)

Payroll and employee benefits ‐ ‐ ‐ (338.2) (320.4) (308.5)

Occupancy & Other Operating Expenses (915.3) (801.7) (648.1) (168.5) (159.4) (156.5)

Depreciation & Amortization (100.8) (101.5) (96.1) (98.0) (96.2) (91.4)

Total company restaurants costs (1,656.5) (1,433.8) (1,205.0) (993.9) (948.7) (913.7)

Cost Of Franchised Restaurant Royalties/Fees (78.4) (104.8) (136.1) (166.1) (173.6) (182.9)

Selling General and Administrative Expenses (282.7) (243.4) (224.7) (224.9) (220.6) (206.8)

Impairment, G/L on Disposition of PPE & Others (300.7) (448.6) (12.6) (32.8) (13.4) (14.9)

Gain/(Loss) On Sale of Business 78.6 55.0 61.1 29.1 4.6 (3.5) Operating Income (EBIT) 231.3 121.9 145.1 120.8 138.2 162.3

Interest Expense (22.2) (17.0) (18.2) (21.0) (16.5) (16.5)

Interest income 1.4 1.1 1.3 2.1 1.2 0.9

Pretax Income (Inc. XO Items) 210.5 106.0 128.2 101.9 123.0 146.6

Effective Tax Rate 37.75% 33.78% 36.24% 33.19% 32.81% 35.32%

Income Tax Expense (79.5) (35.8) (46.5) (33.8) (40.3) (51.8)

Earnings from cont. operations 131.0 70.2 81.8 68.1 82.6 94.8

Discontinued Operations, Net (12.6) ‐ (1.1) (10.5) (31.5) (5.9)

Net Income 118.4 70.2 80.6 57.7 51.2 89.0

Fully Diluted Shares Outstanding 57.7 55.8 50.1 44.9 44.9 42.0

Diluted EPS (Cont. Operations) 2.27$ 1.26$ 1.63$ 1.52$ 1.84$ 2.26$

Year over Year % Change in Diluted EPS ‐44.61% 29.73% ‐7.2% 21.4% 22.8%

Diluted EPS After Discontinued Operations 1.26$ 1.61$ 1.28$ 1.14$ 2.12$

Dividends Per Share 0.40$

JACK in the BOX Income Statement


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Appendix 4

Revenue by Measure & Segment Jack in the Box, (NASDAQ: JACK) Source: 10k, Bloomberg & Team Estimates


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Appendix 5

Company Operated Sales Estimation Jack in the Box, (NASDAQ: JACK) Source: 10k, Bloomberg & Team Estimates

(2014‐2019)

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E (CAGR)

Jack in the Box 1,850.44$ 1,518.43$ 1,181.96$ 943.99$ 850.51$ 782.46$ 750.94$ 763.46$ 776.15$ 717.85$ 691.08$ ‐2.5%

% Change in Sales ‐17.9% ‐22.2% ‐20.1% ‐9.9% ‐8.0% ‐4.0% 1.7% 1.7% ‐7.5% ‐3.7%

Qdoba 125.40$ 150.09$ 168.80$ 239.49$ 293.27$ 338.45$ 397.74$ 481.72$ 571.54$ 658.32$ 753.45$ 17.4%

% Change in Sales 19.7% 12.5% 41.9% 22.5% 15.4% 17.5% 21.1% 18.6% 15.2% 14.5%

Total company Operated Revenue 1,975.8 1,668.5 1,350.8 1,183.5 1,143.8 1,120.9 1,148.7 1,245.2 1,347.7 1,376.2 1,444.5 5.2%

YoY % Change in Sales ‐15.6% ‐19.0% ‐12.4% ‐3.4% ‐2.0% 2.5% 8.4% 8.2% 2.1% 5.0%

Jack in the Box Company Operated Revenue EstimationAvg. Unit Volume (AUV) 1.42$ 1.30$ 1.41$ 1.56$ 1.61$ 1.71$ 1.73$ 1.74$ 1.76$ 1.78$ 1.80$ 1.0%

New Stores 15 19 6 1 3 3 3 (24) (21)

Acquired From Franchisees 0 0 1 4

Closed 10 4 11 2

Number of Jack in The box Restaurants* 1,073 818 611 524 455 435 438 441 404 385

Estimated AUV 1.4$ 1.4$ 1.5$ 1.6$ 1.7$

% Difference from actual** ‐2.8% 0.8% ‐1.1% ‐0.7%

Total Jack in the Box Sales*** 1,518.4$ 1,182.0$ 944.0$ 850.5$ 782.5$ 750.9$ 763.5$ 776.2$ 717.9$ 691.1$ ‐2.5%

*Number of Jack in the Box restaurants was computed by adding new, Acquired from Franchisees, and closed restaurants to the average number of stores between current and prior year.

