Jack in the Box Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 1, 2017 (52 weeks). The prior year had 53 weeks, affecting comparisons. The filing also reports fiscal Q4, a 12-week period; FY2016 Q4 was 13 weeks. Amounts below are U.S. dollars.
Business context
The company operated and franchised 2,977 restaurants: 2,251 Jack in the Box and 726 Qdoba. Jack in the Box was 88% franchised at year-end, up from 82%; management’s stated goal was approximately 95% franchise ownership. Qdoba was 53% company-operated. The company was evaluating strategic alternatives for Qdoba, with no assurance the review would result in a transaction.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,553.9 million | $1,599.3 million |
| Operating earnings / margin | $266.1 million / 17.1% | $229.9 million / 14.4% |
| Continuing-operations earnings | $138.3 million | $126.3 million |
| Net earnings | $135.3 million | $124.1 million |
| Diluted EPS, continuing operations | $4.47 | $3.70 |
| Cash from operations | $171.8 million | $134.2 million |
| Capital expenditures | $67.5 million | $96.6 million |
Revenue fell about 2.8%, while operating earnings and net earnings increased. Operating results included a $38.0 million gain on sales of company-operated restaurants; the company sold 178 Jack in the Box restaurants for proceeds of approximately $99.4 million. FY2016 included an extra week, which management estimated added about $3.1 million, or $0.09 per diluted share, to that year’s net earnings. Fiscal 2017 diluted EPS including discontinued operations was $4.38.
Fiscal Q4 revenue was $338.7 million, operating earnings $60.4 million, net earnings $30.0 million, and diluted EPS $1.01. Direct comparison with FY2016 Q4 is distorted by the prior-year quarter’s extra week.
Operations and changes versus prior year
- Jack in the Box system same-store sales increased 0.5% on a calendar basis; company-operated same-store sales declined 1.1%, with transactions down 5.2% and average check up 4.1%.
- Qdoba system same-store sales declined 1.4% on a calendar basis. Company-operated same-store sales fell 3.0%, as transactions declined 4.8%; catering growth and higher average check partly offset the traffic decline.
- Company restaurant costs rose to 82.4% of company restaurant sales from 79.8%. Jack in the Box costs increased to 79.9%, and Qdoba costs to 86.4%, reflecting sales deleverage, wage inflation and, at Qdoba, higher food costs and new-store impacts.
- Qdoba segment operating earnings decreased to $31.0 million from $47.3 million. Jack in the Box segment operating earnings decreased to $280.1 million from $290.3 million, despite higher consolidated operating earnings; shared-services costs fell and restaurant-sale gains increased.
- Jack in the Box company-operated units fell from 417 to 276, principally through refranchising. Qdoba grew to 726 locations from 699.
Debt, liquidity and capital allocation
Year-end cash was $7.6 million. Current assets of $139.3 million were below current liabilities of $262.0 million. Management said operating cash flow and available financing were expected to cover capital, working-capital and debt-service needs for at least the next 12 months and the foreseeable future.
Debt and capital lease obligations totaled $1.147 billion before debt issuance costs, compared with $995.1 million a year earlier. This included $497.0 million drawn on a $900 million revolver and a $639.4 million term loan. Unused borrowing capacity was $371.6 million, after letters of credit. The facility matures in March 2019; the company reported compliance with its covenants. Net interest expense rose to $46.5 million from $31.1 million. Management estimated a 100-basis-point rise in short-term rates would add about $6.4 million in annual interest expense on unhedged debt.
Operating cash flow less capital expenditures was approximately $104.4 million. The company repurchased 3.2 million shares for $327.2 million and declared $49.2 million in dividends. Stockholders’ deficit widened to $388.0 million, primarily reflecting share repurchases. Operating lease commitments totaled $1.415 billion, although the filing said approximately $1.3 billion of future minimum lease payments were expected to be recovered under non-cancelable subleases.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management planned to continue Jack in the Box refranchising and stated that Qdoba’s long-term unit potential was approximately 2,000; these are strategic plans, not assured outcomes.
- The Qdoba strategic review generated $5.3 million of costs; total restructuring charges were $8.8 million. Total impairment and other charges were $25.1 million, including charges for underperforming Qdoba restaurants and restaurant closures.
- Key risks include restaurant traffic and competitive pressure, wage and commodity inflation, food safety and supply disruption, concentration of Jack in the Box restaurants in California and Texas, franchisee financial or operational difficulties, and substantial lease and debt obligations.
- The company disclosed a wage-and-hour class action, Gessele v. Jack in the Box. It had accrued for a matter it considered probable and estimable, but said it could not estimate additional potential losses; an unfavorable outcome beyond accruals could be material.
- Subsequent franchise-sale disclosures include non-binding letters of intent for additional Jack in the Box restaurants. The filing cites differing unit counts and estimated proceeds in different sections and dates; confirm the latest status and scope.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of the operating-earnings increase reflects recurring performance versus the $38.0 million restaurant-sale gain and lower corporate costs?
- Whether Jack in the Box and Qdoba can reverse transaction declines and improve company-restaurant cost ratios, particularly at Qdoba.
- Progress and final terms, if any, of the Qdoba strategic review and planned Jack in the Box refranchising.
- Refinancing or repayment plans for the credit facility’s March 2019 maturity, alongside covenant headroom and interest-rate exposure.
- Potential cash demands from lease commitments, pension and benefit obligations, purchase commitments, and legal contingencies.