Jack in the Box Inc. — Q2 FY2019 Form 10-Q
Reporting period: 12 weeks ended April 14, 2019; year-to-date (YTD) is 28 weeks. Comparisons are with the periods ended April 15, 2018. Jack in the Box operated and franchised 2,240 restaurants at period-end. Qdoba was sold in March 2018 and is presented as discontinued operations.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | YTD FY2019 | YTD FY2018 |
|---|---|---|---|---|
| Reported revenue | $215.7m | $209.8m | $506.5m | $504.2m |
| Operating earnings | $47.1m | $47.2m | $105.4m | $120.6m |
| Continuing-operations earnings | $25.1m | $25.0m | $56.3m | $37.9m |
| Net earnings | $25.1m | $47.6m | $59.2m | $59.8m |
| Adjusted EBITDA (non-GAAP) | $61.2m | $60.3m | $144.2m | $145.8m |
| Operating margin | 21.8% | 22.5% | 20.8% | 23.9% |
Reported revenue is not directly comparable: adoption of ASC 606 added franchise advertising, sourcing, and technology contributions and related expenses on a gross basis. For Q2, revenue on the filing’s “without adoption” basis was $175.8m; the gross-up largely offsets in earnings. The standard also moved initial franchise fees from upfront recognition to recognition over the franchise term. Comparatives were not restated.
- Sales: System same-store sales were up 0.2% in Q2 and flat YTD. YTD system sales declined 0.4% to $1.861bn, primarily reflecting fewer restaurants. Company-operated same-store sales rose 0.5% YTD, while transactions fell 2.9%; franchise same-store sales were flat.
- Restaurant economics: Company restaurant costs were 72.4% of sales in Q2 and 73.2% YTD, improving from 73.6% and 73.9%. Labor costs as a share of company sales increased, with management citing wage inflation and restaurant mix. Franchise restaurant count rose to 2,103 from 2,057 a year earlier; company-operated count fell to 137 from 188.
- Cash flow and investment: YTD operating cash flow was $60.8m versus $29.3m. Investing used $8.1m; capital expenditures were $18.2m. Financing used $53.8m, including $20.6m of dividends paid. Cash was $1.6m at April 14.
- Debt and liquidity: Debt was approximately $1.057bn ($315.0m term loan and $739.4m revolver outstanding); unused revolver capacity was $129.2m, after $31.4m of letters of credit. The interest rate was LIBOR plus 2.25%; the company reported covenant compliance. Current liabilities exceeded current assets by approximately $76.8m. On May 1, after quarter-end, the credit facility maturity was extended from March 2020 to March 2021.
- Shareholder returns: Two $0.40-per-share dividends were declared YTD. No shares were repurchased during FY2019 through April 14; $14.4m of cash repurchases related to transactions traded in the prior fiscal year and settled in 2019.
Changes, outlook and notable matters
- Net earnings fell sharply in Q2 versus the prior year mainly because Q2 FY2018 included earnings from discontinued operations, including a Qdoba sale gain. Continuing-operations earnings were nearly unchanged in Q2. YTD continuing earnings benefited from a lower effective tax rate; the prior-year period included a substantial non-cash Tax Act impact.
- Interest expense rose to $13.3m in Q2 and $30.7m YTD, primarily due to higher average borrowing rates. YTD restructuring charges were $6.8m, including severance and strategic-alternatives evaluation costs. Management expected about $0.6m of additional severance charges for the remainder of FY2019, but could not estimate further restructuring charges.
- Management expected FY2019 capital expenditures of $30m–$35m, commodity costs to rise approximately 2% versus FY2018, and an FY2019 tax rate of approximately 25%–26%. The company stated that operating cash flow and available financing were expected to meet capital, working-capital, and debt-service needs for at least 12 months.
- Management cited competition, changing customer preferences, food and labor cost inflation, food safety, supplier and distributor concentration, franchisee performance and disagreements, regulatory and litigation exposure, and leverage among risks. It also warned that adoption of lease accounting in FY2020 was expected to significantly increase reported assets and liabilities, without a material earnings or cash-flow impact expected.
- A wage-and-hour class action had a reduced plaintiff demand of $42m; Jack in the Box accrued an immaterial amount and said it could not estimate additional reasonably possible losses. The company also guaranteed certain former Qdoba leases, with a maximum potential obligation of approximately $35.3m; no liability was recorded because default was considered less than probable and Qdoba was meeting its obligations.
Key facts for investors to verify
- Assess underlying revenue and earnings trends using comparable presentation, given the ASC 606 gross-up and the refranchising-driven decline in company restaurant sales.
- Track traffic, labor and commodity costs, system same-store sales, and the effect of the shift toward franchised restaurants on margins and cash generation.
- Review debt levels, unused borrowing capacity, covenant headroom, interest-rate exposure, and the effect of the maturity extension.
- Monitor restructuring charges, strategic-alternatives developments, capital spending, and dividend sustainability.
- Follow developments in the wage litigation and Qdoba lease guarantees, as well as the balance-sheet effects of lease-accounting adoption.