Business Context and Reporting Period
Company: Jack in the Box Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Twelve weeks ended April 14, 2002 (First Quarter) and twenty-eight weeks ended April 14, 2002 (Year-to-Date).
Business Overview: The Company operates and franchises fast-food restaurants. As of the period end, there were 1,476 Company-operated restaurants (up 7.7% year-over-year) and 341 franchised restaurants.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended Apr 14, 2002 |
12 Weeks Ended Apr 15, 2001 |
28 Weeks Ended Apr 14, 2002 |
28 Weeks Ended Apr 15, 2001 |
|---|---|---|---|---|
| Total Revenues | $447,630 | $413,219 | $1,041,810 | $956,442 |
| Net Earnings | $18,186 | $16,771 | $44,860 | $40,492 |
| Diluted EPS | $0.45 | $0.42 | $1.12 | $1.02 |
| Operating Cash Flow (28 wks) | $83,078 (2002) vs $69,600 (2001) | |||
| Total Debt Outstanding | $255.5 million (Apr 14, 2002) | |||
| Cash and Equivalents | $6.1 million (Apr 14, 2002) | |||
| Working Capital Deficit | $142.0 million (Apr 14, 2002) |
Margins (Year-to-Date):
- Restaurant Cost of Sales: 30.7% of sales (down from 30.8% in 2001).
- Restaurant Operating Costs: 51.1% of sales (up from 50.1% in 2001).
- Selling, General & Administrative: 11.1% of revenues.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8.3% for the quarter and 8.9% year-to-date, driven primarily by a 7.7% increase in the number of Company-operated restaurants.
- Comparable Sales: Per store average (PSA) sales for comparable Company-operated restaurants declined 0.3% in the quarter but grew 0.3% year-to-date.
- Profitability: Net earnings increased 8.4% for the quarter and 10.8% year-to-date. Earnings per share (diluted) rose to $0.45 for the quarter and $1.12 year-to-date.
- Cost Pressures: Restaurant operating costs as a percentage of sales increased due to higher labor, utility, and occupancy costs for newer, immature restaurants.
- Debt Reduction: Total debt decreased to $255.5 million from $282.0 million at the beginning of the fiscal year. Interest expense declined due to lower debt levels and interest rates.
- Franchising Activity: The Company sold nine Company-operated restaurants to franchisees year-to-date (compared to four in the prior year), contributing to "Other" revenue growth.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Liquidity Strategy: Management expects to maintain low cash levels, reinvesting operating cash flows into new restaurant development, refurbishments, debt reduction, or share repurchases.
- Financing: The Company has a revolving credit facility of up to $175 million expiring in March 2003. With $39 million borrowed and $120 million available, management expects to secure new financing before expiration.
- Share Repurchase: On May 10, 2002, the Board authorized a new $30 million share repurchase program, in addition to $3.4 million remaining from a prior program.
- Tax Rate: The projected annual tax rate for 2002 is 36.5%, compared to 37.0% in 2001. Management notes the effective tax rate is expected to increase in fiscal 2003.
Risks and Contingencies
- Legal Proceedings: A class action lawsuit filed in April 2001 alleges violations of California wage and hour laws regarding overtime pay for salaried management. A trial date is set for January 17, 2003. Management believes the ultimate liability will not materially affect results.
- Market Risks: Exposure to interest rate fluctuations (a 1% increase would reduce pretax earnings by $0.4 million annually) and commodity price fluctuations.
- Operational Risks: Risks include rising utility costs due to deregulation, potential power outages, and ingredient cost increases.
Unusual Items
- Accounting Change (SAB 101): In fiscal 2001, the Company adopted SAB 101 regarding the recognition of franchise percentage rents. This resulted in a one-time after-tax cumulative effect charge of $1.9 million in the prior year, which is not present in the current period.
- Working Capital Reclassification: The working capital deficit increased significantly due to the reclassification of $35 million in financing lease obligations and revolving bank loans to current maturities.
Investor Verification Checklist
- Debt Maturity: Verify the status of refinancing for the $175 million credit facility expiring in March 2003.
- Legal Exposure: Monitor the outcome of the California wage and hour class action lawsuit scheduled for trial in January 2003.
- Comparable Sales: Track the trend of Per Store Average (PSA) sales, which declined slightly in the quarter despite overall revenue growth.
- Cost Inflation: Assess the impact of rising labor and utility costs on future operating margins, which have expanded as a percentage of sales.
- Share Repurchases: Confirm execution of the newly authorized $30 million share repurchase program.