COVID-19: Its impact on foodservice – update 5

by | 27 Mar 2020 | Covid-19, Trending Now

On March 16, 2020 President Trump issued guidelines that called for Americans to avoid social gatherings of more than 10 people. Initially, the restriction would apply for 15 days, but it can be extended. Although restaurants may provide takeout services, the loss of inhouse dining is devastating.

The National Restaurant Association calls the coronavirus epidemic the greatest crisis the industry has ever faced. ‘Economic forecasts indicate that restaurants and the foodservice industry could sustain $225 billion in losses and eliminate 5-7 million jobs over the next 3 months,’ their website says. The association is requesting that government support a recovery plan to provide direct and targeted relief designed to benefit restaurant and foodservice businesses.1

Foodservice distributors could potentially suffer a $24 billion loss. ‘The unprecedented interruption to normal business has created severe financial hardship for foodservice companies and their 350,000 employees around the country,’ International Foodservice Distributors Association President and CEO Mark Allen said in a letter to Trump asking for a bailout package.2

The effect of the closure of seated dining establishments is evident in analysis by Oppenheimer. The Darden family of restaurants includes Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V’s. According to Brian Bittner, Senior Equity Analyst with Oppenheimer, Darden Restaurants, Inc. saw same-store sales trending down 60% across the restaurant brand’s portfolio during the week following the President’s announcement. This is in line with the brand’s to-go only mandate of 60% of its portfolio. The other stores are at 40% operating capacity. In contrast, the pre-virus environment was very solid with positive sales.3

At this point, no one can predict exactly when the virus will peak across America or the full impact it will impart on the industry. As the best-case assumption, Bittner suggests Coronavirus exerts a near-term impact on sales trends. The upside would be a limited and short-lived impact by the coronavirus. A prolonged impact of the virus is the downside. In this case, same-store sales do not recover and margins are deleveraged over multiple quarters.

In the face of uncertainty, on March 20, Bittner rated Darden’s stock as outperform, in part because the company’s cash positioning is extremely healthy. ‘This swift industry downturn forces us to stress test our models and perform liquidity analysis across our coverage. DRI’s specific cash positioning is extremely healthy and our work suggests the model could go a full six months with zero revenues before liquidity would be needed. This visibility, along with DRI’s ability to take significant market share when the virus recedes, now creates a very attractive risk/reward. DRI is our top casual dining idea at current levels.’

Similarly, on March 4, Starbucks Corporation received an outperform rating by Oppenheimer. The firm lowered estimates on virus impacts. ‘Underlying sales/margin themes are powerful and attract us

to the stock’s upside once virus fears fade,’ he said. Of course, it doesn’t hurt that Starbucks has accelerating loyalty growth and a sizeable drive-through business that is not impacted by the President’s guidelines.4

Yum Brands owns KFC, Taco Bell, Pizza Hut, and the Habit Burger Grill. The company is well positioned as KFC, Pizza Hut, and Taco Bell restaurants in the US will offer drive-thru, carryout and delivery services, which are important ways to make food available safely and with low contact in a social distancing environment. Upon news announced on March 23 that Pizza Hut is set to hire 30,000 permanent workers, shares traded higher. On March 24, the stock closed at $69.66, an increase of $10.14 from the day before.

On March 25, CNBC reported that the company suspended its $2 billion share buyback program and tapped into a $525 million revolving credit. ‘We have over $1 billion of cash now,’ said CEO David Gibbs. ‘Certainly, we’re in a good position. But we want to take an abundance of caution as we manage through the challenges of this situation.’5

The move allows Yum Brands to provide a grace period for franchisees on royalty payments. Employees at restaurants operated by Yum Brands will continue to be paid if they are closed due to government mandates. The company is working with their franchisees to take a similar approach.

Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar are owned by Bloomin’ Brands Inc. The Company owns and operates more than 1,450 restaurants in 48 states. The majority of their customers dine-in. At Fleming’s Prime Steakhouse diners will often linger over a bottle or two of wine to complete the fine dining experience. At the lower end of the scale, Carrabba’s primarily services customers in the restaurant, although they and Outback have well established take-out service.

On March 20, David Deno, CEO of Bloomin’ Brands announced, ‘We remain committed to servicing our communities as we navigate through the current environment. As part of this effort, we will leverage our carry-out service and delivery network, to customers at home, as well as provide limited in-restaurant dining in areas where available.’6

As a protective measure, the company increased borrowing of its revolving credit line to provide additional financial flexibility. The Company has a cash position of over $400 million. This may protect them in the short term, but Moody’s Investors Service issued a downgrade in a press release dated March 23.

