Jack in the Box Inc. — Q1 FY2016 10-Q
Reporting period: Sixteen weeks ended January 17, 2016; comparisons are with the sixteen weeks ended January 18, 2015. Jack in the Box operates and franchises Jack in the Box quick-service restaurants and Qdoba fast-casual restaurants.
Financial results
| Metric | Q1 FY2016 | Prior period |
|---|---|---|
| Total revenue | $470.8 million | $468.6 million |
| Operating earnings | $62.5 million | $63.2 million |
| Continuing-operations earnings | $33.9 million | $37.1 million |
| Net earnings | $33.2 million | $35.8 million |
| Diluted EPS | $0.92 | $0.91 |
| Operating cash flow | $44.9 million | $47.3 million |
| Capital expenditures | $31.5 million | $19.9 million |
Revenue increased approximately 0.5%, while operating earnings fell approximately 1.1% and net earnings fell approximately 7.3%. Diluted EPS rose despite lower earnings, alongside a decline in diluted weighted-average shares to 35.9 million from 39.4 million, primarily reflecting share repurchases. Company-operated restaurant margin was 19.5%, up 20 basis points. Jack in the Box margin increased to 20.9% from 19.4%; Qdoba margin declined to 16.6% from 19.3%.
Liquidity, debt and capital allocation
- Cash was $7.1 million at January 17, 2016, down from $17.7 million at September 27, 2015. Current assets were $109.4 million versus current liabilities of $212.6 million.
- Long-term debt, including current maturities, totaled approximately $786.0 million, compared with approximately $715.3 million at fiscal year-end. The company reported $292.2 million outstanding on its term loan and $474.0 million on its revolving facility; $25.2 million of letters of credit reduced borrowing capacity.
- The credit facility matures March 19, 2019. The current borrowing margin was LIBOR plus 1.75%; the company reported compliance with its covenants. Interest expense rose to $8.2 million from $5.2 million, principally due to higher average borrowings.
- Operating cash flow exceeded capital expenditures by approximately $13.4 million. The company repurchased 1.3 million shares for $100.0 million and paid $10.6 million in dividends. The board subsequently approved an additional $100 million repurchase authorization and declared a $0.30-per-share dividend.
Changes, outlook and risks
- Jack in the Box company same-store sales increased 0.5%, as higher average check was mostly offset by lower transactions; franchise same-store sales increased 1.8%. Qdoba company same-store sales increased 1.5%, compared with 12.9% a year earlier; growth was led by transactions and catering. Qdoba franchise same-store sales increased 2.1%, versus 15.1%.
- Lower food costs supported Jack in the Box margin expansion. Qdoba margin contracted amid higher staffing, occupancy costs and new-restaurant activity. Qdoba restaurant operations earnings fell to $8.7 million from $14.7 million; Jack in the Box restaurant operations earnings increased to $85.7 million from $80.9 million.
- Management expected FY2016 commodity costs to decline approximately 2% at Jack in the Box and 4% at Qdoba, with beef costs expected to decline approximately 15–20%. The company expected an approximately 38% full-year tax rate.
- FY2016 capital expenditures were expected to be $100–$120 million. Plans included 50–60 Qdoba openings, approximately half company-operated, and approximately 20 Jack in the Box openings. The company aimed to increase Jack in the Box franchise ownership to at least 90% within two years; it was 82% franchised at quarter-end.
- Management stated operating cash flows and available financing were expected to cover capital expenditure, working capital and debt-service needs for at least the next twelve months. Risks include commodity-price volatility, competition and consumer demand, labor and regulatory costs, franchisee performance, geographic concentration, substantial indebtedness and litigation.
- The Gessele wage-and-hour case seeks $45 million, an amount the company says lacks a stated basis. The company accrued for a claim it considers probable and estimable but warned an unfavorable outcome beyond existing accruals could materially affect results or liquidity. Estimates for lease-related liabilities also depend on uncertain sublease assumptions.
Important facts for investors to verify
- Whether the Qdoba same-store sales slowdown and margin contraction persisted in subsequent quarters.
- Actual progress on planned restaurant openings, Jack in the Box refranchising and FY2016 capital expenditure guidance.
- Debt growth, covenant headroom, interest costs and the effect of interest-rate exposure despite swaps.
- Cash generation relative to repurchases, dividends, capital spending and pension contributions.
- Developments in the Gessele litigation and changes in lease and self-insurance contingencies.