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 OCTOBER 1, 2023
|☐||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)
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 16, 2023, was approximately $1.8 billion.
Number of shares of common stock, $0.01 par value, outstanding as of the close of business on November 16, 2023 — 19,736,783.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2024 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.
ITEM 1. BUSINESS
Overview. Jack in the Box Inc. (NASDAQ: JACK), a Delaware corporation (the “Company” or “Jack in the Box”), founded and headquartered in San Diego, California, is a restaurant company that operates and franchises Jack in the Box®, one of the nation's largest hamburger chains with approximately 2,200 restaurants across 22 states, and Del Taco®, the second largest Mexican-American quick service restaurants (“QSR”) chain by units in the U.S. with approximately 600 restaurants across 16 states.
On March 8, 2022, the Company acquired Del Taco Restaurants, Inc. (“Del Taco”) for cash according to the terms and conditions of the Agreement and Plan of Merger, dated as of December 5, 2021. As a result, Del Taco became a wholly-owned subsidiary of Jack in the Box.
References to the Company throughout this Annual Report on Form 10-K are made using the first person notations of “we”, “us” and “our.”
Jack in the Box. 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, as well as craveable favorites such as tacos, curly fries, egg rolls, specialty sandwiches and real ice cream shakes, among many other items. We allow our guests to customize meals to their tastes and order any product on the menu when they want it, including breakfast at night, or burgers and chicken in the morning. Our trademark of variety and innovation has led to the development of five true day parts: breakfast, lunch, snack, dinner, and late night.
Jack in the Box opened its first restaurant in 1951 and has 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 third largest QSR hamburger chain in each of those major markets. As of October 1, 2023, we operated and franchised 2,186 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including two in Guam. Of the 2,186 restaurants at fiscal year-end, 2,044, or 94%, were franchised.
Del Taco. Del Taco offers a unique variety of both Mexican and American favorites such as burritos and fries, prepared fresh in every restaurant's working kitchen with the value and convenience of a drive-thru. Del Taco's menu items taste better because they are made with quality ingredients like freshly grilled chicken and carne asada steak, fresh house-made guacamole, freshly grated cheddar cheese, slow-cooked beans made from scratch, and creamy Queso Blanco.
Founded in 1964, today Del Taco serves more than three million guests each week at its restaurants. Del Taco’s commitment to providing guests with the best quality and value for their money originates from cooking, chopping, shredding, and grilling menu items from scratch. As of October 1, 2023, we operated and franchised 592 Del Taco restaurants across 16 states. Of the 592 restaurants at fiscal year-end, 421, or 71%, were franchised.
Our strategies are rooted in two foundational principles:
•Shape a High-Performance Culture - When we serve our people and our franchisees well, we will maximize the guest experience for all who interact with the brand.
•Leverage Innovation and Technology Platforms - Taking our history of strong innovation on menu and operations and placing that same forward thinking on digital and technology development.
We use these principles as a guide while executing on our four strategic pillars:
•Build Brand Loyalty by transforming our restaurant design, improving the image of existing restaurants, and enhancing the digital experience for our guests.
•Drive Operations Excellence by evolving training efforts in our restaurants, execution of our brand standard systems, and improving speed and consistency.
•Grow Restaurant Profits by developing and implementing financial fundamentals, influencing pricing with a dynamic model, and building our data advantage.
•Expand Our Brands Reach by creating modular and flexible restaurant designs, building company-operated stores to help seed growth, fostering growth capital, and increasing franchise candidate and restaurant site lead generations.
This strategy builds on our historical strengths with our Jack in the Box and Del Taco differentiated, challenger brands. Those strengths include our uniquely broad menus, operational capabilities, passionate and loyal guests, committed team members and franchisees, and ability to invest in development and innovation that will deliver long term growth.
Del Taco Refranchising Strategy
In fiscal year 2023, we embarked on our refranchising strategy with three main intentions. First, to create a company-wide asset-light model that will benefit from mitigating exposure to macroeconomic pressures; second, to generate incremental development agreements throughout the refranchising process that provide a more robust unit growth pipeline than otherwise achievable; and third, to provide a more efficient capital structure.
Our objective is to be asset-light as we navigate market forces. We refranchised 111 Del Taco restaurants in fiscal year 2023, and added 109 new Del Taco development commitments as a result of the refranchising effort, across both brands. Throughout 2024, we will continue to adjust the rate, pace and sequence of our refranchising efforts to balance the impact to earnings, as we await accelerated new unit openings from incremental development and natural general and administrative reductions.
Jack in the Box. 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 with some legacy agreements at higher rates. 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 an incentive program that provides discounted royalty fees for new franchisees who maintain development compliance and sign a Development Agreement for a minimum of three restaurants to be developed and opened under the development schedule during the timeframe specified under the Development Agreement.
Del Taco. The franchise agreement provides for an initial franchise fee of $35,000 per restaurant for a 20-year term, and royalty and marketing payments generally set at 5.0% and 4.0%, respectively, 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 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 an incentive program that provides discounted royalty fees for multi-unit franchisees who agree to develop multiple restaurants pursuant to a Development Agreement in certain markets we have identified for further development and that we deem, in our sole determination, to be undeveloped, underdeveloped, or emerging in terms of the Del Taco brand’s market penetration; it is not available in markets we deem to be mature in terms of the Del Taco brand’s market penetration.
Site Selection and Design
Site selection for all new Jack in the Box and Del Taco restaurants is 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. New restaurants developed by franchisees are built to brand standards that we have approved.
Jack in the Box. Jack in the Box offers multiple restaurant designs that feature different configurations and dining room sizes to provide maximum flexibility when considering properties for development. This flexibility enables the Company and franchisees to optimize the layout and configuration of a new restaurant with the property’s specific economic, demographic, geographic, or physical characteristics. Jack in the Box offers an off-premise-only restaurant, which is designed to meet the continued increasing demand for drive-thru service and digital ordering. At only 1,350 square feet, the restaurant features a double Y-lane drive-thru, a walk-up window for ordering, dual assembly kitchens and a dedicated pick-up window for mobile and third-party delivery orders. The goal of this design is to reduce build out costs by around 20%, while also increasing real estate flexibility. The model is designed for free-standing locations but can be adapted to fit in a variety of spaces such as C-stores, travel plazas, and end-cap locations.
Del Taco. A typical Del Taco restaurant is a free-standing building with drive-thru service that ranges in size from 2,000 to 2,600 square feet. Del Taco also has the ‘Fresh Flex’ design, which offers multiple build out options, including small footprint drive-thru only sites with no dining rooms, that range in size from 1,200 to 2,400 square feet. With innovative additions like third-party pick-up stations and double drive-thru lanes with a dedicated lane for mobile orders and delivery pickups, the future-focused model optimizes operational efficiencies and caters to modern consumers' expectations.
Restaurant Management and Operations
Jack in the Box and Del Taco 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.
At both brands, company-operated restaurant managers are supervised by district managers, who are overseen by director of operations, who report to vice president of operations.
Jack in the Box. 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.
Del Taco. General managers, shift managers and team leaders are certified through a series of online and on the job training modules. Every team member receives training modules focused on helping the team member clearly understand the brand and their role as well as modules focusing on the specifics of how to provide a consistent customer experience, how to complete specific tasks for their assigned position and ensure food safety. The training program is a blended learning approach including e-learning courses, hands-on exercises, and online knowledge validation tests.
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.
At both brands, we contract with a single primary food service distributor for substantially all of our food and supplies. Jack in the Box is in the second year of a five-year contract with their distributor. Under the contract, this distributor will provide distribution services to our Jack in the Box restaurants through July 2027. Our Del Taco brand contracts with the same distributor and provides distribution services to our Del Taco restaurants through December 2023. Additionally, Del Taco is in the final stages of executing a long-term extension with this same distributor through September of 2028.
