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JACK > SEC Filings for JACK > Form 10-K on 23-Nov-2011All Recent SEC Filings

Show all filings for JACK IN THE BOX INC /NEW/

Form 10-K for JACK IN THE BOX INC /NEW/


23-Nov-2011

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

For an understanding of the significant factors that influenced our performance during the past three fiscal years, we believe our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Annual Report as indexed on page F-1.

Comparisons under this heading refer to the 52-week periods ended October 2, 2011 and September 27, 2009 for 2011 and 2009, and the 53-week period ended October 3, 2010 for 2010, unless otherwise indicated.

Our MD&A consists of the following sections:

Overview - a general description of our business and fiscal 2011 highlights.

Financial reporting - a discussion of changes in presentation.

Results of operations - an analysis of our consolidated statements of earnings for the three years presented in our consolidated financial statements.

Liquidity and capital resources - an analysis of cash flows including capital expenditures, aggregate contractual obligations, share repurchase activity, known trends that may impact liquidity, and the impact of inflation.

Discussion of critical accounting estimates - a discussion of accounting policies that require critical judgments and estimates.

New accounting pronouncements - a discussion of new accounting pronouncements, dates of implementation and impact on our consolidated financial position or results of operations, if any.

OVERVIEW

As of October 2, 2011, we operated and franchised 2,221 Jack in the Box restaurants, primarily in the western and southern United States, and 583 Qdoba restaurants throughout the United States.

Our primary source of revenue is from retail sales at Jack in the Box and Qdoba company-operated restaurants. We also derive revenue from Jack in the Box and Qdoba franchise restaurants, including royalties (based upon a percent of sales), rents, franchise fees and distribution sales of food and packaging commodities. In addition, we recognize gains from the sale of company-operated restaurants to franchisees, which are presented as a reduction of operating costs and expenses, net in the accompanying consolidated statements of earnings.

The following summarizes the most significant events occurring in fiscal 2011 and certain trends compared to prior years:

Restaurant Sales. System sales at Jack in the Box and Qdoba restaurants open more than one year ("same-store sales") changed as follows:

                                 2011               2010               2009
         Jack in the Box:
         Company                      3.1%             (8.6)%             (1.2)%
         Franchise                    1.3%             (7.8)%             (1.3)%
         System                       1.8%             (8.2)%             (1.3)%
         Qdoba:
         Company                      5.1%               0.8%             (5.0)%
         Franchise                    5.4%               3.6%             (1.3)%
         System                       5.3%               2.8%             (2.3)%


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Commodity Costs. Pressures from higher commodity costs, which had moderated during 2010, impacted our business in fiscal 2011. Overall commodity costs at Jack in the Box and Qdoba company restaurants increased approximately 4.7% and 7%, respectively, as compared to last year.

New Unit Development. We continued to grow our brands with the opening of new company and franchise-operated restaurants. In 2011, we opened 31 Jack in the Box and 67 Qdoba locations system-wide.

Franchising Program. We refranchised 332 Jack in the Box restaurants, while Qdoba and Jack in the Box franchisees opened a total of 58 restaurants in 2011. We achieved our goal of increasing the percentage of franchise ownership to 70-80% of the Jack in the Box system two years ahead of our plan, and we were 72% franchised at the end of fiscal year 2011. We plan to further increase franchise ownership to approximately 80% over the next couple of years.

Share Repurchases. Pursuant to share repurchase programs authorized by our Board of Directors, in 2011, we repurchased 9.1 million shares of our common stock at an average price of $21.27 per share, including the cost of brokerage fees.

Franchise Financing Entity. We formed an entity, Jack in the Box Franchise Finance, LLC ("FFE"), for the purpose of operating a franchisee lending program used primarily to assist franchisees in re-imaging their restaurants. In 2011, FFE provided $14.5 million in loans to franchisees. The impact of this entity on the Company's consolidated financial statements as of and for the fiscal year ended October 2, 2011 was not material.

FINANCIAL REPORTING

The results of operations and cash flows for Quick Stuff, which was sold in 2009, are reflected as discontinued operations for all periods presented. Refer to Note 2, Discontinued Operations, in the notes to our consolidated financial statements for more information.

