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Global supply chain logjams, costs in focus as restaurant chains report earnings

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October 26, 2021

By Hilary Russ

NEW YORK (Reuters) – Investors hope to gauge the impact of the global supply-chain logjam on restaurant expansion plans when McDonald’s Corp, Starbucks Corp and Yum Brands Inc report capital expenditures in their earnings this week.

Skyrocketing prices for kitchen equipment – as well as for labor, food and other goods – are prompting some U.S. restaurant chains to curtail opening plans despite consistently strong revenue growth. Some chains and their franchisees may put off remodeling or adding drive-thrus in the face of rising costs, restaurant consultant Aaron Allen told Reuters.

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Median capital expenditures as a percentage of revenue at publicly traded U.S. restaurant companies dropped to 3% in early May 2021 and remained at that level as of October compared with a ratio of 5% from 2017 to 2019, Allen said.

Chipotle Mexican Grill Inc opened 41 new restaurants in the third quarter. CEO Brian Niccol told Reuters that aligns with plans to build 200 new locations in 2021, mostly in the United States, but without delays and higher costs for construction, labor and equipment, it might have been able to open “well beyond” that.

Domino’s Pizza Inc CEO Richard Allison said in an earnings call on Oct. 14 that problems getting kitchen equipment were a key factor in a number of store openings delayed in the third quarter.

Globally, all sectors are expected to boost capital expenditures by 8.1% in 2021, according to a report from Morgan Stanley’s global economist. Restaurants are paying at least 10% more for some new equipment and waiting months for it to arrive.

SURCHARGES AND LONG WAITS

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Italy-based equipment manufacturer Ali Group raised prices by 10% to 20% on some metal shelving and refrigerators over the past 18 months, said Rob August, senior vice president of manufacturer Ali Group North America.

When Atosa USA’s next price increases take effect on Nov. 1, one of its two-door refrigerators will be priced at $3,249 – 37% more than in January, according to a dealer. Atosa is a division of China’s Yindu Kitchen Equipment Co Ltd.

Ice makers from Ali Group are now hard to find, the dealer said, and the wait for certain Pitco fryers from Middleby Corp has been as long as seven months, franchisees said.

“We are experiencing unprecedented cost increases in material, freight and labor,” a Middleby spokesperson said, noting that while wait times are longer than usual, seven months is not standard.

One McDonald’s franchisee told Reuters that some franchisees have waited 23 weeks to get a new Frymaster Fryer, made by Welbilt Inc.

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Atosa and Welbilt did not reply to requests for comment.

At sandwich chain Portillo’s Restaurant Group Inc, which went public on Thursday, “we’re budgeting about 10 to 15 percent more for new restaurant builds than we were literally six months ago,” said CEO Michael Osanloo.

John Stack, president of A City Discount equipment dealer outside Atlanta, said most of the new and remodeled restaurants his company has designed have delayed openings because they cannot get equipment on time.

(Reporting by Hilary Russ; Editing by Howard Goller)

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Investors brace for potential hit to earnings because of Omicron

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December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

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That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

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U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

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Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

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(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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Bank investment chiefs signal China and emerging market caution

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December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

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“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

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(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

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IMF says euro zone should keep supporting economy, high inflation is temporary

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December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

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“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

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