Thinking Outside The Box

July 29, 2011 Prepared By: Ryan Fusaro ryanfusaro@gmail.com

Jack In The Box Investment Thesis

JACK is comprised primarily of the 5th largest quick service burger chain, Jack In The Box
2nd or 3rd largest player in most markets Improving SSS trends

Ticker: JACK Stock Price: $22.72 Recent Valuation Multiples:

7x EV / 2012e EBITDA

The company also owns a hidden asset in Qdoba, the 2nd largest fast-casual Mexican food chain
Strong growth potential and white space opportunity Value of business being completely ignored by the market, despite contributing ~18% of restaurant EBITDA

In addition, JACK collects an attractive rental income stream for which the market ascribes little to no value

Capitalization: Equity Market Value: $1.1bn Enterprise Value: $1.5bn

om cof a system-wide refranchising JACK is currently in the midst ail. strategy which should result in a significantly more attractive, royalty-like businessm going forward @g ro Strong sa potential exists for operating margin expansion nfu of the business and economically motivated investors own a Operationally-minded ry ~11%
Businesses trades at a meaningful discount to its estimated intrinsic value
Significantly undervalued on a sum-of-the-parts and private market basis

Owned and below-market leasehold properties Real estate business worth up to 60% of current enterprise value

A Brief History of JACK

Jack In The Box was founded in 1951 by Robert Peterson, a Californian businessman In 1968, Peterson sold JACK to Ralston Purina as part of a broader corporate rollup strategy Private Equity interests purchased the JACK franchise for $435mm in an LBO / MBO transaction from Ralston in 1985 The investment group that purchased JACK subsequently re-IPOd the business in 1992 In 2003, JACK acquired Qdoba Mexican grill for $45mm, in order to expand its m footprint and become a nationwide chain co

rya

fus n

@g ro

ail. m

Business Overview
Jack In The Box is comprised of two distinct restaurant concepts, along with a real estate business

5th largest quick service burger chain in the US 2200 system-wide units, ~60% franchised

2nd largest fast-casual Mexican food chain in the US 549 system-wide units, ~60% franchised

~52 % EBITDA(1)

rya

fus EBITDA(1) n ~11%

ro@ a

ma g

o il.c

Collects ~$125mm (and growing) in rent checks from franchisees Owns 874 buildings (2) 232 on leased land 624 on owned land

~37% EBITDA(1)

(1) EBITDA % exclude distribution revenue (2) Source: JACK 2010 10-K/A

JACKs Two Restaurant Concepts

rya

fus n

ro@ a

ma g

o il.c

Jack In The Box Overview

As JACKs original line of business, Jack In The Box has a 60 year operating history and is currently the 5th largest QSR hamburger chain in the US, with a number two or three position in most of its major markets 2220 total units, ~60% franchised Collects 5% royalty fee and ~3.5% net rent spread on franchised store sales Comprises 80% of JACK store count, ~82% of restaurant EBITDA and ~65% of current enterprise value Average Unit Volume (AUV) of $1.3mm ~$6.19 average check m Improving SSS growth trends despite 70% of store count being located California co and Texas ail.

gmbeginning in Q309, JACKs SSS trends have After declining sharply for 6 straight quarters ro@ stabilized, turning positive in Q111 (+1.5%) a us1-3% SSS trend growth going forward Management guidance pointsf to n ya r Strong ROIC characteristics
~23% cash-on-cash return for newly opened company operated store units(1)

Great brand recognition Strong potential to expand geographical reach

Presence currently limited to 19 states
(1) Pre G&A costs, Source: 2010 JACK Company Presentation

Qdoba Overview
Acquired by JACK in 2003 for ~$43mm, Qdoba is currently the second largest fast-casual Mexican food chain in the US behind Chipotle Mexican Grill. Qdoba is largely a hidden asset, as investors have consistently failed to give JACK any consideration for the value of the business 549 total units, ~60% franchised Comprises 20% of JACK store count, ~18% of restaurant EBITDA and ~22% of current enterprise value Collects 5% royalty fee and 3.5% net rent spread on franchised store sales Average Unit Volume (AUV) of $923k ~$10 average check Very strong SSS growth trends

ma Extremely popular concept with long growth runway @g future ~10% annual unit growth potential for the foreseeable aro Management sees potential for 1800-2000 total units fus n Strong ROIC characteristic rya
Diversified geographical footprint

