As this latest earnings season begins, evaluating how various companies are dealing with the fallout from the coronavirus pandemic will be a priority. Concerns about spreading the disease have led to widespread stay-at-home orders, making the evaluation of restaurant companies on traditional metrics like total sales, same-store sales, and operating margin quite difficult.
This data won't really tell investors much about the company's real economic viability as it is likely they all have seen a marked decrease in volume in the last two months, despite the fact that several have continued to operate in some form. With a likely sharp drop in sales, year-over-year profitability and cash flow are not useful indicators right now.
The stocks for these companies have been hard hit recently, particularly casual dining establishments. But it is important to examine restaurants' earnings, even in these difficult times, to help track your investment or as part of your evaluation on possibly starting a new one. Fortunately, there is at least one metric that can help you figure out a restaurant company's sustainability and future growth prospects.
Delivery business: A key metric
With traditional dining-in service halted for most U.S. restaurants, the focus for the earnings success of a restaurant right now has turned to takeout and delivery services. There are even a few select restaurant chains that are also offering to deliver food that is all prepped and ready for the consumer to cook. Texas Roadhouse (TXRH 4.33%) is one such chain with select locations providing ready-to-grill steaks.
With companies relying on delivery and takeout to keep their businesses going for the moment, it makes sense to use this as a performance gauge. Given the relevance of the information right now, it seems likely the majority of restaurant companies will provide details on this data. If the company doesn't explicitly give the information, analysts will undoubtedly ask about it on the earnings call. If management is not forthcoming with the data, it is very difficult to evaluate the quarterly performance. In that case, I would look elsewhere for an investment option.
True, quarterly results will not be directly comparable to year-ago figures, but you can use them as an indicator of how well the business is holding up in a downturn. The larger the percentage increase in deliveries and takeout revenue, the better, even if it doesn't translate into profitability. If a restaurant was doing well before the coronavirus halted its eat-in business and customers have remained loyal during these times, it's an indication that they really like the food and will return to eat at the establishment when they're allowed.
Anecdotally, there have been reports that delivery companies like DoorDash and Uber Eats have seen an increase in business. Such services take a cut of the profits, but they do offer restaurants a lifeline during these trying times.
Balance sheets matter
Strong balance sheets make a restaurant more resilient to tough economic times. So you'll want to factor that into the equation before you consider making an investment. Examining basic debt levels is not enough. You also need to look at liquidity, which is cash on hand and how much the company can access through revolving credit lines. No doubt, restaurants are burning through cash even while cutting expenses, but you'd like to see a company that has enough resources readily accessible to get through these times. Investors have a wide range of choices when it comes to public company restaurant chains, ranging from fast-food, fast-casual, casual dining, and high-end establishments.
Some, like Domino's Pizza (DPZ 2.23%), have an established takeout business and had been pushing carry out prior to the coronavirus pandemic, giving it a benefit heading into its earnings report (which will be released Thursday, April 23). Another company, Darden Restaurants (DRI 3.35%), which runs the Olive Garden and LongHorn Steakhouse chains, recently provided an update that showed it had a tough quarter, but takeout orders accelerated based on the weekly breakdown it provided, and the stock was up 2.4% on the news. Not all these restaurant stocks will have the same performance or react the same way, but it does show the metric is useful right now.
Winnowing the strong from the weak is always challenging, now more than ever. However, you can turn to online orders as a measure to evaluate restaurant stocks' performance for the next couple of quarters.