Jack in the Box Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 29, 2019 (52 weeks). The filing also reports the final 12-week quarter; fiscal 2019 Q4 revenue was $221.2 million and net earnings were $22.1 million. The company operates and franchises Jack in the Box restaurants as a single reporting segment. Fiscal-year results below are compared with FY2018 unless stated otherwise.
Business context
At year-end, the system comprised 2,243 restaurants in 21 states and Guam: 137 company-operated and 2,106 franchised. Franchisees operated 94% of the system, reflecting completion of the company’s multiyear refranchising program. The company’s stated priorities include simplifying restaurant operations, product innovation, franchise-led unit growth, and guest-experience and technology investments.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $950.1 million | $869.7 million |
| Earnings from operations | $202.2 million | $233.4 million |
| Earnings from continuing operations | $91.7 million | $104.3 million |
| Net earnings | $94.4 million | $121.4 million |
| Diluted EPS from continuing operations | $3.52 | $3.62 |
| Adjusted EBITDA (non-GAAP) | $269.0 million | $264.2 million |
| Cash provided by operating activities | $168.4 million | $104.1 million |
| Capital expenditures | $47.6 million | $37.8 million |
Revenue growth is not directly comparable: adoption of ASC 606 caused franchise advertising and other-service contributions and related expenses to be presented gross in FY2019, and franchise fees to be recognized over the agreement term. The gross presentation materially increased reported revenue and expense without material impact on net earnings. Revenue absent the cited ASC 606 adjustments was $775.7 million, according to the filing’s reconciliation.
- System same-store sales rose 1.3% (FY2018: 0.1%); system sales increased 1.1% to $3.50 billion. Menu pricing and favorable mix outweighed lower traffic.
- Company same-store sales increased 1.7%, with transactions down 1.4% and average check up 3.1%. Franchise same-store sales increased 1.3%. System average unit volume was $1.614 million.
- Company restaurant costs were 73.8% of company restaurant sales, versus 73.6%, mainly reflecting higher labor costs. Payroll and benefits rose to 29.7% of company sales from 28.8%; food and packaging costs rose to 29.0% from 28.8%.
- Earnings from operations declined, including the effect of $46.2 million of restaurant-sale gains in FY2018 versus $1.4 million in FY2019. Operating margin was 21.3% of reported revenue, versus 26.8%; the FY2019 gross-up affects this comparison.
- Net interest expense rose to $85.0 million from $45.5 million, including a $23.6 million charge on terminating interest-rate swaps and a $2.8 million debt-extinguishment loss. The effective tax rate declined to 20.8% from 43.9%, partly reflecting the prior-year Tax Act impact.
Cash, debt and capital allocation
Year-end cash was $125.5 million, plus $26.0 million of restricted cash. Current assets were $227.1 million and current liabilities $157.9 million. Total assets were $958.5 million; stockholders’ deficit was $737.6 million. The company reported $1.304 billion of total debt, including $1.274 billion of long-term debt net of issuance costs and current maturities.
- On July 8, 2019, the company refinanced its credit facility with $1.3 billion of fixed-rate securitized notes, bearing stated rates of 3.982%, 4.476%, and 4.970%, and a $150 million variable funding facility. The variable facility was undrawn at year-end; $45.6 million of letters of credit were outstanding. The notes are secured by substantial revenue-generating assets and carry covenants and rapid-amortization triggers.
- Management stated that operating cash flows and financing availability were expected to cover capital expenditure, working-capital and debt-service needs for at least the next 12 months and foreseeable future. The company was in compliance with debt covenants and had no rapid-amortization event at year-end.
- FY2019 share repurchases totaled $125.3 million for 1.4 million shares; $175.7 million remained authorized at year-end. Dividends declared were $1.60 per share, totaling $41.4 million.
- Operating lease commitments totaled $1.094 billion. Management expected adoption of the new lease standard in FY2020 to add approximately $950 million in operating lease liabilities and $900 million in right-of-use assets.
Outlook, risks and unusual items
- No specific financial or same-store-sales guidance is provided in the supplied filing text. Management emphasized franchise-led growth and operating consistency; 19 franchise restaurants opened in FY2019.
- FY2019 restructuring charges were $8.5 million, including $7.2 million for severance and $1.3 million tied to evaluation of strategic alternatives. The company also wrote off $3.5 million of costs for a discontinued technology project. Management expected approximately $1.3 million of further severance costs in FY2020.
- A material weakness in internal control over financial reporting was identified in IT change management, following ineffective oversight of IT-environment changes and insufficient training and documentation. Management said the weakness caused no FY2019 financial-statement misstatement and planned remediation during FY2020. The auditor gave an adverse opinion on internal control effectiveness, while issuing an unqualified opinion on the financial statements.
- Risks highlighted include competition and consumer demand, food and commodity costs, labor inflation, food safety and supply interruptions, franchisee financial and operating performance, cybersecurity and privacy, regulatory changes, and the concentration of nearly 70% of restaurants in California and Texas.
- Legal matters include the Gessele wage-and-hour class action, for which the plaintiffs reduced their demand to $42 million; the company accrued an amount it considered immaterial and said additional loss could not be estimated. In Ramirez, a wrongful-termination award was reduced from $15.4 million to $3.2 million; a $5.1 million attorney-fee motion was pending. The company recorded an $8.3 million settlement accrual and an equal insurance receivable.
- The company remained guarantor on certain former Qdoba leases, with maximum potential payments of approximately $32.1 million; it recorded no liability because default was considered less than probable. The filing also describes substantial purchase commitments supporting system-wide operations.
- Key executive departures were expected in early 2020. After year-end, the board declared a $0.40-per-share dividend and authorized an additional $100 million share-repurchase program.
Investor verification priorities
- Separate underlying revenue and operating trends from ASC 606 gross presentation and the effects of refranchising.
- Track traffic, check growth, company restaurant margins, franchisee sales and unit openings against the company’s franchise-led strategy.
- Review debt-service capacity, securitization covenants and repayment/refinancing needs at the notes’ anticipated repayment dates.
- Monitor execution and auditor assessment of the IT-controls remediation, including whether the material weakness is resolved.
- Follow legal developments, insurance recoverability, Qdoba lease guarantees, and the expected lease-accounting balance-sheet increase.