Business context and reporting period
Jack in the Box Inc. operates and franchises quick-service restaurants. This unaudited Form 10-Q covers the 12 weeks and 40 weeks ended July 4, 2021; comparable periods ended July 5, 2020. The system had 2,219 restaurants at quarter-end: 148 company-operated and 2,071 franchised.
Financial performance
Amounts below are in millions of dollars, except per-share data. Revenue includes franchise advertising contributions and related expenses, which are largely pass-through items.
| Metric | Quarter 2021 | Quarter 2020 | Year-to-date 2021 | Year-to-date 2020 |
|---|---|---|---|---|
| Total revenue | $269.5 | $242.3 | $865.2 | $766.1 |
| Earnings from operations | $67.4 | $61.8 | $221.2 | $164.6 |
| Net earnings | $40.0 | $32.6 | $126.8 | $51.9 |
| Diluted EPS | $1.79 | $1.42 | $5.57 | $2.23 |
| Operating cash flow | Not presented separately for the quarter | $149.9 | $90.2 | |
| Capital expenditures | Not presented separately for the quarter | $35.2 | $16.7 |
Quarter revenue rose 11.2% year over year and net earnings rose 23.0%. Year-to-date revenue increased 12.9% and net earnings increased 144.3%; the comparison benefited from a $39.0 million non-cash pension settlement charge in 2020. Operating margin was 25.0% for the quarter versus 25.5% a year earlier, and 25.6% year-to-date versus 21.5%. The effective tax rate was 23.1% for the quarter and 25.1% year-to-date, down from 27.9% and 29.0%, respectively.
System same-store sales increased 10.2% for the quarter and 14.0% year-to-date. Company same-store sales rose 9.0% in the quarter, including 4.8% average-check growth and 4.2% more transactions; franchise same-store sales increased 10.3%. Adjusted EBITDA, a non-GAAP measure, was $79.0 million for the quarter versus $72.9 million, and $257.1 million year-to-date versus $195.7 million.
Balance sheet, liquidity and capital allocation
At July 4, 2021, cash was $84.2 million and restricted cash was $18.2 million, compared with $199.7 million and $37.3 million, respectively, at September 27, 2020. Year-to-date cash and restricted cash declined $134.5 million, reflecting $258.3 million of financing cash outflows, including repayment of $107.9 million of revolving borrowings, $124.4 million of cash share repurchases and $27.9 million of dividends. Operating cash flow was $149.9 million.
Long-term debt, net of current maturities, was $1.272 billion; total debt carrying value including current maturities was approximately $1.273 billion. The company reported $110.5 million of available borrowing capacity under its Variable Funding Notes and said cash flows and financing availability should cover capital, working-capital and debt-service needs for at least the next 12 months and the foreseeable future. It was in compliance with debt covenants and reported no rapid amortization events. Stockholders’ deficit was $811.6 million, reflecting substantial treasury stock.
The company repurchased 1.2 million shares year-to-date for $130.0 million, with $70.0 million remaining under authorized programs. It declared $1.24 per share in dividends during the first three quarters; a further $0.44-per-share dividend was declared July 30, payable September 3, 2021.
Material changes, outlook and risks
- Management attributed sales growth to higher average checks, menu pricing and improved transactions versus pandemic-affected comparisons. Higher franchise sales lifted quarterly royalty and rental revenues by $5.3 million and $4.6 million, respectively.
- Company restaurant costs as a percentage of sales were flat overall for the quarter: sales leverage offset commodity, labor and delivery costs. Commodity costs rose about 5.7% in the quarter and 2.9% year-to-date; management expected fiscal 2021 commodity inflation of 4%–5% and wage inflation of 7%–8% versus fiscal 2020.
- Management expected labor and supply-chain shortages to continue raising costs in 2021 and the foreseeable future. It noted uncertainty about whether customer traffic would return to pre-pandemic levels. Most restaurants had remained open, primarily relying on drive-through, carryout and delivery while many dining rooms were closed.
- Quarterly SG&A increased $8.1 million, mainly due to litigation, unfavorable market-value movements in investments supporting non-qualified retirement plans, and higher insurance costs. Year-to-date SG&A declined $5.0 million.
- A Midwest franchisee that operated 68 restaurants filed for Chapter 11 in February 2021. Three locations had been rejected through the proceedings, with two additional planned rejections tied to master-lease expirations; the remaining 65 were operating, and management expected transfers to other franchisees. Potential lease-related impairment costs remain a risk.
- A wage-and-hour class action, Gessele v. Jack in the Box, was scheduled for trial in December 2021. Recorded liabilities for all probable and estimable legal matters were $7.4 million; the company said excess exposure was not expected to materially adversely affect its business or financial position.
- The company remained contingently liable for former Qdoba lease guarantees with maximum undiscounted future payments of approximately $27.4 million, although the buyer indemnified the company and management considered payment unlikely.
- After quarter-end, the company took possession of 16 franchise restaurants in a non-cash transaction and was still determining purchase-price allocation. The filing did not provide a quantitative full-year earnings or sales forecast.
Most important facts to verify
- Whether same-store sales momentum and higher average checks persist as comparisons normalize, and whether traffic recovers.
- Actual commodity, wage and supply-chain cost inflation versus management’s stated expectations, and the resulting effect on restaurant margins.
- Cash generation and liquidity after debt repayments, share repurchases, dividends and planned investment; confirm availability under the revolving facility.
- Developments in the franchisee bankruptcy, potential restaurant transfers or closures, and any related lease impairment charges.
- Outcome and potential cost of the Gessele litigation and any changes in the company’s legal accruals.
- Integration, valuation and financial impact of the 16 restaurants acquired after quarter-end; the filing does not state their purchase value.