The primary commodities purchased by Jack in the Box restaurants are beef, poultry, pork, cheese, and produce. Taco meat is the largest commodity purchased by Del Taco. 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 Jack in the Box and Del Taco 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 and Del Taco mobile apps, 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 Jack in the Box and Del Taco company and franchise restaurants. These systems play an integral role in enabling us to accumulate and analyze market information. Our 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 Jack in the Box drive-thru restaurants use order confirmation screens.
Advertising and Promotion
Our brands run a highly coordinated marketing and advertising campaigns to create customer awareness, engage fans, and maximize positive brand associations. 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. We use multiple marketing channels to broadly drive brand awareness, which include, but are not limited to, television, connected TV, radio, digital and social media, outdoor and direct mail. We may utilize local radio, print, internet advertising, and billboards for some of the less developed markets, reaching consumers through our branded mobile app and delivery partnerships. We also provide an ordering website and integrated mobile app featuring a full array of capabilities including full menu ordering, customization options, location finder, product and restaurant information, flexible delivery or pickup options and an integrated loyalty program.
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 Jack in the Box and Del Taco 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 or convenience stores, catering, and delivery services. In selling franchises, we compete with many other restaurant franchisors, some of whom have substantially greater financial resources than we do.
Human Capital Management
Jack in the Box and Del Taco recognizes and takes care of their 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 in our restaurants as their first entry-level job, the opportunity to grow and advance as we invest in their education and career development.
As of October 1, 2023, for our combined brands, we had 9,523 employees, of whom 8,888 were restaurant employees, 542 were corporate management and staff, and 93 were field operations management. Most of our employees are paid on an hourly basis, except manager, field operations management, and certain 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 2023, approximately 95% of our restaurant employees were part-time. We have not experienced any significant work stoppages.
Our Total Rewards framework includes pay and recognition, health and wellness, financial well-being, work/life happiness, culture and community, and learning and development. We are committed to providing employees with market-competitive pay and benefits and flexibility with respect to benefit choices. For our company-operated restaurant positions nationwide, positions are assigned to a pay range that best reflects market pricing of similar jobs in the restaurant industry and in the geographic location, and employees receive an automatic pay increase each time they work a certain number of hours provided performance is satisfactory. All corporate positions, field operations management, and restaurant management positions, including hourly assistant managers and team leaders, are eligible for performance-based cash incentives. Each incentive plan reinforces and rewards individuals for achievement of specific company and/or restaurant business goals.
We regularly review the pay of our female and male employees to ensure pay equity for performing equal or substantially similar work. We share the median pay of our male and female employees in various position classifications with the Board of Directors, and we take remedial action as appropriate to ensure pay equity is maintained.
We are committed to providing market-competitive, high-quality, and affordable benefits to meet the changing needs of our employees. We offer a robust benefits package that includes medical, dental, and vision insurance with health savings account (HSA) employer contributions and an HMO plan; company-paid basic term life insurance; wellness programs; an employee assistance program (EAP); life and disability insurance; flexible spending accounts (FSA); legal services; pet insurance; and a 401(k) with company matching contributions. In addition, we recognize and support the growth and development of our employees and offer opportunities to participate in internal and external learning programs. We also hold regular restaurant level talent and development planning reviews to assist us with growing our internal restaurant teams.
We recognize our responsibility to take the steps necessary to create and maintain a safe and healthy work environment. All of our corporate and restaurant employees may report safety and security issues either through our risk management department or anonymously through our asset protection helpline. Reports are reviewed by our asset protection manager and are addressed appropriately by corporate partners and OSHA, if necessary. All of our corporate and restaurant employees may also report any ethics issues to our ethics hotline. We take every incident and report seriously and have detailed protocols regarding investigation, assessment and correction, safety communications, employee training, and record keeping.
Trademarks and Service Marks
The JACK IN THE BOX® and DEL TACO® names 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 and Del Taco design marks and various product names and designs. Our policy is to pursue registration of our important service marks and trademarks and to vigorously oppose any infringement of them. Generally, with the appropriate renewal and use, the registration of our service marks and trademarks will continue indefinitely.
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.
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, state, and local laws governing packaging and service ware.
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 brands to provide full and equal access to persons with certain mental or physical impairments.
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.
Our marketing, advertising, and promotional programs are governed by various federal, state, and local laws and regulations concerning consumer protection, including the Telephone Consumer Protection 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 all applicable laws and regulations governing our Company operations.
The Company’s corporate website can be found at www.jackinthebox.com. We make available free of charge at this website (under the caption “Investors — Financials — 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 a website with the address of 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 Macroeconomic and Industry Conditions
The COVID-19 pandemic has disrupted and may 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.
Our operating results substantially depend upon our sales volumes, restaurant profitability, and financial stability, and to the extent we and/or our franchisees experience financial distress due to the COVID-19 pandemic, our operating results may be adversely impacted, potentially materially affecting our liquidity, financial condition, or results of operations.
Our business has been disrupted and could be further disrupted to the extent our suppliers, distributors, and/or third-party delivery partners are adversely impacted by the COVID-19 pandemic. If our suppliers, distributors, and/or third-party delivery partners experience labor shortages or their 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, shortages of food items, shortages of delivery services, and/or shortages of other supplies across our restaurants, and our results could be adversely impacted by such interruptions.
The COVID-19 outbreak also may have the effect of heightening many other risks disclosed herein, 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, governmental regulations, and our stock price.
Changes in the availability of and the cost of labor could adversely affect our business.
Our business could be adversely impacted by increases in labor costs, including those increases triggered by regulatory actions regarding wages, scheduling and benefits; increased health care and workers’ compensation insurance costs; increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets and increased wages, benefits and costs related to the COVID-19 pandemic and inflationary and other pressure on wages now being experienced. The growth of our business can make it increasingly difficult to locate and hire sufficient numbers of employees, to maintain an effective system of internal controls, and to train employees to deliver a consistently high-quality product and customer experience, which could materially harm our business and results of operations. Furthermore, we have experienced, and could continue to experience, a shortage of labor for restaurant positions, including due to concerns around and illnesses arising from COVID-19 and its various novel variants and other factors, which could decrease the pool of available qualified
talent for key functions and require restaurants to operate on reduced hours. In addition, our wages and benefits programs may be insufficient to attract and retain the top performing employees especially in a rising wage market.
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 brands. Specifically, nearly 70% of our systemwide 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, inflation, labor shortages, seasonal fluctuations, weather and climate conditions, energy costs, global demand, trade protections and subsidies, food safety issues, infectious diseases, possible terrorist activity, cyberattacks, transportation issues, 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 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, production disruptions such as mechanical failures, 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.
Risks Related to Human Capital
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. The loss of the services of, or our inability to attract and retain, such personnel could have a material adverse effect on our business, including reduced restaurant operating hours. 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.
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 shortages, 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. Labor related laws enacted at the federal, state, provincial or local level could increase our and our franchisees’ labor costs and decrease profitability.
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.
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 the Restaurant Industry
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.
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 brands. 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 brands, 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 brands 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 brands or industry and can 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 our marketing funds 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 wildfires, 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 Relating to Health and Safety
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, sesame 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.
Risks Related to Our Business Model and Strategy
We may not achieve our development goals.
We intend to grow Jack in the Box and Del Taco 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;
•the negative impact of any re-imaging strategy if not adopted by franchisees or embraced by guests;
•delays in completion of construction or shortages of any equipment or construction materials;
•competition for quality cost-efficient property that has a favorable zoning classification allowing drive-thru sales;
•negative impact of delays due to lengthy supply chain lead times for building components and systems;
•negative impact of delays due to longer timelines for permit review and field inspections with the municipal agencies;
•negative impact of delays due to longer than usual design, permitting, approval, procurement, and field installation timelines for utility service providers to supply primary services on new restaurant development projects (i.e. electrical, gas, sewer, water, etc.)
