Larger restaurant wages are wiping out earnings – some warn that extra ache is forward

Employees prepare orders for customers at a Chipotle Mexican Grill restaurant in Hollywood, California.

Patrick T. Fallon | Bloomberg | Getty Images

Customers are returning to restaurants in droves, but workers are not, putting even more pressure on fast food chains to hold market share and protect profits while navigating a tight labor market.

In the past two weeks, restaurant managers have painted a bleak picture of the human resource challenges investors face in their profit calls. CEOs like Ritch Allison of Domino’s Pizza, Brian Niccol of Chipotle Mexican Grill, and Chris Kempczinski of McDonald’s shared details on how restaurants have cut opening times, restricted ordering methods, and lost sales because they couldn’t find enough workers. Some chains have been hit harder by the labor shortage, such as Restaurant Brands International’s Popeyes, which has closed around 40% of its dining rooms due to staff shortages.

“Here we separate the wheat from the chaff,” says Kevin McCarthy, an analyst at Neuberger Berman.

Raising wages is a popular approach to personnel problems, although not a perfect solution. McDonald’s wages at its franchise restaurants have risen about 10% so far this year to attract workers. Higher labor costs have resulted in higher menu prices, up about 6% year over year, according to McDonald’s executives.

Starbucks plans to spend around $ 1 billion on improving the benefits of its baristas in fiscal 2021 and 2022, including two planned wage increases. The decision reduced the earnings forecast for fiscal year 2022, disappointing investors and saving $ 8 billion in market capitalization. However, McCarthy believes that more companies should take a page out of the company’s playbook and invest in their people.

“The stock is in the red, but I think they are a winner. Great move on your part, definitely the right decision over the long term,” he said.

McCarthy said he expected restaurant businesses to lose about 5 points in traffic due to staff shortages.

Looking ahead to the rest of 2021 and into 2022, most publicly traded restaurants expect the problem to persist for at least several more quarters. Texas Roadhouse CEO Gerald Morgan told analysts Thursday that there are “a bit” more people in the pool of applicants, but he still believes there is still a long way to go before the company has enough people to meet demand cover up.

Mark Kalinowski, founder of Kalinowski Equity Research, said privately owned restaurant company executives are more pessimistic about the timing of the labor market recovery.

“It usually happens when high-ranking people in private companies say things are going to get worse,” Kalinowski said.

He has slashed estimates for Starbucks ‘fiscal 2022 results and Domino US revenue growth for the next quarter, according to the companies’ most recent earnings reports.

“Not every company will inevitably see a change in its sales forecast, but the margin side of things has to be taken into account more carefully, especially for concepts that have 100% company-owned locations in the USA or consist mainly of their own stores.” “Said Kalinowski.

Kalinowski said he prefers stocks with a higher concentration of franchise restaurants. McDonald’s, for example, only operates 5% of its US locations, while the rest is operated by franchisees.

More restaurant income is still ahead. Outback steakhouse owner Bloomin ‘Brands, Wingstop and Applebee owner Dine Brands and IHOP parent Dine Brands are among the companies expected to release their latest results next week. Some analysts, like Wedbush Securities’s Nick Setyan, have revised their estimates in light of peer group earnings reports.

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