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 28 weeks ended April 10, 2016, compared with the respective periods ended April 12, 2015. At quarter-end, the systems had 2,251 Jack in the Box and 683 Qdoba restaurants; 82% of Jack in the Box restaurants were franchised.
Financial performance and condition
| Metric | Quarter | Year to date |
|---|---|---|
| Revenue | $361.2 million; +0.8% | $832.0 million; +0.6% |
| Operating earnings | $52.8 million vs. $41.9 million | $115.3 million vs. $105.1 million |
| Net earnings | $28.7 million vs. $23.0 million | $61.9 million vs. $58.8 million |
| Diluted EPS | $0.84 vs. $0.60 | $1.76 vs. $1.51 |
| Operating cash flow | Not separately presented | $80.5 million vs. $90.9 million |
| Capital expenditures | Not separately presented | $51.3 million vs. $33.0 million |
Year-to-date company-operated restaurant margin was 19.6%, down from 19.9%. Jack in the Box margin improved to 20.8% from 20.3%, while Qdoba margin declined to 17.3% from 19.1%. Quarter-end cash was $8.8 million. Total debt, including current maturities, was approximately $935.7 million, up from $715.3 million at September 27, 2015; interest expense rose to $15.1 million year to date from $9.4 million. Current liabilities exceeded current assets by approximately $83.8 million.
Material changes versus prior period
- Quarter revenue grew modestly, but same-store sales diverged: Jack in the Box system sales were flat, including a 1.0% decline at company restaurants; Qdoba system sales increased 2.1%.
- Higher operating earnings partly reflect comparison with a $5.0 million loss on restaurant sales in the prior-year quarter; current-quarter restaurant-sale losses were immaterial.
- Cash from operations fell $10.5 million year to date, mainly because income-tax payments increased $32.1 million, partly offset by higher beverage funding receipts and net earnings.
- The company repurchased 3.5 million shares for $250.0 million year to date and paid $20.8 million in dividends. Stockholders’ equity moved from $16.0 million to a deficit of $190.6 million.
Outlook, commentary and risks
Management expected fiscal 2016 commodity costs to decline approximately 2–3% for Jack in the Box and 5% for Qdoba, and projected a full-year tax rate of about 38% and capital expenditures of $100–$120 million. Plans called for 50–60 Qdoba openings, approximately half company-operated, and about 20 Jack in the Box openings, four company-operated. Management aimed to raise Jack in the Box franchise ownership to at least 90% within two years. It stated operating cash flows and available financing should cover needs for at least the next 12 months.
The $900 million revolving facility and $300 million term loan mature March 2019. At quarter-end, the term loan balance was $288.3 million, revolver borrowings were $628.0 million and letters of credit were $25.2 million; the company reported covenant compliance. Interest-rate swaps mitigate, but do not eliminate, exposure to variable rates. Key risks include restaurant traffic and consumer demand, commodity and labor-cost volatility, execution of expansion and refranchising plans, substantial indebtedness, and litigation. A wage-and-hour lawsuit seeks $45 million; the company has accrued for one claim it considers probable and estimable, and says an adverse resolution beyond existing accruals could materially affect results or liquidity. The board subsequently approved a further $100 million repurchase authorization and declared a $0.30-per-share dividend.
Important facts for investors to verify
- Whether Jack in the Box traffic and same-store sales stabilize, and whether Qdoba’s sales growth translates into improved restaurant margins.
- Debt, interest costs, covenant headroom and liquidity after substantial share repurchases; the filing reports low cash and a working-capital deficit.
- Delivery of unit-growth and refranchising targets alongside the $100–$120 million capital-spending plan.
- Actual commodity-cost, tax-rate and cash-flow outcomes versus management’s estimates, and any developments in the wage-and-hour litigation.