Business context and reporting period
Jack in the Box Inc. operates and franchises Jack in the Box quick-service and Qdoba fast-casual restaurants. This unaudited Form 10-Q covers the 12 weeks and 40 weeks ended July 8, 2012, compared with the periods ended July 10, 2011. Dollar figures below are in millions unless noted.
At quarter-end, the company had 2,247 Jack in the Box restaurants and 614 Qdoba restaurants. Jack in the Box was 74% franchised; Qdoba was 50% company-operated.
Financial performance and liquidity
| Metric | Quarter 2012 | Quarter 2011 | Year to date 2012 | Year to date 2011 |
|---|---|---|---|---|
| Revenue | $501.8 | $519.3 | $1,661.2 | $1,689.1 |
| Operating earnings | $22.1 | $33.0 | $83.7 | $101.7 |
| Operating margin | 4.4% | 6.3% | 5.0% | 6.0% |
| Net earnings | $11.6 | $18.7 | $45.2 | $57.9 |
| Diluted EPS | $0.26 | $0.38 | $1.01 | $1.13 |
| Operating cash flow | — | $111.6 | $92.0 |
Quarter revenue declined 3.4%; year-to-date revenue declined 1.7%. Lower company restaurant sales reflected Jack in the Box refranchising and were partly offset by higher distribution and franchise revenues. Same-store sales increased in the quarter: Jack in the Box system 2.8% and Qdoba system 2.1%. Restaurant cost ratios improved, but higher restructuring charges and lower refranchising gains weighed on operating results. The filing does not provide a consolidated gross-margin figure.
Year-to-date investing cash outflow was $81.8, including $56.2 of capital expenditures and $48.3 to acquire 45 Qdoba franchise restaurants; financing cash outflow was $30.4. Cash was $10.8 at July 8. Current assets were $272.0 and current liabilities $265.7. Total debt on the balance sheet was $451.8, including current maturities; the credit facility had $170.0 of term debt and $275.0 drawn on its revolver, plus $30.9 of letters of credit. The company reported compliance with covenants. Management expected operating cash flow and available financing to cover foreseeable requirements.
Material changes and unusual items
- Company restaurant sales fell 12.5% in the quarter and 13.3% year to date, primarily as the average number of company-operated Jack in the Box restaurants decreased. Franchise revenues rose 14.9% in the quarter and 17.0% year to date.
- Impairment and other charges were $15.2 in the quarter and $24.6 year to date, including restructuring costs of $11.3 and $12.8, respectively. Restructuring primarily related to voluntary early retirement and workforce reductions; additional charges were expected but could not be reasonably estimated. Management identified approximately $10 million in annualized savings, with benefits expected beginning in fiscal 2013.
- Eight underperforming or planned-to-close Jack in the Box locations were written down during the first 40 weeks; the related impairment charge was $2.2. Total restaurant closing costs accrued were $20.3.
- Re-measurement of the primary pension plan increased its obligation by $42.4 due to actuarial losses, recorded in accumulated other comprehensive loss. The discount rate fell to 4.78% from 5.60% at fiscal 2011 year-end.
- After quarter-end, the company agreed to outsource distribution operations. Transition was expected to begin in fiscal Q4 2012 and finish by the end of fiscal Q1 2013; distribution was expected to be reported as discontinued operations beginning in Q4. Management also expected to release approximately $60 million of working capital tied up in franchise receivables and inventories.
Outlook, risks, and contingencies
- Management expected fiscal 2012 overall commodity costs to rise approximately 3.5% year over year, including beef costs of approximately 5%; the estimated fiscal-year tax rate was 35%–36%.
- Fiscal 2012 capital expenditures were expected to be $80–$90 million. The company planned approximately 20 Jack in the Box and 25–30 Qdoba company-operated openings, and expected about $45 million of proceeds from selling approximately 100 Jack in the Box restaurants to franchisees. Management aimed to increase Jack in the Box franchising to approximately 80% over the next couple of years.
- A 100-basis-point increase in short-term interest rates was estimated to raise annual interest expense by $3.5 million. Swaps fixed the rate on $100 million of term borrowings through September 2014 at an estimated all-in rate of 4.04%.
- Risks cited include consumer demand and pricing limits, volatile food and supply costs, competition, development execution, franchisee performance, labor and regulatory costs, outsourcing and cost-reduction execution, debt obligations, and litigation. Routine litigation was not expected by management to have a material adverse effect, though an unfavorable outcome could affect a future period.
Important facts for investors to verify
- Whether the distribution outsourcing closes on schedule, how discontinued-operations treatment affects reported revenue and earnings, and whether the expected working-capital release is realized.
- Whether refranchising proceeds, franchise growth, and same-store sales can offset lower company-operated sales and earnings.
- Whether the projected $10 million annualized restructuring savings materialize and what additional restructuring costs are incurred.
- How commodity inflation, especially beef, affects restaurant-level margins relative to pricing and sales trends.
- Debt capacity, interest-rate exposure, pension funding needs, and the company’s ability to meet capital spending and other obligations.