My inbox has been flooded with links to news stories about a group of big publicly traded restaurant chains that are apparently in imminent danger of filing for bankruptcy.
On that list are some chains that would not surprise readers, such as the eatertainment concept Dave & Buster’s, and quite a few that would, such as Bloomin’ Brands, Denny’s and The Cheesecake Factory.
The source of this list is S&P Global, and the actual report is quite a bit different than the headlines would suggest.
In fact, publicly traded restaurants’ risk of default has actually decreased in recent months. In April, that risk was 35%. By July, it had fallen to 10%. That is a considerable decline in the risk facing the largest restaurant companies.
On Aug. 7, according to S&P, the odds that big, publicly traded restaurants would default was 12%. A year ago it was 8%. Elevated? Yes. Lots of chains in imminent danger of bankruptcy? Hardly.
All of the largest publicly traded companies saw declines in their default risk since April, according to S&P. On May 13, for instance, Dave & Buster’s probability of default peaked at 61.5%. It is down to 16.1% now.
To be sure, the industry as a whole is hardly out of the woods, as the filing of Garbanzo Mediterranean last week reminded us. The simple fact is that a lot of restaurants are in a difficult state at the moment as loan and lease payments come due and private equity sponsors weigh their options. We remain convinced that more industry bankruptcies are on their way.
What’s more, the loss of additional unemployment benefits and further uncertainty regarding federal stimulus could depress restaurant sales in the coming months and increase default risk, which is important as many companies are walking a financial tightrope.
But the universe of publicly traded chains remains relatively healthy when compared with the broader industry. First and foremost, they are publicly traded, which means they can go to public equity investors for some emergency cash.
Just about every big chain “has done something to support its balance sheet,” according to S&P. Shake Shack, for instance, took on $150 million in new equity. Cheesecake Factory brought on Roark Capital as an investor.
More to the point, they are generally large and well-known and have done a better job of courting takeout and delivery customers that have been critical to the ability for restaurants to get their sales back.
Outback Steakhouse owner Bloomin’ Brands, for instance, has done considerable work to generate sales through takeout and delivery, which has eased the impact of the pandemic on the company’s sales.
The very largest brands, including McDonald’s, Yum Brands, Restaurant Brands International and others, operate businesses with drive-thrus or heavy delivery coverage that have worked well during the pandemic. Pizza chains like Domino’s and Papa John’s, along with the wing chain Wingstop, have thrived on a consumer eager for family-size orders of pizza or chicken wings.
Franchisees might be in a tougher position. And the same holds true for privately held companies that tend to have far riskier credit profiles thanks to all that debt they take on and their penchant for leasing locations.
Yet publicly traded chains have managed to weather the pandemic—even though most of them were forced to return their Paycheck Protection Program loans.
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