Jack in the Box Inc. — Q3 FY2015 Form 10-Q
Business context and period: Unaudited results for the 12 weeks ended July 5, 2015, with year-to-date comparisons covering 40 weeks. The company operates and franchises Jack in the Box quick-service and Qdoba fast-casual restaurants. At quarter-end, the systems comprised 2,248 Jack in the Box locations and 648 Qdoba locations. Prior-period results include the distribution business and 62 closed Qdoba restaurants as discontinued operations.
Financial performance
| Metric | Q3 FY2015 | Prior-year quarter | 40 weeks FY2015 | Prior-year 40 weeks |
|---|---|---|---|---|
| Total revenue | $359.5 million | $348.5 million | $1,186.2 million | $1,139.4 million |
| Operating earnings | $50.4 million | $43.0 million | $155.5 million | $133.1 million |
| Net earnings | $26.8 million | $24.7 million | $85.7 million | $72.8 million |
| Diluted EPS | $0.71 | $0.61 | $2.22 | $1.71 |
| Operating margin | 14.0% | 12.3% | 13.1% | 11.7% |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $165.1 million | $113.9 million |
Quarter revenue grew 3.2%; operating earnings rose 17.2% and net earnings rose 8.6%. Year-to-date revenue increased 4.1%, operating earnings 16.8%, and net earnings 17.7%. The quarter and year-to-date effective tax rates were 38.2% and 37.3%, respectively, versus 33.8% and 35.9% a year earlier.
Sales and margins: Q3 same-store sales increased 5.5% at company Jack in the Box restaurants and 6.6% at company Qdoba restaurants; systemwide increases were 7.3% and 7.7%, respectively. Year-to-date company same-store sales rose 5.4% at Jack in the Box and 9.1% at Qdoba. Consolidated company-restaurant margin improved 190 basis points year-to-date to 20.5%. Jack in the Box company-restaurant margin was 22.0% for the quarter and 20.8% year-to-date; Qdoba’s was 21.4% and 19.8%, respectively.
Cash, debt and liquidity: Cash was $17.7 million at July 5, 2015. Total debt, including current maturities, was approximately $658.6 million, versus approximately $507.9 million at September 28, 2014. Current assets were $172.7 million and current liabilities $217.0 million. Year-to-date investing cash outflow was $53.0 million, including $54.8 million of capital expenditures; financing cash outflow was $105.0 million. Cash increased $7.1 million year-to-date.
On July 1, the company amended its credit facility to $1.2 billion: a $900 million revolving facility and a $300 million term loan, both maturing in March 2019. At quarter-end, $350 million was drawn on the revolver, $300 million on the term loan, and $22.1 million of letters of credit were outstanding. The filing reports LIBOR-based pricing at a 1.75% margin at quarter-end. The company entered into additional interest-rate swaps in June to hedge variable-rate borrowings.
Material changes and notable items
- Jack in the Box same-store sales improved, while the average number of company-operated Jack in the Box restaurants declined following refranchising. The company said it had essentially completed its refranchising strategy after selling 20 restaurants in the Southeast in Q2.
- Qdoba’s simplified entrée pricing, introduced in October 2014, contributed to higher average checks and sales. Qdoba company same-store sales also benefited from catering.
- Year-to-date share repurchases totaled 2.95 million shares for $251.6 million; dividends declared totaled $0.70 per share. The May 2015 buyback authorization had $65.5 million remaining at quarter-end.
- Year-to-date losses on sales of company-operated restaurants were $4.4 million, compared with gains of $2.2 million a year earlier. Q3 impairment and other charges were $3.8 million, including accelerated depreciation for beverage-equipment replacement. Year-to-date discontinued-operation losses were $3.2 million.
- Year-to-date operating cash flow increased $51.2 million, mainly due to higher earnings and lower income-tax payments. Capital expenditures increased to $54.8 million from $43.8 million.
Outlook, risks and contingencies
- Management expected FY2015 commodity costs to rise approximately 1.5%–2.0%, with beef costs expected to rise approximately 10%–15%. It cited beef, which represents about 20% of commodity spending, as a key exposure.
- Management expected a FY2015 tax rate of approximately 37.0%–37.5%, capital expenditures of $90–$100 million, 40–45 Qdoba openings (about 15–20 company-operated), and 13–18 Jack in the Box franchise openings. It expected cash from operations and available financing to cover needs for at least the next 12 months.
- Key risks include commodity and labor-cost inflation, consumer demand and competition, weather and supply disruptions, franchisee performance, geographic concentration, interest-rate exposure, and the company’s significant indebtedness. Management stated there were no material changes to previously disclosed risk factors.
- A wage-and-hour lawsuit, Gessele v. Jack in the Box Inc., seeks $45 million, though the company says the claimed amount lacks a stated basis. An accrual exists for a claim management considers probable and estimable; other claims are not accrued. The company intends to defend the case.
- The company reported $24.6 million of estimated general-liability and workers’ compensation claims exceeding self-insurance retention limits, which it expects to be covered by bonds or insurers. A separate distribution-center lease guarantee of $1.4 million was not accrued because default was considered less than probable. Estimates for closed-location lease obligations depend in part on anticipated sublease income.
Most important facts for investors to verify
- Whether same-store sales momentum and restaurant-margin improvement persist, particularly at Qdoba after the pricing change.
- Actual FY2015 commodity inflation, especially beef, and the extent to which pricing and product mix offset cost increases.
- Debt, interest expense, covenant headroom, and the effect of the amended facility and interest-rate swaps on future financing costs.
- Cash deployment for repurchases, dividends, capital spending, and restaurant development, including remaining buyback authorization.
- Actual tax rate and the outcome or changing estimates for litigation, insurance claims, and closed-store lease commitments.