‘The downgrade reflects our expectation for a material deterioration in both earnings and credit metrics following the closure of all in-store dining across Bloomin’ Brand’s entire restaurant base due to efforts to contain the spread of the coronavirus including recommendations from Federal, state and local governments,’ stated Bill Fahy, Moody’s Senior Credit Officer. ‘In response to these operating challenges and to strengthen liquidity, Bloomin’ Brands drew down substantially all of its $1.0 billion bank revolver while also suspending its dividend, share repurchases, and all discretionary capex. While many restaurants are still able to continue to provide take-out, curbside pick-up and delivery, total restaurant sales will still be substantially below normal operating levels for the typical casual dining restaurant.’7

Bloomin’ Brands Inc. stock has dropped from nearly $25 a share one month ago to $7.13 a share on March 24.

Dine Brands Global claims to be one of the largest full-service dining companies in the world with two of the country’s most iconic and enduring brands – Applebee’s Grill and Bar and IHOP (International House of Pancakes). There are 1,841 IHOP restaurants and Applebee’s in 50 states, Puerto Rico and Guam. Not surprisingly, their stocks too, are on a sharp decline that was so abrupt trading halted at 3:56 pm on March 18 due to volatility. Shares plummeted from a high of $92.05 on February 24 to $25.13 on March 24. On March 19 the company announced it has ‘drawn down a total of approximately $223 million of the $225 million available under its revolving financing facility pursuant to its 2019-1 Variable Funding Senior Notes issued as part of the company’s securitization refinancing in 2019. Although Dine Brands does not have an immediate need for additional liquidity, precautionary steps were taken to increase the company’s financial flexibility in light of unprecedented conditions due to the COVID-19 outbreak.’8

 

The question remains how long fine and casual dining establishments can survive without clients. While they may switch to take-out and delivery options, its hard to imagine many finding the comfort of IHOP’s Breakfast Sampler at home. Think of the challenge of delivering two eggs, two hickory-smoked bacon strips, two pork sausage links, two pieces of ham, two fluffy buttermilk pancakes, and golden hash browns in the fresh, warm state that it left the store in.

Similarly, when considering Fleming’s Prime Steakhouse and Wine Bar, can a $60 Prime New York Strip Steak offer the same dining enjoyment when picked up at the restaurant for take-out?

The great unknown is the duration and extent of CoVid-19 across the country. Those with well time-tested take-out and delivery options, such as pizza purveyors and fast food restaurants are more likely to thrive. There’s little doubt that some families (and moms!) are tiring of home cooked meals. Yet the gut punch to the economy will take its toll. The Dow Jones Index closed 20% less on March 23, 2020 than on March 25, 2019 hitting retirement and college savings funds especially hard.

Aside from the sudden loss of employment by hospitality workers such as wait staff and bartenders, retailers like Gap and Columbia Sportswear are cutting their hours in an effort to slow the spread of the virus. Musicians are unable to perform, theaters are closed, and even salons, and cigar stores. Travel, including the airline and hospitality industries are also deeply impacted. The upshot is that many people across the country may not have the disposable funds to support foodservice. Many may return to their college age diets of ramen noodles and Campbell’s soup.

A recent survey conducted by the Kaiser Family Foundation from March 11 to 15 and published on March 17, found that 4 in 10 said that life has been disrupted a lot. Fifty-three percent are worried they will lose income due to a workplace closure or reduced hours. These worries are particularly prevalent among workers earning less than $40,000 a year, part-time workers, and hourly wage earners.

According to that survey, part-time and self-employed workers are likelier than full-time or salaried workers to say they’ve already lost income so far. Those are a lot of people who eat out.9

As the virus continues to drive anxiety, it’s not just restaurants that are affected. The whole chain is set to falter all the way from paper good suppliers to food delivery. US Foods, a leading foodservice distributor admitted on March 23 that ‘the full business impact of CoVid-19 is not yet known. We are taking immediate action to reduce our costs to match the slowdown we’re seeing in restaurant, hospitality, and education case volume. We are also leveraging our supply chain resources to support the retail industry as they experience unprecedented increases in consumer demand.’ The company believes its strong balance sheet will enable it to weather the economic impact of COVID-19 and has proactively drawn $1 billion under its existing revolving credit facilities to retain as cash on hand. The company has no debt maturing until fiscal 2022 and is actively working to explore additional financing opportunities if needed.’10

US Foods Holding Corp shares have fallen from $38.12 a share one month ago to $15.80 on March 24. Analyst response is mixed. Market Edge gives the strong advice to avoid the stock.

