Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service and Qdoba fast-casual restaurants. This unaudited Form 10-Q covers the 16 weeks ended January 18, 2015; comparisons are with the 16 weeks ended January 19, 2014. The company had 2,253 Jack in the Box restaurants and 641 Qdoba restaurants at quarter-end.
Financial and operating performance
| Metric | Quarter ended Jan. 18, 2015 | Prior comparable period |
|---|---|---|
| Revenue | $468.6 million | $450.1 million |
| Earnings from operations | $63.2 million; 13.5% of revenue | $57.2 million; 12.7% |
| Earnings from continuing operations | $37.1 million | $33.0 million |
| Net earnings | $35.8 million | $32.3 million |
| Diluted EPS | $0.91 ($0.94 from continuing operations) | $0.74 ($0.75 from continuing operations) |
| Cash provided by operating activities | $47.3 million | $23.7 million |
| Capital expenditures | $19.9 million | $21.3 million |
Company-operated restaurant margin rose to 19.3%, up 100 basis points. Jack in the Box margin increased to 19.4% from 19.1%; Qdoba rose to 19.3% from 16.4%. Company-operated same-store sales grew 3.9% at Jack in the Box and 12.9% at Qdoba. Qdoba’s simplified entree pricing, rolled out in October, was a key contributor to its higher average checks and sales.
At January 18, cash was $8.8 million, total current assets were $140.9 million and current liabilities were $177.1 million. Balance-sheet debt was $558.6 million, including current maturities. The company separately reported $192.5 million outstanding under its term loan and $362.0 million under its revolver, plus $22.2 million in letters of credit. It was in compliance with credit-facility covenants. The company noted that current liabilities typically exceed current assets in its business.
Material changes versus the prior period
- Revenue increased 4.1%, while operating earnings rose about 10.5%; operating margin improved 0.8 percentage points.
- Jack in the Box company-operated same-store sales growth accelerated to 3.9% from 2.1%; Qdoba growth increased to 12.9% from 2.0%. Qdoba franchise same-store sales rose 15.1%.
- Operating cash flow more than doubled, principally reflecting lower advertising prepayments and income tax payments and higher net earnings.
- Interest expense increased to $5.2 million from $4.5 million, driven by higher average borrowings, partly offset by lower rates.
- The company repurchased 1.31 million shares for $101.6 million and paid $7.8 million in dividends. Weighted-average diluted shares fell to 39.4 million from 43.8 million.
Outlook, risks and unusual items
Management expected fiscal 2015 capital expenditures of $90–$100 million, 50–60 Qdoba openings and 10–15 Jack in the Box openings. It expected overall commodity costs to increase about 3.0% for the year; beef costs were forecast to rise 15%–20%. The company expected a fiscal-year tax rate of approximately 37.0% and said operating cash flows and available financing should meet capital, working-capital and debt-service needs for at least the next 12 months. No full-year revenue or EPS guidance was provided.
The retroactive Work Opportunity Tax Credit reduced the quarter’s tax rate. Discontinued operations generated a $1.3 million net loss, including $1.8 million of unfavorable lease-commitment adjustments for previously closed Qdoba restaurants. The company recorded $2.2 million in impairment and other charges, including restaurant disposition and closing costs. It expected further restructuring charges but could not reasonably estimate them.
A pending Oregon wage-and-hour lawsuit seeks $45 million; the company had accrued for one claim it considered probable and estimable, but not for other claims it considered not probable or not estimable. The filing cautions that an unfavorable outcome exceeding existing accruals could materially affect results, liquidity or financial condition. Other disclosed risks include food and commodity cost volatility, competition, labor and regulatory costs, franchisee performance, indebtedness, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Qdoba’s pricing-driven sales and margin gains are sustainable, and how they perform as commodity costs change.
- Whether Jack in the Box refranchising and planned unit growth meet management’s targets without weakening revenue or cash generation.
- Debt levels, borrowing capacity, covenant compliance and sensitivity to interest rates; a 100-basis-point rate increase was estimated to add $2.5 million in annual interest expense.
- Execution and funding of planned capital expenditures, share repurchases and dividends alongside debt service.
- Developments in the Oregon litigation and estimates for closed-location lease obligations, restructuring costs and other contingencies.