The “Good”, the Bad and the Ugly

Is the government forcing you to close your business? Try suing them. That’s what 30+ Texas bar owners did after the Governor of Texas gave them a shutdown order (again) amidst a surge in COVID cases.

• The restaurant industry has seen the most bankruptcies in 2020 compared to any other industry.
• Early data paints a dark picture of the restaurant industry… What’s on the menu? Bankruptcies, store closures, and higher prices.

THE EXPLANATION

Data by review and reservation apps showed various doomsday scenarios:

• The “good”: OpenTable sees 25% of America’s restaurant closing as a result of COVID.
• The bad: 53% of the 23,981 restaurants listed as closed on Yelp say they will be permanently closing.
• The ugly: A QSR survey showed that 85% of independent restaurants could close by the end of 2020 and at least 75% do not expect to turn a profit this year.

In order to prevent “the ugly”, states have began lifting lockdown restrictions and mandating a seating capacity in restaurants. However, late invoices, delayed rent payments and additional sanitization costs could overwhelm struggling restaurants.

• So what are the impacts? Bankruptcies, large chains downsizing, and higher prices for consumers. Starbucks has already announced permanent closures and restaurants have already started to add mandatory service charges and raising prices to accommodate additional costs.

On June 18, the Restaurant Act, a $120 billion relief package intended for independent restaurants was introduced. Similar to the infrastructure bill we discussed last week, there is no guarantee as to when or if the bill will even be passed. That being said, a successful bill would provide much-needed aid.

THE ACTION

Dine-in only restaurants: Cheesecake Factory ($CAKE), Dine Equity ($DIN), and Red Robin ($RRGB) remains at a fraction of their pre-COVID stock prices. These stocks may look cheap but dine-in restaurants have a long way to go and betting on a recovery can be risky. A resurgence in cases and the second round of shutdown orders in Texas, Florida, and California sent dine-in restaurants stocks down again after an initial rebound.

Unless a vaccine is developed or the virus is controlled, dine-in restaurant stocks are unlikely to see a full recovery. Chains with drive-thru and delivery options such as McDonald’s ($MCD) and Domino’s ($DPZ) have done much better and have already recovered much of their COVID losses.