Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. This unaudited Form 10-Q covers the 16 weeks ended January 19, 2014; comparisons are with the 16 weeks ended January 20, 2013. Results for the distribution business and 62 Qdoba restaurants closed in 2013 are reported as discontinued operations.
At period-end, the company had 2,254 Jack in the Box restaurants (469 company-operated, 1,785 franchised) and 620 Qdoba restaurants (301 company-operated, 319 franchised). Jack in the Box was approximately 79% franchised.
Financial performance and position
| Metric | 16 weeks ended Jan. 19, 2014 | Prior comparable period |
|---|---|---|
| Total revenue | $450.1 million | $454.3 million |
| Company restaurant sales | $338.8 million | $348.9 million |
| Franchise revenue | $111.3 million | $105.4 million |
| Operating earnings | $57.2 million | $43.2 million |
| Earnings from continuing operations | $33.0 million; diluted EPS $0.75 | $26.1 million; diluted EPS $0.59 |
| Net earnings | $32.3 million; diluted EPS $0.74 | $20.7 million; diluted EPS $0.47 |
| Operating margin | 12.7% | 9.5% |
| Effective income tax rate | 37.3% | 30.9% |
| Cash from operating activities | $23.7 million | $90.0 million |
| Capital expenditures | $21.3 million | $21.4 million |
| Cash and cash equivalents at period-end | $9.9 million | $9.6 million at Sept. 29, 2013 |
Reported current assets were $119.1 million versus current liabilities of $181.1 million. Balance-sheet debt was $420.0 million, including $20.9 million current maturities and $399.1 million long-term debt. Under the credit facility, $180.0 million was outstanding on the term loan, $235.0 million on the revolver, and $23.0 million of letters of credit; the company reported covenant compliance. A 100-basis-point increase in short-term interest rates was estimated to add $3.2 million to annual interest expense on unhedged debt.
Material changes versus the prior period
- Revenue declined 0.9%, as lower company restaurant sales from fewer company-operated Jack in the Box locations outweighed higher franchise revenue. Franchise revenue rose 5.5%, primarily due to more franchised Jack in the Box restaurants.
- Company restaurant sales fell $10.1 million. Jack in the Box same-store sales increased 2.1% and Qdoba increased 2.0%; company-operated Jack in the Box transactions declined 0.7%, partly offset by a 2.8% increase in average check.
- Operating earnings rose $14.0 million. Lower restaurant cost ratios and SG&A, including lower pension and advertising costs, contributed; SG&A declined $7.5 million. Interest expense also fell, partly because the prior period included a debt-refinancing fee.
- Net earnings benefited from discontinued-operations losses narrowing to $0.7 million from $5.4 million. Continuing-operations earnings increased despite a higher tax rate.
- Operating cash flow fell $66.3 million, mainly because the prior-year period benefited from working capital released after the distribution-business transition; higher accrued advertising payments also contributed.
- The company repurchased 1.6 million shares for $77.0 million during the period. It fully used its November 2012 authorization and had $59.7 million remaining under the August 2013 authorization at quarter-end.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2014 commodity costs to rise approximately 1.0% overall; beef costs were expected to rise 2.0%–3.0%. The July 2014 California minimum-wage increase was expected to add approximately 20 basis points to payroll and benefits costs for the year.
- Management expected a fiscal-year tax rate of approximately 37.0%–38.0% and capital expenditures of approximately $75–$85 million. Plans included about 3 Jack in the Box and 20 Qdoba company-operated openings in fiscal 2014. No full-year earnings guidance is provided in the filing text.
- Management stated that operating cash flow and available financing were expected to meet capital expenditure, working-capital and debt-service needs for at least the next 12 months. In February 2014, the board authorized an additional $200 million share-repurchase program, expiring November 2015.
- Risks highlighted include food and commodity cost volatility, consumer demand and competition, labor and regulatory costs, supply interruptions, weather, franchisee performance, geographic concentration in California and Texas, and significant indebtedness.
- The company is defending the Gessele wage-and-hour litigation. It accrued for one claim considered probable and estimable; it could not estimate a loss range for other claims, and an unfavorable outcome could materially affect results or liquidity. Distribution-center lease guarantees totaled $2.2 million; no liability was recorded because default was considered less than probable.
- Continuing restructuring efforts may result in additional charges, which management could not reasonably estimate. Quarter-end liabilities included $15.5 million for restaurant closing costs and $7.0 million for leases related to the 2013 Qdoba closures.
Important facts for investors to verify
- Whether same-store sales and restaurant traffic trends persist, especially Qdoba transactions and Jack in the Box traffic.
- Whether commodity, beef and California wage-cost expectations affect restaurant margins as anticipated.
- Cash-flow generation and liquidity relative to share repurchases, capital spending, pension contributions and debt service.
- Debt balances, revolver availability, covenant compliance and exposure to variable interest rates.
- Progress and costs of refranchising, planned openings, restructuring, and remaining closed-restaurant and legal contingencies.
- Whether the higher effective tax rate and discontinued-operations charges change in subsequent periods.