Jack in the Box (JACK, Financial) witnessed a notable uptick in its stock value following a second-quarter earnings report that surpassed gloomy expectations. Despite facing a 35% decline earlier this year, the company, a dominant player in California with over 40% of its outlets located there, is currently navigating through the challenges imposed by a new state law. This regulation, effective from April, mandates fast food chains to increase their minimum hourly wage to $20, significantly impacting operational costs.
The wage hike has compelled Jack in the Box and other similar businesses to escalate their menu prices, especially when lower-income consumers are limiting their spending due to persistent high inflation. Additionally, operational hiccups included a delay in the re-launch of the popular Smashed Jack burger due to supply shortages, postponing its availability until mid-March.
Despite these hurdles, Jack in the Box reported a mild 0.6% drop in same-store sales, with a 2.5% decrease at Jack in the Box restaurants and a 1.4% fall at Del Taco. CEO Darin Harris noted an improvement in sales post-March and outlined a strategy to boost same-store sales. The company slightly lowered its FY24 same-store sales outlook to flat-to-low single digits, a modest adjustment from the previously anticipated low-to-mid single digits.
On a positive note, Jack in the Box is experiencing some relief in commodity costs, which, coupled with higher menu prices, led to a 220 basis points increase in Restaurant-Level Margin to 23.6%. This improvement has helped stabilize the company’s financials, as evidenced by a nearly unchanged Q2 EPS of $1.46 year-over-year. Furthermore, the FY24 EPS forecast has been adjusted slightly to $6.25-$6.40 from the earlier range of $6.25-$6.50, alleviating fears of a significant earnings downturn due to rising labor costs.
With the stock trading at its lowest since the onset of the pandemic in early 2020, the recent earnings reveal that the company is managing to navigate through tough times better than expected, providing some reassurance to concerned investors.
