Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba fast-casual restaurants. This unaudited Form 10-Q covers the 12 weeks and 28 weeks ended April 16, 2017; comparisons are with the 12 and 28 weeks ended April 10, 2016. Fiscal 2017 is a 52-week year, while fiscal 2016 had 53 weeks. At quarter-end, the company had 2,260 Jack in the Box and 717 Qdoba restaurants.
Financial performance and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Quarter 2017 | Quarter 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Revenue | $369.4 | $361.2 | $857.3 | $832.0 |
| Operating earnings | $65.7 | $52.8 | $138.8 | $115.3 |
| Net earnings | $33.1 | $28.7 | $69.0 | $61.9 |
| Diluted EPS | $1.06 | $0.84 | $2.16 | $1.76 |
Quarter revenue rose 2.3% and operating earnings 24.4%; net earnings increased 15.4%. Quarter operating margin was 17.8%, versus 14.6%; net margin was approximately 9.0%, versus 7.9%. Earnings benefited from lower SG&A and a $7.8 million gain on restaurant sales, partly offset by higher restaurant labor and occupancy costs, interest, and restructuring charges. Diluted share count fell to 31.1 million from 34.2 million. YTD operating margin was 16.2%, versus 13.9%.
Jack in the Box system same-store sales increased 1.4% YTD on a calendar basis, mainly from pricing and mix despite fewer transactions. Qdoba system same-store sales fell 1.9%; company-operated Qdoba same-store sales decreased 3.1%, primarily from lower traffic. Qdoba company restaurant costs reached 86.7% of sales YTD, compared with 82.7%, reflecting sales deleverage, wage inflation and higher food costs. Jack in the Box company restaurant costs were 79.2% of sales in both YTD periods. Consolidated company restaurant costs were 81.9% of sales YTD, versus 80.4%.
YTD operating cash flow was $126.2 million, compared with $80.5 million; management attributed much of the increase to collection timing and other working-capital and tax-payment timing, as well as higher earnings. Investing activities provided $1.7 million, versus $45.2 million used, mainly reflecting $31.3 million in restaurant-sale proceeds and lower capital spending. Financing used $138.6 million, including $322.7 million in share repurchases and $25.5 million in dividends. Cash fell $10.7 million to $6.4 million.
At April 16, 2017, total debt was approximately $1.191 billion, including $666.8 million under the term loan and $511.9 million drawn on the revolving facility. The company also had $31.5 million in letters of credit. The $900 million revolver and $700 million term loan mature March 19, 2019; the stated current rate was LIBOR plus 2.00%. The company reported compliance with all covenants. Cash and current assets were $6.4 million and $112.1 million, respectively, against current liabilities of $238.6 million. Stockholders’ deficit was $469.4 million.
Material changes, outlook, risks and unusual items
- Jack in the Box sold 60 company-operated restaurants to franchisees for approximately $31.3 million in proceeds and recognized a $7.8 million gain. It signed non-binding letters of intent covering 69 additional restaurants, with estimated gross proceeds of $36–$40 million. The company aims to increase Jack in the Box franchising from 84% to over 90%.
- Management expected fiscal 2017 capital expenditures of approximately $100 million; openings of 20–25 Jack in the Box restaurants system-wide and 50–60 Qdoba restaurants, including approximately 30 company-operated Qdoba locations. Full-year commodity costs were expected to be approximately flat for both brands; beef costs were expected to decrease approximately 2%. The expected tax rate was 38%–39%.
- 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. This outlook is subject to operating and financing risks.
- After quarter-end, the board approved an additional $100 million share-repurchase program and declared a $0.40-per-share dividend. The company also retained Morgan Stanley to assist the board in evaluating alternatives for Qdoba and other ways to enhance shareholder value, citing concern that the two business models may affect company valuation.
- YTD repurchases totaled 3.2 million shares for $327.2 million; approximately $81 million remained under the prior authorization at quarter-end. Interest expense increased $8.6 million YTD, primarily because of higher average borrowings and, to a lesser extent, higher rates. Interest-rate swaps hedge portions of variable-rate debt.
- YTD restructuring charges were $4.2 million, mainly related to Qdoba’s corporate support-center relocation and consolidation and cost-reduction initiatives. Restaurant-sale activity included lease-commitment charges, impairment and equipment write-offs. Estimates for future lease costs depend in part on uncertain sublease income.
- The company disclosed a wage-and-hour lawsuit with an existing accrual; it said additional losses were not considered probable but could not estimate any possible loss beyond the accrual. It also cited risks involving traffic and consumer demand, commodities, labor costs, competition, franchisee performance, indebtedness, litigation and operations concentrated in California and Texas.
Important facts for investors to verify
- Whether Jack in the Box’s improving system sales and refranchising plan can offset declining transactions and sustain profitability.
- Whether Qdoba can reverse same-store sales declines and higher company-restaurant cost ratios, and the outcome of the board’s strategic review.
- Debt levels, revolver availability, covenant headroom and refinancing needs ahead of the March 2019 facility maturity.
- How much of the cash-flow increase reflects sustainable earnings rather than collection, rent-payment and tax-payment timing.
- Completion and proceeds of the announced restaurant sales, and the effect of further repurchases, dividends and capital spending on liquidity.
- Potential variability in lease-related obligations, litigation outcomes, commodity and labor costs, and the stated operating forecasts.