Qdoba Company Operated Revenue EstimationAvg. Unit Volume (AUV) 1.01$ 0.97$ 1.00$ 1.06$ 1.08$ 1.11$ 1.23$ 1.35$ 1.46$ 1.54$ 1.64$ 8.0%

Number of Qdoba Restaurants* 173 217 281 306 303 325 357 393 427 461

Estimated AUV 0.9$ 0.8$ 0.9$ 1.0$ 1.1$

% Diff. from Actual** 11.7% 28.6% 24.1% 12.7% ‐0.3%

Total Qdoba Sales*** 150.1$ 168.8$ 239.5$ 293.3$ 338.5$ 397.7$ 481.7$ 571.5$ 658.3$ 753.5$ 17.4%*Number of Qdoba restaurants was computed by averaging the current number of stores at year end with the number of stores at year end from previous year.

**Tests the accuracy of average unit volume (AUV) estimation.

***Sales were estimated by multiplying average unit volume (AUV) by the computed number of restaurants.

Source: 10k & Team Estimates

Company Operated Revenue Breakdown


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Appendix 6

Franchise Revenue Estimation Jack in the Box, (NASDAQ: JACK) Source: 10k, Bloomberg & Team Estimates

(2014‐2019)

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E (CAGR)

Jack in the Box (7) 175.3$ 212.7$ 263.1$ 308.0$ 328.8$ 344.8$ 351.7$ 356.7$ 360.7$ 371.7$ 380.4$ 2.0%

% Change in Franchise Revenue 21.3% 23.7% 17.1% 6.7% 4.9% 2.0% 1.4% 1.1% 3.1% 2.3%

Qdoba (7) 17.8$ 18.3$ 48.4$ 17.8$ 17.3$ 18.4$ 20.3$ 24.6$ 29.0$ 33.9$ 38.6$ 15.9%

% Change in Franchise Revenue 2.9% 164.2% ‐63.3% ‐2.6% 6.5% 9.9% 21.4% 17.9% 17.0% 13.7%

Total Franchise Revenue 193.1$ 231.0$ 311.6$ 325.8$ 346.1$ 363.2$ 372.0$ 381.3$ 389.7$ 405.6$ 419.0$ 2.9%

% increase in franchise revenue 19.6% 34.9% 4.6% 6.2% 5.0% 2.4% 2.5% 2.2% 4.1% 3.3%

Jack in the Box Sales per Store 0.17$ 0.17$ 0.17$ 0.18$ 0.18$ 0.19 0.19$ 0.19$ 0.19$ 0.20$ 0.20$

Rents (1) 0.11 0.12 0.12 0.12 0.12 0.12 0.12 0.12

Royalties (2) 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07

Franchise fees and other (3) 0.001 0.003 0.003 0.002 0.003 0.003 0.004 0.004

Average Unit Volume (Thousands) 1.29$ 1.29$ 1.31$ 1.31$ 1.34$ 1.36$ 1.38$ 1.40$ 1.42$ 1.44$ 1.5%

Avg. Number of Restaurants (4) 1,136 1,421 1,648 1,745 1,803 1,825 1,837 1,849 1,875 1,912

Estimated Total Sales (5) 1,462.0$ 1,827.4$ 2,163.2$ 2,288.8$ 2,409.9$ 2,476.7$ 2,530.6$ 2,585.5$ 2,660.4$ 2,753.9$

% Change in Franchise Sales 25.0% 18.4% 5.8% 5.3% 2.8% 2.2% 2.2% 2.9% 3.5%

Estimated Royalties Revenue (5.2% of Sales) 76.0$ 95.0$ 112.5$ 119.0$ 125.3$ 128.8$ 131.6$ 134.4$ 138.3$ 143.2$ 2.7%

