Higher restaurant wages are making a profit – some warn that there is still more pain ahead

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

Patrick T. Fallon | Bloomberg | Getty pictures

Customers return to restaurants in droves, but workers do not, which puts even more pressure on fast food chains to maintain market share and protect profits while navigating a tight labor market.

Restaurant executives have drawn a bleak picture of staffing challenges for investors on their earnings calls over the past two weeks. CEOs like Domino’s Pizza’s Ritch Allison, Chipotle Mexican Grill’s Brian Niccol and McDonald’s Chris Kempczinski shared details about how eateries have shortened hours, limited ordering methods and lost sales because they can’t find enough workers. Some chains have been hit harder by the labor crisis, such as Restaurant Brands International’s Popeyes, which saw about 40% of its dining halls closed due to understaffing.

“This is how we separate wheat from chaff,” said Neuberger Berman analyst Kevin McCarthy.

Salary increase is a popular approach to staffing problems, although it is not a perfect solution. McDonald’s salaries at their franchise restaurants have risen by about 10% so far this year as part of an effort to attract workers. Higher labor costs have led to higher menu prices, which have risen by about 6% from a year ago, according to McDonald’s executives.

Starbucks plans to spend about $ 1 billion in fiscal years 2021 and 2022 on improving the benefits for its baristas, including two planned pay rises. The decision reduced its earnings forecast for the fiscal year 2022, disappointed investors and shaved off $ 8 billion in market value. But McCarthy believes more companies should take a page from the company’s game book and invest in their employees.

“The stock is down, but I think they are a winner out of this. Great move on their part, in the long run is definitely the right decision,” he said.

McCarthy said he has assumed restaurant businesses will lose about 5 traffic points due to understaffing.

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

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

“Typically when you have senior people at private companies who say this is going to get worse, it’s normal,” Kalinowski said.

He has lowered estimates for Starbucks ‘2022 accounting results and Domino’s sales growth in the US in the same store in the next quarter after the companies’ latest earnings reports.

“Not all companies will necessarily see a change in the sales forecast, but the margin side of things you need to pay more attention to, especially for concepts that have 100% company-owned locations in the US or are essentially company stores,” Kalinowski said.

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

There are still more restaurant earnings ahead. Outback Steakhouse owner Bloomin ‘Brands, Wingstop and Applebee’s owner Dine Brands and IHOP parent company Dine Brands are among the companies expected to report their latest results next week. Some analysts, such as Wedbush Securities’ Nick Setyan, have adjusted their estimates based on the earnings reports of peer companies.

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