Jack in the Box Inc. Reports Third Quarter FY 2010 Earnings

“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.”

Third quarter 2010 results were negatively impacted by approximately 6 cents per diluted share by several items that were not included in the company’s previously issued guidance for fiscal year 2010:

• Impairment charges of $2.6 million, or approximately 3 cents per diluted share, primarily related to 7 lower-performing company-operated Jack in the Box® restaurants, were recorded in the quarter and are included in selling, general and administrative (“SG&A”) expenses.
• Mark-to-market adjustments on investments supporting the company’s non-qualified retirement plans negatively impacted SG&A by $2.2 million in the third quarter, or approximately 2 cents per diluted share.
• An insurance recovery related to Hurricane Ike resulted in a $2.0 million benefit to SG&A, or approximately 2 cents per diluted share.
• An increase in workers’ compensation reserves negatively impacted payroll and employee benefits costs by $1.8 million, or approximately 2 cents per diluted share.
• The company wrote off $0.5 million in deferred financing costs in connection with the refinancing of its existing indebtedness in June 2010. This charge is included in interest expense and negatively impacted diluted earnings per share by approximately 1 cent in the quarter.

Same-store sales at Jack in the Box company restaurants decreased 9.4 percent in the third quarter of 2010 compared with a year-ago decrease of 1.0 percent.

Linda A. Lang, chairman, chief executive officer and president, said, “Jack in the Box sales continue to be impacted by high unemployment in our major markets for our key customer demographics. Although our sales outlook remains cautious and largely reliant upon improvement in the economy, we are focused on enhancing the guest experience. We are intensifying our efforts around service consistency and are investing in making noticeable quality improvements to some of our signature products. We’re also accelerating our restaurant re-imaging program and now expect completion at company locations by the end of fiscal year 2011. We believe these actions will increase the relevancy of the Jack in the Box brand and further differentiate us in the marketplace.”

System same-store sales at Qdoba Mexican Grill^® increased 4.6 percent in the third quarter versus a year-ago decrease of 2.8 percent. Lang said, “Qdoba’s same-store sales growth exceeded our expectations, driven by our Craft 2™ menu and higher catering sales as well as increased spending by consumers in the fast-casual segment.”

Consolidated restaurant operating margin was 14.2 percent of sales in the third quarter of 2010, compared with 18.4 percent of sales in the year-ago quarter. The company estimates that sales deleverage negatively impacted margins by approximately 280 basis points in the third quarter of 2010.

Food and packaging costs were 40 basis points higher than prior year. Overall commodity costs were approximately 2 percent higher in the quarter, as expected, driven primarily by higher beef and pork costs which were partially offset by lower costs for poultry, shortening and bakery products.

Payroll and employee benefits costs were 30.4 percent of restaurant sales versus 28.9 percent in the year-ago quarter with estimated sales deleverage of approximately 90 basis points. An increase in workers’ compensation reserves negatively impacted payroll and employee benefits costs by approximately 50 basis points in the quarter versus expectations and 100 basis points as compared to prior year.

Occupancy and other costs increased 220 basis points due primarily to sales deleverage and higher depreciation resulting from the company’s ongoing restaurant re-image program.

Franchised restaurant costs for the third quarter increased to 44.8 percent of franchised restaurant revenues from 41.6 percent last year due primarily to sales deleverage against fixed rental costs.

SG&A expense for the third quarter increased by $1.6 million and was 12.3 percent of revenues compared with 10.9 percent last year. The increase in SG&A was attributable primarily to the following:

• Pension expense increased by $3.9 million due primarily to lower discount rates. Higher pension expense is expected to continue in the fourth quarter and is non-cash in nature. The company expects cash pension contributions for the full year to be similar to last year.
• Mark-to-market adjustments on investments supporting the company’s non-qualified retirement plans negatively impacted SG&A by $2.2 million in the third quarter as compared to a positive impact of $1.0 million in last year’s third quarter, resulting in a year-over-year increase in SG&A of $3.2 million.
• Facility charges increased by $1.7 million due primarily to higher impairment charges.
• The company’s refranchising strategy and planned overhead reductions resulted in lower general and administrative costs of approximately $3.2 million.
• An insurance recovery related to Hurricane Ike resulted in a $2.0 million benefit.
• Incentive compensation declined by $1.7 million.
• Advertising costs were $1.1 million lower, as the impact of refranchising and the decline in Jack in the Box same-store sales was partially offset by incremental spending during the third quarter.

Gains on the sale of 58 company-operated Jack in the Box restaurants to franchisees totaled $23.7 million in the third quarter, or an average of $408,000. Total proceeds for the third quarter of 2010 related to refranchising were $32.9 million, or an average of $568,000 per restaurant.