•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 brands, 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;
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 business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruption, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.
The combination of two independent businesses can be complex, costly, and time-consuming, and it may divert significant management attention and resources to combining ours and Del Taco’s business practices and operations. This process may disrupt our business or otherwise impact our ability to compete. The failure to meet the challenges involved in combining ours and Del Taco’s business and to realize the anticipated benefits of the acquisition could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.
The overall combination of ours and Del Taco’s business may also result in material unanticipated problems, expenses, liabilities, competitive responses and impacts, and loss of customer and other business relationships. The difficulties of combining the operations of the companies, include, among others:
•diversion of management attention to integration matters;
•difficulties in integrating operations and systems, including intellectual property and communications systems, administrative and information technology infrastructure, supplier and vendor arrangements and financial reporting and internal control systems;
•challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;
•differences in control environments and cultures, and the potential identification of material weaknesses while we work to integrate and align policies, principles and practices;
•alignment of key performance measurements may result in a greater need to communicate and manage clear expectations while we work to integrate and align policies and practices;
•difficulties in integrating employees and attracting and retaining key personnel;
•the transition to a combined management team, and the need to address possible differences in corporate cultures and management philosophies;
•challenges in retaining existing customers and obtaining new customers;
•difficulties in achieving anticipated cost savings, synergies, accretion targets, business opportunities, financing plans and growth prospects from the combination; and
•difficulties in managing the expanded operations of a significantly larger and more complex company.
Additionally, uncertainties over the integration process could cause customers, suppliers, distributors, and others to seek to change or cancel our existing business relationships or to refuse to renew existing relationships. Competitors may also target our existing customers by highlighting potential uncertainties and integration difficulties.
Some of these factors are outside our control, and any one of them could result in lower revenues, higher costs, and diversion of management time and energy, which could materially impact our business, financial condition and results of operations.
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 October 1, 2023, approximately 94% of our Jack in the Box restaurants and 71% of Del Taco restaurants were franchised; 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., royalties and rent based on a percentage of sales) and, to a lesser degree, profit 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, franchisee bankruptcies, restaurant closures, or delayed or reduced payments to us. 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 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 brands have 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 brands 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. 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 unfavorably impact 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.
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.
Risks Related to Legal and Regulatory Risks
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. These new laws or regulations could negatively impact our financial results or affect restaurant operations.
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 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 Americans with Disabilities Act or similar state laws, could be material.
Consumer Protection and Privacy Laws
We are subject to various federal, state, and local laws and regulations concerning consumer protection and privacy as it relates to our marketing, advertising, and promotional programs, including, but not limited to, the California Consumer Privacy Act and the Telephone Consumer Protection Act. Any damages, legal fees, or costs associated with litigating or resolving claims under any such law could be material.
The Food Safety Modernization Act granted the U.S. Food and Drug Administration 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 brands 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
•consumer protection and privacy obligations, including the California Consumer Privacy Act, the Telephone Consumer Protection 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 service ware 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.
We may not be able to adequately protect our intellectual property, which could harm the value of our brands 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 brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance.
We franchise our brands to various franchisees. While we try to ensure that the quality of our brands are 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.
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 (e.g., intellectual property related claims), government agencies, or others. 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.
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. 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.
Changes in tax laws, interpretations of existing tax law, or adverse determinations by tax authorities could adversely affect our income tax expense and income tax payments.
We are subject to income taxation at the federal, state, and local levels in the U.S. Any significant changes in income tax laws, including, but not limited to, income tax rate increases, authoritative interpretations of the tax laws, and/or comprehensive tax reform measures could adversely affect our financial condition or results of operations.
We may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
In addition to shareholders, we have several key stakeholders, including our 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 its 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.
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.
Risks Related to Information and Technology
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 and scheduling, 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 brands 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 POS 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, employee, and franchisee 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 or our success in implementing 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, or if such systems or services become outdated, 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.
Risks Related to Our Capital Structure
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 and Series 2022-1 Senior Notes (“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 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 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to record keeping, access to information and similar matters. The 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 Class A-2 Notes on the applicable scheduled maturity date. The 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 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 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 $1.8 billion of outstanding debt as of October 1, 2023.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
The following table sets forth information about our restaurant locations (by segment, by state) for all restaurants in operation as of October 1, 2023:
|Del Taco ||Jack in the Box|
|Alabama||— ||1 ||1 ||— ||— ||— |
|Arizona||— ||39 ||39 ||5 ||173 ||178 |
|California||148 ||210 ||358 ||97 ||846 ||943 |
|Colorado||— ||20 ||20 ||— ||17 ||17 |
|Florida||1 ||6 ||7 ||— ||— ||— |
|Georgia||12 ||11 ||23 ||— ||— ||— |
|Hawaii||— ||— ||— ||— ||28 ||28 |
|Idaho||— ||11 ||11 ||— ||33 ||33 |
|Illinois||— ||— ||— ||— ||11 ||11 |
|Indiana||— ||— ||— ||— ||3 ||3 |
|Kansas||— ||— ||— ||5 ||— ||5 |
|Kentucky||— ||— ||— ||1 ||— ||1 |
|Louisiana||— ||— ||— ||— ||16 ||16 |
|Michigan||— ||10 ||10 ||— ||— ||— |
|Mississippi||— ||1 ||1 ||— ||— ||— |
|Missouri||— ||— ||— ||3 ||34 ||37 |
|Nevada||— ||45 ||45 ||— ||79 ||79 |
|New Mexico||— ||13 ||13 ||— ||8 ||8 |
|North Carolina||— ||— ||— ||— ||18 ||18 |
|Ohio||— ||4 ||4 ||— ||2 ||2 |
|Oklahoma||10 ||— ||10 ||8 ||7 ||15 |
|Oregon||— ||9 ||9 ||— ||41 ||41 |
|South Carolina||— ||— ||— ||— ||8 ||8 |
|Tennessee||— ||— ||— ||— ||4 ||4 |
|Texas||— ||— ||— ||22 ||563 ||585 |
|Utah||— ||35 ||35 ||1 ||5 ||6 |
|Washington||— ||6 ||6 ||— ||146 ||146 |
|Guam||— ||— ||— ||— ||2 ||2 |
Of the total 592 Del Taco and 2,186 Jack in the Box restaurants, our interest in restaurant properties consists of the following:
|Del Taco||Jack in the Box |
|Company-owned restaurant buildings:|
|On company-owned land||— ||— ||— ||11 ||178 ||189 |
|On leased land||1 ||— ||1 ||49 ||543 ||592 |
|Subtotal||1 ||— ||1 ||60 ||721 ||781 |
|Company-leased restaurant buildings on leased land||170 ||153 ||323 ||82 ||987 ||1,069 |
|Franchise directly-owned or directly-leased restaurant buildings||— ||268 ||268 ||— ||336 ||336 |
|Total restaurant buildings||171 ||421 ||592 ||142 ||2,044 ||2,186 |
Our restaurant leases generally provide for fixed rental payments (with cost-of-living index adjustments) plus real estate taxes, insurance, and other expenses. For Jack in the Box, approximately 13% of the leases provide for contingent rental payments between 1% and 10% of the restaurant’s gross sales once certain thresholds are met. For Del Taco, approximately 31% of the leases provide for contingent rental payments between 2% 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 also lease an office, consisting of approximately 40,000 square feet in Lake Forest, California.
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 October 1, 2023:
|Name||Age||Positions||Years with the|
|Darin Harris||54||Chief Executive Officer||3|
|Brian Scott||54||Executive Vice President, Chief Financial Officer||—|
|Ryan Ostrom||48||Executive Vice President, Chief Marketing Officer||2|
|Doug Cook||50||Senior Vice President, Chief Technology Officer||1|
|Tony Darden||53||Senior Vice President, Chief Operating Officer||2|
|Dean Gordon||61||Senior Vice President, Chief Supply Chain Officer||14|
|Dawn Hooper||53||Senior Vice President, Controller||23|
|Tim Linderman||54||Senior Vice President, Chief Development Officer||2|
|Steven Piano||58||Senior Vice President, Chief People Officer||2|
|Sarah Super||47||Senior Vice President, Chief Legal and Risk Officer||10|
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.
Mr. Scott was hired as Executive Vice President and Chief Financial Officer in August 2023. Mr. Scott has more than 20 years of experience leading large companies, both public and private. Mr. Scott most recently served as the Chief Financial Officer of ShiftKey and prior to that he served as Chief Financial Officer of AMN Healthcare for over 10 years. In his prior roles, Mr. Scott oversaw accounting, finance, corporate financial planning and analysis, capital funding, investor relations and internal audit functions as well as certain shared services operations. Mr. Scott started his career with KPMG LLP and was also a partner in a mid-sized CPA firm. Mr. Scott currently serves on the private-equity backed boards of Thriveworks and Hueman. Mr. Scott received his bachelor’s degree in accounting from California Polytechnic State University, San Luis Obispo and a Master of Business Administration from the McCombs School of Business at the University of Texas at Austin.
Mr. Ostrom has been Executive Vice President and Chief Marketing Officer since February 2021. Mr. Ostrom has over 15 years of marketing and branding experience. Previously, from June 2019 until February 2021, he served as the Chief Brand Officer for GNC Holdings, LLC, a health, wellness, and nutrition brand. Prior to that, from June 2015 to June 2019, he served as the Chief Digital Officer of Yum Brands Inc. Mr. Ostrom also has held roles at Kenmore, Craftsman & DieHard at Sears Holding Corporation, and Reebok.
Mr. Cook has been Senior Vice President and Chief Technology Officer since October 2021. He has more than 20 years of industry experience leading guest and employee-facing platforms. Mr. Cook served as interim CTO of Jack in the Box from July 2021 to October 2021, leading the technology team and strategy. Prior to that, Mr. Cook served as Chief Information Officer at Pizza Hut from July 2019 to December 2020. From 1999 to June 2019, Mr. Cook held several positions at Sonic, applying leading-edge technologies and analytics to grow the company’s innovation and market position.
Mr. Darden has been Senior Vice President and Chief Operating Officer since June 2021. He has more than 20 years of cross functional executive leadership experience. Most recently, he served as the President of Mooyah, LLC, a privately held American fast casual hamburger restaurant chain headquartered in Plano, TX from April 2019 until June 2021. Prior to that, from May 2017 until April 2019, Mr. Darden served as the Chief Operating Officer of Taco Bueno Restaurants, L.P. (“Taco Bueno”), a privately held quick serve restaurant chain headquartered in Farmers Branch, TX that operates Tex-Mex style restaurants throughout the American South and Southwest. Through its acquisition of Taco Bueno, from December 2018 until April 2019, Mr. Darden also served as the Chief Operating Officer of Sun Holdings, Inc., a multi-concept franchisee based in Dallas, TX which owns and operates restaurants across eight states among different brands including Arby’s, Burger King, CiCi’s Pizza, Golden Corral, Krispy Kreme, Popeyes, and Taco Bueno. From February 2011 to May 2017, he served as the Vice President of Operation of Panera, LLC, an American chain store of bakery-café casual restaurants. Mr. Darden received his Bachelor of Arts, Interpersonal Communications from Azusa Pacific University.
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 25 years of Supply Chain Management experience.
Ms. Hooper has been Senior Vice President, Controller since December 2022, and has been with Jack in the Box since October 2000. She previously held positions of increasing responsibility in accounting since joining the Company in 2000, including Interim CFO, Controller, Assistant Controller, Vice President of Financial Reporting and Senior Manager of Corporate Accounting. Prior to joining the company, she began her career with KPMG LLP where she worked from September 1993 to September 2000. Ms. Hooper has more than 29 years in experience in accounting and finance. Ms. Hooper received her bachelor’s degree in accounting from University of San Diego from the Knauss School of Business.
Mr. Linderman has been Senior Vice President, Chief Development Officer since April 2022, and previously held the position of Senior Vice President, Chief Franchise and Corporate Development Officer since August 2021. He held the position of Senior Vice President, Franchise and Corporate Development from October 2020 through July 2021. He has over 18 years of experience in the franchise industry. He most recently served as Chief Development Officer of Ascent Hospitality Management, LLC, a restaurant management company, from July 2019 to October 2020. Prior to that, from January 2014 until July 2019, he was the Chief Development Officer at Global Franchise Group, LLC, where he oversaw franchise sales, real estate, and construction for Great American Cookies, Marble Slab Creamery, Pretzelmaker, MaggieMoo’s Ice Cream and Treatery and Hot Dog on a Stick. Before that, he was the Director of Franchise Development for Primrose School Franchising Company and held that same position at Arby’s.
Mr. Piano has been Senior Vice President, Chief People Officer since April 2021. He has over ten years of experience in leadership roles as Chief People Officer and Human Resource Officer. He most recently served as the Chief Human Resources Officer at GNC Holdings, LLC, a health, wellness, and nutrition brand, from January 2018 to April 2021. Prior to that, Mr. Piano was the Chief Human Resource Officer for MoneyGram International Inc., an American cross-border P2P payments and money transfer company, from August 2009 until April 2017. Mr. Piano has also held leadership positions with Lehman Brothers, Citibank, and others.
Ms. Super has been Senior Vice President, Chief Legal and Risk Officer since March 2020, served as Senior Vice President, General Counsel since November 2019, and 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.
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 2023, the Board of Directors declared four cash dividends of $0.44. Our dividend is subject to the discretion and approval of our Board of Directors and our compliance with applicable law, and depends upon, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, and other factors that our Board of Directors may deem relevant.
Stock Repurchases. The following table sets forth information on our share repurchases of our common stock during the fourth quarter of 2023 (dollars in thousands, except per share data):
Total number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced programs
Maximum dollar value that may yet be purchased under these programs
|July 10, 2023 - August 6, 2023||— ||$||— ||— ||$||114,971 |
|August 7, 2023 - September 3, 2023||353,993 ||$||80.43 ||353,993 ||$||86,499 |
|September 4, 2023 - October 1, 2023||18,833 ||$||81.11 ||18,833 ||$||84,971 |
|Total||372,826 ||372,826 |
Stockholders. As of November 16, 2023, 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 October 1, 2023. 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)||587,641||$94.92||2,597,343|
(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 five-year 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, 2018 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. In its annual review of the Peer Group Index used to benchmark executive compensation for our executive officers, the Compensation Committee of the Board of Directors, in consultation with its independent compensation consultant, approved changes to the Peer Group Index to include companies that more closely aligned with our financial selection criteria and are highly-franchised.
|Jack in the Box Inc.||$100||$111||$98||$122||$95||$91|
|S&P 500 Index||$100||$104||$120||$156||$132||$160|
|2022 Peer Group (1)||$100||$121||$138||$176||$139||$168|
|2023 Peer Group (2)||$100||$120||$137||$175||$138||$167|
(1)The 2022 Peer Group Index includes the following seventeen companies: BJ's Restaurants Inc.; Carrols Restaurant Group, Inc.; Cheesecake Factory Inc.; Chipotle Mexican Grill, Inc.; Cracker Barrel Old Country Store, Inc.; Denny's Corp.; Dine Brands Global Inc.; Domino's Pizza, Inc.; El Pollo Loco Holdings Inc.; Krispy Kreme, Inc.; Papa John's Int’l Inc.; Red Robin Gourmet Burgers, Inc.; Restaurant Brands Int’l Inc.; Shake Shack Inc.; Texas Roadhouse, Inc.; Wendy’s Company; and Wingstop Inc.
