Jack in the Box Inc. — Q2 FY2022 Form 10-Q
Reporting period: 12 weeks ended April 17, 2022; year-to-date (YTD) covers 28 weeks. Comparisons are with the corresponding periods ended April 11, 2021. On March 8, 2022, Jack in the Box acquired Del Taco, so current-period results include Del Taco only from the acquisition date and are not directly comparable on an organic basis.
Business context and key financial metrics
Jack in the Box operates and franchises the Jack in the Box and Del Taco brands. At quarter-end, it had 2,207 Jack in the Box restaurants and 599 Del Taco restaurants.
| Metric | Q2 FY2022 | Q2 FY2021 | YTD FY2022 | YTD FY2021 |
|---|---|---|---|---|
| Revenue | $322.3m | $257.2m | $667.0m | $595.8m |
| Earnings from operations | $38.2m | $64.9m | $112.0m | $153.8m |
| Net earnings | $7.8m | $35.9m | $47.1m | $86.8m |
| Diluted EPS | $0.37 | $1.58 | $2.21 | $3.78 |
| Adjusted EBITDA (non-GAAP) | $64.4m | $75.8m | $155.6m | $178.1m |
| Operating cash flow | Not presented separately | Not presented separately | $67.8m | $78.5m |
Quarterly operating margin was approximately 11.9%, compared with 25.2% a year earlier. Jack in the Box system same-store sales declined 0.8% in the quarter and increased 0.3% YTD; company-operated same-store sales rose 1.7% and 0.6%, respectively. Company-operated sales benefited from higher average checks, while transactions declined 2.0% in the quarter and 3.0% YTD.
Capital expenditures were $20.8m YTD. Cash and restricted cash totaled $84.6m at April 17, 2022, including $28.9m of restricted cash. Total debt was $1.874bn, compared with $1.293bn at October 3, 2021. Stockholders’ deficit was $783.6m. Dividends declared were $0.44 per share for the quarter.
Material changes versus the prior comparable period
- Reported quarterly revenue increased 25.3%, but the increase includes $63.0m of Del Taco revenue after acquisition. Del Taco reported $2.5m of post-acquisition net earnings.
- Quarterly net earnings fell to $7.8m from $35.9m. Results included $13.1m of acquisition, integration and restructuring costs, higher interest expense, and weaker company restaurant cost performance.
- Quarterly food and packaging costs rose to 32.6% of Jack in the Box company restaurant sales from 27.8%; payroll and benefits rose to 34.0% from 30.8%; occupancy and other costs rose to 18.4% from 15.5%.
- YTD operating cash flow declined $10.7m. Investing cash outflow was $598.2m, primarily reflecting the $580.8m Del Taco acquisition payment, net of cash acquired.
Debt, liquidity, outlook, and risks
In February 2022, the company issued $1.1bn of fixed-rate senior secured notes: $550m at 3.445% and $550m at 4.136%, with anticipated repayment dates in 2027 and 2032. The refinancing helped fund the Del Taco acquisition and repaid $570.7m of prior notes. The company also had $50m outstanding under its variable funding notes, with $58.0m available, and $4m outstanding on Del Taco’s revolving facility, with $58.2m available. Management stated that operating cash flow and available facilities should meet capital expenditure, working capital, and debt service needs for at least the next 12 months. Debt covenants were in compliance at quarter-end, with no rapid amortization event. The specified leverage ratio was above 5.0x, so scheduled amortization payments resumed.
Management expected FY2022 commodity cost inflation of 12%–14% and wage inflation of 12%–13% versus FY2021. It expected labor and supply-chain operating margin pressures to continue through the remainder of FY2022. Restaurants faced labor availability constraints, reduced operating hours at some locations, limited supply shortages, and inflation. No full-year earnings or revenue guidance is stated in the provided filing text.
Other notable matters include the preliminary Del Taco purchase price allocation, which remains subject to revision; a franchisee bankruptcy, for which the company fully reserved $3.5m owed and deferred certain revenue; and legal matters with up to approximately $14m of reasonably possible losses in excess of recorded accruals. The company also disclosed a maximum potential $25.4m of future undiscounted payments under legacy Qdoba lease guarantees, but recorded no liability because payment was considered remote. Key risks include acquisition integration, elevated debt and securitization restrictions, food and labor cost inflation, supply disruption, and franchisee financial health.
Important facts for investors to verify
- Separate Del Taco’s post-acquisition contribution from Jack in the Box’s underlying performance; reported revenue growth is not a like-for-like comparison.
- Track whether menu pricing and sales trends offset continuing commodity and wage inflation and declining restaurant transactions.
- Monitor leverage, scheduled debt amortization, available borrowing capacity, and compliance with securitization covenants.
- Review final Del Taco acquisition valuations and integration costs, including potential future depreciation, amortization, or impairment effects.
- Follow the franchisee bankruptcy reorganization and litigation outcomes, including the estimated additional reasonably possible legal losses.