Jack in the Box Inc. — Q3 2010 Form 10-Q
Reporting period: The 12 weeks ended July 4, 2010; year-to-date (YTD) means the 40 weeks ended that date. Comparatives are the corresponding periods ended July 5, 2009. Amounts below are in U.S. dollars; financial statement figures are rounded to millions. The company operates and franchises Jack in the Box and Qdoba restaurants. It had 2,234 Jack in the Box and 515 Qdoba restaurants at quarter-end.
Financial performance
| Metric | Q3 2010 | Q3 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Total revenue | $523.3M | $575.7M | $1,734.3M | $1,930.8M |
| Operating earnings | $41.8M | $57.1M | $116.7M | $164.6M |
| Continuing-operations earnings | $24.2M | $32.9M | $66.2M | $90.4M |
| Net earnings | $24.2M | $19.6M | $66.2M | $77.8M |
| Diluted EPS | $0.44 | $0.34 | $1.18 | $1.35 |
| Operating margin | 8.0% | 9.9% | 6.7% | 8.5% |
Q3 revenue fell 9.1%, operating earnings fell 26.7%, and earnings from continuing operations fell 26.3% year over year. Net earnings rose because the prior-year quarter included a $13.3M loss from discontinued operations; the company had sold its Quick Stuff convenience stores and fuel stations in fiscal 2009. YTD revenue declined 10.2%, operating earnings 29.1%, and net earnings 15.0%.
Company-operated restaurant sales fell 17.8% in Q3 and 17.9% YTD, reflecting refranchising and weaker Jack in the Box same-store sales. Jack in the Box company-operated same-store sales declined 9.4% in Q3 and 9.9% YTD; Qdoba system same-store sales increased 4.6% and 1.8%, respectively. Franchised restaurant revenue increased 16.5% in Q3 and 16.3% YTD as the franchise base grew.
Q3 company restaurant costs were 85.8% of restaurant sales, compared with 81.6% a year earlier. Food and packaging costs were 31.8% of restaurant sales versus 31.4%; payroll and benefits were 30.4% versus 28.9%; and occupancy and other costs were 23.5% versus 21.3%. Management attributed cost-rate pressure primarily to sales deleverage, workers’ compensation costs and depreciation from restaurant re-imaging. Distribution operations recorded an operating loss of $0.6M in Q3, versus $0.2M of earnings a year earlier.
Cash flow, balance sheet and capital
- YTD operating cash flow was $45.7M, including $47.9M from continuing operations, down from $115.1M and $112.1M, respectively. Management cited working-capital timing and lower adjusted earnings.
- YTD investing activities provided $23.7M, versus using $84.2M a year earlier. Property and equipment purchases were $62.2M, down from $118.8M; restaurant-sale proceeds were $52.0M.
- YTD financing activities used $109.5M. Cash declined $40.1M to $12.9M from $53.0M at fiscal year-end.
- At July 4, 2010, current assets were $262.9M and current liabilities $239.7M. Total debt, including current maturities, was approximately $357.1M, versus $425.2M at September 27, 2009. Stockholders’ equity was $562.4M.
- On June 29, the company refinanced with a $400M revolving facility and a $200M five-year term loan, initially priced at LIBOR plus 2.50%. At quarter-end, revolving borrowings were $148M and letters of credit were $34.9M. The facility has financial covenants and restrictions, including on capital spending and share repurchases.
- The company repurchased about 2.6M shares for $50M YTD; $47.4M remained under the existing authorization. It reported no cash dividends and did not expect to pay dividends in the foreseeable future.
Outlook, commentary and risks
- Management expected fiscal 2010 capital expenditures of approximately $125M–$135M and planned about 30 company-operated Jack in the Box and 15 company-operated Qdoba openings.
- Management expected fiscal 2010 proceeds of $90M–$95M from sales of approximately 200 company-operated restaurants to franchisees. It remained on track to reach 70%–80% franchise ownership in Jack in the Box by fiscal 2013; the system passed 50% franchised during Q3.
- Management expected Jack in the Box commodity costs to increase about 4% in Q4 year over year, but decrease about 1% for fiscal 2010 overall. It expected a fiscal-year tax rate of approximately 37%.
- Management said operating cash flows and available financing were expected to meet capital expenditure, working-capital and debt-service needs for the foreseeable future. The filing also notes that a 100-basis-point rise in short-term rates would increase annual interest expense by an estimated $3.5M.
- Key risks include persistent unemployment and weak consumer spending, competitive pricing and promotions, food and labor cost inflation, workers’ compensation costs, execution and returns on remodeling and growth, and franchisees’ access to financing and ability to meet obligations. The company reported routine litigation and did not expect pending matters to materially affect results, financial position or liquidity.
- Unusual or significant items included $23.7M of Q3 gains from restaurant sales to franchisees, $4.1M YTD impairment charges, and a $0.5M write-off of prior credit-facility financing fees. The company acquired 16 Qdoba restaurants in the Boston market for approximately $8.1M in Q3.
Investor verification priorities
- Assess whether Jack in the Box same-store sales and average check recover; management said Q3 promotions more than offset approximately 1.2% price increases and average check declined about 2.5%.
- Separate underlying earnings and cash generation from refranchising gains, changing company-operated restaurant counts, and working-capital timing.
- Review new credit-facility covenant headroom, scheduled term-loan amortization, borrowing costs, and liquidity after capital spending and repurchases.
- Track execution against fiscal 2010 capital expenditure, restaurant-opening and refranchising targets, and the longer-term franchise-ownership goal.
- Monitor commodity, labor, pension and workers’ compensation costs, plus the estimated tax rate and potential state-tax settlements.