Earnings Up, Sales Down at Jack in the Box
Jack in the Box Inc. reports fourth quarter and fiscal year 2009 earnings; issues guidance for fiscal year 2010.
-- Chain Leader, 11/19/2009 8:59:00 AM
PRESS RELEASE: SAN DIEGO--(BUSINESS WIRE)--Jack in the Box Inc. (NASDAQ: JACK) today reported earnings from continuing operations of $40.6 million, or 70 cents per diluted share, for the fourth quarter ended Sept. 27, 2009, compared with earnings from continuing operations of $26.1 million, or 45 cents per diluted share, for the fourth quarter of fiscal 2008. For fiscal 2009, earnings from continuing operations totaled $131.0 million, or $2.27 per diluted share, compared with $118.2 million, or $1.99 per diluted share in fiscal 2008. Both the fourth quarter of 2008 and fiscal year 2008 included a negative impact of approximately 4 to 5 cents per diluted share for losses and costs related to Hurricane Ike.
As previously announced, the company completed the sale of its 61 Quick Stuff(r) convenience stores during the fourth quarter of fiscal 2009 in multiple transactions with cash proceeds totaling $34.4 million. The company recorded after-tax charges totaling $15.0 million in fiscal 2009, which reduced diluted earnings per share by approximately 26 cents. This charge and the results of operations for Quick Stuff are included in discontinued operations in the accompanying consolidated statements of earnings for all periods presented.
"Our ability to grow earnings in a recessionary environment, marked by the highest unemployment levels in 26 years, was largely due to the successful execution of strategic initiatives, such as refranchising, new unit growth and improving our cost structure," said Linda A. Lang, chairman and chief executive officer. "Our performance in these areas more than offset ongoing weakness in sales while strengthening our core brand and positioning the company for continued growth and margin expansion when the economy recovers."
Fourth quarter and FY 2009 financial results
Same-store sales at Jack in the Box(r) company restaurants decreased 6.0 percent in the fourth quarter of 2009, reflecting weakening trends during the last half of the quarter. This compares to a year-ago decrease of 0.8 percent, which reflected a negative impact of approximately 1.0 percent from Hurricane Ike.
For fiscal year 2009, same-store sales at company Jack in the Box restaurants decreased 1.2 percent compared to a 0.2 percent increase in fiscal 2008.
System same-store sales at Qdoba Mexican Grill(r) decreased 3.1 percent in the fourth quarter versus a year-ago decrease of 1.0 percent. For the full year, system same-store sales decreased 2.3 percent at Qdoba compared to a fiscal 2008 increase of 1.6 percent.
Consolidated restaurant operating margin improved to 15.8 percent of sales in the fourth quarter of 2009, compared with 13.6 percent of sales in the year-ago quarter, which reflected a negative impact from Hurricane Ike of approximately 50 basis points. The company estimates that sales deleverage negatively impacted margins by approximately 180 basis points in the fourth quarter of 2009.
Food and packaging costs were 320 basis points better than prior year. Commodity costs were approximately 5.5 percent lower in the quarter versus prior year, better than anticipated. Most commodities trended favorable to the company's expectations, including beef and cheese, which were down 17 percent and 31 percent, respectively, from last year's fourth quarter. Additionally, food and packaging costs benefitted from price increases and the company's margin-improvement initiatives.
Beginning in the fourth quarter of fiscal 2009, restaurant operating costs have been separated into two lines on the company's consolidated statements of earnings: "Payroll and employee benefits" and "Occupancy and other." A schedule reflecting this additional disclosure for each quarter of fiscal years 2008 and 2009 is included in the supplemental information at the end of this press release. Payroll and employee benefits costs were 29.6 percent of restaurant sales versus 29.3 percent in the year-ago quarter, as sales deleverage and increases in the minimum wage of approximately 20 basis points offset labor productivity initiatives. Occupancy and other costs increased 70 basis points due to sales deleverage, higher depreciation resulting from the kitchen enhancement program completed in fiscal 2008 and the ongoing re-image program at Jack in the Box, which were partially offset by lower utilities costs.
