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PREVIEW-Starbucks, Yum sales likely recovered, but new costs may weigh

Credit: REUTERS/KIM KYUNG-HOON

U.S. restaurant chains including Starbucks Corp and Taco Bell parent Yum Brands Inc could show a sales recovery as consumers resume normal activities, but higher wages, commodity and COVID-19-related costs will likely weigh on earnings.

By Nivedita Balu

Oct 26 (Reuters) - U.S. restaurant chains including Starbucks Corp SBUX.O and Taco Bell parent Yum Brands Inc YUM.N could show a sales recovery as consumers resume normal activities, but higher wages, commodity and COVID-19-related costs will likely weigh on earnings.

The sector, one of the worst hit by the pandemic, is still operating with limited sit-down options in some places but has begun recovering from lows in March and April, when government mandates brought dine-in services to a halt.

Since then, companies have invested in hiring staff, cleaning supplies, drive-thrus and delivery, weighing on profits. Rising commodity costs have also been eating into earnings.

Domino's Pizza Inc DPZ.N said cheese prices went from their lowest in the second quarter to record rates in the third quarter. Chipotle Mexican Grill Inc CMG.N, which brought carne asada back to its menu, said high beef prices dented profits.

Both companies recently reported underwhelming earnings largely hurt by higher coronavirus-related expenses, even as sales rose and revenue beat expectations.

Starbucks, which is still recovering from the loss of morning business as people work from home, reports on Thursday.

"While the pace of Starbucks' top line recovery will continue to be closely watched, the timing of the FY21 margin recovery will also be a key focus for investors and the subject of debate," RBC Capital Markets analyst Christopher Carril wrote in a note.

Carril noted the coffee chain paid out about $300 million in the previous quarter for sick pay and enhanced frontline pay for store employees.

Restaurant Brands International Inc QSR.TO is to report Tuesday. The operator in its preliminary quarterly report said Burger King and Tim Hortons struggled but Popeyes' sales continued to grow on demand for its chicken sandwiches.

Investors will look to Tuesday's report as a "show-me story," though "there is limited visibility into the unit growth outlook," wrote Credit Suisse analyst Lauren Silberman.

(Reporting by Nivedita Balu in Bengaluru; Additional reporting by Hilary Russ in New York; Editing by Richard Chang)

((Hilary.Russ@thomsonreuters.com; +1 (646) 223-7381; Reuters Messaging: hilary.russ.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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