Business context and reporting period
Jack in the Box Inc. filed this unaudited Form 10-Q for the 12 weeks and 40 weeks ended July 10, 2022, compared with the corresponding periods ended July 4, 2021. The company operates and franchises Jack in the Box and, following its March 8, 2022 acquisition, Del Taco. The acquisition materially affects year-over-year comparisons because Del Taco was not included in prior-year results.
Key financial metrics
| Metric | Quarter | Year to date |
|---|---|---|
| Revenue | $398.3 million, up 47.8% | $1.065 billion, up 23.1% |
| Operating earnings | $51.9 million, down 23.0% | $163.9 million, down 25.9% |
| Net earnings | $22.9 million, down 42.9% | $69.9 million, down 44.9% |
| Diluted EPS | $1.08, versus $1.79 | $3.29, versus $5.57 |
| Adjusted EBITDA (non-GAAP) | $73.2 million, versus $79.0 million | $228.8 million, versus $257.1 million |
| Operating cash flow | Not separately provided | $103.8 million, versus $149.9 million |
| Cash and restricted cash | Not separately provided | $92.9 million at July 10, 2022 |
| Total debt | Not separately provided | $1.862 billion at July 10, 2022 |
Quarter operating margin was approximately 13.0%, versus 25.0% a year earlier; net margin was approximately 5.7%, versus 14.9%. These ratios are calculated from reported earnings and revenue. The filing reports $120.0 million of available borrowing capacity across the variable funding notes and Del Taco revolving facility. Stockholders’ deficit was $767.9 million.
Material changes versus prior comparable period
- Del Taco contributed $126.3 million of quarterly revenue and $5.2 million of net earnings after acquisition; its year-to-date contribution was $189.3 million of revenue and $5.2 million of net earnings.
- Jack in the Box system same-store sales declined 0.6% in the quarter; company-operated sales rose 3.5%, while franchise sales fell 1.0%. Del Taco system same-store sales rose 3.5%.
- Jack in the Box segment operating profit fell to $65.0 million from $75.4 million in the quarter. Consolidated earnings were pressured by higher operating costs, interest expense, and acquisition-related costs.
- Year-to-date operating cash flow declined $46.1 million, primarily reflecting an unfavorable working-capital change.
- Debt increased from $1.293 billion at fiscal year-end, largely reflecting acquisition financing. The company issued $1.1 billion of 2022 secured notes and refinanced existing debt.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2022 commodity-cost inflation of 12%–14% and wage inflation of 12%–13% versus fiscal 2021, and expected labor and supply-chain pressures to continue through the rest of the year. The filing does not provide a numerical earnings or revenue forecast.
- Management stated that operating cash flow and available credit were expected to cover capital expenditure, working-capital and debt-service needs for at least the next 12 months.
- The Del Taco purchase-price allocation remained preliminary and subject to revision. Year-to-date acquisition, integration and restructuring costs were $18.9 million.
- A $50.0 million Del Taco wage-and-hour class-action settlement was accrued, subject to court approval. Separately, the company estimated up to approximately $10 million of reasonably possible losses in excess of accruals for legal matters.
- Inflation, labor availability, supply constraints, COVID-19 disruption, integration execution, franchisee financial health and substantial debt are highlighted risks. Debt covenants were reported in compliance, with no rapid-amortization event as of July 10, 2022; the specified leverage ratio was above 5.0x, so scheduled principal amortization had resumed.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported growth and earnings reflects Del Taco versus performance of the legacy Jack in the Box business, and whether integration benefits offset costs.
- Whether pricing can continue to offset food and labor inflation without further weakening traffic, margins or same-store sales.
- Debt service, refinancing and liquidity capacity, including the effect of leverage above 5.0x and restricted cash.
- The final Del Taco purchase-price allocation and any resulting changes to goodwill, deferred taxes, depreciation or amortization.
- Approval and payment terms of the $50.0 million settlement, and developments in other litigation and franchisee bankruptcy matters.
- Whether management’s expected cost inflation and liquidity outlook remain achievable as operating conditions change.