SG&A expense for the fourth quarter decreased by $4.7 million and was 11.6 percent of revenues compared with 11.5 percent last year. Lower SG&A costs resulting from the company's refranchising strategy, lower impairment charges and advertising, as well as positive mark-to-market adjustments on investments supporting the company's non-qualified retirement plans were partially offset by severance and related expenses and higher incentive compensation reflecting the increase in earnings compared to last year's fourth quarter.
Gains on the sale of 96 company-operated Jack in the Box restaurants to franchisees totaled $34.3 million in the fourth quarter compared with $23.1 million in the year-ago quarter from the sale of 41 restaurants. For fiscal 2009, gains on the sale of 194 company-operated restaurants to franchisees totaled $78.6 million compared with $66.3 million in fiscal 2008 from the sale of 109 company-operated restaurants. Despite the tight credit markets, the number of restaurants sold as well as total proceeds and gains exceeded the company's guidance for fiscal year 2009. Excluding a loss of $2.4 million recorded in the third quarter related to the expected sale of a lower-performing Jack in the Box company-operated market, average gains were $418,000 for fiscal 2009. Total proceeds for the year related to refranchising, including cash and notes receivable, were $116.5 million, or an average of $601,000 per restaurant.
The company provided $7.8 million in financing during the quarter for four of the eight refranchising transactions and collected $7.9 million during the quarter related to previous refranchising transactions. As of the end of the fourth quarter, notes receivable from franchisees related to refranchising activities totaled $12.2 million.
"Refranchising is a critical element in transforming the company to a business model that is less capital intensive and not as susceptible to cost fluctuations," Lang said. "Over the last four years, we have refranchised 461 restaurants and increased franchise ownership from 25 percent to 46 percent of the system. The company remains on track to achieve its long-term goal to increase the percentage of franchise ownership in the Jack in the Box system to 70 to 80 percent by the end of fiscal year 2013."
The tax rate for the fourth quarter was 35.1 percent compared with 35.5 percent in the prior year, and the full-year tax rate was 37.7 percent versus 37.3 percent for fiscal 2008. The tax rate for the fourth quarter and fiscal year 2009 was lower than 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, and the impact of such changes on the full-year tax rate was negligible.
Capital expenditures related to continuing operations decreased to $153.5 million in fiscal year 2009 versus $178.6 million last year due primarily to higher spending in fiscal 2008 related to kitchen enhancements, smoothie equipment, and the Jack in the Box restaurant re-image program. This decrease was partially offset by costs resulting from more company restaurant openings in 2009 than 2008.
The company did not repurchase any shares of its common stock in fiscal year 2009. Approximately $97 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
Fifteen new Jack in the Box restaurants opened in the fourth quarter, including 7 franchised locations, compared with 15 new restaurants opened system-wide during the same quarter last year, of which 5 were franchised locations. For the year, 64 new Jack in the Box restaurants opened, including 21 franchised locations, compared with 38 system openings in 2008, of which 15 were franchised locations.
During the year, Jack in the Box expanded into several new contiguous markets, including Colorado Springs, Colo., Albuquerque, N.M., Bend, Ore., and Abilene and Wichita Falls, Texas. Jack in the Box will continue expanding into new contiguous markets in fiscal 2010, including locations currently under construction in Oklahoma City, and Tulsa, Okla.
In the fourth quarter, 21 Qdoba restaurants opened, including 11 franchised locations, versus 25 new restaurants in the year-ago quarter, 13 of which were franchised. For the full year, 62 new Qdoba restaurants opened, including 38 franchised locations, compared with 77 new restaurants in fiscal 2008, 56 of which were franchised.
At Sept. 27, 2009, the company's system total comprised 2,212 Jack in the Box restaurants, including 1,022 franchised locations, and 510 Qdoba restaurants, including 353 franchised locations.
Fourth quarter FY 2009 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.
A major element of this brand-reinvention initiative is a comprehensive restaurant re-imaging program. Approximately 53 percent of company restaurants and 46 percent of the Jack in the Box system, including new construction, now feature all interior and exterior elements of the program. Exterior enhancements, including new paint schemes, lighting and landscaping, are now completed at 96 percent of the Jack in the Box system.
With the recession pinching discretionary spending, Jack in the Box rolled out two limited-time, value-priced promotions in the fourth quarter. In July, the chain launched the Big Deal, a bundled meal featuring a cheeseburger, taco, small order of natural cut fries, and a small drink - all for $2.99, plus tax. And in September, Jack in the Box began offering its Big Cheeseburger and Big Texas Cheeseburger for just $1, plus tax.
