TXRH is the best performing casual dining company this year down 8.2%, including the 2.8% increase yesterday. Before the pandemic, despite having strong top-line sales, TXRH was struggling to right-size the ship with Restaurant levels margins down 143bps since peaking in 3Q16. The Company is currently trading at 19x 2021 NTM EV/EBITDA ($252 million), which implies the Company is back to an $80 million EBITDA run-rate by 1Q20, which is where it was before the pandemic. Each passing day that scenario looks more and more unlikely. The recovery in sales and profitability will not be that smooth and does not factor in millions of unemployed consumers and the likelihood of a recession in 2021. What the 2021 estimate does imply is a significant stimulus from the federal government. Structurally, operating indoor dining is complicated and will require substantial changes to consumer behavior and, more importantly, managing partner adjustments to operations will limit dining capacity and increase costs.
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REOPENING IS NOW A NEGATIVE
TXRH has significant exposure to states that reopened early, allowing sales to recover faster than others in the industry. As DRI noted on its call, LongHorn is doing well in Atlanta and Cincinnati. Between Ohio and Georgia, TXRH has 13.8% of its restaurants. Add to that the troubles in TX, which account for another 13.4% of TXRH restaurants, we are at 27% of the stores in states slowing reopening. Looking at RT. Live, spell more trouble for another 25% of the company restaurants. The value of Rt ( is a crucial measure of how fast the virus is growing. Rt is the average number of people who become infected by an infectious person. If Rt is above 1.0, the infection will spread quickly. When Rt is below 1.0, the virus will stop spreading, theoretically. More than 50% of TXRH locations are in states that have an Rt above 1.0. This factor is harmful to the entire casual dining industry.
INDUSTRY RECOVERY SLOWING & BEHAVIORAL CHANGES
We believe that a real recovery in the restaurant industry is more of a late 2021 and early 2022 story. The restaurant recovery has stagnated since early June. The COVID-19 outbreak has had numerous impacts on the grocery industry, some of which will have long-lasting implications for how we'll eat and shop. Shopping behavior from the number of trips, to what brands we buy, to price elasticity, has been redefined overnight. It has also changed how we'll eat. E-commerce penetration has been pushed forward by years. We will explore which trends will revert and which are more permanent and worth paying for. Driven by higher than consensus sales estimates, improving gross margins, and SG&A improving sequentially in the 2H, we are modeling upside in our EPS estimates for the grocers.
WHAT IS THE DINING ROOM CAPACITY?
DRI made it clear on its earnings call that once you're past 25% occupancy, the only thing that matters is the requirement of 6 feet of social distancing takes over. In every restaurant, there are always significant inefficiencies in seating capacity. So different layouts, even inside the same brand, will yield you different seating efficiencies under social distancing. This suggests that once you're past 25% occupancy, the 6-foot restriction on social distancing trumps any other limitation, and getting to 50% capacity may be challenging. The TXRH units with a significant number of "booth backs" are likely less than 6 feet, limiting capacity. As of May 11, 2020, the Company had reopened the dining rooms in approximately 160 of our company-owned restaurants under various limited capacity restrictions.