(2)The 2023 Peer Group Index includes the following seventeen companies: BJ's Restaurants Inc.; Bloomin’ Brands, Inc.; Brinker Int’l, Inc.; Cheesecake Factory Inc.; Chipotle Mexican Grill, Inc.; Cracker Barrel Old Country Store, Inc.; Denny's Corp.; Dine Brands Global Inc.; Domino's Pizza, Inc.; El Pollo Loco Holdings Inc.; Krispy Kreme, Inc.; Papa John's Int’l Inc.; Restaurant Brands Int’l Inc.; Shake Shack Inc.; Texas Roadhouse, Inc.; Wendy’s Company; and Wingstop Inc.
ITEM 6. RESERVED.
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 October 1, 2023 and October 2, 2022, respectively. A comparison of our results of operations and cash flows for fiscal 2022 compared to fiscal 2021 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 October 2, 2022.
Our MD&A consists of the following sections:
•Overview — a general description of our business.
•Results of Operations — an analysis of our consolidated statements of earnings for fiscal 2023 compared to fiscal 2022.
•Liquidity and Capital Resources — an analysis of our cash flows, including capital expenditures, share repurchase activity, dividends, and known trends that may impact liquidity.
•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.
•Cautionary statements regarding forward-looking statements — a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management.
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. 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-wide sales, and AUV information are useful to investors as they have a direct effect on the Company’s profitability.
Same-store sales, system restaurant sales, franchised restaurant sales and AUVs 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.
Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants. As of October 1, 2023, we operated and franchised 2,186 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including two in Guam.
On March 8, 2022, we completed the acquisition of Del Taco Restaurants, Inc. (“Del Taco”), the nation’s second largest Mexican quick service restaurant chain by number of restaurants and as of October 1, 2023 has 592 restaurants across 16 states.
We derive revenue from retail sales at company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees.
Refranchising of Del Taco
In fiscal year 2023, we embarked on our refranchising strategy with three main intentions. First, to create a company-wide asset-light model that will benefit from mitigating exposure to macroeconomic pressures; second, to generate incremental development agreements throughout the refranchising process that provide a more robust unit growth pipeline than otherwise achievable; and third, to provide a more efficient capital structure. Our objective is to be asset-light as we navigate market forces. We refranchised 111 Del Taco restaurants in fiscal year 2023, and added 109 new development commitments as a result of the refranchising effort.
RESULTS OF OPERATIONS FOR FISCAL 2023 AND 2022
The following tables summarize changes in same-store sales for Jack in the Box and Del Taco company-operated, franchised, and system restaurants:
|Jack in the Box:||2023||2022|
|Company||8.8 ||%||3.7 ||%|
|Franchise||7.1 ||%||0.6 ||%|
|System||7.3 ||%||0.9 ||%|
|Del Taco:||2023||2022 (1)|
|Company||2.0 ||%||2.9 ||%|
|Franchise||1.4 ||%||5.0 ||%|
|System||1.7 ||%||3.9 ||%|
(1) Fiscal 2022 full year same store sales figures are shown for information purposes only.
The following tables summarize changes in the number and mix of company and franchise restaurants for our two brands:
|Jack in the Box:||Company||Franchise||Total||Company||Franchise||Total|
|Beginning of year||146 ||2,035 ||2,181 ||163 ||2,055 ||2,218 |
|New||2 ||18 ||20 ||— ||17 ||17 |
|Acquired from franchisees||— ||— ||— ||13 ||(13)||— |
|Refranchised||(5)||5 ||— ||(15)||15 ||— |
|End of year||142 ||2,044 ||2,186 ||146 ||2,035 ||2,181 |
|% of system||6 ||%||94 ||%||100 ||%||7 ||%||93 ||%||100 ||%|
|Beginning of year||290 ||301 ||591 ||296 ||306 ||602 |
|New||— ||14 ||14 ||1 ||2 ||3 |
|Refranchised||(111)||111 ||— ||— ||— ||— |
|End of year||171 ||421 ||592 ||290 ||301 ||591 |
|% of system||29 ||%||71 ||%||100 ||%||49 ||%||51 ||%||100 ||%|
(1) Fiscal 2022 full year restaurant activity figures are shown for information purposes only.
The following tables summarize restaurant sales for company-operated, franchised, and systemwide sales for our two brands (in thousands):
|Jack in the Box:||2023||2022|
|Company-operated restaurant sales||$||413,748 ||$||414,225 |
|Franchised restaurant sales (1)||4,005,985 ||3,696,817 |
|Systemwide sales (1)||$||4,419,733 ||$||4,111,042 |
|Del Taco:||2023||2022 (2)|
|Company-operated restaurant sales||$||432,530 ||$||484,347 |
|Franchised restaurant sales (1)||541,913 ||472,682 |
|Systemwide sales (1)||$||974,443 ||$||957,029 |
(1)Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. Systemwide sales include company and franchised restaurant sales. We do not record franchised sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchised sales. We believe franchised and systemwide sales information is useful to investors as they have a direct effect on the Company's profitability.
(2)Fiscal 2022 full year systemwide sales figures are shown for information purposes only.
Jack in the Box Brand
Company Restaurant Operations
The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands):
|Company restaurant sales||$||413,748 ||$||414,225 |
|Company restaurant costs:|
|Food and packaging||$||130,904 ||31.6 ||%||$||133,815 ||32.3 ||%|
|Payroll and employee benefits||$||127,357 ||30.8 ||%||$||138,038 ||33.3 ||%|
|Occupancy and other||$||69,215 ||16.7 ||%||$||74,337 ||17.9 ||%|
Company restaurant sales decreased $0.5 million, or 0.1%, in 2023 as compared with the prior year due to a decrease in the average number of restaurants, partially offset by an increase in traffic and average check. The following table presents the approximate impact of these items on company restaurant sales in 2023 (in millions):
|2023 vs. 2022|
|AUV increase||$||32.4 |
|Decrease in the average number of restaurants ||(32.9)|
|Total change in company restaurant sales||$||(0.5)|
Same-store sales at company-operated restaurants increased 8.8% in 2023 compared to a year ago. The following table summarizes the changes in company-operated same-store sales:
|2023 vs. 2022|
|Average check (1)||6.3 ||%|
|Change in same-store sales||8.8 ||%|
(1)Includes price increases of 8.5% in 2023.
Food and packaging costs, as a percentage of company restaurant sales, decreased to 31.6% in 2023 from 32.3% a year ago, primarily due to a 2.4% impact from pricing leverage and 0.6% from favorable menu item mix, partially offset by 2.3% from commodity inflation.
Commodity costs increased in the current fiscal year by approximately 8.4%. The inflation we have experienced is across all categories with the greatest impact seen in potatoes, produce, sauces, and beverages.
Payroll and employee benefit costs, as a percentage of company restaurant sales, decreased to 30.8% in 2023 compared with 33.3% a year ago primarily due to a change in the mix of restaurants and sales leverage, partially offset by labor inflation of approximately 5.8% in the current fiscal year. For fiscal 2024, we expect annual wage inflation to be approximately 10% to 12% compared with fiscal 2023. New regulations, such as AB 1228, which goes into effect April 2024, are expected to increase labor costs, especially considering our concentration of restaurants in California.
Occupancy and other costs, as a percentage of company restaurant sales, decreased to 16.7% in 2023 from 17.9% a year ago primarily due to sales leverage and a change in the mix of restaurants, partially offset by higher other operating costs including utilities, delivery fees and security.
