Jack In The Box’s Revenue and Profit Margin Analysis

Jack in the Box – Lunch. Source: Flickr

With more than 2,000 restaurants located mainly in the North American region, Jack In The Box is one of the largest burger chains in the U.S.

Jack In The Box’s annual revenue exceeded the $1 billion mark again in fiscal 2020 after dipping slightly below $900 million in fiscal 2018.

Jack In The Box used to own Qdoba Mexican Eats, a fast-casual restaurant specializing in Mexican cuisine.

However, the company sold the entire subsidiary off in 2018 to Apollo Global Management for an aggregate purchase price of $305 million.

The transaction was completed in fiscal 2018 Q2 and was done entirely in cash.

As a result, the company operates only the Jack In The Box quick-service restaurants after the sales of Qdoba.

In this article, we will examine several of Jack In The Box’s revenue and profitability metrics, including the sales breakdown, gross profit, gross margin, operating income, net profit, EPS and EBITDA.

Let’s take a look!

Jack In The Box’s Revenue By Segment

Jack In The Box’s revenue breakdown by segment

Jack In The Box’s revenue segment is broken down into 2 categories, and they are company-owned restaurant sales and franchise revenue.

Simply put, company-owned restaurant sales are sales generated from company-operated Jack In The Box restaurants.

On the other hand, franchise revenue is made up of several segments, including franchise rental revenue, franchise royalties and fees, franchise contribution for advertising and services.

Jack In The Box does not recognize directly the revenue generated from franchise restaurants as the company does not own them.

Instead, Jack In The Box earns royalties, rentals, advertising fees, franchise fees, and other fees from its franchisees.

These are considered leasing revenues and are recurring.

Jack In The Box will collect the leasing revenue as long as the franchisees continue to use Jack In The Box’s brand name and operate its restaurants.

Jack In The Box’s Company-Owned Restaurant Sales

Jack In The Box’s restaurant sales

Let’s first look at Jack In The Box’s company-owned restaurant sales figures for the period between fiscal 2017 and fiscal 2021.

These are revenues generated from Jack In The Box’s operated restaurants and are recognized when the delivery of food and beverages to customers is completed.

According to the chart, Jack In The Box’s company-operated restaurant sales have been on a decline and reached about $370 million on a TTM basis in fiscal 2021 Q2.

The decline of revenue in company-operated restaurants is expected as Jack In The Box has been planning to reduce the company-owned restaurants through its re-franchising strategy.

Since fiscal 2016, Jack In The Box’s re-franchising strategy has successfully reduced company-owned restaurants from 18% or 417 units reported in fiscal 2016 4Q to only 6% or 144 units reported in fiscal 2020 4Q.

As of fiscal 2021 2Q, Jack In The Box owns and operates 148 restaurants, or 6.6% of the 2,228 total restaurants.

Jack In The Box’s Company-Owned Restaurant Gross Profit

Jack In The Box’s restaurant gross profit

Jack In The Box’s company-owned restaurant gross profit reached about $100 million on a TTM basis in fiscal 2021 2Q.

In the long run, Jack In The Box’s company-owned restaurant gross profit has been on a decline and this is in line with the company’s strategy of reducing the company-operated restaurants through re-franchising.

The re-franchising strategy has several advantages over company-owned restaurants.

First off, Jack In The Box’s asset base will significantly decline and this will make the company leaner and operate more efficiently.

Secondly, Jack In The Box’s revenues from franchisees are more stable and predictable compared to company-operated restaurants as they are recurring and are usually based on leasing terms.

For example, according to the 2020 annual report, Jack In The Box gets an initial franchise fee of $50,000 per restaurant for a 20-year term.

While Jack In The Box does not immediately recognize the $50,000 franchise fee as revenue, it gets the cash first and recognizes the franchise fees over the 20-year term.

In addition, over the franchising term, Jack In The Box will also be getting royalty and other fees that are generally set at 5% of gross sales for franchisees.

Jack In The Box’s Company-Owned Restaurant Gross Margin

Jack In The Box’s restaurant gross margin

Jack In The Box’s company-owned restaurant gross margin has been fairly stable and hovers around 25% on average.

