Jack in the Box has a minimum-wage problem

Heidi Chung
Reporter

While minimum wage increases might be good news for some American workers, they’re not always good news for restaurants. And one fast-food chain is even more impacted than the rest: Jack in the Box (JACK).

About half of Jack in the Box locations are in regions of the U.S. that are highly exposed to minimum wage increases, specifically California, Arizona and Washington.

Jack in the Box menu items. (Photo by Glenn Koenig/Los Angeles Times via Getty Images)

The San Diego, California-based company reported its most recent quarterly earnings report on May 15, and on the earnings conference call, management addressed the impact of wage increases on the business.

“We have 1,000 plus units in California; we’re obviously seeing some wage inflation there. So, I’m not going to put an exact number on it, but I will tell you that we do need to run some pretty reasonable sales numbers, in order to keep the profitability meter going up,” CFO Lance Tucker explained on the call May 16.

Effective January 1, 2019, the minimum wage in California increased to $12 from $11 a year earlier. The rise in minimum wage puts pressure on margins for many of the restaurants in the fast-casual space. According Jack in the Box’s most recent earnings report, of the more than 2,200 restaurants, about 2,085 of them are franchises.

Jack in the Box exposure to rising minimum wage (Thinknum)

In response to the pressure that franchises face because of the minimum wage bump, Tucker said, “Ultimately, if we continue to drive traffic increases along, and with them reasonable price increases, that’s where [the franchisees are] going to start to see the flow through, and they’ll be less concerned about some of the underlying cost pressures that they’re dealing with.”

The unemployment rate in the U.S. is at a five-decade low, and the labor market is tight as job growth continues to boom. Despite Jack in the Box store count remaining constant over the past year and a half, job listings are down, according to data complied by Thinknum.

Jack in the Box foot traffic increasing (Thinknum)

Nevertheless foot traffic, according to Thinknum, is still trending upwards.

“Ultimately, if we continue to drive traffic increases along with them reasonable price increases, that’s where [the franchisees are] going to start to see the flow through, and they’ll be less concerned about some of the underlying cost pressures that they’re dealing with,” Tucker said.

Jack in the Box’s same-store sales for company-owned stores, a key industry metric, jumped 0.6% during the most recent quarter, which was roughly in-line with analysts’ expectations.

Shares of Jack in the Box rose 6% this year and have been underperforming both the broader market and its peers. The S&P 500 (^GSPC) was up 14%, while McDonald’s (MCD) jumped 13%, and Yum Brands (YUM) rose 11%.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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