Jack in the Box Inc. — FY2013 Form 10-K
Business context and reporting period. Jack in the Box operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. This 10-K covers the 52-week fiscal year ended September 29, 2013; it is an annual report, not a standalone fourth-quarter filing. At year-end, the system had 2,866 restaurants: 2,251 Jack in the Box and 615 Qdoba.
Key financial results
| Metric | FY2013 | FY2012 | Change or context |
|---|---|---|---|
| Revenue | $1,489.9 million | $1,509.3 million | Down 1.3% |
| Operating earnings | $138.2 million | $120.8 million | Up 14.4%; operating margin 9.3%, versus 8.0% |
| Earnings from continuing operations | $82.6 million | $68.1 million | Diluted EPS $1.84, versus $1.52 |
| Net earnings | $51.2 million | $57.7 million | Diluted EPS $1.14, versus $1.28 |
| Operating cash flow | $198.9 million | $136.7 million | Up $62.1 million |
| Capital expenditures | $84.7 million | $80.2 million | FY2014 estimate: $80–$90 million |
| Long-term debt, net of current maturities | $349.4 million | $405.3 million | Debt including current maturities and capital leases was $370.3 million |
Company restaurant sales were $1,143.8 million, down 3.4%, while franchise revenue rose 6.2% to $346.1 million. The shift reflects Jack in the Box refranchising: company-operated Jack in the Box units fell to 465 from 547, while franchise ownership increased to 79% of that system. Company restaurant costs were 82.9% of related sales, compared with 84.0% in FY2012. Jack in the Box same-store sales increased 0.3% system-wide; Qdoba same-store sales increased 0.8% system-wide.
Year-end cash was $9.6 million. Current assets of $117.2 million were below current liabilities of $211.7 million; management notes that a working-capital deficit can be typical in the restaurant industry. The $400 million revolving facility had $175 million drawn and $28.1 million of letters of credit outstanding; reported unused borrowing capacity was $196.9 million. The company was in compliance with its debt covenants. Operating cash flow exceeded capital expenditures by approximately $114.2 million.
Material changes and unusual items
- Qdoba closures: The company closed 62 company-operated Qdoba restaurants after reviewing returns and operating performance. FY2013 discontinued operations included a $31.5 million after-tax loss from the closures and distribution business combined, reducing diluted EPS by $0.70. The Qdoba closures alone generated $22.2 million of asset impairment charges and $10.3 million of future lease commitment charges, before tax and other exit costs.
- Distribution outsourcing: The Jack in the Box distribution business transition was completed in the first quarter of FY2013. The company expects outsourcing and Qdoba closures to benefit future earnings and cash flow.
- Repurchases: The company repurchased 4.0 million shares during FY2013 for $140.1 million, an average $35.29 per share. No dividends were paid; management reported no current intention to pay them.
- Restructuring: FY2013 restructuring charges were $3.5 million, mainly severance and other costs. The company said further restructuring charges may arise, but it could not reasonably estimate them.
- Management transition: CEO Linda Lang announced retirement effective January 1, 2014; President and COO Leonard Comma was designated to succeed her as CEO and Board chair.
Outlook, commentary, and risks
- For FY2014, management planned approximately 10 new Jack in the Box restaurants system-wide, 60–70 new Qdoba restaurants system-wide, and capital expenditures of $80–$90 million. It planned to increase Jack in the Box franchise ownership to 80–85% and expand Qdoba company-operated locations.
- Management expected overall commodity costs to rise approximately 1% in FY2014, with beef costs expected to increase 3–4% and higher inflation anticipated in the first quarter. FY2013 commodity costs rose 2.2% at Jack in the Box and 1.5% at Qdoba.
- Management expected cash from operations and available financing to cover capital expenditure, working-capital, and debt-service needs for at least the next 12 months. A $100 million portion of variable-rate debt was hedged through September 2014; a 100-basis-point rate increase on unhedged debt was estimated to add $2.7 million to annual interest expense.
- Key disclosed risks include food and labor cost inflation, competition and pricing pressure, consumer demand and menu execution, food safety and brand reputation, franchisee financial health, restaurant development returns, weather and supply disruptions, regulatory and labor-cost changes, litigation, and leverage. The company also cited dependence on a concentrated Jack in the Box footprint, with nearly 70% of system restaurants in California and Texas.
- A wage-and-hour class-action matter, Gessele v. Jack in the Box, remained pending. The company accrued one claim it considered probable and estimable; it could not estimate a loss range for other claims, and an unfavorable outcome could have a material adverse effect. The company also remained secondarily liable for $2.9 million of assigned distribution-center lease obligations.
Most important facts for investors to verify
- Whether continuing-operations earnings growth is sustainable after separating the substantial FY2013 discontinued-operation and closure charges.
- Whether Jack in the Box same-store sales and traffic improve: FY2013 company transactions declined 0.9%, while average check rose 1.9%.
- Whether Qdoba’s post-closure sales, unit economics, and planned 60–70 restaurant openings deliver acceptable returns.
- Whether refranchising and the outsourced distribution model improve recurring margins and cash flow, while accounting for lower company restaurant sales and franchisee risks.
- Debt capacity and cash commitments: the filing lists $1.72 billion of operating lease obligations and $1.60 billion of purchase commitments, in addition to debt; a substantial portion of operating leases is expected to be recovered through non-cancellable subleases.
- Progress and ultimate exposure in the wage-and-hour litigation, lease guarantees, pension funding, and any additional restructuring or impairment charges.