Higher Restaurant Wages Whack Profits—Some Warn More Pain Is Still Ahead

Patrick T. Fallon | Bloomberg | Getty Images
  • Restaurant executives have painted a bleak picture of staffing challenges to investors on their earnings calls in the last two weeks.
  • McDonald's and Starbucks are among the chains that have raised wages to attract workers.
  • The tight labor market is expected to persist for at least several more quarters.

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

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

"This is kind of where we're separating the wheat from the chaff," said Neuberger Berman analyst Kevin McCarthy.

Raising wages is one popular approach to staffing problems, although it isn't a perfect solution. McDonald's wages at its franchised restaurants have risen roughly 10% so far this year as part of an effort to attract workers. Higher labor costs have led to increased menu prices, which are up about 6% from a year ago, according to McDonald's executives.

Starbucks plans to spend roughly $1 billion in fiscal 2021 and 2022 on improving benefits for its baristas, including two planned wage hikes. The decision reduced its earnings forecast for fiscal 2022, disappointing investors and shaving off $8 billion in market cap. But McCarthy thinks more companies should take a page from the company's playbook and invest in their employees.

"The stock is down, but I think they're a winner out of this. Great move on their part, long-term definitely the right decision," he said.

McCarthy said he's been assuming that restaurant companies are losing roughly 5 points of traffic due to understaffing.

Looking ahead to the rest of 2021 and into 2022, most publicly traded restaurants said they expect the problem to persist for at least several more 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 thinks there's a long way to go before the company has enough employees to meet demand.

Mark Kalinowski, founder of Kalinowski Equity Research, said executives for privately held restaurant companies are more pessimistic about the timeline for the labor market's recovery.

"Typically when you have high-level people at private companies saying this is going to get worse, it usually is," Kalinowski said.

He has lowered estimates for Starbucks' fiscal 2022 results and Domino's U.S. same-store sales growth next quarter after the companies' latest earnings reports.

"Not every company is going to necessarily see a change in the sales forecast, but the margin side of things, you got to pay closer attention to, particularly for concepts that have 100% company-owned locations in the U.S. or are significantly company stores," Kalinowski said.

Kalinowski said he's favoring stocks with a higher concentration of franchised restaurants. McDonald's, for example, only operates 5% of its U.S. locations, while the rest are run by franchisees.

More restaurant earnings are still ahead. Outback Steakhouse owner Bloomin' Brands, Wingstop and Applebee's owner Dine Brands and IHOP parent Dine Brands are among the companies expected to report their latest results next week. Some analysts, like Wedbush Securities' Nick Setyan, have tweaked their estimates, given the earnings reports from peer companies.

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