Business Context and Reporting Period
Company: Jack in the Box Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 5, 2009 (12-week quarter and 40-week year-to-date)
Business Overview: The Company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. As of July 5, 2009, the system included 2,199 Jack in the Box locations and 491 Qdoba locations. The Company is executing a strategic plan focused on brand reinvention, expanding franchising, and transitioning to a predominantly franchised business model.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended July 5, 2009 |
40 Weeks Ended July 5, 2009 |
|---|---|---|
| Total Revenues | $575,722 | $1,930,806 |
| Earnings from Operations | $57,119 | $164,605 |
| Net Earnings | $19,558 | $77,816 |
| Net Earnings Per Share (Diluted) | $0.34 | $1.35 |
| Cash and Cash Equivalents | $12,153 | $12,153 (Ending Balance) |
| Total Debt Outstanding | $455,500 | $455,500 (Ending Balance) |
| Operating Cash Flow (40 weeks) | N/A | $115,056 |
Note: Net earnings include losses from discontinued operations (Quick Stuff convenience stores) of $13.3 million for the quarter and $12.6 million year-to-date.
Material Changes vs. Prior Period
- Revenue: Total revenues decreased 2.7% in the quarter and 1.3% year-to-date compared to the prior year. Restaurant sales declined due to a reduction in company-operated units and same-store sales decreases in the quarter, partially offset by growth in distribution and franchised revenues.
- Profitability: Earnings from continuing operations increased to $32.9 million ($0.57 diluted EPS) in the quarter from $29.5 million ($0.50 diluted EPS) in the prior year. However, net earnings dropped significantly due to a $14.1 million after-tax loss on the disposition of discontinued operations (Quick Stuff).
- Costs: Restaurant costs of sales improved to 31.5% of sales in the quarter (down from 33.2% last year) due to price increases and lower commodity costs. Selling, general, and administrative (SG&A) expenses improved to 10.9% of revenues in the quarter.
- Liquidity: Cash and cash equivalents decreased by $35.7 million to $12.2 million, primarily due to capital expenditures and net repayments on the revolving credit facility.
- Debt: Total debt decreased to $455.5 million from $518.6 million at the beginning of the fiscal year due to repayments on the revolving credit facility.
Guidance, Outlook, and Risks
- Franchising Strategy: The Company expects to refranchise approximately 150 Jack in the Box restaurants in fiscal 2009, aiming to increase franchise ownership to 70%-80% by the end of fiscal 2013. Proceeds from these sales are expected to total $90-$95 million for the year.
- Capital Expenditures: Fiscal 2009 capital expenditures are projected to be approximately $175 million, including costs for the Jack in the Box re-image program. The Company plans to open approximately 40 Jack in the Box and 25 Qdoba company-operated restaurants in 2009.
- Commodity Costs: Commodity costs increased 3.9% year-to-date but moderated to 0.8% lower than the prior year in the quarter. The Company expects a fiscal year increase of approximately 2.0%.
- Tax Rate: The effective tax rate for the year is expected to be approximately 39%, higher than the prior year due to market performance of insurance investment products funding non-qualified retirement plans.
- Risks: Key risks include recessionary economic conditions affecting consumer spending, rising commodity and labor costs, tight credit markets impacting franchisee development, and the realization of gains from restaurant sales. The Company also faces potential liabilities from legal proceedings and self-insurance claims.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the $13.3 million loss from Quick Stuff operations impacts the reported net earnings and whether this is a one-time event or indicative of ongoing divestiture costs.
- Franchising Execution: Monitor the pace of refranchising (target: 150 units in 2009) and the associated cash proceeds ($90-$95 million) to assess the transition to a less capital-intensive model.
- Liquidity Position: Review the $12.2 million cash balance against the $175 million capital expenditure plan and debt service requirements to ensure sufficient liquidity without further credit facility drawdowns.
- Same-Store Sales Trends: Analyze the divergence between year-to-date same-store sales growth (0.5% for Jack in the Box) and the quarterly decline (-1.0%) to gauge the impact of the recessionary environment on recent performance.
- Pension Plan Funding: Confirm the Company's voluntary contribution plans for its pension fund, as market declines have reduced plan asset values, potentially increasing future cash outflows.