In a follow-up to our previous Restaurant sector write-up we identify off-premise sales growth as an interesting variable to track. Takeout and delivery channels have been the primary focus for most restaurant companies as they attempt to minimize cash burn rates. BJ’s Restaurants (ticker: BJRI) is one interesting case study we explore in detail.

Doug DeMuth
May 11, 2020

Restaurants – The Present and Future Story

Restaurants – The Present and Future Story

In our March 18 blog post titled, Restaurants – A Story Overshadowed by "The Story," we discussed how COVID-19 had derailed what was an improving margin story in the Restaurant sector in early 2020. The thinking was that these strong trends would likely re-emerge as the economy began its recovery. The below chart appeared in our last restaurant post, and represented our findings just as the coronavirus was hitting financial markets in earnest:

Restaurant Margin Commentary as of March 18

A Follow-Up on Restaurants

Admittedly, at the time of our previous restaurant post the positive trends seemed much more relevant than they do now. Nonetheless, we wanted to verify what the Amenity Coronavirus Tracker told us at the time. While it is difficult to keep with the theme of margin improvement given the COVID-19 disruption, we did find positive commentary regarding pre-coronavirus sales trends:

Cheesecake Factory Press Release, April 6, 2020
First quarter fiscal 2020 comparable restaurant sales at The Cheesecake Factory restaurants are expected to be down approximately 13%.These results reflect quarter-to-date through February comparable sales growth of approximately 3%...
David Hoffman, CEO of Dunkin Brands - Earnings Call Transcript, April 30, 2020
For the full quarter, Dunkin' U.S. comparable store sales were down 2% versus the prior year. The rapid onset of COVID reversed strong momentum across the system that kick-started the year. During the first 10 weeks of the quarter, Dunkin' U.S. had 3.5% comparable store sales, on track to deliver the highest quarterly comp since Q3 of 2013.
Wyman Roberts, CEO of Brinker International - Earnings Call Transcript, April 29, 2020
Third quarter started out strong and was shaping up to be another great quarter for Brinker. If circumstances had remained normal, we'd be marking our eighth consecutive quarter of comp sales growth and a KNAPP-TRACK category beat of 2% to 3%...

While disclosure on margins previous to COVID-19's impact is limited, we presume that the story was intact for companies like those above, as positive comparable sales growth generally drives margin improvement. And in some cases, margins were addressed more directly:

David Overton, Chairman & CEO of The Cheesecake Factory - Earnings Call Transcript, May 5, 2020
I'd like to share some pre-COVID-19 business highlights as our first quarter was off to a very strong start before the onset of the virus. Cheesecake Factory comp store sales growth was both ahead of plan and outperforming the broader casual dining industry, which drove solid restaurant-level margin results through February.

Amenity’s NLP toolbox had led us in the proper direction by highlighting anticipated margin improvements… that is, until the world changed.

Back to the Present… and Future

The focus for restaurant operators has shifted to survival mode, which has meant shedding employees and raising capital to bridge the gap between now and some degree of normalcy.  For Amenity, the most interesting variable to track has been off-premise sales growth.  The takeout and delivery channels have been the primary focus for most restaurant companies as they attempt to minimize cash burn rates.

BJ’s Restaurants (ticker: BJRI) is an interesting case study in that it relies heavily on its brewery / bar operations – only 10% of its sales were off-premise prior to COVID-19, which was at the low end of the range for the industry.  They quickly pivoted to a takeout model and raised capital from an investment group that included Ron Shaich, founder of Panera Bread.  Their recent successes and remaining challenges were addressed on their May 7 earnings conference call:

Gregory Trojan, CEO of BJ's Restaurants - Earnings Call Transcript, May 7, 2020
Through our operations' leadership and the hard work and problem-solving creativity of our restaurant teams, we have been able to keep all but 4 of our 209 restaurants operating to date. And the sales volumes of our off-premise business have nearly tripled since the start of the crisis to approximately $31,800.

As BJRI quickly reduced its cost structure in reaction to the business conditions, the company was able to cut its burn rate to $2.5mm per week. While off-premise sales growth has stalled since the initial burst, BJRI has reopened locations in some states, albeit with limited capacity:

Gregory Trojan, CEO of BJ's Restaurants - Earnings Call Transcript, May 7, 2020
While it's less than a full week since Texas reopened its dining rooms at only 25% capacity, our dine-in sales in Texas are adding roughly 20,500 of additional weekly sales. As more dining rooms reopen, permitted capacities grow and we expand our menu closer to our pre-COVID offerings…

However, opening restaurants with these capacity constraints does not alter the cash flow situation:

Gregory Trojan, CEO of BJ's Restaurants - Earnings Call Transcript, May 7, 2020
I previously mentioned that we're running about negative $2.5 million per week prior to dining room openings. Initially, we don't think dining rooms limited to 25% capacity will improve that run rate and in fact, may put some near-term pressure on that level as the cost involved in safely opening are significant. However, we're confident we will see steady improvement as effective capacities grow to 50% and beyond.

This was reinforced by Trojan in the Q&A section of the call, where he addressed the burn rate in response to an analyst question:

Gregory Trojan, CEO of BJ's Restaurants - Earnings Call Transcript, May 7, 2020
...don't expect us to convert to a wildly different burn rate immediately based upon that sales increase because of the cost of, really, the incremental cost of opening at those volumes, right? It's still only $20,000 a week, right? So -- and the cost of the supplies, et cetera, is not going to wildly change the $2.5 million burn rate until that number grows.

Final Thoughts

The next hurdle for BJ’s Restaurants is reaching operating cash flow break-even.  While it’s only been one week, dine-in sales at Texas stores open at 25% capacity hit levels equal to roughly 20% of pre-COVID levels.  The addition of dine-in sales to their increased off-premise business has resulted in reopened stores generating revenue equal to roughly half of normal.  Management believes it has achieved weekly sales within $10k of the level required for break-even at these recently opened locations.

While this gives us a good insight into the company’s fixed vs. variable cost structure, it remains uncertain as to how soon this required revenue level can be met.  Are those who have undertaken in-store visits part of an intrepid minority, akin to tech early adopters?  A larger question may be what happens to current off-premise sales as dine-in traffic (presumably) comes back.

Obviously, the coronavirus has changed consumer habits drastically in the short-term, but the degree to which that sticks over time remains highly uncertain.  Restaurant company management teams acted swiftly and effectively, but there is a limit to what they can do in the face of precipitous revenue declines.  The stocks are well off their bottoms and have already discounted some degree of expected improvement, but a full recovery is far from being priced-in to most names.  We will keep on top of the group and share any incremental findings as they come.

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About Amenity

Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.

This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.

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