An Analysis of Public Restaurant Companies in the Wake of COVID-19, Part 2

By Michael Kearns, MAI, ASA and Colin Langeveld

Kearns & Langeveld LLC

In our last 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. Part 2 of our analysis will examine the other side of the profitability equation: costs.

Total Costs

Against the backdrop of declining sales, one of the primary ways for restaurants to stay solvent during these turbulent times, other than to directly raise capital, has been to attempt to control costs. Many restaurants have cut costs dramatically to reduce cash burn. 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. Denny’s Corporation, for example, has implemented the following strategies according to a May 4, 2020 business update: “The Company has implemented cost savings measures, including suspended travel, canceled in-person field meetings, placed holds on all open corporate and field positions, significantly reduced restaurant level staffing across the company portfolio, meaningfully reduced compensation for the Board of Directors and multiple levels of management, and furloughed over 25% of the corporate office.” Similarly, Dave & Buster’s temporarily furloughed more than 15,000 employees and store management and corporate staff was reduced by nearly 90%, among other cost saving measures.

Restaurant Labor Costs

Restaurant-level labor costs tend to be one of the larger costs associated with running restaurants. The account includes restaurant management salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits. Among the companies that separately report labor costs, rather than aggregate all costs together into a single line item, average costs savings in this category between Q419 and Q120 were reported at 4%. Most restaurants realized cost savings ranging from 2% to 27%. Several, however, saw labor costs increase between 1% and 5%. BBQ Holdings (BBQ) saw the largest increase; however, as noted in our previous update, the company fueled revenue growth through significant expansion just prior to the onset of COVID.

Some companies have incurred additional costs directly related to the pandemic. Cheesecake Factory (CAKE), for example, incurred $3.95 million in additional costs in the first quarter of 2020 (equivalent to 0.64% of the revenues for the quarter) related directly to COVID in the form of healthcare and meal benefits for furloughed staff members. Despite this, overall labor costs at the company were still down approximately 5% between Q419 and Q120. Similarly, The ONE Group Hospitality Inc. (which operates upscale restaurants in casinos, hotels, and other venues), “…incurred approximately $1.3 million of costs directly related to COVID-19 in the three months ended March 31, 2020, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed.”

A sharp increase in the unemployment rate is expected to keep labor costs in check over the near term. When unemployment spiked during the previous 2008-09 recession, the employment cost index for Accommodation/Food Service workers in the U.S. stagnated. Between 2003 and 2008, the index increased by 15.58%, or 3.12% per year. During the recession between 2008 and 2011, the growth in the index decreased to 1.76% per year. After 2011, the index resumed a more aggressive growth rate of 2.66% per year. Given the sharp spike in unemployment due to COVID, annual wage growth in the sector is expected to be minimal in the near term until such time as the economy recovers.

Food & Beverage Costs

Food and Beverage (F&B) costs are another major expense associated with the restaurant industry. F&B costs include all restaurant-level food and beverage costs, which are generally influenced by the cost of food and beverage items, distribution costs, and menu mix. Here, companies have been even more aggressive in cutting costs, with the average company reducing F&B costs by 9% between Q419 and Q120 (increasing to an average of 10% if BBQ is excluded). Full-service restaurants have trimmed average F&B costs by 8%, fast casual restaurants by an average of 7%, and limited-service restaurants by an average of 13%. Del Taco (TACO) cut F&B costs by almost a third.

The Producer Price Index (PPI), a measure of change in farm and wholesale prices, tends to be a somewhat volatile measure of inflationary pressures, particularly in relation to the relatively stable CPI. During the prior recession, the PPI for finished consumer foods averaged around 2.1%, as compared to a higher average of 4.0% between 2003 and the second quarter of 2008. Since the end of the recession in the second quarter of 2009, the index has averaged around 1.8%. The USDA forecasts most components of the PPI, including meats, dairy, fruits, and vegetables, to decline in 2020, with farm-level eggs, soybeans, and wheat forecast to see an increase. The USDA notes that the PPI has “…historically shown a strong correlation with the all-food and food-at-home CPIs.” Moreover, due to significant processing in U.S. food systems, the CPI tends to lag the PPI.

Restaurant Level Expenses

Restaurant level expenses include items related to occupancy and operations, such as maintenance, utilities, CAM charges, and rent. The average company reduced restaurant level expenses by 5% between Q419 and Q120. Full-service restaurants have trimmed average F&B costs by 6% and limited-service restaurants by an average of 7%. Fast casual restaurant level expenses averaged a 1% increase.

Many operators have identified negotiating rent payments as a potential source of savings. An April 2020 note from BJ’s Restaurants, Inc. indicates that the company is currently negotiating deferment or abatement of approximately $1.2 million of weekly cash rent payments. On May 26, Tilman Fertitta, CEO of Landry’s, a private hospitality company with over 600 restaurants nationwide, told CNBC “Everybody has to be reasonable with everybody. I want to be a reasonable tenant, and I expect the landlord to be reasonable with me. But don’t expect me to pay you 100% rent when I’ve been closed by the county, the city, the state, the government and you — because your mall’s not open or your facility’s not open.” Denny’s Corporation secured rent relief in the form of abatements or deferrals for over 70% of the leases in which the Company is a lessee. On June 4, the Washington Post reported that only 58.6% of retailers paid rent in May 2020, reflecting broader weakness in the retail sector and potentially spelling trouble for retail landlords.

General & Administrative Expenses

General and Administrative (G&A) expenses include corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future Company and franchisee growth. The average company has been able to reduce G&A costs by 12% between Q419 and Q120. Full-service restaurants have trimmed average G&A costs by 16%, fast casual restaurants by an average of 9%, and limited-service restaurants by an average of 5%.


To close out our last analysis, 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 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 remains tepid, but is nevertheless up from April/early-May lows. Restaurants in the U.S. experienced a second dip in bookings over last weekend, as fears of a second wave of COVID infections begins to take hold.

We here at Kearns & Langeveld will continue to track these data points and trends. Please stay tuned for Part III of this newsletter to be released next week. 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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