Jack in the Box Inc. — Fiscal 2020 Form 10-K
Reporting period: 52 weeks ended September 27, 2020; the filing was signed November 18, 2020. Fiscal 2020 includes the fourth quarter, a 12-week period ended September 27, 2020.
Business context
Jack in the Box operates and franchises quick-service restaurants, primarily in the western and southern United States. At year-end, the system had 2,241 restaurants, of which 2,097 (94%) were franchised. The company reports one operating segment. Revenue comes from company restaurant sales and franchise rent, royalties, advertising contributions, and fees.
Financial and operating metrics
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Total revenue | $1,021.5 million | $950.1 million |
| Earnings from operations | $230.6 million; 22.6% of revenue | $202.2 million; 21.3% of revenue |
| Earnings from continuing operations | $89.4 million | $91.7 million |
| Net earnings | $89.8 million | $94.4 million |
| Diluted EPS from continuing operations | $3.84 | $3.52 |
| Adjusted EBITDA (non-GAAP) | $274.2 million | $269.0 million |
| Cash provided by operating activities | $143.5 million | $168.4 million |
| Capital expenditures | $19.5 million | $47.6 million |
| Cash and restricted cash at year-end | $236.9 million | $151.6 million |
| Total debt, including finance leases | $1,401.1 million | $1,303.6 million |
System same-store sales increased 4.0% (2019: 1.3%); franchise same-store sales rose 4.0% and company-operated sales rose 3.1%. System sales, including franchisee sales not recorded as company revenue, were $3.67 billion, up from $3.50 billion. Company restaurant costs rose to 75.4% of company restaurant sales from 73.8%. Food and packaging costs were 29.4% of sales, payroll and benefits 30.5%, and occupancy and other costs 15.5%.
Cash and restricted cash comprised $199.7 million of cash and $37.3 million of restricted cash. Operating cash flow declined by $24.9 million year over year, with lower collections of deferred franchise rent and marketing fees and higher cash interest and tax payments among the cited factors. The company had $107.9 million drawn on its variable funding notes and only $2.7 million of remaining borrowing availability; $39.5 million of letters of credit were also outstanding. Management said cash on hand, operating cash flow, and mitigation actions were expected to provide adequate liquidity for the next 12 months and foreseeable future.
Material changes versus fiscal 2019
- Revenue increased 7.5%, while net earnings fell 4.9%. Operating earnings improved, but a $39.2 million non-cash pension settlement charge contributed to lower continuing-operations earnings.
- Adjusted EBITDA increased to $274.2 million from $269.0 million. The measure excludes, among other items, the pension settlement charge.
- Interest expense declined to $66.7 million from $85.0 million, primarily because fiscal 2019 included a $23.6 million charge for terminating interest-rate swaps; excluding that item, interest expense increased, mainly due to higher average debt.
- Fiscal 2020 revenue and expense presentation is not fully comparable with 2019 following adoption of ASC 842 lease accounting. Gross presentation added approximately $37.4 million to both franchise rental revenue and franchise occupancy expense, with no net earnings impact.
- Company repurchases totaled 1.9 million shares for $153.5 million. Three dividends of $0.40 per share were declared, totaling $27.7 million, compared with four dividends totaling $41.4 million in 2019. Repurchases and the dividend were temporarily suspended during the pandemic; the dividend resumed the following quarter.
- The system ended the year with two fewer restaurants than a year earlier: 27 franchise openings and 29 closures. The company acquired eight restaurants from a franchisee following legal action.
Outlook, commentary, risks and unusual items
- COVID-19: Substantially all restaurants remained open, largely for drive-thru, delivery, and carry-out, while dining rooms were closed in many locations. System same-store sales fell 17.0% in the final five weeks of the second quarter as restrictions took effect, then accelerated in the third and fourth quarters. Management attributed the recovery largely to higher average checks while traffic remained significantly lower. The company provided no fiscal 2021 guidance because of uncertainty.
- Franchise support and liquidity actions: The company reduced and deferred certain marketing fees, postponed some franchise rent collections, extended development deadlines, and suspended some required capital investments. It also reduced capital spending to essential items and drew $107.9 million under its variable funding facility as a precaution.
- Debt and leases: Most debt is securitized, secured by specified revenue-generating assets, and subject to covenants and rapid-amortization triggers. The company reported compliance with debt covenants and no rapid-amortization event at year-end. Anticipated repayment dates for the fixed-rate note classes are August 2023, 2026, and 2029; additional interest may accrue if not repaid or refinanced by those dates. Operating lease obligations were $1.149 billion in undiscounted future payments.
- Unusual items: Fiscal 2020 included $39.2 million of non-cash pension settlement charges and a $10.8 million gain on sale of a corporate office building. The company also settled a California Private Attorney General Act lawsuit for $3.8 million; it recorded $3.8 million of aggregate liabilities for probable and reasonably estimable legal matters and could not estimate possible losses beyond those accruals.
- Other risks: The filing highlights pandemic-related disruption, franchisee financial health, labor and commodity cost inflation, supply-chain dependence, competition, cybersecurity and digital-platform risks, regulatory and litigation exposure, and substantial indebtedness. The company also guarantees certain former Qdoba leases, with a maximum stated exposure of approximately $29.8 million; no liability was accrued because a loss was not considered probable.
- Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective at year-end. A material weakness in IT general controls identified in 2019 was reported as remediated in 2020. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying franchise sales and rent economics versus the gross presentation changes from ASC 842.
- Whether sales momentum and traffic recover sustainably after COVID-related restrictions, and whether average-check growth can offset weaker traffic.
- Franchisee liquidity, collection of deferred rent and marketing fees, and the financial condition of major franchise operators.
- Debt-service capacity, remaining variable-funding availability, and refinancing plans ahead of the 2023, 2026, and 2029 anticipated repayment dates.
- The assumptions and future cash implications behind pension obligations, self-insurance reserves, legal contingencies, and the Qdoba lease guarantees.