RESULTS OF OPERATIONS

The following table presents certain income and expense items included in our consolidated statements of earnings as a percentage of total revenues, unless otherwise indicated. Percentages may not add due to rounding.


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                    CONSOLIDATED STATEMENTS OF EARNINGS DATA



                                                                        Fiscal Year
                                                            2011           2010           2009
Revenues:
Company restaurant sales                                      62.9%          72.6%          80.0%
Distribution sales                                            24.2%          17.3%          12.2%
Franchise revenues                                            12.9%          10.1%           7.8%

Total revenues                                               100.0%         100.0%         100.0%

Operating costs and expenses, net:
Company restaurant costs:
Food and packaging (1)                                        33.4%          31.8%          32.4%
Payroll and employee benefits (1)                             30.0%          30.3%          29.7%
Occupancy and other (1)                                       23.9%          23.9%          21.7%

Total company restaurant costs (1)                            87.3%          85.9%          83.8%

Distribution costs (1)                                       100.5%         100.4%          99.6%
Franchise costs (1)                                           48.3%          45.4%          40.6%
Selling, general and administrative expenses                  10.2%          10.6%          10.5%
Impairment and other charges, net                              0.6%           2.1%           0.9%
Gains on the sale of company-operated restaurants, net       (2.8)%         (2.4)%         (3.2)%
Earnings from operations                                       6.5%           5.3%           9.4%

Income tax rate (2)                                           35.9%          33.8%          37.7%

(1) As a percentage of the related sales and/or revenues.

(2) As a percentage of earnings from continuing operations and before income taxes.

The following table presents Jack in the Box and Qdoba company restaurant sales, costs and costs as a percentage of the related sales. Percentages may not add due to rounding.

     SUPPLEMENTAL COMPANY-OPERATED RESTAURANTS STATEMENTS OF EARNINGS DATA

                             (dollars in thousands)



                                                                        Fiscal Year
                                             2011                          2010                          2009
Jack in the Box:
Company restaurant sales            $  1,181,961                  $  1,518,434                  $  1,850,442
Company restaurant costs:
Food and packaging                       403,209       34.1%           488,179       32.2%           602,581       32.6%
Payroll and employee benefits            358,917       30.4%           463,625       30.5%           552,001       29.8%
Occupancy and other                      271,432       23.0%           353,056       23.3%           392,780       21.2%

Total company restaurant costs      $  1,033,558       87.4%      $  1,304,860       85.9%      $  1,547,362       83.6%
Qdoba:
Company restaurant sales            $    198,312                  $    150,093                  $    125,400
Company restaurant costs:
Food and packaging                        57,581       29.0%            42,434       28.3%            37,335       29.8%
Payroll and employee benefits             55,546       28.0%            41,513       27.7%            35,550       28.3%
Occupancy and other                       58,334       29.4%            45,010       30.0%            36,199       28.9%

Total company restaurant costs      $    171,461       86.5%      $    128,957       85.9%      $    109,084       87.0%

Revenues

As we execute our refranchising strategy, which includes the sale of restaurants to franchisees, we expect the number of company-operated restaurants and the related sales to decrease while revenues from franchise restaurants increase. As such, company restaurant sales decreased $288.3 million in 2011 and $307.3 million in 2010 as compared with the prior year. The decrease in restaurant sales in both years is due primarily to decreases


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in the average number of Jack in the Box company-operated restaurants, partially offset by an increase in the number of Qdoba company-operated restaurants and increases in per-store average ("PSA") sales at our Jack in the Box and Qdoba restaurants in 2011. In 2010, declines in PSA sales at Jack in the Box and Qdoba restaurants also contributed to the decrease in sales versus the prior year. The following table presents the approximate impact of these increases and decreases on company restaurant sales and the effect of additional sales from a 53rd week in 2010 (in millions):

                                                        2011 vs. 2010        2010 vs. 2009
Reduction in the average number of Jack in the Box
restaurants                                               $    (431.7)         $    (176.6)
Jack in the Box PSA sales increase (decrease)                    120.8              (156.1)
Qdoba restaurant sales increase (decrease)                        51.5                (3.5)
53rd week                                                       (28.9)                 28.9

Total decrease in company restaurant sales                $    (288.3)         $    (307.3)

Same-store sales at Jack in the Box company-operated restaurants increased 3.1% in 2011 primarily driven by transaction growth compared with a decrease of 8.6% in 2010 driven primarily by a decline in transactions, unfavorable product mix changes, promotions and discounting. Same-store sales at Qdoba company-operated restaurants increased 5.1% in 2011 and 0.8% in 2010 primarily driven by a combination of transaction growth, pricing and, in 2011, higher catering sales. The following table summarizes the change in company-operated same-store sales.

