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Actionable news in DRI: DARDEN RESTAURANTS Inc,

No Relief In Sight For Restaurant Stocks

Bernstein said in a note that it sees no relief for U.S. restaurants as higher minimum wages and tighter labor markets loom for 2017. The firm believes the probability of rollbacks on healthcare mandates may provide restaurants less relief than investors may hope for from the new administration placing less upward pressure on wages in the year ahead.

Minimum Wage Rise To Have Minimum Impact

Analyst Sara Senatore noted that 15 states are targeting an average 10.5 percent increase in minimum wage. The analyst expects minimal impact from the rise in federal minimum wage, given that an average restaurant employee makes more than minimum wage. Accordingly, the analyst models less than 1 percentage point negative impact to earnings per share growth.

However, assuming that the minimum wage increase flowed through the entire pay structure, the firm sees a 3–4 percent inflation based on state level exposure. This, according to the firm, is consistent with the company guidance.

Labor Market Tightness To Hurt

Meanwhile, the firm expects a bigger impact from the tightness of the labor market, which it expects to get exacerbated by the incoming government's policies. Unlike in 2007–2009 when minimum wages were increased, the firm noted wage inflation stems from tightness of the labor market and not from the minimum wage floor. According to the firm, fiscal stimulus, if combined with a potential shrinking of labor force due to the immigration policies could increase the dynamic.

Bernstein sees 2017 to be similar to 2016, with the potential for even faster wage inflation, risking company operated models. While noting higher output inflation than input inflation has aided restaurant margins, the firm highlighted that food deflation is hurting top line. The firm noted the market has tended to reward restaurants the most when the top line is growing and margins are rewarding.

Ratings/Price Targets

At Time Of Writing

  • Brinker International was losing 1.63 percent to $52.56.
  • Chipotle Mexican Grill was down 5.53 percent at $374.37.
  • Darden Restaurants was losing 0.72 percent to $76.16.
  • McDonald's was down 0.30 percent to $118.93.
  • Panera Bread was losing 0.81 percent at $212.70.
  • Starbucks was edging down 0.23 percent to $57.37.
  • Wendy's was adding 0.27 percent to $12.89.
  • Yum Brands was adding 0.41 percent at $63.32.
  • Yum China was slipping 0.11 percent to $27.97.

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