Saleh pegged casual-dining leader Texas Roadhouse as the best in its category to weather the COVID-19 storm. While difficult to estimate the dine-in ban timeline, Saleh believes we could be looking at several months or quarters until a vaccine and/or therapeutic remedy is readily available. Texas Roadhouse has some $300MM in available cash and $500MM worth of land, as well as very low financial leverage (0.5x). It also has the ability to increase its available credit facility, Saleh said, leading to its position of surviving at least through the summer without further financial assistance.
Also, in the past, Texas Roadhouse only offered dinner, with most locations opening around 4 p.m. Given recent dining-room closures, the company shifted operating hours to offer lunch, however, opening at noon and closing at 8 p.m. So, although all of these sales are for take-out, Saleh said, the ability to offer a new daypart should enable Texas Roadhouse to offset some of the sales declines it endured in the p.m. hours. Additionally, Saleh said, the chain could gain share from many independents when the industry exits this period of social distancing. He added he would not be surprised if Texas Roadhouse continues to offer lunch for an extended period to recoup some lost sales.
On the quick-service side, Saleh said, brands like Wendy’s that can expand into new dayparts (breakfast in this case) would be wise to do so. What was once an incremental goal, can now turn into a much-needed source of revenue. Consider late-night, drive-thru business if possible (and not offered before). Saleh also suggested Chipotle has the potential to expand into breakfast, leveraging its existing asset base and helping pay employees along the way.
About potential relief
Despite the many hurdles and issues to address, it’s a sure-fire bet many franchisees and restaurants will qualify for small business loans/grants under the CARES Act. Saleh said the bill stands to benefit the quick-service sector, which is already better off than casual dining given its drive-thru footprint and “essential” business designation that comes with higher franchise mix.
The new legislation enables restaurants, foodservice, caterers, and hotels that employ no more than 500 people per physical location of the business to receive a single loan for the lesser of 2.5 times their monthly payroll, or $10 million. These funds can be converted into grants (forgiven loans) if franchisees use the funds for payroll, rent or utilities. This is a complex and evolving situation, though, as the Association pointed out this week.
Saleh said he expects nearly all quick-service operators to tap this fund to increase liquidity, but the net beneficiaries of this capital will be concepts with healthy sales during COVID-19. For instance, in the case of Papa John’s franchisees, the assistance could represent nearly three times the royalty relief operators received over the past year (about $15,000) to offset sales declines stemming from negative publicity. “While this assistance didn’t completely stop unit closures, it aided franchisee cash flows enough to prevent more widespread closures. We expect Papa John’s franchisees to hire more drivers and use funds from the CARE Act to pay these employees,” Saleh said.
Here’s a look at how pizza chains are faring already.
Saleh estimates franchisees will be eligible to borrow between $45,000 to $50,000 per store and eventually turn this debt into a grant, or free money. Again, though, there are many elements to take into account, as the first link in the relief category explores.
Saleh noted franchisees tend to be more credit-worthy than independent operators as well. This dynamic, coupled with royalty relief, advertising contribution, and rent abatements, could considerably strengthen franchisees' financial position during this period of economic turbulence, Saleh said.
Another point, and one that’s already playing out across the chain lexicon: Many companies have halted construction of new restaurants, paused non-essential capital investments, and deferred some maintenance pending. This led, Saleh said, to a precipitous decline in construction costs.
Given the long lead times on permitting and construction, he predicts capital spending to plummet in 2020 and remain depressed in 2021 as companies with higher leverage prioritize debt repayment over new unit growth.
In all, this is going to be a very different universe for restaurant operators to navigate in the near future. And it’s an impact that won’t fade anytime soon.