SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☑||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
FOR THE FISCAL YEAR ENDED September 27, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER 1-9390
JACK IN THE BOX INC.
(Exact name of registrant as specified in its charter)
|(State of Incorporation)||(I.R.S. Employer Identification No.)|
9357 Spectrum Center Blvd.
San Diego, California 92123
(Address of principal executive offices)
9330 Balboa Avenue
San Diego, California 92123
(Former name or former address, if changed since last report)
Registrant’s telephone number, including area code (858) 571-2121
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, $0.01 par value||JACK||NASDAQ Global Select Market|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☑
The aggregate market value of the common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, computed by reference to the closing price reported on the NASDAQ Global Select Market — Composite Transactions as of April 10, 2020, was approximately $1.0 billion.
Number of shares of common stock, $0.01 par value, outstanding as of the close of business on November 12, 2020 — 22,722,941.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2021 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
JACK IN THE BOX INC.
TABLE OF CONTENTS
From time to time, we make oral and written forward-looking statements that reflect our current expectations regarding future results of operations, economic performance, financial condition, and achievements of Jack in the Box Inc. (the “Company”). A forward-looking statement is neither a prediction nor a guarantee of future events or results. In some cases, forward-looking statements can be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “should,” “will,” “would,” and similar expressions. Certain forward-looking statements are included in this Form 10-K, principally in the sections captioned “Business,” “Legal Proceedings,” “Consolidated Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including statements regarding our strategic plans and operating strategies. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations and forward-looking statements may prove to be materially incorrect due to known and unknown risks and uncertainties.
In some cases, information regarding certain important factors that could cause our actual results to differ materially from any forward-looking statement appears together with such statement. In addition, the factors described under “Risk Factors” and “Discussion of Critical Accounting Estimates” in this Form 10-K, as well as other possible factors not listed, could cause our actual results, economic performance, financial condition or achievements to differ materially from those expressed in any forward-looking statements. As a result, investors should not place undue reliance on such forward-looking statements, which speak only as of the date of this report. The Company is under no obligation to update forward-looking statements, whether as a result of new information or otherwise.
Unless otherwise specified in this Annual Report on Form 10-K (“Annual Report”), or the context requires, Jack in the Box Inc.(NASDAQ: JACK) is referred to as the “Company,” “Jack in the Box,” or in the first-person notations of “we,” “us” and “our.”
ITEM 1. BUSINESS
Jack in the Box Inc., based in San Diego, California, operates and franchises Jack in the Box® quick-service restaurants (“QSRs”). We opened our first restaurant in 1951 and have since become one of the nation’s largest hamburger chains. Based on number of restaurants, our top 10 major markets comprise approximately 70% of the total system, and Jack in the Box is at least the second largest QSR hamburger chain in eight of those major markets.
As of September 27, 2020, we operated and franchised 2,241 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam. Of the 2,241 restaurants at fiscal year-end, 2,097, or 94%, were franchised.
The Company operates as a single segment for reporting purposes. Our revenue is derived from sales by company-operated restaurants and by charging royalties, rent, advertising fees, and franchise and other fees to our franchisees.
Our long-term goals are focused on meeting evolving customer needs, with an emphasis on improving operations consistency and targeted investments designed to maximize our returns. The key initiatives of our long-term goals include:
•Simplifying Restaurant Operations - We will continue focusing on redefining and elevating the guest experience to drive consistency through back-of-the-house simplification, including kitchen equipment / technology that can drive higher throughput, improved quality, and labor cost benefits.
•Differentiating Through Innovation - We will continue focusing on what makes us different by balancing premium and value innovation and leveraging our unique brand personality to differentiate creatively and focus on our core customer.
•Expanding our Brand Footprint - We are focused on growing units in existing, developing and new markets, primarily through franchise restaurants.
•Enhancing the Guest Experience - We are focused on targeted investments designed to maximize our returns while meeting the evolving needs of our customers to drive a consistent experience and brand image in our restaurants and across digital platforms through leveraging technology such as our mobile application to meet the evolving needs of our customers and improve in-store efficiencies.
Jack in the Box restaurants offer a broad selection of distinctive products including classic burgers like our Jumbo Jack® and innovative product lines such as Buttery Jack® burgers. We also offer quality products such as breakfast sandwiches with freshly cracked eggs, and craveable favorites such as tacos and curly fries, along with specialty sandwiches, salads, and real ice cream shakes, among other items. We allow our guests to customize their meals to their tastes and order any product when they want it, including breakfast items any time of day (or night). We are known for variety and innovation, which has led to the development of four strong dayparts: breakfast, lunch, dinner, and late-night.
The Jack in the Box restaurant chain was the first major hamburger chain to develop and expand the concept of drive-thru restaurants. In addition to drive-thru windows, most of our restaurants have seating capacities ranging from 20 to 100 people and are open 18-24 hours a day.
Through the execution of our refranchising strategy, we have increased franchise ownership of the Jack in the Box system to 94% at the end of fiscal 2020. In fiscal 2020, our franchisees developed 27 new franchise restaurants, and we expect the majority of new unit growth will be through franchise restaurants. The following table summarizes the changes in the number of company-operated and franchise restaurants over the past five years:
|Beginning of period||137 ||137 ||276 ||417 ||413 |
|New||— ||— ||1 ||2 ||4 |
|Refranchised||— ||— ||(135)||(178)||(1)|
|Closed||(1)||— ||(5)||(15)||— |
|Acquired from franchisees||8 ||— ||— ||50 ||1 |
|End of period total||144 ||137 ||137 ||276 ||417 |
|% of system||6 ||%||6 ||%||6 ||%||12 ||%||18 ||%|
|Beginning of period||2,106 ||2,100 ||1,975 ||1,838 ||1,836 |
|New||27 ||19 ||11 ||18 ||12 |
|Refranchised||— ||— ||135 ||178 ||1 |
|Sold to company||(8)||— ||— ||(50)||(1)|
|End of period total||2,097 ||2,106 ||2,100 ||1,975 ||1,838 |
|% of system||94 ||%||94 ||%||94 ||%||88 ||%||82 ||%|
|System end of period total||2,241 ||2,243 ||2,237 ||2,251 ||2,255 |
The franchise agreement generally provides for an initial franchise fee of $50,000 per restaurant for a 20-year term, and royalty and marketing payments generally set at 5.0% of gross sales. Royalty rates are typically 5.0% of gross sales but may range as high as 10.0% of gross sales. Some existing agreements provide for lower royalties for a limited time and may have variable rates. We may offer development agreements to franchisees (referred to in this context as “Developers”) for construction of one or more new restaurants over a defined period of time and in a defined geographic area. Developers may be required to pay fees for certain company-sourced new sites. Developers may lose their rights to future development if they do not maintain the required opening schedule. To stimulate growth, we have offered a waiver of development fees for new sites, in addition to lower royalty rates or a development loan, to franchisees who open restaurants within a specified timeframe.
Site Selection and Design
Site selections for all new company-operated restaurants are made after an economic analysis and a review of demographic data and other information relating to population density, traffic, competition, restaurant visibility and access, available parking, surrounding businesses, and opportunities for market penetration. Restaurants developed by franchisees are built to brand specifications on sites we have approved.
Our company-operated restaurants have multiple restaurant models with different seating capacities to improve our flexibility in selecting locations. Management believes that this flexibility enables the Company to match the restaurant configuration with the specific economic, demographic, geographic, or physical characteristics of a particular site.
Based on the geographical location and constraints of the potential restaurant property, as well as the prototype building selected for use, typical costs to develop a traditional restaurant, range from approximately $1.4 million to $2.0 million, excluding the land value. The majority of our corporate restaurants are constructed on leased land or on land that we purchase and subsequently sell, along with the improvements, in sale and leaseback transactions. Upon completion of a sale and leaseback transaction, the Company’s initial cash investment is reduced to the cost of equipment, which ranges from approximately $0.3 million to $0.4 million.
Restaurant Management and Operations
Jack in the Box restaurants are operated by a company manager or franchise operator who is directly responsible for the operations of the restaurant, including product quality, service, food safety, cleanliness, inventory, cash control, and the conduct and appearance of employees. We focus on attracting, selecting, engaging, and retaining employees and franchisees who share our passion for creating long-lasting, successful restaurants.
Managers of company-operated restaurant are supervised by district managers, who are overseen by directors of operations, who report to the vice president of company operations. Under our performance system, the vice president is eligible for annual incentive compensation based on achievement of goals related to company-wide performance and restaurant level margin. Directors are eligible for an annual incentive compensation based on achievement of goals related to the sales and profit of their assigned region, and a company-wide performance goal. District managers and restaurant managers are eligible for quarterly incentives based on growth in restaurant sales and profit and certain other operational performance standards.
Company-operated restaurant managers are required to complete an extensive management training program involving a combination of in-restaurant instruction and on-the-job training in specially designated training restaurants. Restaurant managers and supervisory personnel train other restaurant employees in accordance with detailed procedures and guidelines using training aids available at each location.
Company-operated and franchise-operated restaurants devote significant resources toward offering quality food and excellent service at all of our restaurants. One tool we have used to help us maintain a high level of customer satisfaction is our Voice of Guest program, which provides restaurant managers, district managers, and franchise operators with ongoing feedback from guests who complete a short satisfaction survey via an invitation typically provided on the register receipt. In these surveys, guests rate their satisfaction with key elements of their restaurant experience, including friendliness, food quality, cleanliness, speed of service, and order accuracy. Our Guest Relations Department receives feedback that guests provide via phone and our website and communicates that feedback to restaurant managers and franchise operators. We also collect and respond to guest feedback through social media, restaurant reviews and other feedback sources.
Our “farm-to-fork” food safety program is designed to maintain high standards for the food products and food preparation procedures used by our vendors and in our restaurants. We maintain product specifications for our ingredients and our Food Safety and Regulatory Compliance Department must approve all suppliers of food products to our restaurants. We use third-party and internal audits to review the food safety management programs of our vendors. We manage food safety in our restaurants through a comprehensive food safety management program that is based on the Food and Drug Administration (“FDA”) Food Code requirements. The food safety management program includes employee training, ingredient testing, documented restaurant practices, and attention to product safety at each stage of the food preparation cycle. In addition, our food safety management program uses American National Standards Institute certified food safety training programs to train our company and franchise restaurant management employees on food safety practices for our restaurants.
All of our company-operated restaurants and franchisees have a long-term contract with a third-party distributor. Under this contract, the distributor will provide distribution services to our Jack in the Box restaurants through August 2022 through seven distribution centers in the continental United States.
The primary commodities purchased by our restaurants are beef, poultry, pork, cheese, and produce. We monitor and purchase commodities in order to minimize the impact of fluctuations in price and supply. Contracts are entered into and commodity market positions may be secured when we consider them to be advantageous. However, certain commodities remain subject to price fluctuations. Most, if not all essential food and beverage products are available or can be made available upon short notice from alternative qualified suppliers.
Our restaurant software allows for daily polling of sales, inventory, and other data from the restaurants directly. Our company restaurants and traditional-site franchise restaurants use standardized Windows-based touch screen point-of-sale (“POS”) platforms. These platforms allow the restaurants to accept cash, credit cards, and our re-loadable gift cards. The single POS system for all restaurants helps franchisees and brand managers adapt more quickly to meet consumer demands and introduce new products, pricing, promotions, and technologies such as the Jack in the Box mobile app, third party delivery, or any other business-driving initiative while maintaining a secure, PCI-compliant payment system.
We have business intelligence systems that provide us with visibility to the key metrics in the operation of company and franchise restaurants. These systems play an integral role in enabling us to accumulate and analyze market information. Our company restaurants use labor scheduling systems to assist managers in managing labor hours based on forecasted sales volumes. We also have inventory management systems that enable timely and accurate deliveries of food and packaging to our restaurants. To support order accuracy and speed of service, our drive-thru restaurants use order confirmation screens.
Advertising and Promotion
We build brand awareness and drive sales through our marketing and advertising programs. These activities are supported primarily by financial contributions to a marketing fund from all company and franchise restaurants based on a percentage of gross sales. Activities to build brand equity, advertise products, and attract customers include, but are not limited to, system-wide and regional campaigns on television, digital and social media, radio, and print media, as well as reaching consumers through our branded mobile app and delivery partnerships.
Competition and Markets
The restaurant business is highly competitive and is affected by local and national economic conditions, including unemployment levels, population and socioeconomic trends, traffic patterns, local and national competitive changes, changes in consumer dining habits and preferences, and new information regarding diet, nutrition, and health, all of which may affect consumer spending habits. Key elements of competition in the industry are the quality and innovation in the food products offered, price and perceived value, quality of service experience (including technological and other innovations), speed of service, personnel, advertising and other marketing efforts, name identification, restaurant location, and image and attractiveness of the facilities.
Each restaurant competes directly and indirectly with a large number of national and regional restaurant chains, some of which have significantly greater financial resources, as well as with locally-owned or independent restaurants in the quick-service and the fast-casual segments, and with other consumer options including grocery and specialty stores, catering, and delivery services. In selling franchises, we compete with many other restaurant franchisors and franchisors generally, some of whom have substantially greater financial resources than we do.
Human Capital Management
Jack in the Box recognizes and takes care of its employees by offering a wide range of competitive pay, recognition, and benefit programs. We are proud to provide our employees, many who begin their career at Jack in the Box with their first entry-level job, the opportunity to grow and advance as we invest in their education and career development.
As of September 27, 2020, we had approximately 5,200 employees, of whom 4,840 were restaurant employees, 330 were corporate management and staff, and 40 were field management. Most of our employees are paid on an hourly basis, except certain restaurant and operations management and corporate positions. We employ both full-time and part-time restaurant employees in order to provide the flexibility necessary during peak periods of restaurant operations and meet the individual needs of our employees. As of the end of fiscal 2020, approximately 60% of our restaurant employees were part-time. We have not experienced any significant work stoppages.
We are committed to providing market-competitive pay and benefits. All corporate management and staff and restaurant management positions, including hourly assistant managers and team leaders, are eligible for performance-based cash incentive programs. Each incentive plan reinforces and rewards individuals for achievement of specific company and/or restaurant business goals.
We strive to ensure pay equity between our female employees and male employees performing equal or substantially similar work. Each year, we review the median pay of our male and female employees, share the results with the Board of Directors, and take remedial action as appropriate.
We offer comprehensive benefit programs to our employees that provide flexibility of choice through our Total Rewards framework of pay and recognition, health and wellness, financial well-being, work/life happiness, culture and community, and learning and development. We recognize and support the growth and development of our employees and offer opportunities to participate in internal as well as external learning programs. An increased focus area has been on educational benefits for our restaurant teams, including enhancing tuition reimbursement and adding new scholarship, high school diploma, and English as a Second Language (“ESL”) programs. In addition, we hold regular restaurant level talent and development planning reviews to assist us with growing our internal restaurant teams, resulting in a majority of current restaurant managers being promoted from within.
