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Many companies have executed digital advances during the pandemic to help with customer engagement. Some might say digital strengthens the entire industry, possibly even casual dining? Most players have learned the benefit of leveraging this now critical platform that improves consumer access and serves as an effective marketing and potential labor savings tool. As the theory goes, the more guests order on your app, the more extensive the email database, the less you need to spend on costly TV ads. Can you keep engagement at high levels, though? In 2021, sales have softened versus January, but the looming sales surge as we exit March makes the current quarter more noise than usual.
Many stocks look extended versus traditional valuations but will likely return to a more normalized environment as we exit 2021. We are looking for companies with attractive growth characteristics and those companies with a combination of good earnings visibility and discounted valuations. The latter being very difficult to find. Combined with the lapping the pandemic, same-store sales are expected to accelerate meaningfully for last year's pandemic losers. Some valuations reflect significant optimism about the demand to come from the economic reopening and the potential structural changes mentioned above, but is it real? How long will the enthusiasm last? The risks on the horizon come after the stimulus/reopening fades and investors' potential to shift to companies that can sustain operating momentum in 2022 and beyond.
We have updated our LONG/SHORT list, as seen below. To this end, please note that we have eliminated the LONG/SHORT bias list and the name are ranked ordered by the best idea. We are reversing our LONG casual dining call moving all the names to the SHORT side. Many of the names in the casual dining space more than reflecting the re-opening euphoria. This call is 3-6 months early as we are focused on looking out to 2H21 when we lap the peak shut down and the challenges many of the weaker players will have to execute excess demand. The next 6 to 9 is a critical time for every restaurant company hit hard by the pandemic. Managing a business that will have 60-100% in same-store sales will not be easy, and some are likely to fall short of expectations. Some things to consider are:
- What are the currently expected staffing levels?
- Have you made the appropriate investment in staffing and recruiting?
- How do you ensure your supply chain is growing with the demand?
- Are they prepared for running the basic things that go on every day?
- There is currently a labor shortage in the restaurant industry, what does that mean for the weaker players?
The Restaurant MACRO will turn to headwinds in 2H21
- Will the federal min-wage look like Florida?
- What is the right tip wage?
- What if servers in tip credit states start making less income?
- Will the Biden Administration get a tax increase passed in 2H?
- The stimulus check will be spent and no more coming?
- Protein inflation will impact some.
- Are we headed for Quad 4 in 4Q21?