Qdoba Sales per Store 0.05$ 0.05$ 0.14$ 0.06$ 0.05$ 0.06$ 0.06$ 0.06$ 0.07$ 0.07$ 0.08$

Royalties (2) 0.05 0.05 0.049 0.054 0.059 0.064 0.068 0.073

Franchise fees and other (3) 0.005 0.005 0.007 0.002 0.003 0.003 0.004 0.004

Average Unit Volume (Thousand) 0.94$ 0.99$ 0.96$ 0.96$ 1.03$ 1.13$ 1.24$ 1.34$ 1.42$ 1.51$ 8.0%

Avg. Number of Restaurants (4) 345 338 325 315 324 343 378 415 451 487

Estimated Total Sales (5) 345.9$ 338.5$ 325.5$ 316.0$ 324.5$ 388.3$ 470.3$ 558.0$ 642.8$ 735.7$

% Change in Franchise Sales ‐2.2% ‐3.8% ‐2.9% 2.7% 19.7% 21.1% 18.6% 15.2% 14.5%

Estimated Royalties (5% of Sales) 17.3$ 16.9$ 16.3$ 15.8$ 16.2$ 19.4$ 23.5$ 27.9$ 32.1$ 36.8$ 17.8%

Royalties Revenue Estimation Test

Total Estimated Royalties Revenue 93.32 111.95 128.76 134.81 141.54

% Difference from Actual (6) 0.7% 1.6% 0.4%

Total Franchise Revenue FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E

Rents 195.7 207.5 217.2 218.6 220.1 221.5 226.2 230.4 1.2%

Royalties 127.9 132.7 141.0 148.2 155.1 162.3 170.5 180.0 5.0%

Others (3) 2.18 5.91 5.05 5.17 6.10 5.79 9.00 8.60 11.2%

Total 325.8 346.1 363.2 372.0 381.3 389.7 405.6 419.0

Increase in Franchises (Jack) ‐ ‐ 33 12 12 12 39 36

Increase in Franchises (Qdoba) 9 31 39 36 36 36

42 43 51 48 75 72

(2) Represents estimated royalty revenue divided by total restaurants at year end.

(4) Average number restaurants for both segments were computed by averaging the current number of stores at year end with the number of stores at year end from previous year.

(5) Estimated franchised sales was computed by multiplying AUV by the Avg. number of stores.

(6) Tests the accuracy of the franchise total sales estimation.

(7) Computed by multiplying estimated revenue per store by the number of stores at year end.

Franchise Revenue Breakdown

(1) Rent revenue is assumed to be paid only by Jack in the Box franchisees only. Therefore, historical rent revenue was divided by number of Jack in the Box at year end. To forecast future rent

revenue we multiplied the number of franchised restaurants at year end by the unit $0.12, which was assumed to remain constant in the future.

(3) Other revenues was estimated by multiplying previous years revenues by the % change in total the number of franchise restaurants from period to period. An then allocated equally between

number of Jack in the Box and Qdoba franchised restaurants.


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Appendix 7

Projected Income Statement Jack in the Box, (NASDAQ, JACK) Source: 10k & Team Estimates

(In Millions of USD)

FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E

Restaurant Sales/Food And Beverage 1,120.9 1,148.68 1,245.18 1,347.69 1,376.17 1,444.53

Franchised Restaurant Royalties/Fees 363.2 372.00 381.28 389.66 405.64 418.99

Other Revenue

Total Revenue 1,484.1 1,520.7 1,626.5 1,737.4 1,781.8 1,863.5

Food And Beverage Costs (357.3) (370.2) (401.3) (434.4) (443.6) (465.6)

Payroll and employee benefits (308.5) (318.9) (345.7) (374.2) (382.1) (401.1)

Occupancy & Other Operating Expenses (156.5) (160.2) (173.7) (188.0) (191.9) (201.5)

Depreciation & Amortization (91.4) (95.4) (100.9) (105.9) (110.0) (114.0)

Total company restaurants costs (913.7) (944.8) (1,021.6) (1,102.4) (1,127.6) (1,182.1)

Cost Of Franchised Restaurant Royalties/Fees (182.9) (186.9) (191.6) (195.8) (203.8) (210.5)