We took early action regarding employee well-being in response to the COVID-19 pandemic, implementing comprehensive protocols to protect the health and safety of our employees and guests. Remote work for corporate management and staff was adopted ahead of state and county requirements. We limited reductions in scheduled hours for employees in our company-operated restaurants. For employees of our company-operated restaurants, we also enhanced our benefits programs to offer expanded supplemental paid sick leave ahead of state and county mandates and in counties where sick leave is not mandated, waived employee cost-sharing for COVID-19 testing, waived employee cost-sharing for all virtual visits, provided COVID-19 401(k) enhancements, and made free meals available for restaurant employees during their work shifts. We believe that employee sentiment regarding our response to the pandemic is very favorable.
Trademarks and Service Marks
The JACK IN THE BOX® name and logos are of material importance to us and are registered trademarks and service marks in the United States and elsewhere. In addition, we have registered or applied to register numerous service marks and trade names for use in our businesses, including the Jack in the Box design marks and various product names and designs.
Restaurant sales and profitability are subject to seasonal fluctuations because of factors such as vacation and holiday travel, seasonal weather conditions, and weather crises, all of which affect the public’s dining habits. We are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.
Each restaurant is subject to regulation by federal agencies, as well as licensing and regulation by state and local health, sanitation, safety, fire, zoning, building, consumer protection, taxing, and other agencies and departments. Restaurants are also subject to rules and regulations imposed by owners and operators of shopping centers, airports, or other locations where a restaurant is located. Difficulties or failures in obtaining and maintaining any required permits, licenses or approvals, or difficulties in complying with applicable rules and regulations, could result in restricted operations, closures of existing restaurants, delays or cancellations in the opening of new restaurants, increased cost of operations, or the imposition of fines and other penalties.
We are subject to federal, state, and local laws governing restaurant menu labeling, as well as laws restricting the use of, or requiring disclosures about, certain ingredients used in food sold at our restaurants.
We are also subject to federal and state laws regulating the offer and sale of franchises, as well as judicial and administrative interpretations of such laws. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may also apply substantive standards to the relationship between franchisor and franchisee, including limitations on the ability of franchisors to terminate franchises and alter franchise arrangements.
We are subject to the federal Fair Labor Standards Act and various state laws governing such matters as minimum wages, exempt status classification, overtime, breaks and other working conditions for company employees. Our franchisees are subject to these same laws. Many of our food service personnel are paid at rates set in relation to the federal and state minimum wage laws and, accordingly, changes in the minimum wage requirements may increase labor costs for us and our franchisees. Federal and state laws may also require us to provide paid and unpaid leave, or healthcare or other employee benefits to our employees, which could result in significant additional expense to us and our franchisees. We are also subject to federal immigration laws requiring compliance with work authorization documentation and verification procedures.
We are subject to certain guidelines under the Americans with Disabilities Act of 1990 and various state codes and regulations, which require restaurants and our brand to provide full and equal access to persons with physical disabilities.
Our collection or use of personal information about our employees or our guests is regulated at the federal and state levels, including the California Consumer Privacy Act.
We are also subject to various federal, state, and local laws regulating the discharge of materials into the environment. The cost of complying with these laws increases the cost of operating existing restaurants and developing new restaurants. Additional costs relate primarily to the necessity of obtaining more land, landscaping, storm drainage control, and the cost of more expensive equipment necessary to decrease the amount of effluent emitted into the air, ground, and surface waters.
In addition to laws and regulations governing restaurant businesses directly, there are also regulations, such as the Food Safety Modernization Act, that govern the practices of food manufacturers and distributors, including our suppliers.
We have processes in place to monitor compliance with applicable laws and regulations governing our company operations.
The Company’s corporate website can be found at www.jackintheboxinc.com. We make available free of charge at this website (under the caption “Investors — SEC Filings”) all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and amendments to those reports. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission (“SEC”). The SEC also maintains an Internet site (www.sec.gov) that contains our reports, proxy and information statements, and other information.
ITEM 1A. RISK FACTORS
We caution you that our business and operations are subject to a number of risks and uncertainties. The factors listed below are important factors that could cause our actual results to differ materially from our historical results and from projections in the forward-looking statements contained in this report, in our other filings with the SEC, in our news releases, and in oral statements by our representatives. However, other factors that we do not anticipate or that we do not consider material based on currently available information may also have an adverse effect on our results.
Risks Related to Operating in the Restaurant Industry
The COVID-19 pandemic has disrupted and is expected to continue to disrupt our business, which has affected and could continue to materially affect our operations, financial condition and results of operations for an extended period of time.
The COVID-19 pandemic outbreak, federal, state and local government responses to COVID-19 and our responses to the outbreak have all disrupted and may continue to disrupt our business. Individuals are being encouraged to practice social distancing, restricted from gathering in groups, and in some areas, placed on complete restriction from non-essential movements outside of their homes. In response to the COVID-19 outbreak and these changing conditions, the majority of our company-owned and franchise-operated restaurants have operated in an off-premise capacity, including drive-thru, third-party delivery and carry-out throughout the pandemic. We have implemented a number of safety procedures, including implementing heightened sanitation requirements, practicing employee social distancing, and adhering to glove and mask protocol for all restaurant employees.
Our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial stability. The financial impact of COVID-19 has had, and could continue to have in the future, an adverse effect on our franchisees’ liquidity. To ensure financial health of our valued franchise operators, we reduced March and April marketing fees and postponed collection of these marketing fees, postponed the collection of certain franchisee rental payments and extended all fiscal 2020 franchise development agreements by at least six months and suspended other required capital investments. To the extent our franchisees experience financial distress, our operating results may be adversely impacted, potentially materially affecting our liquidity, financial condition, or results of operations.
As discussed in this report, we have a significant amount of debt outstanding and have previously drawn down on our Variable Funding Notes, which provided us $107.9 million of unrestricted cash, to provide additional security to our liquidity position and provide financial flexibility given uncertain market and economic conditions as a result of the COVID-19 pandemic. A material increase in our level of debt could have certain material adverse effects on us. There can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 outbreak lasts.
Our business could be further disrupted if any of our company or franchised restaurant employees are diagnosed with COVID-19 since this could require us or our franchisees to quarantine some or all of a restaurant’s employees and disinfect the restaurant’s facilities. If a significant percentage of our or our franchisees’ workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our results may be adversely impacted, potentially materially affecting our liquidity, financial condition, or results of operations.
Our suppliers could be adversely impacted by the COVID-19 outbreak. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face cost increases and/or shortages of food items or other supplies across our restaurants and our results could be adversely impacted by such supply interruptions.
The equity markets in the United States have been extremely volatile due to the COVID-19 outbreak and our stock price has fluctuated significantly.
Additional government regulations or legislation as a result of COVID-19 in addition to decisions we have made and may make in the future relating to the compensation of and benefit offerings for our company-operated restaurant team members could also have an adverse effect on our business. We cannot predict the types of government regulations or legislation that may be passed relating to employee compensation as a result of the COVID-19 outbreak. We have implemented an emergency paid sick leave program at our company-operated restaurants and taken other compensation and benefit actions to support our restaurant team members during the COVID-19 business interruption, but those actions may not be sufficient to compensate our team members for the entire duration of any business interruption resulting from COVID-19. Those team members might seek and find other employment during that interruption, which could materially adversely affect our ability to properly staff and reopen our restaurants with experienced team members when the business interruptions caused by COVID-19 abate or end.
The COVID-19 outbreak also may have the effect of heightening other risks disclosed, including, but not limited to, those related to consumer confidence, increase in food and commodity costs, supply chain interruptions, labor availability and cost, cybersecurity incidents, increased indebtedness, regulatory and legal complexity, and governmental regulations.
We face significant competition in the food service industry and our inability to compete may adversely affect our business.
The food service industry is highly competitive with respect to price, service, location, product offering, image and attractiveness of the facilities, personnel, advertising, brand identification, and food quality. Our competition includes a large number of national and regional restaurant chains, as well as locally owned and independent businesses. In particular, we operate in the quick service restaurant chain segment, in which we face a number of established competitors, as well as frequent new entrants to the segment nationally and in regional markets. Some of our competitors have significantly greater financial, marketing, technological, personnel, and other resources than we do. In addition, many of our competitors have greater name recognition nationally or in some of the local or regional markets in which we have restaurants.
Additionally, the trend toward convergence in grocery, deli, delivery, and restaurant services is increasing the number of our competitors. For example, competitive pressures can come from deli sections and in-store cafes of major grocery store chains, including those targeted at customers who desire high-quality food and convenience, as well as from convenience stores and other dining outlets. These competitors may have, among other things, a more diverse menu, lower operating costs and prices, better locations, better facilities, more effective marketing, and more efficient operations than we do. Such increased competition could decrease the demand for our products and negatively affect our sales, operating results, profits, business and financial position, and prospects (collectively, our “financial results”).
While we continue to make improvements to our facilities, to implement new service, technology, and training initiatives, and to introduce new products, there can be no assurance that such efforts will generate increased sales or sufficient customer interest. Many of our competitors are remodeling their facilities, implementing service improvements, introducing a variety of new products and service offerings, and advertising that their ingredients are healthier or locally sourced. Such competing products and health- or environmental-focused claims may hurt our competitive positioning as existing or potential customers could seek out other dining options.
Changes in demographic trends and in customer tastes and preferences could cause sales and the royalties that we receive from franchisees to decline.
Changes in customer preferences, demographic trends, and the number, type, and location of competing restaurants have great impact in the restaurant industry. Our sales and the revenue that we receive from franchisees could be impacted by changes in customer preferences related to dietary concerns, such as preferences regarding calories, sodium content, carbohydrates, fat, additives, and sourcing, or in response to environmental and animal welfare concerns. Such preference changes could result in customers favoring other foods to the exclusion of our menu items. If we fail to adapt to changes in customer preferences and trends, we may lose customers and our sales and the rents, royalties and marketing fees we receive from franchisees may deteriorate.
Changes in consumer confidence and declines in general economic conditions could negatively impact our financial results.
The restaurant industry depends on consumer discretionary spending. We are impacted by consumer confidence, which is, in turn, influenced by general economic conditions and discretionary income levels. A material decline in consumer confidence or a decline in family “food away from home” spending could cause our financial results to decline. If economic conditions worsen, customer traffic could be adversely impacted if our customers choose to dine out less frequently or reduce the amount they spend on meals while dining out, which could cause our company and our franchised average restaurant sales to decline. An economic downturn may be caused by a variety of factors, such as macro-economic changes, increased unemployment rates, increased taxes, interest rates, or other changes in government fiscal policy. High gasoline prices, increased healthcare costs, declining home prices, and political unrest, foreign or domestic, may potentially contribute to an economic downturn, as may regional or local events, including natural disasters or local regulation. The impact of these factors may be exacerbated by the geographic profile of our brand. Specifically, nearly 70% of our restaurants are located in the states of California and Texas. Economic conditions, state and local laws, or government regulations affecting those states may therefore more greatly impact our results than would similar occurrences in other locations.
Increases in food and commodity costs could decrease our profit margins or result in a modified menu, which could adversely affect our financial results.
We and our franchisees are subject to volatility in food and commodity costs and availability. Accordingly, our profitability depends in part on our ability to anticipate and react to changes in food costs and availability. As is true of all companies in the restaurant industry, we are susceptible to increases in food costs that are outside of our control. Factors that can impact food and commodity costs include general economic conditions, seasonal fluctuations, weather and climate conditions, global demand, trade protections and subsidies, food safety issues, infectious diseases, possible terrorist activity, currency fluctuations, product recalls, and government regulatory schemes. Additionally, some of our produce, meats, and restaurant supplies are sourced from outside the United States. Any new or increased import duties, tariffs, or taxes, or other changes in U.S. trade or tax policy, could result in higher food and commodity costs that would adversely impact our financial results.
Weather and climate related issues, such as freezes or drought, may lead to temporary or even longer-term spikes in the prices of some ingredients such as produce and meats, or of livestock feed. Increasing weather volatility or other long-term changes in global weather patterns, including any changes associated with global climate change, could have a significant impact on the price or availability of some of our ingredients. Any increase in the prices of the ingredients most critical to our menu, such as beef, chicken, pork, tomatoes, lettuce, dairy products, and potatoes could adversely affect our financial results. In the event of cost increases with respect to one or more of our raw ingredients, we may choose to change our pricing or suspend serving a menu item rather than paying the increased cost for the particular ingredient.
We seek to manage food and commodity costs, including through extended fixed price contracts, strong category and commodity management, and purchasing fundamentals. However, certain commodities such as beef and pork, which currently represent approximately 18% and 6% respectively, of our commodity spend, do not lend themselves to fixed price contracts. We cannot assure you that we will successfully enter into fixed price contracts on a timely basis or on commercially favorable pricing terms. In addition, although our produce contracts contain predetermined price limits, we are subject to force majeure clauses resulting from weather or acts of God that may result in temporary spikes in costs.
Further, we cannot assure you that we or our franchisees will be able to successfully anticipate and react effectively to changing food and commodity costs by adjusting purchasing practices or menu offerings. We and our franchisees also may not be able to pass along price increases to our customers as a result of adverse economic conditions, competitive pricing, or other factors. Therefore, variability of food and other commodity costs could adversely affect our profitability and results of operations.
Failure to receive scheduled deliveries of high-quality food ingredients and other supplies could harm our operations and reputation.
Dependence on frequent deliveries of fresh produce and other food products subjects food service businesses such as ours to the risk that shortages or interruptions in supply could adversely affect the availability, quality or cost of ingredients or require us to incur additional costs to obtain adequate supplies. Deliveries of supplies may be affected by adverse weather conditions, natural disasters, labor shortages, or financial or solvency issues of our distributors or suppliers, product recalls, or other issues. Further, increases in fuel prices could result in increased distribution costs. In addition, if any of our distributors, suppliers, vendors, or other contractors fail to meet our quality or safety standards or otherwise do not perform adequately, or if any one or more of them seeks to terminate its agreement or fails to perform as anticipated, or if there is any disruption in any of our distribution or supply relationships or operations for any reason, our business reputation, financial condition, and results of operations may be materially affected.
We have a limited number of suppliers for our major products and rely on a distribution network with a limited number of distribution partners for the majority of our national distribution program. If our suppliers or distributors are unable to fulfill their obligations under their contracts, it could harm our operations.
We contract with a distribution network with a limited number of distribution partners located throughout the nation to provide the majority of our food distribution services. Through these arrangements, our food supplies are largely distributed through several primary distributors. If any of these relationships are interrupted or terminated, or if one or more supply or distribution partners are unable or unwilling to fulfill their obligations for whatever reasons, product availability to our restaurants may be interrupted, and business and financial results may be negatively impacted. Although we believe that alternative supply and distribution sources are available, there can be no assurance that we will be able to identify or negotiate with such sources on terms that are commercially reasonable to us.
Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
Food safety is a top priority for our company, and we expend significant resources on food safety programs to ensure that our customers are able to enjoy safe and high-quality food products. These include a daily, structured food safety assessment and documentation process at our restaurants, and periodic third-party and internal audits to review the food safety performance of our vendors, distributors and restaurants. Nonetheless, food safety risks cannot be completely eliminated, and food safety and food-borne illness issues do occur in the food service industry. Any report or publicity linking us to instances of food-borne illness or other food safety issues, including issues involving food tampering, natural or foreign objects, or other contaminants or adulterants in our food, could adversely affect our reputation, as well as our financial results. Furthermore, our reliance on food suppliers and distributors increases the risk that food-borne illness incidents could be introduced by third-party vendors outside our direct control. Although we test and audit these activities, we cannot guarantee that all food items are safely and properly maintained during transport or distribution throughout the supply chain.
Additionally, past reports linking nationwide or regional incidents of food-borne illnesses such as salmonella, E. coli, and listeria to certain products such as produce and proteins, or human-influenced illness such as hepatitis A or norovirus, have resulted in consumers avoiding certain products and restaurant concepts for a period of time. Similarly, reaction to media-influenced reports of avian flu, incidents of “mad cow” disease, or similar concerns have also caused some consumers to avoid products that are, or are suspected of being, affected and could have an adverse effect on the price and availability of affected ingredients. Further, if we react to these problems by changing our menu or other key aspects of the brand experience, we may lose customers who do not accept those changes, and we may not be able to attract enough new customers to generate sufficient revenue to make our restaurants profitable.
Our restaurants currently have an ingredient mix that can be exposed to one or more food allergens, such as eggs, wheat, milk, fish, shellfish, tree nuts, peanuts, and soy. We employ precautionary allergen training steps for food handlers in order to minimize risk of allergen cross contamination and we post allergen information on nutritional posters in our restaurants or otherwise make such information available to guests upon request. Even with such precautionary measures, the potential risk of allergen cross contamination exists in a restaurant environment. A potentially serious allergic reaction by a guest may result in adverse public communication, media coverage, a decline in restaurant sales, and a material decline in our financial results.
Negative publicity relating to our business or industry could adversely impact our reputation.
Our business can be materially and adversely affected by widespread negative publicity of any type, particularly regarding food quality, food safety, nutritional content, safety or public health issues (such as outbreaks, pandemics, epidemics, or the prospect of any of these), obesity or other health concerns, animal welfare issues, and employee relations issues, among other things. Adverse publicity in these areas could damage the trust customers place in our brand. The increasingly widespread use of mobile devices and social media platforms has amplified the speed and scope of adverse publicity and could hamper our ability to promptly correct misrepresentations or otherwise respond effectively to negative publicity, whether or not accurate. Any widespread negative publicity regarding the Company, our brand, our vendors and suppliers, and our franchisees, or negative publicity about the restaurant industry in general, whether or not accurate, could cause a decline in restaurant sales, and could have a material adverse effect on our financial results.
Additionally, employee or customer claims against us or our franchisees based on, among other things, wage and hour violations, discrimination, harassment, or wrongful termination may also create negative publicity that could adversely affect us and divert financial and management resources that would otherwise be focused on the future performance of our operations. Consumer demand for our products could decrease significantly if any such incidents or other matters create negative publicity or otherwise erode consumer confidence in us, our brand or our products, or in the restaurant industry in general.
We are also subject to the risk of negative publicity associated with animal welfare regulations and campaigns. Our restaurants utilize ingredients manufactured from beef, poultry, and pork. Our policies require that our approved food suppliers and their raw material providers engage in proper animal welfare practices. Despite our policies and efforts, media reports and portrayals of inhumane acts toward animals by participants in the food supply chain, whether by our suppliers or not, can create a negative opinion or perception of the food industry’s animal welfare efforts. Such media reports and negative publicity could impact guest perception of our brand or industry and can have a material adverse effect on our financial results.
Our business could be adversely affected by increased labor costs.
Labor is a primary component of our operating costs. Increased labor costs due to factors such as competition for workers, labor market pressures, increased minimum wage requirements, paid sick leave or vacation accrual mandates, or other legal or regulatory changes, such as predictive scheduling, may adversely impact operating costs for us and our franchisees. Additional taxes or requirements to incur additional employee benefit costs, including the requirements of the Patient Protection and Affordable Care Act (the “Affordable Care Act”) or any new or replacement healthcare requirements, could also adversely impact our operating costs.
The enactment of additional state or local minimum wage increases above federal wage rates or regulations related to non-exempt employees has increased and could continue to increase labor costs for employees across our system-wide operations, especially considering our concentration of restaurants in California.
Inability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
We believe that our continued success will depend, in part, on our ability to attract and retain the services of skilled personnel, from our senior management to our restaurant employees. The loss of the services of, or our inability to attract and retain, such personnel could have a material adverse effect on our business. We believe good managers and crew are a key part of our success, and we devote significant resources to recruiting and training our restaurant managers and crew. We aim to reduce turnover among our restaurant crews and managers in an effort to retain top performing employees and better realize our investment in training new employees. Any failure to do so may adversely impact our operating results by increasing training costs and making it more difficult to deliver outstanding customer service, which could have a material adverse effect on our financial results.
We may not have the same resources as our competitors for marketing, advertising, and promotion.
Some of our competitors have greater financial resources, which enable them to: invest significantly more than us in advertising, particularly television and radio ads, as well as endorsements and sponsorships; have a presence across more media channels; and support multiple system and regional product launches at one time. Should our competitors increase spending on marketing, advertising, and promotion, or should the cost of advertising increase or our advertising funds decrease for any reason (including reduced sales, implementation of reduced spending strategies, or a decrease in the percentage contribution to the marketing fund for any reason), our results of operations and financial condition may be materially impacted.
In addition, our financial results may be harmed if our marketing, advertising, and promotional programs are less effective than those of our competitors. The growing prevalence and importance of social media platforms, behavioral advertising, and mobile technology also pose challenges and risks for our marketing, advertising, and promotional strategies; and failure to effectively use and gain traction on these platforms or technologies could cause our advertising to be less effective than our competitors. Moreover, improper or damaging use of social media or mobile technology, including by our employees, franchisees, or guests could increase our costs, lead to litigation, or result in negative publicity, all of which could have a material adverse effect on our financial results.
We may be adversely impacted by severe weather conditions, natural disasters, terrorist acts, or civil unrest that could result in property damage, injury to employees and staff, and lost restaurant sales.
Food service businesses such as ours can be materially and adversely affected by severe weather conditions, such as severe storms, hurricanes, flooding, prolonged drought, or protracted heat or cold waves, and by natural disasters, such as earthquakes and wild fires, or “man-made” calamities such as terrorist incidents or civil unrest, and their aftermath. Such occurrences could result in lost restaurant sales, property damage, lost products, interruptions in supply, and increased costs.
If systemic or widespread adverse changes in climate or weather patterns occur, we could experience more severe impact, which could have a material adverse effect on our financial results. The impact of these factors may be exacerbated by our geographic profile, as nearly 70% of our restaurants are located in the states of California and Texas.
Risks Related to Our Business Strategy
We may not achieve our development goals.
We intend to grow the brand primarily through new restaurant development by franchisees, both in existing markets and in new markets. Development involves substantial risks, including the risk of:
•the inability to identify suitable franchisees;
•limited availability of financing for the Company and for franchisees at acceptable rates and terms;
•development costs exceeding budgeted or contracted amounts;
•delays in completion of construction;
•the inability to identify, or the unavailability of suitable sites at acceptable cost and other leasing or purchase terms;
•developed properties not achieving desired revenue or cash flow levels once opened;
•the negative impact of a new restaurant upon sales at nearby existing restaurants;
•the challenge of developing in areas where competitors are more established or have greater penetration or access to suitable development sites;
•incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion;
•impairment charges resulting from underperforming restaurants or decisions to curtail or cease investment in certain locations or markets;
•in new geographic markets where we have limited or no existing locations, the inability to successfully expand or acquire critical market presence for our brand, acquire name recognition, successfully market our products or attract new customers;
•operating cost levels that reduce the demand for, or raise the cost of, developing new restaurants;
•the challenge of identifying, recruiting, and training qualified franchisees or company restaurant management;
•the inability to obtain all required permits;
•changes in laws, regulations, and interpretations, including interpretations of the requirements of the Americans with Disabilities Act;
•unique regulations or challenges applicable to operating in non-traditional locations, such as airports, and military or government facilities; and
•general economic and business conditions.
Although we manage our growth and development activities to help reduce such risks, we cannot assure that our present or future growth and development activities will perform in accordance with our expectations. Our inability to expand in accordance with our plans or to manage the risks associated with our growth could have a material adverse effect on our results of operations and financial condition.
Our highly franchised business model presents a number of risks, and the failure of our franchisees to operate successful and profitable restaurants could negatively impact our business.
As of September 27, 2020, approximately 94% of our operating restaurant properties were franchised restaurants; therefore, our success increasingly relies on the financial success and cooperation of our franchisees, yet we have limited influence over their operations. Our income arises from two sources: fees from franchised restaurants (e.g., rent and royalties based on a percentage of sales) and, to a lesser degree, sales from our remaining Company-operated restaurants. Our franchisees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. If our franchisees do not experience sales growth, our revenues and margins could be negatively affected as a result. Also, if sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures, or delayed or reduced payments to us. Our refranchising strategy has increased that dependence and the potential effect of those factors. Our success also increasingly depends on the willingness and ability of our independent franchisees to implement shared strategies and major initiatives, which may include financial investment, and to remain aligned with us on operating and promotional plans. Franchisees’ ability to contribute to the achievement of our plans is dependent in large part on the availability to them of funding at reasonable interest rates and may be negatively impacted by the financial markets in general or by the credit worthiness of our franchisees or the Company. As small businesses, some of our franchise operators may be negatively and disproportionately impacted by strategic initiatives, capital requirements, inflation, labor costs, employee relations issues, or other causes. In addition, franchisees’ business obligations may not be limited to the operation of Jack in the Box restaurants, making them subject to business and financial risks unrelated to the operation of our restaurants. These unrelated risks could adversely affect a franchisee’s ability to make payments to us or to make payments on a timely basis. We cannot assure you that our franchisees will successfully participate in our strategic or marketing initiatives or operate their restaurants in a manner consistent with our requirements, standards, and expectations. As compared to some of our competitors, our brand has relatively fewer franchisees who, on average, operate more restaurants per franchisee. There are significant risks to our business if a franchisee, particularly one who operates a large number of restaurants, encounters financial difficulties, including bankruptcy, or fails to adhere to our standards, projecting an image inconsistent with our brand or negatively impacting our financial results.
We are subject to financial and regulatory risks associated with our owned and leased properties and real estate development projects.
We own or lease the real properties on which most of our restaurants are located and lease or sublease to the franchisee a majority of our franchised restaurant sites. We have engaged and continue to engage in real estate development projects. As is the case with any owner or operator of real property, we are subject to eminent domain proceedings that can impact the value of investments we have made in real property, and we are subject to other potential liabilities, cost and damages arising out of owning, operating, leasing, or otherwise having interests in real property.
If we close a restaurant in a leased location, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Additionally, the potential losses associated with our inability to cancel leases may result in our keeping open restaurant locations that are performing significantly below targeted levels. As a result, ongoing lease obligations at closed or underperforming restaurant locations could impair our results of operations. In addition, at the end of the lease term and expiration of all renewal periods, we may be unable to renew the lease without substantial additional cost, if at all. As a result, we may be required to close or relocate a restaurant, which could subject us to construction and other costs and risks and may have an adverse effect on our operating performance.
Our tax provision may fluctuate due to changes in expected earnings.
Our income tax provision is sensitive to expected earnings and, as those expectations change, our income tax provisions may vary from quarter-to-quarter and year-to-year. In addition, we may occasionally take positions on our tax returns that differ from their treatment for financial reporting purposes. The difference in treatment of such positions could have an adverse impact on our effective tax rate.
General Business Risks
We are subject to the risk of cybersecurity breaches, intrusions, data loss, or other data security incidents.
We and our franchisees rely on computer systems and information technology to conduct our business. We have instituted controls, including information security governance controls that are intended to protect our computer systems, our point of sale (“POS”) systems, and our information technology systems and networks; and adhere to payment card industry data security standards and limit third party access for vendors that require access to our restaurant networks. We also have business continuity plans that attempt to anticipate and mitigate failures. However, we cannot control or prevent every cybersecurity risk.
A material failure or interruption of service, or a breach in the security of our computer systems caused by malware, ransomware or other attack, could cause reduced efficiency in operations, or other business interruptions; could negatively impact delivery of food to restaurants, or financial functions such as vendor payment, employee payroll, franchise operations reporting, or our ability to receive customer payments through our POS or other systems, or could result in the loss or misappropriation of customer or employee data. Such events could negatively impact cash flows or require significant capital investment to rectify; result in damage to our business or reputation or loss of consumer or employee confidence; and lead to potential costs, fines and litigation. Damage to our business or reputation or loss of consumer confidence may also result from any failure by our franchisees to implement standard computer systems and information technology, as we are dependent on our franchisees to adopt appropriate safeguards. These risks may be magnified by increased and changing regulations. The costs of compliance and risk mitigation planning, including increased investment in technology or personnel in order to protect valuable business or consumer information, have increased significantly in recent years, and may also negatively impact our financial results.
Restaurants and other retailers have faced, and we could in the future become subject to, claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information or the loss of personally identifiable information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could further adversely affect our financial results.
We collect and maintain personal information about our employees and our guests and are seeking to provide our guests with new digital experiences. These digital experiences will require us to open up access into our Point of Sale systems to allow for capabilities like mobile order and pay, third party delivery, and digital menu boards. The collection and use of personal information are regulated at the federal and state levels; such regulations include the California Consumer Privacy Act. We increasingly rely on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. There has been an increase over the past several years in the frequency and sophistication of attempts to compromise the security of these types of systems. If the security and information systems that we or our outsourced third-party providers use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply with applicable laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected by these types of security breaches or regulatory violations, which could impair our ability to attract and retain qualified employees.
We are subject to risks associated with our increasing dependence on digital commerce platforms and technologies to maintain and grow sales, and we cannot predict the impact that these digital commerce platforms and technologies, other new or improved technologies or alternative methods of delivery may have on consumer behavior and our financial results.
