Jack in the Box Inc. — FY2010 Form 10-K
Business context and reporting period. Fiscal 2010 ended October 3, 2010 and comprised 53 weeks; fiscal 2009 comprised 52 weeks. The company operated and franchised Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. At year-end, the systems included 2,206 Jack in the Box and 525 Qdoba restaurants. Quick Stuff was sold in 2009 and is reported as discontinued operations.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $2.298 billion | $2.471 billion |
| Operating earnings | $121.9 million | $231.3 million |
| Operating margin | 5.3% | 9.4% |
| Net earnings | $70.2 million | $118.4 million |
| Diluted EPS from continuing operations | $1.26 | $2.27 |
| Cash from continuing operating activities | $64.0 million | $147.3 million |
| Capital expenditures | $95.6 million | $153.5 million |
FY2010 revenue was down 7.0%; the extra week contributed an estimated $28.9 million of company restaurant sales and $1.8 million of net earnings. Operating cash flow less capital expenditures was approximately negative $31.6 million, a simple derived measure.
Jack in the Box system same-store sales fell 8.2% (company-operated: down 8.6%; franchise-operated: down 7.8%). Qdoba same-store sales increased 2.8%. Jack in the Box company-operated average unit volume declined to $1.297 million from $1.420 million; Qdoba system average unit volume rose to $923,000 from $905,000.
FY2010 fourth quarter: Revenue was $563.2 million, operating earnings $5.2 million, net earnings $4.0 million, and diluted EPS $0.07. The comparable FY2009 quarter reported revenue of $540.3 million, operating earnings of $66.7 million, net earnings of $40.6 million, and diluted EPS of $0.70. FY2010 Q4 results included charges tied to closing 40 underperforming Jack in the Box restaurants.
Liquidity, debt and capital
- Cash and cash equivalents were $10.6 million at year-end, down from $53.0 million. Current assets were $274.9 million and current liabilities $283.2 million, a working-capital deficit of $8.3 million.
- Long-term debt, including current maturities, totaled approximately $366.4 million, including $160.0 million drawn on the revolver and $197.5 million under the term loan. Letters of credit outstanding were $34.9 million. The new five-year credit facility totals $600 million; the company reported covenant compliance.
- Operating lease obligations were $1.901 billion. Total contractual obligations were $3.115 billion, including leases, debt, purchase commitments and benefit obligations.
- The company repurchased 4.9 million shares for $97.0 million during FY2010. A new authorization for up to $100 million of repurchases was approved in November 2010. No cash dividends were paid or expected in the foreseeable future.
Material changes and management commentary
- Refranchising accelerated: 219 Jack in the Box restaurants were sold to franchisees, increasing franchise ownership of that system from 46% to 57%. Management targeted 70–80% franchise ownership by FY2013.
- Company restaurant sales fell $307.3 million, mainly from fewer company-operated locations and lower Jack in the Box same-store sales. Franchise revenue increased 19.6% to $231.0 million, primarily due to more franchised restaurants.
- Operating earnings declined despite lower food and packaging costs as a share of company restaurant sales (31.8% versus 32.4%); sales deleverage, higher occupancy costs, impairment and closure charges weighed on results. Payroll and benefits rose to 30.3% of company restaurant sales from 29.7%.
- Forty underperforming Jack in the Box restaurants were closed in Q4. The filing reports a $28.0 million charge associated with the closures, including impairment and future lease commitments; the quarterly results note an $18.5 million after-tax charge.
- The company entered a new $400 million revolver and $200 million term loan in June 2010. It also entered interest-rate swaps intended to fix rates on $100 million of term-loan borrowings beginning in September 2011.
Outlook, risks and contingencies
- FY2011 capital expenditures were forecast at approximately $135–$145 million. Plans included 30–35 new Jack in the Box restaurants and 50–60 new Qdoba restaurants; separate disclosures specified about 25 new company-operated locations for each brand.
- Management expected proceeds of $85–$95 million from selling 175–225 Jack in the Box restaurants to franchisees in FY2011. The restaurant re-image program was targeted for completion by the end of FY2011.
- Management said operating cash flows and available financing were expected to meet foreseeable capital, working-capital and debt-service needs. This outlook is subject to execution and financing risks.
- Key risks include weak consumer spending and elevated unemployment in major markets, intense competition and discounting, food and labor cost inflation, supply disruptions, severe weather, minimum-wage and healthcare costs, and execution risks in growth and refranchising. California and Texas accounted for approximately 57% of all restaurants. A 100-basis-point rise in short-term rates was estimated to add $3.6 million to annual interest expense.
- Management considered routine litigation unlikely to materially affect results, financial position or liquidity. KPMG issued an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Jack in the Box traffic, same-store sales and margins stabilize after the steep FY2010 declines, and whether Qdoba’s sales growth continues.
- Whether refranchising proceeds and the targeted franchise mix are achieved without weakening franchisee health, royalty collections or future earnings.
- Whether the restaurant closures and re-image investments produce the expected improvement in profitability and cash flow.
- Cash generation, debt reduction, revolver availability, covenant headroom and sensitivity to interest rates, alongside substantial lease and purchase commitments.
- The exact timing and cost effects of FY2011 development, re-imaging and healthcare requirements; the filing presents plans and risks, not guaranteed outcomes.