6% SSS growth over prior 3 quarters Management guidance points to 4-6% SSS trend growth going forward

o il.c

~20% cash-on-cash return for newly opened company operated store units (1) Store base is spread out over 43 states with minimal single state concentration

Based on recent market prices, investors are currently getting this attractive business for 7 free
(1) Pre G&A costs, Source: 2010 JACK Company Presentation

System Overview
While the total number of Jack In The Box units in the system should be fairly stable going forward, Qdoba is poised for continued healthy expansion and should grow as a percentage of total system-wide stores
Total Unit Count
(1)

515 2005 2049 25% 193 250 77% -

604 2006 2079 29% 1.5% 248 318 78% 27.2%

696 2007 2132 33% 2.5% 305 395 77% 24.2%

842 2008 2158 39% 1.2% 343 454 76% 14.9%

1022 2009 2212 46% 2.5% 353 510 69% 12.3%

1250 1340 2010 2206 57% -0.3% 337 525 64% 2.9% Q1 11 2213 61% 0.3% 348 542 64% 3.2%

1372 Q2 11 2220 62% 0.3% 328 549 60% 1.3% 1464 2011(2) 2239 65% 0.9% 349 590 59% 7.5%

Jack In The Box % Franchised Growth Rate Qdoba % Franchised Growth Rate
(1)

Forecast 1682 1900 2118 (2) (2) 2012 2013 2014(2) 2272 2305 2338 74% 82% 91% 1.5% 1.5% 1.4% 389 655 59% 11.0% 429 720 60% 9.9% 469 785 60% 9.0%

Based on end of year totals for fiscal years ending September (2) Assumes constant growth of 33 (18 co. owned) units for JIB and 65 (20 co. owned) units for Qdoba per mgmt. guidance for FY 2011 Note: YTD JIB 7 new co. owned units, 9 new franchise units, 114 refranchised, 1 closed YTD Qdoba 11 new co. owned units, 19 new franchise units, 22 repurchased, 6 closed

rya

fus n

ro@ a

ma g

o il.c

JACKs Real Estate Business

rya

fus n

ro@ a

ma g

o il.c

JACKs Real Estate Business

JACK also owns a substantial amount of wholly-owned real estate assets as well as long-term, below-market leasehold assets from which it derives a healthy rent roll from its underlying franchisees. Since revenues from this segment are rolled up into franchise sales, few investors give JACK credit for its real estate portfolio
Generally earns a net 3.5% rent spread on franchise sales Generated rents of $128mm in Fiscal 2010 Sublease expense of $78mm derived a net rental income of ~$50mm in 2010

m co property to its franchisees, As JACK continues to refranchise its system and rents iadditional a l. this income stream should continue to grow materially over time gm ro@ a us f an ry

A Business In Transition

rya

fus n

ro@ a

ma g

o il.c

JACKs Refranchising Strategy

In 2005, JACK set out to refranchise its entire hamburger chain store base, taking the percent of franchised units from roughly 30% to 70-80% by 2013

JACK has executed well on this strategy thus far, refranchising ~850 units since 2005 for total proceeds of $350mm Through 2014, JACK has the potential to refranchise an additional 686 units for estimated proceeds of ~$215mm (1) m

gm program, including franchise Total proceeds through the end @ the o of r fees, should total $770mm,sa roughly 70% of JACKs current or nfu market cap rya

il.c a

(1)

Analysis estimates $315k per unit in proceeds, beneath historical average and management guidance Source: JACK 10K

12

Refranchising is an Attractive Strategy

Refranchising will serve to convert JACK from a capital intensive, low-margin restaurant business into a high-margin, high-multiple brand royalty business with the following attractive characteristics:

Revenues comprised primarily of royalty and rent checks from franchisees Less volatile, more stable and predictable earnings streams Low capex requirements m High free cash flow co ail. Recurring revenue base gm Highly scalable model ro@ a us f No commodity risk or exposure an ry Potential for 40-60% EBITDA margins

13

JACKs Re-Imaging Strategy

Beginning in 2006, JACK also embarked on a large scale re-imaging project, whereby it set out to renovate the entirety of Jack In The Box units in order to bring them up to date and make them more appealing to consumers

