Investors have been wondering for months whether Jack in the Box (JACK 2.08%) would sell itself after the restaurant chain in December announced a strategic review of its financing options. The company just settled that question as part of its second-quarter earnings report, with management saying it couldn't secure attractive terms for a sale despite discussions that included many potential buyers. Jack in the Box instead aims to go forward as an independent entity following a large debt restructuring.
Meanwhile, the company revealed modest improvements in its operating trends while downgrading its sales outlook for the full year.
More on that fiscal 2019 prediction in a moment. First, here's how the headline numbers compare with those from the prior-year period:
|
Metric |
Q2 2019 |
Q2 2018 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$216 million |
$210 million |
3% |
|
Net income |
$25 million |
$48 million |
(48%) |
|
Earnings per share |
$0.97 |
$1.64 |
(41%) |
Data source: Jack in the Box's financial filings. YOY = year over year.
What happened this quarter?
The chain continued to struggle to stand out in a competitive industry, but sales trends improved slightly. Reported earnings fell due to its 2018 sale of the Qdoba restaurant franchise while operating margin ticked higher.
Image source: Getty Images.
Highlights of the quarter included:
- Comparable-store sales inched higher by less than 1% to mark a modest improvement over the prior quarter's result. That performance likely translated into more market-share losses, given that the industry has been expanding at a 3% pace this year.
- Restaurant-level operating margins improved to 27.6% of sales from 26.4% a year ago, mainly thanks to reduced store maintenance expenses and higher menu prices.
- Selling expenses dove due to lower advertising spending. The chain spent more on maintaining its debt, though, so adjusted earnings before taxes fell to $33.5 million from $36.4 million a year ago.
What management had to say
CEO Lenny Comma said the management team was happy with the customer reaction to marketing changes. "Our greater emphasis on bundled value," he said in a press release, "resulted in a sequential improvement in traffic and sales without sacrificing restaurant margins." The positive momentum has accelerated into the start of the new quarter, too, executives said, with growth rising to over 2%. "Our guests are responding favorably to our promotion line-up which leverages our strategy around compelling value bundles."
Regarding the end of its sale review, management said in another press release that a "robust and wide-ranging process" by the board of directors landed on debt restructuring rather than a sale as the best path forward. "Implementing a new capital structure in the form of a securitization is the best alternative for driving shareholder value at this time," they explained.
Looking forward
Comma and his team affirmed their long-term guidance but lowered their outlook for the remainder of fiscal 2019. Comps are now expected to rise by 0.5% at the midpoint of guidance compared to the prior 1% target.
All of the chain's other key financial predictions held steady, so investors should still see adjusted earnings range from between $260 million and $270 million. Management is hoping to get that annual figure up to around $300 million by 2020, but it foresees operating under a significant debt burden for the time being, with debt predicted to rise to about 5 times adjusted annual profits.