Advances in technologies, including advances in digital food order and delivery technologies, and changes in consumer behavior driven by such advances could have a negative effect on our business. Technology and consumer offerings continue to develop, and we expect that new and enhanced technologies and consumer offerings will be available in the future, including those with a focus on restaurant modernization, restaurant technology and digital engagement and ordering. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable guest proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these digital platforms, delivery channels or systems or other technologies or their impact on our business.
We are dependent on information technology and digital service providers and any material failure, misuse or interruption of our computer systems, supporting infrastructure, consumer-facing digital capabilities or social media platforms could adversely affect our business.
We are dependent upon information technology and digital service providers to properly conduct our business, including point-of-sale processing in our restaurants, order processing through digital channels, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business, service our customers and process digital orders through our mobile application and third-party delivery partnerships depends significantly on the reliability and performance of our systems and those managed by our service providers. The failure of these systems and processes to operate effectively, including an interruption or degradation in such systems or services, could be harmful and cause delays in customer service, loss of digital sales, reduce efficiency or cause delays in operations. Significant capital investments may be required to remediate any such problems. Additionally, the success of certain of our strategic initiatives, including to expand our consumer-facing digital capabilities to connect with customers and drive growth, is highly dependent on our technology systems and digital service providers.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which could harm our business and the value of the Company’s common shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting. During the fourth quarter of fiscal 2019, management identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) as further disclosed in Part II, Item 9A. As a result, management concluded that our internal control over financial reporting was not effective as of the end of our fiscal year 2019. During fiscal year 2020, we completed the remediation measures related to the material weakness and management concluded that our internal control over financial reporting was effective as of the fiscal year ended September 27, 2020. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes in the future. We may in the future discover areas of our internal controls that need improvement. Furthermore, to the extent our business grows or significantly changes, our internal controls may become more complex, and we would require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of the Company’s common stock. Additionally, the existence of any material weakness may require management to devote significant time and incur significant expense to remediate any such material weaknesses and management may not be able to remediate any such material weaknesses in a timely manner.
We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.
Our ability to successfully implement our business strategy depends, in part, on our ability to further build brand recognition using our trademarks, service marks, trade dress, and other proprietary intellectual property, including our name and logos, our strategy, and the ambiance of our restaurants. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates or infringes our intellectual property, either in print or on the Internet or a social media platform, the value of our brand may be harmed, which could have a material adverse effect on our business and might prevent our brand from achieving or maintaining market acceptance.
We franchise our brand to various franchisees. While we try to ensure that the quality of our brand is maintained by all franchisees, we cannot assure that all franchisees will uphold brand standards so as not to harm the value of our intellectual property or our reputation.
Jack in the Box may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
In addition to its shareholders, Jack in the Box has several key stakeholders, including its independent franchise operators. Third parties such as franchisees are not subject to the control of the Company and may take actions or behave in ways that are adverse to the Company. Because the ultimate interests of franchisees and the Company are largely aligned around maximizing restaurant profits, the Company does not believe that any areas of disagreement between the company and franchisees are likely to create material risk to the Company or its shareholders. Nevertheless, it is possible that conflict and disagreements with these or other critical stakeholders could distract management or otherwise have a material adverse effect on the Company’s business.
The securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
The Series 2019-1 Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Series 2019-1 Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Series 2019-1 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Series 2019-1 Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to record keeping, access to information and similar matters. The Series 2019-1 Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Series 2019-1 Class A-2 Notes on the applicable scheduled maturity date. The Series 2019-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2019-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.
In the event that a rapid amortization event occurs under the Indenture (including, without limitation, upon an event of default under the Indenture or the failure to repay the securitized debt at the end of the applicable term) which would require repayment of the Series 2019-1 Senior Notes, the funds available to us would be reduced or eliminated, which would in turn reduce our ability to operate and/or grow our business. If our subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If our subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations which could have a material adverse effect on our financial condition.
We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
Under the Indenture, the Master Issuer has approximately $1.4 billion of outstanding debt as of September 27, 2020, which includes $107.9 million of borrowings we drew down on our revolving credit facility during the year to provide additional security and liquidity given the uncertainty of the COVID-19 pandemic.
This level of debt could have certain material adverse effects on the Company, including but not limited to:
•our available cash flow in the future to fund working capital, capital expenditures, acquisitions, and general corporate or other purposes could be impaired, and our ability to obtain additional financing for such purposes is limited;
•a substantial portion of our cash flows could be required for debt service and, as a result, might not be available for our operations or other purposes;
•any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or could force us to modify our operations or sell assets;
•our ability to operate our business and our ability to repurchase stock or pay cash dividends to our stockholders may be restricted by the financial and other covenants set forth in the Indenture.
•our ability to withstand competitive pressures may be decreased; and
•our level of indebtedness may make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business, regulatory, and economic conditions.
In addition, we may incur additional indebtedness in the future. If new debt or other liabilities are added to our current consolidated debt levels, the related risks that it now faces could intensify.
The securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.
The Indenture and the management agreement entered into between certain of our subsidiaries and the Indenture trustee (the “Management Agreement”) contain various covenants that limit our and our subsidiaries’ ability to engage in specified types of transactions. For example, the Indenture and the Management Agreement contain covenants that, among other things, restrict, subject to certain exceptions, the ability of certain subsidiaries to:
•incur or guarantee additional indebtedness;
•sell certain assets;
•alter the business conducted by our subsidiaries;
•create or incur liens on certain assets; or
•consolidate, merge, sell or otherwise dispose of all or substantially all of the assets held within the securitization entities.
As a result of these restrictions, we may not have adequate resources or the flexibility to continue to manage the business and provide for growth of the Jack in the Box system, including product development and marketing for the Jack in the Box brand, which could adversely affect our future growth prospects, financial condition, results of operations and liquidity.
Changes in accounting standards may negatively impact our results of operations.
Changes in accounting standards, policies, or related interpretations by accountants or regulatory entities may negatively impact our financial results. Many accounting standards require management to make subjective assumptions and estimates, such as those required for long-lived assets, retirement benefits, self-insurance, restaurant closing costs, goodwill and other intangibles, legal accruals, and income taxes. Changes in those underlying assumptions and estimates could significantly change our results.
We are subject to increasing legal complexity and may be subject to claims or lawsuits that are costly to defend and could result in our payment of substantial damages or settlement costs.
We are subject to complaints or litigation brought by current or former employees, customers, current or former franchisees, vendors, landlords, shareholders, competitors, government agencies, or others. We assess contingencies to determine the degree of probability and range of possible losses for potential accrual in our financial statements. An estimated loss contingency is accrued if it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Because lawsuits are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. However, the amount of ultimate loss may differ from these estimates. A judgment that is not covered by insurance or that is significantly in excess of our insurance coverage for any claims could materially adversely affect our financial results. In addition, regardless of whether any claims against us are valid or whether we are found to be liable, claims may be expensive to defend, and may divert management’s attention away from our operations and hurt our performance. Further, adverse publicity resulting from claims against us or our franchisees may harm our business or that of our franchisees.
Unionization activities or labor disputes may disrupt our operations and affect our profitability.
Some or all of our employees or our franchisees’ employees may elect to be represented by labor unions in the future. If a significant number of these employees were to become unionized and collective bargaining agreement terms were significantly different from current compensation arrangements, this could adversely affect our business and financial results or the business and financial results of our franchisees. In addition, a labor dispute or organizing effort involving some or all of our employees or our franchisees’ employees may harm our brand and reputation. Resolution of such disputes may be costly and time-consuming, and thus increase our costs and distract management resources.
Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
Our regulatory environment exposes us to complex compliance and similar risks that could affect our operations and results in material ways. In many of our markets, we are subject to increasing regulation, which has increased our cost of doing business. We are affected by the cost, compliance and other risks associated with the often conflicting and highly prescriptive regulations, including where inconsistent standards imposed by multiple governmental authorities can adversely affect our business and increase our exposure to litigation or governmental investigations or proceedings.
Our success depends in part on our ability to manage the impact of new, potential or changing regulations that can affect our business plans and operations. These include regulations affecting product packaging, marketing, the nutritional content and safety of our food and other products, labeling and other disclosure practices. Compliance efforts with those regulations may be affected by the need to comply with different, potentially conflicting laws in different jurisdictions, and the need to rely on the accuracy and completeness of information from third-party suppliers (particularly given varying requirements and practices for testing and disclosure).
Regulatory bodies may enact new laws or promulgate new regulations that are adverse to our business, or they may view matters or interpret laws and regulations differently than they have in the past or in a manner adverse to our business. For example, a recently enacted law in California purports to codify an employment classification test set forth by the California Supreme Court that established a new standard for determining employee or independent contractor status. Although we would argue that the law does not change the status of franchisees or their employees, it has been suggested that the law could be read to, for example, make franchisors legally liable for the conduct of franchisee employees. Acceptance of this or similar arguments by the courts in California or elsewhere could impact our financial results or affect restaurant operations.
Our insurance may not provide adequate levels of coverage against claims.
We believe that we maintain insurance policies customary for businesses of our size, type, and experience. Historically, through the use of deductibles or self-insurance retentions, we retained a portion of expected losses for our workers’ compensation, general liability, certain employee medical and dental, employment, property, and other claims. However, there are types of losses that we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations.
Risks Related to Government Regulations
Governmental regulation, including in one or more of the following areas, may adversely affect our existing and future operations and results, including by harming our ability to profitably operate our restaurants.
Americans with Disabilities Act and Similar State Laws
We are subject to the Americans with Disabilities Act (“ADA”) and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations, and other areas. The expenses associated with any modifications we may be required to undertake with respect to our restaurants or services, or any damages, legal fees, and costs associated with litigating or resolving claims under the ADA or similar state laws, could be material.
The Food Safety Modernization Act signed into law in January 2011, granted the FDA new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are not directly implicated by these requirements, our suppliers may initiate or otherwise be subject to food recalls or other consequences impacting the availability of certain products, which could result in adverse publicity, or require us to take actions that could be costly for us or otherwise impact our business and financial results.
Local Licensure, Zoning, and Other Regulation
Each of our restaurants is subject to state and local licensing and regulation by health, sanitation, food, and workplace safety and other agencies. We may experience material difficulties, delays, or failures in obtaining the necessary licenses or approvals for new restaurants, which could delay planned restaurant openings. In addition, stringent and varied requirements of local regulators with respect to zoning, land use, and environmental factors could delay or prevent development of new restaurants in particular locations.
We are subject to federal, state, and local environmental laws and regulations concerning the discharge, storage, handling, release, and disposal of hazardous or toxic substances, as well as local ordinances restricting the types of packaging we can use in our restaurants. If and to the extent any hazardous or toxic substances are present on or adjacent to any of our restaurant locations, we believe any such contamination would be the responsibility of one or more third parties, and would have been or should be addressed by the responsible party. If the relevant third parties have not or do not address the identified contamination properly or completely, then under certain environmental laws, we could be held liable as an owner or operator to address any remaining contamination, sometimes without regard to whether we knew of, or were responsible for, the release or presence of hazardous or toxic substances. Any such liability could be material. Further, we may not have identified all of the potential environmental liabilities at our properties, and any such liabilities could have a material adverse effect on our financial results. We also cannot predict what environmental laws or laws regarding packaging will be enacted in the future, how existing or future environmental or packaging laws will be administered or interpreted, or the amount of future expenditures that we may need to make to comply with, or to satisfy claims relating to, such laws.
Employment and Immigration Laws
We and our franchisees are subject to the federal labor laws, including the Fair Labor Standards Act, as well as various state and local laws governing such matters as minimum wages, exempt status classification, overtime, breaks, schedules, and other working conditions for employees. Federal, state, and local laws may also require us to provide paid and unpaid leave, healthcare, or other benefits to our employees. Changes in the law, or penalties associated with any failure on our part to comply with legal requirements, could increase our labor costs or result in significant additional expense to us and our franchisees.
States in which we operate may adopt new immigration laws or enforcement programs, and the U.S. Congress and the Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations, or enforcement programs. Such changes and enforcement programs may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. All of our Company employees currently participate in the “E-Verify” program, an Internet-based, free program run by the United States government to verify employment eligibility. However, use of the “E-Verify” program does not guarantee that we will successfully identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our employees or our franchisees’ employees are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees who are found to be unauthorized workers may disrupt operations, cause temporary increases in labor costs to train
new employees, and result in additional adverse publicity. We could also become subject to fines, penalties, and other costs related to claims that we did not fully comply with all record keeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our financial results.
Our franchising activities are subject to federal regulations administered by the U.S. Federal Trade Commission, laws enacted by a number of states, and rules and regulations promulgated by the U.S. Federal Trade Commission. In particular, we are subject to federal and state laws regulating the offer and sale of franchises, as well as judicial and administrative interpretations of such laws. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may also apply substantive standards to the relationship between franchisor and franchisee, including limitations on the ability of franchisors to terminate franchises and alter franchise arrangements. Failure to comply with new or existing franchise laws, rules, and regulations in any jurisdiction or to obtain required government approvals could negatively affect our ability to grow or expand our franchise business and sell franchises.
The proliferation of federal, state, and local regulations increases our compliance risks, which in turn could adversely affect our business.
The restaurant and retail industries are subject to extensive federal, state, and local laws and regulations, including regulations relating to:
•the preparation, ingredients, labeling, packaging, advertising, and sale of food and beverages;
•building and zoning requirements;
•sanitation and safety standards;
•employee healthcare, including the implementation and legal, regulatory, and cost implications of the Affordable Care Act;
•labor and employment, including minimum wage adjustments, overtime, working conditions, employment eligibility and documentation, sick leave, and other employee benefit and fringe benefit requirements, and changing judicial, administrative, or regulatory interpretations of federal or state labor laws;
•the registration, offer, sale, termination, and renewal of franchises;
•Americans with Disabilities Act;
•climate change, including regulations related to the potential impact of greenhouse gases, water consumption, or taxes on carbon emissions; and
•privacy obligations, including the recently passed California Consumer Privacy Act and other new or proposed federal and state regulations.
The increasing amount and complexity of regulations and their interpretation may increase the costs to us and our franchisees of labor and compliance and increase our exposure to legal and regulatory claims which, in turn, could have a material adverse effect on our business. While we strive to comply with all applicable existing rules and regulations, we cannot predict the effect on our operations from modifications to the language or interpretations of existing requirements, or to the issuance of new or additional requirements in the future.
Legislation and regulations regarding our products and ingredients, including the nutritional content of our products, could impact customer preferences and negatively impact our financial results.
Changes in government regulation and consumer eating habits may impact the ingredients and nutritional content of our menu offerings or require us to disclose the nutritional content of our menu offerings. For example, a number of states, counties, and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers or have enacted legislation restricting the use of certain types of ingredients in restaurants. Furthermore, the Affordable Care Act requires chain restaurants to publish calorie information on their menus and menu boards. These and other requirements may increase our expenses, slow customers’ ordering process, or negatively influence the demand for our offerings; all of which can impact sales and profitability.
