Jack in the Box Inc. — Q2 2012 Form 10-Q
Business context and period. The filing covers the 12 weeks and 28 weeks ended April 15, 2012, compared with the periods ended April 17, 2011. The company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. It ended the quarter with 2,242 Jack in the Box locations and 605 Qdoba locations. Jack in the Box was 73% franchised, consistent with the company’s strategy to shift toward franchising.
Financial results and key metrics
| Metric | Quarter | Year to date (28 weeks) |
|---|---|---|
| Total revenue | $506.6 million, up 0.3% from $505.1 million | $1,159.3 million, down 0.9% from $1,169.9 million |
| Operating earnings | $37.3 million, versus $14.1 million | $61.6 million, down from $68.7 million |
| Operating margin | 7.4%, versus 2.8% | 5.3%, versus 5.9% |
| Net earnings | $21.6 million, versus $6.8 million | $33.6 million, versus $39.2 million |
| Diluted EPS | $0.48, versus $0.13 | $0.75, unchanged |
| Operating cash flow | Not separately presented | $69.6 million, versus $81.8 million |
Revenue mix and operating drivers. Quarterly company restaurant sales fell 9.5% to $290.8 million, mainly because fewer Jack in the Box restaurants were company-operated following refranchising; same-store sales rose 5.6% at company Jack in the Box restaurants and 3.8% at company Qdoba restaurants. Distribution sales rose 15.5% to $140.1 million and franchise revenue rose 21.0% to $75.7 million. Quarterly earnings benefited substantially from $14.1 million of restaurant-sale gains, compared with $0.9 million a year earlier. Year-to-date restaurant-sale gains were $15.2 million, down from $28.8 million.
Company restaurant costs were 84.5% of related sales in the quarter versus 87.7% a year earlier; year-to-date they were 85.6% versus 87.5%. Higher sales leverage and refranchising contributed to the improvement, while commodity inflation remained a cost pressure. Quarterly results also included $1.5 million in restructuring severance costs.
Liquidity, debt, and capital allocation
- Cash was $11.3 million at April 15, 2012. Current assets were $267.4 million and current liabilities $258.2 million.
- Total reported debt was approximately $482.5 million, comprising $21.8 million of current maturities and $460.7 million of long-term debt. The credit facility had $175 million outstanding on the term loan and $300 million on the revolver, plus $38.9 million of letters of credit. The company reported compliance with all covenants.
- Year-to-date capital expenditures were $40.6 million. Management expected fiscal 2012 capital expenditures of $85–$95 million.
- Year-to-date investing cash use was $64.6 million, including $39.2 million to acquire 36 Qdoba franchise restaurants. Financing cash use was $5.1 million; cash declined by $0.1 million during the period.
- A 100-basis-point increase in short-term interest rates was estimated to increase annual interest expense by $3.8 million. Swaps fixed the rate on $100 million of term debt at an indicated all-in rate of 4.29% through September 2014.
Outlook, changes, and risks
- Management expected fiscal 2012 overall commodity costs to rise approximately 3%–4%, with beef costs expected to rise 5%–6%; Qdoba commodity costs had increased more than Jack in the Box costs year to date.
- Management expected a fiscal-year tax rate of 35%–36%. It planned to open approximately 15 company-operated Jack in the Box and 25–30 company-operated Qdoba restaurants in 2012, and expected $40–$50 million of proceeds from selling 80–120 Jack in the Box restaurants to franchisees. The longer-term goal was to raise Jack in the Box franchise ownership to approximately 80%.
- The company offered a voluntary early retirement program on April 23, after quarter-end; its financial impact depended on employee participation. A temporary credit-facility amendment raised the maximum leverage ratio to 2.50 from 2.25 through Q3 to provide flexibility around refranchising timing and Qdoba acquisitions.
- Principal disclosed risks include commodity and supply-cost volatility, consumer demand and pricing limits, competition, restaurant development and franchisee execution, labor and regulatory costs, weather, food safety or negative publicity, interest-rate exposure, and unpredictable litigation. Management said routine litigation was not expected to have a material adverse effect, while noting unfavorable outcomes could affect a future reporting period.
Important facts for investors to verify
- How much of the quarter’s earnings improvement reflects restaurant-sale gains and whether that level of gains is repeatable.
- Whether same-store sales, transaction growth, and pricing can offset refranchising-related reductions in company restaurant sales and commodity inflation.
- Progress and economics of planned restaurant sales, Qdoba development and acquisitions, and the shift toward an 80% franchised Jack in the Box system.
- Actual capital spending, cash generation, debt levels, covenant headroom, and refinancing or interest-rate exposure.
- The cost and operational effects of the restructuring and voluntary retirement program, and any changes in tax estimates, litigation contingencies, or commodity-cost expectations.