Jack in the Box Inc. Reports Third Quarter FY 2019 Earnings
Jack in the Box system same-store sales increased 2.7 percent for the quarter. Company same-store sales increased 2.8 percent in the third quarter driven by average check growth as transactions improved to flat for the quarter.
Jack in the Box Inc. (NASDAQ: JACK) today reported financial results for the third quarter ended July 7, 2019.
Increase in same-store sales:
|
| 12 Weeks Ended |
| 40 Weeks Ended | |||||
|
|
| July 7, 2019 |
| July 8, 2018 |
| July 7, 2019 |
| July 8, 2018 |
| Company | 2.8% |
| 0.6% |
| 1.2% |
| 0.5% | |
| Franchise | 2.7% |
| 0.5% |
| 0.8% |
| 0.0% | |
| System | 2.7% |
| 0.5% |
| 0.8% |
| 0.0% | |
Jack in the Box system same-store sales increased 2.7 percent for the quarter. Company same-store sales increased 2.8 percent in the third quarter driven by average check growth as transactions improved to flat for the quarter.
Lenny Comma, chairman and chief executive officer, said, "Our greater emphasis on bundled value in the third quarter resulted in a substantial improvement in both traffic and sales trends while also driving check and maintaining strong restaurant margins. Our guests have responded favorably to the breadth of our promotions, which leverage our strategy around compelling value bundles, including both new product innovation as well as guest favorites, without devaluing our core menu items. This momentum has accelerated thus far into our fourth quarter.
"With our recent refinancing completed, we've achieved our target leverage ratio of approximately 5.0 times EBITDA. We remain firmly committed to returning cash to shareholders and now have $301 million available for share repurchases.
"Our long-term goals continue to center around meeting evolving consumer needs, with emphasis on improving operations consistency and targeted investments designed to maximize our returns. We remain focused on balancing the interests of all our stakeholders, including our franchisees, customers, employees and shareholders."
Earnings from continuing operations were $13.5 million, or $0.51 per diluted share, for the third quarter of fiscal 2019 compared with $48.1 million, or $1.70 per diluted share, for the third quarter of fiscal 2018. In connection with the refinancing of the company's senior credit facility, the company terminated its existing interest rate swaps. This resulted in a pre-tax charge of $23.6 million, which is reflected in interest expense, net, in the third quarter of fiscal 2019, or $0.56 per diluted share after the associated tax benefit of approximately $9.0 million.
Operating Earnings Per Share(1), a non-GAAP measure, were $1.07 in the third quarter of fiscal 2019 compared with $1.00 in the prior year quarter. A reconciliation of non-GAAP Operating Earnings Per Share to GAAP results is provided below, with additional information included in the attachment to this release.
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| 12 Weeks Ended |
| 40 Weeks Ended | ||||||||||||
|
| July 7, |
| July 8, |
| July 7, |
| July 8, | ||||||||
| Diluted earnings per share from continuing operations - GAAP | $ | 0.51 |
|
| $ | 1.70 |
|
| $ | 2.67 |
|
| $ | 2.94 |
|
| Loss on early termination of interest rate swaps | 0.56 |
|
| — |
|
| 0.56 |
|
| — |
| ||||
| Gains on the sale of company-operated restaurants | — |
|
| (0.74 | ) |
| (0.01 | ) |
| (1.05 | ) | ||||
| Restructuring charges | — |
|
| 0.05 |
|
| 0.19 |
|
| 0.12 |
| ||||
| Non-cash impact of the Tax Cuts and Jobs Act | — |
|
| 0.03 |
|
| — |
|
| 1.10 |
| ||||
| Excess tax benefits from share-based compensation arrangements | — |
|
| (0.04 | ) |
| — |
|
| (0.07 | ) | ||||
| Operating Earnings Per Share – non-GAAP | $ | 1.07 |
|
| $ | 1.00 |
|
| $ | 3.41 |
|
| $ | 3.02 |
|
In the first quarter of fiscal 2018, the company entered into a definitive agreement to sell Qdoba Restaurant Corporation ("Qdoba"), a wholly owned subsidiary of the company, to certain funds managed by affiliates of Apollo Global Management, LLC. The transaction closed on March 21, 2018, and operating results for Qdoba are included in discontinued operations for all periods presented. However, the company did not allocate any general and administrative shared services expenses to discontinued operations prior to the sale.
