JACK IN THE BOX INC annual report, FY2016

Business context and reporting period

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba fast-casual restaurants. This Form 10-K covers the fiscal year ended October 2, 2016, a 53-week year, compared with 52-week fiscal 2015. The company reported 2,954 system restaurants at year-end: 2,255 Jack in the Box and 699 Qdoba. Previously closed Qdoba locations and the distribution business are reported as discontinued operations.

Financial and operating highlights

Company-operated restaurant margin was 20.2%, down from 20.4%. Jack in the Box company restaurant margin rose to 21.2% from 20.7%; Qdoba’s declined to 18.1% from 19.7%. System same-store sales increased 1.2% at Jack in the Box and 1.4% at Qdoba, versus 6.5% and 9.3%, respectively, in 2015. Jack in the Box company same-store sales were flat as price increases were offset by lower transactions; Qdoba company same-store sales grew 1.7%.

Cash from operations fell $92.7 million, primarily reflecting an $80.0 million accelerated pension contribution, higher interest and tax payments, and working-capital timing. The company ended the year with a $217.2 million stockholders’ deficit, versus $16.0 million of equity in 2015, primarily in the context of substantial share repurchases. It repurchased 3.9 million shares for $291.9 million and declared $40.5 million in dividends. Operating lease obligations totaled $1.494 billion; the filing estimates approximately $1.0 billion will be recovered under non-cancelable operating subleases.

Material changes and notable items

• Revenue grew about 3.8%, while operating earnings and diluted EPS from continuing operations increased. Fiscal 2016 included an additional week, which management estimated added approximately $3.1 million, or $0.09 per diluted share, to net earnings.
• Jack in the Box franchise ownership remained 82%; management’s stated goal is to exceed 90%. Qdoba company-operated restaurants grew from 322 to 367, including the acquisition of 14 franchise restaurants.
• Interest expense, net increased to $31.1 million from $18.8 million, reflecting higher average borrowings and, to a lesser extent, higher rates.
• The company recorded $10.1 million of restructuring charges, including severance and costs tied to the planned relocation of Qdoba’s support center and other cost-reduction initiatives. It also recorded a $2.5 million recovery related to its Deepwater Horizon claim.
• In September 2016, the credit facility was expanded to $1.6 billion: a $900 million revolving facility and $700 million term loan, both maturing in March 2019. At year-end, borrowings were $282.4 million on the revolver and $694.1 million on the term loan; unused borrowing capacity was $592.5 million. The company reported covenant compliance.

Outlook, commentary, and risks

For fiscal 2017, management expected approximately 20–25 new Jack in the Box restaurants system-wide and 60–70 new Qdoba restaurants, including about 40 company-operated units. Planned capital expenditures were $105–$115 million. Management forecast overall commodity costs to be flat to down 1% at both brands and expected pension and postretirement expense to decline by $9.3 million. It stated that operating cash flows and available financing should cover expected capital, working-capital, and debt-service needs for at least the next 12 months.

Key risks include intense competition and weaker customer traffic, food and commodity price volatility, labor-cost and minimum-wage increases, food-safety and brand-reputation events, supply or distribution disruption, execution and returns on new restaurant growth, franchisee financial or operating difficulties, and cybersecurity or systems failures. Leverage, variable-rate debt exposure, large lease commitments, and sensitivity of pension liabilities to actuarial assumptions are also relevant. The filing identifies the Gessele wage-and-hour litigation, whose complaint seeks $45 million without a stated basis; the company accrued for one claim it considers probable and estimable and says an unfavorable outcome beyond existing accruals could be material.

The fourth quarter comprised 13 weeks and reported revenue of $398.4 million, operating earnings of $58.9 million, net earnings of $32.0 million, and diluted EPS of $0.97. The comparable 2015 fourth quarter comprised 12 weeks, so raw quarterly comparisons are not directly like-for-like. Management and the independent auditor reported effective internal controls; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

• Whether same-store sales and transaction trends improved after FY2016, particularly at Jack in the Box and Qdoba.
• Progress toward the restaurant opening plans and Jack in the Box’s goal of exceeding 90% franchise ownership, including unit economics and returns on Qdoba’s company-operated growth.
• Debt paydown, interest costs, covenant headroom, and refinancing needs ahead of the March 2019 credit-facility maturity; also assess the impact of rate changes despite hedges.
• Cash generation after the one-time accelerated pension contribution, and the sustainability of dividends and buybacks alongside planned capital expenditures and leverage.
• Execution and realized savings from restructuring, the Qdoba support-center relocation, and planned restaurant remodels.
• Developments in the Gessele litigation, pension funding and assumptions, and actual sublease recoveries against the disclosed lease obligations.