Jack in the Box Inc. — Q1 FY2021 Form 10-Q
Reporting period: 16 weeks ended January 17, 2021; comparable period ended January 19, 2020. Jack in the Box operated and franchised 2,237 restaurants at quarter-end. Substantially all locations remained open, primarily serving customers through drive-thru, carryout, and delivery.
Financial and operating performance
| Metric | Q1 FY2021 | Prior-year period |
|---|---|---|
| Total revenue | $338.5 million | $307.7 million |
| Earnings from operations | $88.9 million | $70.0 million |
| Operating margin | 26.3% | 22.7% |
| Net earnings | $50.9 million | $7.9 million |
| Diluted EPS | $2.21 | $0.33 |
| Adjusted EBITDA (non-GAAP) | $102.4 million | $76.6 million |
| Operating cash flow | $62.3 million | $22.7 million |
| Capital expenditures | $7.1 million | $7.2 million |
Revenue growth reflected company restaurant sales of $114.3 million, franchise rental revenue of $103.7 million, and franchise royalties and other revenue of $59.6 million. Franchise advertising contributions of $60.9 million are reported as revenue with associated advertising expenses of $62.7 million; these amounts should be considered together.
System same-store sales rose 12.5% (company-operated: 7.5%; franchise: 13.0%). Franchise restaurant sales, which are franchisees’ sales and not company revenue, were $1.116 billion versus $979.3 million. Company same-store sales reflected a 21.2% increase in average check, including approximately 3.1% menu pricing, offset by a 13.7% decline in transactions. Franchise AUVs were $537,000 versus $469,000.
Company restaurant costs for food and packaging, payroll and benefits, and occupancy and other were 74.5% of company restaurant sales, down from 75.2%. Food-cost percentage improved to 28.3% from 29.8%, while payroll rose to 30.6% from 30.3% and occupancy and other rose to 15.6% from 15.1%. Management cited favorable mix, pricing, and sales leverage, partly offset by ingredient-cost inflation, wage pressure, and delivery fees.
Liquidity, debt, and capital allocation
At January 17, 2021, cash was $251.3 million and restricted cash was $37.3 million. Operating cash flow increased by $39.6 million year over year, with management attributing much of the improvement to working capital, including franchisee deferral collections and timing of receivables and payables. Net cash increased $51.7 million during the period.
Total debt was approximately $1.4 billion, including $1,290.3 million of Class A-2 Notes and $107.9 million drawn on Variable Funding Notes. On January 21 and 25, 2021, the company repaid the full $107.9 million Variable Funding Notes balance. The company reported compliance with debt covenants and no rapid amortization events; its leverage ratio was below 5.0x. Management expected operating cash flow and the securitized facility to meet requirements for at least the next 12 months. Stockholders’ deficit was $749.1 million.
The company declared a $0.40-per-share dividend, totaling $9.1 million for the period. It made no share repurchases in Q1 and said it anticipated resuming repurchases in Q2 FY2021, subject to its plans and circumstances.
Material changes and unusual items
- Net earnings increased substantially, mainly because the prior-year period included a $38.6 million non-cash pension settlement charge. The pension-related expense line declined to $0.3 million from $39.0 million.
- SG&A declined $7.7 million, primarily due to lower litigation-related charges and favorable changes in the value of company-owned life insurance and related deferred compensation obligations.
- Impairment and other gains were $0.5 million, compared with $9.3 million of gains in the prior period. The prior period included a $10.8 million gain on an office-building sale; the current period included $2.2 million of gains on two real estate sales.
- Interest expense, net, increased to $20.7 million from $19.9 million, reflecting higher average borrowings and lower interest income.
Outlook, risks, and contingencies
The company provided no FY2021 guidance, citing uncertainty about COVID-19 and the lack of visibility into sustained trends. Management said recent sales acceleration was driven largely by average-check growth while traffic remained significantly below prior levels, and it was uncertain whether traffic would return to pre-pandemic levels.
On February 16, 2021, after quarter-end, a franchisee operating 68 restaurants filed for Chapter 11 bankruptcy. Jack in the Box subleases 50 locations and owns the land and buildings at the other 18. The restaurants were still operating and the franchisee was current on obligations due at the report date, but rejected leases could result in impairment costs and other adverse effects.
COVID-19 could bring further restrictions, temporary closures, supply-chain or staffing disruption, and adverse effects on franchisee sales and financial stability. Other disclosed risks include commodity and labor cost increases, competition, food safety, dependence on franchisees and suppliers, digital and cybersecurity risks, and significant debt. The company reported $3.8 million of accrued liabilities for legal matters; it could not estimate reasonably possible losses beyond those accruals. It also remained contingently liable for certain former Qdoba leases, with maximum undiscounted future payments of approximately $27.5 million; no liability was recorded because payment was considered remote.
Key facts for investors to verify
- Whether same-store sales growth persists and transactions recover, given the quarter’s strong average-check growth and declining traffic.
- The financial and lease consequences of the franchisee’s Chapter 11 filing, including any lease rejections, impairments, or changes to restaurant operations.
- Post-quarter debt repayment, remaining facility availability, debt-service obligations, and compliance with securitized-debt covenants.
- The sustainability and composition of earnings and Adjusted EBITDA growth, particularly the prior-year pension charge, litigation-related SG&A changes, and property-sale gains.
- Franchisee financial health and collections, including the $6.6 million of postponed March 2020 marketing fees still uncollected at quarter-end.