Jack in the Box Inc. — Q1 FY2012 Form 10-Q
Reporting period: Sixteen weeks ended January 22, 2012; comparisons are with the sixteen weeks ended January 23, 2011. Unaudited consolidated results cover Jack in the Box and Qdoba. The company operated and franchised both brands, with refranchising shifting Jack in the Box locations from company ownership to franchisees.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages, and restaurant counts.
| Metric | Q1 FY2012 | Prior year |
|---|---|---|
| Revenue | $652.7 | $664.7 |
| Operating earnings / margin | $24.3 / 3.7% | $54.6 / 8.2% |
| Net earnings | $12.0 | $32.4 |
| Diluted EPS | $0.27 | $0.61 |
| Operating cash flow | $27.8 | $45.8 |
| Capital expenditures | $26.9 | $46.9 |
- Revenue fell 1.8%; operating earnings fell 55.6% and net earnings fell 63.1%. Lower gains from restaurant sales were a major comparison factor: gains were $1.1 million versus $27.9 million in the prior period.
- Company restaurant sales declined 16.7% to $364.1 million, mainly reflecting fewer average company-operated Jack in the Box restaurants. Distribution sales increased 32.8% to $194.8 million, and franchise revenue rose 15.7% to $93.8 million.
- Same-store sales increased 3.6% for the Jack in the Box system and 3.8% for Qdoba. Jack in the Box company same-store sales rose 5.3%; Qdoba company sales rose 3.5%. Price increases contributed to both brands’ company results.
- Food and packaging costs were 33.5% of company restaurant sales, up from 32.5%. Company restaurant costs overall improved to 86.5% of related sales from 87.4%; distribution operations were reported at approximately break-even in 2012.
- Cash and cash equivalents were $13.6 million at quarter-end. Current assets of $264.8 million exceeded current liabilities of $246.3 million. Long-term debt was $472.8 million and current maturities were $21.0 million, for total balance-sheet debt of approximately $493.8 million.
- At January 22, the company had $180 million outstanding under its term loan, $305 million drawn on its $400 million revolving facility, and $38.9 million of letters of credit. It reported compliance with credit covenants at quarter-end.
Material changes and business developments
- Jack in the Box company-operated restaurants numbered 634, down from 873 a year earlier; franchise restaurants rose to 1,602 from 1,340. The system was approximately 72% franchised. Management planned to increase franchise ownership to approximately 80% over the next couple of years.
- Qdoba’s company-operated count increased to 262 from 194. The company acquired 11 Qdoba franchise restaurants during the quarter for $6.2 million.
- After quarter-end, on February 20, 2012, the company acquired 25 additional Qdoba restaurants for approximately $33 million. The purchase price allocation was not yet available when the filing was issued.
- Interest expense, net, increased to $6.1 million from $4.6 million, primarily because of higher average borrowings. A 100-basis-point rise in short-term interest rates was estimated to add $3.9 million in annual interest expense. Swaps fixed the rate on $100 million of variable-rate term debt through September 2014.
- Repurchased 326,532 shares for approximately $6.4 million, completing the earlier authorization. A new $100 million repurchase authorization was available at quarter-end.
Outlook, risks, and contingencies
- Management expected fiscal 2012 commodity costs to increase approximately 5%; Jack in the Box and Qdoba restaurant commodity costs rose approximately 7.0% and 13.2%, respectively, in the quarter. Beef costs were expected to rise in the high-single-digit range for the year.
- Management expected a fiscal-year tax rate of 36%–37%, capital expenditures of approximately $90–$100 million, and planned approximately 15 new company-operated Jack in the Box and 40 Qdoba restaurants in 2012.
- Management expected $35–$50 million in proceeds from sale of 80–120 Jack in the Box restaurants during 2012. It also expected operating cash flows and available financing to cover foreseeable capital, working-capital, and debt-service needs.
- On February 16, the credit agreement was amended to temporarily increase the maximum leverage ratio from 2.25:1.00 to 2.50:1.00 through the fiscal quarter ending July 8, 2012, providing flexibility in connection with refranchising timing and the subsequent Qdoba acquisition.
- Risks cited include volatile food and commodity costs, economic and consumer-demand conditions, competition, supply interruptions, weather, development and franchisee execution, regulation, technology and security, debt obligations, and unpredictable litigation. The company said routine litigation was not expected to have a material adverse effect, but an unfavorable resolution could materially affect a future period.
- Restaurant impairment and other charges were $4.4 million, including impairment of two underperforming Jack in the Box restaurants and costs associated with closed restaurants. Accrued restaurant closing costs were $21.2 million at quarter-end.
Important facts for investors to verify
- Whether improving same-store sales can offset the revenue and earnings effects of continued refranchising and higher commodity costs.
- Execution and funding of the Qdoba acquisitions, including the $33 million post-quarter purchase and its eventual purchase-price allocation.
- Debt, revolving-facility availability, covenant headroom under the amended leverage limit, and sensitivity to interest-rate increases.
- Realization of the stated 2012 refranchising proceeds, capital-spending, restaurant-opening, commodity-cost, and tax-rate expectations.
- Potential cash requirements from pension contributions, restaurant lease-closing obligations, and litigation or tax-audit outcomes.