Jack in the Box Inc. — Form 10-Q Summary
Business context and period: The filing covers the 12 weeks and 28 weeks ended April 12, 2020, compared with the periods ended April 14, 2019. Jack in the Box operated and franchised 2,246 restaurants at quarter-end: 144 company-operated and 2,102 franchised. COVID-19 materially affected results in the final five weeks of the quarter; substantially all restaurants remained open for off-premise service.
Key financial results
| Metric | Quarter 2020 | Quarter 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Revenue | $216.2 million | $215.7 million | $523.8 million | $506.5 million |
| Operating earnings | $32.8 million | $47.1 million | $102.8 million | $105.4 million |
| Net earnings | $11.5 million | $25.1 million | $19.4 million | $59.2 million |
| Diluted EPS | $0.50 | $0.96 | $0.82 | $2.26 |
| Adjusted EBITDA | $46.3 million | $61.2 million | $122.9 million | $144.2 million |
| Operating cash flow | Not separately stated for the quarter | $58.9 million | $60.8 million |
- Quarter revenue was nearly flat, while operating earnings fell about 30% and net earnings fell about 54%. Year-to-date net earnings declined about 67%, substantially reflecting a $38.9 million non-cash pension settlement charge.
- Quarter operating margin was 15.2%, versus 21.8% in 2019. Company restaurant costs rose to 79.4% of company restaurant sales from 72.4%, reflecting COVID-related sales deleverage, wage and commodity inflation, and operating costs.
- System same-store sales fell 4.2% in the quarter and 0.8% year to date. Company same-store sales declined 4.1%; transactions fell 10.5%, partly offset by 6.4% average-check growth. Sales increased 5.2% in the seven weeks through March 8, then declined 17.0% in the final five weeks.
- Quarter company restaurant sales decreased 3.0% to $74.4 million. Franchise restaurant sales, which are franchisees’ revenue rather than company revenue, declined 3.5% to $695.9 million.
- Revenue comparisons were affected by adopting lease accounting standard ASC 842: certain franchise rental revenue and occupancy costs are now presented gross. The change increased both by $8.6 million in the quarter and $20.2 million year to date, with no net earnings impact.
Financial position, liquidity and capital allocation
- At April 12, 2020, cash was $132.2 million and restricted cash $37.0 million. Year-to-date operating cash flow was $58.9 million; investing activities provided $29.6 million, and financing activities used $70.9 million.
- Total debt was $1.408 billion, including $107.9 million drawn on the variable funding facility during the quarter. Only $1.1 million remained available under its $150 million capacity after outstanding letters of credit. The company reported compliance with debt covenants and no rapid-amortization event.
- The company’s actual securitized-debt leverage ratio exceeded 5.0x, requiring quarterly principal payments of $3.25 million. Restricted cash included amounts reserved, as a precaution, for August 2020 principal and interest payments.
- ASC 842 added $903.0 million of operating lease right-of-use assets and $944.7 million of operating lease liabilities at quarter-end. The balance-sheet figures are not directly comparable with the prior-year presentation, which was not restated.
- Current liabilities exceeded current assets by approximately $79.8 million. Management stated that cash, operating cash flow and mitigation actions were expected to provide adequate liquidity for the next 12 months and foreseeable future.
- The company repurchased 1.9 million shares for $153.5 million in the first quarter at an average $81.41 per share; there were no second-quarter repurchases. It paid $18.5 million in dividends year to date. On May 8, the board temporarily suspended dividends and share repurchases and the company reduced capital expenditures to essential spending.
Outlook, risks and notable items
- Management withdrew previously issued fiscal 2020 and long-term guidance because the pandemic’s duration and financial effects could not be reasonably estimated.
- Mitigation for franchisees included reduced and deferred marketing fees, postponed collection of approximately 40% of April rents, and at least six months’ deferral of remodel requirements and development agreements. The company also provided emergency paid sick leave and protective equipment.
- Landlords deferred approximately $13.4 million of company rent payments. The company postponed collection of approximately $9.1 million of April franchise rents and passed approximately $10.4 million of landlord concessions to franchisees.
- The first-quarter sale of a corporate office building generated a $10.8 million gain; a separate sale-leaseback generated $17.4 million of proceeds and a $0.2 million loss. These transactions contributed to year-to-date investing cash inflows.
- Other significant items include higher litigation costs, adverse market-value changes in investments supporting non-qualified retirement plans, and a $2.9 million increase in the allowance for doubtful accounts since fiscal year-end. The company’s eight-franchise-restaurant acquisition during the quarter followed a legal judgment and involved $0.9 million of consideration.
- Legal matters included a recorded $14.2 million aggregate liability for probable, estimable matters. In the Ramirez case, the company accrued $7.3 million and recorded a matching $7.3 million insurance receivable. The filing says additional losses beyond recorded accruals are reasonably possible but does not provide an estimable range. Separately, Qdoba lease guarantees could expose the company to up to approximately $29.3 million; no liability was accrued because losses were not considered probable.
- Disclosure controls were deemed ineffective due to a previously reported material weakness in internal control over financial reporting; remediation was ongoing and not yet considered complete. A new CEO was appointed after quarter-end, with a start date no later than June 15, 2020.
Important facts for investors to verify
- Subsequent same-store sales, restaurant operating restrictions, franchisee liquidity and the timing and extent of recovery from COVID-19.
- Cash generation, borrowing capacity, debt-service requirements and compliance with securitized-debt covenants, particularly given limited remaining revolver availability.
- The status of suspended dividends and repurchases, and whether franchise rent and marketing deferrals are collected as scheduled.
- Progress in remediating the material weakness in internal controls and developments in significant litigation and Qdoba lease guarantees.
- Comparability of reported franchise revenue and occupancy expenses after ASC 842 adoption, and the impact of pension and other unusual items on earnings.