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Higher restaurant wages whack profits—some warn more pain is still ahead


An employee prepares orders for Chipotle Mexican Grill customers in Hollywood, California.

Patrick T. Fallon | Bloomberg | Getty Images

Fast-food restaurants are experiencing a surge in customers returning to their establishments. However, workers are not. This puts more pressure on them to maintain market share, protect profits, and navigate a labor market that is tight.

In the past two weeks, restaurant executives painted a grim picture about staffing problems to investors during their earnings calls. CEOs love Domino’s Pizza’sRitch Allison Chipotle Mexican Grill’sBrian Niccol McDonald’sChris Kempczinski gave details of how fast-food restaurants cut hours, reduced ordering options and lost sales as they couldn’t find sufficient workers. The labor crunch has been particularly hard on some chains, including Restaurant Brands International’sPopeyes which saw about 40% of its dining roomsClosed due to shortage of staff.

Kevin McCarthy, Neuberger Berman analyst, said that this is where they are sorting the wheat and the chaff.

While raising wages can be a great way to solve staffing problems it doesn’t always work. In an attempt to increase workers, McDonald’s wage has risen by roughly 10% at franchised McDonald’s locations so far in this year. Executives at McDonald’s say that higher labor costs are causing increased prices for menu items, up about 6 percent from last year.

StarbucksIt plans to spend approximately $1 billion on fiscal 2021-2022, including two planned wage rises. This decision has reduced the company’s fiscal 2022 earnings estimates. disappointing investors This would result in a reduction of $8 billion market capital. McCarthy says more companies need to follow their lead and invest in employees.

The stock has fallen, but they are a potential winner. “Great move, they’ve made the right decision long-term,” he stated.

McCarthy stated that he has been thinking about the fact that understaffing is causing restaurants to lose approximately 5 percent of their traffic.

Most restaurants that are publicly traded said they anticipate the problem will persist into the future, in particular for the remainder of 2021 as well as 2022. Texas RoadhouseOn Thursday, Gerald Morgan, the CEO of Morgan Corporation told analysts that while there were “a bit” more applicants in the pool than he expected but there is still much to do before Morgan believes the company can have enough people to fulfill demand.

Kalinowski Equity Research’s founder Mark Kalinowski stated that private-held restaurants executives are much more optimistic about the timing of the recovery.

Kalinowski explained that when top-ranking officials at private companies tell you this is about to get worse it almost always is.

After the company’s latest earnings reports, he has reduced his estimates of Starbucks’ fiscal 2022 results as well as Domino’s U.S. sales growth for next quarter.

Kalinowski explained that “not every company will necessarily see a shift in their sales forecast”, but it is important to focus on the margin side, especially for concept stores or locations with 100% company ownership in the U.S.

Kalinowski stated that he prefers stocks with more franchised restaurants. McDonald’s only has a 5% presence in the United States, and all other locations are managed by franchisees.

There are more restaurant profits ahead. Outback Steakhouse owner Bloomin’ Brands WingstopApplebee owner Dine BrandsIHOP Parent Dine BrandsAmong the expected companies to release their most recent results are: Nick Setyan from Wedbush Securities has revised his estimates based on earnings reports from peers.