Jack in the Box Inc. — Q1 Fiscal 2018 Form 10-Q
Reporting period: Sixteen weeks ended January 21, 2018; comparisons are with the sixteen weeks ended January 22, 2017. Results are unaudited. Qdoba is reported as discontinued operations following the agreement to sell it; unless noted, operating results below are continuing operations.
Business context and key metrics
- Jack in the Box operated 255 company restaurants and franchised 1,995, for 2,250 system restaurants. The system was 89% franchised, up from 81% a year earlier. Qdoba, with 738 restaurants, was classified as held for sale.
- Revenue was $294.5 million, down 16.6% from $353.2 million. Company restaurant sales fell to $169.6 million from $238.6 million, primarily reflecting refranchising and fewer company-operated restaurants. Franchise revenue rose to $124.8 million from $114.6 million.
- Operating earnings increased to $72.8 million from $66.8 million; the current period included $8.9 million of gains on restaurant sales, versus $0.1 million a year earlier. Adjusted EBITDA, a non-GAAP measure, declined to $85.4 million from $90.6 million.
- Net earnings were $12.2 million, or $0.41 per diluted share, versus $35.9 million, or $1.11 per diluted share. Continuing-operations earnings were $12.9 million versus $34.5 million; discontinued operations recorded a $0.7 million loss versus $1.4 million of earnings.
- Company restaurant costs, excluding depreciation and amortization, were 74.0% of company sales versus 74.2%. Same-store sales increased 0.2% at company restaurants, decreased 0.3% at franchise restaurants, and decreased 0.2% system-wide. Franchise AUV was $455,000 versus $453,000.
- Operating cash flow was $53.7 million, down from $69.8 million. Continuing-operations cash flow after investing and financing was negative $3.0 million. Cash at quarter-end was $3.8 million.
- Debt totaled approximately $1.105 billion on the balance sheet: $68.6 million current and $1.037 billion long-term. The credit facility had $625.7 million outstanding on the term loan and $472.4 million on the revolver; letters of credit were $31.4 million. The company reported covenant compliance.
- Capital expenditures were $10.8 million. A $0.40-per-share dividend was declared and paid during the quarter. No shares were repurchased.
Material changes and unusual items
- Refranchising 22 restaurants reduced company restaurant sales but increased franchise rental and royalty revenues. The sales generated $14.7 million in proceeds and a $8.9 million gain. Restaurant costs as a share of company sales improved slightly, while commodity inflation raised food and packaging costs to 28.8% of sales from 28.5%.
- The Tax Cuts and Jobs Act led to a provisional, non-cash tax expense of $30.6 million, primarily from remeasuring deferred tax balances. The reported effective tax rate was 78.5%, versus 38.7%; this tax item materially reduced earnings.
- Interest expense increased to $12.8 million from $10.4 million, primarily due to higher average rates and borrowings. The company uses interest-rate swaps to hedge a portion of variable-rate debt.
- Qdoba’s sale was agreed for approximately $305 million in cash, subject to customary conditions and adjustments, with closing anticipated by April 2018. The sale requires a mandatory debt prepayment at closing. Qdoba’s discontinued operations reported a $0.6 million net loss for the quarter.
Outlook, risks, and contingencies
- Management expected a fiscal 2018 tax rate of approximately 41%, capital expenditures of $30–$35 million, about 25 Jack in the Box restaurant openings, and commodity costs approximately 3% above fiscal 2017. It stated operating cash flows and available financing should meet needs for at least the next twelve months.
- The company signed non-binding letters of intent to sell about 10 restaurants before quarter-end and about 50 after quarter-end; the combined approximately 60 restaurants were expected to produce $27–$30 million in gross proceeds. These prospective sales were not completed transactions.
- Management cited traffic weakness, food and labor cost inflation, competition, supply and food-safety risks, franchisee performance, litigation, and the possibility of delay or failure in closing the Qdoba sale. A wage-and-hour class action remained pending; the company said it could not estimate possible losses beyond its existing accrual.
- The company expected the new lease accounting standard to significantly increase reported assets and liabilities upon adoption. It was still evaluating the impact of certain revenue-recognition changes.
Important facts for investors to verify
- Whether and when the Qdoba transaction closed, final proceeds and adjustments, and the resulting mandatory debt repayment.
- Progress and realized proceeds from the approximately 60 restaurant sale letters of intent, and the pace and economics of further refranchising.
- Whether same-store sales, traffic, commodity costs, and restaurant-level margins track management’s expectations.
- The final fiscal 2018 tax rate and any revisions to the provisional Tax Act accounting.
- Debt maturities, refinancing or repayment plans for the March 2019 credit-facility maturity, interest costs, and covenant compliance.
- Developments in the Gessele litigation and any other contingencies that could materially affect results or liquidity.