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| (1) Operating Earnings Per Share represents diluted earnings per share from continuing operations on a GAAP basis excluding gains or losses on the sale of company-operated restaurants, restructuring charges, loss on early termination of interest rate swaps, the non-cash impact of the Tax Cuts and Jobs Act in fiscal year 2018, and the excess tax benefits from share-based compensation arrangements which are now recorded as a component of income tax expense versus equity prior to fiscal year 2018. See "Reconciliation of Non-GAAP Measurements to GAAP Results." |
Adjusted EBITDA(2), a non-GAAP measure, was $57.8 million in the third quarter of fiscal 2019 compared with $64.4 million for the prior year quarter.
Restaurant-Level Margin(3), a non-GAAP measure, decreased by 50 basis points to 27.0 percent of company restaurant sales in the third quarter of fiscal 2019 from 27.5 percent a year ago. The decrease was due primarily to wage and commodity inflation, partially offset by the benefit of refranchising and lower maintenance and repairs expenses. Food and packaging costs, as a percentage of company restaurant sales, increased 90 basis points in the quarter driven by higher ingredient costs, which were partially offset by menu price increases and favorable product mix. Commodity costs increased 2.9 percent in the quarter as compared with the prior year.
Effective fiscal 2019, the company adopted the new US GAAP revenue recognition standard (Topic 606) using the modified retrospective method, and therefore no prior periods have been restated. The new revenue standard resulted in an increase to franchise revenues and a corresponding increase to franchise expenses primarily related to the reclassification of marketing fees received from franchisees. In addition, certain amounts previously netted in general and administrative expenses are now reflected as franchise revenues and expenses. Although the prior year results have not been restated for the impact of this accounting change, a reconciliation to a recast statement of earnings is included within the "Supplemental Information" section of this release.
Also effective fiscal 2019, the company adopted the new US GAAP pension standard (Topic 715) and began presenting certain pension cost components in Other pension and post-retirement expenses, net, in its condensed consolidated statements of earnings. The prior year condensed consolidated statement of earnings was adjusted to conform with this new presentation.
Franchise-Level Margin(3), a non-GAAP measure,as a percentage of total franchise revenues, was 42.6 percent in the third quarter of fiscal 2019. This compared with 60.2 percent in the prior year quarter, or 42.4 percent using recast 2018 figures as though Topic 606 had been applied retrospectively to the prior year.
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| (2) Adjusted EBITDA represents net earnings on a GAAP basis excluding earnings or losses from discontinued operations, income taxes, interest expense, net, gains or losses on the sale of company-operated restaurants, impairment and other charges, net, depreciation and amortization, and the amortization of franchise tenant improvement allowances. See "Reconciliation of Non-GAAP Measurements to GAAP Results." |
| (3) Restaurant-Level Margin and Franchise-Level Margin are non-GAAP measures. These non-GAAP measures are reconciled to earnings from operations, the most comparable GAAP measure, in the attachment to this release. See "Reconciliation of Non-GAAP Measurements to GAAP Results." |
SG&A expenses for the third quarter of fiscal 2019 increased by $4.7 million and were 11.0 percent of revenues compared with 10.5 percent in the prior year quarter, or 8.2 percent using recast 2018 figures. Advertising costs, which are included in SG&A, were $4.0 million in the third quarter compared with $5.9 million in the prior year quarter. The $1.9 million decrease in advertising costs was due to a $0.4 million decrease resulting from refranchising, and a decrease of $1.5 million resulting from incremental spending in the prior year quarter. The $6.7 million increase in G&A, which excludes advertising, was primarily driven by:
- $7.1 million related to an unfavorable jury verdict in a wrongful termination lawsuit delivered in the quarter. As previously disclosed, the company intends to appeal this verdict;
- a $5.2 million increase in incentive compensation; and
- a $2.7 million decrease in transition services income as compared with the prior year resulting from the sale of Qdoba, which resulted in an increase to G&A.
These increases were partially offset by:
- a $5.1 million decrease in insurance related to workers' compensation and general liability;
- a $1.1 million decrease related to technology fees and costs netted in G&A in the prior year, which are now reflected as franchise revenues and expenses in the condensed consolidated statement of earnings in 2019;
- mark-to-market adjustments on investments supporting the company's non-qualified retirement plans resulting in a $1.0 million year-over-year decrease in G&A; and
- a $0.8 million decrease due primarily to workforce reductions related to refranchising.