As of fiscal 2021 2Q, its gross margin clocked in at 26%, a reasonably high margin for a restaurant operator.

At this level of gross margin, Jack In The Box’s company-owned restaurants may not be significantly profitable considering that there are a host of other costs associated with running the restaurants.

For example, Jack In The Box’s food and packaging costs alone ate up about 29% of revenue in fiscal 2020.

Food and packaging costs come mainly from ingredients and commodities such as beef, cheese, pork, etc.

For Jack In The Box, beef is its most significant commodity and the cost of beef alone has increased 15% in fiscal 2020 compared to a year ago.

Other than commodities and ingredients, Jack In The Box also needs to pay its employees and takes care of their well-being, including health care and insurance.

As such, payrolls and employee benefits came in at 30.5% of revenue in fiscal 2020, even larger than food and packaging costs.

Jack In The Box’s Franchise Revenues

Jack In The Box’s franchise revenue

Another revenue segment that significantly contributes to Jack In The Box’s total revenue is the franchise revenue.

As discussed, Jack In The Box’s franchise revenue is made up of several items, including royalties, rental revenue, fees, franchise advertising and services, etc.

These are recurring sales and are more stable and predictable than company-owned restaurant sales.

According to the chart, Jack In The Box’s franchise revenue has been on a rise, reaching as much as $724 million on a TTM basis in fiscal 2021 Q2.

On an annual basis, Jack In The Box’s franchise revenue totaled $672 million in fiscal 2020, an increase of nearly 10% from fiscal 2019.

The increase in franchise revenue has been partly a result of Jack In The Box’s re-franchising strategy that slowly converts company-owned restaurants to franchised restaurants in addition to new franchised restaurants being added.

As of fiscal 2021 Q2, Jack In The Box’s franchised restaurants reached 2,080 units or 93.4% of total restaurants.

While Jack In The Box has been impacted by store shutdowns and lower guest traffic during the COVID time, its franchise revenue seems to defy the odds and even accelerated in the last few fiscal quarters, suggesting that Jack in The Box’s operation may even thrive during the pandemic.

Jack In The Box’s Franchise Gross Profit

Jack In The Box’s franchise gross profit

Similar to the increasing franchise revenue, Jack In The Box’s franchise gross profit has also been on a rise since fiscal 2017.

As of fiscal 2021 Q2, Jack In The Box’s franchise gross profit clocked in at $300 million on a TTM basis, a new high since fiscal 2017 and roughly 3 times more than its company-owned restaurant sales.

Also, Jack In The Box’s franchise gross profit has significantly increased in the last few fiscal quarters, suggesting that the company’s operations have largely been spared from the negative impact of the outbreak.

Jack In The Box’s Franchise Gross Margin

Jack In The Box’s franchise gross margin

Jack In The Box’s franchise gross margin hovers around 40% and was down from the high 60% reported back in fiscal 2017.

The decline was mainly attributable to the adoption of an accounting standard that recognizes the franchise advertising and service revenue as well as expenses starting in fiscal 2019 Q1.

While Jack In The Box’s gross margin has lowered and remained more or less flat throughout fiscal 2020, it has maintained at the 40% level even during the COVID age, suggesting the company’s operations have largely skirted the COVID negative impacts.

With a 40% gross margin, Jack In The Box’s franchise revenue is nearly twice as profitable as its company-owned restaurant revenue.

The higher gross margin of franchise revenue is expected as Jack In The Box doesn’t have to worry about rising commodity and ingredient costs as well as payrolls and employee benefits which only exist in company-operated restaurants.

Jack In The Box’s Operating Income

Jack In The Box’s operating income

From an operational perspective, Jack In The Box derived an exceptional operating margin that was north of 25% on the back of a $280 million TTM operating income reported in fiscal 2021 2Q.

The good news is that Jack In The Box’s growth in operating income has accelerated even during the middle of a pandemic.

As shown in the chart, you can see that Jack In The Box had significantly bolstered its operating profit since the start of fiscal 2020, and the figure has reached a new high in the latest quarter since fiscal 2017 from a TTM standpoint.

