Jack in the Box Inc. — Q3 FY2014 Form 10-Q
Reporting period: 12 weeks ended July 6, 2014; year-to-date figures cover 40 weeks. Comparatives are the periods ended July 7, 2013. The company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. Results exclude the distribution business and 62 Qdoba locations closed in 2013, which are reported as discontinued operations.
Financial performance and position
| Metric | Q3 FY2014 | Prior-year quarter | 40 weeks FY2014 | Prior-year 40 weeks |
|---|---|---|---|---|
| Total revenue | $348.5 million | $350.3 million | $1,139.4 million | $1,151.9 million |
| Operating earnings | $43.0 million | $30.9 million | $133.1 million | $101.5 million |
| Operating margin | 12.3% | 8.8% | 11.7% | 8.8% |
| Continuing-operations earnings | $26.1 million | $17.3 million | $77.4 million | $58.5 million |
| Net earnings (loss) | $24.7 million | ($5.7 million) | $72.8 million | $28.3 million |
| Diluted EPS | $0.61 | ($0.12) | $1.71 | $0.63 |
- Quarter revenue comprised $264.4 million in company restaurant sales and $84.1 million in franchise revenue. Company sales declined 2.4%; franchise revenue rose 5.8%.
- Same-store sales increased 2.4% for Jack in the Box and 7.5% for Qdoba systemwide in the quarter. Company-operated same-store sales rose 2.4% and 7.2%, respectively.
- Company restaurant costs were 80.9% of company restaurant sales in the quarter, versus 82.1% a year earlier. SG&A declined $4.7 million to $47.4 million. The filing attributes improvement chiefly to cost leverage, sales mix and lower pension-related expense; commodity costs increased.
- Year-to-date operating cash flow was $113.9 million, down from $167.3 million. Investing used $26.3 million and financing used $87.4 million; cash ended at $9.9 million.
- At July 6, 2014, total debt was approximately $535.0 million, versus approximately $370.3 million at September 29, 2013. Cash was $9.9 million. Current assets of $184.4 million were below current liabilities of $192.3 million. The company reported compliance with credit-facility covenants.
- Year-to-date capital expenditures were $43.8 million. The company repurchased 4.95 million shares for $277.0 million during fiscal 2014 to date and paid its initial $0.20-per-share quarterly dividend.
Material changes versus prior period
- Quarter revenue edged down despite stronger franchise revenue and same-store sales, primarily because the average number of company-operated Jack in the Box restaurants declined under the refranchising strategy. The Jack in the Box system was 80% franchised at quarter-end.
- Continuing-operations earnings improved substantially; the prior-year quarter’s net loss included $23.0 million of discontinued-operations losses, compared with $1.4 million this quarter.
- Year-to-date operating cash flow declined by $53.4 million. Management cited the prior-year distribution-business transition and associated working-capital effects, advertising-payment timing, rent timing, and lower tax payments as factors.
- Debt increased amid refinancing and significant share repurchases. The new credit agreement, entered into in March 2014, provides a $600 million revolver and a $200 million term loan, both maturing in March 2019.
Outlook, commentary and risks
- Management expected fiscal 2014 commodity costs to rise approximately 1.5%–2.0%, and beef costs to rise approximately 5%–6%. Fiscal 2014 capital expenditures were expected to be approximately $70 million; planned company openings were about two Jack in the Box and 15–17 Qdoba restaurants.
- Management expected a fiscal-year tax rate of approximately 35.5%–36.5% and stated operating cash flows and available financing should be sufficient for capital expenditure, working-capital and debt-service needs for at least the next 12 months.
- The company planned to maintain Jack in the Box franchise ownership at 80%–85%; letters of intent covered approximately 44 Jack in the Box restaurants in three markets. A further $100 million share-repurchase authorization and a $0.20-per-share dividend were approved after quarter-end.
- Risks highlighted include commodity and utility price volatility, competition and consumer demand, franchisee performance, geographic concentration, supply interruptions, technology and cybersecurity, substantial indebtedness, and unpredictable litigation. A 100-basis-point increase in short-term rates was estimated to raise annual interest expense by $2.9 million on the then-unhedged debt balance.
- The company continued to accrue for a probable and estimable claim in the Gessele wage-and-hour litigation; other claims were not accrued where loss was not considered probable or was not estimable. The company cautioned that an unfavorable outcome exceeding recorded accruals could materially affect results or liquidity. It also expects additional restructuring charges but could not reasonably estimate them.
Important facts for investors to verify
- Whether same-store sales and Qdoba momentum persist, and how refranchising affects reported sales, margins and recurring franchise revenue.
- Actual commodity and beef cost inflation versus management’s fiscal 2014 estimates, and the extent of pricing or cost actions needed to offset it.
- Debt, available revolver capacity, covenant headroom and interest-rate exposure following the refinancing and share repurchases.
- Cash-flow conversion and the sustainability of capital spending, dividends and buybacks relative to operating cash flow.
- Final outcomes and cash costs for closed-location leases, restructuring, pending litigation and planned restaurant-market sales.