An Analysis of Public Restaurant Companies in the Wake of COVID-19, Part 3

By Michael Kearns, MAI, ASA and Colin Langeveld

Kearns & Langeveld LLC

In our first market update, examining the financial statements of several publicly traded restaurant companies in the wake of the COVID pandemic, we noted sales had declined precipitously through the first quarter of 2020 (generally ending on or around March 31). On a quarter over quarter (QoQ) basis, the average restaurant company has seen revenues decline by about 12% between Q419 and Q120. Limited-service restaurants fared the worst, with sales down 14% on average across the sector. Full-service restaurants fared similarly, posting declines of 10% on average over the quarter.

In our second update, we noted how total costs had also been cut dramatically. Quarter over quarter, most companies have successfully reduced costs by furloughing employees, cutting back on purchases and capital expenditures, and deferring rent and other payments where possible. Limited-service restaurants have led the way, cutting overall costs by an average of 12%. Full-service restaurants have also achieved cost savings, although to a lesser extent, realizing savings of 4% on average. Part 3 of our analysis will combine the two elements and analyze the resulting change in operating profits.

Operating Profit

As would be expected, operating profit has, for the most part, been negatively affected due to the pandemic. The food service industry is inherently low margin for most companies, leading to large swings in profitability depending upon firm size. Most dramatically, Potbelly Corporation, a sandwich shop, went from a profit of approximately $0.1 million in Q419 to a loss of $11.1 million, representing a mathematical decline of more than 11,000%.

Due to overly dramatic swings as evidenced by some firms within the sector, the overall average is not considered to be a useful metric from which to analyze the broader industry. The median firm in the sector exhibited a decline in net operating profit of 24%. As would be expected, the median full-service restaurant saw a greater profit drop by 49%. Fast casual and limited-service restaurants fared much better, with the median firm dropping 21% and 22% respectively. Given that full-service restaurant sales deteriorated after these statements were released in April 2020, we would expect second quarter results to show a greater decline in profit.

The biggest winner within the sector was Papa John’s Pizza (PZZA), which posted a net profit of $15.4 million in Q120, an increase of more than 600% over the prior quarter’s loss of $3 million. Over the course of 2019, Papa John’s posted a net profit for the year of just under $20 million. It is not a surprise that a company with a strategy predicated on take-out dining and delivery would do well during a pandemic when much of the population is required to remain at home and food and delivery workers are deemed to be essential workers.

At first glance, it appears that Domino’s Pizza Inc. (DPZ) did not replicate this success, with net profit down almost 24% between Q419 and Q120. However, as noted earlier, Domino’s had an extremely strong fourth quarter last year, making this decline in profit a function of revenues reverting to the mean. In fact, upon deeper investigation, Domino’s has remained in a strong position, with a profit margin in the first quarter of 2020 approaching 18%, which has been stable over the last year. In contrast, Papa John’s has been operating on a much lower margin of just under 4% for the same period.

Profit within the sector has also been bolstered by revenue from franchised operations. As these are large public corporations, they represent a mix of operations. Some companies within the sector, such as Yum! Brands (YUM), Denny’s Corporation (DENN), as well as the aforementioned PZZA and DPZ operate the majority of their restaurants (85%+ of their locations) on a franchise model. When segregating the data into mostly-franchised versus mostly-company-operated locations, the results are striking. The median firm with sales derived from franchised operations (i.e. more than 51% of locations franchised) showed a decline in operating profit of around 17%. In contrast, the median firm in which most sales are from company-operated locations (i.e. 50% or fewer locations are franchised) saw a decline in operating profit of 88%.


The steep decline in revenues and profits have resulted in significant difficulties. Several large bankruptcies have already happened, with FoodFirst Global Restaurants (parent of Brio Italian Mediterranean and Bravo Fresh Italian restaurant chain) filing for Chapter 11 bankruptcy on April 10. A month later, on May 14, Garden Fresh Restaurants, owner of the buffet chains Souplantation and Sweet Tomatoes filed for Chapter 7 bankruptcy. Most recently, Chuck E. Cheese parent company CEC Entertainment filed for Chapter 11 bankruptcy protection on June 25.

To close out our last two analyses, we examined the OpenTable index of reservation data, which tracks industry trends through its reservation network of nearly 60,000 restaurants throughout the world. It is considered something of a leading indicator for restaurant traffic volumes. Since the middle of March, when the WHO officially declared a pandemic and most countries shut down public gatherings, the index, which tracks year-over-year changes in reservation activity, has remained dismal.

Germany, which has generally been praised in its handling of the pandemic, has shown a potential way forward. Restaurant bookings in the country have rebounded significantly, posting several positive numbers throughout June, potentially representing the rebound in pent-up demand that some industry observers are forecasting. In the United States, activity remain tepid, but is nevertheless up from April/early-May lows. Most states are currently down in bookings between 50% and 60%. Fears of a second wave of COVID infections (or merely a continuation and worsening of the first wave) have begun to take hold, which will likely keep activity muted for the time being.

We here at Kearns & Langeveld will continue to track these data points and trends. These analyses will be updated once second quarter data begins to be released. In the meantime, if we can be of any assistance, please reach out to us for any of your appraisal or analytical needs. Stay healthy and stay safe.

Wishing you all the best,

Michael Kearns, MAI, ASA & Colin Langeveld

Kearns & Langeveld LLC

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