                                                        Increase/(Decrease)
                                                 2011 vs. 2010       2010 vs. 2009
   Jack in the Box transactions                            3.2%              (7.1)%
   Jack in the Box average check (1)                     (0.1)%              (1.5)%

   Jack in the Box change in same-store sales              3.1%              (8.6)%

   Qdoba change in same-store sales (2)                    5.1%                0.8%

(1) Includes price increases of approximately 1.8% and 1.7% in 2011 and 2010, respectively.

(2) Includes price increases of approximately 1.7% and 2.2% in 2011 and 2010, respectively.

Distribution sales to Jack in the Box and Qdoba franchisees grew $133.0 million in 2011 and $95.8 million in 2010 as compared with the prior year. The growth in distribution sales in both years primarily reflects an increase in the number of franchise restaurants that purchase ingredients and supplies from our distribution centers, which contributed additional sales of approximately $113.4 million and $108.4 million in 2011 and 2010, respectively, and were partially offset by lower PSA volumes in 2010. Higher commodity prices also contributed to the sales increase in 2011.


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Franchise revenues increased $51.0 million and $37.9 million in 2011 and 2010, respectively, and include the impact of additional revenues of $4.6 million from a 53rd week in 2010. The increase in franchise revenues in both years primarily reflects an increase in the average number of Jack in the Box franchise restaurants, which contributed additional royalties and rents of approximately $53.5 million in 2011 and $36.6 million in 2010. Additionally, in 2011, increases in the number of restaurants sold to and developed by franchisees resulted in higher revenues from initial franchise fees of $5.7 million. These increases were partially offset by an increase in re-image contributions to franchisees in 2011, which are recorded as a reduction of franchise revenues, and, in 2010, a decline in same-store sales at Jack in the Box franchise restaurants. The following table reflects the detail of our franchise revenues in each year and other information we believe is useful in analyzing the change in franchise revenues (dollars in thousands):

                                                  2011                2010                2009
Royalties                                       $   109,422         $    91,216         $    79,690
Rents                                               161,279             128,143             103,784
Re-image contributions to franchisees               (8,208)             (1,455)             (3,700)
Franchise fees and other                             19,573              13,123              13,345

Franchise revenues                              $   282,066         $   231,027         $   193,119

% increase                                            22.1%               19.6%
Average number of franchise restaurants               1,707               1,424               1,215
% increase                                            19.9%               17.2%
Increase (decrease) in franchise-operated
same-store sales:
Jack in the Box                                        1.3%              (7.8)%              (1.3)%
Qdoba                                                  5.4%                3.6%              (1.3)%
Royalties as a percentage of estimated
franchise restaurant sales:
Jack in the Box                                        5.3%                5.3%                5.3%
Qdoba                                                  5.0%                5.0%                5.0%

Operating Costs and Expenses

Food and packaging costs were 33.4% of company restaurant sales in 2011, 31.8% in 2010 and 32.4% in 2009. The increase in 2011 primarily relates to higher commodity costs and the unfavorable impact of product mix and promotions, partially offset by the benefit of selling price increases. Overall commodity costs increased approximately 4.7% and 7.0% at our Jack in the Box and Qdoba company-operated restaurants, respectively, including higher costs for beef, cheese, pork, dairy, eggs and shortening, partially offset by lower costs for poultry and bakery. The decline in 2010 reflects a decrease in commodity costs at our Jack in the Box restaurants of 1.4% (including beef, shortening, poultry and bakery), margin improvement initiatives and selling price increases, which more than offset the impact of unfavorable product mix and promotions.

