Jack in the Box Inc. — Q3 FY2011 Form 10-Q
Reporting period: Third quarter ended July 10, 2011 (12 weeks); year-to-date covers 40 weeks. Comparisons are with the 12 and 40 weeks ended July 4, 2010. Dollar amounts below are in millions unless noted.
Business context
The company operates and franchises Jack in the Box quick-service and Qdoba Mexican Grill fast-casual restaurants. Its strategy is shifting Jack in the Box toward franchising: 67% of that system was franchised at quarter-end, versus 51% a year earlier. The system had 2,220 Jack in the Box restaurants and 564 Qdoba restaurants.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | 40 weeks FY2011 | 40 weeks FY2010 |
|---|---|---|---|---|
| Revenue | $519.3 | $523.3 | $1,689.1 | $1,734.3 |
| Operating earnings | $33.0 | $41.8 | $101.7 | $116.7 |
| Net earnings | $18.7 | $24.2 | $57.9 | $66.2 |
| Diluted EPS | $0.38 | $0.44 | $1.13 | $1.18 |
| Operating margin | 6.3% | 8.0% | 6.0% | 6.7% |
- Quarterly revenue declined 0.8%; company restaurant sales fell 13.3%, primarily because of refranchising, partly offset by higher franchise and distribution revenue. Year-to-date revenue declined 2.6%.
- Jack in the Box system same-store sales increased 3.2% in the quarter; Qdoba system same-store sales rose 5.1%. Company-operated Jack in the Box same-store sales rose 4.7%, including 3.4% transaction growth.
- Company restaurant costs were 87.5% of company restaurant sales, versus 85.8% a year earlier. Food and packaging costs rose to 33.9% of sales from 31.8%; Jack in the Box commodity costs increased about 6.5% in the quarter and 4.3% year-to-date.
- Quarterly net interest expense increased to $4.0 from $2.4; the filing attributes this mainly to higher average rates and borrowings and deferred finance-fee amortization.
- Year-to-date operating cash flow was $92.0, compared with $45.7 in the prior period. Investing used $21.7, including $99.5 of capital expenditures; financing used $68.9. Cash ended at $12.0. Operating cash flow less capital expenditures was negative $7.5 before other investing flows.
- Current assets were $249.3 and current liabilities $260.3, a working capital deficit of $11.0. Total debt was approximately $447.5, comprising $21.1 current and $426.4 long-term debt, compared with $366.4 at October 3, 2010.
Material changes and unusual items
- Refranchised 226 Jack in the Box restaurants year-to-date, versus 111 in the prior period. The company recognized $38.9 of year-to-date restaurant-sale gains; these gains reduce reported operating costs and are not recurring restaurant operating revenue.
- Repurchased approximately 6.5 million shares year-to-date for $139.8. The remaining authorized repurchase amount at July 10 was $60.2.
- Acquired 24 Qdoba franchise-operated restaurants year-to-date for approximately $22.1, including $17.4 of goodwill in the purchase-price allocation. After quarter-end, acquired another eight Qdoba restaurants for approximately $9.0.
- Impairment and other charges were $2.1 for the quarter and $10.2 year-to-date. Quarter-end accrued restaurant closing costs were $20.9.
- Q3 diluted weighted-average shares fell to 49.3 million from 55.7 million, reflecting the effect of share repurchases.
Liquidity, outlook and risks
- The $400 revolving credit facility and $200 term loan mature June 29, 2015. At quarter-end, $250 was drawn on the revolver, $190 on the term loan, and $35.8 of letters of credit was outstanding. The company reported compliance with all covenants.
- Management expected cash from operations and available financing to meet foreseeable needs. Fiscal 2011 capital expenditures were forecast at $120–$125; planned openings were approximately 16 company-operated Jack in the Box and 25 company-operated Qdoba restaurants.
- Management expected $95–$105 of proceeds from selling 250–300 Jack in the Box restaurants in FY2011 and estimated overall FY2011 commodity-cost inflation of approximately 5.0%. It expected a tax rate of approximately 35.0%.
- The company expected to be ahead of schedule toward its goal of 70–80% Jack in the Box franchise ownership. Its restaurant re-image and new-logo program was expected to be substantially complete by year-end 2011.
- A 100-basis-point increase in short-term interest rates was estimated to increase annual interest expense by $4.4. Swaps were expected to fix the rate on $100 of variable-rate term debt from September 2011 through September 2014, at an estimated all-in fixed rate of 4.04% based on the then-current margin.
- Key stated risks include food, labor and other cost inflation; economic and consumer-spending weakness; competition; franchisee creditworthiness and development capacity; execution and returns on remodels and new units; food-safety concerns; and legal, regulatory and insurance costs. Management said pending legal matters were not expected to have a material adverse effect, based on current information, reserves and insurance.
Important facts for investors to verify
- Whether same-store sales growth can offset commodity inflation and pressure on company restaurant margins.
- How refranchising affects recurring earnings and cash generation compared with the reported gains on restaurant sales.
- Progress toward FY2011 capital spending, restaurant-sale proceeds, unit-opening and commodity-cost expectations.
- Debt, covenant headroom, interest-rate exposure, and the impact of continued share repurchases on liquidity.
- Qdoba acquisition economics and the credit exposure and expected additional contributions to the franchisee-lending entity.