Larger restaurant wages whack earnings—some warn extra ache continues to be 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 personnel challenges investors face in their profit calls. CEOs like Domino’s Pizza Ritch Allison, Chipotle Mexican Grills Brian Nickol and MC Donalds Chris Kempczinski shared 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 Brands International’s restaurant Popeyes, that saw about 40% of its dining rooms closed due to lack of staff.

“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 services for 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 save $ 8 billion in market cap. McCarthy believes, however, 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. Big step on your part, definitely the right decision in the long run,” 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 a few more quarters. Texas Roadhouse CEO Gerald Morgan told analysts on 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.

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

“When high-ranking people in private companies say it is getting worse, it usually is,” Kalinowski said.

He has slashed estimates for Starbucks’ fiscal 2022 results and Domino’s U.S. revenue growth for the next quarter, according to the company’s latest earnings reports.

“Not every company will inevitably see a change in its sales forecast, but the margin side has to be considered more closely, especially for concepts that have 100% company-owned locations in the US or are primarily company transactions,” 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. Owner of an outback steakhouse Bloomin ‘brands, Wing stop and Applebees owners Your brands and IHOP parents Your 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 earnings reports from peer companies.