Compliance with current and future laws and regulations in a number of areas, including with respect to ingredients, nutritional content of our products, and packaging and serviceware may be costly and time-consuming. Additionally, if consumer health regulations change significantly, we may be required to modify our menu offerings or packaging, and as a result, may experience higher costs or reduced demand associated with such changes. Some government authorities are increasing regulations regarding trans-fats and sodium. While we have removed all artificial or “added during manufacturing” trans fats from our ingredients, some ingredients have naturally occurring trans-fats. Future requirements limiting trans-fats or sodium content may require us to change our menu offerings or switch to higher cost ingredients. These actions may hinder our ability to operate in some markets or to offer our full menu in these markets, which could have a material adverse effect on our business. If we fail to comply with such laws and regulations, our business could also experience a material adverse effect.
Failure to obtain and maintain required licenses and permits or to comply with food control regulations could lead to the loss of our food service licenses and, thereby, harm our business.
We are required, as a restaurant business, under state and local government regulations to obtain and maintain licenses, permits, and approvals to operate our businesses. Such regulations are subject to change from time to time. Any failure by us or our franchisees to obtain and maintain these licenses, permits, and approvals could adversely affect our financial results.
Risks Related to Our Common Stock
Our quarterly results and, as a result, the price of our common stock, may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors.
Our quarterly results and the price of our common stock may each fluctuate significantly and could fail to meet the expectations of securities analysts and investors because of factors including:
•actual or anticipated fluctuations in our operating results;
•changes in earnings estimated by securities analysts or our ability to meet those estimates;
•the operating and stock price performance of comparable companies;
•changes in our stockholder base;
•volatility of the stock market in general;
•changes to the regulatory and legal environment in which we operate; and
•general domestic and worldwide economic conditions.
As a result of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Same-store sales, system-wide sales, and earnings from continuing operations per share in any particular future period may decrease, or commodity, labor, or other operating costs and selling, general, and administrative expenses may increase. In the future, operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to fall. In addition, the stock market has historically experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our financial results, and those fluctuations could materially reduce the price of our common stock.
Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
From time to time, we may be subject to proposals by stockholders urging us to take certain corporate actions. If activist stockholder activities ensue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. For example, we may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial, and communications advisers, the costs of which may negatively impact our future financial results. In addition, perceived uncertainties as to our future direction, strategy or leadership created as a consequence of activist stockholder initiatives may result in the loss of potential business opportunities, harm our ability to attract new investors, customers, employees, and joint venture partners, and cause our stock price to experience periods of volatility or stagnation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
The following table sets forth information about our restaurant locations (by state) for all restaurants in operation as of September 27, 2020:
|New Mexico||— ||8||8|
|North Carolina||— ||19||19|
|South Carolina||— ||10||10|
Of the total 2,241 restaurants, our interest in restaurant properties consists of the following:
|Company-owned restaurant buildings:|
|On company-owned land||8 ||199 ||207 |
|On leased land||54 ||571 ||625 |
|Subtotal||62 ||770 ||832 |
|Company-leased restaurant buildings on leased land||82 ||1,037 ||1,119 |
|Franchise directly-owned or directly-leased restaurant buildings||— ||290 ||290 |
|Total restaurant buildings||144 ||2,097 ||2,241 |
Our restaurant leases generally provide for fixed rental payments (with cost-of-living index adjustments) plus real estate taxes, insurance, and other expenses. In addition, approximately 14% of our leases provide for contingent rental payments between 1% and 12% of the restaurant’s gross sales once certain thresholds are met. We have generally been able to renew our restaurant leases as they expire at then-current market rates.
In addition to the restaurant locations, we own our corporate headquarters located in San Diego, California, which consists of approximately 70,000 square feet and approximately four acres of undeveloped land directly adjacent to it. We believe that our current office space is suitable and adequate for its intended purpose.
ITEM 3. LEGAL PROCEEDINGS
See Note 16, Commitments and Contingencies, of the notes to the consolidated financial statements for a discussion of our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Information about our Executive Officers
The following table sets forth the name, age, position and years with the Company of each person who is an executive officer of Jack in the Box Inc. as of September 27, 2020:
|Name||Age||Positions||Years with the|
|Darin Harris||51||Chief Executive Officer||—|
|Dawn Hooper||50||Vice President, Controller and Interim Principal Financial Officer||19|
|Melissa Corrigan, Ph.D.||50||Senior Vice President, Chief Human Resources Officer||23|
|Dean Gordon||58||Senior Vice President, Chief Supply Chain Officer||11|
|Adrienne Ingoldt||38||Senior Vice President, Chief Brand and Experience Officer||5|
|Jennifer Kennedy||38||Senior Vice President, Chief Product and Innovation Officer||11|
|Drew Martin||56||Senior Vice President, Chief Information Officer||4|
|Sarah Super||44||Senior Vice President, General Counsel and Risk Officer||7|
|Marcus Tom||63||Senior Vice President, Chief Operating Officer||3|
The following sets forth the business experience of each executive officer for at least the last five years:
Mr. Harris has been Chief Executive Officer since June 2020. He was previously Chief Executive Officer of North America for flexible working company, IWG PLC, Regus, North America, from April 2018 to May 2020. Prior to that, from August 2013 to January 2018, Mr. Harris served as Chief Executive Officer of CiCi’s Enterprises LP. For just under five years, Mr. Harris also served as Chief Operating Officer for Primrose Schools from November 2008 to July 2013. He previously held franchise leadership roles as Senior Vice President at Arby’s Restaurant Group, Inc, from June 2005 to October 2008 and Vice President, Franchise and Corporate Development at Captain D’s Seafood, Inc., from May 2000 to January 2004. He was also a prior franchise operator of multiple Papa John’s Pizza and Qdoba Mexican Grill restaurants from November 2002 to June 2005. Mr. Harris has more than 25 years of leadership experience in the restaurant industry encompassing operations, franchising, brand strategy and restaurant development.
Ms. Hooper has been Vice President, Controller since May 2020 and has served as the Company’s interim principal financial officer upon the resignation of our former Chief Financial Officer in August 2020. She previously served as Assistant Controller from January 2013 to May 2020. She previously held positions of increasing responsibility in accounting since joining the Company in 2000. Prior to joining the Company, Ms. Hooper worked for KPMG LLP from September 1993 to September 2000. Ms. Hooper has more than 25 years in experience in accounting and finance.
Dr. Corrigan has been Senior Vice President, Chief Human Resources Officer since November 2019. She previously served as its Vice President and Human Resources Officer from November 2018 to November 2019 and Vice President of Human Resources and Total Rewards from 2015 to 2018. Dr. Corrigan was Vice President of Human Resources from 2013 to 2015, and she was Director of Human Resources from 2011 to 2013. She previously held several positions of increasing responsibility in Learning and Development since joining the Company in 1997 as a Training and Development Program Manager and has more than 20 years of experience with the Company in human resources related roles.
Mr. Gordon has been Senior Vice President, Chief Supply Chain Officer since November 2019. He previously served as its Vice President and Chief Supply Chain Officer from July 2017 to November 2019. He was previously Vice President of Supply Chain Services since October 2012, and Division Vice President of Purchasing from February 2009 to October 2012. Prior to joining the Company in February 2009, Mr. Gordon was Vice President of Supply Chain Management for Potbelly Sandwich Works from December 2005 to February 2009, and he held various positions with Applebee’s International from August 2000 to December 2005, most recently as Executive Director of Procurement. Mr. Gordon also held a number of positions at Prandium, Inc., an operator of multiple restaurant concepts, from October 1994 to August 2000. Mr. Gordon has over 20 years of Supply Chain Management experience.
Ms. Ingoldt has been Senior Vice President, Chief Brand and Experience Officer since November 2019. She previously served as Vice President of Marketing Communications, and Director of Marketing Communications, from February 2018 to November 2019 and August 2015 to February 2018, respectively. Prior to joining the Company in August 2015, she worked for advertising agency Vitro LLC from April 2012 to August 2015, as their Group Account Director leading multiple consumer brands.
Ms. Kennedy served as Senior Vice President, Chief Product and Innovation Officer since November 2019. Before that, she was Vice President, Culinary and Product Marketing from November 2017 to November 2019; Director, Product Marketing, from October 2016 to November 2017; Director, Integrated Marketing from March 2016 to October 2016; and Director, Innovation from September 2014 to March 2016. Ms. Kennedy left the Company on November 13, 2020.
Mr. Martin has been Senior Vice President, Chief Information Officer since November 2019. He previously served as Vice President and Chief Information Officer from November 2016 to November 2019. He was previously Executive Vice President and Chief Information Officer for Lytx Inc. (formerly DriveCam) from October 2011 to December 2014. He previously held IT leadership positions with Sony Electronics and PepsiCo, and from January 2015 until November 2016, was owner and a principal in Silicon Beach Advisors, a technology strategy consulting firm. Mr. Martin has over 25 years of experience in corporate IT and innovation.
Ms. Super has been Senior Vice President, General Counsel and Risk Officer since November 2019. She previously served as Vice President and Associate General Counsel from May 2018 until November 2019. Prior to joining the Company in December 2013, she was a partner at the law firm of Gordon & Rees. Ms. Super has more than 15 years of legal experience.
Mr. Tom has been Senior Vice President, Chief Operating Officer since November 2019. He previously served as Vice President and Chief Operating Officer from February 2018 to November 2019. Prior to joining the Company, Mr. Tom served as the Senior Vice President of Operations for JAB Beech Inc.’s Einstein Bros. Bagels brand from July 2015 to December 2016, and its Caribou Coffee brand from January 2017 to December 2017. From March 2006 to June 2015, Mr. Tom held several positions at Starbucks Coffee Company. From January 2014 to June 2015, he served as Director of Business Operations for all licensed stores in the U.S. and Canada. From May 2012 to December 2013, he served as the Director of Licensed Stores, and from 2006 to 2012 as the Director of Company Stores. Prior to joining Starbucks, Mr. Tom held several positions with YUM Brands International from 1991 to 2006. Mr. Tom has more than 15 years of experience in operation leadership positions in the restaurant industry.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Our common stock is traded on the NASDAQ Global Select Market under the symbol “JACK.”
Dividends. In fiscal 2020 and 2019, the Board of Directors declared three and four cash dividends, respectively, of $0.40 per share each. Our dividend is subject to the discretion and approval of our Board of Directors and our compliance with applicable law, and depends upon, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, and other factors that our Board of Directors may deem relevant.
Stock Repurchases. There were no share repurchases of our common stock during the fourth quarter of 2020. As of September 27, 2020, there was approximately $122.2 million remaining under Board-authorized stock buyback programs, consisting of $22.2 million which expires in November 2020 and $100.0 million that expires in November 2021.
On November 13, 2020, the Board of Directors authorized an additional $100.0 million stock buy-back program that expires on November 30, 2022.
Stockholders. As of November 12, 2020, there were 517 stockholders of record.
Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes the equity compensation plans under which Company common stock may be issued as of September 27, 2020. Stockholders of the Company have approved all plans requiring such approval.
|(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)||(b) Weighted-average exercise price of outstanding options (1)|
(c) Number of securities remaining for future issuance under equity compensation plans (excluding securities reflected in column (a))
|Equity compensation plans approved by security holders (2)||513,522||$91.85||1,907,050|
(1)Includes shares issuable in connection with our outstanding stock options, performance share awards, nonvested stock units, and non-management director deferred stock equivalents. The weighted-average exercise price in column (b) includes the weighted-average exercise price of stock options.
(2)For a description of our equity compensation plans, refer to Note 13, Share-Based Employee Compensation, of the notes to the consolidated financial statements.
Performance Graph. The following graph compares the cumulative return to holders of the Company’s common stock at September 30th of each year to the yearly weighted cumulative return of a Peer Group Index and to the Standard & Poor’s (“S&P”) 500 Index for the same period. The below comparison assumes $100 was invested on September 30, 2015 in the Company’s common stock and in the comparison groups and assumes reinvestment of dividends. The Company uses a Peer Group to assess the competitive pay levels of our senior executives, and to evaluate program design elements.
|Jack in the Box Inc.||$100||$126||$136||$114||$127||$112|
|S&P 500 Index||$100||$115||$137||$161||$168||$194|
|Peer Group (1)||$100||$89||$89||$120||$139||$178|
(1)The Peer Group Index comprises the following companies: BJ’s Restaurants, Inc.; Bloomin’ Brands, Inc.; Brinker International, Inc.; The Cheesecake Factory Inc.; Chipotle Mexican Grill Inc.; Cracker Barrel Old Country Store, Inc.; Denny’s Corp.; Dine Brands Global Inc.; Domino’s Pizza, Inc.; Dunkin’ Brands Group, Inc.; Papa John's Int'l, Inc.; Red Robin Gourmet Burgers, Inc.; Texas Roadhouse, Inc.; and The Wendy’s Company.
ITEM 6. SELECTED FINANCIAL DATA
Our fiscal year is 52 or 53 weeks, ending the Sunday closest to September 30. All years presented below include 52-weeks, except for 2016, which includes 53-weeks. The selected financial data reflects Qdoba Restaurant Corporation as discontinued operations for all fiscal years presented below. This selected financial data should be read in conjunction with our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. Our consolidated financial information may not be indicative of our future performance.
| ||Fiscal Year|
|(dollars and shares in thousands, except per share data)|
|Statements of Earnings Data (1):|
|Total revenues (2), (3) ||$||1,021,506||$||950,107||$||869,690||$||1,097,291||$||1,162,258|
|Operating costs and expenses (2), (3) ||$||794,183||$||749,250||$||682,407||$||889,912||$||971,995|
|Gains on the sale of company-operated restaurants||(3,261)||(1,366)||(46,164)||(38,034)||(1,230)|
|Total operating costs and expenses, net (2), (3)||$||790,922||$||747,884||$||636,243||$||851,878||$||970,765|
|Earnings from continuing operations||$||89,394||$||91,747||$||104,339||$||128,573||$||106,473|
|Earnings per Share and Share Data:|
|Earnings per share from continuing operations (1):|
|Cash dividends declared per common share (1)||$||1.20||$||1.60||$||1.60||$||1.60||$||1.20|
|Weighted-average shares outstanding — Basic (1)(4)||23,125||25,823||28,499||30,630||33,735|
|Weighted-average shares outstanding — Diluted (1)(4)||23,269||26,068||28,807||30,914||34,146|
|Market price at year-end||$||80.24||$||90.45||$||83.83||$||101.92||$||95.94|
|Other Operating Data:|
|Company-operated average unit volume (6)||$||2,489||$||2,465||$||2,193||$||1,874||$||1,870|
|Franchise-operated average unit volume (5)(6)||$||1,595||$||1,523||$||1,488||$||1,475||$||1,454|
|System average unit volume (5)(6)(7)||$||1,651||$||1,581||$||1,553||$||1,543||$||1,530|
|Change in fiscal basis company-operated same-store sales (5)||3.1%||1.7%||0.6%||(1.3)%||—%|
|Change in fiscal basis franchise-operated same-store sales (5)||4.0%||1.3%||0.1%||0.9%||1.6%|
|Change in fiscal basis system same-store sales (5)||4.0%||1.3%||0.1%||0.5%||1.2%|
|Capital expenditures from continuing operations (1)||$||19,528||$||47,649||$||37,842||$||38,970||$||52,761|
|Balance Sheet Data (at end of period) (1):|
|Total assets (3)||$||1,906,494||$||958,483||$||823,397||$||1,234,745||$||1,345,012|
|Long-term debt, net of current maturities ||$||1,376,913||$||1,274,374||$||1,037,927||$||1,079,982||$||934,972|
|Stockholders’ (deficit) equity (8)||$||(793,361)||$||(737,584)||$||(591,699)||$||(388,130)||$||(217,206)|
(1)Financial data was extracted or derived from our audited consolidated financial statements.
