Darden's Rising Labor Costs Cause For Concern

Darden Restaurants, Inc. (DRI) reported improving Q1 numbers and the herd seems to be running strong.

The labor expense item caught my eye: up a whopping 4.7%. Revenues were up 3.3%. Linda Dimopoulos CFO touched on the point in the most recent conference call transcript:

The second structural impact is that of labor expenses that have been rising due to the increased FICA tip expense, resulting from the higher level of tip reporting by our employees.

There was no comment on what to expect in the future. With an aging population, will the legal cheap labor pool of servers continue? This line item will most likely experience negative pressures.

The analysts on the call either missed this point or chose to ignore it.

DRI 1-yr chart:

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Comments

[Paul Meisel:]

She also mentioned earlier in the call that a portion of the increase was due to higher mix of Olive Garden sales, their highest labor cost franchise. Having eaten in all of their chains, I understand this -- the level of service and presentation of food is better there.

I find it interesting that there is a higher level of tip reporting. Typically wait staff don't report more than they have to.... I wonder what mechanism is at work there, possibly that tips are up so that there is more reporting while skimming about the same portion? Or something else?

2006 Sep 21 01:15 PM

[George Guto...:]

Most wait staff resist reporting tips. But given Dardens large system approach to payroll and HR the IRS can easily lean on them and force out the bigger numbers. If this persists Darden will develop a bad reputation with wait staff. The good ones usually have other wait staff options.

2006 Sep 26 08:09 AM

[Paul Meisel:]

I should have thought of this at the time -- a club manager friend reminded me that staff have no choice but to report the tips charged on plastic -- and the percentage of these is both trending up over time, and is larger at upper end establishments.

So the long-term trend towards reporting more tips is probably unavoidable for the mid and upper end chains.

2006 Oct 26 10:04 AM