Business Context and Reporting Period
Company: Jack in the Box Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 27, 2009
Overview: The Company operates and franchises Jack in the Box quick-service restaurants (QSR) and Qdoba Mexican Grill fast-casual restaurants. As of period end, the system included 2,212 Jack in the Box locations (1,190 company-operated, 1,022 franchised) and 510 Qdoba locations (157 company-operated, 353 franchised). The Company completed the sale of its Quick Stuff convenience store chain in the fourth quarter, classifying it as discontinued operations.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Revenues | $2,471.1 million | $2,539.6 million |
| Earnings from Continuing Operations | $131.0 million | $118.2 million |
| Net Earnings | $118.4 million | $119.3 million |
| Diluted EPS (Continuing Ops) | $2.27 | $1.99 |
| Operating Cash Flow (Continuing) | $147.3 million | $167.0 million |
| Capital Expenditures | $153.5 million | $178.6 million |
| Long-Term Debt | $357.3 million | $516.3 million |
| Restaurant Operating Margin | 16.2% | 16.1% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 2.7% to $2.47 billion, primarily due to the sale of 194 company-operated Jack in the Box restaurants to franchisees and a 1.2% decline in same-store sales at company-operated Jack in the Box locations.
- Profitability Increase: Earnings from continuing operations increased 10.9% to $131.0 million, driven by gains on the sale of company-operated restaurants ($78.6 million) and improved cost controls.
- Debt Reduction: Long-term debt decreased significantly by approximately $159 million as the Company repaid borrowings under its revolving credit facility using cash flows from operations and asset sales.
- Discontinued Operations: The Company recorded a net loss of $12.6 million from discontinued operations, reflecting a $15.0 million after-tax loss on the sale of the Quick Stuff convenience store chain.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Strategic Initiatives: Management continues to focus on brand reinvention (menu innovation, service, and facility re-imaging), expanding franchising (targeting 70-80% franchise ownership by 2013), and improving the business model.
- 2010 Guidance: The Company plans to open 45-50 new Jack in the Box restaurants and 30-40 new Qdoba restaurants in fiscal 2010. Capital expenditures are expected to be approximately $125-$135 million.
- Refranchising: The Company expects to sell 150-170 Jack in the Box restaurants in 2010, generating estimated proceeds of $85-$95 million.
Risks and Contingencies
- Economic Conditions: Recessionary environments and high unemployment levels negatively impact discretionary spending and restaurant traffic.
- Commodity Costs: While commodity costs moderated in 2009 (up ~2.0%), the Company remains exposed to fluctuations in beef, poultry, and dairy prices.
- Franchising Execution: Tight credit markets may slow the rate of refranchising, impacting the ability to realize gains and reduce operating costs as planned.
- Pension Obligations: A decrease in the discount rate from 7.30% to 6.16% is expected to increase pension expense in fiscal 2010.
Investor Verification Checklist
- Refranchising Progress: Verify the number of restaurants sold to franchisees in 2010 against the 150-170 unit guidance and the associated cash proceeds.
- Same-Store Sales: Monitor same-store sales trends for both Jack in the Box and Qdoba to assess the impact of the recession and brand reinvention efforts.
- Pension Funding: Confirm the actual pension contributions made in 2010, as management expects voluntary contributions of approximately $22.0 million despite no minimum requirement.
- Debt Covenants: Review compliance with financial covenants under the $565 million credit facility, particularly regarding leverage ratios and mandatory prepayments triggered by asset sales.
- Capital Expenditures: Track actual capital spending against the $125-$135 million range, specifically regarding the completion of the Jack in the Box re-image program.