Jack in the Box Inc. Reports First Quarter FY 2010 Earnings; Updates Guidance for FY 2010

“More than 47 percent of the Jack in the Box system is now franchised, and we expect to cross the 50 percent mark later this year” Same-store sales at Jack in the Box® company restaurants decreased 11.1 percent in the first quarter of 2010 compared with a year-ago increase of 1.7 percent.

Linda A. Lang, chairman, chief executive officer and president, said, “We believe high unemployment rates for our key customer demographics continue to be the biggest factor impacting sales at Jack in the Box.”

System same-store sales at Qdoba Mexican Grill® decreased 1.7 percent in the first quarter versus a year-ago decrease of 1.1 percent. Lang said, “Qdoba’s same-store sales improved sequentially throughout the quarter and turned slightly positive in the last half of the quarter.”

Consolidated restaurant operating margin was 14.3 percent of sales in the first quarter of 2010, compared with 14.6 percent of sales in the year-ago quarter. The company estimates that sales deleverage negatively impacted margins by approximately 250 basis points in the first quarter of 2010.

Food and packaging costs were 230 basis points better than prior year. Overall commodity costs were approximately 7 percent lower in the quarter versus prior year, including beef and cheese, which were down 19 percent and 18 percent, respectively, from last year’s first quarter. Additionally, food and packaging costs benefitted from price increases and the company’s margin-improvement initiatives.

Payroll and employee benefits costs were 30.5 percent of restaurant sales versus 30.2 percent in the year-ago quarter, as sales deleverage of approximately 60 basis points offset labor productivity initiatives. Occupancy and other costs increased 230 basis points due primarily to sales deleverage and higher depreciation due to remodels.

Franchised restaurant costs for the first quarter increased to 45.5 percent of franchised restaurant revenues from 39.2 percent last year due primarily to sales deleverage against fixed rental costs.

SG&A expense for the first quarter decreased by $17.4 million and was 10.8 percent of revenues compared with 11.7 percent last year. The decrease in SG&A was attributable primarily to the following:

* The company’s refranchising strategy and planned overhead reductions resulted in lower general and administrative costs of approximately $4.0 million.

* Advertising costs were $5.5 million lower, approximately half of which was due to refranchising.

* Mark-to-market adjustments on investments supporting the company’s non-qualified retirement plans positively impacted SG&A by $2.1 million in the first quarter as compared to a negative impact of $5.8 million in last year’s first quarter, resulting in a year-over-year decrease in SG&A of $7.9 million.

* Insurance recovery related to Hurricane Ike resulted in a $1.0 million benefit.

* Facility charges declined by $4.3 million.

* Pension expense increased by approximately $5.2 million due primarily to lower discount rates. Higher pension expense is expected to continue throughout the year.

Gains on the sale of 23 company-operated Jack in the Box restaurants to franchisees totaled $9.4 million in the first quarter compared with $18.4 million in the year-ago quarter from the sale of 29 restaurants. Average gains were $408,000 for the first quarter of fiscal 2010 as compared to $633,000 in the first quarter of fiscal 2009. The first quarter of 2009 included the sale of the entire Santa Barbara market, which had substantially higher-than-average sales, cash flow and resulting gains. Total proceeds for the first quarter of 2010 related to refranchising, including cash and notes receivable, were $14.3 million, or an average of $622,000 per restaurant.

“More than 47 percent of the Jack in the Box system is now franchised, and we expect to cross the 50 percent mark later this year,” Lang said. “We remain on track to achieve our long-term goal to increase the percentage of franchise ownership to 70 to 80 percent by the end of fiscal year 2013.”

The company provided $2.7 million in short-term financing during the quarter for one of the five refranchising transactions and collected $4.3 million during the quarter related to previous refranchising transactions. As of the end of the first quarter, notes receivable from franchisees related to refranchising activities totaled $10.6 million.

The tax rate for the first quarter was 36.7 percent compared with 40.0 percent in the prior year. The tax rate for the first quarter was lower than prior year and the company’s most recent guidance due primarily to the market performance of insurance investment products used to fund certain non-qualified retirement plans. Changes in the cash value of the insurance products are not deductible or taxable.

The company repurchased approximately 2.1 million shares of its common stock in the first quarter of 2010 at an average price of $18.98 per share. Approximately $57 million remains available for additional purchases according to the terms of the company’s credit facility under a three-year stock-buyback program authorized by the company’s board of directors in November 2007.

Restaurant openings

Seventeen new Jack in the Box restaurants opened in the first quarter, including 8 franchised locations, compared with 16 new restaurants opened system-wide during the same quarter last year, of which 4 were franchised locations.

In the first quarter, 6 Qdoba restaurants opened, including 4 franchised locations, versus 17 new restaurants in the year-ago quarter, 15 of which were franchised.

