When I first decided to compare fast-food giant McDonald's (NYSE:MCD) to the smaller and more beaten-up casual eatery BJ's Restaurants (NASDAQ:BJRI), my initial assumption was that the Golden Arches would win, hands-down. I mean, how could BJ's, with its old-school sit-down restaurants barely generating any business in the current environment, compete against a McDonald's that's already built to serve people to-go style?
And that's before acknowledging the fact that casual chains have lost appeal -- and market share -- to fast-casual and newer restaurant concepts over the past decade. But when you start to pull back the layers, there's actually a lot to like about BJ's, so long as you understand the risk profile. So which is the better buy? In short, both have something for investors to consider, but it boils down to what you're looking for. Keep reading to learn more.
How have sales held up?
Since stay-at-home orders started going into effect in March, both restaurant chains have seen sales fall sharply. But the McDonald's model is already built to operate in the social-distancing reality.
Same-restaurant sales were up 7.2% in January and February at McDonald's, but it ended the quarter with revenue down 6% by the time March was over. But over 95% of U.S. locations have drive-throughs, and "essentially all" of them are open. On the international front, it's been harder, with many countries requiring mandatory closures of all restaurants. But as things begin to reopen, the U.S. offers a benchmark. CFO Kevin Ozan said on the first-quarter earnings call that U.S. comps are expected to be down about 20% in April. Sure, a 20% drop in sales doesn't sound great, but in the midst of a complete lockdown of the U.S. economy that's put 30 million Americans out of work in a matter of weeks, it's a pretty amazing accomplishment.
That's particularly true when you compare it to BJ's, a restaurant concept that's built to attract eaters to come in and enjoy their meal in your dining room. For the jury's consideration: BJ's counted on take-away orders for about only 10% of sales before the coronavirus crisis. It wasn't exactly a priority.
As a result, BJ's has seen its sales crater. Sales for the last week of March were down 82%, and that's with 205 of the 209 restaurants remaining open, and the chain is blowing through cash at a very high rate. Even with some states starting to allow restaurants to open their doors with limited seating, the chain needs to more than double its recent average sales rates to reach cash-flow breakeven, according to Ozan: "[W]e believe our average weekly sales levels needed to reach needed to reach about $65,000 per week to attain positive cash flow for the company, including corporate costs and current levels of capex spend. We were averaging about $30,000 per week before starting to reopen our dining rooms."
McDonald's comes out way ahead here. Its sales have fallen sharply, but BJ's simply can't survive on to-go food sales. The chain needs to get restaurants open to drive enough business just to make ends meet.
What about the balance sheet?
McDonald's not only has almost $5.4 billion in cash in the bank at quarter-end, but its operations are also expected to be cash-flow positive for most of the year, so it's not really a fair comparison, particularly since BJ's said it needs to more than double its recent sales run rate just to get breakeven on a cash flows basis.
So instead of a raw comparison, let's look at how much breathing room the balance sheet gives at BJ's it before it would run out of money. The company said it had $134 million of cash and equivalents as of May 7, after tapping the remaining limit on its line of credit and reaching a deal to sell $70 million in stock. It also worked with lenders to modify the terms of its credit agreements, a move that will reduce the risk of defaulting on debt covenants.
Based on the cash balance and management's comments about current sales levels and where sales need to be to break even on cash flows, it looks like BJ's has enough money to make it 20-30 weeks at recent sales levels. The good thing is its sales results have been steadily moving higher, reducing its cash burn rate. And with more states planning to allow restaurants limited dine-in capacity in the weeks ahead, it's reasonable to project BJ's should be able to get to cash breakeven sales levels well before it runs out of money.
Again, McDonald's is the clear winner. But does BJ's have enough liquidity to buy time to get sales back to a breakeven level? I think the answer is yes.
Which is the better buy? Depends on your objectives
Let's make no bones about it: For most investors, buying McDonald's stock would be the safer move. Its business has held up much better, and with more of the world allowing restaurants to open up for business, it's better positioned to recover most of its sales sooner rather than later. Such are the benefits of selling low-cost fast food that people just as readily take away as eat in your dining room. That should allow the company to continue paying its dividend, yielding over 2.6% at recent prices.
BJ's, on the other hand, isn't built for this. With to-go food making up only 10% of sales heading into the coronavirus crisis, the company has had to adapt quickly just to survive, and it's still a race against time before it runs out of cash. That means for now a dividend is off the table, and investors in the company are taking a risk that it can get to breakeven without having to take on more debt or sell more stock, and assuming lenders will continue to be patient.
Yet the upside is apparent. At recent prices, BJ's stock is down more than half from the 2020 peak, versus McDonald's at 17% below the 2020 high. Investors have run from BJ's on the risk it runs out of capital before business recovers, while investors have stayed with McDonald's and its more dependable revenues and dividend.
So the better buy is up to you. Investors looking for certainty and lower risk of permanent losses should avoid BJ's and buy McDonald's. If it's a risk-reward investment with capital you can afford to lose, BJ's gets the nod.