Re-imaging objectives: Remodel and revamp existing stores and modernize their look Grow SSS and profitability through increased traffic and interest post-renovation JACK has spent an estimated $200mm on omre-imaging program, its c or nearly 20% of its current market capilsince 2006 a. gm Re-imaging program is set to be @ complete at the end of 2011, aro which should boost freenfus flow trends as capex largely reverts cash ya back to maintenancerlevels (~40-60mm/yr) Remodeling and construction at renovated stores has lead to a temporary decline in business at certain locations, which should reverse as the work is finished on these units, thereby improving 14 overall sales

So What is the Business Worth?

rya

fus n

ro@ a

ma g

o il.c

Peer Analysis
JACKs trades at a significant discount to its quick service peers as the company has historically been a low-margin, capital intensive restaurant business

rya

fus n

ro@ a

ma g

o il.c

However, as JACK transitions its business into a higher quality franchise model and highlights the value of its Qdoba concept, investors should award JACK a higher multiple
(1) Consensus Wall St. estimates for peer EBITDA Source: Bloomberg

16

Sum-Of-The-Parts Analysis (As Is)

Business
(data in mm's, except for share price)

2012e EBITDA $111 $25 $79

Low EV Multiple(1) 8x 12x 11x

High EV Multiple(1) 9x 14x 12.5x Add: PV of Refranchising Gains (2) Add: PV of Franchise Fees (3) Add: Cash Less: Debt Equity Value Shares Outstanding Implied Price
Current Price

EV Low $888 $300 $869 203 24 15 389 1910 49.7 38.4

22.72

EV High $999 $350 $988 203 24 15 389 2190 49.7 44.1

22.72

Jack In The Box Qdoba Real Estate

On a sum-of-the-parts basis, analysis o suggests that JACK r potential of 69%-94%shares are currently worth between $38-$44, for an upside sa

Said differently, at current ry levels you are essentially buying the Jack In The Box franchise along with the companys real estate assets at 7.7x EBITDA and getting the entire high-growth Qdoba franchise for free
(1) Real Estate multiple implies 8%-9% cap rate (2) Assumes refranchising of 86 units in second half of FY11, 200 JIB units in years 2012, 2013 and 2014 to bring total franchise % of JIB to 90% Average gain of $275k, discounted at 3% (3) Assumes net franchising fee of $32.5k, 218 new JIB franchise units per year, 40 new Qdoba franchise units per year

nfu a

gm @

% Upside

il.c a

om

69%

94%

Upside Potential: What Might Qdoba be Worth in the Future?

Additionally, given its relatively low current unit count, extremely popular concept and potential for significant expansion, Qdobas long-term value has the potential to be significantly higher than what it is today
Enterprise Value

Total Unit Count

700 384,722,030 419,696,760 454,671,490 489,646,220 524,620,950 800 447,224,855 487,881,660 528,538,465 569,195,270 609,852,075 900 509,727,680 556,066,560 602,405,440 648,744,320 695,083,200 1000 572,230,505 624,251,460 676,272,415 728,293,370 780,314,325 1100 634,733,330 692,436,360 750,139,390 807,842,420 865,545,450

11 12 13 14 15

EV / EBITDA Multiple

Potential Upside To Current EV Estimate

700 23.31% 34.52% 45.73% 56.94% 68.15%

11 12 13 14 15

EV / EBITDA Multiple

rya

fus n

800 ro@ a43.34% 56.37% 69.40% 82.43% 95.47%

Total maUnit Count g

900 63.37% 78.23% 93.08% 107.93% 122.78%

o il.c

1000 83.41% 100.08% 116.75% 133.43% 150.10%

1100 103.44% 121.93% 140.43% 158.92% 177.42%

(1)

Analysis assumes Qdoba sales grow 4% to 959k/unit and EBITDA margins of 9.5% and 47% are reached on the company operated and franchise units respectively (see margin analysis on pg. 22)

18

Why Is The Stock Misunderstood?