Payroll and employee benefit costs were 30.0% of company restaurant sales in 2011, 30.3% in 2010 and 29.7% 2009. The decrease in 2011 reflects leverage from same-store sales increases, lower insurance costs and the benefit of refranchising, which were partially offset by increases in unemployment taxes in several states in which we operate and higher levels of staffing designed to improve the guest experience at our Jack in the Box restaurants. The increase in 2010 reflects the impact of same-store sales deleverage and higher workers' compensation costs of approximately 50 basis points, which more than offset the benefits derived from our labor productivity initiatives.

Occupancy and other costs were 23.9% of company restaurant sales in 2011 and 2010 and 21.7% in 2009. The percentage in 2011 reflects the leverage from same-store sales increases, lower utilities expense and the benefit of refranchising. These benefits were offset by higher costs associated with the 2011 rollout of new uniforms and menu boards at our Jack in the Box restaurants, higher PSA depreciation expense related to the re-image program at Jack in the Box and higher rent expense as a percentage of sales resulting from a greater proportion of company-operated Qdoba restaurants compared with fiscal 2010. The higher percentage in 2010 compared with 2009 is due primarily to sales deleverage and higher depreciation from the Jack in the Box re-image program, which were partially offset by lower utilities expense.


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Distribution costs increased $133.8 million in 2011 and $98.8 million in 2010 primarily reflecting increases in the related sales. As a percentage of the related sales, these costs were 100.5%, 100.4% and 99.6% in 2011, 2010 and 2009, respectively. The percent of sales increase in 2010 relates primarily to deleverage from lower PSA sales at Jack in the Box franchise restaurants.

Franchise costs, principally rents and depreciation on properties leased to Jack in the Box franchisees, increased $31.3 million in 2011 and $26.4 million in 2010, due primarily to our refranchising strategy. Franchise costs increased to 48.3% of the related revenues in 2011 from 45.4% in 2010 and 40.6% in 2009. The percent of sales increase in 2011 versus 2010 is primarily due to higher PSA depreciation expense attributable to an increase in building costs for refranchised locations relating to our re-image program, an increase in re-image contributions to franchisees and higher rent and depreciation expense resulting from an increase in the percentage of locations we lease to franchisees. These increases were partially offset by the leverage provided from same-store sales growth and higher franchise fee revenue. The higher percentage in 2010 as compared with 2009 is primarily due to revenue deleverage from lower sales at franchised restaurants and higher rent and depreciation expense relating to an increase in the percentage of locations we lease to franchisees.

The following table presents the change in selling, general and administrative ("SG&A") expenses in each year compared with the prior year (in thousands):

                                                       Increase/(Decrease)
                                                2011 vs. 2010       2010 vs. 2009
   Advertising                                    $    (17,867 )      $    (11,689 )
   Refranchising strategy                               (5,857 )           (14,818 )
   Incentive compensation                                2,202              (6,062 )
   Cash surrender value of COLI policies, net            2,818              (2,954 )
   Pension and postretirement benefits                  (5,295 )            17,632
   Hurricane Ike insurance proceeds                      4,223              (4,223 )
   Qdoba general and administrative costs                4,430               3,673
   Other                                                    45              (2,465 )
   53rd week                                            (3,597 )             3,597

                                                  $    (18,898 )      $    (17,309 )

Our refranchising strategy has resulted in a decrease in the number of company-operated restaurants and the related overhead expenses to manage and support those restaurants. As such, advertising costs, which are primarily contributions to our marketing funds determined as a percentage of restaurant sales, decreased at Jack in the Box and were partially offset by higher advertising expense at Qdoba due to an increase in the number of company-operated restaurants and same-store sales growth. Additionally, in 2010, Jack in the Box advertising costs decreased due to lower PSA sales at company-operated restaurants, partially offset by incremental Company contributions of approximately $6.5 million. The change in incentive compensation expense reflects an improvement in the Company's results compared with performance goals in 2011 and a weakening in 2010 as compared with the previous year. The cash surrender value of our Company-owned life insurance ("COLI") policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $0.1 million in 2011 compared with a net benefit of $2.7 million in 2010 and a negative impact of $0.3 million in 2009. In 2011, the decrease in pension and postretirement benefits expense principally relates to the curtailment of the Company's qualified pension plan whereby participants will no longer accrue benefits after December 31, 2015. The increase in pension and postretirement benefits expense in 2010 primarily relates to a decrease in the discount rate as compared with 2009. Qdoba general and administrative costs increased in 2011 and 2010 primarily due to higher overhead to support our growing number of company-operated restaurants.