At Jan. 17, 2010, the company’s system total comprised 2,228 Jack in the Box restaurants, including 1,052 franchised locations, and 507 Qdoba restaurants, including 348 franchised locations.

First quarter FY 2010 initiatives

During the quarter, the company continued to execute its strategic initiative to reinvent the Jack in the Box brand by offering guests a better restaurant experience than typically found in the quick-serve restaurant segment, through menu innovation, enhanced restaurant facilities and improvements in guest service.

With the recession pinching discretionary spending, Jack in the Box focused on both value and premium promotions during the quarter. In October, Jack in the Box brought back a popular double-patty favorite called the Bonus Jack™ and promoted it in a value-priced combo along with a small order of fries and small drink for $3.99, plus tax.

In late December, the chain launched a limited-time bundled-value promotion, the Jumbo Deal, which featured a Jumbo Jack® hamburger, two tacos, a small order of fries, and a small drink – all for just $3.49, plus tax.

Other value promotions during the quarter included the Big Cheeseburger and Big Texas Cheeseburger for just $1, plus tax, a breakfast value message – two croissants for $3, plus tax, and half-price holiday shakes during afternoon hours.

In November, Jack in the Box also launched the Southwest Chicken Bowl, capitalizing on the popularity of Teriyaki Bowls launched last year. Southwest Chicken Bowls were available for a limited time and priced at $4.29, plus tax.

Second quarter FY 2010 initiatives

Jack in the Box has a creative and compelling marketing calendar planned for fiscal 2010, with a robust pipeline of new products that are in various stages of development and test. “Our marketing strategy is to target multiple dayparts and balance our advertising and promotions to feature innovative premium products along with value-priced offerings, without jeopardizing our position as a premium QSR brand,” Lang said.

In early February, the company debuted a new platform, Grilled Sandwiches, with two varieties, each served on a new grilled artisan bread: Turkey, Bacon & Cheddar, which features roasted turkey, two slices of cheddar cheese and two bacon strips topped with a sun-dried tomato sauce; and Deli Trio, which features Genoa salami, sliced ham, roasted turkey, two slices of provolone cheese and two pickle fillets topped with a creamy Italian sauce. Grilled Sandwiches are available for $3.99, plus tax.

Also in February, Jack in the Box began offering for a limited time its Fish Sandwich for just $1.49, plus tax. The product features two crispy fish fillets, lettuce and tartar sauce on a warm sesame seed bun.

Guidance

The following guidance and underlying assumptions reflect the company’s current expectations for the second quarter ending April 11, 2010, and fiscal year ending Oct. 3, 2010. Fiscal 2010 is a 53-week year, with 16 weeks in the first quarter, 12 weeks in each of the second and third quarters, and 13 weeks in the fourth quarter versus 12 weeks in the fourth quarter of fiscal 2009.

Q2 FY 2010 guidance

* Same-store sales are expected to decrease 8 to 10 percent at Jack in the Box company restaurants versus a 0.4 percent increase in the year-ago quarter.

* Same-store sales are expected to range from flat to down 2 percent at Qdoba system restaurants versus a 2.3 percent decrease in the year-ago quarter. Same-store sales guidance reflects trends experienced during the

first four weeks of the second quarter. Refranchising gains are expected to be lower than the year-ago

quarter as a result of the timing of such transactions, although the

full-year guidance remains unchanged. Fiscal year 2010 guidance

* 5 to 8 percent decrease in same-store sales at Jack in the Box company restaurants, with trends improving in the second half of the fiscal year.

* Flat to 2 percent decrease in same-store sales at Qdoba system restaurants.

* Overall commodity costs are expected to decrease by approximately 1 percent for the full year, reflecting the approximate 7 percent decrease experienced during the first quarter. Commodity costs in the second quarter are expected to decline by approximately 1 percent and then increase in the third and fourth quarters as compared to prior year.

* Restaurant operating margin for the full year is expected to range from 15 to 16 percent, depending on same-store sales.

* 45 to 50 new Jack in the Box restaurants, including approximately 30 company locations.

* 30 to 40 new Qdoba restaurants, including approximately 15 company locations.

* $60 to $70 million in gains on the sale of 150 to 170 Jack in the Box restaurants to franchisees, with $85 to $95 million in total proceeds resulting from the sales.

* Capital expenditures of $125 to $135 million. Capital expenditures are expected to remain in this range through fiscal year 2012. Following the planned completion of the Jack in the Box re-image program, annual capital expenditures are anticipated to be approximately $110 million or less.

* SG&A expense in the mid-11 percent range.

* Tax rate of approximately 36 to 37 percent.

* Diluted earnings per share of $1.85 to $2.05, with the range reflecting uncertainty in the timing of anticipated refranchising transactions as well as same-store sales volatility. The impact of the 53rd week is estimated to contribute approximately 4 cents per diluted share.


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