Business Context and Reporting Period
Company: Jack in the Box Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 11, 2010 (First Quarter of Fiscal 2010)
Business Overview: The Company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. As of April 11, 2010, the system included 2,233 Jack in the Box locations and 505 Qdoba locations. The Company is executing a strategic plan to reinvent the Jack in the Box brand, expand franchising (targeting 70-80% franchise ownership by 2013), and improve profitability.
Key Financial Metrics
| Metric (Year-to-Date) | 2010 (in thousands) | 2009 (in thousands) |
|---|---|---|
| Total Revenues | $1,211,024 | $1,355,084 |
| Net Earnings | $41,928 | $58,258 |
| Earnings Per Share (Diluted) | $0.74 | $1.01 |
| Cash Flow from Operating Activities | $24,474 | $67,341 |
| Cash and Cash Equivalents (Ending) | $12,461 | $11,008 |
| Total Debt (Current + Long-Term) | $399,216 | $425,247 |
| Effective Tax Rate | 36.1% | 39.5% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 10.6% year-to-date. Restaurant sales dropped 17.9% due to a reduction in company-operated units and a 10.1% decline in Jack in the Box same-store sales. Conversely, distribution sales increased 22.9% and franchised restaurant revenues rose 16.3% as the Company refranchised 53 units.
- Profitability: Net earnings decreased 28.0% to $41.9 million. Earnings from operations fell 30.3% to $74.9 million. This was driven by lower sales volumes and reduced gains on the sale of company-operated restaurants ($12.4 million in 2010 vs. $35.6 million in 2009).
- Cost Management: Food and packaging costs as a percentage of sales improved to 31.6% from 33.2% due to lower commodity costs (excluding beef, which is expected to rise). Selling, general, and administrative expenses decreased $26.1 million, aided by reduced advertising and overhead.
- Liquidity: Cash and cash equivalents decreased $40.5 million to $12.5 million, primarily due to $50.0 million in stock repurchases, capital expenditures of $42.6 million, and debt repayments, partially offset by operating cash flows.
Guidance, Outlook, and Risks
- Commodity Outlook: Overall commodity costs are expected to decrease approximately 1.0% in fiscal 2010. However, beef costs are projected to increase in the low double-digits in the third and fourth quarters.
- Capital Expenditures: Fiscal 2010 capital expenditures are expected to be between $125 million and $135 million, including costs for the Jack in the Box re-image program.
- Franchising Goals: The Company expects to cross the 50% franchise ownership mark for Jack in the Box later in fiscal 2010. Total proceeds from the sale of approximately 200 company-operated restaurants are projected to be $85-$95 million for the full year.
- Tax Rate: The effective tax rate for fiscal 2010 is expected to be approximately 36-37%.
- Risks: Key risks include the impact of the recessionary economy on consumer spending, rising beef costs, the ability to successfully execute the brand re-image, and the financial stability of franchisees.
Investor Verification Checklist
- Same-Store Sales Trend: Verify the continued decline in Jack in the Box same-store sales (-10.1% YTD) and assess the impact of the brand re-image on future traffic.
- Beef Cost Exposure: Monitor the projected low double-digit increase in beef costs for the remainder of fiscal 2010 and its potential impact on margins.
- Franchising Execution: Confirm the pace of refranchising (53 units sold YTD) and the realization of expected proceeds ($85-$95 million) to ensure capital generation targets are met.
- Debt Covenants: Review the credit facility terms, specifically the financial leverage ratio and mandatory prepayment requirements based on excess cash flows.
- Stock Repurchase Program: Note that $47.4 million remains available under the current $200 million repurchase authorization expiring in November 2010.