Jack in the Box Inc. — Q2 FY2011 Form 10-Q
Business context and reporting period. The unaudited quarter ended April 17, 2011 covered 12 weeks; year-to-date covered 28 weeks. Comparisons are with the corresponding periods ended April 11, 2010. Jack in the Box operated and franchised Jack in the Box quick-service and Qdoba fast-casual restaurants. At quarter-end, the systems comprised 2,220 Jack in the Box restaurants and 549 Qdoba restaurants. Results reflect an ongoing shift toward franchising Jack in the Box locations.
Key financial metrics
| Metric | Quarter | Year to date |
|---|---|---|
| Revenue | $505.1 million, down 4.6% | $1,169.9 million, down 3.4% |
| Operating earnings | $14.1 million vs. $31.2 million | $68.7 million vs. $74.9 million |
| Operating margin | 2.8% vs. 5.9% | 5.9% vs. 6.2% |
| Net earnings | $6.8 million vs. $17.7 million | $39.2 million vs. $41.9 million |
| Diluted EPS | $0.13 vs. $0.32 | $0.75 vs. $0.74 |
| Cash from operations | Not separately stated for the quarter | $81.8 million vs. $24.5 million |
| Capital expenditures | Not separately stated for the quarter | $74.1 million vs. $42.6 million |
Quarterly company restaurant sales fell 17.3% to $321.2 million, principally because fewer Jack in the Box restaurants remained company-operated. Franchise revenue rose 23.5% to $62.5 million, while distribution sales increased to $121.4 million. Jack in the Box system same-store sales were up 0.1% for the quarter; Qdoba system same-store sales rose 6.0%.
Company restaurant costs were 87.7% of related sales, compared with 84.8% a year earlier. Food and packaging costs rose to 33.4% of company restaurant sales from 31.5%; management cited higher commodity costs. Quarter-end cash was $14.7 million. Current assets of $243.4 million were below current liabilities of $261.1 million. Long-term debt was $388.7 million and current maturities were $18.7 million, for total reported debt of $407.4 million.
Material changes and notable items
- Jack in the Box refranchised 114 restaurants year-to-date, compared with 53 in the prior-year period. The company-operated share of the Jack in the Box system declined to 38%, from 52% a year earlier.
- Year-to-date gains on restaurant sales were $28.8 million, versus $12.4 million. These gains reduced reported operating costs; they were uneven between periods and should be considered when assessing underlying results.
- Operating cash flow improved substantially, which management attributed mainly to timing of rent payments and lower bonus and estimated tax payments. Investing cash use increased, including $21.5 million to acquire 22 Qdoba franchise restaurants.
- The company repurchased approximately 3.5 million shares for $75 million year-to-date. A further $100 million repurchase authorization was approved in May 2011.
Outlook, commentary and risks
- Management expected Jack in the Box commodity costs to rise approximately 4.5%–5.5% for FY2011 and estimated a full-year tax rate of about 35%.
- FY2011 capital expenditures were projected at $125 million–$135 million. Plans included approximately 18 new company-operated Jack in the Box restaurants and 25 Qdoba restaurants.
- Management expected to sell 175–225 Jack in the Box restaurants during FY2011, generating $85 million–$95 million in proceeds. It reported being ahead of schedule toward a 70%–80% franchised Jack in the Box system.
- Management said operating cash flows and available financing were expected to fund foreseeable capital, working-capital and debt-service needs. The company was in compliance with credit-facility covenants. At quarter-end it had $192.5 million outstanding on its term loan, $207.0 million on its revolving facility, and $35.8 million of letters of credit outstanding.
- A 100-basis-point increase in short-term interest rates was estimated to add $4.0 million to annual interest expense. Swaps were scheduled to fix the rate on $100 million of variable-rate term debt from September 2011 through September 2014.
- Risks highlighted include food and labor cost inflation, consumer demand and economic conditions, competition, franchisee financing and payment risks, restaurant development and remodeling returns, and legal or regulatory developments. Routine legal proceedings were not expected by management to have a material adverse effect.
- The company’s franchise lending entity had provided $6.7 million to franchisees for reimaging. Management expected further company contributions of $5 million–$10 million during the remainder of FY2011; disclosed maximum exposure to loss was estimated at $10 million–$20 million.
Important facts for investors to verify
- Whether same-store sales and restaurant-level cost trends continue to improve, especially as commodity inflation pressures margins.
- How much reported earnings depend on refranchising gains, and whether planned restaurant sale volumes and proceeds are achieved.
- Whether the large year-to-date operating cash flow increase persists after the timing effects identified by management.
- Execution and returns on the reimaging program, planned capital spending, and Qdoba expansion.
- Debt, revolving-facility availability and covenant headroom, along with the use of cash for repurchases and franchisee lending.
- Actual FY2011 commodity costs, tax rate, capital expenditures, restaurant openings and refranchising results versus management’s estimates.