Jack In The Box 2007 Annual Report Download - page 37

Operating Costs and Expenses
Restaurant costs of sales, which include food and packaging costs, increased to $683.9 million in 2007 from
$654.7 million in 2006, and $647.6 million in 2005. As a percentage of restaurant sales, restaurant costs of sales
were 31.8% in 2007, 31.2% in 2006, and 31.7% in 2005. In 2007, higher commodity costs, primarily cheese, eggs,
beef and shortening were partially offset by lower packaging costs. In 2006, lower commodity costs, principally
beef, cheese and pork, as well as favorable product mix changes contributed to the lower rate. In 2006, beef costs
were approximately 5% lower than fiscal 2005. In fiscal 2005, beef costs were high, unfavorably impacted by the
closing of the U.S. border to Canadian cattle, and produce costs were up approximately 9%. The cost increases in all
years were partially offset in part by modest selling price increases.
Restaurant operating costs were $1,082.2 million in 2007, $1,078.0 million in 2006, and $1,051.4 million in
2005 and, as a percentage of restaurant sales, were 50.3%, 51.3%, and 51.4%, respectively. In 2007, the percentage
improvement compared with 2006 is primarily due to fixed cost leverage on same-store sales and lower costs for
workers’ compensation insurance, utilities, and profit improvement initiatives, partially offset by higher costs
related to brand re-invention initiatives. In 2006, the lower rate is due primarily to fixed-cost leverage on same-store
sales, lower costs for workers’ compensation insurance and profit improvement program initiatives, partially offset
by higher costs for utilities.
Costs of distribution and other sales increased to $579.1 million in 2007 from $506.0 million in 2006 and
$343.8 million in 2005, primarily reflecting an increase in the related sales. These costs were 99.0% of distribution
and other sales in 2007, and 98.7% in 2006 and 2005. The percentage increase in 2007 compared with 2006
primarily relates to higher retail prices per gallon of fuel, which have proportionately higher costs, but yield stable
penny profits. The percentage in 2006 remained consistent with 2005 as increases in distribution volumes related to
strong sales at JACK IN THE BOX restaurants offset the impact of higher retail prices per gallon of fuel at our
QUICK STUFF locations.
Franchised restaurant costs, principally rents and depreciation on properties leased to JACK IN THE BOX
franchisees, increased to $56.5 million in 2007 from $44.5 million in 2006 and $35.3 million in 2005, due primarily
to an increase in the number of franchised restaurants. As a percentage of franchised restaurant revenues, franchise
restaurant costs decreased to 40.4% in 2007 from 40.5% in 2006 and 40.9% in 2005 benefiting from the leverage
provided by higher franchise revenues.
Selling, general, and administrative (“SG&A”) expenses were $293.9 million, $300.8 million, and $273.8 mil-
lion in 2007, 2006, and 2005, respectively. SG&A expenses decreased to approximately 10.2% of revenues in 2007
from 11.0% of revenues in 2006 and 2005. In 2007, increased leverage from higher revenues, lower pension costs
and insurance recoveries contributed to the percent of revenue decline compared with 2006. In 2006, SG&A
expenses as a percent of revenues remained flat compared with 2005 as the sales leverage benefit was offset by the
inclusion of stock option expense of $7.3 million upon the adoption of SFAS 123R, higher pension costs and
charges related to certain restaurant closures and the impairment of 8 JACK IN THE BOX restaurants.
Gains on sale of company-operated restaurants were $39.3 million, $42.0 million and $23.3 million in 2007,
2006 and 2005, respectively. The change in gains relates to the number of restaurants sold and the specific sales and
cash flows of those restaurants. In 2007, we sold 76 JACK IN THE BOX restaurants, compared with 82 in 2006, which
included all 25 company-operated restaurants in Hawaii, and 58 in 2005. The Hawaii transaction represented the
first sale of an entire market since we announced our intent to increase franchising activities in 2002 and contributed
approximately $15.0 million to gains on sale of company-operated restaurants in 2006.
Interest Expense, Net
Interest expense, net was $23.4 million, $12.1 million, and $13.4 million, in 2007, 2006 and 2005, respectively,
and includes interest expense of $32.2 million, $19.6 million and $17.1 million, respectively, and interest income of
$8.8 million, $7.5 million, and $3.7 million, respectively. The increase in interest income in each year reflects
higher average cash balances and higher interest rates on invested cash. In 2007, interest expense increased
compared with 2006 primarily due to higher average bank borrowings and increased interest rates incurred on our
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