As the restaurant industry attempts to slowly recover from the wide-ranging effects of the ongoing coronavirus pandemic, according to S&P Global Market Intelligence, the odds that a restaurant will default on its debt fell to 10% in July from 35% in April. For larger chains, performance and financial stability is almost where it was a year ago, with the odds of a publicly traded restaurant defaulting on its loans at 12% in August, compared with 8% a year prior.
But the good news of long-term industry recovery highlights the comparatively challenging times and precarious performances for smaller chains and independent restaurants, along with struggling categories like eatertainment and casual-dining chains.
According to S&P data, the largest publicly traded restaurant companies most likely to default on their loans are Dave & Buster’s Entertainment Inc. (16.1% probability of default), Bloomin’ Brands Inc. (13.2% probability of default), Denny’s Corp. (11.9%), The Cheesecake Factory (11.7%), and Dine Brands Global, Inc. (11.3%). But even though the casual-dining industry has struggled to recover, according to S&P, every single one of these brands has improved since the beginning of the pandemic. For example, in April Dave & Buster’s was 56% likely to default on its loans within a year.
“Nearly every big chain has done something to support its balance sheet,” James Rutherford, a vice president and research analyst at Stephens Inc., told S&P Global Market Intelligence. “The place I do see risk for default is going to be with franchisees.”
NPC International, one of the largest restaurant franchisees in the country and owner of Pizza Huts, Wendy’s locations and more in 30 states, filed for bankruptcy in July, citing increased labor and commodity costs.
The performance of some of the most vulnerable brands has faltered, like Dave & Buster’s, which reported a net loss of $43.5 million for its first quarter ended May 3, although some analysts believe that they could bounce back after the pandemic is under control.
“With many competing ‘eatertainment’ concepts still struggling to reopen, Dave & Buster’s appears poised to benefit from a more favorable competitive environment post-pandemic, following several years of pressure from the rapid expansion of myriad new concepts,” Sharon Zackfia, a William Blair analyst, said.
Meanwhile, Bloomin’ Brands has seen a significant sales bounce back with sales down as little as 4.2% in June after the casual-dining company began reopening the majority of its dining rooms. Bloomin’ attributes much of their bounce back to committing to not laying off or furloughing workers.
Despite the improvements, S&P maintains that restaurants are still among the hardest hit industries and that the future stability of restaurants depends on the stability of the consumer.
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