As a percentage of system-wide sales, G&A, which excludes advertising, was 2.5 percent in the third quarter of fiscal 2019 compared with 1.7 percent in the 2018 quarter, or 1.6 percent using recast 2018 figures. Full-year G&A is expected to be approximately 1.8 to 2.0 percent of system-wide sales, consistent with prior guidance.
Impairment and other charges, net, decreased $6.5 million in the third quarter. The decrease was due primarily to a $5.7 million gain related to the sale of a restaurant property. In addition, restructuring charges, which are included in Impairment and other charges, net, in the accompanying condensed consolidated statements of earnings, decreased $1.9 million in the quarter.
Interest expense, net, increased by $25.6 million in the third quarter due primarily to the termination of interest rate swaps, which resulted in a pre-tax charge of $23.6 million. The remaining increase was due to a higher effective interest rate for fiscal 2019 and higher debt balances.
The Tax Cuts and Jobs Act (the "Tax Act"), enacted into law on December 22, 2017, reduced the statutory federal rate from 35 percent to 21 percent as of January 1, 2018. The tax rate reduction was phased in, resulting in a blended statutory federal tax rate of 24.5 percent for the fiscal year ended September 30, 2018. In addition, the Tax Act resulted in a non-cash increase to the provision for income taxes of $0.9 million, or $0.03 per diluted share, for the third quarter of fiscal 2018 related primarily to the revaluation of deferred tax assets and liabilities at the new lower rates. The statutory federal tax rate for fiscal year 2019 is 21.0 percent. The effective tax rate for the third quarter of fiscal 2019 was a benefit of 17.9 percent, including a $9.0 million benefit related to the termination of interest rate swaps. Excluding this impact, the effective tax rate in the third quarter was 19.9 percent. The expected full-year effective tax rate is approximately 20.0 percent, or 23.0 to 24.0 percent excluding the impact of the termination of interest rate swaps.
Capital Allocation
The company did not repurchase any shares of its common stock in the third quarter of fiscal 2019. The company has approximately $101.0 million remaining under share repurchase programs authorized by its Board of Directors that expire in November 2019. On August 2, 2019, the company's Board of Directors authorized an additional $200.0 million share repurchase program that expires in November 2020.
The company also announced today that on August 2, 2019, its Board of Directors declared a cash dividend of $0.40 per share on the company's common stock. The dividend is payable on September 10, 2019, to shareholders of record at the close of business on August 19, 2019.
Guidance
This release includes forward-looking guidance for certain non-GAAP financial measures, including Restaurant-Level Margin and Adjusted EBITDA. The company is unable without unreasonable effort to provide reconciliations of these forward-looking non-GAAP measures.
Fiscal Year 2019 Guidance
The following guidance and underlying assumptions reflect the company’s current expectations for the fiscal year ending September 29, 2019. Fiscal 2019 and fiscal 2018 are 52-week years, with 16 weeks in the first quarter, and 12 weeks in each of the second, third and fourth quarters.
Updated from prior guidance:
- System same-store sales increase of at least 1.0 percent.
- Tax rate of approximately 20.0 percent, or 23.0 to 24.0 percent excluding the termination of interest rate swaps in the third quarter. The expected tax rate in the fourth quarter is approximately 26.0 to 27.0 percent. These rates are subject to fluctuations arising from the impact of excess tax benefits from share-based compensation arrangements.
- Tenant improvement allowances of approximately $15 to $20 million.
Consistent with prior guidance:
- Commodity cost inflation of approximately 2.0 percent.
- Restaurant-Level Margin of approximately 26.0 to 27.0 percent of company restaurant sales.
- SG&A as a percentage of revenues of approximately 8.5 to 9.0 percent, which reflects the new revenue recognition standard.
- G&A as a percentage of system-wide sales of approximately 1.8 to 2.0 percent, which reflects the new revenue recognition standard.
- Approximately 25 to 35 new restaurants opening system-wide, the majority of which will be franchise locations.
- Capital expenditures of approximately $30 to $35 million, excluding purchases of assets held for sale or leaseback.
- Adjusted EBITDA of approximately $260 to $270 million.
About Jack in the Box Inc.
Jack in the Box Inc. (NASDAQ: JACK), based in San Diego, is a restaurant company that operates and franchises Jack in the Box® restaurants, one of the nation’s largest hamburger chains, with more than 2,200 restaurants in 21 states and Guam.