Jack in the Box Franchise Operations
The following table presents franchise revenues and costs in each fiscal year and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
|Franchise rental revenues||$||351,283||$||335,936|
|Franchise fees and other||7,226||14,309|
|Franchise royalties and other||214,290||203,211|
|Franchise contributions for advertising and other services||215,990||197,816|
|Total franchise revenues||$||781,563||$||736,963|
|Franchise occupancy expenses ||$||216,452||$||211,260|
|Franchise support and other costs||10,072||15,622|
|Franchise advertising and other services expenses||227,868||206,192|
|Total franchise costs||$||454,392||$||433,074|
|Franchise costs as a percentage of total franchise revenues||58.1 ||%||58.8 ||%|
|Average number of franchise restaurants||2,035||2,031|
|Franchised restaurant sales||$||4,005,985||$||3,696,817|
|Franchise restaurant AUV||$||1,968||$||1,820|
|Royalties as a percentage of total franchise restaurant sales (1)||5.2 ||%||5.1 ||%|
(1) Excluding the impact of the $7.3 million termination fee in the first quarter of the current year, royalties as a percentage of total franchised restaurant sales would be 5.0% year-to-date for the period ended October 1, 2023.
Franchise rental revenues increased $15.3 million, or 4.6%, in 2023 compared to the prior year, primarily due to an increase in percentage rent of $10.6 million, driven by higher sales, and higher minimum rent of $4.8 million.
Franchise royalties and other increased $11.1 million, or 5.5%, mainly in connection with higher franchise restaurant sales driving royalties higher by approximately $10.7 million. Additionally, a $7.3 million termination fee paid by a franchise operator who sold his restaurants to a new franchisee in the current year also contributed to the increase. These increases were partially offset by a decrease in early termination fees of $6.5 million as compared to the prior year.
Franchise contributions for advertising and other services increased $18.2 million, or 9.2%, primarily due to higher marketing contributions of $16.8 million in connection with higher franchise same store sales of 7.1%.
Franchise occupancy expenses, primarily rent, increased $5.2 million, or 2.5% in 2023, primarily due to higher operating lease costs.
Franchise support and other costs decreased $5.6 million, or 35.5% in 2023, mainly in connection with lower bad debt expense of $6.6 million as a result of rolling over bad debt expense associated with two specific franchise matters last year.
Franchise advertising and other service expenses increased $21.7 million, or 10.5% in 2023 primarily due to higher marketing contributions resulting from an increase in franchise sales.
Del Taco Brand
Jack in the Box Inc. acquired Del Taco on March 8, 2022. Fiscal 2022 results include approximately 30 weeks of operating results compared with 52 weeks in fiscal 2023.
Company Restaurant Operations
The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands):
|Company restaurant sales||$||432,530 ||$||286,845 |
|Company restaurant costs:|
|Food and packaging||$||119,931 ||27.7 ||%||$||82,531 ||28.8 ||%|
|Payroll and employee benefits||$||147,241 ||34.0 ||%||$||94,212 ||32.8 ||%|
|Occupancy and other||$||94,057 ||21.7 ||%||$||61,465 ||21.4 ||%|
Company restaurant sales increased $145.7 million or 50.8%, in 2023 as compared with the prior year primarily due to 52 weeks of operating results in 2023 versus 30 weeks last year and an increase in average check, partially offset by a decrease in sales in connection with current year refranchising activity and a decline in transactions.
The following table presents the approximate impact of these items on company restaurant sales (in millions):
|2023 vs. 2022|
|Increase in number of operating weeks||$||158.9 |
|AUV increase||0.4 |
|Decrease in the average number of restaurants||(13.6)|
|Total change in company restaurant sales||$||145.7 |
Same-store sales at company-operated restaurants increased 2.0% in 2023 compared to a year ago. The following table summarizes the increases (decreases) in company-operated same-store sales:
|2023 vs. 2022|
|Average check (1)||6.0 ||%|
|Change in same-store sales||2.0 ||%|
(1)Includes price increases of approximately 9.6% in 2023.
Food and packaging costs, as a percentage of company restaurant sales, decreased to 27.7% in 2023 from 28.8% a year ago primarily due to a 2.5% benefit from pricing leverage, partially offset by 1.6% from commodity inflation.
Commodity costs inflation was 5.9% in 2023. The largest sources of inflation in the current year were due to tortillas, shells and potatoes, and was partially offset by favorability in chicken, cheese and produce.
Payroll and employee benefit costs, as a percentage of company restaurant sales, increased to 34.0% in 2023 compared with 32.8% a year ago primarily due to labor inflation. Labor inflation was 3.8% in the current year. For fiscal 2024, we expect annual wage inflation to be approximately 10% to 12% compared with fiscal 2023. Additional regulations, such as AB 1228, which will go into effect April 2024, are expected to increase labor costs for employees, especially considering our concentration of restaurants in California.
Occupancy and other costs, as a percentage of company restaurant sales, increased to 21.7% in 2023 from 21.4% a year ago primarily due to higher operating expenses including utilities, rent, insurance, and delivery fees, partially offset by pricing leverage.
Del Taco Franchise Operations
The following table presents franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
|Franchise rental revenues||$||13,308||$||4,455|
|Franchise fees and other||556||196|
|Franchise royalties and other||26,225||13,610|
|Franchise contributions for advertising and other services||24,933||11,985|
|Total franchise revenues||$||64,466||$||30,050|
|Franchise occupancy expenses ||$||13,150||$||4,349|
|Franchise support and other costs||2,259||868|
|Franchise advertising and other services expenses||25,666||12,081|
|Total franchise costs||$||41,075||$||17,298|
|Franchise costs as a percentage of total franchise revenues||63.7 ||%||57.6 ||%|
|Number of franchise restaurants at end of period||421||301|
|Franchised restaurant sales||$||541,913||$||281,933|
|Franchised restaurant AUVs||$||1,287||$||937|
|Royalties as a percentage of total franchised restaurant sales||4.7 ||%||4.8 ||%|
Franchise rental revenues increased $8.9 million, or 198.7% in 2023 compared to the prior year, primarily due to higher rental income of $5.1 million resulting from new subleases in connection with the 111 restaurants refranchised in 2023, as well as prior year only including 30 weeks of operating results versus 52 weeks in 2023.
Franchise royalties and other increased $12.6 million, or 92.7% in 2023 compared to the prior year, primarily due to the increase in operating weeks, as well as $2.9 million related to the increase in the number of franchise restaurants due to our refranchising strategy.
Franchise contributions for advertising and other services revenues increased $12.9 million, or 108.0% in 2023 compared to the prior year, primarily due to the increase in operating weeks, as well as $2.6 million related to the increase in the number of franchise restaurants due to our refranchising strategy.
Franchise occupancy expenses, primarily rent, increased $8.8 million, or 202.4% in 2023 compared to the prior year, primarily due higher franchise rent expense of $5.1 million related to the restaurants refranchised in 2023, as well as the increase in operating weeks.
Franchise support and other costs increased $1.4 million, or 160.3% in 2023 compared to the prior year, primarily due to the increase in operating weeks.
Franchise advertising and other service expenses increased $13.6 million, or 112.4% in 2023 compared to the prior year, primarily due to the increase in operating weeks, as well as higher marketing contributions of $2.4 million related to the increase in the number of franchise restaurants due to our refranchising strategy.
Depreciation and Amortization
Depreciation and amortization increased $6.2 million in 2023 as compared with the prior year, primarily due to the timing of the acquisition of Del Taco in the second quarter of 2022 resulting in an increase of $10.1 million, partially offset by a decrease in Jack in the Box franchise assets depreciation of $3.9 million as these assets become fully depreciated.
