Jack in the Box and Qdoba Look Set to Take Down Chipotle

Shares of Jack in the Box have had a great run in the past year after gaining more than 74%. Shares got a further boost last week after the company beat earnings expectations.The chief concerns on this Fool's mind surround whether this run is set to continue and the long-term outlook for Qdoba and Jack in the Box.

More than just Jack in the Box
While most people think of Jack in the Box as a hamburger chain, the company also owns Qdoba, a Mexican fast-food chain that competes with Chipotle Mexican Grill . In the latest quarter, system-wide sales were led by Qdoba, which posted a sales increase of 2%. Jack in the Box, on the other had, posted a systemwide same-store sales decline of 1.4%. Overall, earnings per share came in at $0.45, which was $0.06 better than expectations.

Qdoba first opened in 1995 in Denver, two years after the first Chipotle opened in the same city. Originally, Qdoba was named Zuma, and that later changed to Z-TECA Mexican Grill. The company later settled on the name Qdoba to avoid confusion with another Mexican restaurant chain with a similar name.

How does Qdoba stack up against Chipotle?
Today, there are more than 600 Qdoba restaurants in 46 states, Washington, D.C., and Canada. This compares to about 1,500 restaurants for Chipotle. So as you can see, there's plenty of room for Qdoba to grow and catch up.

Both Chipotle and Qdoba focus on the fast-casual segment where food is prepared fresh in front of your eyes. This differs from Taco Bell and McDonald's, which are in the fast-food category where the food is already pre-made. Qdoba and Chipotle offer a similar menu that focuses on burritos, tacos, chips, nachos, and salads.

Everyone loves a breakfast burrito
One of the most popular items on Qdoba's menu is its breakfast burrito. Hours of operation vary for locations, but many are open 24 hours on the weekends. This is perfect for those looking for that 2 a.m. breakfast burrito or a fresh start to their day. A Qdoba breakfast burrito comes with egg, potato, and grilled chicken or spicy Mexican sausage.

Chipotle, on the other hand, only serves breakfast burritos at one of its locations at the Dulles International Airport outside of Washington, D.C. Chipotle is looking to roll out coffee to its locations after signing an agreement with premier coffee roaster La Colombe.

So far, there are no broader plans from Chipotle to offer breakfast, but if it were to do so, I think it would be a real game changer for the company and for its customers. Breakfast is one of the most profitable segments for the restaurant industry, and we've seen the expansion of breakfast menus and operation times at McDonald's, Burger King and Taco Bell.

Looking to jump start growth
Jack in the Box expects same-store sales at Qdoba to grow 2% to 3% next year. The company expects same-store sales to grow 1.5% to 2.5% at its Jack in the Box locations. Qdoba plans to open 60 to 70 new locations next year, while Jack in the Box will open only 10 new restaurants. As you can see, the company is counting on Qdoba for growth. Longer term, the company is counting on Qdoba to open 40 to 70 new company-owned restaurants and 30 to 40 new franchised locations.

How do they compare as investments?
Chipotle trades at a premium to Jack in the Box--Chipotle is trading at 41 times next year's earnings,while Jack in the Box is trading at only 18 times. In addition, Chipotle trades at 5.4 times sales, while Jack in the Box trades at only 2.5 times sales. This is warranted because Chipotle is growing at a much faster rate.

Revenue at Chipotle grew 18% year-over-year, and earnings increased by 15%. Jack in the Box, meanwhile, saw revenue decrease 5.5% over the prior year. Chipotle also has better margins--its gross margin is 37%, compared to 25% at Jack in the Box.

Foolish assessment
While I'm not yet going to say that Qdoba is in the same league as Chipotle, the chain does have potential. Many of the complaints that I have read relate to poor customer service at Qdoba. If the chain can improve its overall customer experience, I think it has plenty of potential.

As investors, we're all looking for the next Chipotle. If Jack in the Box can boost same-store sales at its namesake hamburger chain and continuing growing the Qdoba brand, it looks to be a winning combination for investors.

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The article Jack in the Box and Qdoba Look Set to Take Down Chipotle originally appeared on Fool.com.

Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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