Jack in the Box Inc. — Q2 FY2018 Form 10-Q
Reporting period: 12 weeks ended April 15, 2018; year-to-date (YTD) covers 28 weeks. Comparatives are the corresponding periods ended April 16, 2017. Results are presented for continuing operations unless noted. Qdoba was sold on March 21, 2018, and is reported as discontinued operations.
Business context and material changes
Jack in the Box operated 2,245 restaurants at quarter-end: 188 company-operated and 2,057 franchised. The system was 92% franchised, versus 84% a year earlier, reflecting the refranchising strategy. The company also sold Qdoba for approximately $305 million in cash, subject to customary adjustments.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | YTD FY2018 | YTD FY2017 |
|---|---|---|---|---|
| Revenue | $209.8m | $265.9m | $504.2m | $619.1m |
| Operating earnings | $46.8m | $59.8m | $119.6m | $126.5m |
| Continuing-operations earnings | $25.0m | $31.4m | $37.9m | $65.9m |
| Net earnings | $47.6m | $33.1m | $59.8m | $69.0m |
| Diluted EPS | $1.62 | $1.06 | $2.01 | $2.16 |
| Adjusted EBITDA | $60.3m | $69.5m | $145.8m | $160.1m |
Lower reported revenue primarily reflects fewer company-operated restaurants after refranchising and the exclusion of Qdoba from continuing operations. Q2 net earnings benefited from $22.6 million of discontinued-operations earnings, including the Qdoba sale gain; continuing earnings declined. YTD tax expense included a provisional, non-cash $31.2 million Tax Act charge, chiefly from remeasuring deferred tax balances. The continuing-operations effective tax rate was 60.7% YTD, versus 38.4% a year earlier.
Company-operated same-store sales rose 0.9% in the quarter and 0.5% YTD; franchise same-store sales fell 0.2% and 0.3%, respectively. System sales declined 0.3% YTD. Company restaurant costs were 73.6% of company restaurant sales in the quarter, versus 76.1% a year earlier; YTD they were 73.9%, versus 75.1%. Management attributed the improvement mainly to refranchising lower-volume restaurants. Adjusted EBITDA declined, which management primarily attributed to refranchising.
Cash flow, debt and liquidity
YTD cash provided by operating activities was $29.3 million, down from $115.2 million. Management cited timing of franchise collections and rent payments, lower incentive payments, and other working-capital timing factors. Continuing-operations investing cash flow provided $11.2 million; financing used $326.1 million, including debt repayments, $100.0 million of share repurchases and dividends. Capital expenditures were $18.3 million. Cash at April 15 was $1.2 million.
Balance-sheet debt was approximately $943.3 million, versus $1.144 billion at October 1, 2017. At quarter-end, term-loan borrowings were $357.7 million and revolver borrowings $581.1 million; letters of credit were $31.4 million and unused borrowing capacity was $287.5 million. The Qdoba sale triggered a $260.0 million term-loan prepayment. The credit facility was amended to extend maturity to March 19, 2020, and raise the maximum leverage ratio from 4.0x to 4.5x. The company reported covenant compliance. Current assets of $145.1 million were below current liabilities of $167.5 million. Stockholders’ deficit was $430.9 million.
Outlook, risks and unusual items
- Management expected approximately 25 Jack in the Box restaurant openings system-wide in FY2018, mostly franchised, and aimed to reach approximately 95% franchise ownership by fiscal year-end.
- Management expected FY2018 capital expenditures of $30–$35 million, commodity costs to rise approximately 3% versus FY2017, and an FY2018 tax rate of approximately 45%. Tax estimates remained provisional and could change.
- Management stated that operating cash flows and available financing were expected to cover capital, working-capital and debt-service needs for at least the next 12 months.
- After quarter-end, the board approved an additional $200 million share-buyback authorization and declared a $0.40-per-share dividend. Letters of intent covered approximately 25 additional restaurant sales, with estimated gross proceeds of $21–$23 million.
- The company remains a guarantor on certain Qdoba leases. First-year annual rent on those leases was approximately $6.2 million, with terms extending up to approximately 18 years; no liability was recorded because a Qdoba default was considered less than probable. The filing also describes a wage-and-hour class action and other routine litigation; management could not estimate reasonably possible losses beyond its accrual in the described case.
- Key disclosed risks include traffic and consumer demand, food and labor inflation, competition, franchisee performance, supply availability, food safety, interest rates, and litigation. The filing reported no material change in previously disclosed risk factors.
Investor facts to verify
- Separate recurring continuing-operations performance from Qdoba discontinued results and the sale gain when assessing reported net income and EPS.
- Track comparable sales, traffic, commodity inflation and franchise economics as the company continues refranchising.
- Monitor cash generation, debt and covenant headroom, upcoming debt maturities, and execution of planned restaurant sales and buybacks.
- Review the final Tax Act accounting and tax rate, Qdoba lease-guarantee exposure, and developments in the disclosed litigation.