The company did not provide any financing during the quarter for refranchising transactions. As of the end of the third quarter, notes receivable from franchisees related to refranchising activities totaled $6.9 million.

“We reached an important milestone during the quarter as more than 50 percent of the Jack in the Box system is now franchised,” 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 tax rate for the third quarter was 38.5 percent compared with 37.7 percent in the prior year, with the increase 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 did not repurchase any shares of its common stock during the third quarter. Through the first three quarters of fiscal 2010, the company repurchased approximately 2,569,000 shares of its common stock at an average price of $19.44 per share. Approximately $47 million remains available for additional purchases under a three-year stock-buyback program authorized by the company’s board of directors in November 2007.

Restaurant openings

Four new Jack in the Box restaurants opened in the third quarter, including 2 franchised locations, compared with 15 new restaurants opened system-wide during the same quarter last year, of which 6 were franchised.

In the third quarter, 13 Qdoba restaurants opened, including 8 franchised locations, versus 9 new restaurants in the year-ago quarter, 4 of which were franchised. During the quarter, the company acquired 16 franchised Qdoba restaurants in the Boston area for approximately $8.1 million.

At July 4, 2010, the company’s system total comprised 2,234 Jack in the Box restaurants, including 1,140 franchised locations, and 515 Qdoba restaurants, including 334 franchised locations.

Third quarter FY 2010 initiatives

In April, Jack in the Box expanded its breakfast menu with a Grilled Breakfast Sandwich. Featuring premium grilled artisan bread, the new sandwich includes two fried eggs and two slices each of American cheese, ham and bacon. The Grilled Breakfast Sandwich is the newest addition to the Grilled Sandwich platform introduced in February, which currently includes the Deli Trio and the Turkey, Bacon & Cheddar sandwiches.

Also in April, Jack in the Box introduced a new premium blend of coffee made with Kona coffee beans. The new Kona Classic® coffee blend is being brewed for the chain’s hot and iced coffee drinks.

In May, Jack in the Box further expanded its beverage line-up with the Raspberry Trio, which features a Raspberry Real Fruit Smoothie, a Raspberry Shake made with real ice cream, and Raspberry Iced Tea.

Balancing its new premium offerings with a value message, during the quarter Jack in the Box featured a promotion that provided guests a unique way to create their own combo meals. For just $3 guests could choose any three of eight popular value-oriented menu items.

Jack in the Box launched another limited-time value promotion at the end of June featuring a new product, Jack’s Really Big Chicken Sandwich, which includes two breaded chicken patties, lettuce, tomato, bacon, cheese and mayo-onion sauce served on a jumbo bakery bun. For just $3.99 guests may order a combo meal featuring the new sandwich, small fountain drink and small order of seasoned curly fries.

Fourth quarter FY 2010 initiatives

To build upon the continued strength of its breakfast daypart, which accounted for nearly 20 percent of sales in the third quarter, Jack in the Box this week expanded its breakfast menu with a Breakfast Pita Pocket. The new Breakfast Pita Pocket, which features scrambled eggs, strips of bacon and ham, and American cheese stuffed in a pita made with whole grains, is served with a side of fire-roasted salsa and available in most markets for $2.69.

In addition to promoting the Really Big Chicken Sandwich combo, Jack in the Box plans to further expand its premium Grilled Sandwich platform later this month.

Guidance

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

Q4 FY 2010 guidance

• Same-store sales are expected to decrease 4.5 to 5.5 percent at Jack in the Box company restaurants versus a 6.0 percent decrease in the year-ago quarter.
• Same-store sales are expected to increase 3 to 4 percent at Qdoba system restaurants versus a 3.1 percent decrease in the year-ago quarter.
• Same-store sales guidance reflects trends experienced during the first four weeks of the fourth quarter.

Fiscal year 2010 guidance update

• Approximately 9 percent decrease in same-store sales at Jack in the Box company restaurants.
• Approximately 2 percent increase in same-store sales at Qdoba system restaurants.
• Overall commodity costs are expected to decrease by approximately 1 percent for the full year. Commodity costs are expected to increase by approximately 4 percent in the fourth quarter as compared to prior year.
• Restaurant operating margin for the full year is now expected to be in the low-14 percent range, due primarily to lower sales expectations.
• 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.
• $65 to $70 million in gains on the sale of approximately 200 Jack in the Box restaurants to franchisees, with $90 to $95 million in total proceeds resulting from the sales.
• Capital expenditures of $125 to $135 million.
• SG&A expense in the mid-11 percent range.
• Tax rate of approximately 37 percent.
• Diluted earnings per share of $1.65 to $1.75, including the impact of the 53^rd week.

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