Jack in the Box Inc. — Q3 fiscal 2018 Form 10-Q
Reporting period: 12 weeks ended July 8, 2018; year-to-date figures cover 40 weeks. Comparisons are with the periods ended July 9, 2017. Jack in the Box operated and franchised 2,241 restaurants at quarter-end, including 146 company-operated locations. Qdoba was sold on March 21, 2018, and is reported as discontinued operations.
Financial highlights
| Metric | Q3 2018 | Q3 2017 | 40 weeks 2018 | 40 weeks 2017 |
|---|---|---|---|---|
| Revenue | $188.0m | $246.1m | $692.2m | $865.2m |
| Operating earnings | $76.3m | $55.4m | $196.0m | $182.0m |
| Net earnings | $45.3m | $36.4m | $105.1m | $105.4m |
| Diluted EPS | $1.60 | $1.22 | $3.59 | $3.37 |
| Adjusted EBITDA (non-GAAP) | $64.4m | $62.4m | $210.1m | $222.5m |
| Cash from continuing operating activities | Not stated quarterly | Not stated quarterly | $59.4m | $106.7m |
Quarter revenue declined 23.6%, chiefly reflecting the shift of company-operated restaurants to franchisees and the absence of Qdoba revenue following its sale. Year-to-date revenue fell 20.0%. Company restaurant costs were 72.5% of company restaurant sales in Q3, compared with 76.8% a year earlier; year-to-date, the ratio improved to 73.5% from 75.5%. The company attributed this primarily to refranchising lower-volume restaurants.
Quarter operating earnings included $28.7m of gains on restaurant sales; year-to-date gains were $43.1m. The quarter also included a $2.8m loss from discontinued operations, while year-to-date discontinued operations contributed $19.1m, including the Qdoba sale gain. Adjusted EBITDA is a non-GAAP measure and declined 5.6% year-to-date.
Balance sheet, debt and liquidity
- At July 8, 2018, cash was $0.1m, total debt was approximately $996.0m, and stockholders’ deficit was $490.5m. Cash was $4.5m and debt approximately $1,144.2m at October 1, 2017.
- The amended credit facility had $347.0m outstanding on the term loan and $645.7m outstanding on the $900.0m revolving facility; letters of credit were $31.4m and unused borrowing capacity was $222.9m. The company reported compliance with all covenants.
- Continuing operating cash flow was $59.4m; investing cash flow was $40.8m and financing cash flow was negative $386.4m. Financing included a $260.0m term-loan repayment after the Qdoba sale, $200.0m of share repurchases and $34.6m of dividends paid.
- The Qdoba sale generated approximately $298.5m in net proceeds and a $32.1m pretax gain. The credit facility maturity was extended to March 19, 2020, and the maximum leverage ratio was raised from 4.0x to 4.5x.
Material changes and management outlook
- System same-store sales were up 0.5% in Q3 and flat year-to-date. Company same-store sales rose 0.6% in Q3 and 0.5% year-to-date, as higher average checks offset lower transactions. Franchise same-store sales rose 0.5% in Q3.
- The system was 93% franchised at quarter-end. The company sold 127 restaurants to franchisees year-to-date and had eight restaurants remaining in its current refranchising program. It expected 15–20 system openings in fiscal 2018, mostly franchised.
- Management expected fiscal 2018 capital expenditures of $30m–$35m, commodity costs to rise approximately 3% versus fiscal 2017, and the fiscal-year tax rate to be approximately 44%. Management said operating cash flow and available financing were expected to meet capital, working-capital and debt-service needs for at least the next 12 months.
- The Tax Act resulted in a $32.1m year-to-date non-cash tax expense, primarily from remeasuring deferred tax balances. The reported year-to-date effective tax rate was 46.9%; the final annual rate remained uncertain.
- Qdoba-related lease guarantees remain a contingency. First-year annual rent on guaranteed leases was approximately $6.2m, with terms extending up to about 18 years. No liability was recorded because a Qdoba default was considered less than probable.
Risks, contingencies and unusual items
Risks highlighted include competition, declining traffic or changing consumer preferences, food and commodity cost inflation, labor availability and wage costs, supply-chain and food-safety issues, franchisee performance, interest-rate exposure, litigation, and weather or other disruptions. The company cited the Gessele wage-and-hour class action; it had accrued for one claim but said it could not estimate any additional reasonably possible loss. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings and operating margin depends on refranchising gains, and how results trend after the remaining restaurant sales.
- Whether traffic and system sales improve: menu pricing supported same-store sales while transactions declined.
- Debt, interest costs, covenant headroom and refinancing requirements ahead of the March 2020 facility maturity.
- The cash-flow effect of franchisee notes receivable, tenant-improvement distributions, dividends and share repurchases.
- Final tax accounting and the full-year effective tax rate, including the provisional Tax Act adjustments.
- Potential exposure from Qdoba lease guarantees and the Gessele litigation, neither of which had a recorded additional liability beyond disclosed accruals.