Jack in the Box Inc. — Q2 FY2014 Form 10-Q
Reporting period: The 12 weeks ended April 13, 2014; year-to-date figures cover 28 weeks. Comparatives are the periods ended April 14, 2013. Amounts below are in millions of dollars unless noted.
Business context
The company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. At quarter-end, the systems comprised 2,254 Jack in the Box restaurants and 626 Qdoba restaurants. Jack in the Box was approximately 80% franchised. Results exclude the former distribution business and 62 Qdoba locations closed in 2013, which are reported as discontinued operations.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | 28 weeks FY2014 | 28 weeks FY2013 |
|---|---|---|---|---|
| Total revenue | $340.9 | $347.2 | $791.0 | $801.6 |
| Operating earnings | $32.9 | $27.4 | $90.1 | $70.6 |
| Operating margin | 9.6% | 7.9% | 11.4% | 8.8% |
| Continuing-operations earnings | $18.3 | $15.1 | $51.3 | $41.2 |
| Net earnings | $15.8 | $13.3 | $48.1 | $34.0 |
| Diluted EPS, continuing operations | $0.43 | $0.33 | $1.18 | $0.92 |
| Diluted EPS, total | $0.37 | $0.29 | $1.11 | $0.76 |
Quarterly revenue declined 1.8%; year-to-date revenue declined 1.3%. Company restaurant sales fell as Jack in the Box refranchising reduced the average company-operated restaurant count, partly offset by higher unit volumes and Qdoba growth. Franchise revenue rose 6.0% in the quarter and 5.7% year-to-date. Same-store sales in the quarter were up 0.7% for the Jack in the Box system and 7.0% for Qdoba.
Company restaurant costs improved to 81.5% of company restaurant sales in the quarter from 82.9% a year earlier. Lower food and packaging and labor cost rates helped; occupancy and other costs increased as a share of sales. Higher impairment and restructuring charges partly offset operating improvement: quarterly impairment and other charges were $9.1 million versus $2.4 million, including a $6.4 million impairment of restaurant software no longer planned for use. Quarterly net gains on restaurant sales were $1.8 million, versus a $2.4 million net loss a year earlier.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $51.0 million, down from $121.6 million. Management attributed the decline chiefly to the prior-year benefit from outsourcing distribution and working-capital movements, plus higher advertising and income-tax payments.
- Investing cash outflow was $21.2 million; financing cash outflow was $30.3 million. Capital expenditures were $31.2 million, compared with $41.8 million a year earlier. Cash ended at $9.1 million.
- At April 13, total balance-sheet debt was approximately $509.7 million, comprising $10.9 million current maturities and $498.9 million long-term debt. Current assets of $150.0 million were below current liabilities of $178.8 million, a working-capital deficit of approximately $28.8 million.
- The March refinancing established a $600 million revolving facility and a $200 million term loan, both maturing March 2019. At quarter-end, revolving borrowings were $305 million, term borrowings were $200 million, and letters of credit were $23 million. The company reported compliance with its covenants.
- During the year to date, the company repurchased 3.7 million shares for $202.0 million, at an average $54.93 per share. $134.7 million remained authorized under the newest repurchase program at quarter-end.
Outlook, commentary and notable items
- Management expected FY2014 commodity costs overall to rise approximately 1%–2%, with beef costs expected to increase 4%–5%. The filing notes that beef represented approximately 20% of total commodity spend and that the company typically did not use fixed-price beef contracts.
- FY2014 capital expenditures were expected to be approximately $75–$85 million. Planned company-operated openings were approximately three Jack in the Box and 20 Qdoba restaurants.
- Management expected a FY2014 tax rate of approximately 37%–38%, while cautioning that the final rate could differ. It stated that operating cash flow and available financing were expected to meet capital, working-capital and debt-service needs for at least the next 12 months.
- After quarter-end, the company entered into swaps intended to fix rates on $300 million of variable-rate borrowings from October 2014 through October 2018. It also announced a quarterly dividend of $0.20 per share, with the first payment scheduled for June 9, 2014; future dividends remain subject to board approval.
- Year-to-date losses from discontinued operations were $3.2 million, including $2.8 million associated with the closed Qdoba locations. The Qdoba closure lease liability was $7.1 million at quarter-end. The company expected no material remaining costs for that closure transaction.
- The company cited exposure to commodity and utility price changes, restaurant competition, consumer demand, supply disruptions, labor and regulatory costs, franchisee performance, interest rates, indebtedness, and litigation. It reported no material change in previously disclosed risk factors. A former-employee wage-and-hour case remained pending in part; the company had recorded an accrual for a claim it considered probable and estimable.
Most important facts for investors to verify
- Whether continued refranchising and same-store sales trends support revenue and operating-margin improvement, particularly given Jack in the Box’s declining company-operated sales.
- Whether food, especially beef, labor, occupancy and other operating costs track management’s estimates and preserve restaurant-level margins.
- Debt, covenant headroom, interest-rate exposure and the cash-flow capacity to fund capital spending, scheduled debt service, repurchases and the newly initiated dividend.
- The size and timing of restructuring, closed-location lease and litigation costs, including whether assumptions about subleases and contingencies change.
- The effect of the announced swaps and dividend after quarter-end; neither was reflected as a completed quarter-end cash payment or full-period interest outcome.