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Impairment and other charges, net decreased $36.2 million in 2011 and increased $26.9 million in 2010 as compared to the prior year. The following table presents the components of impairment and other charges, net in each year (in thousands):

                                                    2011               2010               2009
Impairment charges                                $    1,367         $   12,970         $    6,586
Losses on disposition of property and
equipment, net                                         7,650             10,757             11,418
Costs of closed restaurants (primarily
lease obligations) and other                           3,655             25,160              4,010

                                                  $   12,672         $   48,887         $   22,014

Fiscal 2010 includes a charge of $28.0 million (primarily including future lease obligations of $19.0 million and property and equipment impairment charges of $8.4 million) related to the closure of 40 underperforming Jack in the Box restaurants. The decision to close these restaurants was based on a comprehensive analysis that took into consideration levels of return on investment and other key operating performance metrics. After consideration of the fiscal 2010 closure charge, impairment and other charges, net decreased an additional $8.2 million in 2011 due primarily to declines in costs related to our restaurant re-image and new logo program as this program nears completion and lower impairment charges for underperforming Jack in the Box restaurants as compared with 2010.

Gains on the sale of company-operated restaurants to franchisees, net are detailed in the following table (dollars in thousands):

                                                    2011               2010               2009
Number of restaurants sold to franchisees                332                219                194
Gains on the sale of company-operated
restaurants                                       $   61,125         $   54,988         $   81,013
Loss on expected sale of underperforming
market                                                     -                  -             (2,371 )

Gains on the sale of company-operated
restaurants, net                                  $   61,125         $   54,988         $   78,642

Average gain on restaurants sold                  $      184         $      251         $      418

Gains were impacted by the number of restaurants sold and changes in average gains recognized, which relate to the specific sales and cash flows of those restaurants. The lower average gains in 2011 and 2010 relate to the sale of markets with lower-than-average sales volumes and cash flows. In 2009, gains on the sale of company-operated restaurants to franchisees, net included a loss of $2.4 million relating to the anticipated sale of a lower performing Jack in the Box market.

Interest Expense, Net

Interest expense, net is comprised of the following (in thousands):



                                    2011              2010              2009
        Interest expense          $   18,165        $   17,011        $   22,155
        Interest income               (1,310 )          (1,117 )          (1,388 )

        Interest expense, net     $   16,855        $   15,894        $   20,767

Interest expense, net increased $1.0 million in 2011 and decreased $4.9 million in 2010. The increase in 2011 is primarily attributable to an increase in the amortization of deferred finance fees related to the refinancing of our credit facility in 2010 and higher average borrowings, offset in part by lower average interest rates. The decrease in 2010 is primarily due to lower average interest rates and borrowings, partially offset by a $0.5 million loss on the early retirement of debt recorded in connection with the refinancing of our credit facility.


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Income Taxes

The income tax provisions reflect effective tax rates of 35.9%, 33.8%, and 37.7% of pretax earnings from continuing operations in 2011, 2010, and 2009, respectively. The higher tax rate in 2011 is primarily due to the market performance of insurance investment products used to fund certain non-qualified retirement plans. The lower tax rate in 2010 is largely attributable to the impact of audit settlements, higher work opportunity tax credits and the market performance of insurance investment products. Changes in the cash value of the insurance products are not included in taxable income.

Earnings from Continuing Operations

Earnings from continuing operations were $80.6 million, or $1.61 per diluted share, in 2011; $70.2 million, or $1.26 per diluted share, in 2010; and $131.0 million, or $2.27 per diluted share, in 2009. We estimate that the extra 53rd week benefitted net earnings by approximately $1.8 million, or $0.03 per diluted share, in fiscal 2010.

Earnings from Discontinued Operations, Net

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