Research Team cautions clients to reduce shares. CFRA continues to give a 3-star rating however; their stock report observes, ‘USFD is one of only two national distributors in the food-away-from-home industry. Due to the uncertainty caused by Covid-19 on the overall state of the restaurant and foodservice industry, we believe it is necessarily to assess risk as high. In some regions, restaurants are seeing sales falling by around 70%. Our biggest concern is if these types of percentage drops spread across the country for a prolonged period of time. In that case, we could start to see many bankruptcies, particularly in the smaller, family-owned establishments. These customers are typically more profitable customers for food distributors.’11

Sysco is the second national distributor. The company’s president and CEO, Kevin Hourican, joined Sysco on February 1, 2020. He recently had this to say. ‘We can’t predict when this shock will subside, but we know through it we will continue to provide innovative solutions for our customers in the ways we lead the industry. Our ability to navigate the current environment stems from our strong fundamentals and the advantages we hold. We are actively engaging our customers who don’t normally utilize a take-out or third-party delivery model to help them develop these capabilities. Sysco is helping enable small businesses pivot their business model.’ The company has ramped up sales of cleaning and take-out supplies such as utensils and to-go containers. Additionally, one-third of Sysco’s business is composed of healthcare, government/military, correctional facilities and other sorts of ‘food-away-from-home’ which are less volatile amidst disruptions.12

Americans, as well as others across the globe, are feeling the disruption and loss of confidence. Runs on grocery stores have wiped out entire shelves of baked goods and canned products. Even staples like dried beans are scarce. The entire food chain in America is at risk of disruption. A shortage of truck drivers could have serious consequences. Even before the onset of coronavirus, trucking companies have been having difficulty recruiting long haul drivers. Might this be exacerbated with fears of the virus?

Agriculture is seasonal. Now is the beginning of planting season when farm employees are working long, hard hours. Dairy, pork, poultry, and beef producers’ workers handle food in relatively close quarter where recommended social distancing cannot be implemented. If the outbreak extends to these workers, the food supply may slow.

While uncertainty is currently high in the US, there is hope in looking at China where coronavirus has flattened. South Korea flattened the curve with a swift response to public health by testing early to minimize spread. The President’s Coronavirus Guidelines for America say that it takes 15 days to slow the spread.

In a live press conference that the author followed, the director of the Shelby County Health Department in Tennessee describes the Epi Curve as how many cases you have before it starts to go down. ‘Our goal is to shorten the duration of the curve, to blunt the curve to where there aren’t as many cases and to reduce the spread. We would anticipate that you would have to go through from 2 to 4 incubation cycles to see significant impact. You’re talking 4 to 8 weeks before we see if our efforts are going to have an impact. My personal opinion is that it would be difficult to return to normal in 2 weeks, however taking early aggressive action can reduce spread.’ Whether this holds across the US remains to be seen as it is a large country dependent on all taking the same protective actions.

 

SOURCES

  1. Klein D. National Restaurant Association Expects $225B Impact, 5–7M Jobs Lost from COVID-19. QSR (Mar 2020) https://www.qsrmagazine.com/finance/national-restaurant-association-expects-225b-impact-5-7m-jobs-lost-covid-19
  2. Foodservice distribution industry pleads their case to the Administration. IFDA (Mar 2020) https://www.ifdaonline.org/news-insights/industry-news/covid19letter
  3. US Foods Holding Corp. Oppenheimer (Mar 2020)
  4. Ibid.
  5. Stankiewics K. Yum Brands suspends $2 billion buyback program, provides royalty grace period for franchisees. CNBC (Mar 2020) https://www.cnbc.com/2020/03/25/yum-brands-suspends-2-billion-buyback-program-amid-coronavirus-crisis.html
  6. Bloomin’ Brands leveraging Carry-out and Delivery service in response to COVID-19. Bloomin’ Brands Inc. (Mar 2020) https://investors.bloominbrands.com/news-releases/news-release-details/bloomin-brands-leveraging-carry-out-and-delivery-service
  7. Moody’s downgrades Bloomin’ Brand’s CFR to Ba3; bank credit facilities to Ba2; all ratings placed under review for downgrade. Moody’s (Mar 2020) https://www.moodys.com/research/Moodys-downgrades-Bloomin-Brands-CFR-to-Ba3-bank-credit-facilities–PR_420491?WT.mc_id=AMRG93Sm9uZXNOZXdzcm9vbV9TQl9OUl9DVl9SYXRpbmdfTmV3c19BbGxfRW5n20200323_PR_420491
  8. Dine Brands Global, Inc. Draws on Existing Variable Funding Senior Notes. Nasdaq (Mar 2020) https://www.nasdaq.com/press-release/dine-brands-global-inc.-draws-on-existing-variable-funding-senior-notes-2020-03-19
  9. Hamel L. et al. KFF Coronavirus Poll: March 2020. KFF (Mar 2020) https://www.kff.org/global-health-policy/poll-finding/kff-coronavirus-poll-march-2020/
  10. US Foods update Related to CoVid-19. US Foods (Mar 2020) https://ir.usfoods.com/investors/stock-information-news/press-release-details/2020/US-Foods-Update-Related-to-COVID-19/default.aspx
  11. See US Foods Holding Corp.
  12. Sysco Provides CoVid-19-Related Business Update. Sysco (Mar 2020) https://investors.sysco.com/annual-reports-and-sec-filings/news-releases/2020/03-20-2020-100012565