In August, Jack in the Box enhanced its breakfast menu with a Chorizo Sausage Burrito, which features hash brown sticks, scrambled eggs, crumbled chorizo sausage and cheddar cheese sauce stuffed in a flour tortilla and served with a side of fire-roasted salsa.
Also in August, Jack in the Box launched a five-week promotional event called Jack's Big Rip-Off, a peel-and-reveal game co-sponsored by Dr Pepper and GameStop.
First 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 in various stages of development and test. "Our marketing strategy is to 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 October, Jack in the Box reintroduced a double-patty favorite from the 1970's called the Bonus Jack(tm). Featuring two beef patties topped with two slices of American cheese, lettuce, pickle and Secret Sauce and served in a triple-decker bun, the Bonus Jack is being promoted in a value-priced combo along with a small order of fries and small drink for $3.99, plus tax.
Last week, Jack in the Box launched a Southwest Chicken Bowl, capitalizing on the popularity of Teriyaki bowls launched last year. Available for a limited time, the Southwest Chicken Bowl is priced at $4.29, plus tax, and is made with fajita-seasoned chicken, rice, grilled onions and peppers, and topped with shredded cheddar cheese and a tangy cilantro lime sauce.
Also last week, Jack in the Box began selling a limited-edition antenna ball that features a bubble-gum blowing Jack-style character sporting a backwards baseball cap and red wrap shades for $1, plus tax. Seventy percent of antenna ball sales will go to Big Brothers Big Sisters, the company's primary charitable partner for more than a decade. A similar promotion last year netted nearly $360,000 for the youth-mentoring organization.
Guidance
The following guidance and underlying assumptions reflect the company's current expectations for the first quarter 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.
Q1 FY 2010 guidance
* Same-store sales are expected to decrease approximately 10 percent at Jack in the Box company restaurants versus a 1.7 percent increase in the year-ago quarter.
* Same-store sales are expected to decrease approximately 5 percent at Qdoba system restaurants versus a 1.1 percent decrease in the year-ago quarter.
* Same-store sales guidance reflects trends experienced during the first seven weeks of the first quarter.
Fiscal year 2010 guidance
* 3 to 7 percent decrease in same-store sales at Jack in the Box company restaurants, with trends improving in the second half of the fiscal year.
* 3 to 5 percent decrease in same-store sales at Qdoba system restaurants.
* Overall commodity costs are expected to be approximately flat, with greater favorability in the first half of the fiscal 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 11.0 to 11.5 percent range.
* Tax rate of approximately 37 to 38 percent.
* Diluted earnings per share of $1.90 to $2.10, 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.
Conference call
The company will host a conference call for financial analysts and investors on Thursday, Nov. 19, 2009, beginning at 10:30 a.m. PST (1:30 p.m. EST). The conference call will be broadcast live over the Internet via the Jack in the Box website. To access the live call through the Internet, log onto the Investors section of the Jack in the Box Inc. website at http://investors.jackinthebox.com at least 15 minutes prior to the event in order to download and install any necessary audio software. A replay of the call will be available through the conference-call link on the Jack in the Box Inc. home page for 21 days, beginning at approximately 1:00 p.m. PST on Nov. 19.
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(r) restaurants, one of the nation's largest hamburger chains, with more than 2,200 restaurants in 18 states. Additionally, through a wholly owned subsidiary, the company operates and franchises Qdoba Mexican Grill(r), a leader in fast-casual dining, with more than 500 restaurants in 42 states and the District of Columbia. For more information, visit www.jackinthebox.com.
Safe harbor statement
This press release contains forward-looking statements within the meaning of the federal securities laws. Such statements are subject to substantial risks and uncertainties. A variety of factors could cause the company's actual results to differ materially from those expressed in the forward-looking statements. These factors are discussed in the company's annual report on Form 10-K and its periodic reports on Form 10-Q filed with the Securities and Exchange Commission which are available online at www.jackinthebox.com or in hard copy upon request. The company undertakes no obligation to update or revise any forward-looking statement, whether as the result of new information or otherwise.
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