Selling, General and Administrative (“SG&A”) Expenses
The following table presents the amounts for each fiscal period as well as the increase (decrease) in SG&A expenses in 2023 compared with the prior year (in thousands):
|Advertising||$||38,753 ||$||32,557 |
|Incentive compensation (including share-based compensation and related payroll taxes)||31,756 ||14,014 |
|Cash surrender value of COLI policies, net||(5,953)||9,911 |
|Litigation matters||7,001 ||(995)|
|Insurance||5,991 ||2,049 |
|Other||95,324 ||73,287 |
|$||172,872 ||$||130,823 |
Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $6.2 million compared to the prior year primarily due to the increase in Del Taco operating weeks from 30 to 52 in the current year.
Incentive compensation increased by $17.7 million in 2023 primarily due to a $13.7 million increase from higher achievement levels compared to the prior year for the Company’s annual incentive plan, as well as an increase in stock-based compensation of $4.1 million due to a higher number of executive stock awards outstanding compared to the prior year.
The cash surrender value of our Company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $15.9 million versus the prior year.
Litigation matters increased by $8.0 million in 2023 primarily due to litigation developments mainly in connection with one litigation matter in the current year, and rolling over a $2.6 million favorable settlement received in the prior year. In fiscal 2023, we recorded litigation charges of $8.3 million for Gessele vs. Jack in the Box Inc., partially offset by a $1.6 million reversal in connection with the J&D Restaurant Group legal matter based on the Court’s final ruling. Refer to Note 16, Commitments and Contingencies, of the notes to the consolidated financial statements for additional information.
Insurance costs increased $3.9 million in 2023 versus the prior year primarily due to more favorable trends in the prior year related to expected losses associated with workers’ compensation claims.
The increase in other is primarily due to the timing of the Del Taco acquisition in the second quarter of 2022 and therefore prior year only included 30 weeks of operating results versus 52 weeks in 2023.
Other Operating Expense (Income), Net
Other operating expense (income), net is comprised of the following (in thousands):
|Acquisition, integration and strategic initiatives||9,112 ||20,081 |
|Costs of closed restaurants and other||4,786 ||4,290 |
|Restaurant impairment charges||4,569 ||5,927 |
|Accelerated depreciation||541 ||1,124 |
|Gains on disposition of property and equipment, net||$||(8,171)||$||(30,533)|
Other operating expense (income), net
|$||10,837 ||$||889 |
Other operating expense (income), net increased $9.9 million in 2023 versus the prior year primarily due to the lower gains on disposition of property and equipment of $22.4 million in connection with the sale of restaurant properties to franchisees, partially offset by a decrease in Del Taco acquisition and integration costs. Refer to Note 9, Other Operating Expense (Income), Net, of the notes to the consolidated financial statements for additional information.
Gains on the Sale of Company-Operated Restaurants
In 2023, gains on the sale of company-operated restaurants totaled $18.0 million and were related to the refranchising of 111 Del Taco restaurants and five Jack in the Box restaurants. In the prior year, gains on the sale of company-operated restaurants totaled $3.9 million and were related to the refranchising of 15 Jack in the Box restaurants. Refer to Note 4, Summary of Refranchisings and Franchise Acquisitions, of the notes to the consolidated financial statements for additional information.
Interest Expense, Net
Interest expense, net, is comprised of the following (in thousands):
|Interest expense||$||84,627 ||$||86,524 |
|Interest expense, net||$||82,446 ||$||86,075 |
Interest expense, net, decreased $3.6 million in 2023. Interest expense decreased $1.9 million due in part to the prior year $7.7 million loss on early extinguishment of debt not recurring in the current year, partially offset by increased expense of $6.2 million due to higher average debt levels year-over-year. Additionally, interest income increased in the current year primarily due to the higher cash balances throughout the year.
The income tax provisions reflect effective tax rates of 30.9% and 28.5%, in fiscal years 2023 and 2022, respectively. The major components of the year-over-year increase in tax rates were the impact of non-deductible goodwill related to the sale of company-operated restaurants, partially offset by non-taxable gains in the current year as opposed to non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our securitized financing facility. Our cash requirements consist principally of working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance and incentive distributions, dividend payments, and obligations related to our benefit plans. We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock.
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our credit facilities. As of October 1, 2023, the Company had $185.9 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $175.5 million under both the $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility.
The Company continually assesses the optimal sources and uses of cash for our business. Since the Del Taco acquisition, we have undertaken a process to review our balance sheet for any undervalued assets, and to pursue opportunities for capital sources, including sales of Jack in the Box real estate assets identified in its portfolio, and refranchising, primarily for Del Taco in the near term. The Company intends to use the net proceeds from these transactions to pay down debt, provide additional liquidity and for other corporate purposes including investments in growth initiatives and potential share repurchases.
Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, borrowings available under our Variable Funding Notes and revolving credit facility, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.
The table below summarizes our cash flows for each of the last two fiscal years (in thousands):
|Total cash provided by (used in):|
|Operating activities||$||215,006 ||$||162,882 |
|Investing activities||42,219 ||(578,588)|
|Financing activities||(207,358)||478,178 |
|Net cash flows||$||49,867 ||$||62,472 |
Operating Activities. Cash flows provided by operating activities increased $52.1 million compared with a year ago, primarily due to favorable change in working capital of $61.8 million. The favorable change in working capital primarily relates to the deferral of 2023 income taxes in connection with the southern California winter storm disaster area declaration of $50.3 million, lower payments for incentive compensation of $17.1 million, timing of collections of $14.0 million primarily due to the Jack segment rent billings for October, and lower marketing payments of $11.4 million. These benefits were partially offset by a $25.5 million payment made in the fourth quarter connection with our Torrez litigation as well as $17.8 million due to the timing of accounts payable, including the Jack segment October rent payments. Cash flows provided by operating activities was also impacted by a lower net income, after adjusting for non-cash items, of $9.6 million.
In addition to continuing operations, other known uses of cash flow in the first quarter of fiscal year 2024 include the $50.3 million for fiscal 2023 deferred income tax payments, as well as $25.5 million for Torrez, a previously announced litigation settlement. For additional information related to Torrez, refer to Note 16, Commitments and Contingencies, of the notes to the consolidated financial statements.
Pension and Postretirement Contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of the date of our last actuarial funding valuation for our qualified pension plan, there was no minimum contribution funding requirement. In 2023 and 2022, we contributed $6.2 million and $6.7 million, respectively, to our pension and postretirement plans. We do not anticipate making any contributions to our qualified defined benefit pension plan in fiscal 2024. 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 $620.8 million from 2023 compared to 2022. This increase was primarily due to $580.8 million of cash that was used in the prior year for the acquisition of Del Taco, coupled with $78.8 million of additional cash received in 2023 from the sale of Del Taco company-owned restaurants to franchisees. These increases in cash were partially offset by an increase of $28.5 million for amounts used for the purchase of property and equipment as well as a $7.1 million decrease in proceeds from the sale and leaseback of assets.
Capital Expenditures — The composition of capital expenditures in each fiscal year is summarized in the table below (in thousands):
|Remodel / refresh programs||$||9,159 ||$||8,823 |
|New restaurants||8,159 ||2,887 |
|Restaurant facility expenditures||22,592 ||21,469 |
|Purchases of assets intended for sale and leaseback||14,960 ||1,986 |
|Restaurant information technology||13,037 ||6,350 |
|67,907 ||41,515 |
|Information technology||6,752 ||3,524 |
|Corporate facilities||295 ||1,436 |
|7,047 ||4,960 |
|Total capital expenditures||$||74,954 ||$||46,475 |
In 2023, capital expenditures increased by $28.5 million compared to a year ago, primarily due to an increase in the purchases of Jack in the Box restaurant properties intended for sale and leaseback of $13.0 million, an increase in information technology for both restaurant and corporate of $9.9 million, as well as new restaurant openings of $5.3 million.
