Jack in the Box Inc. — Q1 FY2011 Form 10-Q
Business context and period. The unaudited quarter comprised 16 weeks ended January 23, 2011; comparisons are with the 16 weeks ended January 17, 2010. The company operates and franchises Jack in the Box quick-service restaurants and Qdoba fast-casual restaurants. At quarter-end it had 2,213 Jack in the Box restaurants and 542 Qdoba restaurants.
Financial results and liquidity
| Metric | Q1 FY2011 | Prior-year quarter |
|---|---|---|
| Revenue | $664.7 million | $681.3 million |
| Operating earnings | $54.6 million; 8.2% margin | $43.7 million; 6.4% margin |
| Net earnings | $32.4 million | $24.2 million |
| Diluted EPS | $0.61 | $0.43 |
| Operating cash flow | $45.8 million | $8.9 million |
| Capital expenditures | $46.9 million | $28.7 million |
- Revenue declined 2.4%, while net earnings rose about 34%. Operating earnings included $27.9 million of gains on restaurant sales to franchisees, versus $9.4 million a year earlier.
- Company restaurant sales fell 14.7% to $436.9 million, principally as Jack in the Box locations were refranchised. Franchise revenue rose 25.6% to $81.1 million; distribution sales increased to $146.7 million from $104.6 million.
- Same-store sales improved: Jack in the Box system sales rose 1.1% and Qdoba rose 6.4%, compared with declines of 11.2% and 1.7%, respectively, a year earlier. Company-operated Jack in the Box same-store sales increased 1.5%.
- Jack in the Box segment operating earnings increased to $54.2 million from $41.9 million; Qdoba segment operating earnings declined to $1.1 million from $2.5 million. Distribution operations recorded a $0.7 million operating loss.
- Cash and cash equivalents were $16.5 million at January 23, up from $10.6 million at fiscal year-end. Current assets of $229.6 million were below current liabilities of $245.5 million. Total reported debt, including current maturities, was $373.2 million.
- Cash flow from investing was positive $20.8 million, largely reflecting restaurant-sale proceeds and collections on notes receivable. Financing used $60.7 million, including $50.0 million for share repurchases. Operating cash flow benefited from timing of rent payments and lower estimated tax payments.
Changes, outlook, and risks
- Refranchising accelerated: 88 Jack in the Box restaurants were sold during the quarter, versus 23 in the prior-year period. Jack in the Box was 61% franchised at quarter-end; management aims for 70–80% franchised by fiscal 2013.
- Management expected fiscal 2011 capital expenditures of $130–$140 million, commodity-cost inflation of approximately 3–4%, and an effective tax rate of approximately 35–36%. It planned to open about 19 company-operated Jack in the Box and 25 Qdoba restaurants during fiscal 2011.
- Management expected $85–$95 million in proceeds from selling 175–225 Jack in the Box restaurants in fiscal 2011 and said operating cash flows and available financing were expected to cover foreseeable capital, working-capital, and debt-service needs.
- A new franchisee lending program has capacity of up to $100 million, funded through a $20 million company commitment and an $80 million third-party revolving facility. The company had contributed $5 million and expected to contribute a further $5–$15 million during the rest of fiscal 2011; stated maximum exposure was $10–$20 million.
- On February 14, 2011, after quarter-end, the company acquired 20 Qdoba restaurants for approximately $21 million.
- Key risks include rising food, labor, utility, and other operating costs; economic and competitive pressures; consumer and food-safety concerns; execution and returns on restaurant remodeling and development; franchisee financing and payment risks; and exposure to variable interest rates. A 100-basis-point rate increase was estimated to add $3.7 million to annual interest expense. The company reported compliance with credit-facility covenants and no material adverse expected effect from routine litigation.
Important facts for investors to verify
- How much of earnings growth depends on restaurant-sale gains, and whether refranchising proceeds and gains can be sustained.
- Whether improved same-store sales continue and offset lower company-operated restaurant sales as refranchising proceeds.
- Actual commodity inflation, restaurant-level margins, and progress and costs of the re-image program.
- Fiscal 2011 capital spending, restaurant-sale proceeds, and the timing and economics of the Qdoba acquisition.
- Debt levels, revolving-facility availability, share repurchases, and the franchise lending program’s credit performance and exposure.