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1 in 4 Restaurants Could Die This Summer

By Rick Munarriz – May 17, 2020 at 4:00PM

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It's not just dining customers asking for the check these days. Many indie operators and a few established chains may buckle in this COVID-19 environment.

There have been harder hit industries than restaurants, especially those with active takeout and delivery angles to keep serving customers during the shelter-in-place phase of this pandemic. However, the casualty rate among eateries will be high in the coming months. 

Reservations specialist OpenTable put out a sobering forecast last week, predicting that one in every four U.S. restaurants will not reopen as a result of the pandemic-fueled quarantines.

OpenTable books tables at trendy independent eateries, so it's not necessarily representative of how the major publicly traded chains will fare during the shutdown. It's hard not to see many established chains going down here. We've already seen salad buffet concept Sweet Tomatoes throw in its croutons, and other well-known concepts will inevitably follow suit. 

Investors can't afford to be in some of the risky names here. Let's take a closer look at some of the restaurant stocks that will survive and possibly even thrive in this tricky climate. 

A server delivering food to a table of very happy and appreciative customers.

Image source: Getty Images.

Study the menu before placing an order

It's not easy running a restaurant these days, and it won't be business as usual anytime soon. Even the states that have allowed restaurants to reopen have done so with social distancing measures that limit capacity. Tack on the extra sanitation equipment and labor costs, and you have an industry going through a margin crunch -- and we still haven't seen the impact of the inevitable recession.

A record 20.5 million people lost their jobs last month, and ordering takeout is a luxury when money's tight. Thankfully the trends have gotten better instead of worse since the crisis began. Shake Shack (SHAK -2.00%) broke down how weekly sales have played out since the crisis started earlier this month through late April in its quarterly report this week. The comps are scary, but the trend is encouraging.   

Comps for the week ending:

  • March 11-(10%)
  • March 18-(46%)
  • March 25-(73%)
  • April 1-(72%)
  • April 8-(69%)
  • April 15-(64%)
  • April 22-(50%) 
  • April 29-(45%)

It wasn't until March 16 that Shake Shack shut down the dining room at all of its locations, limiting its business to customer takeout orders and third-party delivery apps. The first full week of this new normal saw the chain's comparable-store sales plummet 73% pitted against the same week a year earlier. Shake Shack has gone on to improve every week to a 45% year-over-year decline by the final full week of April. A company losing nearly half of its sales may not seem very applause worthy, but it's refreshing to see weekly improvement despite a lack of in-eatery dining. 

The rub for Shake Shack is that it was smarting even before the coronavirus-fueled shutdown. Comps were negative dating back to late last year when there wasn't a COVID-19 fear in sight. If you're going to invest in restaurant stocks you may as well pick the chains that were rolling ahead of the country hitting the pause button, as they're the ones that will likely be the quickest to bounce back.

Two months ago I took a look at three stocks built to last the coronavirus outbreak. I singled out Chipotle Mexican Grill (CMG -4.96%), McDonald's (MCD -1.69%), and Domino's Pizza (DPZ -1.01%) as publicly traded chains that are well positioned to lead the way for the industry.

The three stocks have averaged a 55% return since the March 18 article, even if that's mostly Chipotle more than doubling in that time delivering a 109% return. Chipotle was clocking in with monster comps growth through February, but store-level sales only declined 16% in March. A well-timed push into digital orders has helped keep the malaise in check. 

Domino's stock has risen 30% in the past two months. Pizza delivery chains haven't skipped a beat. They are built for the new normal. There are no dining rooms to manage, and in Domino's case 70% of its sales were already coming in digitally. Domino's posted positive comps in the first quarter, stretching its streak of same-store sales growth to 105 quarters internationally and 36 quarters in the U.S. market. 

McDonald's has been the weakest of the three stocks, but even its shares have come through with a 27% increase in that time. Comps wound up declining just 13.4% for its U.S. stores in March. Things were significantly worse internationally, with comps off nearly 35% due to not being as far along with its mobile ordering and delivery apps as it is on its home turf.  

Chipotle, McDonald's, and Domino's get it. This is a scary time to be investing in restaurant stocks, but some concepts are better positioned to survive the calamity and come out ahead in the end.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

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