Jack in the Box Inc. — Form 10-Q Summary
Business context and reporting period
For the 12-week quarter and 40 weeks ended July 3, 2016, Jack in the Box Inc. operated and franchised Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants. Comparisons are with the periods ended July 5, 2015. At quarter-end, the company had 2,254 Jack in the Box restaurants and 688 Qdoba restaurants; 74% of its combined 2,942-restaurant system was franchised.
Financial performance and liquidity
| Metric | Quarter | Year to date |
|---|---|---|
| Revenue | $368.9 million, up 2.6% | $1,200.9 million, up 1.2% |
| Operating earnings | $55.7 million, up 10.5%; 15.1% margin vs. 14.0% | $171.0 million, up 10.0%; 14.2% margin vs. 13.1% |
| Net earnings | $30.2 million vs. $26.8 million | $92.1 million vs. $85.7 million |
| Diluted EPS | $0.91 vs. $0.71 | $2.67 vs. $2.22 |
| Operating cash flow | Not presented for the quarter | $146.7 million vs. $165.1 million |
| Capital expenditures | Not presented for the quarter | $75.0 million vs. $54.8 million |
Year-to-date company-operated restaurant margin was 20.3%, down from 20.5%. Jack in the Box margin increased to 21.3% from 20.8%; Qdoba margin declined to 18.4% from 19.8%. Quarter same-store sales were up 1.1% for the Jack in the Box system and 0.6% for Qdoba; year-to-date they were up 0.9% and 1.6%, respectively. Jack in the Box company same-store sales were down 0.2% year-to-date, principally reflecting lower transactions; Qdoba company same-store sales increased 1.8%.
At July 3, cash was $6.6 million, current assets $136.3 million and current liabilities $221.3 million. Total reported debt was approximately $896.3 million, including $26.3 million of current maturities; stockholders’ deficit was $167.5 million. The company had $282.4 million outstanding on its term loan, $595.0 million drawn on its $900 million revolving facility and $25.1 million of letters of credit. It reported compliance with credit covenants. Year-to-date financing included $250 million of share repurchases and $30.5 million of dividends; cash fell by $11.1 million to $6.6 million.
Material changes and unusual items
- Higher operating earnings and EPS were partly offset by higher net interest expense: $7.6 million for the quarter and $22.7 million year-to-date, compared with $4.5 million and $13.9 million. Management attributed the increase to higher average borrowings and, to a lesser extent, higher rates.
- Quarter SG&A declined $8.2 million year over year, including a $2.5 million legal settlement recovery and favorable changes in company-owned life-insurance values and incentive compensation. The filing says the $2.5 million recovery arose from an approved Deepwater Horizon settlement-program claim.
- Impairment and other charges rose to $10.5 million for the quarter from $3.8 million, largely due to $7.7 million of restructuring charges. The plan includes workforce reductions, relocating Qdoba’s corporate support center and consolidating information technology. Management expected $10–$13 million of fiscal 2016 pretax restructuring charges; the filing does not estimate post-2016 charges.
- Year-to-date discontinued-operation losses were $1.6 million, primarily related to lease obligations at previously closed Qdoba locations. Remaining closure costs were not expected to be material, but sublease estimates are judgmental.
Outlook, risks and contingencies
- Management expected fiscal 2016 capital expenditures of $100–$110 million, approximately 50–60 Qdoba openings (about 35 company-operated) and approximately 20 Jack in the Box openings, mostly franchised. It aimed to increase Jack in the Box franchise ownership to 90–95% by the end of fiscal Q1 2018, from 82% at quarter-end.
- Management forecast fiscal 2016 commodity-cost declines of approximately 2–3% for Jack in the Box and 5% for Qdoba, with beef costs expected to fall approximately 15–20% for the year. It expected a fiscal-year tax rate of about 37%.
- The company expected $66.1–$86.1 million in fourth-quarter pension and postretirement contributions, including accelerated pension contributions intended to reduce Pension Benefit Guaranty Corporation variable-rate premiums. It stated that operating cash flow and available financing should cover expected needs for at least the next 12 months.
- Risks highlighted include restaurant traffic and consumer-spending trends, commodity and labor costs, competition, franchisee performance and execution of the refranchising and cost-reduction plans, supply interruptions, severe weather, substantial indebtedness and litigation.
- A wage-and-hour lawsuit, Gessele v. Jack in the Box, seeks $45 million in damages. The company had accrued for one claim it considers probable and estimable, disputes other claims and intends to defend the matter; an unfavorable outcome beyond existing accruals could materially affect results or liquidity.
Important facts for investors to verify
- Whether Jack in the Box’s weak company-store transactions and Qdoba’s margin pressure persist, and how those trends affect restaurant-level profitability.
- Actual restructuring costs, savings achieved and progress toward the stated franchise mix and restaurant-opening targets.
- Debt, interest expense and revolver availability after planned pension contributions, capital spending, dividends and repurchases.
- Actual commodity costs, annual tax rate and pension funding compared with management’s estimates.
- Developments in the Gessele litigation and estimates for closed-store lease commitments and sublease recoveries.