Jack in the Box Inc. — Q1 FY2013 Form 10-Q
Reporting period: Sixteen weeks ended January 20, 2013; comparisons are with the sixteen weeks ended January 22, 2012. Jack in the Box operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. The filing reports amounts in thousands unless otherwise noted.
Financial performance
| Metric | Q1 FY2013 | Prior period |
|---|---|---|
| Total revenue | $465.5 million | $457.9 million |
| Operating earnings / margin | $39.7 million / 8.5% | $24.3 million / 5.3% |
| Earnings from continuing operations | $23.9 million | $12.0 million |
| Net earnings | $20.7 million | $12.0 million |
| Diluted EPS | $0.47, including discontinued operations; $0.54 from continuing operations | $0.27 |
| Cash provided by operating activities | $90.0 million | $27.8 million |
| Capital expenditures | $21.4 million | $26.9 million |
| Cash and cash equivalents at period end | $9.5 million | $8.5 million at September 30, 2012 |
| Total debt, including current maturities | $395.9 million | $421.2 million at September 30, 2012 |
Revenue rose 1.7%, while company restaurant sales declined 1.1% to $360.1 million and franchise revenue increased 12.4% to $105.4 million. Company restaurant costs were 84.3% of related sales, versus 86.5% a year earlier. Cash from operations increased substantially, primarily due to working capital released as the distribution business was outsourced, higher adjusted earnings, and timing of rent payments; it should not be read as solely reflecting recurring earnings growth.
Business and operating changes
- Jack in the Box system same-store sales increased 1.9% (company-operated 2.1%; franchise 1.8%). Qdoba system same-store sales increased 1.0% (company-operated 1.5%; franchise 0.5%). Growth was slower than in the prior-year period for both brands.
- At period end, the company had 2,255 Jack in the Box restaurants, 76% franchised, and 636 Qdoba restaurants. Management intends to increase Jack in the Box franchise ownership to approximately 80%.
- Franchise revenue growth reflected more Jack in the Box franchise restaurants and lower re-image contributions to franchisees. The company continued to acquire selected franchised restaurants, including six Qdoba and one Jack in the Box location.
- The company completed the transition of its Jack in the Box distribution centers to a third-party provider. The distribution business is presented as discontinued operations; Q1 results include a $3.3 million after-tax loss, or approximately $0.07 per diluted share.
Debt, liquidity, outlook, and risks
- In November 2012, the company refinanced with a $400 million revolving facility and a $200 million term loan, both maturing November 5, 2017. At January 20, $190 million was drawn on the revolver, $200 million on the term loan, and $30.9 million of letters of credit was outstanding. The filing states the company was in compliance with its covenants. It expects operating cash flows and available financing to meet foreseeable needs.
- Management expected FY2013 commodity costs to increase approximately 2%–3% overall, with beef costs expected to rise approximately 4%. It projected a full-year tax rate of approximately 35%–36%, capital expenditures of $95–$105 million, and openings of approximately 10 company-operated Jack in the Box and 40–45 company-operated Qdoba restaurants.
- A 100-basis-point increase in short-term interest rates was estimated to increase annual interest expense by $2.9 million on the unhedged debt balance. Swaps fixed the rate on $100 million of variable-rate term debt through September 2014.
- Management cited consumer demand and pricing limits, commodity costs and availability, competition, weather and supply interruptions, restaurant development, cost-saving execution, labor and regulatory costs, information-technology disruption, debt service, and litigation as risks. It reported no material change in the risk factors from the FY2012 Form 10-K.
- The company recorded $2.5 million of restaurant impairment charges and $0.8 million of restructuring costs; restructuring expenses may continue, but additional costs could not be reasonably estimated. A $2.1 million gain from resolving two eminent-domain matters partly reduced impairment and other charges.
- In the Gessele wage-and-hour litigation, a magistrate judge recommended certification of certain payroll-deduction claims and denial of meal-break claims. The company intends to defend the case; it accrued one claim it considered probable and estimable, while other claims were not accrued because loss was not considered probable or estimable. The filing warns an unfavorable outcome could materially affect results or liquidity.
- Lease guarantees related to two former distribution centers totaled $3.5 million; no liability was recorded because third-party default was considered less than probable. The company repurchased approximately 1.0 million shares for $26.9 million during the quarter, and $150 million remained authorized under repurchase programs.
Important facts for investors to verify
- Whether the sharp increase in operating cash flow is sustainable after the one-time working-capital effects of distribution outsourcing and timing differences.
- Progress toward the stated refranchising and restaurant-development plans, and the effect on company sales, franchise revenue, and margins.
- Actual commodity inflation, particularly beef, compared with management’s FY2013 estimates, and the company’s ability to offset cost increases through pricing.
- Debt levels, covenant compliance, borrowing availability, interest-rate exposure, and the pace of share repurchases relative to operating cash generation.
- Further restructuring charges, distribution-transition costs, restaurant impairments, litigation developments, and potential exposure under the distribution-center lease guarantees.