Why a minimum wage hike will impact these companies: Morgan Stanley

Yahoo Finance Video

March 12, 2021 at 11:10 AM

A boost to a $15 an hour minimum wage missed the cut in the latest COVID-19 relief bill, but a move to a more palatable $11 an hour soon is possible, Morgan Stanley strategists think. Yahoo Finance's Brian Sozzi shares the details.

Video Transcript

JULIE HYMAN: It's time for Brian Sozzi's Take. And this time around, he is looking at the prospects for minimum wage increases. And Brian, of course, we saw at the federal level, a minimum wage increase did not make it into this latest coronavirus aid package. However, it's still a possibility. And there are some analysts who are looking at the prospects for that and what that would mean for various companies.

BRIAN SOZZI: Right, Julie. The folks at Morgan Stanley crunching the numbers on this one. And I wrote this up. It's on YahooFinance.com right now. But I wrote this up because it's a large universe, a large sample size. Myles likes large tams. I like large sample sizes when it comes to analysts' surveys and reports.

And Morgan Stanley looked at 1,000-plus North American stocks within its coverage universe. It noted 94% of that list will see maybe a 100-basis point increase if hourly wages first go to $11 an hour and then $15 an hour. That's OK. But it's that 6% I think investors should be absolutely petrified about, especially if they own shares in some of these companies.

Obviously, most exposed here retailers and restaurants because for decades, they have feasted on paying their workers minimum wage. Now, 10 companies in particular that I note in this report. First up, Red Robin Gourmet Burger, they may make probably, what, 15-pound burgers. And they can really be hit especially hard here, a nearly 40% operating profit hit to Red Robin if wages go to $11 an hour. If it goes to $15 an hour, that hit goes to 221%.

Next up on my list, Shake Shack. Shake Shack's profits could be hit close to 20% if minimum wages go to $11 an hour. That gets bumped up in terms of impact to 125%. Now, I have a whole list on YahooFinance.com in this story. But again, this offers up a flavor or taste of what could be to come to some of these companies.

And Myles and Julie, these restaurants are not prepared. None of us are going to pay $25 for an Applebee's steak, given the quality and the portion size. It's not going to happen. And I think a lot of these stocks could be hit as a result.

JULIE HYMAN: Back up for just a second. Is Morgan Stanley looking at the demand side of the equation as well? Because it's not just going to affect costs. It's going to affect consumer spending power as well. If they're making more, they're going to be able to spend more.

BRIAN SOZZI: That might be true. But with their increased purchasing power, Julie, are they going to spend $30 for an Applebee's steak? I would argue no. Are they going to spend $20 on a Shake Shack burger? I would argue.

JULIE HYMAN: No, but they might go there more frequently and spend more and buy more stuff when they're there.

BRIAN SOZZI: I like to look at myself as the average consumer. I'm not spending $30 on an Apple steak. If I have more money to spend, I'm going to my local restaurant. And I might drop $120 on a real nice dinner. I think a lot of these companies--

JULIE HYMAN: You don't make minimum wage, Brian Sozzi.

BRIAN SOZZI: Well, I know. We don't agree, necessarily, I think, on this topic. But the fact is, these business models are about to get uprooted in a big way.

JULIE HYMAN: Myles, you got anything? [CHUCKLES] You're not going to get in the middle of this one?

MYLES UDLAND: No, no. The minimum wage is a religious argument. So I will not be weighing in.

BRIAN SOZZI: Well, your Chipotle bowl, Myles, with its cauliflower rice, 20 bucks soon, 20 bucks.

MYLES UDLAND: We got to we got to talk to them about the cauliflower rice. It's a tough scene. That's a tough scene.

JULIE HYMAN: I'm not sure that Myles is paying any price for the cauliflower rice these days. All right, well, on that note--

MYLES UDLAND: I already did once. That was one pun too many.

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