Profit margins at Jack in the Box restaurants took a hit last quarter, the company said on Tuesday, which isn’t surprising. After all, it was the first period in which the San Diego-based burger chain had to contend with California’s $20 fast-food wage.
But perhaps this is surprising: Same-store sales were better in the state than in the rest of the system. “California fared substantially better than we thought,” CEO Darin Harris told analysts on Tuesday, according to a transcript on the financial services site AlphaSense. The same is true at Jack in the Box’s sister chain Del Taco, where California was one of its best markets.
But make no mistake, California remains a challenge for restaurant operators and particularly Jack in the Box. In addition, the broader environment isn’t exactly friendly for fast-food chains at the moment.
Executives talked about the “challenging environment,” and the company lowered its projections for same-store sales for both brands for the year.
Jack in the Box’s same-store sales declined 2.2% in the quarter, the company’s fiscal third. Store-level margins declined to 21% of sales, from 21.8%. Labor costs increased 200 basis points in the period, to 32.4% of sales at company restaurants.
Harris told analysts that the company expects to regain that margin through “improved sales and our ongoing equipment, technology and financial fundamentals initiatives.”
Del Taco is in a tougher spot, however. Its same-store sales declined 3.9%. And its store-level margins plunged, to 13.4% in the period from 17.4% a year ago.
Labor costs increased 460 basis points, to 38.6% of sales at the chain, the company said.
“We were disappointed with the third-quarter same-store sales and margin results,” Harris said. He said the chain’s management is working to improve its marketing, media and menu strategy and implement operational changes to improve service and profit margins.
Both Jack in the Box and Del Taco rely heavily on the California market. Well over half of Del Taco’s nearly 600 restaurants are in the state, according to Restaurant Business sister company Technomic. About 40% of Jack in the Box’s 2,200 locations are in California.
The state began requiring fast-food chain restaurants to pay a minimum of $20 per hour starting April 1, which increased the minimum wage for those concepts by 25% overnight. Chains have raised prices as a result, and data from the foot traffic tracking firm Placer.ai suggests they are seeing weaker traffic as a result.
But Jack in the Box CFO Brian Scott said that Jack in the Box corporate restaurants, mostly in California, performed better than all but one market.
“Del Taco had a very similar result,” he said, “with California being one of our top markets in the quarter.”
The sales performance came thanks to price hikes. Working with Jack in the Box franchisees, “we looked at pricing by menu item across every market by every store,” Harris said. “We took specific, surgical pricing on individual items. We did it in a timely fashion. So I think we made the right moves in California.”
Similarly, Del Taco took incremental price increases, which helped that chain offset traffic declines.
But Californians also hold the chain in high regard. “This speaks to the brand being really well-regarded here,” Scott said.
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