Jack in the Box Inc. — Q3 2020 Form 10-Q
Reporting period: 12 weeks ended July 5, 2020; year-to-date (YTD) figures cover 40 weeks. Comparisons are with the corresponding periods ended July 7, 2019. The company operates and franchises Jack in the Box restaurants; at quarter-end it had 144 company-operated and 2,100 franchised locations.
Financial performance and position
| Metric | Quarter | YTD |
|---|---|---|
| Total revenue | $242.3 million, up 9.0% | $766.1 million, up 5.1% |
| Operating earnings | $61.8 million, versus $48.3 million | $164.6 million, versus $153.7 million |
| Net earnings | $32.6 million, versus $13.2 million | $51.9 million, versus $72.4 million |
| Diluted EPS | $1.42, versus $0.50 | $2.23, versus $2.77 |
| Adjusted EBITDA (non-GAAP) | $72.9 million, versus $57.8 million | $195.7 million, versus $202.1 million |
| Cash provided by operating activities | Not presented separately for the quarter | $90.2 million, versus $116.8 million |
Quarterly operating margin was 25.5% of revenue, versus 21.7%. Company restaurant costs rose to 74.6% of company restaurant sales from 73.0%, reflecting wage inflation and higher operating costs. YTD net earnings included $39.0 million of non-cash pension settlement charges. Quarterly interest expense was $15.7 million, down from $36.5 million, primarily because the prior-year quarter included a $23.6 million charge for terminating interest-rate swaps.
At July 5, cash was $159.5 million and restricted cash was $37.4 million. Total debt was $1.405 billion, including $107.9 million drawn on variable funding notes; only $1.1 million of borrowing capacity remained after letters of credit. The company also reported $947.2 million of operating lease liabilities. Current assets were $310.1 million and current liabilities were $352.9 million. Debt covenants were in compliance, with no rapid amortization event reported.
Changes versus the prior comparable period
- System same-store sales increased 6.6% in the quarter and 1.5% YTD. Company same-store sales rose 4.1% in the quarter, as average check increased 20.2% while transactions fell 16.1%; franchise same-store sales rose 6.9%.
- System sales increased to $887.2 million from $825.8 million in the quarter. Franchise rental revenue growth was partly affected by ASC 842 lease accounting: gross presentation increased both franchise rental revenue and occupancy expense, with no net earnings impact.
- Quarterly SG&A fell $10.7 million, mainly due to lower litigation-related costs and favorable market-value movements in investments supporting non-qualified retirement plans.
- YTD operating cash flow declined $26.6 million, primarily reflecting franchise rent and marketing fee deferrals, as well as higher income-tax and interest payments. Capital expenditures fell to $16.7 million from $25.0 million.
Outlook, risks, contingencies and unusual items
- COVID-19 and guidance: Substantially all restaurants remained open in off-premise-only operations, including drive-thru, delivery and carry-out. Management reported improving sales but continued guest-traffic reductions and substantial uncertainty. It withdrew fiscal 2020 and long-term guidance and said it would update guidance when impacts could be reasonably estimated.
- Liquidity actions: The company drew $107.9 million on its variable funding facility, reduced capital spending, paused share repurchases and temporarily suspended dividends after Q2. The board declared a $0.40-per-share dividend on July 31, payable September 3, 2020. Management stated cash, operating cash flow and mitigation actions were expected to provide adequate liquidity for the next 12 months; this outlook depends on uncertain pandemic and franchisee conditions.
- Franchisee support and receivables: March and April marketing fees were reduced and collection deferred; $16.2 million of postponed fees remained uncollected at quarter-end. The company also deferred some franchise rent and reported an increased allowance for doubtful accounts. Franchisee financial distress could reduce company revenue and cash flow.
- Lease accounting and concessions: Adoption of ASC 842 added substantial lease assets and liabilities to the balance sheet. Landlords deferred approximately $15.5 million of rent; the company also postponed certain franchisee rent collections and passed some landlord concessions to franchisees.
- Legal and other exposures: Recorded liabilities for probable and estimable legal matters totaled $14.9 million. The company disclosed that additional losses were reasonably possible but could not estimate a range beyond recorded accruals. Qdoba lease guarantees had a maximum potential exposure of approximately $29.3 million; no amount was accrued because loss was not considered probable.
- Controls: Management concluded disclosure controls were not effective because of a previously disclosed material weakness in internal control over financial reporting. Remediation was in progress but was not yet considered complete.
Important facts for investors to verify
- Whether the third-quarter same-store sales recovery persisted, particularly given the decline in transaction counts and continuing COVID-19 restrictions.
- Franchisee liquidity, collections of deferred rent and marketing fees, receivable quality, and any resulting bad-debt or impairment charges.
- Cash availability and debt-service capacity, including variable-rate borrowing costs, required principal payments and limited remaining revolver capacity.
- Progress in remediating the material weakness in internal controls and the status of significant litigation and Qdoba lease guarantees.
- Comparability of reported franchise revenue and expenses after ASC 842 adoption, and the effect of the $39.0 million YTD pension settlement charge on earnings.