(2)The Company adopted the revenue recognition guidance in the first quarter of 2019 using the modified retrospective method; therefore, periods prior to 2019 do not reflect adjustments for the guidance and are not comparable.
(3)The Company adopted the new accounting guidance for leases during the first quarter of 2020 on a modified retrospective basis using the effective date transition method; therefore, periods prior to 2020 do not reflect adjustments for the guidance and are not comparable.
(4)Weighted-average shares reflect the impact of common stock repurchases under Board-approved programs.
(5)Changes in same-store sales and average unit volumes are presented for franchise restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system sales growth and average unit volume information is useful to investors as a significant indicator of the overall strength of our business as it incorporates our significant revenue drivers, which are company and franchise same-store sales as well as net unit development. Company, franchise, and system changes in same-store sales include the results of all restaurants that have been open more than one year.
(6)2016 average unit volume is adjusted to exclude the 53rd week for comparison purposes.
(7)2019 system average unit volume has been revised from the previously reported $1,614 to $1,581 as a correction.
(8)In 2016, the Company began to accumulate a stockholders’ deficit related to the execution of our share repurchase programs authorized by our Board of Directors.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced our performance during the fiscal year, 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 September 27, 2020 and September 29, 2019 for fiscal years 2020 and 2019, respectively. A comparison of our results of operations and cash flows for fiscal 2019 compared to fiscal 2018 can be found under Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2019.
Our MD&A consists of the following sections:
•Overview — a general description of our business and fiscal 2020 highlights.
•Financial reporting — a discussion of changes in presentation, if any.
•Results of operations — an analysis of our consolidated statements of earnings for fiscal 2020 compared to fiscal 2019.
•Liquidity and capital resources — an analysis of our cash flows, including capital expenditures, share repurchase activity, dividends, and known trends that may impact liquidity, and the impact of inflation, if applicable.
•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 the impact on our consolidated financial position or results of operations, if any.
We have included in our MD&A certain performance metrics that management uses to assess company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include:
•Changes in sales at restaurants open more than one year (“same-store sales”), system restaurant sales, franchised restaurant sales, and average unit volumes (“AUVs”). Same-store sales, restaurant sales, and AUVs are presented for franchised restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system same-store sales, franchised and system restaurant sales, and AUV information are useful to investors as they have a direct effect on the Company’s profitability.
•Adjusted EBITDA, which represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding gains or losses from discontinued operations, income taxes, interest expense, net, gains on the sale of company-operated restaurants, impairment and other charges, net, depreciation and amortization, and the amortization of tenant improvement allowances and other, and pension settlement charges. We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
Same-store sales, system restaurant sales, franchised restaurant sales, AUVs, and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies.
IMPACT OF COVID-19
Throughout the pandemic, substantially all of our restaurants have remained open, with dining rooms closed and all locations operating in an off-premise capacity, which has historically represented close to 90% of the Company’s business, including drive-thru, third-party delivery, and carry-out. While we navigate through this time of uncertainty, Jack in the Box remains committed to operating our restaurants with integrity, providing great guest service, and most importantly, protecting the health and safety of our employees and guests.
In the last five weeks of the second quarter, upon the rise in “shelter-in-place” mandates and “social distancing” requirements across the country, system same-store sales decreased by 17.0%; however, starting in our third quarter and continuing into our fourth quarter we have seen an acceleration of system same-store sales. The acceleration of sales during the pandemic has been largely driven by average check growth while we have continued to experience a significant reduction in restaurant traffic. Given the uncertainty associated with the COVID-19 pandemic, the Company has not provided any guidance for fiscal 2021 at this time, but will evaluate on a quarterly basis, with the intent to return to providing guidance once the visibility into sustained trends becomes more clear.
To mitigate the impact of COVID-19 on the Company, operations, franchisees and our employees, we have undertaken the following actions:
•Implemented a short-term cash preservation strategy (refer to the Liquidity and Capital Resources section for further information).
•Provided financial support to our franchisees in the form of a reduction and payment deferral of marketing fees, postponement of rent, and extended deadlines for remodel requirements and development agreements.
•Instituted a new emergency paid sick leave program at company-operated restaurants and have procured protective masks, gloves, sneeze guards and thermometers at all company-owned and franchised locations.
As of September 27, 2020, we operated and franchised 2,241 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam.
We derive revenue from retail sales at Jack in the Box company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees. In addition, we recognize gains or losses from the sale of company-operated restaurants to franchisees, which are included as a line item within operating costs and expenses, net, in the accompanying consolidated statements of earnings.
The following summarizes the most significant events occurring in fiscal 2020, and certain trends compared to fiscal 2019:
•System same-store sales — System same-store sales increased 4.0% in fiscal 2020 as a result of strong sales momentum in the second half of our fiscal year.
•Company restaurant operations — Company restaurant costs including food and packaging, payroll and employee benefits, and occupancy and other operating costs, as a percentage of sales increased to 75.4% from 73.8% in the prior year primarily due to wage inflation and increases in other operating costs.
•Franchise operations — Franchise restaurant sales increased 4.9% for the year, resulting in higher royalties and percentage rent for the Company.
•Corporate initiatives — During 2020, we executed on previously announced corporate initiatives, which included the sale of one of our corporate office buildings as we consolidated our corporate facilities, as well as completing a lump sum payment option in connection with the Company’s pension plan de-risking strategy.
•Return of cash to shareholders — We returned cash to shareholders in the form of share repurchases and quarterly cash dividends. We repurchased 1.9 million shares of our common stock during fiscal 2020 at an aggregate cost of $153.5 million. We declared dividends of $1.20 per share totaling $27.7 million.
•Adjusted EBITDA — Adjusted EBITDA increased in 2020 to $274.2 million from $269.0 million in 2019.
In fiscal 2020, we adopted Accounting Standards Codification Topic 842, Leases (“ASC 842”), effective at the beginning of our fiscal year on a modified retrospective basis using the effective date transition method. Our consolidated financial statements reflect the application of ASC 842 guidance beginning in 2020, while our consolidated financial statements for prior periods were prepared under the guidance of a previously applicable accounting standard.
The most significant effects of this transition that affect comparability of our results of operations between 2020 and 2019 include the following:
•Our transition to ASC 842 resulted in the gross presentation of property tax and maintenance expenses and related lessee reimbursements as “Franchise occupancy expenses” and “Franchise rental revenues”, respectively. These expenses and reimbursements were presented on a net basis under the previous accounting standard. Although there was no net impact to our consolidated statement of earnings from this change, the presentation resulted in total increases in “Franchise rental revenues” and “Franchise occupancy expenses” of $37.4 million.
•ASC 842 also changed how lessees account for leases subleased at a loss. Under ASC 842, sublease income and lessee rent expense are recorded as franchise rent revenue and franchise occupancy costs as earned or incurred. As a result of this change, franchise revenues and franchise occupancy expenses increased by $4.2 million and $4.8 million, respectively.
RESULTS OF OPERATIONS FOR FISCAL 2020 AND 2019
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.
|Company restaurant sales||34.2 ||%||35.4 ||%|
|Franchise rental revenues||31.4 ||%||28.7 ||%|
|Franchise royalties and other||17.5 ||%||17.9 ||%|
|Franchise contributions for advertising and other services||17.0 ||%||18.0 ||%|
|100.0 ||%||100.0 ||%|
|Operating costs and expenses, net:|
|Food and packaging (1)||29.4 ||%||29.0 ||%|
|Payroll and employee benefits (1)||30.5 ||%||29.7 ||%|
|Occupancy and other (1)||15.5 ||%||15.0 ||%|
|Franchise occupancy expenses (excluding depreciation and amortization) (2)||65.5 ||%||61.1 ||%|
|Franchise support and other costs (3)||7.3 ||%||7.1 ||%|
|Franchise advertising and other services expenses (4)||104.2 ||%||104.3 ||%|
|Selling, general and administrative expenses||7.9 ||%||8.0 ||%|
|Depreciation and amortization||5.2 ||%||5.8 ||%|
|Impairment and other charges, net||(0.6)||%||1.3 ||%|
|Gains on the sale of company-operated restaurants||(0.3)||%||(0.1)||%|
|Earnings from operations||22.6 ||%||21.3 ||%|
|Income tax rate (5)||26.8 ||%||20.8 ||%|
(1)As a percentage of company restaurant sales.
(2)As a percentage of franchise rental revenues.
(3)As a percentage of franchise royalties and other.
(4)As a percentage of franchise contributions for advertising and other services.
(5)As a percentage of earnings from continuing operations and before income taxes.
The following table summarizes changes in same-store sales for company-owned, franchised, and system-wide restaurants:
|Company||3.1 ||%||1.7 ||%|
|Franchise||4.0 ||%||1.3 ||%|
|System||4.0 ||%||1.3 ||%|
The following table summarizes the changes in the number and mix of company and franchise restaurants in each fiscal year:
|Beginning of year||137 ||2,106 ||2,243 ||137 ||2,100 ||2,237 |
|New||— ||27 ||27 ||— ||19 ||19 |
|Acquired from franchisees||8 ||(8)||— ||— ||— ||— |
|End of year||144 ||2,097 ||2,241 ||137 ||2,106 ||2,243 |
|% of system||6 ||%||94 ||%||100 ||%||6 ||%||94 ||%||100 ||%|
The following table summarizes the restaurant sales for company-owned, franchised, and total system-wide restaurants (in thousands):
|Company-owned restaurant sales||$||348,987 ||$||336,807 |
|Franchised restaurant sales (1)||3,323,745 ||3,167,920 |
|System sales (1)||$||3,672,732 ||$||3,504,727 |
(1)Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. System sales include company and franchised restaurant sales. We do not record franchised sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchised sales. We believe franchised and system restaurant sales information is useful to investors as they have a direct effect on the Company's profitability.
Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):
|Net earnings - GAAP||$||89,764 ||$||94,437 |
|Earnings from discontinued operations, net of income taxes||(370)||(2,690)|
|Income taxes||32,727 ||24,025 |
|Interest expense, net||66,743 ||84,967 |
|Pension settlement charges||39,218 ||— |
|Gains on the sale of company-operated restaurants||(3,261)||(1,366)|
|Impairment and other charges, net||(6,493)||12,455 |
|Depreciation and amortization||52,798 ||55,181 |
|Amortization of franchise tenant improvement allowances and other||3,028 ||1,983 |
|Adjusted EBITDA - Non-GAAP||$||274,154 ||$||268,992 |
Company Restaurant Operations
The following table presents company restaurant sales and costs as a percentage of the related sales in each fiscal year. Percentages may not add due to rounding (dollars in thousands):
|Company restaurant sales||$||348,987 ||$||336,807 |
|Company restaurant costs:|
|Food and packaging||$||102,449 ||29.4 ||%||$||97,699 ||29.0 ||%|
|Payroll and employee benefits||$||106,540 ||30.5 ||%||$||100,158 ||29.7 ||%|
|Occupancy and other||$||54,157 ||15.5 ||%||$||50,613 ||15.0 ||%|
Company restaurant sales increased $12.2 million in 2020 as compared with the prior year. In 2020, the increase was primarily driven by an increase in the number of company-operated restaurants related to the acquisition of eight restaurants from a franchisee during the year which resulted in additional sales of $6.1 million, average check growth, and menu price increases, and were partially offset by a decline in traffic during COVID-19 impacted weeks.
Same-store sales at company-operated restaurants increased 3.1% in 2020 compared to a year ago. The following table summarizes the increases (decreases) in company-operated same-store sales:
|2020 vs. 2019|
|Average check (1)||12.0 ||%|
|Change in same-store sales||3.1 ||%|
(1)Includes price increases of approximately 2.6% in 2020.
Food and packaging costs as a percentage of company restaurant sales increased to 29.4% in 2020 from 29.0% a year ago due primarily to higher costs for ingredients and changes in product mix, partially offset by menu price increases. Commodity costs increased by 3.5% for the year due primarily to increases in beef and cheese. Beef, our most significant commodity, increased 14.9% compared to a year ago.
Payroll and employee benefit costs as a percentage of company restaurant sales increased to 30.5% in 2020 compared with 29.7% a year ago due primarily to higher average wages resulting from wage inflation and a highly competitive labor market, and higher incentive compensation costs during the year; partially offset by higher sales leverage.
Occupancy and other costs as a percentage of company restaurant sales increased to 15.5% in 2020 from 15.0% a year ago due primarily to higher costs for delivery fees as we grow our delivery sales mix, supplies primarily related to COVID-19, and the acquisition in 2020 of eight restaurants with lower than average sales volumes; partially offset by leverage from higher same-store sales.
The following table presents franchise revenues and costs in each fiscal year and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
|Franchise rental revenues||$||320,647||$||272,815|
|Franchise fees and other||6,912||6,764|
|Franchise royalties and other||178,319||169,811|
|Franchise contributions for advertising and other services||173,553||170,674|
|Total franchise revenues||$||672,519||$||613,300|
|Franchise occupancy expenses ||$||210,038||$||166,584|
|Franchise support and other costs||13,059||12,110|
|Franchise advertising and other services expenses||180,794||178,093|
|Total franchise costs||$||403,891||$||356,787|
|Franchise costs as a percentage of total franchise revenues||60.1 ||%||58.2 ||%|
|Average number of franchise restaurants||2,084||2,081|
|Franchised restaurant sales||$||3,323,745||$||3,167,920|
|Franchise restaurant AUV||$||1,595||$||1,523|
|Increase in franchise-operated same-store sales||4.0 ||%||1.3 ||%|
|Royalties as a percentage of total franchise restaurant sales||5.2 ||%||5.1 ||%|
Franchise rental revenues increased $47.8 million, or 17.5%, in 2020 versus a year ago due primarily to our adoption of ASC 842, which increased our rental revenues $41.6 million for the year, as well as higher percentage rent driven by higher franchise restaurant sales.
