GENERAL
All comparisons between 2020 and 2019 refer to the 12-weeks ("quarter") and 40-weeks ("year-to-date") endedJuly 5, 2020 andJuly 7, 2019 , respectively, unless otherwise indicated. For an understanding of the significant factors that influenced our performance during 2020 and 2019, our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year endedSeptember 29, 2019 . Our MD&A consists of the following sections: •Overview - a general description of our business and 2020 highlights. •Financial reporting - a discussion of changes in presentation, if any. •Results of operations - an analysis of our condensed consolidated statements of earnings for the periods presented in our condensed consolidated financial statements. •Liquidity and capital resources - an analysis of our cash flows including pension and postretirement health contributions, capital expenditures, franchise tenant improvement allowance distributions, share repurchase activity, dividends, known trends that may impact liquidity and the impact of inflation, if applicable. •Discussion of critical accounting estimates - a discussion of accounting policies that require critical judgments and estimates. •New accounting pronouncements - a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any. •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 and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system same-store sales, franchised and system restaurant sales, and AUV information are useful to investors as they have a direct effect on the Company's profitability. •Adjusted EBITDA, which represents net earnings on a generally accepted accounting principles ("GAAP") basis excluding earnings or losses from discontinued operations, income taxes, interest expense, net, gains or losses on the sale of company-operated restaurants, impairment and other charges, net, depreciation and amortization, amortization of tenant improvement allowances and other, and pension settlement charges. We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. Same-store sales, system restaurant sales, franchised restaurant sales, AUVs, and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies. 23
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IMPACT OF COVID-19 Throughout the pandemic, substantially all of our restaurants remain open, with dining rooms closed and all locations operating in an off-premise capacity, which has historically represented close to 90% of the Company's business, including drive-thru, third-party delivery, and carry-out. While we navigate through this time of uncertainty,Jack in the Box remains committed to operating our restaurants with integrity, providing great guest service, and most importantly, protecting the health and safety of our employees and guests. In the last five weeks of the second quarter, upon the rise in "shelter-in-place" mandates and "social distancing" requirements across the country, system same-store sales decreased by 17.0%; however, during the third quarter our system same-store sales have accelerated, increasing by 6.6%. Given the level of volatility and uncertainty surrounding the future impact of COVID-19 on the broaderUnited States economy and specific impacts to our business, in the second quarter we withdrew our previously issued fiscal 2020 and long-term guidance. We will provide an update when we can reasonably estimate the impacts of the COVID-19 pandemic on business results. To mitigate the impact of COVID-19 on the Company, operations, franchisees and our employees, we have undertaken the following actions: •Implemented a short-term cash preservation strategy (refer to the Liquidity and Capital Resources section for further information). •Provided financial support to our franchisees in the form of a reduction and payment deferral of marketing fees, postponement of rent, and delayed remodel requirements and development agreements for at least six months. •Instituted a new emergency paid sick leave program at company-operated restaurants and have procured protective masks, gloves, sneeze guards and thermometers at all company-owned and franchised locations. OVERVIEW As ofJuly 5, 2020 , we operated and franchised 2,244Jack in the Box quick-service restaurants, primarily in the western and southernUnited States , including one inGuam . The following summarizes the most significant events occurring in the third quarter of 2020, and certain trends compared to a year ago: •System same-store sales - System same-store sales increased by 6.6% in the quarter and 1.5% year-to-date. Company same-store sales increased 4.1% in the quarter, driven by a 20.2% increase in average check growth, partially offset by a 16.1% decrease in transactions. •Company restaurant operations - Company restaurant costs as a percentage of company restaurant sales increased in the quarter to 74.6% from 73.0% a year ago primarily due to wage inflation and increases in other operating costs. •Franchise operations - Franchise same-store sales increased by 6.9% in the quarter, resulting in higher royalties and percentage rent for the Company during the quarter. •Selling, general and administrative ("SG&A") expenses - SG&A decreased by$10.7 million in the quarter, primarily due to lower litigation-related matters and favorable mark-to-market adjustments on investments supporting the Company's non-qualified retirement plans. •Adjusted EBITDA - Adjusted EBITDA increased to$72.9 million in the quarter from$57.8 million in the prior year. FINANCIAL REPORTING In fiscal 2020, we adopted Accounting Standards Codification Topic 842, Leases ("ASC 842"), effective at the beginning of our fiscal year on a modified retrospective basis using the effective date transition method. Our consolidated financial statements reflect the application of ASC 842 guidance beginning in 2020, while our consolidated financial statements for prior periods were prepared under the guidance of a previously applicable accounting standard. 24
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The most significant effects of this transition that affect comparability of our
results of operations between 2020 and 2019 include the following:
•Our transition to ASC 842 resulted in the gross presentation of property tax
and maintenance expenses and related lessee reimbursements as "Franchise
occupancy expenses" and "Franchise rental revenues", respectively. These
expenses and reimbursements were presented on a net basis under the previous
accounting standard. Although there was no net impact to our consolidated
statement of earnings from this change, the presentation resulted in total
increases in "Franchise rental revenues" and "Franchise occupancy expenses" of
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