The Great American Diner Serves Up Empty Profits

Fast food thrives while restaurants struggle to stay alive only through takeout.

Anthony Russo
    Apr 28, 2020 5:00 AM  PT
The Great American Diner Serves Up Empty Profits
author: Anthony Russo   

Since the outbreak of the coronavirus in the U.S., the restaurant industry has been one of the hardest-hit sectors. In April and March, restaurants lost an estimated $80 billion in sales, according to the National Restaurant Association (NRA). More than 8 million restaurant workers have been laid off or furloughed, representing around 28% of all jobless Americans.

UBS analyst Dennis Geiger said earlier this month that 3% of restaurants have already closed for good, a number he expects to grow considerably.

"Closer to 20% is possible considering the health and overleverage of independent owners and select franchisees across casual dining in particular," Geiger said.

That would put the industry in danger of losing 200,000 restaurants permanently. 

Fast Food Operators Will Survive…Even Thrive. 

With a chunk of restaurants already closed, the remaining have been gasping for air making efforts to comply with the take out the only mandate. The same struggle does not apply to fast-food operators such as McDonald's Corp., (NYSE: MCD) and The Wendy's Company, (Nasdaq: WEN) both of which CapitalWatch editor Greg Bergman has urged investors to buy. 

Bergman put a buy on WEN and MCD on Mar. 20; WEN since then has risen from $10.94 per share to $19.54, while MCD rose from $148.49 to $187. 85 per share. 

Already using the drive-thru, sales will only pick-up at fast food joints after customers navigate the world with more ease. Casual or fine dining restaurants haven't been so lucky—many of them just cannot survive on takeout alone. 

Cheesecake Crisis

One of the hardest-hit restaurants amid the Covid-19 crisis is The Cheesecake Factory, Inc. (Nasdaq: Cake) As the outbreak of the pandemic worsened in March, the operator of 294 restaurants in the U.S. and Canada said it was temporarily closing 27 locations. Things have worsened for the California-based company, as it has furloughed around 41,000 hourly employees. According to its 2019 annual report, CAKE had 46,250 employees.

In March, restaurant sales plunged for CAKE plunged approximately 46%. It also expects sales to fall roughly 13% for the First quarter fiscal 2020. In addition, CAKE has told its landlords that it would not be able to pay rent at any of its locations in April.

"Severe decrease in restaurant traffic has severely decreased our cash flow and inflicted a tremendous financial blow to our business," David Overton, Cake's chief executive officer wrote in a letter. 

The good news is last week, Cake announced it received a $200 million investment from private-equity firm Roark Capital, which owns Buffalo Wild Wings, Cinnabon, and Arby's. That helps improve the Cake's liquidity position, but so many uncertainties lie ahead for the company, as shares are down 50% year-to-date, as of midday Monday.

Yahoo Finance: CAKE.png

(Yahoo Finance: CAKE)

DINE and Ditch? 

Another company in some trouble is the operator of Applebee's and IHOP Dine Brands Global, Inc., (NYSE: DIN) The California-based company has closed hundreds of its locations, as it said in a filing earlier this month that 1,339 franchise-operated Applebee's restaurants and 1,372 franchise-operated IHOP restaurants have remained open. 

In addition, Dine Brands said it would furlough some of its workers, but did not specify an amount. In the fiscal year 2019, Dine Brands revenues reached $627.16 million, up 22% year-over-year on a net income of $104.35 million. As of midday Monday, shares are down 59% YTD.

Yahoo Finance: DIN.png

(Yahoo Finance: DIN)

Steakhouses Just About Overcooked 

It also hasn't been too pretty for the steakhouse chains Texas Roadhouse, Inc. (Nasdaq: TXRH) and Ruth's Hospitality Group, Inc. (Nasdaq: RUTH)

Hit the hardest by far of the two has been Ruth's Hospitality, which is the parent of Ruth's Chris Steak House. In March the Florida-based company said it furloughed a "significant" amount of employees and that it temporarily closed 23 restaurants where take out and delivery is not viable. With more than 150 restaurants globally, Ruth's has watched its shares fall 60% YTD. To improve liquidity, Ruth's has suspended all new restaurant construction and non-essential capital expenditures. Also, the company expects to lower yearly capital expenditures by more than $35 million and has suspended its quarterly dividend. 

Yahoo Finance: Ruth .png

(Yahoo Finance: RUTH) 

Earlier month, Ruth's received $20 million in forgivable loans but returned them after receiving scrutiny for taking loans that could otherwise go to small businesses. Investors should keep an eye on its stock that's traded under $10 per share, but the company has a mouthful of problems. 

For Texas Roadhouse, the Covid-19 has forced the company to withdraw its fiscal year guidance, ending Dec. 29. While shares are down 25% YTD for the Kentucky-based company there has been a little bit more of a positive outlook on the company. For one, Texas Roadhouse said it was keeping all of its domestic restaurants open and operating at full capacity in March. In addition, the company has "ramped up" To-Go, Family Value Packs, and curbside services

CEO W. Kent Taylor has agreed to forgo his salary and bonus from Mar. 18 through Jan. 7. The money will be used to pay front-line workers. Even if motivated purely by PR, investors and shareholders should be encouraged by its commitment. Texas Roadhouse still isn't out of the woods yet, but keep an eye on this stock and buy if it falls in the lower $40.00 per share range. 