Franchise royalties and other increased $8.5 million, or 5.0%, in 2020 compared with the prior year due primarily to an increase in franchise restaurant sales driving royalties higher.
Franchise contributions for advertising and other services increased $2.9 million, or 1.7% in 2020 versus a year ago primarily due to a $2.6 million increase in technology and sourcing fees primarily as a result of an increase in technology fees in July 2019. Marketing contributions were $0.3 million higher than last year due to higher franchise restaurant sales which more than offset the impact of a $7.9 million decrease in marketing fee contribution percentages for March and April.
Franchise occupancy expenses increased $43.5 million in 2020 versus a year ago due primarily to the adoption of ASC 842, which increased franchise occupancy expenses by $42.2 million for the year.
Franchise support and other costs increased $0.9 million in 2020 versus a year ago due primarily to an increase in franchisee bad debt expense related to specific franchise situations that occurred in the first quarter of 2020.
Franchise advertising and other service expenses increased $2.7 million, or 1.5% in 2020 versus a year ago primarily as a result of higher technology and sourcing costs of $2.4 million for the year.
Depreciation and Amortization
Depreciation and amortization decreased $2.4 million in 2020 as compared with the prior year, primarily due to certain of our franchise building assets becoming fully depreciated in the current fiscal year.
Selling, General and Administrative (“SG&A”) Expenses
The following table presents the increase (decrease) in SG&A expenses in 2020 compared with the prior year (in thousands):
|2020 vs. 2019|
|Incentive compensation (including share-based compensation and related payroll taxes)||(2,277)|
|Cash surrender value of COLI policies, net||401 |
|Litigation matters||1,500 |
|Other (includes transition services income and savings related to our restructuring plan)||4,533 |
Advertising costs represent company contributions to our marketing fund and are generally determined as a percentage of company-operated restaurant sales. Advertising costs in 2020 decreased $1.9 million versus a year ago primarily due to a $2.0 million discretionary marketing fund contribution made by the Company in 2019 that was not made in 2020.
Incentive compensation decreased by $2.3 million in 2020 versus a year ago primarily due to a decrease in share-based compensation of $3.7 million, resulting from the departures of our former Chief Executive Officer and Chief Financial Officer in 2020, partially offset by an increase in annual incentives of $1.4 million as a result of higher achievement levels.
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 $0.4 million versus the prior year.
Litigation matters increased by $1.5 million in 2020 versus a year ago primarily due to a California Private Attorney General Act lawsuit settled for $3.8 million in the current year and litigation costs accrued for various other pending legal matters, partially offset by a $3.8 million settlement in our favor from a class action lawsuit related to credit card interchange fees.
Insurance costs increased $2.2 million in 2020 versus the prior year primarily due to less favorable development factors related to workers’ compensation and general liability claims compared to the prior year.
Impairment and Other Charges, Net
The following table presents the components of impairment and other charges, net, in each fiscal year (in thousands):
|Restructuring costs||$||1,168 ||$||8,455 |
|Costs of closed restaurants and other||1,872 ||8,628 |
|Gains on disposition of property and equipment, net||(9,768)||(6,244)|
|Accelerated depreciation||235 ||1,616 |
Impairment and other charges, net decreased $18.9 million in 2020 versus the prior year primarily from higher gains on the sale of property and equipment of $3.5 million, primarily due to a $10.8 million gain recognized on the sale of one of our corporate office buildings in fiscal 2020 compared to a $5.7 million gain on the sale of a restaurant property in the prior year, and from lower restructuring costs of $7.3 million, as our general and administrative cost reduction initiative came to its conclusion as planned. Additionally, costs of closed restaurants and other decreased by $6.8 million due primarily to the write-off of software development costs associated with a discontinued technology project in the prior year and higher canceled project costs for the prior year.
Refer to Note 9, Impairment and Other Charges, Net, of the notes to the consolidated financial statements for additional information regarding these charges.
Gains on the Sale of Company-Operated Restaurants
In 2020 and 2019, no company-operated restaurants were sold to franchisees. Gains on the sale of company-operated restaurants in both periods pertain to meeting certain contingent consideration provisions included in restaurants sold in previous years. Refer to Note 3, Summary of Refranchisings and Franchise Acquisitions, of the notes to our consolidated financial statements for further information regarding these gains.
Other Pension and Post-Retirement Expenses, Net
Other pension and post-retirement expenses, net increased by $40.2 million in 2020 versus the prior year, primarily due to non-cash pension settlement charges of $39.2 million in fiscal 2020. Refer to Note 12, Retirement Plans, of the notes to the consolidated financial statements for additional information regarding these charges.
Interest Expense, Net
Interest expense, net, is comprised of the following in each fiscal year (in thousands):
|Interest expense||$||67,273 ||$||86,027 |
|Interest expense, net||$||66,743 ||$||84,967 |
Interest expense, net, decreased $18.2 million in 2020 as compared to a year ago primarily due to a charge of $23.6 million from the early termination of our interest rate swaps in the prior year. Excluding this impact, interest expense increased by $5.3 million, primarily as a result of higher average debt balances.
The income tax provisions reflect effective tax rates of 26.8% and 20.8% in fiscal years 2020 and 2019, respectively. The major components of the year-over-year change in tax rates were the impact of nonrecurring activities in fiscal year 2019 including the termination of interest rate swap agreements and the release of a federal tax liability due to expiration of statute of limitations, and a current year increase in deduction limitations on officers' compensation and nondeductible costs resulting from a California Private Attorney General Act lawsuit settled in the current year.
Earnings from Discontinued Operations, Net
As described in Note 10, Discontinued Operations, in the notes to our consolidated financial statements, the results of operations from Qdoba have been reported as discontinued operations for all periods presented. Refer to Note 10 for additional information regarding discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
As is common in the restaurant industry, we generally maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets and not as part of working capital. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit. We generally reinvest available cash flows from operations to enhance existing restaurants, to reduce debt, to repurchase shares of our common stock, and to pay cash dividends. Our cash requirements consist principally of working capital, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance distributions, dividend payments, and obligations related to our benefit plans.
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available financing in place. On July 8, 2019, we completed a refinancing of our existing senior credit facility with a new securitized financing facility, comprised of $1.3 billion of senior fixed-rate term notes and $150.0 million of variable funding notes. During the second quarter of fiscal 2020, to enhance our liquidity position and provide financial flexibility given the uncertain market conditions, we fully drew down on our Variable Funding Notes, which provided us $107.9 million of unrestricted cash. As of September 27, 2020, the Company had $236.9 million of cash and restricted cash on its balance sheet.
In the context of an unprecedented global pandemic, we believe it is prudent to maintain maximum financial flexibility by preserving our capital and maintaining the Company’s healthy liquidity position. As a result, beginning in the second quarter, we temporarily suspended all repurchase activity and significantly reduced capital expenditures to essential spend only. The Company also temporarily suspended its dividend payments for the second quarter, which were reinstated the following quarter. The reinstatement of the dividend reflects the strong financial health of the Company and our continued commitment to shareholders.
We believe that our cash on hand, cash flow from operations, and the actions taken to mitigate the effects of the COVID-19 pandemic discussed above will provide us with adequate liquidity for the next twelve months and the foreseeable future.
The table below summarizes our cash flows from continuing operations activities for each of the last two fiscal years (in thousands):
|Total cash provided by (used in):|
|Operating activities||$||143,525 ||$||168,405 |
|Investing activities||29,123 ||(13,819)|
|Net increase in cash from continuing operations||$||85,359 ||$||148,856 |
Operating Activities. Operating cash flows decreased $24.9 million in 2020 compared to prior year primarily due to lower collections of $19.0 million from rent and marketing deferrals we provided to our franchisees and an increase in cash paid for interest and income taxes of $22.4 million and $14.5 million, respectively. These unfavorable changes were partially offset by lower rent payments of $7.2 million from payment deferrals we received from our landlords, lower marketing payments due to timing and an increase in our marketing fund surplus of $8.0 million, and lower severance payments of $7.0 million.
Pension and Postretirement Contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2020, the date of our last actuarial funding valuation for our qualified pension plan, there was no minimum contribution funding requirement. In both 2020 and 2019, we contributed $6.2 million to our pension and postretirement plans. We do not anticipate making any contributions to our qualified defined benefit pension plan in fiscal 2021. For additional information, refer to Note 12, Retirement Plans, of the notes to the consolidated financial statements.
Investing Activities. Cash flows provided by investing activities increased $42.9 million in 2020 compared to 2019, primarily due to a decrease of $28.1 million in capital expenditures, an increase of $28.4 million in proceeds received on the sale or sale and leaseback of property and equipment; partially offset by a decrease of $16.8 million in repayments of notes receivable issued in connection with 2018 refranchising transactions.
Capital Expenditures — The composition of capital expenditures in each fiscal year is summarized in the table below (in thousands):
|Restaurant facility expenditures||$||9,056 ||$||9,202 |
|Purchases of assets intended for sale or sale and leaseback||440 ||21,660 |
|New restaurants||— ||1,381 |
|Other, including information technology||4,857 ||3,597 |
|14,353 ||35,840 |
|Information technology||3,505 ||9,405 |
|Other, including facility improvements||1,670 ||2,404 |
|5,175 ||11,809 |
|Total capital expenditures||$||19,528 ||$||47,649 |
Our capital expenditure program includes, among other things, restaurant remodeling, information technology enhancements, and investments in new locations and equipment. In 2020, capital expenditures decreased compared to a year ago primarily due to the Company reducing capital expenditures to essential spend only to provide additional liquidity and financial flexibility given this year’s uncertainty surrounding the pandemic. In addition, purchases of assets intended for sale and leaseback decreased by $21.2 million, primarily due to the Company’s purchase of a $17.3 million multi-tenant commercial property during the fourth quarter of 2019. The Company completed the sale and leaseback of the company-operated restaurant parcel during the first quarter of 2020 and received net proceeds of $17.4 million.
Financing Activities. Cash flows used in financing activities increased by $81.6 million in 2020 compared to 2019, mainly due to lower net borrowings of $101.2 million as a result of net proceeds received in the prior year from our refinancing transaction, partially offset by borrowings on our variable funding notes in the current year, and an increase in stock repurchases of $17.9 million. These unfavorable changes were partially offset by a lower cash used for dividends payments of $13.6 million as a result of temporarily suspending our quarterly dividend for the second quarter of fiscal 2020 which we reinstated the following quarter, and interest rate swap termination payments of $23.6 million made in the prior year a result of the retirement of our senior credit facility.
As of September 27, 2020, our long-term debt consists of $1,290.3 million of total principal outstanding on the Class A-2 Notes (as defined below). During the second quarter of 2020, the Company borrowed $107.9 million under our $150.0 million Variable Funding Notes (as defined below) as a precautionary measure given the uncertainty surrounding the pandemic. As of September 27, 2020, borrowing availability under our Variable Funding Notes was $2.7 million and $39.5 million of letters of credit were outstanding.
On July 8, 2019, Jack in the Box Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of the Company, completed its securitization transaction and issued $575.0 million of its Series 2019-1 3.982% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”), $275.0 million of its Series 2019-1 4.476% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes”) and $450.0 million of its Series 2019-1 4.970% Fixed Rate Senior Secured Notes, Class A-2-III (the “Class A-2-III Notes”) and together with the Class A-2-I Notes and the Class A-2-II Notes, (the “Class A-2 Notes”), in an offering exempt from registration under the Securities Act of 1933, as amended. In connection with the issuance of the Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Variable Funding Notes”), which allows for the drawing of up to $150.0 million under the Variable Funding Notes and the issuance of letters of credit. The Class A-2 Notes and the Variable Funding Notes are referred to collectively as the “Notes.”
Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. The quarterly principal payment of $3.25 million on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0x. Exceeding the leverage ratio of 5.0x does not violate any covenant related to the Class A-2 Notes. We made three principal payments of $3.25 million each during 2020. As of September 27, 2020, the Company’s actual leverage ratio was under 5.0x, and as a result, quarterly principal payments are not required.
The legal final maturity date of the Class A-2 Notes is in August 2049, but it is expected that, unless earlier prepaid to the extent permitted under the Indenture, the anticipated repayment dates of the Class A-2-I Notes, the Class A-2-II Notes and the Class A-2-III Notes will be August 2023, August 2026 and August 2029, respectively (the “Anticipated Repayment Dates”). If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue pursuant to the Indenture.
In accordance with the terms of the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders and are restricted in their use. As of September 27, 2020, the Master Issuer had restricted cash of $37.3 million, which primarily represented cash collections and cash reserves held by the trustee to be used for payments of interest and commitment fees required for the Class A-1 and A-2 Notes. During fiscal 2020, with uncertainty surrounding COVID-19 events, and as a cautionary measure, we voluntarily elected to fund quarterly interest payments due in February 2021.
The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of September 27, 2020, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.
Repurchases of Common Stock — During fiscal 2020, we repurchased 1.9 million shares at an aggregate cost of $153.5 million. Repurchases of common stock included in our consolidated statement of cash flows for fiscal 2020 include $2.0 million related to repurchase transactions traded in fiscal 2019 but settled in fiscal 2020. As of September 27, 2020, there was approximately $122.2 million remaining under Board-authorized stock buyback programs, consisting of $22.2 million which expires in November 2020 and $100.0 million that expires in November 2021.
On November 13, 2020, the Board of Directors authorized an additional $100.0 million share repurchase program to more than offset the $22.2 million authorization that was set to expire at the end of November 2020. This brings the total remaining under share repurchase programs to $200.0 million, consisting of $100.0 million which expires in November 2021 and $100.0 million which expires in November 2022.
Dividends — In fiscal 2020, the Board of Directors declared three cash dividends of $0.40 per share totaling $27.7 million. In fiscal 2019, the Board of Directors declared four cash dividends of $0.40 per share totaling $41.4 million. Future dividends are subject to approval by our Board of Directors.
