Jack in the Box Inc. — Q3 fiscal 2017 Form 10-Q
Business context and period. The company operates and franchises Jack in the Box quick-service restaurants and Qdoba fast-casual restaurants. This filing covers the 12 weeks ended July 9, 2017, and year-to-date results for 40 weeks, compared with periods ended July 3, 2016. At quarter-end, the system included 2,255 Jack in the Box and 720 Qdoba restaurants.
Key financial results
| Metric | Q3 2017 | Q3 2016 | 40 weeks 2017 | 40 weeks 2016 |
|---|---|---|---|---|
| Revenue | $357.8m | $368.9m | $1,215.2m | $1,200.9m |
| Earnings from operations | $67.0m | $55.7m | $205.7m | $171.0m |
| Net earnings | $36.4m | $30.2m | $105.4m | $92.1m |
| Diluted EPS | $1.22 | $0.91 | $3.37 | $2.67 |
| Operating margin | 18.7% | 15.1% | 16.9% | 14.2% |
| Operating cash flow | Not separately provided | Not separately provided | $139.9m | $146.7m |
Quarter revenue fell about 3%, while operating earnings and net earnings rose. Year-to-date revenue increased about 1.2% and net earnings about 14%. Gains on restaurant sales were a significant earnings contributor: $13.3m in the quarter and $21.2m year-to-date, versus $0.4m and $1.2m, respectively, in 2016. The quarter also benefited from lower SG&A; higher interest expense partly offset these factors. Discontinued-operations losses were small.
Sales and costs. Quarter system same-store sales were down 0.2% at Jack in the Box and up 0.5% at Qdoba on a calendar basis. Year-to-date calendar-basis sales were up 0.9% at Jack in the Box and down 1.2% at Qdoba. Jack in the Box company-store traffic weakness and Qdoba traffic declines pressured results. Consolidated company restaurant costs were 81.9% of company restaurant sales in the quarter, versus 78.1% a year earlier; year-to-date they were 81.9%, versus 79.7%. Management cited sales deleverage, wage inflation, and higher maintenance and occupancy costs.
Cash, debt and liquidity
- Cash was $7.6m at July 9, 2017, down from $17.0m at fiscal year-end. Current assets were $162.7m and current liabilities $246.6m.
- Balance-sheet debt, including current maturities, was $1,184.9m, compared with $991.3m at October 2, 2016. The credit facility included $653.1m of term-loan borrowings and $520.9m of revolver borrowings; $31.4m of letters of credit also reduced borrowing capacity. The applicable LIBOR margin was 2.00%; the company reported compliance with all covenants.
- Year-to-date investing cash flow was positive $17.5m, primarily reflecting $62.9m of proceeds from refranchising 118 Jack in the Box restaurants, partly offset by capital spending. Capital expenditures were $47.2m. Financing cash outflow was $166.9m, including $334.4m of share repurchases and $37.2m of dividends paid.
- Stockholders’ deficit was $439.0m. The company repurchased 3.2m shares year-to-date for $327.2m, at an average $101.59 per share; $181.0m remained authorized under buyback programs.
Changes, outlook and material matters
- Refranchising and growth: Jack in the Box sold 118 company-operated restaurants year-to-date and was 85% franchised; management aims to exceed 90% franchised. Non-binding letters of intent covered another 63 restaurants, with estimated gross proceeds of $35m–$40m. Fiscal 2017 plans called for 20–25 Jack in the Box system openings and about 45 Qdoba openings, including approximately 25 company-operated units.
- Outlook: Management expected fiscal 2017 capital expenditures of $80m–$90m, commodity costs approximately flat at both brands, and an approximately 37% full-year tax rate. It expected operating cash flows and available financing to cover capital, working-capital and debt-service needs for at least the next 12 months. Management cautioned that the final annual tax rate could differ.
- Qdoba evaluation: The company began evaluating potential alternatives for the Qdoba brand and recorded $1.7m of related costs in the quarter. It gave no assurance that the review would produce a definitive action and could not estimate additional evaluation costs.
- Other unusual items: The company acquired 50 Jack in the Box franchise restaurants year-to-date, including 31 taken over from an underperforming franchisee and 19 obtained following litigation. It sold eight acquired locations to a franchisee and closed three during the quarter; it plans to refranchise the remaining acquired restaurants.
- Contingency: In Gessele v. Jack in the Box, a court certified state-law classes concerning alleged improper payroll deductions and late final wages. The company maintained that additional losses beyond its existing accrual were not probable and could not be estimated, and said it would vigorously defend the case.
- Risks: Management highlighted restaurant traffic and consumer demand, food and commodity costs, labor inflation, competition, franchisee performance, execution of refranchising and cost-reduction plans, substantial indebtedness, and litigation. Nearly 70% of Jack in the Box system restaurants were in California and Texas. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Qdoba strategic review leads to a transaction or other action, and any resulting costs or proceeds.
- Completion, pricing and timing of the planned sale of 63 additional Jack in the Box restaurants, and progress toward the over-90% franchised target.
- Whether traffic trends, labor and occupancy costs, and restaurant-level margins improve, particularly at company-operated locations.
- Debt maturities, borrowing capacity, interest-rate exposure and compliance with credit-facility covenants; the facility matures March 19, 2019.
- Developments in the Gessele litigation and changes in lease, sublease or other closure-related estimates.
- Execution against fiscal 2017 capital-spending, restaurant-opening, commodity-cost and tax-rate expectations.