Jack in the Box Inc. — FY2014 Form 10-K
Business context and reporting period. The filing covers the 52 weeks ended September 28, 2014; the fourth quarter was 12 weeks. Jack in the Box operated and franchised 2,250 restaurants, and Qdoba 638. The company continued shifting Jack in the Box restaurants to franchisees while expanding Qdoba company-operated locations.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1.484 billion | $1.490 billion |
| Operating earnings | $162.3 million | $138.2 million |
| Net earnings | $89.0 million | $51.2 million |
| Diluted EPS, continuing operations | $2.26 | $1.84 |
| Diluted EPS, including discontinued operations | $2.12 | $1.14 |
| Cash from operating activities | $201.0 million | $198.9 million |
| Capital expenditures | $60.5 million | $84.7 million |
- Operating margin rose to 10.9% from 9.3%. Company-operated restaurant margin increased 140 basis points to 18.5%.
- Jack in the Box company-operated same-store sales rose 2.0%; Qdoba’s rose 5.7%. Systemwide same-store sales increased 2.0% and 6.0%, respectively.
- Revenue declined slightly as refranchising reduced Jack in the Box company restaurant sales; higher franchise revenue and Qdoba sales partly offset that impact. Franchise revenue grew 4.9% to $363.2 million.
- Continuing-operations earnings improved; discontinued operations generated a $5.9 million net loss, mainly related to the 2013 Qdoba closures and the outsourced distribution business.
- Cash and cash equivalents were $10.6 million. Total debt, including capital leases, was $507.9 million; the company reported $271.8 million of unused borrowing capacity. Current liabilities exceeded current assets by approximately $59.7 million.
Material changes and capital allocation
- Jack in the Box franchise ownership reached 81%, up from 79%; management targeted a range of 80–85%. The company sold 37 Jack in the Box locations to franchisees in FY2014.
- The company refinanced its credit facility in March 2014 with a five-year $600 million revolver and a $200 million term loan, both maturing in 2019. It was in compliance with credit covenants at year-end.
- Repurchased 5.6 million shares for $319.7 million and initiated a quarterly dividend, declaring $0.40 per share for FY2014. A further $100 million buyback authorization and a $0.20-per-share dividend were announced after year-end.
- Stockholders’ equity declined to $257.9 million from $472.0 million, primarily reflecting substantial share repurchases and other equity changes.
Outlook, risks and unusual items
- For FY2015, management expected capital expenditures of approximately $90–$100 million, about 2 new Jack in the Box company restaurants and 25–30 new Qdoba company restaurants. Systemwide openings were forecast at 10–15 Jack in the Box and 50–60 Qdoba restaurants.
- Management forecast FY2015 beef costs to rise approximately 15–20% and overall commodities approximately 3% versus FY2014. Commodity volatility, especially beef, could pressure margins; pricing increases may be constrained by competition.
- Management expected pension and postretirement expense to increase by approximately $5 million in FY2015, principally due to lower discount rates and expected asset returns.
- FY2014 included $14.9 million in impairment and other charges, including a $6.5 million write-off of restaurant software no longer planned for deployment. The company also recorded a $1.9 million loss related to an anticipated Jack in the Box market sale.
- A former-employee wage-and-hour lawsuit in Oregon seeks $45 million, but the filing says the complaint provides no basis for that amount. The company accrued for one claim it considered probable and estimable, and stated the accrual was not material; a significantly adverse outcome could still affect results.
- Other principal risks include restaurant competition, food safety and reputation, labor and regulatory costs, supply disruptions, franchisee financial health, execution of growth plans, leverage, interest rates and litigation. Management said operating cash flows and available financing should cover anticipated needs for at least the next 12 months.
Important facts for investors to verify
- Whether same-store sales momentum and restaurant margins can persist, particularly if forecast commodity inflation materializes.
- How refranchising and Qdoba’s planned company-store growth affect revenue mix, cash needs and returns on invested capital.
- Debt levels, covenant headroom, interest-rate exposure and the sustainability of buybacks and dividends given low year-end cash.
- Actual FY2015 capital spending and restaurant openings versus management’s plans.
- Updates on the Oregon litigation, restructuring costs, Qdoba closure lease obligations and pension funding assumptions.