Business context and reporting period
Jack in the Box Inc.’s Form 10-K covers the 52-week fiscal year ended September 30, 2018. The company operated and franchised 2,237 Jack in the Box restaurants in 21 states and Guam; 94% were franchise-operated at year-end. Qdoba was sold on March 21, 2018, and is reported as discontinued operations for all periods presented. Fiscal 2017 is the primary comparable period.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $869.7 million | $1,097.3 million |
| Earnings from continuing operations | $104.3 million | $128.6 million |
| Continuing-operations diluted EPS | $3.62 | $4.16 |
| Net earnings, including discontinued operations | $121.4 million | $135.3 million |
| Adjusted EBITDA | $264.2 million | $284.7 million |
| Cash flow from continuing operations | $104.1 million | $133.7 million |
| Capital expenditures | $32.3 million | $33.3 million |
Reported operating margin was 26.6% of revenue, versus 22.1% in 2017; it includes $46.2 million of gains on restaurant sales. Company restaurant costs were 73.6% of company restaurant sales, improving from 75.8%. Company-operated same-store sales increased 0.6%; franchise same-store sales increased 0.1%, leaving system same-store sales up 0.1%. System sales declined 0.1% to $3.466 billion. Franchise restaurant sales are franchisees’ revenue, not Jack in the Box revenue.
Cash at year-end was $2.7 million. Current assets of $95.0 million were below current liabilities of $183.7 million. Debt, including capital lease obligations, was $1.071 billion; the revolving facility had $730.4 million drawn, the term loan $336.4 million, and unused borrowing capacity was $138.2 million. The company reported compliance with credit covenants. Stockholders’ deficit was $591.7 million. The filing attributes the deficit partly to substantial share repurchases.
Material changes versus the prior period
- Revenue fell 20.7%, primarily reflecting the shift of company-operated restaurants to franchise ownership and the exclusion of Qdoba from continuing operations after its sale.
- Continuing-operations earnings fell 18.8% and diluted EPS declined from $4.16 to $3.62. Adjusted EBITDA decreased 7.2%, which management attributed primarily to refranchising.
- Company-operated restaurant count fell from 276 to 137; franchise count rose from 1,975 to 2,100. The company sold 135 restaurants to franchisees and recorded $46.2 million in related gains.
- Interest expense increased to $45.5 million from $38.1 million, reflecting higher average rates and borrowings. Continuing-operations cash flow decreased by $29.6 million.
- Qdoba’s sale generated net proceeds of approximately $298.5 million and a $30.7 million pretax gain. The company used $260.0 million to repay term debt.
Outlook, commentary, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management described priorities including simplifying restaurant operations, investing in technology, improving drive-thru operations and remodeling. Up to 600 mature restaurants were slated for remodels or drive-thru enhancements over three years, with investment levels tied to sales and margins. Management expected cash from operations and available financing to cover capital, working-capital and debt-service needs for at least the next 12 months.
- The Tax Cuts and Jobs Act produced a $32.5 million non-cash tax expense, primarily from remeasuring deferred tax balances. The fiscal 2018 effective tax rate was 43.9%; management estimated a 21.0% federal statutory rate for subsequent fiscal years.
- Fiscal 2018 restructuring and other charges were $18.4 million, including $10.6 million of restructuring costs. The company expected approximately $4.5 million in additional severance costs in fiscal 2019.
- Following the Qdoba sale, Jack in the Box remained guarantor on certain Qdoba leases, with maximum potential payments of approximately $38.7 million. No liability was recorded because default was considered less than probable.
- In Gessele v. Jack in the Box, plaintiffs’ counsel alleged potential damages of approximately $62 million. The company said it did not consider additional losses probable and could not estimate a possible loss range beyond its existing accrual; it intends to defend the case.
- Key risks include intense competition, traffic and consumer-demand trends, food and labor cost inflation, reliance on franchisees and distribution partners, food safety, cybersecurity, regulatory changes, and significant leverage. A 100-basis-point rate increase on the unhedged debt balance was estimated to add $5.7 million in annual interest expense.
- New accounting standards were expected to defer recognition of initial franchise fees over franchise terms and increase reported revenue and expenses through gross presentation of certain franchise transactions; management did not expect a material net-earnings impact. Lease accounting changes were expected to significantly increase reported assets and liabilities beginning in fiscal 2020.
In fiscal 2018 the company repurchased 3.9 million shares for $340.0 million and declared $1.60 per share in dividends. After year-end, the board authorized an additional $60.0 million buyback and declared a $0.40 per-share dividend.
Important facts for investors to verify
- How continuing-operations performance and comparable sales trend after the completed refranchising program, separating operating results from restaurant-sale gains.
- Debt repayment capacity, covenant headroom, refinancing needs around the March 2020 facility maturity, and the effect of interest rates.
- Franchisee financial health, restaurant openings and closures, remodel execution, and the effect of franchise cost and support requirements.
- The ultimate exposure, if any, from the Gessele litigation and Qdoba lease guarantees.
- Actual fiscal 2019 restructuring costs and the financial-statement effects of adopting the new revenue and lease accounting standards.