Jack in the Box’s stock price has taken a beating over the past six months, shedding 33.8% of its value and falling to $11.78 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Jack in the Box, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Jack in the Box Will Underperform?

Even though the stock has become cheaper, we're swiping left on Jack in the Box for now. Here are three reasons you should be careful with JACK and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Jack in the Box’s demand has been shrinking over the last two years as its same-store sales have averaged 4% annual declines.

2. Shrinking Operating Margin

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.

Looking at the trend in its profitability, Jack in the Box’s operating margin decreased by 9.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Jack in the Box’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 4%.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Jack in the Box’s $2.63 billion of debt exceeds the $71.97 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $232.2 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Jack in the Box could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Jack in the Box can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Jack in the Box falls short of our quality standards. After the recent drawdown, the stock trades at 3.2× forward P/E (or $11.78 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.

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