Jack in the Box Inc. — Q2 FY2015 Form 10-Q
Reporting period: 12 weeks ended April 12, 2015; year-to-date (YTD) covers 28 weeks. Comparisons are with the corresponding periods ended April 13, 2014. The company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants.
Financial performance
| Metric | Quarter | YTD |
|---|---|---|
| Total revenue | $358.1 million, up 5.1% | $826.7 million, up 4.5% |
| Operating earnings | $41.9 million, up 27.3% | $105.1 million, up 16.7% |
| Operating margin | 11.7%, versus 9.6% | 12.7%, versus 11.4% |
| Net earnings | $23.0 million, versus $15.8 million | $58.8 million, versus $48.1 million |
| Diluted EPS | $0.60, versus $0.37 | $1.51, versus $1.11 |
| Operating cash flow | Not presented separately | $90.9 million, versus $51.0 million |
Quarter revenue comprised $268.9 million in company restaurant sales and $89.2 million in franchise revenue. YTD company-operated restaurant margin was 19.9%, up 150 basis points. The reported quarter included a $5.0 million loss on restaurant sales, compared with a $1.8 million gain in the prior-year quarter; lower impairment and other charges partly offset this impact.
Liquidity, debt and capital returns
- Cash was $10.4 million at April 12, 2015. Current assets of $166.0 million were below current liabilities of $199.0 million.
- Balance-sheet debt, including current maturities, was approximately $603.9 million. The company reported $190 million outstanding on its term loan and $410 million on its revolving facility, plus $22.2 million in letters of credit. The $600 million revolver therefore had approximately $167.8 million of nominal unused capacity before other restrictions.
- YTD investing cash outflow was $28.6 million and financing cash outflow was $62.5 million. Capital expenditures were $33.0 million; share repurchases used $174.1 million of cash and dividends paid were $15.4 million.
- The company was in compliance with credit-facility covenants. A 100-basis-point rise in short-term interest rates was estimated to increase annual interest expense by $3.0 million on the unhedged debt balance.
Material changes, outlook and risks
- Same-store sales increased in the quarter: Jack in the Box company restaurants 7.4% and system-wide 8.9%; Qdoba company restaurants 7.0% and system-wide 8.3%. YTD company same-store growth was 5.3% for Jack in the Box and 10.2% for Qdoba. Management attributed Qdoba growth principally to simplified entrée pricing, alongside menu innovation, catering and reduced discounting.
- Jack in the Box essentially completed its refranchising strategy after selling 20 company restaurants in the Southeast. The system was 82% franchised. Management expected 13–18 Jack in the Box openings and 50–60 Qdoba openings in FY2015; approximately half of Qdoba openings were expected to be company-operated.
- Management forecast FY2015 capital expenditures of approximately $90–$100 million, total commodity-cost inflation of about 2%, beef-cost inflation of about 15%, and an income tax rate of approximately 37%. These are expectations, not guarantees.
- Qdoba’s simplified pricing helped raise average checks, but food and packaging costs as a percentage of Qdoba company sales rose year over year, reflecting commodity inflation and product mix. Weather also negatively affected Qdoba transactions and same-store sales.
- The company repurchased 2.08 million shares YTD for $176.6 million and declared two $0.20-per-share dividends. After period-end, the board declared a $0.30-per-share dividend and authorized another $100 million buyback program.
- Risks include food and commodity price volatility, competitive and consumer-demand pressures, weather and supply disruptions, franchisee performance, substantial indebtedness and litigation. A wage-and-hour lawsuit seeks $45 million in alleged damages; the company stated that it had accrued for one claim it considers probable and estimable, and that an adverse outcome beyond existing accruals could materially affect results or liquidity.
- Other unusual items include YTD discontinued-operation losses of $1.6 million, mainly related to lease commitments at previously closed Qdoba restaurants. The remaining closure-related estimates depend in part on future sublease income.
Important facts for investors to verify
- Whether same-store sales growth and Qdoba’s pricing changes persist, and how commodity inflation affects restaurant margins.
- Actual FY2015 restaurant openings, capital spending, commodity costs and tax rate versus management’s stated expectations.
- Debt availability and covenant headroom, cash generation, and the pace of buybacks and dividends relative to debt and investment needs.
- Developments in the $45 million wage-and-hour lawsuit and changes in lease, insurance and other contingency estimates.
- Reported earnings included a sizable year-over-year change in restaurant-sale gains or losses; assess operating performance separately from these items.