Off-Balance Sheet Arrangements
We have entered into certain off-balance sheet contractual obligations and commitments in the ordinary course of business, which are recognized in our consolidated financial statements in accordance with U.S. generally accepted accounting principles. We are not a party to any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
The following is a summary of our contractual obligations and commercial commitments as of September 27, 2020 (in thousands):
|Payments Due by Fiscal Year|
|1-3 years||3-5 years||After 5 years|
|Long-term debt obligations (1)||$||1,398,127 ||$||— ||$||570,688 ||$||— ||$||827,439 |
|Interest payments on debt obligations||355,624 ||59,566 ||119,132 ||73,682 ||103,244 |
|Finance lease obligations||3,171 ||917 ||1,810 ||424 ||20 |
|Operating lease obligations||1,149,301 ||215,039 ||308,502 ||207,910 ||417,850 |
|Purchase commitments (2)||73,378 ||16,452 ||32,100 ||24,826 ||— |
|Benefit obligations (3)||72,496 ||16,942 ||12,857 ||12,678 ||30,019 |
|Total contractual obligations||$||3,052,097 ||$||308,916 ||$||1,045,089 ||$||319,520 ||$||1,378,572 |
|Other Commercial Commitments:|
|Stand-by letters of credit (4)||$||39,500 ||$||39,500 ||$||— ||$||— ||$||— |
(1)Includes mandatory principal payments on our Class A-1 and Class A-2 Notes. Amounts are reflected through the anticipated repayment dates as described further above in “Liquidity and capital resources.”
(2)Includes non-cancelable purchase commitments related to information technology agreements and volume commitments for beverage products.
(3)Includes expected payments associated with our non-qualified defined benefit plan, postretirement healthcare plans and our non-qualified deferred compensation plan through fiscal 2029.
(4)Consists primarily of letters of credit for interest reserves required under the Indenture and insurance.
We maintain a noncontributory defined benefit pension plan (“Qualified Plan”) covering substantially all full-time employees hired before January 1, 2011. Our policy is to fund our Qualified Plan at amounts necessary to satisfy the minimum amount required by law, plus additional amounts as determined by management to improve the plan’s funded status. Contributions beyond fiscal 2020 will depend on pension asset performance, future interest rates, future tax law changes, and future changes in regulatory funding requirements. Based on the funding status of our Qualified Plan as of our last measurement date, there was no minimum contribution required in 2020. For additional information related to our pension plans, refer to Note 12, Retirement Plans, of the notes to the consolidated financial statements.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the notes to the consolidated financial statements.
Long-lived Assets — We evaluate long-lived assets, such as property and equipment and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors that we consider important individually or in combination trigger an impairment review include, but are not limited to, bankruptcy proceedings or other significant financial distress of a lessee, significant underperformance relative to historical or projected operating results, significant changes in our business and/or negative industry or economic trends, or our expectation to dispose of long-lived assets before the end of their estimated useful lives. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. For company-operated restaurants, the impairment test is performed at the individual-restaurant level. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the carrying amount of a long-lived asset group exceeds the sum of related undiscounted future cash flows, we recognize an impairment loss by the amount that the carrying value of the assets exceeds fair value. Our estimates of cash flows used to assess impairment are subject to a high degree of judgment and may differ from actual cash flows due to, among other things, changes in our business plans, operating performance, and economic conditions.
Self-Insurance — We are self-insured for a portion of our losses related to workers’ compensation, general liability and other legal claims, and health benefits. In estimating our self-insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analysis of historical data. These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater number of claims occur compared to what was estimated, or should medical costs increase beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.
Legal Accruals — The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if any, for these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts as we deem appropriate. Because lawsuits are inherently unpredictable, and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgment about future events. As a result, the amount of ultimate loss may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the notes to the consolidated financial statements for a discussion of the impact of new accounting pronouncements on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are only exposed to interest rate risk on borrowings under our $150.0 million variable funding notes. During the second quarter of 2020, we borrowed $107.9 million under the variable funding notes, which remains outstanding as of September 27, 2020. Based on outstanding borrowings as of September 27, 2020, an increase or decrease of 100 basis points in interest rates would impact our interest expense by approximately $1.1 million on an annualized basis.
We are also exposed to the impact of commodity and utility price fluctuations. Many of the ingredients we use are commodities or ingredients that are affected by the price of other commodities, weather, seasonality, production, availability and various other factors outside our control. In order to minimize the impact of fluctuations in price and availability, we monitor the primary commodities we purchase and may enter into purchasing contracts and pricing arrangements when considered to be advantageous. However, certain commodities remain subject to price fluctuations. We are exposed to the impact of utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs for commodities and utilities through higher prices is limited by the competitive environment in which we operate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, related financial information, and the Report of Independent Registered Public Accounting Firm required to be filed are indexed on page F-1 and are incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
a.Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s fiscal year ended September 27, 2020, the Company’s Chief Executive Officer and Controller (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.
b.Changes in Internal Control Over Financial Reporting
Except for the changes in connection with our implementation of the remediation plan described below, there have been no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 27, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
c.Management’s Report on Internal Control Over Financial Reporting
Management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with U.S. GAAP and includes those policies and procedures that:
•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions;
•Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with appropriate authorizations; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management, under the oversight of our principal executive officer, principal financial officer, and Audit Committee, assessed the effectiveness of the Company’s internal control over financial reporting as of September 27, 2020. In making this assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 29, 2019, during the fourth quarter of 2019, management concluded that the Company’s internal control over financial reporting was not effective because of the effect of the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.
Management identified the following deficiencies in our internal control over financial reporting.
•We did not maintain effective risk assessment, oversight and monitoring controls over changes in the Company’s information technology (“IT”) environment in connection with the restructuring and outsourcing of certain IT support functions to third party contractors.
•We were overly dependent on the knowledge and actions of certain individuals with IT expertise without providing sufficient training and documentation to support other personnel with control responsibilities.
•As a consequence, the Company did not maintain effective controls over IT change management for systems that support the Company’s financial reporting process to ensure that program and data changes were tested, approved and implemented appropriately. Automated process-level controls and manual controls dependent upon the accuracy and completeness of information derived from IT systems were also rendered ineffective.
During 2020, we implemented our previously disclosed remediation plan that included:
(i)developing enhanced risk assessment procedures and controls related to changes in IT systems;
(ii)enhancing governance by management of significant and/or unusual changes to the IT environment;
(iii)developing and conducting a mandatory annual program addressing IT general controls and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to change-management over IT systems; and
(iv)implementing an annual requirement for IT personnel to review and acknowledge their understanding of change control policies and procedures.
During the fourth quarter of 2020, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded that the material weakness has been remediated as of September 27, 2020.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Jack in the Box Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Jack in the Box Inc. and subsidiaries’ (the Company) internal control over financial reporting as of September 27, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 27, 2020 and September 29, 2019, the related consolidated statements of earnings, comprehensive income, stockholders’ deficit, and cash flows for each of the fifty-two week periods ended September 27, 2020, September 29, 2019, and September 30, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated November 18, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
San Diego, California
November 18, 2020
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
That portion of our definitive Proxy Statement appearing under the captions “Election of Directors,” “Director Qualifications and Biographical Information,” “Committees of the Board,” and “Section 16(a) Beneficial Ownership Reporting Compliance” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 27, 2020 and to be used in connection with our 2021 Annual Meeting of Stockholders is hereby incorporated by reference.
Information regarding our executive officers is set forth in Part I of this Report under the caption “Information about our Executive Officers.”
That portion of our definitive Proxy Statement appearing under the caption “Committees of the Board - Audit Committee,” relating to the members of the Company’s Audit Committee and the members of the Audit Committee who qualify as financial experts, is also incorporated herein by reference.
That portion of our definitive Proxy Statement appearing under the caption “Stockholder Recommendations and Board Nominations,” relating to the procedures by which stockholders may recommend candidates for director to the Nominating and Governance Committee of the Board of Directors, is also incorporated herein by reference.
We have adopted a Code of Ethics, which applies to all Jack in the Box Inc. directors, officers, and employees, including the Chief Executive Officer, Chief Financial Officer, Controller, and all of the financial team. The Code of Ethics is posted on the Company’s corporate website, www.jackintheboxinc.com (under the “Investors — Corporate Governance — Code of Conduct” caption) and is available in print free of charge to any stockholder upon request. We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Ethics for the Chief Executive Officer, Chief Financial Officer, and Controller or persons performing similar functions, by posting such information on our corporate website. No such waivers have been issued during fiscal 2020.
We have also adopted a set of Corporate Governance Principles and Practices for our Board of Directors and charters for all of our Board Committees, including the Audit, Compensation, and Nominating and Governance Committees. The Corporate Governance Principles and Practices and committee charters are available on our corporate website at www.jackintheboxinc.com and in print free of charge to any shareholder who requests them. Written requests for our Code of Business Conduct and Ethics, Corporate Governance Principles and Practices and committee charters should be addressed to Jack in the Box Inc., 9357 Spectrum Center Blvd., San Diego, California 92123, Attention: Corporate Secretary.
ITEM 11. EXECUTIVE COMPENSATION
That portion of our definitive Proxy Statement appearing under the caption “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 27, 2020 and to be used in connection with our 2021 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
That portion of our definitive Proxy Statement appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 27, 2020 and to be used in connection with our 2021 Annual Meeting of Stockholders is hereby incorporated by reference. Information regarding equity compensation plans under which Company common stock may be issued as of September 27, 2020 is set forth in Item 5 of this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
That portion of our definitive Proxy Statement appearing under the caption “Certain Relationships and Related Transactions” and “Directors’ Independence,” if any, to be filed with the Commission pursuant to Regulation 14A within 120 days after September 27, 2020 and to be used in connection with our 2021 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
That portion of our definitive Proxy Statement appearing under the caption “Independent Registered Public Accounting Fees and Services” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 27, 2020 and to be used in connection with our 2021 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15(a) (1) Financial Statements. See Index to Consolidated Financial Statements on page F-1 of this Report.
ITEM 15(a) (2) Financial Statement Schedules. None.
ITEM 15(a) (3) Exhibits.
|Number||Description||Form||Filed with SEC|
|4.2|Series 2019-1 Supplement to Base Indenture, dated as of July 8, 2019, by and between Jack in the Box Funding, LLC, as Master Issuer of the Series 2019-1 fixed rate senior secured notes, Class A-2, and Series 2019-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2019-1 Securities Intermediary. |8-K||7/8/2019|
|10.1.20|Class A-1 Note Purchase Agreement, dated as of July 8, 2019, by and among Jack in the Box Funding, LLC, as Master Issuer, each of Different Rules, LLC, Jack in the Box Properties, LLC and Jack in the Box SPV Guarantor, LLC, as Guarantors, Jack in the Box Inc. as Manager, the conduit investors party thereto, the financial institutions party thereto, certain funding agents, and Coöperatieve Rabobank, U.A., New York Branch, as L/C Provider, Swingline Lender and Administrative Agent |8-K||7/8/2019|
|10.1.21|The Guarantee and Collateral Agreement, dated July 8, 2019, by and among Jack in the Box SPV Guarantor, LLC, Different Rules, LLC, and Jack in the Box Properties, LLC, each as a Guarantor and Citibank, N.A., as Trustee. |8-K||7/8/2019|
|10.1.22|Management Agreement, dated as of July 8, 2019, by and among Jack in the Box Funding, LLC, as Master Issuer, certain subsidiaries of Jack in the Box Funding, LLC party thereto, Jack in the Box Inc., as Manager, and Citibank, N.A., as Trustee. |8-K||7/8/2019|
|Number||Description||Form||Filed with SEC|
* Management contract or compensatory plan.
ITEM 15(b) All required exhibits are filed herein or incorporated by reference as described in Item 15(a)(3).
ITEM 15(c) All schedules have been omitted as the required information is inapplicable, immaterial or the information is presented in the consolidated financial statements or related notes.
ITEM 16. FORM 10-K SUMMARY
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|JACK IN THE BOX INC.|
|By:||/s/ DAWN HOOPER|
Vice President, Controller (principal financial officer)
|November 18, 2020|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Each person whose signature appears below constitutes and appoints Darin Harris and Dawn Hooper, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
|/s/ DARIN HARRIS||Chief Executive Officer and Director (principal executive officer)||November 18, 2020|
|/s/ DAWN HOOPER||Vice President, Controller (principal financial officer)||November 18, 2020|
|/s/ DAVID L. GOEBEL||Director and Chairman of the Board||November 18, 2020|
|David L. Goebel|
|/s/ JEAN M. BIRCH||Director||November 18, 2020|
|Jean M. Birch|
|/s/ JOHN P. GAINOR||Director||November 18, 2020|
|John P. Gainor|
|/s/ SHARON P. JOHN||Director||November 18, 2020|
|Sharon P. John|
|/s/ MADELEINE A. KLEINER||Director||November 18, 2020|
|Madeleine A. Kleiner|
|/s/ MICHAEL W. MURPHY||Director||November 18, 2020|
|Michael W. Murphy|
|/s/ JAMES M. MYERS||Director||November 18, 2020|
|James M. Myers|
|/s/ DAVID M. TEHLE||Director||November 18, 2020|
|David M. Tehle|
|/s/ VIVIEN M. YEUNG||Director||November 18, 2020|
|Vivien M. Yeung|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedules not filed: All schedules have been omitted as the required information is inapplicable, immaterial, or the information is presented in the consolidated financial statements or related notes.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Jack in the Box Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Jack in the Box Inc. and subsidiaries (the Company) as of September 27, 2020 and September 29, 2019, the related consolidated statements of earnings, comprehensive income, stockholders’ deficit, and cash flows for each of the fifty-two week periods ended September 27, 2020, September 29, 2019, and September 30, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2020 and September 29, 2019, and the results of its operations and its cash flows for each of the fifty-two week periods ended September 27, 2020, September 29, 2019, and September 30, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 27, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 18, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of September 30, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases, and changed its method of accounting for revenue as of October 1, 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of self-insurance liabilities related to workers’ compensation and general liability
As discussed in Note 1 to the consolidated financial statements, the Company establishes its undiscounted insurance liability and reserves using independent actuarial estimates of expected losses based on a statistical analysis of historical claims data. As of September 27, 2020, the Company has recorded an estimated self-insurance liability of $25.0 million.
We identified the assessment of self-insurance liabilities related to workers’ compensation and general liability as a critical audit matter. Evaluating the Company’s judgments regarding the use of actuarial estimates and assumptions related to the loss development factors and the expected loss rates involved a high degree of complex and subjective auditor judgment. Changes in the loss development factors and expected loss rates could have a significant impact on the liability recognized.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to develop the estimate of self-insurance liabilities, with the involvement of actuarial professionals when appropriate. This included a control related to the review of the loss development factors and expected loss rates applied in the actuarial report and controls related to the completeness and accuracy of claims data. We tested the claims paid and claims reported (not paid) data used in the actuarial models for consistency with the actual claims paid and claims reported (not paid) records of the Company, which is used in the development of the loss development factors and expected loss rates. We involved actuarial professionals with specialized skills and knowledge, who assisted in evaluating the Company’s actuarial estimates and assumptions related to the loss development factors and expected loss rates, by comparing them to generally accepted actuarial methodologies and the Company’s historical data.
/s/ KPMG LLP
We have served as the Company’s auditor since 1986.
San Diego, California
November 18, 2020
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)