Can new cheese pumps save Jack in the Box’s profits?
The San Diego-based burger chain on Tuesday told investors that its profits in the coming fiscal year will be a lot lower than they expected, the result of a combination of soaring inflation and investments the company is making in technology and growth.
The result hammered its stock price, which plunged 16% through late-afternoon trading.
Yet the company believes it is taking steps in the right direction. It is just combating a difficult environment while trying to position the company for expansion. “The fundamental, underlying business is performing extremely well, but we have some things that are creating challenges,” CEO Darin Harris told investors.
“All our peers are experiencing this situation where 40-year-high inflation is impacting margins, and it’s carrying over from 2022 to 2023. And we just can’t take enough price to cover all of it.”
Jack in the Box, which also operates Del Taco, has had a “margin task force” featuring franchisees, company store operators and leadership designed to improve margins by 200 basis points.
The effort includes a variety of changes, including standardized product builds that Harris said would save $2,900 per year, per restaurant, by simplifying execution. It also includes new cheese pumps that reduce waste and require less time and should save $7,500 per restaurant.
There are also Hydra Rinse Shake machines that standardize cleaning and should save $5,000 per restaurant. Jack in the Box is also reducing its receipts, which could save $400,000 for the entire system, Harris said.
“We’re looking at every little line item to find where we can improve,” Harris said.
Rising food and labor costs hammered Jack in the Box last quarter. Wage rates rose 11.3% and commodity costs increased 14.9%. The result was a decline in restaurant-level margins to 16.2%.
That’s not what led investors to hit Jack in the Box on Tuesday. The company projected that it would generate earnings per share between $5.25 and $5.65 in the 2023 fiscal year, which started Oct. 3. That was more than $1 per share below Wall Street expectations.
Some of that is due to continuing inflationary impacts. In addition, cost savings from Jack’s purchase this year of Del Taco aren’t expected to be realized until 2024.
But the company is also making investments in technology that it believes will pay off in the long run. That will include a point-of-sale system that should help the company “to set the stage for future applications, software and tools like digital menu boards, AI and personalized in-store ordering.
“We’re making a clear investment in technology for future growth,” Harris said. Still, the company expects to spend $160 million to $170 million in sales, general and administrative spending.
For the company, improving profitability and pushing for more technology will help Jack in the Box lure more operators and encourage growth. The company has been working for the past two years to get more unit growth and expects it to generate net new unit growth this fiscal year, for the first time since 2019.
Jack in the Box has had roughly the same number of locations for the past decade. But it also has signed commitments for 267 new restaurants over the past year. “Site approvals were higher the past 18 months than in the previous 30 months combined,” Harris said.
The company plans to enter into two new markets this year: Salt Lake City and Louisville, Ky. Salt Lake City is what Harris called a “wagon wheel market” because it’s near existing markets and there is high demand. But Louisville is a brand-new market.
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