Dynamic nature of business obfuscates true underlying value

Re-imaging program, refranchising efforts, multiple operating units and other moving pieces cloud consolidated financials and create difficulty ascertaining core earnings and intrinsic value

Misperception of business model

JACK still trades as a capital intensive restaurant business as opposed to a high margin royalty business despite its ongoing refranchising efforts m

o il.c Qdobas small size leads to underappreciation of franchise ma g As a small component of JACKs@ sales, Qdoba receives very little total ro aignored by the investment community attention and is thus largely fus n ya Incomplete sell-side coverage r

Restaurant analysts covering JACK tend not to give the company credit for its real estate assets
19

Unlocking Value

rya

fus n

ro@ a

ma g

o il.c

20

Evaluating Strategic Transactions

Given JACKs significant misunderstood, hidden and potential value, coupled with its depressed valuation in the marketplace, management should begin considering strategic alternatives in order to close the gap to estimated intrinsic value present in JACK shares

rya

fus n

ro@ a

ma g

o il.c

21

Margin Improvement
While JACK does not disclose store-level and franchise level EBITDA margins, they can reasonably be estimated to be ~7.5% and 39% respectively, versus typical restaurant and franchise level margins of ~10-12% and 50-60%, respectively. If JACK were to close to margin gap with its peers by as little as 50% (1), its shares would be could be worth considerably more than the previous estimate suggests
Business
(data in mm's, except for share price)

2012e EBITDA $138 $30 $79

Low EV Multiple(1) 8x 12x 11x

High EV Multiple(1) 9x 14x 12.5x Add: PV of Refranchising Gains (2) Add: PV of Franchise Fees (3) Add: Cash Less: Debt Equity Value

EV Low $1,104 $360 $869

EV High $1,242 $420 $988 203 24 15 389 2503 49.7 50.4

22.72

Jack In The Box Qdoba Real Estate

rya

fus n

Shares ro@ Outstanding a Implied Price

Current Price

ma g

o il.c

203 24 15 389 2186 49.7 44.0

22.72

% Upside

94%

122%

On a sum-of-the-parts basis, analysis suggests that fixed JACK shares are currently worth between $44-$50, for an upside potential of 94%-122%
(1) (2) As Is margins estimated to be 39% for franchise business, 7.25% and 8% for JIB and Qdoba Company Operated units, respectively, based on pro-rated G&A and franchise costs Fixed margins estimated to be 47% for franchise business, 9.25% and 9.5% for JIB and Qdoba Company Operated units, respectively

Qdoba Spin-Off
Today, Qdoba is essentially a hidden asset that many investors are not even aware JACK owns. A full or partial spin-off of Qdoba is something that JACK management should strongly consider for a number of strategic reasons, including:

Highlight and unlock the inherent value of the Qdoba franchise which is not being fully reflected in todays share price Given the different growth potential and trends between Jack In The Box and Qdoba, the two businesses deserve vastly different earnings multiples which a separation would allow investors to properly assign Upon separation, Qdoba would be one of only two publicly listed, fastm co and scarce pure-play casual Mexican food chains, representingailunique a. asset which would attract passive investors as well as strategic acquirers gm ro@ to dedicate the proper amount of Allow management of both companies a us each segment with minimal distraction f focus to growing and improving an ry Give investors a choice as to which of the two business they prefer to own Streamline business and simplify financial statements to enable deeper analytical work on each segment
23

Precedent Transaction: Chipotle Spin-Off

In January 2006, McDonalds spun-off its majority holding in rapidly growing Chipotle Mexican Grill to a much anticipated IPO. At only ~500 Chipotle units versus ~30k McDonalds units, management sought to spin-off its interest in CMG in order to highlight Chipotle's performance and unique characteristics, which were overshadowed by the larger McDonald's global business. (1) Since the divesture, both stock prices of both MCD and CMG has risen sharply, while JACKs share price has stagnated

fus System-Widean y Units r

Chipotle Qdoba

ro@ a

ma g

o il.c

(at Fiscal Year End)

2006 581 318

2007 704 395

2008 837 454

2009 956 510

2010 1084 525

24
(1) McDonalds CEO Jim Skinner, Businessweek: Chipotle's IPO: One Hot Tamale?, September 2005

JACK is also a Prime LBO Candidate

Over the 18 months, private equity firms have made a number of acquisitions in the restaurant industry(1), given its free cash flow characteristics and opportunity for margin improvement. JACK shares many of these qualities and is an attractive buyout candidate as well Good core free cash flow characteristics that are temporarily depressed and masked by reimaging program and should rebound strongly in Fiscal 2012 With re-imaging nearly complete, a financial buyer is essentially getting the ~200mm in capital improvements JACK has already put in place for free Shift to brand royalty and real estate business should provide more stable cash flows over time Refranchising proceeds act as dividends and provide an additional revenue source through m which to finance the transaction co ail. Relatively low debt with ample interest coveragem

a Real estate assets provide downside support us f Potential for significant margin an improvement in core business y r