Wholesalers See Increased Demand

While casual diners have struggled in the Covid-19 environment, grocery providers and other food store retailers have watched business picked up. 

One of those companies is Walmart Inc. (NYSE: WMT) Earlier this month, the Wall Street Journal reported that the retail and wholesale giant sale's from more than 4,700 U.S. stores soared nearly 20% in March. Meanwhile, sales on Walmart.com had surged more than 30% over the past eight weeks, as downloads of its grocery mobile app skyrocketed.  

As a result, even in a recessed economy, Walmart has already hired 150,000 new associates, while planning on bringing in an additional 50,000. Shares of the Arizona-based company are up nearly 9% YTD. Expect this stock to continue to gain in 2020.

 Yahoo Finance: WMT.png

(Yahoo Finance: WMT)

Another retailer finding success in a world without competition from restaurants is Costco Wholesale Corp. (Nasdaq: COST) The operator of 787 warehouses posted sales of $15.49 billion in the five weeks through April 5, up 12% year-over-year. The Issaquah, Washington-based company also said it was paying its employees an additional $2 per hour, from Mar. 2 to Apr. 5. 

However, Costco has been criticized by its employees for showing a lack of transparency and a disregard for Covid-19 warnings, according to BuzzFeed. At least 75 people across Costco's warehouses and corporate offices have tested positive for the Covid-19, along with two lives claimed. Shares in Costco are up 5% YTD, as of right now this stock is a buy. 

Although it isn't a grocery retailer, another stock performance worth noting is the delivery chain Domino's Pizza, Inc. (NYSE: DPZ). Now, while consumers won't order pizza every night while they are stacked up on groceries, it's not a huge surprise to see why Domino's shares have surged 25% YTD. Ordering pizza has always been popular in the U.S., as consumer spending deliveries reached roughly $11 billion in 2019, which was the highest amount since 2007, according to market research provider Statista.

Source: Statista.png

(Source: Statista)

Between Mar. 23 and Apr. 19, Domino's reported that its retail sales from its U.S. stores grew 11% in its first-quarter earnings last week. In the first quarter, Domino's revenues\ was $37.1 million on a net income of $29 million. The Michigan-based company also opened 69 new net stores; 30 of which in the U.S. Out of 32 Wall Street analysts, 20 have Dominos as a buy with 12 giving it a hold. The stock is certainly worth monitoring, but one can only wonder if the company can sustain this type of success once restaurants reopen. 

Some Restaurants Get Creative

Currently, even though people are advised to stay home, the truth is they are looking to get out of the house when they can. As a result, some restaurants are now attempting to sell groceries. One is the restaurant chain Denny's Corp. (Nasdaq: DENN) In more than 30 locations in Oregon and California, Denny's is providing an online system grocery system that includes the sale of paper goods, cheese, bread, deli meat and fresh and frozen fruit and vegetables. How it's designed to work its customers order from their cars and Denny's employees deliver it to them the parking lot.

"This new service allows customers to get the food and supplies they need without compromising social distancing protocols or having to enter high-contact spaces," Denny's said in a statement earlier this month.

However, Denny's is still expecting "comparable restaurant sales" to fall around 6% year-over-year in the first quarter. It has also reduced the base salaries of its top executives and has implemented furloughs. Shares of Denny's are down more than 50% YTD.

Yahoo Finance: DENN.png

(Yahoo Finance: DENN)

St Louis, Missouri-based Panera Bread has also gotten in on the grocery initiative. It is offering rapid pick up and contactless delivery for items that fall under produce, dairy, as well as Bread and Bagels. The privately held sandwich company's CEO, Niren Chaudhary told CNBC that it lost half its business once its dining rooms closed. 

"It's a win for our associates because we will be able to keep our cafes open longer, and it's great from a business standpoint because it should be incremental profit and revenue for us at a time when we desperately need it," Chaudhary told CNBC.

Some Dining Areas are Starting to Reopen 

Currently, it is a nightmare for the restaurant industry, but there is some good news. One, the U.S. Senate passed a $310 billion bill, designed to give small businesses Covid-19 relief. The other is some states in the U.S. planning on reopening dining rooms, as Washington has been eager to restart the economy. That includes Georgia, which is targeting to do so on Monday and Texas, which could reopen dine-in restaurants this week. However, still, more than 97% of the U.S. population remains under shelter-in-place orders, according to CNN.

According to the NRA, industry sales were projected to reach $863 billion in 2019. In 2020, sales in the restaurant sector were expected to hit $899 billion. However, with the impact of Covid-19, the NRA estimated in March that sales would decline by $225 billion in the next three months, representing roughly 25% of the projection. 

Just Because They Can, Doesn't Mean They Will 

The industry is one of the hardest hit in the country. Even when they do reopen, one can wonder how long it will take for consumers to start packing restaurants again without fears of contracting the coronavirus. But with a big chunk of unemployment coming from the restaurant sector, the industry needs as much relief as possible.

For now, if you are a shareholder in any of the companies we listed before that have been impacted and you've made it this long, you might as well stay put. If you're looking to buy, I would take a look at stocks such as Denny's, Dine Brands, and Texas Roadhouse. And those retailers are safe buys, benefitting in many ways form the current crisis. 

But boy, Restaurants can't open soon enough. I miss my ribeye steak cooked medium with a side of baked potato and vegetables. I guess I could make that at home. But who has time to learn to cook when there is so much Netflix to catch up on?


YOU MAY LIKE