Jack in the Box Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The unaudited quarter ended July 9, 2023 covered 12 weeks; year-to-date covered 40 weeks. The company operates and franchises Jack in the Box and Del Taco. At quarter-end, it had 2,191 Jack in the Box and 594 Del Taco restaurants. Comparisons with 2022 are affected by Del Taco’s March 2022 acquisition; prior-year year-to-date results include only about 18 weeks of Del Taco operations.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Year-to-date 2023 | Year-to-date 2022 |
|---|---|---|---|---|
| Revenue | $396.9 | $398.3 | $1,319.8 | $1,065.3 |
| Operating earnings | $63.5 | $51.9 | $226.1 | $163.9 |
| Net earnings | $29.2 | $22.9 | $108.9 | $69.9 |
| Diluted EPS | $1.41 | $1.08 | $5.22 | $3.29 |
| Adjusted EBITDA (non-GAAP) | $79.4 | $73.2 | $268.8 | $228.8 |
| Operating margin | 16.0% | 13.0% | 17.1% | 15.4% |
| Net margin | 7.3% | 5.7% | 8.3% | 6.6% |
Quarter revenue was essentially flat year over year, while operating earnings rose about 23% and net earnings about 28%. Year-to-date revenue rose about 24%, operating earnings about 38%, and net earnings about 56%; these year-to-date growth rates are not directly comparable because of the Del Taco acquisition timing.
- Sales trends: Q3 same-store sales rose 7.9% at Jack in the Box systemwide and 1.7% at Del Taco. Jack in the Box systemwide sales were $1.045 billion, up about 8%; Del Taco systemwide sales were $230.8 million, up about 2%. Company-operated restaurant sales fell 4.0% at Jack in the Box and 11.1% at Del Taco, with restaurant count changes contributing to the declines.
- Cash flow: Year-to-date operating cash flow was $182.1 million, versus $103.8 million. Capital expenditures were $56.7 million, versus $34.3 million; operating cash flow less capital expenditures was $125.4 million. Investing activities provided $25.5 million, mainly reflecting restaurant and property sales; financing activities used $161.6 million, including debt repayments, dividends, and repurchases. Cash and restricted cash increased $46.0 million to $182.0 million.
- Debt and liquidity: Debt carrying value was approximately $1.76 billion, including $30.0 million of current maturities; this excludes operating lease liabilities. Cash was $154.1 million and restricted cash $27.9 million. Available borrowing capacity was $172.0 million across the securitized variable funding notes and Del Taco revolving facility, net of letters of credit. The company reported compliance with debt covenants and no rapid amortization events.
- Capital returns: Year-to-date repurchases totaled $60.4 million for 0.7 million shares. Dividends declared through July 9 totaled $27.4 million at $0.44 per share per quarter. The board declared another $0.44 dividend after quarter-end.
Material changes and management commentary
- Jack in the Box Q3 same-store sales growth reflected 5.8% higher average check and 1.1% transaction growth. Del Taco’s 1.7% growth reflected a 4.1% higher average check, partly offset by a 2.4% transaction decline.
- Jack in the Box restaurant food and labor costs improved as a percentage of sales, helped by pricing, mix, and sales leverage. Management reported year-to-date commodity inflation of about 10.0% for Jack in the Box and expected fiscal 2023 commodity inflation of 8%–10% for both brands. Expected fiscal 2023 wage inflation for Jack in the Box was 3%–6%.
- Del Taco Q3 food cost as a percentage of sales improved, but labor cost as a percentage worsened. Del Taco commodity inflation was 2.1% in the quarter; labor inflation was 4.8%.
- Year-to-date results include $7.3 million of Jack in the Box franchise termination-fee revenue recognized in Q1. Q3 included $5.8 million of gains on restaurant sales; year-to-date gains were $10.3 million. Q3 also included $4.4 million of impairment charges, relating to underperforming Del Taco restaurants.
- The company refranchised 66 Del Taco and five Jack in the Box restaurants year-to-date. After quarter-end, it sold another 23 Del Taco company-operated restaurants for $13.8 million.
- Del Taco goodwill and trademark fair values exceeded carrying values by approximately 9% and 13%, respectively, at the Q3 impairment testing date. Management said the Jack in the Box reporting unit’s fair value was substantially above carrying value.
Outlook, risks, and contingencies
Management stated that operating cash flow and available borrowing facilities are expected to meet capital expenditure, working capital, and debt-service needs for at least the next 12 months and the foreseeable future. The filing does not provide overall revenue or earnings guidance. Management identified commodity and labor cost inflation expectations noted above.
- Litigation: The company accrued $6.6 million for the Gessele wage-and-hour verdict, which it disputes and intends to challenge. It accrued a $50.0 million Torrez settlement, subject to court approvals and other conditions. The court overturned the $8.0 million J&D Restaurant Group verdict against the company, and the related accrual was reversed. Total legal accruals were $64.2 million at quarter-end.
- Other risks: The filing highlights competition, consumer demand and economic conditions, food and labor costs, supply-chain concentration, franchisee financial health, integration of Del Taco, legal and regulatory exposure, cybersecurity and technology dependence, and significant debt and securitization restrictions.
- Other contingency: The company remains a guarantor on certain former Qdoba leases with maximum undiscounted potential payments of approximately $22.9 million. No liability was recorded because management considers payment remote and cites buyer indemnification and other protections.
Investor verification priorities
- Check subsequent results against same-store sales and transaction trends, particularly Del Taco’s traffic decline and the effect of refranchising on company restaurant sales and margins.
- Assess whether expected commodity and wage inflation, pricing, and cost controls support restaurant-level profitability.
- Review leverage, scheduled debt amortization, borrowing availability, and securitization covenant and rapid-amortization triggers.
- Track court approval and payment timing for the $50.0 million Torrez settlement, appeals and interest related to Gessele, and the adequacy of legal accruals.
- Monitor the modest Del Taco goodwill and trademark valuation cushions and any further restaurant impairment charges.
- Separate recurring operating performance from refranchising gains, the one-time $7.3 million franchise fee, COLI valuation effects, and other unusual items when comparing periods.