Jack in the Box Inc. — Q2 FY2021 Form 10-Q
Reporting period: 12 weeks ended April 11, 2021; year-to-date (YTD) covers 28 weeks. Comparisons are to periods ended April 12, 2020. The company operates and franchises Jack in the Box restaurants; it reported 2,228 locations, including 148 company-operated and 2,080 franchised.
Financial performance and liquidity
- Revenue: Q2 revenue was $257.2 million, up 19.0% from $216.2 million. YTD revenue was $595.8 million, up 13.7%. Franchise advertising contributions and related expenses are largely pass-through items.
- Profit: Q2 operating earnings were $64.9 million versus $32.8 million; net earnings were $35.9 million versus $11.5 million. Diluted EPS was $1.58 versus $0.50. YTD net earnings were $86.8 million versus $19.4 million; diluted EPS was $3.78 versus $0.82.
- Margins: Q2 operating margin was 25.2% of revenue versus 15.2%. Company restaurant costs were 74.1% of company restaurant sales, down from 79.4%, reflecting sales leverage and lower food costs as a share of sales.
- Sales trends: System same-store sales increased 20.6% in Q2 and 15.9% YTD; franchise same-store sales rose 21.3% and 16.5%, respectively. Company-store Q2 same-store sales rose 14.5%, as average check increased 19.9% while transactions declined 5.4%.
- Cash flow: YTD operating cash flow was $78.5 million, investing cash outflow $15.7 million, and financing cash outflow $191.0 million. Cash and restricted cash declined $128.1 million to $108.8 million.
- Debt and liquidity: Long-term debt, net of current maturities, was $1.271 billion; current debt maturities were $0.9 million. Cash was $90.6 million and restricted cash $18.1 million. The company reported $110.5 million of borrowing availability under its Variable Funding Notes, no outstanding borrowings on that facility at quarter-end, and compliance with debt covenants.
- Capital returns: The company repurchased 0.6 million shares for $65.0 million during Q2 and had $135.0 million remaining under authorized programs. It declared two FY2021 dividends of $0.40 per share; after quarter-end, the board declared a $0.44 dividend.
Changes versus the prior comparable period
- Results benefited from a strong same-store sales recovery against pandemic-affected comparisons. The company said system sales had fallen 17.0% during the final five weeks of Q2 FY2020.
- Q2 SG&A declined $5.3 million, mainly due to favorable changes in company-owned life insurance values, lower litigation costs, and lower insurance costs.
- YTD earnings comparisons also reflect the prior-year $38.9 million pension settlement charge. Prior-year results included a $10.8 million gain on the sale of a corporate office building; 2021 YTD included gains on real-estate dispositions.
- YTD operating cash flow increased $19.6 million. Financing cash outflow was higher, chiefly because the company repaid $107.9 million of prior-year Variable Funding Notes borrowings.
Outlook, commentary, and risks
- Management expected COVID-19 to continue affecting FY2021 results and said the timing of a return to normal operations remained uncertain. Most dining rooms had been closed during the pandemic, with restaurants relying on drive-thru, carryout, and delivery.
- The filing did not provide full-year earnings or revenue guidance. Management expected FY2021 commodity costs to increase approximately 3% versus FY2020. It cited higher ingredient costs, wage inflation, and a competitive labor market as pressures.
- Management stated that operating cash flows and available securitized financing were expected to cover capital expenditure, working capital, and debt-service needs for at least the next 12 months and foreseeable future.
- A Midwest franchisee operating 68 restaurants filed for Chapter 11 in February 2021. As of the filing date, agreements for three locations had been rejected; further lease rejections could cause impairment or other costs.
- The company recorded $3.9 million of aggregate liabilities for probable and reasonably estimable legal matters, but said possible additional losses could not be estimated. A wage-and-hour class action was scheduled for trial in December 2021. Separately, the company disclosed up to $26.4 million of potential undiscounted lease-guarantee payments related to former Qdoba locations; it considered payment remote and had recorded no liability.
- Other disclosed risks include pandemic uncertainty, food and labor cost inflation, franchisee financial health, supply-chain dependence, competition, litigation, and restrictions and repayment risks associated with substantial securitized debt.
Important facts for investors to verify
- Whether same-store sales growth persists as pandemic comparisons normalize, particularly given declining company-store transactions and reliance on average-check growth.
- Actual commodity, wage, and other operating-cost trends versus management’s approximately 3% FY2021 commodity-cost expectation.
- Developments in the Chapter 11 case, including additional franchise or lease rejections and related impairment exposure.
- Cash generation, the use of cash for repurchases and dividends, and continued access to the $110.5 million Variable Funding Notes capacity.
- Debt repayment and refinancing plans ahead of the notes’ anticipated repayment dates, as well as continued compliance with securitization covenants.
- Potential outcomes of the Gessele litigation and other contingencies; the filing does not provide a clear estimate of reasonably possible losses beyond recorded accruals.