Higher labor and food costs, along with a shortage of workers and inflationary pressures, have combined to create a challenging environment for restaurant chains that analysts are warning could sap earnings for the just-completed quarter.

Restaurant earnings so far show that a challenging labor environment and higher food costs are … [+] likely to hurt industry profits.
Jeffrey Greenberg/Universal Images Group via Getty Images

Shares of Brinker International, parent company to restaurant chains like Chili’s and Maggiano’s Little Italy, fell as much as 11% Wednesday morning after a negative preliminary earnings announcement.

The Dallas-based company reported that while revenue was in-line with expectations at around $860 million, profit margins took a substantial hit amid higher labor and food costs, both of which have been exacerbated by the resurgence of the coronavirus pandemic spurred by the spread of the delta variant.

Domino’s reported last week that it was also dealing with industry-wide labor issues, as the pizza chain’s quarterly U.S. same-store sales growth turned negative for the first time in more than a decade.

As Domino’s CEO Ritch Allison said last week, a shortage of workers has put pressure on the number of orders restaurants can process–with some locations being forced to slash hours.

Wall Street analysts have already pointed out that this trend is likely to continue in the upcoming weeks: “Earnings are going to be tougher” for restaurant companies, admits Vital Knowledge founder Adam Crisafulli.

With many restaurants warning about higher costs across the board, however, investors are showing that markets so far think the hit to profits is temporary: Brinker stock pared back some losses and is now down 4.5%.

Shares of other restaurant companies such as Denny’s, Darden Restaurants and the Cheesecake Factory were all down slightly on the news, but pared back most of their losses by midday.

“The COVID surge starting in August exacerbated the industry-wide labor and commodity challenges and impacted our margins and bottom line more than we anticipated,” Brinker CEO Whyman Roberts said in a statement.

Brinker said in its announcement that it would be raising prices to help “offset inflationary costs” related to labor and commodities in a bid to protect margins going forward. The company’s stock is down nearly 17% so far this year.

“The Domino’s report from last week alluded to these headwinds, but they are hurting Brinker’s much more,” says Crisafulli. “Investors have been willing to look through most margin shortfalls in the last few weeks, but this Brinker’s miss is probably too large to ignore.”

Biden’s Latest Stimulus Package Is Fueling Short-Term Inflation, New Report Finds (Forbes)

Read More