Selling General and Administrative Expenses (206.8) (211.9) (226.6) (242.1) (248.3) (259.6)

Impairment, G/L on Disposition of PPE & Others (14.9) (15.3) (16.3) (17.5) (17.9) (18.7)

Gain/(Loss) On Sale of Business (3.5) (3.6) (3.9) (4.2) (4.3) (4.5) Operating Income (EBIT) 162.3 158.2 166.4 175.4 180.0 188.0

Interest Expense (16.5) (9.7) (10.4) (10.8) (10.0) (9.5)

Interest income 0.9 0.9 0.9 1.0 1.0 1.1

Pretax Income (Inc. XO Items) 146.6 149.4 156.9 165.6 171.0 179.6

Effective Tax Rate 35.32% 35.00% 35.00% 35.00% 35.00% 35.00%

Income Tax Expense (51.8) (52.3) (54.9) (58.0) (59.8) (62.8)

Earnings from cont. operations 94.8 97.1 102.0 107.6 111.1 116.7

Discontinued Operations, Net (5.9) (6.0) (6.5) (6.9) (7.1) (7.4)

Net Income 89.0 91.1 95.5 100.7 104.1 109.3

Fully Diluted Shares Outstanding 42.0 40.2 40.2 40.2 40.2 40.2

Diluted EPS (Cont. Operations) 2.26$ 2.42$ 2.54$ 2.68$ 2.77$ 2.90$

Year over Year % Change in Diluted EPS 22.8% 6.9% 5.0% 5.5% 3.3% 5.0%

Diluted EPS After Discontinued Operations 2.12$ 2.27$ 2.38$ 2.51$ 2.59$ 2.72$

Dividends Per Share 0.40$ 0.70$ 0.87$ 1.05$ 1.12$ 1.24$

5.1%

25.5%

JACK in the BOX

Dividends CAGR (14‐19)

EPS CAGR (14‐19)

Income Statement

Assumptions linked to Income Statement

Average

(2013‐2014)

Food And Beverage Costs as a % of Restaurant Sales/ Food and Beverage ‐32.2%

Payroll and employee benefits as a % of Restaurant Sales/ Food and Beverage ‐27.8%

Occupancy & Other Operating Expenses as a % of Restaurant Sales/ Food and Beverage ‐13.9%

Depreciation & Amortization as a % of NET PPE ‐12.6%

Cost Of Franchised Restaurant Royalties/Fees as % of Franchise Revenue ‐50.3%

Selling General and Administrative Expenses as % of Total Sales ‐13.9%

Impairment and other one‐time charges as % of Total Sales ‐1.0%

Gain/(Loss) On Sale of Business as % of Total Sales ‐0.2%

Interest income as % of total Sales 0.1%

Discontinued Operations, Net as % of Total Sales ‐0.4%


SDSU| 18

Appendix 8

DuPont and Sustainable Growth Analysis Jack in the Box, (NASDAQ: JACK) Source: 10k & Team Estimates

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E

Profit Margin 4.9% 3.8% 3.4% 6.0% 6.0% 5.9% 5.8% 5.8% 5.9%

Asset Turnover 1.2 1.0 1.1 1.1 1.2 1.2 1.2 1.2 1.2

Leverage 3.1 3.5 3.1 3.5 5.1 5.3 4.6 4.0 3.6

ROE 17.4% 14.1% 11.6% 24.4% 35.8% 36.3% 31.7% 26.9% 24.9%

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E

Dividends per Share ‐ ‐ ‐ 0.40$ 0.70$ 0.87$ 1.05$ 1.12$ 1.24$

Diluted EPS 1.61$ 1.28$ 1.14$ 2.12$ 2.27$ 2.38$ 2.51$ 2.59$ 2.72$

Retention ratio 1.00 1.00 1.00 0.81 0.69 0.63 0.58 0.57 0.54

ROE 17.4% 14.1% 11.6% 24.4% 35.8% 36.3% 31.7% 26.9% 24.9%

Sustainable Growth 17.41% 14.10% 11.57% 19.77% 24.76% 22.99% 18.47% 15.29% 13.51%

Sustainable Growth Analysis

JACK Decomposition of ROE (DuPont System)


