What happened

Shares of Brinker International (EAT -2.22%) were falling 5% in midday trading Wednesday after the owner of the Chili's and Maggiano's Little Italy restaurant chains provided a business update for its fiscal 2022 first quarter.

The restaurant operator said a surge in new COVID-19 cases that began in August, along with higher labor and commodity costs, were eating into its profits, causing margins to narrow.

Waiter serving friends

Image source: Getty Images.

So what

First-quarter sales rose 18% to almost $860 million, Brinker said, while operating income rose almost 5% year over year. Restaurant operating margins, however, tumbled more than 10% for the period because labor costs surged 150 basis points as commodity costs rose by 60 basis points.

Because extended unemployment benefits that paid workers more to stay home than find a job didn't end until September, an intense labor shortage that has yet to break was created. Brinker was forced to hike its pay rate while giving existing workers merit increases.

The outbreak of new coronavirus cases exacerbated the situation.

Now what

The situation is not likely to improve, even if the labor shortage is resolved. Brinker announced it was going to increase the wages it paid to its hourly employees to $18 per hour. In fiscal 2021, workers were earning $16.95 per hour on average.

While a seemingly modest increase, the rate hikes tend to result in wage creep, which means employees who were already earning that higher rate or near it, whether through longevity or merit, would have to have their earnings increased as well.

Brinker also says it plans to increase Chili's general manager pay to an average of $100,000 by fiscal year 2025, up from $87,000 in 2020.

The restaurant chain also said it was looking to raise prices, with a target to have them up 3% to 3.5% for the full year to offset inflation.