Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service and Qdoba fast-casual restaurants. This unaudited Form 10-Q covers the 16 weeks ended January 22, 2017; comparative results cover the 16 weeks ended January 17, 2016. The company reported 2,261 Jack in the Box and 712 Qdoba restaurants at quarter-end. Fiscal 2016 had 53 weeks versus 52 weeks in fiscal 2017, so management also presents calendar-basis same-store sales.
Financial performance and position
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Revenue | $487.9 million | $470.8 million |
| Earnings from operations | $73.1 million | $62.5 million |
| Continuing-operations earnings | $37.0 million | $33.9 million |
| Net earnings | $35.9 million | $33.2 million |
| Diluted EPS | $1.11 | $0.92 |
| Operating cash flow | $71.0 million | $44.9 million |
| Capital expenditures | $20.9 million | $31.5 million |
Revenue increased 3.6% and net earnings increased 8.2%. Operating margin rose to 15.0% of revenue from 13.3%. Company-operated restaurant margin declined to 18.6% from 19.5%: Jack in the Box improved to 21.6% from 20.9%, while Qdoba fell to 13.1% from 16.6%. Jack in the Box franchise margin improved to 52.9% from 50.1%.
At January 22, 2017, cash was $6.1 million, current assets were $102.5 million and current liabilities were $220.7 million. Reported debt was $1.042 billion, including $55.9 million of current maturities; stockholders’ deficit was $273.2 million. Operating cash flow was partly offset by $62.2 million of financing outflows, including $115.4 million of share repurchases and $13.0 million of dividends. Cash declined $10.9 million to $6.1 million. Management said operating cash flow and available financing were expected to meet requirements for at least the next 12 months.
Material changes and management commentary
- Calendar-basis same-store sales rose 3.1% for Jack in the Box system restaurants, primarily from pricing and favorable mix, partly offset by lower transactions. Qdoba system same-store sales declined 1.0%, principally reflecting lower traffic.
- Qdoba’s company restaurant sales increased with unit growth, but margin pressure reflected traffic declines, new-unit activity, labor inefficiencies and wage inflation, and higher food and occupancy costs. Jack in the Box benefited from lower commodity costs, while wage and maintenance expenses increased.
- SG&A declined $10.2 million, including lower pension and incentive costs and restructuring-related savings. Impairment and other charges rose to $5.1 million from $1.7 million, including $2.0 million of restructuring charges and higher closed-restaurant costs.
- Interest expense increased to $12.7 million from $8.2 million, mainly due to higher average borrowings and, to a lesser extent, higher rates. The income tax rate was 38.7%; management estimated a full-year rate of approximately 38%–39%.
Outlook, risks and unusual items
- Management expected fiscal 2017 commodity costs to be approximately flat to down 1% for both brands, and beef costs to decline about 5% for the year. Fiscal 2017 capital expenditures were expected to be approximately $100 million.
- Expected fiscal 2017 openings: 20–25 Jack in the Box restaurants system-wide, mostly franchised; and 50–60 Qdoba restaurants, including about 30 company-operated locations.
- Jack in the Box planned to increase its franchised mix from 81% toward more than 90%. After quarter-end, the company signed non-binding letters of intent to sell approximately 75 company restaurants for estimated gross proceeds of $40–$45 million; completion is not assured.
- The $1.6 billion credit facility matures in March 2019. At quarter-end, $680.5 million was outstanding under the term loan and $346.4 million under the revolver, with $31.5 million of letters of credit; the company reported compliance with its covenants. Interest-rate swaps hedge portions of variable-rate exposure.
- Key risks include restaurant traffic and consumer demand, commodity and labor costs, competition, franchisee performance, execution of refranchising and growth plans, substantial indebtedness, and litigation. The company noted that sublease assumptions affect restaurant-closure liabilities. A wage-and-hour lawsuit remained pending in part; management said an adverse outcome exceeding accrued amounts could materially affect results or liquidity. No material changes to previously disclosed risk factors were reported.
- The board declared a further $0.40-per-share dividend after quarter-end. Future dividends remain subject to board approval.
Important facts for investors to verify
- Whether the proposed sale of about 75 Jack in the Box restaurants proceeds, and its effect on cash, earnings and franchised mix.
- Whether Qdoba’s traffic and restaurant margins stabilize, and whether Jack in the Box transaction declines continue.
- Actual full-year capital spending, openings, commodity costs and tax rate versus management’s estimates.
- Debt, revolver availability, covenant headroom and interest-rate exposure as the March 2019 facility maturity approaches.
- Cash returned through repurchases and dividends relative to operating cash generation, and any changes in closure-related liabilities or litigation exposure.