Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants. This Form 10-K covers the 52-week fiscal year ended September 27, 2015; comparisons are with fiscal 2014, ended September 28, 2014. At year-end, the system had 2,910 restaurants: 2,249 Jack in the Box and 661 Qdoba.
The company continued shifting Jack in the Box toward franchising: 82% of its restaurants were franchise-operated, up from 81% in 2014. Qdoba represented 44% of company-operated units.
Financial and operating highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $1.540 billion | $1.484 billion |
| Earnings from operations | $197.2 million | $162.3 million |
| Earnings from continuing operations | $112.6 million | $94.8 million |
| Net earnings | $108.8 million | $89.0 million |
| Diluted EPS from continuing operations | $2.95 | $2.26 |
| Operating cash flow | $226.9 million | $201.0 million |
| Capital expenditures | $86.2 million | $60.5 million |
| Cash and cash equivalents | $17.7 million | $10.6 million |
| Total debt, including current maturities | $715.3 million | $507.9 million |
| Stockholders’ equity | $16.0 million | $257.9 million |
Operating margin was 12.8% of revenue, compared with 10.9% in 2014. Consolidated company-operated restaurant margin rose 190 basis points to 20.4%. Same-store sales increased 6.5% system-wide at Jack in the Box and 9.3% at Qdoba. Company-operated same-store sales rose 5.1% at Jack in the Box and 8.3% at Qdoba.
Net earnings include $3.8 million of after-tax losses from discontinued operations, principally remaining costs associated with the previously closed Qdoba restaurants and distribution business. Continuing-operations earnings are the clearer measure of ongoing performance.
Material changes versus fiscal 2014
- Revenue increased about 3.8%; operating earnings rose to $197.2 million from $162.3 million, and continuing-operations earnings increased to $112.6 million from $94.8 million.
- Jack in the Box company restaurant sales were nearly flat at $782.5 million: higher average unit volumes offset the effect of fewer company-operated restaurants from refranchising. Franchise revenue and margin grew, with Jack in the Box franchise margin reaching 49.9%, versus 48.1%.
- Qdoba company restaurant sales increased to $374.3 million from $338.5 million, supported by higher average unit volumes and more company-operated locations. Its restaurant margin improved to 19.7% from 18.3%.
- Operating cash flow increased, while investing cash use rose as capital expenditures expanded. Debt rose by approximately $207 million; the July 2015 credit amendment added a $300 million term loan and increased revolving capacity.
- Share repurchases totaled $317.1 million for the year and dividends declared totaled $37.6 million. Equity declined substantially, mainly reflecting repurchases and other comprehensive losses.
Outlook, commentary, risks and unusual items
Management expected fiscal 2016 commodity costs to increase about 1% at Jack in the Box and decrease about 3% at Qdoba. Planned system openings were approximately 20 Jack in the Box restaurants and 50–60 Qdoba restaurants. The company expected fiscal 2016 capital expenditures of $100–$120 million, including Qdoba remodels and technology upgrades, and planned to open 4 company-operated Jack in the Box and approximately 25–30 company-operated Qdoba restaurants.
Management stated that operating cash flows and available financing were expected to meet capital expenditure, working capital and debt-service needs for at least the next 12 months. The company had $479.8 million of unused borrowing capacity at year-end and was compliant with its credit-facility covenants. It had $715.3 million of total debt and substantial lease commitments; reported operating lease obligations were $1.498 billion, with approximately $1.0 billion expected to be recovered under non-cancelable subleases.
Key risks include food and commodity price volatility, labor and minimum-wage increases, competition and execution of menu and growth plans, food safety and brand reputation, franchisee financial health, supply-chain disruption, technology and cybersecurity events, regulation, and leverage. Jack in the Box is geographically concentrated, with nearly 70% of its system in California and Texas.
Unusual and judgment-sensitive matters include $11.8 million of impairment and other charges, a $35.6 million increase in combined pension and postretirement projected benefit obligations associated with updated mortality assumptions, and $4.6 million of additional fiscal 2015 costs for the 2013 Qdoba closures. The filing also describes the Gessele wage-and-hour litigation, whose complaint seeks $45 million; the company had accrued for one claim it considered probable and estimable, but not for the other claims.
Important facts for investors to verify
- Review the debt schedule, covenant terms, interest-rate exposure and swap coverage; debt increased materially during the year.
- Assess whether FY2015 same-store sales growth and margin improvements—particularly Qdoba’s simplified pricing benefits—are sustainable and translate into returns on planned expansion and remodel spending.
- Compare reported net earnings with continuing-operations results and examine the remaining closure-related lease liabilities and assumptions about sublease recoveries.
- Evaluate the effects of buybacks and dividends on leverage, liquidity and the very low year-end stockholders’ equity balance.
- Track commodity, labor, pension and litigation exposures, including the Gessele matter and the company’s self-insurance estimates.