The governors in many states have approved the partial reopening of restaurants, offering help to a once-booming industry brought to its knees by the coronavirus pandemic. The return of the customers and employees of having to deal with new social distancing and sanitation rules, but the lightest of restrictions should go a long way to relieve the anxiety and stress generated by weeks of enforced quarantine and stay-at-home orders.
So, now is the time to buy shares of publicly traded companies, restaurant chains? Unfortunately, there is no simple answer, because these operations will continue to face headwinds, which vary from place to location and chain chain. To begin, re-openings are unlikely to signal a return to normal business income, because, as polls indicate, over half of the U.s. population plans to avoid these places until there is a vaccine.
Due To Contrary Winds
In addition, the reduction of seating capacity to undermine a return to profitability at the same time that the owners are trying to rebuild their damaged balance sheets. It is less of a problem for large companies with unlimited access to credit markets than small operations that now have to repay the government loans in addition to payroll, rent, and inventory. The public channels have also better access to the pick-up and delivery services, all of which have fuelled the income from production stoppages began in March.
A sharp rise in bankruptcies seems inevitable at this point, but a publicly traded chains such as Mcdonald’s Corporation (MCD) and Yum!!! Brands, Inc. (YUM) are in a better position than the mom-and-pop restaurants. It is a different story for the regional channels, such as Ruth Hospitality Group, Inc. (RUTH), who got caught with his hand in the cookie jar, taking small business loans for restaurants. He has since returned the cash, but the attempt confirmed that these channels are running into liquidity problems.
The demographic data also have an impact on the future prospects of the group since the consumption and travel patterns for people over 50 are likely to change, much more than those under 50 years of age. While young people are generally healthier and can withstand COVID infection without major trauma, older people are more at risk for life-threatening results, increasing the chances that they will continue aggressive social distancing long after the politicians to lift restrictions.
Similarly, encouraging signs are emerging. The Cheesecake Factory Incorporated (CAKE) made disturbing headlines in March, after having confirmed that the string does not have the capital needed to pay the April rent at 294 locations. It has received an amount of $ 200 million strategic investment from a hedge fund in mid-April, in exchange for a seat on the board, strengthening the company’s liquidity outlook just before the governors began to speak of the closure restrictions.
Last night, Cheesecake Factory reported a 12% same-store sales are falling, but beat the first-quarter to 2020, the earnings estimates by a wide margin, with a $ 0.04 profit instead of waiting for a $0.30 loss. Revenue of $ 615 million marked a 2.6% year-on-year increase in spite of the shutdown, with over 200 sites offering take-out and delivery of services that has booked a lot higher than expected first quarter income.
The stock topped out at $67.14 in May 2017 and entered into a down trend found support in the upper $30 in September. A resumption of the wave in the second quarter of 2018, has posted a lower high near $60, before renewed selling pressure which was completed near 2017 low in August. The price action in March 2020 ended in a failure, has dropped to a 10-year low of $14.52. The rebound in the month of April failed to mount 50-day exponential moving average (EMA) resistance in the lower $20, while the distribution sets new resistance in the upper $30.
The balance volume (OBV), the accumulation-distribution indicator reveals heavy bottom fishing and the value of hunting since the end of March, the lifting of course the highest since July 2018, despite the seemingly bearish price pattern. The stock is running up about $20 after last night’s earnings report, but was not able to find her way back to April of the resistance and get out, head in a more formidable barrier in the upper $30.
The Bottom Line
A publicly traded restaurant chains are showing signs of sagging, but the industry will continue to face stiff headwinds for the rest of 2020.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.