Jack in the Box Inc. — Q1 FY2022 Form 10-Q
Reporting period: Sixteen weeks ended January 23, 2022, compared with the sixteen weeks ended January 17, 2021. The company operates and franchises Jack in the Box quick-service restaurants; it reported 2,208 system restaurants at period-end.
Financial and operating performance
| Metric | Q1 FY2022 | Prior period | Change |
|---|---|---|---|
| Revenue | $344.7 million | $338.5 million | +1.8% |
| Earnings from operations | $73.7 million | $88.9 million | -17.1% |
| Net earnings | $39.3 million | $50.9 million | -22.8% |
| Diluted EPS | $1.85 | $2.21 | -16.3% |
| Adjusted EBITDA (non-GAAP) | $91.2 million | $102.4 million | -10.9% |
| Cash provided by operating activities | $34.1 million | $62.3 million | Down $28.2 million |
Operating margin was 21.4%, versus 26.3% a year earlier. Company restaurant sales rose 5.1% to $120.1 million, while company same-store sales declined 0.3%; system same-store sales increased 1.2%. Systemwide sales were $1.238 billion, up 0.6%. The company declared dividends of $0.44 per share, compared with $0.40 a year earlier.
Food and packaging costs rose to 31.3% of company restaurant sales from 28.3%, and payroll and benefits rose to 33.1% from 30.6%. Management cited commodity inflation, labor inflation, and an unfavorable sales mix. The filing reports commodity costs increased approximately 10.5% and labor inflation approximately 10.9%.
Balance sheet, cash flow and liquidity
At January 23, 2022, cash and restricted cash totaled $88.5 million. Total debt on the balance sheet was approximately $1.276 billion, comprising $0.9 million of current maturities and $1.275 billion of long-term debt. Current assets were $162.6 million and current liabilities were $277.9 million. Stockholders’ deficit was $786.1 million.
Operating cash flow fell primarily because of a $25.3 million unfavorable year-over-year working-capital change, including lower collections of prior franchisee marketing and rent deferrals, timing of property-tax payments, and higher bonus payments. Capital expenditures were $9.4 million; cash dividends paid were $9.3 million. The company said operating cash flows and available securitized-facility borrowings were expected to meet requirements for at least the next twelve months. It was in compliance with debt covenants at quarter-end.
Material changes and notable events
- Restaurant revenue growth did not translate into higher earnings: operating costs increased, and other operating expenses included $3.0 million of Del Taco acquisition costs. Prior-year results also benefited from higher gains on property dispositions and company-owned life insurance market performance.
- The company entered an agreement to acquire Del Taco for $12.51 per share in cash, in a transaction valued at approximately $575 million including existing debt. At the filing date, completion was expected in the first calendar quarter of 2022, subject to shareholder and regulatory approvals and other conditions.
- On February 11, 2022, after quarter-end, the company issued $1.1 billion of new fixed-rate senior secured notes at 3.445% and 4.136%. Proceeds repaid $570.7 million of existing notes, including applicable costs, and were expected to fund part of the Del Taco acquisition. A new revolving facility of up to $150 million replaced the prior $150 million facility. The filing states that outstanding debt at the Master Issuer was $1.82 billion following the refinancing.
- There were 12 restaurant closures and 2 openings during the quarter; 4 franchise restaurants were acquired and 4 transferred out of the franchise count. System restaurants declined 1.3% from the beginning of the period.
Outlook, risks and contingencies
No specific earnings or sales guidance was provided. Management expected labor and supply-chain challenges, and related operating-margin pressure, to continue through the remainder of fiscal 2022. During the quarter, labor availability led some restaurants to reduce operating hours; the company also reported limited supply shortages and continued inflationary pressure.
Key risks include completion and integration of the Del Taco acquisition, elevated debt and restrictive securitization covenants, labor and commodity-cost inflation, supply-chain disruption, COVID-19 effects, franchisee financial difficulties, and litigation. A franchisee operating 68 Midwest restaurants was in Chapter 11; motions to reject leases and franchise agreements for 11 locations had been authorized, and certain amounts owed were reserved. The company reported $6.8 million of aggregate accrued liabilities for probable and reasonably estimable legal matters. It also disclosed maximum potential undiscounted exposure of $26.7 million under former Qdoba lease guarantees, but recorded no liability, citing remote likelihood of payment and buyer indemnification.
Important facts for investors to verify
- Whether the Del Taco acquisition closed on the expected timetable, its final financing and purchase accounting, and whether anticipated integration benefits are realized.
- Post-refinancing debt, interest expense, covenant requirements, and available revolving capacity, including the impact of debt service on dividends and investment flexibility.
- Whether labor and commodity inflation, supply availability, and reduced operating hours continue to pressure restaurant margins and same-store sales.
- Whether operating cash flow recovers from the working-capital decline and how capital expenditures, dividends, and any share repurchases are funded.
- Developments in the Midwest franchisee bankruptcy and litigation, and any resulting impairment, collection, or lease-guarantee exposure.