Jack in the Box Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012 (52 weeks); comparative FY2011 also comprised 52 weeks. The filing includes unaudited results for the final 12 weeks of FY2012. Unless noted, financial results below are continuing operations; the distribution business is presented as discontinued operations.
Business context
The company operated and franchised Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. At year-end, the systems totaled 2,250 Jack in the Box locations and 627 Qdoba locations. Strategy emphasized refranchising Jack in the Box to reduce capital intensity while expanding Qdoba company operations.
Key financial results
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,545.0 million | $1,662.3 million | Down 7.1% |
| Operating earnings | $112.5 million | $145.1 million | Down 22.5% |
| Earnings from continuing operations | $63.0 million | $81.7 million | Down 23.0% |
| Net earnings | $57.7 million | $80.6 million | Down 28.5% |
| Diluted EPS, continuing operations | $1.40 | $1.63 | Down 14.1% |
| Operating cash flow | $136.7 million | $124.3 million | Up $12.5 million |
| Capital expenditures | $80.2 million | $129.3 million | Down $49.1 million |
Operating margin was 7.3%, versus 8.7% in FY2011. Company restaurant sales fell to $1,219.2 million from $1,380.3 million, largely reflecting fewer company-operated Jack in the Box restaurants following refranchising. Franchise revenue increased 15.5% to $325.8 million, driven mainly by more franchise locations and related royalties and rents. Jack in the Box system same-store sales rose 3.4%; Qdoba system same-store sales rose 2.4%.
FY2012 ending cash was $8.5 million. Total current assets were $231.2 million and current liabilities $275.3 million. Reported long-term debt was $405.3 million; total debt including current maturities and capital leases was $421.2 million. The company had $250 million drawn on its revolving facility and $165 million outstanding on its term loan at year-end. Operating lease obligations totaled $1.765 billion.
For the final 12 weeks of FY2012, revenue was $357.6 million, operating earnings $28.8 million, net earnings $12.5 million and diluted EPS $0.27. In the comparable FY2011 quarter, these were $367.0 million, $42.0 million, $22.7 million and $0.49, respectively.
Material changes and unusual items
- Jack in the Box company ownership declined to 24% of its system from 28% in FY2011; 97 company restaurants were refranchised. Qdoba company-operated locations increased to 316 from 245, including 46 acquired franchise locations.
- Company restaurant costs improved to 84.9% of related sales from 87.3%, helped by sales leverage, refranchising and the larger Qdoba mix. Commodity costs nevertheless increased 2.7% at Jack in the Box and 4.3% at Qdoba.
- Impairment and other charges rose to $32.9 million from $12.6 million, including $15.5 million of restructuring costs, primarily severance and enhanced pension benefits. Management expected savings from the restructuring to begin in FY2013.
- The distribution business generated a FY2012 operating loss of $8.8 million before tax. The company recorded $5.3 million of after-tax exit charges in discontinued operations, reducing diluted EPS by about $0.12; it expected to complete the outsourcing-related sale in FY2013.
- Share repurchases totaled $29.5 million in FY2012. The company reported $57.7 million net earnings, while total comprehensive income was $17.6 million, reflecting actuarial losses on employee benefit plans.
Outlook, risks and contingencies
Management forecast FY2013 commodity costs 2%–3% above FY2012, with beef costs expected to rise 4%–5%. Planned FY2013 capital expenditures were $95–$105 million; the company planned approximately 10 new Jack in the Box and 40–45 new company-operated Qdoba restaurants. System-wide opening plans were 20–25 Jack in the Box and 70–85 Qdoba restaurants. Management stated that operating cash flows and available financing were expected to meet foreseeable capital, working-capital and debt-service needs.
On November 5, 2012, after year-end, the company refinanced its debt with a five-year $600 million facility: a $400 million revolver and $200 million term loan. At closing, approximately $220 million was drawn on the revolver and $200 million on the term loan. The new agreement includes financial and other covenants. The company also authorized a further $100 million share repurchase program in November 2012.
Key risks include competition and execution of growth plans; food, labor, fuel and other cost inflation; food safety and brand reputation; weather and supply interruptions; dependence on franchisee financial health; regulation and labor costs; information-security failures; and leverage, interest rates and covenant restrictions. The company disclosed routine litigation and said it did not expect currently known matters to have a material adverse effect, while noting outcomes could affect a future reporting period. Management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of the revenue and earnings decline reflects the ongoing refranchising mix shift versus underlying restaurant performance; compare same-store sales, AUVs and segment results.
- Whether the projected FY2013 commodity increases, especially beef, are offset by pricing, purchasing actions and operating efficiencies.
- Debt levels, borrowing costs, covenant headroom and the effect of the November 2012 refinancing and subsequent repurchases on liquidity.
- Execution and returns on planned Qdoba growth, including the economics of acquired and newly opened company-operated restaurants.
- Future restructuring savings, pension funding requirements and the sensitivity of benefit obligations to discount rates and investment returns.
- Completion and final economics of the distribution-business outsourcing and sale, and any related costs beyond those disclosed.