Jack in the Box Inc. — Q2 FY2013 Form 10-Q
Reporting period: 12 weeks ended April 14, 2013; year-to-date (“YTD”) covers 28 weeks. Comparisons are with the corresponding periods ended April 15, 2012. Dollar amounts below are in millions unless stated otherwise.
Business context
Jack in the Box operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. At quarter-end, the systems included 2,256 Jack in the Box restaurants (76% franchised) and 647 Qdoba restaurants. The company completed outsourcing its Jack in the Box distribution business during Q1; its results are reported as discontinued operations.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | YTD FY2013 | YTD FY2012 |
|---|---|---|---|---|
| Revenue | $355.6 | $366.5 | $821.1 | $824.4 |
| Operating earnings | $24.7 | $37.3 | $64.4 | $61.6 |
| Operating margin | 7.0% | 10.2% | 7.8% | 7.5% |
| Earnings from continuing operations | $13.4 | $21.6 | $37.4 | $33.6 |
| Net earnings | $13.3 | $21.6 | $34.0 | $33.6 |
| Diluted EPS | $0.29 | $0.48 | $0.76 | $0.75 |
- Quarter revenue fell 3.0%, while YTD revenue was down 0.4%. Company restaurant sales declined as the average number of Jack in the Box company-operated restaurants decreased; franchise revenue growth partly offset the decline.
- Same-store sales: Jack in the Box system +0.1% for the quarter and +1.1% YTD; Qdoba system -1.5% and -0.1%, respectively. Qdoba company-store quarterly sales were pressured by transaction declines and promotions.
- Company restaurant costs were 84.2% of related sales in the quarter, versus 84.5% a year earlier; YTD, 84.3% versus 85.6%. Qdoba’s company restaurant cost ratio rose to 87.8% from 84.4% in the quarter.
- Operating cash flow was $121.6 versus $69.6 YTD. Investing used $45.5 and financing used $74.4; cash increased $1.7 to $10.2. Management attributed much of the operating cash-flow improvement to working capital released through distribution outsourcing.
- YTD capital expenditures were $41.8. Cash paid for interest was $8.6 and income taxes $22.9.
Balance sheet, debt and capital allocation
- At April 14, 2013, total debt was approximately $390.7, including current maturities; cash was $10.2. Current assets were $170.0 against current liabilities of $205.7.
- The November 2012 credit facility comprises a $400.0 revolving facility and a $200.0 term loan, both maturing November 5, 2017. At quarter-end, $190.0 was drawn on the revolver, $195.0 remained on the term loan, and letters of credit totaled $30.9. The company reported compliance with all covenants.
- YTD, the company repurchased approximately 1.4 million shares for $41.3 at an average $29.39 per share. $135.6 remained authorized under repurchase programs. No dividends were paid, and none were anticipated in the foreseeable future.
Changes, outlook and material items
- Quarter operating earnings declined despite lower restaurant costs as a percentage of sales, largely reflecting the change from $14.1 of prior-year net restaurant-sale gains to a $2.4 net loss in the current quarter. The current-period amount included a $2.7 loss related to an anticipated sale of a Jack in the Box market.
- Q2 discontinued operations recorded a $0.1 after-tax loss; YTD loss was $3.4, or about $0.08 per diluted share. YTD exit costs included accelerated depreciation, future lease commitments and vendor-contract exit costs.
- Management expected FY2013 commodity costs to increase approximately 2%–2.5%, with beef costs expected to rise approximately 3%. Expected FY2013 tax rate was 35%–36%; planned capital expenditures were $95–$105. Management planned approximately 6 new Jack in the Box and 40 new Qdoba company-operated restaurants in 2013.
- The company planned to increase Jack in the Box franchising from approximately 76% toward 80%–85%. It expected operating cash flows and available financing to meet capital expenditure, working capital and debt-service needs for the foreseeable future.
- Management continued organizational restructuring and said additional charges were expected, but could not reasonably estimate them. The filing cited risks including consumer demand, competition, food and commodity costs, supply interruptions, weather, development execution, labor and regulatory costs, information technology, debt obligations and litigation.
Contingencies and other disclosures
In the Gessele wage-and-hour litigation, an Oregon court certified certain payroll-deduction claims and conditionally certified related federal claims, while denying certification of meal-break claims. The company intends to defend the case; it accrued one claim but said potential losses on other claims were not probable or estimable. Lease guarantees related to two former distribution centers totaled $3.4 and were not accrued because third-party default was considered less than probable. Disclosure controls were assessed as effective, and the filing reported no material change in risk factors from the prior Form 10-K.
Important facts for investors to verify
- Whether Jack in the Box and Qdoba same-store sales and traffic trends improve, particularly Qdoba’s weak quarterly transactions.
- Whether planned refranchising, restaurant openings and capital spending deliver the expected growth and cost benefits.
- Commodity-cost, especially beef, trends and their effect on restaurant margins and pricing.
- Cash generation, debt balances, covenant headroom and the effects of continued share repurchases.
- Potential additional restructuring charges, distribution-exit costs and outcomes of litigation or lease guarantees.