1.5x net debt / EBITDA with staggered maturities

@g ro

G&A costs are significantly elevated relative to QSR and fast-casual peers

Given Wall Streets short term focus, JACKs transformative refranchising plan and scaling up of Qdoba franchise may be better executed in the private market
PE firms can IPO the business after completion of refranchising program and once Qdoba develops increased scale 25
(1) 3G Capital acquisition of Burger King at 8.8x EBITDA, September 2010 Apollo acquisition of CKE Restaurants at 6.6x EBITDA, April 2010

What Price Would a Financial Sponsor be Willing to pay?

At a price of up to $40 per share, a financial sponsor could still earn a mid teens IRR

Price Paid % Premium Total Return IRR

34.10 50.1% 197% 24.3%

35.24 55.1% 174% 22.3%

36.38 60.1% 152% 20.3%

37.52 65.1% 132% 18.3%

38.65 70.1% 113% 16.3%

39.79 75.1% 95% 14.3%

Return calculations assume 20% equity ro@ a contribution, 5 year term, 9x exit multiple, 389mm long term debt at exit, $139mm terminal restaurant EBITDA, 7.5% interest fus rate and complete monetization n real estate assets for proceeds of $900mm, along rya of improvements with previously stated operational

ma g

o il.c

26
(1) Return scenario also assumes $55mm in annual FCF and $200mm from refranchising during 5 yr period which is used entirely to pay down new and existing debt

Transformative Real Estate Transaction

In light of JACKs refranchising strategy which will result in vastly lower company operated restaurant units, JACK now has less of a need to own its own buildings, creating the opportunity for the company to monetize some or all of its real estate portfolio
JACK owns ~875 buildings on either owned or leased land(1) JACK also has long-term leasehold assets which it sublets to franchisees at an attractive spread Valuing JACKs real estate assets is somewhat difficult given the mix of wholly owned and leasehold real estate assets, coupled with limited financial disclosures
Book value of $965mm Applying a conservative cap rate of 8-9% to JACKs current rent rolls, its real estate assets appear to be worth up to $988mm or 66% of the companys current enterprise value Numerous Loopnet Jack In The Box property listings (land and building) and precedent sales suggest prices ranging from $1mm-$2mm for JACK properties

s fuestate assets into separate entity and subsequent REIT Potential exists for separation of n ryareal to create a more efficient capital structure, shield conversion or alternative transaction
future taxes and unlock the inherent value of the companys assets

ro@ a

ma g

o il.c

(1) Source: JACK 2010 10-K/A

Shareholder Interests Are Being Well Represented

With active shareholders controlling ~11% of the company, passive shareholders of JACK receive, at no cost, the benefit economically motivated investors with a history of unlocking value pushing for change at JACK on their behalf

William Stiritz 13G filer since November 2009 Personally owns 5.5% of shares outstanding Intimate knowledge of Jack In The Box Proven history of unlocking value at various companies Streamlined conglomerate Ralston Purinaom1980s and 1990s by il.c in divesting a number of non-core businesses, including Energizer, ma @g EverReady and Jack In The Box, amongst others aro Recently led announced us f spin-off of Post Foods from Ralcorp an Blue Harbour Group ry Owns 5.8% of shares outstanding Well-known activist investor, might look to cut expenses, improve margins or spin-off units
28

Conclusion

rya

fus n

ro@ a

ma g

o il.c

Conclusion
Combination of two somewhat unrelated but attractive restaurant concepts - Jack In The Box and Qdoba Refranchising of entire Jack In The Box concept should result in a highermargin, high-multiple royalty like business model Qdoba concept offers strong growth potential, which investors are currently getting for free Valuable real estate assets not properly accounted for in share price Business transformation creates temporarily depressed free cash flow, resulting in deeply undervalued stock Potential exists for margin expansion and meaningful profitability m improvement co l. aiof the company and are Operationally centered investors own 11% gm working hard on behalf of shareholders ro@ business to financial or strategic Spin-off of Qdoba unit and / usa of or sale f unlocking shareholder value buyer represent catalystsan for

ry

Upside potential: 69-122%

30