With the second round of stimulus coming trying to fight being short is not the right place to be. The news flow from the industry could not be worse for some players, and the market does not care. Here is a summary of what is currently happening in the restaurant industry, and the average restaurant stock is up 18% over the last month:
- In 2Q20 MCD, DNKN, SBUX, QSR have all announced store closures, and more closures are likely.
- Thousands of independent restaurants have permanently closed are more are likely to close.
- Permanent job losses in the restaurant could total 3 million in 2020.
- Tourism contributes over $120 million to restaurant industry sales, and travel is limited.
- Business travel is all, but shut-in and a CEO said, "I think business travel will be prolonged to recover, and my guess is that it will take five to 10 years for business travel to fully recover to 2019 levels."
- Knapp Trak reported yesterday that the Casual Dining recovery has stalled out.
- Black Box, a broader measure of industry sales (50,000 restaurants with $76 billion in sales and covering 290 brands), has stalled and sent out a message in early August that "at -15.1% same-store sales, July was the best month for the industry since February. But the bad news is that the pace of that recovery is starting to stagnate."
To that end, we are covering several shorts in the Restaurant and Consumer staples coverage lists. First, we are covering the short in SYY. Yesterday SYY reported earnings mostly in line, but revenue below expectations and organic US case volumes down (41.9%). The current run rate for SYY revenues is running down 25-30%, and globally its customer base has been decimated, and the stock traded up 1.3% yesterday and 16% over the last week. The CEO has even taken a step back from his call for a "complete recovery" of the restaurant industry to "there is now going to be a 'churn' in his customer base." He finally acknowledged the decimation in his customer base, but said they would be back! That could take years. The bottom line for us is that the market will look for the recovery story, before the economic reality that SYY earnings power has been significantly reduced in the pandemic.
On the restaurant side, we are keeping the SHORTS on BYND and SHAK and closing the SHORTS on SBUX MCD, QSR, DNKN, CMG, YUM, WEN, and TXRH. We are moving SBUX, MCD, DNKN & QSR to the SHORT BIAS list given their exposure to the breakfast daypart.
We are also removing WING from the BEST IDEA LONG list. We are adding several Casual Dining names to the LONG BIAS list – DRI, EAT, BJRI, and TXRH. DIN and BLMN remain on the SHORT bias list.
LONG BIAS TO CASUAL DINING
We are now fast approaching a six-month window on how we like to think about stocks. As we head into 4Q20, a potential bull case for casual dining stocks will emerge or is it already baked into the stocks.
Coming into the pandemic, the casual dining industry had been in a secular decline for the better part of 10 years. Bankers did not want to lend to the industry, and many companies have just gotten lazy about operations. Importantly, as we have said in the past, the case volume growth at SYY, PFGC, and USFD was running +mid-single digits, which represented how fast the independents were growing. With thousands of independents closed and likely not to re-open, the casual dining industry will benefit from less industry capacity. The names we like on the long side all fit a similar theme. First, what is the core concept's central positioning, and is it getting weaker or stronger? Second, coming out of the pandemic (2022 and beyond), will the concept be more robust than it would have been without COVID-19? Third, is the concept close to FCF neutral now?
Other issues to consider as reasons to be long:
- What if there is a vaccine?
- How long before we are talking about easy comparisons?
- To-go will continue to be a bigger part of Casual Dining sales after COVID-19 due to a lower supply of restaurants.
- LW numbers show that small chains are suffering more than the larger chains.
- The companies are prepared for a second wave and reduced dining capacity.
- Reduced cost structures and small menus can improve the speed of service.
- Contactless payment improves customer experience.
We will be hosting a Restaurant industry Themes deck in the upcoming weeks to update our thinking on the restaurant industry.
