GENERAL


All comparisons between 2020 and 2019 refer to the 12-weeks ("quarter") and
40-weeks ("year-to-date") ended July 5, 2020 and July 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
ended September 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.
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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 broader United 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 of July 5, 2020, we operated and franchised 2,244 Jack in the Box
quick-service restaurants, primarily in the western and southern United States,
including one in Guam.
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.
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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 $8.6 million in the quarter and $28.8 million year-to-date. •ASC 842 also changed how lessees account for leases subleased at a loss. Under ASC 842, sublease income and lessee rent expense are recorded as franchise rent revenue and franchise occupancy costs as earned or incurred. As a result of this change, franchise revenues and franchise occupancy expenses increased by $1.1 million and $1.3 million, respectively, in the quarter and $3.2 million and $3.9 million year-to-date.

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