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Appendix 9

Fully Diluted Shares Outstanding (Treasury Stock Method) Jack in the Box, (NASDAQ: JACK) Source: 10k

Share Price as of 01/30/15 88.12$

Options outstanding 1,189,570

Weighted‐Avg. exercise price 26.74$

Shares Repurchased 360,974.83

New Shares 828,595.17

Performance share awards Out. 330,203 Weighted‐Avg. Grant Date Fair Value 25.69$

Shares Repurchased 96,265.49 New Shares 233,937.51

Nonvested stock awards Out. (RSA) 95,815

Weighted‐Avg. Grant Date Fair Value 20.56$



Nonvested stock units out. (RSU) 330,871




Stock equivalents out. (Director's comp.) 75,466




Basic Shares Outstanding (01/18/15) 38,792,973

Fully Diluted Shares Outstanding 40,188,580

Fully Diluted Shares Outstanding


SDSU| 20

Appendix 10

WACC Computation Jack in the Box, (NASDAQ: JACK) Source: Bloomberg. & Team Estimates

Regression Statistics

Multiple R 0.3

R Square 0.1

Adjusted R Square 0.1

Standard Error 0.0

Observations 158

Beta 0.54 10‐year Treasury Yield 2.0% 9.6% Cost of Equity 6.1%

Adjusted Beta* 0.69

*Adjusted for mean reversion. However, raw beta was used to calculate cost of equity.

**Geometric mean of yearly returns on the S&P 500 from 1994 to 2013.

Jack in the Box Cost of Equity Estimation

3‐Year Weekly

01/23/2012 to 1/26/2015

Expected Market Return**

S&P 500 & Jack in the Boxy = 0.5379x + 0.0075

‐6%

‐3%

0%

3%

6%

9%

12%

‐5.0% ‐4.0% ‐3.0% ‐2.0% ‐1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Alternative #1 *Unsing Bloomberg Most Recent Information

Debt Price ICE LIBOR USD 3M Margin (1.25‐2.00%) LIBOR+Margin Funded Amount Fair Value w(d)

Weighted Avg.

Cost of Debt

Revolver 100.0% 0.26% 1.75% 2.0% 306,000,000 305,969,400 60.8% 1.2%

Term Loan 98.8% 0.26% 1.5% 1.8% 200,000,000 197,500,000 39.2% 0.7%

Marginal Tax Rate 35% After Tax Cost of Debt 1.2% Total Debt 506,000,000 503,469,400 100% 1.9%

Source: Bloomberg

Alternative #2 *Equivalent Credit Rate and Default SpreadEBIT Interest Expense Debt Amount Outstanding RF+Default Spread

162.31$ 16.53 Long Term 506,000,000$ 2.7%

Interest Coverage Ratio 9.8x

Equivalent Rate Aa2/AA

Default Spread* 0.70%

Risk Free ^TNX 1.99%

Pre‐tax Cost of Debt 2.7%


After Tax Cost of Debt 1.7%

Source: New York University, Stern

Alternative #3 *Dividing Interest expense by Debt OutstandingInterest Expense Debt Outstanding Cost of Debt

16,530,000.0 506,000,000.0 3.3%


After Tax Cost of Debt 2.1%

Source: Team Estimates

Jack in the Box Cost of Debt Estimation

Shares Outstanding Share Price

38,792,973 88.12$ Cost Weight

Equity 3,418,436,780.76 6.1% 87.1%

Debt

Debt 506,000,000.00 1.9% 12.9%

Tax Shield Total Capital 3,924,436,780.76$ 100.0%

65.0% 5.4%

Weighted Average Cost of Capital

Equity

Weighted Average Cost of Capital

87%

13%

CapitalStructure

Equity

Debt


SDSU| 21

Appendix 11

Comparables Valuation Jack in the Box, (NASDAQ: JACK) Source: Bloomberg

Jack in The BoxComparable Companies Analysis

(in Mil l ions , except per share data)

Company

Share

Price

% of 52‐

wk. High Equity Value

Enterprise

Value 2015E 2016E

Net

Income

(%)

EBIT/ Int.

