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 10-K covers fiscal 2011, the 52 weeks ended October 2, 2011; fiscal 2010 had 53 weeks. Fiscal 2011 Q4 was 12 weeks, compared with 13 weeks in fiscal 2010 Q4.
At year-end, the systems included 2,221 Jack in the Box restaurants and 583 Qdoba restaurants. The company’s strategy is to expand Qdoba and shift Jack in the Box toward franchising: 332 Jack in the Box locations were refranchised in 2011, lifting the franchise share of that system to 72% from 57%.
Financial and operating results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $2,193.3 million | $2,297.5 million |
| Operating earnings | $142.6 million; 6.5% of revenue | $121.9 million; 5.3% of revenue |
| Net earnings | $80.6 million | $70.2 million |
| Diluted EPS | $1.61 | $1.26 |
| Operating cash flow | $124.3 million | $64.0 million |
| Capital expenditures | $129.3 million | $95.6 million |
- Revenue fell 4.5%, mainly reflecting fewer company-operated Jack in the Box restaurants after refranchising. Company restaurant sales declined $288.3 million; distribution sales rose $133.0 million and franchise revenue rose $51.0 million.
- System same-store sales improved: Jack in the Box +1.8% and Qdoba +5.3%, following declines in 2010. Company-operated same-store sales were +3.1% and +5.1%, respectively.
- Higher food costs pressured restaurant economics. Company restaurant food and packaging costs rose to 33.4% of related sales from 31.8%; company-reported commodity costs increased approximately 4.7% at Jack in the Box and 7% at Qdoba.
- Fiscal 2011 Q4 revenue was $504.2 million, operating earnings $41.0 million, net earnings $22.7 million and diluted EPS $0.49. In fiscal 2010 Q4, the corresponding results were $563.2 million, $5.2 million, $4.0 million and $0.07; that quarter included a $18.5 million after-tax charge for closing 40 Jack in the Box restaurants. The quarters differ in length.
Balance sheet, debt and liquidity
- Cash was $11.4 million at October 2, 2011. Current assets of $254.4 million were below current liabilities of $283.0 million, a working-capital deficit of approximately $28.6 million.
- Long-term debt, net of current maturities, was $447.4 million; including current maturities, gross debt was approximately $468.5 million. This compares with approximately $366.4 million of total debt a year earlier. The balance included $275.0 million drawn on the $400 million revolver, a $185.0 million term loan and $7.3 million of capital leases.
- The term loan and revolver mature in 2015. The credit agreement contains financial-ratio requirements and restrictions on, among other things, borrowing, capital spending, franchisee loans, dividends and share repurchases. A 100-basis-point rise in short-term rates was estimated to add $3.6 million to annual interest expense; swaps fixed the rate on $100 million of term debt at an effective 4.04% through September 2014.
- Operating cash flow increased $60.2 million year over year, driven in part by payment timing and lower payments for advertising, taxes, rent, pensions and bonuses. Cash generation was substantially allocated to investment, refranchising-related activity, debt and share repurchases. The company repurchased 9.1 million shares for $193.1 million in 2011.
- Contractual obligations totaled $2.60 billion, including $1.82 billion of operating lease payments; the filing says approximately $1.1 billion of future minimum lease payments is expected to be recovered through non-cancellable subleases.
Changes, outlook and risks
- Operating earnings improved despite lower total revenue, supported by better same-store sales and lower impairment charges. Results also included $61.1 million of net gains from selling 332 company-operated restaurants; this gain is not equivalent to recurring restaurant operating profit.
- Management expects cash flows and available financing to meet requirements for the foreseeable future. Fiscal 2012 capital expenditures were forecast at approximately $90–$100 million. The filing also describes plans for 25–30 new Jack in the Box restaurants and 70–90 new Qdoba restaurants systemwide in fiscal 2012, and sales of 80–120 Jack in the Box restaurants for expected proceeds of $35–$50 million. Management aims to reach approximately 80% Jack in the Box franchise ownership over the next couple of years.
- Management cited significant commodity inflation and expected continued volatility. Key risks include food and labor cost increases, economic weakness and constrained pricing, intense competition, food safety and reputation exposure, weather and supply disruptions, franchisee financial health, development execution, regulation, and the company’s leverage and lease commitments.
- Qdoba expansion and selective acquisitions are part of the growth plan; the company acquired 32 Qdoba franchise restaurants for $31.1 million in 2011, including $24.3 million of goodwill. The franchisee lending entity provided $14.5 million in loans and expected to receive a further $5–$10 million of company contributions in fiscal 2012.
- Routine litigation was not expected by management to have a material adverse effect, although an unfavorable resolution could materially affect a future reporting period. The qualified pension plan was underfunded by $92.6 million at year-end; management forecast pension and postretirement expense to increase $2.8 million in fiscal 2012.
Important facts for investors to verify
- Whether same-store sales gains and restaurant-level profitability persist as commodity costs rise, particularly after the large reduction in company-operated Jack in the Box units.
- How much of reported operating earnings depends on refranchising gains, and whether proceeds and gains can be sustained as the refranchising program advances.
- Actual progress toward the 80% Jack in the Box franchise target, planned unit openings, and fiscal 2012 capital spending.
- Debt repayment and covenant capacity, interest-rate exposure, and the effect of substantial lease obligations on liquidity and financial flexibility.
- Qdoba acquisition economics, goodwill recoverability, and repayment performance of franchisee loans.