While operating profit had slightly dipped during the start of the pandemic, it has since picked up and is headed higher in subsequent quarters, illustrating that the company’s operations have largely defied the odds and been spared from the impact of the outbreak.

Jack In The Box’s Net Income

Jack In The Box’s net income

Similar to the operating income, Jack In The Box’s net income experienced the same continuous uptrend after having a decline in fiscal 2020.

As of fiscal 2021 2Q, Jack In The Box’s net income clocked in at nearly $160 million on a TTM basis, tripling the figure reported a year ago.

Again, the increasing net profit in the midst of a pandemic points to the resilience of Jack In The Box’s restaurant and franchise businesses.

That said, we can almost safely conclude that Jack In The Box is a pandemic proved and even a recession proved business.

Jack In The Box’s Earnings Per Share (EPS)

Jack In The Box’s earnings per share

Jack In The Box’s earnings per share has not significantly declined thanks to its persistent share buybacks even during the COVID age.

While Jack In The Box has temporarily suspended share buybacks for 4 consecutive quarters starting in fiscal 2020 Q2, it has resumed the share buyback in fiscal 2021 Q2 and spent a notable $65 million on share buyback in the same quarter.

Since fiscal 2016, Jack In The Box has cumulatively spent a nice $1.3 billion on share buyback.

On a TTM basis, Jack In The Box’s EPS reaches nearly $7.00 USD per share as of fiscal 2021 2Q.

With a PE ratio of around 17X, Jack In The Box’s stock price clocked in at $120 per piece as of June 2021.

In short, Jack In The Box’s EPS has only 1 way to go, which is up in the long run, driven primarily by continuous share buybacks and rising profitability.

Jack In The Box’s EBITDA

Jack In The Box’s adjusted EBITDA

The EBITDA is a measure of cash flow before the changes of working capital and is almost equivalent to operating cash flow.

That said, Jack In The Box has taken 1 step ahead by eliminating more income and expense items, including pension charges, gain on the sale of company-operated restaurants, impairment charges, etc.

As such, Jack In The Box’s EBITDA is a measure of the company’s core performance by eliminating non-core items that may distort the results.

All told, Jack In The Box’s adjusted EBITDA has been fairly stable over the last 5 years and averages around $270 million since fiscal 2017.

After dipping to $250 million in fiscal 2020 Q2, Jack In The Box’s EBITDA were headed higher in subsequent quarters and clocked in at $330 million in fiscal 2021 Q2, a new high for the company since fiscal 2017.

Similar to the trend observed in other profitability metrics, Jack In The Box’s adjusted EBITDA has been on a rise post-2020 2Q and reached a new high in the latest quarter, largely defying the COVID impact.

At an EBITDA of $330 million in fiscal 2021 Q2, Jack In The Box is producing a considerable amount of cash earnings and is literally printing cash.

Summary

Jack In The Box’s company-owned restaurant revenue has been on a decline whereas its franchise revenue has been on a rise.

The opposing trend of both revenue segments has been largely driven by Jack In The Box’s re-franchising strategy to convert company-operated restaurants to franchise restaurants.

In terms of profitability, Jack In The Box’s franchise revenue is nearly 2 times more profitable than company-operated restaurant revenue.

The higher profitability is attributable to the 40% gross margin reported in the franchise sector compared to only 26% gross margin reported in company-operated restaurants.

Additionally, Jack In The Box’s profitability has been on a rise even during the midst of the COVID age as seen in all profitability metrics, including operating income, net income, EPS and EBITDA.

After temporarily dipping in mid-2020, Jack In The Box’s profitability metrics, including operating profit, net profit and EPS, have projected upward again in subsequent quarters and reached record highs in fiscal 2021 Q2.

References and Credits

1. All financial figures in this article were obtained and referenced from Jack In The Box’s financial statements which can be found in Jack In The Box’s Investor Relations.

2. Featured images are used under Cretive Common Licenses and are obtained from Ernesto Andrade and Willis Lam.

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