Business Context and Reporting Period
Company: Foodmaker, Inc. (d/b/a Jack in the Box)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended September 28, 1997 (52 weeks)
Overview: Foodmaker owns, operates, and franchises Jack in the Box fast-food restaurants, primarily in the western and southwestern United States. As of September 28, 1997, the system comprised 1,323 restaurants (963 company-operated, 360 franchised). The company focuses on adult fast-food customers with a diverse menu including hamburgers, Mexican foods, and breakfast items. Drive-thru sales account for approximately 64% of company-operated restaurant sales.
Key Financial Metrics
| Metric | Fiscal 1997 | Fiscal 1996 | Fiscal 1995 |
|---|---|---|---|
| Total Revenues | $1,071.7 million | $1,062.8 million | $1,018.7 million |
| Restaurant Sales | $986.6 million | $892.0 million | $804.1 million |
| Net Earnings | $34.1 million | $20.1 million | ($69.0 million) Loss |
| Earnings Per Share (Diluted) | $0.86 | $0.51 | ($1.77) Loss |
| Operating Cash Flow | $99.5 million | $81.0 million | $33.0 million |
| Total Debt Outstanding | $347.7 million | $398.2 million | $449.2 million |
| Cash and Equivalents | $28.5 million | $42.0 million | $35.9 million |
| Working Capital | ($93.1 million) Deficit | ($50.6 million) Deficit | ($34.1 million) Deficit |
Margins: Restaurant cost of sales was 33.2% of restaurant sales in 1997 (up from 32.6% in 1996). Restaurant operating costs were 51.7% of sales in 1997 (down from 53.6% in 1996). The effective income tax rate was 22% in 1997.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 0.8% to $1.07 billion. Company-operated restaurant sales grew 10.6% to $986.6 million, driven by a 6.5% increase in comparable store sales and an increase in the average number of company-operated units (900 in 1997 vs. 868 in 1996).
- Distribution Sales Decline: Distribution sales plummeted to $45.2 million from $132.4 million in 1996. This was caused by franchisees forming a purchasing cooperative and the expiration of the distribution contract with Chi-Chi's.
- Profitability Improvement: Net earnings more than doubled to $34.1 million from $20.1 million, reversing the significant losses of 1995. This was aided by reduced interest expense ($40.4 million vs. $46.1 million) and improved operating efficiencies.
- Debt Reduction: Total debt decreased by $50.5 million. The company prepaid $50 million of its 9 1/4% senior notes in September 1997, resulting in an extraordinary loss of $1.3 million (net of tax).
- Cost Pressures: Restaurant cost of sales percentage increased due to higher commodity costs (pork, dairy) and the cost of improved french fries.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Growth: The company intends to open approximately 400-500 new restaurants over the next five years, with 15% on non-traditional sites.
- Liquidity: Management expects cash flows from operations, combined with a $60 million revolving credit facility (of which $52.8 million was unused at year-end) and potential sale-leasebacks, to meet debt service and capital expenditure requirements.
- Dividends: The company does not anticipate paying dividends in the foreseeable future due to credit agreement restrictions.
Risks and Contingencies:
- Legal Proceedings: Significant litigation includes a $38.5 million claim by international franchisee Wolsey, Ltd.; a class action regarding ADA compliance (tentative settlement reached); and a suit by Ralston Purina seeking over $11 million regarding a tax sharing agreement. Management believes ultimate liability will not materially affect operations.
- Food Safety: The company remains vigilant regarding food-borne illness risks following the 1993 outbreak, having implemented a HACCP system.
- Year 2000 Compliance: The company is working to ensure all hardware and software are Y2K compliant by December 31, 1999, noting that failure to do so could have a material adverse effect.
- Minimum Wage: A significant portion of the workforce is paid at or near minimum wage; increases could materially impact profitability if not offset by price increases.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial ratios and restrictions on capital expenditures and dividends under the revolving credit agreement and senior notes.
- Legal Exposure: Monitor the status of the Wolsey, Ltd. litigation ($38.5M claim) and the Ralston Purina tax dispute ($11M+ claim) for potential settlements or judgments.
- Franchisee Relations: Assess the impact of the franchisee purchasing cooperative on future distribution revenue and the ongoing class action lawsuit regarding franchise agreements.
- Commodity Costs: Track fluctuations in beef, pork, and dairy prices, as these directly impact the cost of sales margin which rose to 33.2% in 1997.
- Capital Expenditures: Confirm the ability to fund the planned opening of 400-500 new restaurants over the next five years given the current working capital deficit.