Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. This unaudited Form 10-Q covers the 12-week quarter and 40 weeks ended July 7, 2013; comparisons are to the periods ended July 8, 2012. Results for the distribution business and 62 Qdoba locations closed during the quarter are presented as discontinued operations.
Key financial results
| Metric | Quarter 2013 | Quarter 2012 | Year-to-date 2013 | Year-to-date 2012 |
|---|---|---|---|---|
| Total revenue | $350.3 million | $354.1 million | $1,151.9 million | $1,160.4 million |
| Operating earnings | $30.9 million | $23.7 million | $101.5 million | $89.7 million |
| Earnings from continuing operations | $17.3 million | $12.6 million | $58.5 million | $48.9 million |
| Net earnings (loss) | ($5.7 million) | $11.6 million | $28.3 million | $45.2 million |
| Diluted EPS, continuing operations | $0.38 | $0.28 | $1.30 | $1.09 |
| Diluted EPS, total | ($0.12) | $0.26 | $0.63 | $1.01 |
Quarterly operating margin was 8.8% of revenue, up from 6.7%; year-to-date margin was 8.8%, up from 7.7%. Quarter revenue declined 1.1%, while franchise revenue rose 2.4% to $79.5 million and company restaurant sales fell 2.0% to $270.9 million. Year-to-date revenue declined 0.7%. Jack in the Box company same-store sales rose 1.2% for the quarter and 1.4% year-to-date; Qdoba company same-store sales rose 0.5% and 0.3%, respectively. Management said price increases were a key contributor; Qdoba results also reflected transaction declines and promotional activity.
Quarter operating earnings improved despite slightly lower revenue, alongside lower impairment and restructuring charges and lower interest expense. Jack in the Box segment operating earnings were $23.5 million versus $15.4 million; Qdoba segment operating earnings were $7.4 million versus $8.3 million. The company’s 40-week results also benefited from fewer impairment and restructuring charges than in the comparable period.
Cash flow, debt and liquidity
Year-to-date operating cash flow was $167.3 million, compared with $111.6 million. Investing activities used $39.3 million, versus $81.8 million; financing activities used $126.7 million, versus $30.4 million. Ending cash was $9.8 million. Capital expenditures were $58.0 million year-to-date.
At July 7, 2013, current assets were $175.4 million and current liabilities were $217.3 million, a working-capital deficit of $41.9 million. Management notes that working capital deficits can be typical in the restaurant industry and expects operating cash flow and available financing to cover foreseeable capital, working-capital and debt-service needs. Balance-sheet debt, including current maturities, totaled approximately $380.4 million. Under the credit facility, $190.0 million was outstanding on the term loan and $185.0 million on the revolving facility; letters of credit were $29.1 million. The facilities mature November 5, 2017. The company was in compliance with its covenants at quarter-end. A 100-basis-point increase in short-term rates was estimated to raise annual interest expense by $2.8 million, based on quarter-end unhedged debt.
Material changes, outlook and risks
- The company closed 62 Qdoba restaurants after a market-performance review. The closures generated a $22.6 million quarterly net loss in discontinued operations; total discontinued-operations losses were $23.0 million for the quarter and $30.2 million year-to-date. Closure charges included $22.7 million of asset impairments and lease-related costs. Management expects the closures to benefit future earnings and cash flow and does not expect remaining closure costs to be material.
- The Jack in the Box distribution business transition was completed in the first quarter. Management attributed part of the year-to-date cash-flow improvement to working capital released by outsourcing distribution.
- Management expects fiscal 2013 commodity costs to increase approximately 2.0%, the tax rate to be approximately 35%, and capital expenditures to be approximately $90–$95 million. It planned approximately six new company-operated Jack in the Box restaurants and 35 Qdoba restaurants in fiscal 2013. Management’s longer-term goal is for Jack in the Box to be 80%–85% franchised; it was approximately 77% franchised at quarter-end.
- The company repurchased approximately 2.8 million shares year-to-date for $92.2 million. In August 2013, the board authorized a further $100 million repurchase program. Subsequent to quarter-end, the company sold 27 company-operated Jack in the Box restaurants to franchisees for $13.7 million.
- Risks discussed include food and commodity cost volatility, consumer demand and competition, supply interruptions, severe weather, development and franchisee financing risks, regulatory and labor costs, information-technology disruption, debt-service demands and litigation. In the Gessele wage-and-hour case, the company intends to defend itself; it accrued for one claim but could not estimate a loss range for other claims. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether same-store sales, transaction trends and average checks improve, particularly at Qdoba, and whether Jack in the Box refranchising supports recurring earnings.
- The cash and earnings effects of closing 62 Qdoba restaurants, including actual remaining lease and exit costs.
- Debt levels, revolver availability, covenant compliance, interest-rate exposure and the impact of share repurchases on liquidity.
- Whether fiscal 2013 commodity-cost, tax-rate and capital-expenditure expectations were achieved.
- Potential outcomes and financial exposure from the Gessele litigation and other contingencies.