Berko: Restaurant changes could boost stock
Friday, November 01, 2013 11:11 AM
Dear Mr. Berko:
My mother, who reads your column, asked me to write to you. I graduated in the summer of 2011 with a bachelor’s degree in liberal arts. The only position I could find was a waiter at a restaurant called Maggiano’s Little Italy. I really like working there. I made $26,000 my first year, which was more money than I ever believed I could make. And because I had $1,400 saved up from my student loan, I bought 50 shares of Maggiano’s when it was $22, though the stock is really of Brinker International, which owns this restaurant and Chili’s. I only work part time now because I’m studying to become a hairstylist. I hope to open my own salon and really make good money. Tell me whether I should sell the stock, which is now $41, because I read about the new $15-an-hour wage the unions want restaurant owners to pay restaurant workers. I know that this will force down profits and that Brinker will need to raise prices, which is not good and probably will cause my stock to go down. How come I can’t get you on Facebook or Twitter?
P.D., Wilmington, N.C.
You can’t get me on Facebook or Twitter because I’m not lonely, because I don’t have a weak self-image or a low social IQ, because I’m not intellectually immature, because I don’t crave attention, because it takes me years to make friends, because I enjoy personal contact, because I’m never bored with myself and because there are too many good books that I haven’t read yet. But congratulations on finishing college, though you should have used the remaining $1,400 to stay in class a little longer (in your case, a lot longer) to improve your composition skills. Still, I wish you enormous and quick success in your hairstyling endeavor. And congratulations on your wise purchase of Brinker International (EAT-$41). If your hair salon dreams fail to materialize, you should consider becoming a restaurant analyst in the brokerage industry. Certainly, your two years as a waiter with Maggiano’s – which is among the best Italian eateries in the Free World – gives you the credentials to be one of the top restaurant analysts on Wall Street.
Organized labor has staged strikes at fast-food restaurants (McDonald’s, Burger King, KFC and the like) in 50 U.S. cities, demanding $15-an-hour wages plus benefits. Growing national media coverage and the social media buzz helped fuel strikes in New York, St. Louis, Hartford, Dallas, Detroit and Chicago, which caused work stoppages and millions in lost revenues. And your premise that higher wages and higher prices will cause lower profits is spot on. Wages of $15 an hour plus benefits (about $40,000 a year) mean that a NYC McDonald’s will be charging $23.18 for a Big Mac, a small fry and a shake. Well, yipsee doodle dandy, more folks eat at home.
Chili’s, one of the largest dining chains in the U.S., will soon be installing table screens in its 1,266 units, and the unions are having a coronary. Wyman Roberts, EAT’s president and CEO, saw this (and Obamacare) coming and has been testing a device made by Dallas-based Zio Technologies. It’s a computer screen mounted on a sturdy base, loaded with pictures of menu items, a credit card swipe device and games that can be played for 99 cents. And most diners would prefer to pay by machine because it often takes too long to get a check from the waitstaff. McDonald’s and other fast-food chains may hop on this idea faster than a duck on a June bug. So in the next few years, many restaurant chains will be reducing staff while saving big bucks on wages and Obamacare costs.
Hold on to your EAT. Revenues and earnings should continue to improve nicely, and the dividend, which has enjoyed impressive growth, may continue to increase annually. Chili’s has an excellent menu, and Maggiano’s continues to enjoy strong unit growth. Some on the Street believe that EAT will be a $65-$70 stock in the next couple of years.
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