Jack in the Box has seen some sales momentum in recent months as consumers return to restaurants and the company’s various initiatives gain some steam.
But it also has a few headwinds, notably its major presence in California, the state that earlier this year started requiring fast-food chain restaurants to pay a minimum of $20 per hour—a minimum that stands out even more after voters in the state rejected a base wage of $18 for every other industry.
That wage is costing company restaurants in the state, including flagship Jack in the Box and the Mexican chain Del Taco, $15 million on an annualized basis. It’s natural to guess that it’s costing franchisees, who operate a lot more restaurants in the state, even more than that. Labor costs are up 400 basis points as a percentage of revenue.
“That’s a lot of headwind,” CEO Darin Harris told analysts on Wednesday. “It’s a large number. So franchisees in California will definitely feel some of that unless we offset it with more top-line growth, and then some of the things we’re doing from a cost standpoint.”
Jack in the Box is more exposed than most companies to California, with about 1,300 restaurants total, or just under half of the total number of locations in both of the company’s chains. That includes 952 Jack in the Box locations and 357 Del Taco restaurants.
Both brands have seen same-store sales struggle in recent years, particularly 2024 as consumers shift away from fast-food restaurants. At Del Taco, same-store sales declined 3.9% in the company’s fiscal fourth quarter ended Sept. 29. They declined 2.1% at Jack in the Box.
That chain’s performance has been improving more recently, however. Same-store sales at Jack in the Box improved in September and were up 1% so far in the current quarter.
The improvement follows that of several other restaurant chains in October, including Wendy’s and Burger King, as well as McDonald’s before its E. coli outbreak emerged. Harris, however, credited the company’s value marketing, premium offerings and digital efforts.
“All of these things are working to drive sales in a more meaningful way,” he said.
Executives have maintained that California hasn’t been a sales problem for the brand, and that performance of its two brands last quarter were not rooted in weak sales in the state.
“California’s actually performed relatively well for us,” said Brian Scott, who recently announced plans to leave as CFO of Jack in the Box. He noted that Jack in the Box took some pricing in California, which hurt traffic. But, he said, “It’s such a strong market for us. It’s actually held up well.”
“It’s really more of an industry issue that all the QSRs have faced in the last couple of quarters,” Scott added. “And we’re not immune to that.”
Company executives added that they expect fast-food transactions to improve next year.
But they’re not expecting that much improvement. Jack in the Box same-store sales are expected to be flat to up 1% next year. At Del Taco they’re expected to be flat to down 1%. The company “faced some near-term industry headwinds that shaped our expectations for next year,” Scott said. “And while we are encouraged by the improved sales trends at Jack to start the [fiscal] year, it is early and our full-year sales guidance reflects some near-term gross-margin pressures.”
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