We remain bullish on casual dining, especially our favorite names TXRH and EAT. BJRI and DRI are on the long bias list.
Casual Dining stocks were on a tear up 5.3% yesterday and 16% over the past month. Yesterday, they were up with improved prospects of COVID-19 vaccine development, and many of these companies will be one of the prime beneficiaries of a gradual reopening of the U.S. economy. We can't ignore that data that suggests that the industry's sales trends are slowing in late October and early November against a backdrop of the COVID-19 surge across the country. Over the past month, the best performing names in order of returns are PLAY (+47%), RUTH (+33%), RRGB (+30%), and CAKE (+19%). All of these names are still down YTD. I would be very skeptical of playing the long side of these names from here.
BLACK BOX WEEKLY SALES
For the week ending October 25, YoY SSS saw no improvement compared to previous weeks. The decline in SSS speaks to a sales recovery that has significantly slowed in October. A driving factor behind the slowdown may be the spike in COVID-19 cases, which started trending up again around the same time frame in October. SSS and traffic during the week were the second-worst results in the last six weeks. Dine-in sales growth likely stopped helping as dine-in sales growth flattened since mid-September and has not seen much improvement since. Although still growing at historically high rates for full-service restaurants, off-premise sales have continued to taper off slowly. After seeing dine-in sales growth improve steadily since April, the last six weeks have begun to show the upward momentum slowing for limited-service restaurants. Off-premise sales growth remains high for limited-service and continues to be a key driver of its success. All regions of the country experienced negative comp sales growth during the week.
The Southeast, Southwest, the Western region, and Mountain Plains were the country's best-performing regions. The most significant sales declines were California, New England, New York-New Jersey, and the Midwest.
BLACK BOX OCTOBER SALES
October was the best month for restaurant same-store sales growth since February; however, as Black Box notes, "the biggest headline of the month is how much the recovery slowed down."
In October, same-store sales declined -7.5%, which represented a 0.6% improvement from September. By contrast, same-store sales improved, on average 3.6% during each of the months between July and September. October's same-store traffic declined -13.7% and was also the best result for the industry since February but represented a modest 0.8% improvement over September. Black Box noted that "as the number of COVID-19 cases started rising in many areas of the country and concerns that a new wave of infections expansions of dine-in capacity has slowed." October may be a sign of things to come as we head into the seasonally slower winter quarters.
CAKE
One concern for CAKE would be increased costs against the backdrop of slowing sales trends and estimates that now look aggressive.
In particular, in the CAKE 10-Q for FY20 Q3, the company said, "we called back to work a majority of our staff members who were previously furloughed, and restored Board, executive, and corporate support staff compensation. In addition, we resumed new unit development on a limited basis. We will continue to evaluate the pace and quantity of new unit development as more clarity on the restaurant industry operating environment emerges."
We now have some clarity for the balance of 2020!
Was this move by CAKE premature given the current backdrop of California Gov. Gavin Newsom on Monday ordered widespread closures of indoor operations as the state faces its fastest surge in cases since the COVID-19 pandemic began, pulling what he called the "emergency brake" on 94% of residents? Newsom said he was compelled to act by a case surge that is "simply without precedent in California's pandemic history." California's daily cases have doubled in the past ten days, with topping 9,890 on Sunday, the state reported Monday. "This is simply the fastest increase California has seen since the beginning of this pandemic," Newsom said during a press briefing. That has led Newsom to accelerate the stay-at-home process, ensuring 41 of California's 58 counties will have to shut churches, indoor dining, and gyms until the state deems them safe for operation. That includes most of the state's heavily populated counties, including most of the San Francisco Bay Area that previously had forestalled the same coronavirus spread seen elsewhere. The restrictions will impact more than 95% of the state's restaurants. We think it is premature to call a recovery in these names when the business models are challenged, and the general population will not be vaccinated for the better part of six months.
PLAY
I don't think PLAY will ever recover unless it does something radical, like changing its business model into a virtual sportsbook. I have chatted with the GLL team that has produced a Sports Betting Black Book on the subject in early October, and right now, that seems unlikely. The conclusion was, "Barstool/PENN might be looking at doing “virtual sportsbooks” where they partner with a bar or restaurant and set up iPads and sign-up stations and grow the brand. PENN seems more interested in setting up a nightlife angle, too, so not sure it applies to some of your names like PLAY, but who knows. Keep in mind that – NJ, PA, NV, IA, CO, IN, IL, NH, VA, and MI are the only states with online sports betting right now. Online (phone, desktop, or tablet betting) needs to be legal for this to work." For this to work for PLAY, TX would need to join this list.
Like CAKE, the recovery in same-store sales looks to be fully factored in, and the 2Q21E estimate looks crazy.
Our updated position monitor:
