Jack in the Box Inc. — Q1 FY2019 Form 10-Q
Reporting period: Sixteen weeks ended January 20, 2019; comparisons are with the sixteen weeks ended January 21, 2018. The company operated and franchised 2,241 Jack in the Box restaurants. Qdoba was sold in March 2018 and is reported as discontinued operations.
Financial performance
- Revenue: Reported revenue was $290.8 million, versus $294.5 million. The comparison is distorted by ASC 606 adoption, which added franchise advertising and service contributions and related expenses to reported revenue on a gross basis in 2019. Excluding the identified ASC 606 presentation effects, 2019 revenue was $237.9 million; the filing does not provide a directly comparable restated 2018 figure.
- Sales trends: System sales declined 0.6% to $1.063 billion; system same-store sales decreased 0.1%. Company same-store sales rose 0.5%, while franchise same-store sales fell 0.1%. Company restaurant sales decreased to $102.8 million, mainly reflecting fewer company-operated restaurants after refranchising.
- Profit: Operating earnings were $58.3 million, down from $73.4 million. Continuing-operations earnings were $31.1 million, versus $12.9 million; net earnings were $34.1 million, versus $12.2 million. Diluted EPS was $1.31, versus $0.41. The prior-year comparison includes a much higher tax provision, including a one-time, non-cash Tax Act impact. The 2019 quarter also included $3.0 million of after-tax discontinued-operations earnings, principally reflecting a California tax election related to the Qdoba sale.
- Margins and costs: Company restaurant costs were 73.8% of company restaurant sales, compared with 74.0%. Payroll and benefits increased to 29.4% of sales from 28.8%, while food and packaging remained 28.8%. Reported operating margin was 20.1%, versus 24.9%; gross presentation changes affect comparability. Adjusted EBITDA, a non-GAAP measure, declined to $83.0 million from $85.4 million.
- Cash flow: Operating cash flow was $37.6 million, down from $53.7 million, primarily due to working-capital timing and lower adjusted net income. Capital expenditures were $11.2 million. Cash increased to $4.3 million from $2.7 million.
- Debt and liquidity: Balance-sheet debt was approximately $1.056 billion, including current maturities. The company reported $325.7 million outstanding on the term loan and $727.4 million on the revolver, with $141.2 million of unused borrowing capacity. The credit-facility rate was LIBOR plus 2.25%; $500 million of borrowings were hedged to fixed rates through October 2022. Current assets of $96.5 million were below current liabilities of $187.7 million. The company said operating cash flow and available financing should meet anticipated needs for at least twelve months; it was in compliance with covenants.
- Shareholder returns: A $0.40-per-share dividend was paid during the quarter. Cash-flow statement repurchases of $14.4 million related to transactions traded in the prior fiscal year and settled in 2019; the company said it did not repurchase shares during the quarter.
Material changes and notable items
- The company continued refranchising: 137 restaurants were company-operated, down from 255 a year earlier; franchise restaurants increased to 2,104 from 1,995.
- ASC 606 adoption deferred recognition of initial franchise fees over franchise terms and changed advertising, sourcing, and technology contributions and costs to gross presentation. It reduced opening retained earnings by approximately $37.3 million, net of related tax effects, and did not affect cash flows.
- Impairment and other charges rose to $7.7 million from $2.3 million, including $5.8 million of restructuring costs. These included severance and $1.3 million of costs for an evaluation of strategic alternatives for the company.
- Interest expense increased to $17.4 million from $12.8 million, primarily due to higher average borrowing rates. The effective tax rate was 23.1%, compared with 78.5% a year earlier.
Outlook, risks and contingencies
- Management expected FY2019 capital expenditures of $30 million to $35 million, commodity costs to increase approximately 2% versus FY2018, and an annual tax rate of approximately 26% to 27%.
- Management expected to incur approximately $1.6 million of additional severance costs during the remainder of FY2019; further restructuring costs could not be estimated. The strategic alternatives evaluation was ongoing, with no outcome or timing specified.
- Adoption of the new lease standard in FY2020 was expected to significantly increase balance-sheet assets and liabilities, with no material impact expected on earnings or cash flow.
- A wage-and-hour lawsuit includes a plaintiff-side allegation of approximately $62 million in potential damages. The company said it could not estimate reasonably possible losses beyond its existing accrual and intends to defend the matter.
- The company guaranteed certain leases transferred with Qdoba; maximum potential payments were approximately $35.9 million, with terms extending up to about 17 years. No liability was recorded because a Qdoba default was considered less than probable.
- Disclosed risks include competition, consumer demand, commodity and labor costs, food safety and supply disruptions, franchisee relations, leverage, litigation, cybersecurity, regulation, and execution of refranchising and restructuring initiatives.
Investor facts to verify
- How reported revenue and operating margins compare after adjusting for ASC 606’s gross presentation changes.
- Whether sales and traffic trends, particularly franchise same-store sales and company transactions, improve or weaken.
- Debt levels, borrowing costs, covenant headroom, and available revolver capacity.
- Actual restructuring costs and the outcome of the strategic alternatives evaluation.
- Developments in the wage-and-hour litigation and the Qdoba lease guarantees.