Restaurants: 'Labor issue is probably more of a disruption' than Omicron, analyst says

BTIG Managing Director and Restaurant Analyst Peter Saleh joins Yahoo Finance’s Brian Sozzi and Julie Hyman to discuss the impact of the Omicron COVID-19 variant on restaurant demand.

Video Transcript

BRIAN SOZZI: All right, according to the latest OpenTable restaurant data, the omicron variant may be impacting eating out at restaurants again. So how should investors play the restaurant space with the pandemic clearly raging on? Peter Saleh is a managing director and restaurant analyst at BTIG and joins us now. Peter, how do you play it?

PETER SALEH: Well, thanks for having me. Look, I think in this environment, I think everyone's going to rush to the names that are the stay at home plays, which are the delivery guys, the Papa John's of the world, Domino's, guys who have a lot of you digital and delivery, Chipotle, what really won through the pandemic.

With that said though, we're seeing very little evidence that the omicron variant is impacting demand. We had spoke to Darden last week on their call. And on multiple occasions, they noted that they're just not seeing it. And they've got restaurants all over the country.

So look, I don't think there's a lot of appetite, for lack of a better term, for lockdowns or people to stay home. I think on the fringe, there may be some folks that opt not to go to the restaurants or maybe not do takeout. But right now, I don't think demand has been impacted by this new variant. We're just not seeing any evidence of that at this point.

JULIE HYMAN: I mean, Peter, it's Julie here. Hello. I'm going to push back against this just a little bit. I mean, even just on an anecdotal basis, this weekend in New York City, there were a lot of restaurants closed, and not even necessarily because of the sort of lockdown attitude, although maybe that was some of it. But also because they didn't have enough people to come into work because people were sick.

And so I wonder if it's not going to be the longer disruption that we got in the earlier part of the pandemic but more just sort of an exacerbation of the labor shortages, for example, and more sort of hiccups than longer-term disruptions.

PETER SALEH: Yeah, you're right. And look, there's a lot of restaurants that are opening later, closing earlier, in some instances not opening at all. And the labor issue is probably more of a disruption right now than the variant.

But I'll tell you, for the chains, the larger chains, they seem to be managing through this labor environment. Yes, they're paying up. But most of them are fairly staffed. It's the independents that are struggling.

I mean, just the most recent data point, again, out of Darden was that they're back to 95% of pre-COVID staffing levels. I think they're probably one of the best. I think many of the independents are struggling on the staffing side.

So I think staffing is a real issue. I think commodity inflation is a real issue. I think those two are probably the biggest issues we have right now in the restaurant space, rather than just overall demand. Look, could that change over the coming weeks if this variant spreads further or gets worse? For sure.

But they've lived through this before. They've managed to do it. They've figured out the digital side. They've figured out takeout. So I think in this environment, to be honest with you, I think in this environment, the larger chains win, they take share from the independents, especially if COVID gets far worse.

BRIAN SOZZI: Peter, at the height of the pandemic in 2020, really, we saw a significant acceleration in same store sales at the likes of Domino's and Papa John's. I'm not saying we're going to get those same types of sales accelerations, especially off of these strong comparisons to last year at those names. But if you had to choose, which stock do you like better, Papa John's or Domino's here?

PETER SALEH: So we prefer Papa John's. Just, I think there's more low-hanging fruit for Papa John's. We expect that Papa John's is going to continue to see an acceleration in unit development. Look, Domino's is a fantastic operator. But they're operating at near-perfect levels, whereas I think Papa John's is still improving their margins, improving their menu innovation, and still driving an acceleration of development. So I still think there's more upside in the Papa John's story over the long term versus Domino's at these levels.

JULIE HYMAN: Hey, Peter, from pizza to coffee, I'm looking at your top picks going into 2022. You like Starbucks. And you like Chef's Warehouse, which is so interesting to me, because it's not obviously, strictly speaking, a restaurant, if you will. But you like these two because you think they cater to more affluent customers. Talk me through your thesis here.

PETER SALEH: Yeah. Look, we believe that, over the past 18 months, the consumer, especially the low-end consumer, has gotten this boost from stimulus and unemployment benefits. A lot of that is going to wear off over the next 12 months. We think the brands that are catering to a more affluent customer that can absorb the higher price increases--

Price increases are going up across the board for restaurants, from every restaurant from high-end to low-end. And we think the low-end consumer is going to have a harder time absorbing that, pushing back a little bit more, especially on traffic, whereas the higher-income consumers, brands like Starbucks and Chef's Warehouse, I think their customers will absorb the price increase more so.

And you'll see less of an impact on demand there. So this is the theme that we see going into '22. We think value is going to become more important across the space, especially at the beginning of the year, as consumers are really looking for more value, looking for lower-priced options, as some of the stimulus and the unemployment benefits are really wearing off.

So that's what we see going into '22. At this point, you want to be in brands that cater to a higher-income demographic.

BRIAN SOZZI: Peter, how big a risk is it to Starbucks' long-term margins, this recent push to unionize its restaurants?

PETER SALEH: Look, I think we're talking about a handful of restaurants at this point. So at this point, I think it's irrelevant. If it becomes more widespread, it could be a bigger problem for them, for sure.

But again, I think Starbucks has pricing power. They are one of the most innovative companies that we follow. They always find a way to push their margins higher. And honestly, they've been among the best for their employees, having health care benefits, education benefits, among the highest pay in the industry.

So I'm not exactly sure what the union's going to generate for them that's going to be incremental. But at this point, I think it's irrelevant to the fundamentals and the financials of the story. It's definitely more of a headline risk to Starbucks at this point.

BRIAN SOZZI: Always great insight for us, Peter Saleh, managing director and restaurant analyst at BTIG. Have a great rest of the holiday season. We'll talk to you soon.