Sale and Sale-leaseback Transactions — To optimize our balance sheet and capital structure, we use sales and leaseback financing and provide our franchisees the opportunity to purchase the property that we currently lease to them.
In 2023, we completed one sales-leaseback transaction involving a restaurant property with proceeds of $3.7 million and completed the sale of properties to franchisees and other third parties during the year with proceeds of $25.2 million.
Financing Activities. Cash flows used in financing activities increased by $685.5 million compared with a year ago, primarily as a result of a decrease in net borrowings of $621.4 million and a $65.0 million increase in share repurchases compared with a year ago.
Repurchases of Common Stock — In fiscal 2023, the Company repurchased 1.1 million shares of its common stock for an aggregate cost of $90.7 million, including the applicable excise tax. As of October 1, 2023, there was $85.0 million remaining under share repurchase programs authorized by the Board of Directors which expired on November 20, 2023.
Dividends — In fiscal 2023, the Board of Directors declared four quarterly cash dividends of $0.44 per share, totaling $36.2 million. Future dividends are subject to approval by our Board of Directors.
Securitized Refinancing Transaction — On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively, unless earlier prepaid to the extent permitted.
In 2022, the Company also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Secured Notes (the “Variable Funding Notes”), which permits borrowings up to a maximum of $150.0 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. As of October 1, 2023, we did not have any outstanding borrowings and had available borrowing capacity of $100.5 million under our 2022 Variable Funding Notes, net of letters of credits issued of $49.5 million.
The net proceeds from the sale of the 2022 Notes were used to repay in full $570.7 million in aggregate outstanding principal amount of the Company’s Series 2019-1 Class A-2-I Notes, together with the applicable make-whole premium and unpaid interest, and was used to fund a portion of the Company’s acquisition of Del Taco Restaurants, Inc.
The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes. The 2022 Notes are subject to the same covenants and restrictions as the Series 2019-1 Notes.
The quarterly principal payment 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.
Restricted Cash — 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 October 1, 2023, the Master Issuer had restricted cash of $28.3 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-2 Notes and Variable Funding Notes.
Covenants and Restrictions — 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 October 1, 2023, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.
Our cash requirements greater than twelve months from contractual obligations and commitments include:
Debt Obligations and Interest Payments — Refer to Note 7, Indebtedness, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.
Operating and Finance Leases — Refer to Note 8, Leases, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.
Purchase Commitments — Purchase obligations includes non-cancelable purchase commitments related to information technology agreements and volume commitments for beverage products. Refer to Note 16, Commitments and Contingencies, for further detail of our obligations and the timing of expected future payments.
Benefit Obligations — Refer to Note 12, Retirement Plans, of the notes to the consolidated financial statements for further information regarding our obligations and the timing of expected payments under our non-qualified defined benefit plan and postretirement healthcare plans.
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 review our 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. 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. The impairment test for long-lived assets requires us to assess the recoverability of long-lived asset groups by comparing their net carrying value to the sum of undiscounted estimated future cash flows expected to be generated through leases and/or subleases or by our individual company-operated restaurants. 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.
Goodwill and Indefinite-Lived Intangible Assets — We evaluate goodwill and indefinite-lived intangibles for impairment in the third quarter of each year, or more frequently, if indicators of impairment are present. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values. Our reporting units are our two restaurant brands, Jack in the Box and Del Taco.
Our impairment analyses first include a qualitative assessment to determine whether events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Significant factors considered in this assessment include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, share price fluctuations, overall financial performance, and results of past impairment tests. If the qualitative factors indicate that it is more likely than not that the fair value is less than the carrying value, we perform a quantitative impairment test.
In performing a quantitative test for impairment of goodwill, we primarily use the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of the reporting unit. Significant assumptions made by management to estimate fair value under the discounted cash flow method include future cash flow assumptions, which may differ from actual cash flows due to, among other things, economic conditions, or changes in operating performance. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risk and uncertainty inherent in the forecasted cash flows. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.
In the process of a quantitative test, if necessary, of the Del Taco trademark intangible asset, we primarily use the relief from royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate, an estimated income tax rate, and a discount rate to be applied to the forecast revenue stream.
In the third quarter of 2023, we performed quantitative tests using the approaches described above. The fair value of our Jack in the Box reporting unit was substantially in excess of its respective carrying value as of the testing date. The fair value of our Del Taco reporting unit and indefinite-lived trademarks were in excess of their carrying values by approximately 9% and 13%, respectively, as of the testing date.
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 and assumptions related to the loss development factors, 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
Interest Rate Risk — We would be exposed to interest rate risk on borrowings under our $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility. As of October 1, 2023, we had no outstanding variable rate borrowings.
Commodity Price Risk —The Company is 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 October 1, 2023, the Company’s Chief Executive Officer and Chief Financial Officer (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
As previously announced, the Company acquired Del Taco Restaurants, Inc. (“Del Taco”) in the second quarter of 2022, and was permitted to exclude the Del Taco segment from the 2022 assessment of internal control over financial reporting as that was the first year following the date of acquisition. The Company has included the Del Taco’s internal controls within management’s assessment of the effectiveness of the Company’s internal control over financial reporting for fiscal year ended October 1, 2023.
There were no other changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended October 1, 2023 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions; (2) 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 (3) 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 October 1, 2023. 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. Management has concluded that, as of October 1, 2023, the Company’s internal control over financial reporting was effective, at a reasonable assurance level, based on these criteria.
The Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which follows.
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 October 1, 2023, 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 October 1, 2023, 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 October 1, 2023 and October 2, 2022, the related consolidated statements of earnings, comprehensive income, stockholders’ deficit, and cash flows for each of the fifty-two week periods ended October 1, 2023 and October 2, 2022, and for the fifty-three week period ended October 3, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated November 21, 2023 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 21, 2023
ITEM 9B. OTHER INFORMATION
During the last fiscal quarter, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
On August 15, 2023, the Company adopted a Rule 10b5-1 trading arrangement to repurchase shares of the Company’s common stock up to an aggregate purchase price of $30.0 million. This Rule10b5-1 trading arrangement subsequently terminated on September 29, 2023.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
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,” and “Committees of the Board” to be filed with the Commission pursuant to Regulation 14A within 120 days after October 1, 2023 and to be used in connection with our 2024 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 — Governance — Governance Documents — 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 2023.
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 and Stock Ownership Requirements,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” to be filed with the Commission pursuant to Regulation 14A within 120 days after October 1, 2023 and to be used in connection with our 2024 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 October 1, 2023 and to be used in connection with our 2024 Annual Meeting of Stockholders is hereby incorporated by reference. Information regarding equity compensation plans under which Company common stock may be issued as of October 1, 2023 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 October 1, 2023 and to be used in connection with our 2024 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
That portion of our definitive Proxy Statement appearing under the caption “Independent Registered Public Accountants Fees and Services” to be filed with the Commission pursuant to Regulation 14A within 120 days after October 1, 2023 and to be used in connection with our 2024 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|
|4.3|Series 2022-1 Supplement to Base Indenture, dated as of February 11, 2022, by and between Jack in the Box Funding, LLC, as Master Issuer of the Series 2022-1 fixed rate senior secured notes, Class A-2, and Series 2022-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2022-1 Securities Intermediary. |8-K||2/15/2022|
|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|
|10.1.26|Class A-1 Note Purchase Agreement, dated as of February 11, 2022, 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||2/15/2022|
|10.1.27|First Amendment to the Management Agreement, dated as of February 11, 2022, 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||2/15/2022|
* Management contract or compensatory plan
1 Certain of the exhibits and schedules in this Exhibit have been omitted pursuant to Item 601(a)(5) and 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted exhibits and schedules to the Securities and Exchange Commission upon its request.
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