An Analysis of Public Restaurant Companies in the Wake of COVID-19, Part 1

By Michael Kearns, MAI, ASA and Colin Langeveld

Kearns & Langeveld LLC


As of the third quarter of 2019, there were more than 650,000 restaurants throughout the United States (defined as the number of establishments nationwide in NAICS code 722 – Food Services and Drinking Places) according to the Bureau of Labor Statistics. A significant portion of these establishments are owned, operated, franchised, or otherwise managed by firms that are publicly traded on various national and global stock markets. These operators are required to file quarterly and annual statements sharing operating results, allowing insight into current market conditions. This is particularly useful in the current, turbulent environment.


A rehash of the ongoing COVID-19 pandemic is not necessary here, as most industry analysts are likely very familiar with the situation at hand and ample information regarding the pandemic is already freely available. Since the middle of March 2020, public health has been at the forefront of the broader social and political conversation. Many in-person retail and dining establishments throughout the country have been required to close. Some remain closed to this day, while others have begun to cautiously re-open, with new rules being enforced to observe new social distancing standards. Others have remained open or re-opened offering only take-out or delivery service.


Revenues

The result of this upheaval is that revenues at these establishments have been thrown into disarray. Monthly retail and food service sales throughout the United States are indicated by the Federal Reserve to be $157.85 billion per month as of April 2020. Throughout 2020 so far, retail sales have been averaging $188.36 billion per month, which is below 2019's average of $202.69 billion per month. Prior to the onset of the Great Recession, retail sales had previously peaked at $179.70 billion per month in November 2007. Since that peak, sales declined to a recession low of $155.18 billion per month in March 2009, a decline of 15.80%. Prior to the onset of the COVID-19 disruption, sales had recovered, surpassing their previous highs to reach $204.67 billion per month in August 2019, an increase of 31.89% from their recession lows. Retail sales are currently down -22.87% from their pre-COVID peak.


To drill down into this sector further, we have analyzed the most recent financial statements of the largest restaurant companies in the country. Together, the 25 companies surveyed account for more than 160,000 locations, or around a quarter of all the locations in the country. Most financial statements analyzed cover the operational period through the first quarter of 2020 (March 31 or thereabouts) and have therefore begun to absorb the impact of the COVID disruptions. Companies that had not released post-COVID operating results were not included in the survey. In particular, we have analyzed the change between the fourth quarter of 2019 (Q419) and the first quarter of 2020 (Q120).


All of the companies surveyed cited COVID-19 extensively as a driver of uncertainty and sales declines over the period. Most companies have withdrawn future earnings guidance and suspended share repurchase programs or cash dividends. Some have drawn down their full credit facilities, as Shake Shack did in March when they drew down their full $50 million revolving credit facility. Some have even taken asset-impairment charges against goodwill and/or recent acquisitions. YUM Brands, for example, took an after-tax impairment charge of $107 million against the company’s March 2020 acquisition of The Habit Restaurants. The original purchase price was reported at $408 million, net of cash, prior to the impairment.


On a quarter over quarter (QoQ) basis, the average restaurant company has seen revenues decline by about 12% between Q419 and Q120. All three fast casual restaurants surveyed, as well as all limited-service restaurants, exhibited declines, with Del Taco Restaurants, Inc. (TACO), leading the downward trend and posting a decline of 30%. In general, 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. The only company to post a positive gain was BBQ Holdings, which fueled revenue growth primarily through opening new restaurants at the end of 2019, in addition to acquisitions during the first quarter, which were closed just prior to the onset of the pandemic.



In general, restaurants that have traditionally focused on delivery options have fared better recently. Papa John’s Pizza (PZZA), for example, showed a modest decline in revenues of only 2% between Q419 and Q120. On a year-over-year basis, the company exhibited sales gains of 3%. The company’s subsequent COVID business update issued on May 6, 2020 noted “preliminary estimated April fiscal period comparable sales increases of 26.9% for North America.” The other pizza delivery company surveyed, Domino’s Pizza, exhibited a decline of 24% between Q419 and Q120; however, this decline was more a function of an incredibly strong Q419, when sales increased more than 40% from Q319. On a year-over-year basis, Domino’s Pizza still showed relatively strong revenue growth of 4%, which exceeded all but one other company in the dataset.


Full-service restaurants did not fare as poorly as otherwise might be expected, exhibiting average declines of only 10% for the period. Analysis of operational guidance released subsequent to these statements, however, paints a somewhat bleaker picture. Denny’s Corporation, for example, reported in a May 4, 2020 business update that same store sales in April were down between 72% and 79% from the prior year. Similarly, BJ’s Restaurants, Inc. noted sales in April down 70%. Bloomin Brands, which operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Fleming’s Steakhouse, reported sales across their units down 55.9% to 69.5%. Darden Restaurants, which operates Olive Garden and Longhorn Steakhouse reported sales across their units down 44.7% to 65.2%. Ruth’s Hospitality Group noted “comparable restaurant sales at company-owned restaurants decreased 13.5% [in the first quarter of 2020] compared to the first quarter of 2019, which consisted of a 14.1% decrease in traffic, as measured by entrees, and an average check increase of 0.7%. Through the end of February, comparable restaurant sales increased 2.2%, including flat traffic and an average check increase of 2.2%. Comparable restaurant sales in March declined 50.5%.” We would therefore expect these ongoing and more severe disruptions to be reflected more fully in second quarter 2020 financial statements.


The CPI that tracks purchases of food-away-from-home (i.e. restaurant purchases) was essentially flat in April 2020, up 0.1% over March. Furthermore, it showed a modest increase of 2.8% over April 2019. The USDA is forecasting food-away-from-home prices to increase between 1.5% and 2.5% in 2020. Should this price increase materialize, this could slightly offset the reduced dining volumes in the sector. Food-at-home prices are forecast by the USDA to increase at a greater rate of 2.0% to 3.0% in 2020. Traditionally, food-away-from-home has increased at a rate greater than food-at-home; however, COVID has reversed that trend.


Conclusion

Undoubtedly, the COVID pandemic has represented a severe disruption in daily American life, which has filtered to the restaurant industry in dramatic and unprecedented ways. The preceding analysis was based on operating results through the end of the first quarter and even with only several weeks of operations during COVID-related shutdowns, the results are already disheartening. Second quarter results, which should take into account the full effect of the pandemic, are likely to show further declines in revenues and profits.


OpenTable, which tracks industry trends through its reservation network of nearly 60,000 restaurants throughout the world, 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 been 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, even posting a positive 32% mark in booking activity on June 1, 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.


We here at Kearns & Langeveld will continue to track these data points and trends. Please stay tuned for Part II of this newsletter, addressing costs and expenses, to be released next week. Part III will then put the picture together, analyzing overall profitability. 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,


Kearns & Langeveld LLC

Michael Kearns, MAI, ASA

mike@knlvalue.com

Colin Langeveld

colin@knlvalue.com

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