Business context and reporting period
Jack in the Box Inc. operates and franchises the Jack in the Box and Del Taco quick-service restaurant brands. This Form 10-K covers the 52 weeks ended October 2, 2022; the comparable fiscal 2021 period had 53 weeks. Jack in the Box acquired Del Taco on March 8, 2022, so fiscal 2022 results include Del Taco only from the acquisition date and are not directly comparable with the prior year.
At year-end, the company had 2,181 Jack in the Box restaurants (93% franchised) and 591 Del Taco restaurants (51% franchised). The filing reports two operating segments.
Financial performance and position
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Revenue | $1.468 billion | $1.144 billion |
| Earnings from operations | $248.3 million | $289.9 million |
| Net earnings | $115.8 million | $165.8 million |
| Diluted earnings per share | $5.45 | $7.37 |
| Adjusted EBITDA (non-GAAP) | $306.6 million | $331.4 million |
| Cash from operating activities | $162.9 million | $201.1 million |
| Capital expenditures | $46.5 million | $41.0 million |
Fiscal 2022 revenue included $701.1 million in company restaurant sales and $767.0 million in franchise rental, royalty, fee, advertising and other revenues. Del Taco contributed $316.9 million of revenue and $28.0 million of segment operating profit for the post-acquisition period. Jack in the Box segment revenue was $1.151 billion; its segment operating profit was $310.7 million, versus $327.2 million in fiscal 2021.
Jack in the Box system same-store sales rose 0.9% (company-operated +3.7%; franchised +0.6%). Company-operated same-store transactions fell 1.7%, while average check rose 5.4%, including price increases of 8.4%. Systemwide Jack in the Box sales were $4.111 billion versus $4.155 billion; these include franchisee sales, which are not recorded as company revenue.
Cost pressure compressed company-operated restaurant economics: Jack in the Box food and packaging costs rose to 32.3% of sales from 29.1%, payroll and benefits to 33.3% from 30.7%, and occupancy and other costs to 17.9% from 15.9%. Commodity costs increased approximately 14.4% during fiscal 2022; wage inflation was approximately 12.3%.
At October 2, 2022, cash was $108.9 million and restricted cash was $27.2 million. Gross debt was $1.855 billion, including $30.2 million of current maturities; long-term debt, net of current maturities and issuance costs, was $1.800 billion. The company reported $117.9 million of available borrowing capacity across its variable funding notes and Del Taco revolving facility, net of letters of credit. Operating lease liabilities totaled approximately $1.336 billion. Current assets were $283.0 million versus current liabilities of $521.7 million.
Material changes versus the prior period
- Revenue increased 28%, principally because Del Taco was consolidated after its acquisition; the increase does not represent comparable organic growth.
- Net earnings declined approximately 30%, and adjusted EBITDA declined approximately 7%. Operating earnings also decreased, while interest expense rose to $86.1 million from $67.5 million.
- The Del Taco acquisition had $593.3 million of purchase consideration and required $580.8 million of net cash investing outflow. The company issued $1.1 billion of 2022 secured notes, used proceeds in part to refinance existing notes and fund the acquisition, and recorded a $7.7 million loss on early extinguishment of debt.
- Acquisition and integration costs were $20.1 million. Results also included $5.9 million of restaurant impairment charges and $30.5 million of gains on property dispositions. The company repurchased $25.0 million of shares and declared dividends totaling $37.2 million.
- Goodwill rose to $366.8 million, including $319.7 million associated with the Del Taco acquisition; the acquired Del Taco trademark was valued at $283.5 million. Management’s impairment tests found Del Taco’s reporting-unit and trademark fair values exceeded carrying values by approximately 8% and 7%, respectively.
Outlook, commentary, risks and contingencies
Management expected labor and supply-chain-related margin pressures to continue in fiscal 2023. It forecast company-wide commodity cost inflation of 9%–11% and wage inflation of 3%–6% compared with fiscal 2022. Management stated that operating cash flows and borrowing capacity were expected to cover capital expenditures, working capital and debt service for at least the next 12 months.
On November 2, 2022, the company announced plans to pursue the sale of certain company-operated Del Taco restaurants, with the stated aims of moving toward an asset-light model, generating development agreements and improving capital structure. Management said it would pace refranchising to balance earnings effects; execution and proceeds were not assured. A new Jack in the Box off-premise prototype was designed to reduce buildout costs by around 20%, a stated goal rather than a reported result.
Key risks include food and labor inflation, labor availability, supply-chain and distributor concentration, consumer demand and competition, integration and growth execution, franchisee financial health, and the company’s substantial debt and lease commitments. Securitized debt has restrictive covenants and rapid-amortization triggers. The company reported covenant compliance and no rapid-amortization event at year-end; its leverage ratio was above 5.0x, so scheduled principal payments resumed.
Legal matters were significant. The company accrued $50.0 million for the Torrez Del Taco wage-and-hour settlement, subject to court approval and other conditions. As of year-end, aggregate legal accruals were $59.2 million; management estimated reasonably possible losses in excess of accruals of up to approximately $6.5 million, excluding interest and attorney fees. After year-end, on October 24, 2022, a jury awarded approximately $6.4 million in damages and penalties in Gessele, plus interest and attorney fees to be determined; the company disputed liability and the award and planned post-trial motions and appeals. A former franchisee bankruptcy-related note and deferred amounts were also subject to collection risk; the company fully reserved $3.8 million owed in that matter.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Del Taco from the year-end internal-control assessment following the acquisition; Del Taco represented approximately 39% of consolidated assets and 22% of fiscal 2022 revenue.
Important facts for investors to verify
- How much fiscal 2023 growth and margin performance is comparable, separating acquisition contribution, pricing, traffic and the extra week in fiscal 2021.
- Whether commodity and wage inflation, traffic trends and pricing actions develop in line with management’s outlook.
- Progress, timing, proceeds and earnings effects of Del Taco refranchising and any resulting development commitments.
- Debt service, leverage, available borrowing capacity, refinancing needs and compliance with securitization covenants and trigger conditions.
- The final outcome and cash impact of the Torrez settlement, Gessele verdict and other legal matters, as well as the recoverability of franchisee receivables.
- Whether Del Taco integration, goodwill and trademark valuations, and restaurant-level impairment assumptions remain supportable.