Jack in the Box Inc. — Q3 FY2019 Form 10-Q
Reporting period: 12 weeks ended July 7, 2019; year-to-date (YTD) figures cover 40 weeks. Comparisons are with the periods ended July 8, 2018. Jack in the Box operated and franchised 2,242 restaurants; Qdoba was sold in March 2018 and is reported as discontinued operations.
Financial performance and operating trends
| Metric | Q3 FY2019 | Q3 FY2018 | YTD FY2019 | YTD FY2018 |
|---|---|---|---|---|
| Total reported revenue | $222.4 million | $188.0 million | $728.9 million | $692.2 million |
| Operating earnings | $48.3 million | $76.8 million | $153.7 million | $197.4 million |
| Net earnings | $13.2 million | $45.3 million | $72.4 million | $105.1 million |
| Diluted EPS | $0.50 | $1.60 | $2.77 | $3.59 |
| Adjusted EBITDA | $57.8 million | $64.4 million | $202.1 million | $210.1 million |
- Reported revenue comparisons are affected by adoption of ASC 606: advertising, sourcing, and technology contributions and related costs are now presented gross, while 2018 was presented net. Excluding the adoption adjustments, Q3 FY2019 revenue was $181.1 million versus $188.0 million; YTD revenue was $594.7 million versus $692.2 million. The filing says the gross presentation largely offsets in earnings.
- Q3 same-store sales increased 2.7% systemwide (company-operated: 2.8%; franchised: 2.7%); YTD systemwide same-store sales rose 0.8%. Management attributed growth mainly to price and product mix, partly offset by declining transactions. Company-operated transactions fell 2.0% YTD.
- Company restaurant costs were 73.0% of company sales in Q3, compared with 72.5% a year earlier; YTD they were 73.1%, compared with 73.5%. Higher labor and food costs pressured results, while refranchising and lower occupancy costs helped.
- Q3 earnings included $23.6 million of expense from terminating interest-rate swaps and a $7.1 million SG&A charge, net of insurance, for an adverse jury verdict. A $5.7 million property-sale gain reduced impairment and other charges. Q3 effective tax rate was (17.9)%; YTD rate was 18.4%.
Cash flow, debt, and liquidity
- YTD cash from continuing operating activities was $116.8 million, versus $59.4 million. Management attributed the increase principally to favorable working-capital timing, including advertising payments and lower income-tax payments; lower adjusted net income partly offset the benefit.
- YTD capital expenditures were $25.0 million. Cash at July 7 was $12.4 million. Current assets were $106.0 million and current liabilities were $218.8 million.
- At July 7, the former credit facility had $304.4 million of term-loan borrowings and $707.4 million drawn on its revolving facility, with $162.7 million of unused capacity. In May, the facility maturity was extended to March 2021.
- On July 8, after quarter-end, the company issued $1.3 billion of fixed-rate securitized notes at rates of 3.982%, 4.476%, and 4.970%, with anticipated repayment dates in 2023, 2026, and 2029. Proceeds retired the former credit facility. A revolving facility of up to $150 million was also established; it had no borrowings as of July 8. The notes are secured by specified franchise-related, real estate, and intellectual-property assets and carry restrictive covenants and rapid-amortization triggers.
Outlook, material developments, and risks
- Management expects cash from operations and financing availability to meet capital expenditure, working-capital, and debt-service needs for at least the next 12 months. FY2019 capital expenditures are expected to be $30–$35 million; commodity costs are expected to rise approximately 2% versus FY2018; the estimated FY2019 tax rate is approximately 20%.
- The company continued cost-reduction restructuring and a strategic-alternatives evaluation. YTD restructuring charges were $6.7 million, including $5.4 million of severance and $1.3 million of advisory costs. The filing provides no specific outcome or timetable for the strategic review.
- Following the refinancing, management said remaining proceeds may be used for working capital or general corporate purposes, potentially including returns of capital. The board declared a further $0.40-per-share dividend in August and authorized a new $200 million share-repurchase program.
- A Qdoba-related lease guarantee exposes the company to maximum potential payments of approximately $33.8 million as of July 7; no liability was recorded because default was considered less than probable.
- In the Ramirez employment case, a jury awarded $5.4 million in compensatory and $10.0 million in punitive damages. The company recorded a $7.1 million charge net of insurance and is pursuing post-trial relief, with appeal planned if needed. In Gessele, plaintiffs reduced their demand to $42 million; the company accrued an amount it considers immaterial and says it cannot estimate additional possible loss.
- Other stated risks include commodity and labor-cost inflation, competition and consumer demand, food safety and supply-chain disruption, litigation, and compliance with securitized-debt covenants. The company expects adoption of lease accounting in FY2020 to significantly increase reported assets and liabilities; it did not quantify the impact.
Most important facts for investors to verify
- How the July 8 securitized refinancing affects interest expense, cash availability, covenant flexibility, and the ability to pay dividends or repurchase shares.
- Underlying revenue and earnings trends after separating ASC 606 gross presentation effects, refranchising, and discontinued Qdoba results.
- Whether same-store sales and traffic trends improve, and whether wage and commodity inflation can be offset by pricing and mix.
- The eventual outcomes and potential exposure in the Ramirez and Gessele matters, and the status of the Qdoba lease guarantees.
- Progress and costs associated with the strategic-alternatives evaluation and restructuring, for which the filing gives no definitive outcome.