Exp. 2015E 2016E

LT EPS

Growth

Jack in the Box Inc 87.5 ‐1.2% 3,392.9 3,890.2 13.6x 12.4x 18.8% 6.0% 9.8x 30.8x 26.5x 13.7%

McDonald's Corp 95.0$ ‐8.5% 92,434.9 104,331.8 11.4x 10.9x 35.4% 17.3% 5.7x 18.8x 17.5x 7.3%

Yum! Brands Inc 74.6$ ‐10.8% 32,632.6 35,464.6 11.9x 10.4x 21.0% 7.9% 11.8x 21.5x 18.4x 11.8%

Chipotle Mexican Grill Inc* 670.4$ ‐7.9% 20,797.1 20,039.0 19.9x 17.0x 20.8% 10.8% N/A 39.0x 32.6x 22.0%

Domino's Pizza Inc 100.6$ ‐3.2% 5,531.4 7,024.7 18.5x 16.7x 19.3% 8.3% 24.1x 34.5x 29.7x 13.7%

Dunkin' Brands Group Inc 47.3$ ‐10.9% 4,943.7 6,553.5 16.2x 14.9x 51.0% 23.6% 18.1x 25.4x 21.6x 14.8%

Panera Bread Co 160.8$ ‐16.7% 4,337.5 4,291.4 10.3x 9.2x 14.9% 7.1% 0.5x 24.3x 21.1x 16.0%

Wendy's Co/The 11.0$ ‐4.0% 4,034.4 5,138.5 12.9x 12.7x 21.0% 5.9% 12.7x 32.6x 28.0x 12.2%

Sonic Corp 31.5$ ‐2.0% 1,686.9 2,102.4 13.1x 12.3x 27.1% 8.8% 17.3x 30.6x 26.3x 15.9%

Popeyes Louisiana Kitchen Inc 60.5$ ‐3.5% 1,412.0 1,511.8 20.1x 17.3x 31.9% 15.9% 5.4x 36.7x 31.0x 17.0%

El Pollo Loco Holdings Inc 24.2$ ‐42.0% 901.2 1,048.1 17.9x 16.2x 17.1% ‐5.4% 69.2x 43.7x 35.4x 16.5%

Minimum 10.3 9.2 18.8 17.5

25th Percentile 11.8 10.8 23.6 20.4

Median 14.6 13.8 31.6 27.1

Mean 15.2 13.8 30.7 26.1

75Th Percentile 18.9 16.8 37.3 31.4

Maximum 20.1 17.3 43.7 35.4

σ 3.7x 3.0x 8.1x 6.2x

P/E

Tier 1: QSR & Fast Casual

EV / EBITDA

2015E

EBITDA

Margin


SDSU| 22

Appendix 12

Sensitivity Analysis Jack in the Box, (NASDAQ: JACK) Source: Team Estimates

11.6x 12.6x 13.6x 14.6x 15.6x 16.6x 17.6x

4.94% 81.49$ 88.12$ 94.76$ 101.40$ 108.03$ 114.67$ 121.30$

5.19% 80.57$ 87.13$ 93.69$ 100.25$ 106.81$ 113.36$ 119.92$

5.44% 79.67$ 86.15$ 92.63$ 99.12$ 105.60$ 112.08$ 118.56$

5.69% 78.79$ 85.19$ 91.59$ 98.00$ 104.40$ 110.81$ 117.21$

5.94% 77.91$ 84.24$ 90.57$ 96.90$ 103.23$ 109.56$ 115.89$

Share Value

EXIT Multiple

WAAC

1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75%

4.50% 115.39$ 124.95$ 136.24$ 149.79$ 166.35$ 187.06$ 213.68$

5.00% 98.31$ 105.27$ 113.31$ 122.68$ 133.76$ 147.06$ 163.31$

5.44% 86.66$ 92.10$ 98.28$ 105.35$ 113.54$ 123.11$ 134.47$

6.00% 75.08$ 79.19$ 83.80$ 88.97$ 94.84$ 101.55$ 109.28$

6.50% 66.85$ 70.14$ 73.77$ 77.81$ 82.33$ 87.41$ 93.17$

WAAC

Share Value

Perpetuity Growth Rate


SDSU| 23

Appendix 13

Valuation Methods ‐ Football Field 25th to 75th percentile range of the valuation methods applied. Source: Team Estimates

ld

CFA Society San Diego

2015.02.15 sdsu cfa research challenge report

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