It's no secret the COVID-19 pandemic created chaos on Wall Street, as investors grapple with the economic fallout. Among the hardest-hit sectors is the restaurant industry. Around the world, restaurants are promoting social distancing by closing dining rooms and shifting to a completely off-premise operating model. But this has caused sales to plummet, and restaurant stocks have been hammered.
Among the worst hit is BJ's Restaurants (NASDAQ:BJRI). As of April 9, its stock is down 65% from 52-week highs. Although it's also worth noting that if you bought shares at the bottom on March 18, you're already up 200%.
Clearly, it was an eventful month for BJ's Restaurants stock. But looking ahead, investors want to know if the shares are a buy right now.
Can it survive this storm?
At the risk of sounding bombastic, we must ask if BJ's Restaurants can survive the current economic crisis. The question is justified. Consider that privately held CraftWorks Holdings, the holding company of Logan's Roadhouse, recently filed for bankruptcy, according to Nation's Restaurant News. Granted, it was struggling prior to the coronavirus. But with 338 locations across CraftWorks' portfolio of restaurant chains, it's clear that even casual-dining chains the size of BJ's are susceptible to the fallout from COVID-19.
BJ's Restaurants is in a challenging situation. For proof, look at management's decisions over the past month. It has completely drawn down its $250 million line of credit, deferred its dividend payments, delayed or outright canceled new restaurant openings, temporarily laid off 16,000 employees (around 70% of its workforce), and suspended April's rent payments. The company is experiencing a cash crunch, and it's preserving liquidity by all means necessary.
Some restaurant companies are built to handle a completely off-premise business model. BJ's Restaurants is not. Exact numbers aren't broken out, but in the fourth-quarter earnings call, CFO Greg Levin said off-premise sales were about 10% of total sales. Management says off-premise sales are currently up comparatively, but the company is likely generating a fraction of the total revenue it had just a couple of months ago.
In a recent Securities and Exchange Commission filing, BJ's management said if all 209 restaurants closed completely, it would still burn through $5 million per week when including expenses like retaining store managers. As of March 23, having fully withdrawn its credit, it had $95 million in cash, allowing it to survive 19 weeks in a zero-revenue situation.
Since BJ's is still generating some revenue through carry out and delivery options, it can stay afloat longer than that. But make no mistake: The sooner it can fully reopen, the better.
When sunnier days return
Despite how bad the COVID-19 pandemic is, I'm optimistic that BJ's will fully reopen before running out of cash. But that doesn't mean business will immediately return to pre-shutdown levels.
In 2019, BJ's had strong average unit volumes (AUVs, the annual sales per restaurant location) around $5.7 million. It's reasonable to expect that to drop in the quarters following a full reopening, as diners remain cautious about the lingering dangers of contracting COVID-19.
Here's why that matters. Restaurants have many fixed costs, like lease payments. Higher volume drives operating leverage and higher profits. If AUV falls, margins get squeezed. And BJ's was already having a hard time with margins. Prior to the pandemic, it was reinvesting cash flow into a kitchen redesign to increase efficiency, but it still wasn't enough to offset wage inflation.
Furthermore, coming out of this situation, BJ's will be highly leveraged and will want to deleverage as soon as possible. That means that cash dividends, share buybacks, and capital expenditures like new restaurant locations will likely remain on hold while the company repairs the balance sheet. The longer it remains closed now, the longer it will take to fix later. But fixing it later is the right choice.
So BJ's isn't likely to be in a position to return capital to shareholders for a time, and it won't be growing the top line via new restaurant openings. Consider that restaurant openings are the primary way this company grows revenue since comparable-restaurant sales growth is modest. Comps fell 0.7% in 2017, and then grew 5.3% and 1.1% in 2018 and 2019, respectively.
Is it a buy?
Given this is a stressed business with growth prospects on hold, I wouldn't buy shares of BJ's Restaurants today. That doesn't mean it's a bad company. Rather, it merely reflects the lingering impact the current shutdown will have. For now, I'd wait to see how long it keeps the dining rooms closed, to better assess how long it will take to dig itself out of this hole later.