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OPINIONFinancing

A ‘meteor’ obliterates restaurant stocks as in-store dining stops

Valuations for many chains suggest potentially serious problems, and that could bode ill for the entire industry, says RB’s The Bottom Line.
closed Starbucks
Photograph by Jonathan Maze

the bottom line

Restaurant companies have lost almost half of their value in recent weeks as investors panic over the state of their finances while consumers abandon dine-in eating.

And while that only represents a small portion of the industry, the steep declines in valuation show that investors are fearful of the impact of the coronavirus on restaurants. They could well prompt a massive change in how the industry is valued going forward—and how it’s funded.

Going into trading Tuesday, with many restaurant stocks down, the median publicly traded restaurant chain had lost more than 60% of its value since its 52-week high, according to an analysis by Nick Mazing, director of research for financial services site Sentieo.

That’s more than double the decline of the S&P 500. So while stocks have crashed as the coronavirus spreads, restaurants as a whole have fallen through the basement.

Several companies have lost three-quarters of their valuations, including some casual-dining stalwarts such as Brinker International (down 78% going into today’s trading), BJ’s Restaurants (down 76%), Red Robin (down 84%) and Dave & Buster’s (down 88%).

Everyone has lost value, however, including Domino’s Pizza, which is down 25% from its 52-week high.

“This is the meteor,” Mazing said. “The industry as we know it will change dramatically. This is pricing in severe business impairments or worse.”

And, he adds, it may well bode ill for the industry as a whole—not just the publicly traded space. “If this is what is happening with well-recognized national chains, imagine what the implications are for small operators.”

For the industry, the financial implications of the limits being placed on restaurants during the coronavirus cannot be overstated.

There were concerns about the state of the industry long before the first American came down with the coronavirus, or anyone in China for that matter. Years of highly leveraged overexpansion led to too many restaurants, hurting traffic.

Consumers shifted their spending. Labor costs skyrocketed. Many industry strategies focused on increasing average check, leaving many consumers cutting back. Bankruptcies were on the upswing. And they were expected to increase.

In the middle of this, the coronavirus was a bomb. It was already hurting traffic and sales last week as diners canceled reservations and cut back their dining. And then state and local governments started closing dining rooms. Now President Trump wants consumers to use the drive-thru.

Much of the industry cannot handle a month or two of bad sales.

“We are going to see the number of publicly traded restaurants shrink,” Mazing said. “We will probably see the industry overall shrink.”

It might even get people to think twice before they start a restaurant. “We are going to see an exodus of talent from the industry,” Mazing said. “An entrepreneur who lost everything in two weeks through no fault of their own will not jump right back in. We will also probably see the same with GMs. The average restaurant GM has an incredibly wide skill set, from wine pairing to plumbing, from IT troubleshooting to HR compliance. These are skills that will go to other industries.”

Mazing also believes that financiers will rethink the industry. Again, much of that had already been happening long before anyone heard of COVID-19—cash challenges at restaurant franchisees and the impending bankruptcy of NPC International was likely to take care of that.

And, really, that might be one good thing that comes about this in the long term. Maybe restaurants have to change how they finance their capital needs.

“I think the system will see reduced leverage as investors and banks pull back,” Mazing said. “It will also lead to a major rethink of real estate. A national chain franchisee was in many ways the gold standard for a tenant. This will probably go away. We might see new rent structures emerge, like more variable rents, which means that real estate financing will change, too.”

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