The restaurant industry hasn't had an easy time of it during the pandemic, first having to rely upon takeout and delivery to survive, then in many places having to adapt to using largely (or solely) outdoor seating for on-premises service.
Yet as winter's chill settles over much of the U.S., most customers are losing their appetite for outdoor dining, and restaurants will have to make do with sharply limited indoor seating capacity. How well various chains will cope under these conditions is unclear, making this a difficult consumer discretionary sector to gauge.
However, in my view, these restaurant companies ought to do well regardless.
Arcos Dorados (NYSE:ARCO) is the world's largest franchisee of McDonald's (NYSE:MCD) restaurants, operating more than 2,200 locations across 20 countries in Latin America. That region, too, has been hit hard by the coronavirus pandemic, and between March and April, half of Arcos Dorados' locations were completely shut down.
Since then, it has been able to reopen almost all of them to some extent. Yet the region is still beseiged by the virus. The respected medical journal The Lancet last month published an article deeming the COVID-19 outbreak in Latin America a "humanitarian crisis," and pointing out that death rates from the coronavirus there are among the highest in the world.
With that as a backdrop, Arcos Dorados stock remains 37% below where it traded before the pandemic was declared, and though it has bounced off its 2020 lows, it has been fairly range-bound between $4 and $5 a share for most of the year.
There's reason to hope it can break out of this pattern soon. It has at least one sales channel -- drive-thru, delivery, or takeout -- available in 95% of its restaurants. In Brazil, where close to half of its restaurants are located, sales tumbled by 40% in the last nine months and adjusted EBITDA plunged by 70% -- but it remains a profitable market.
Arcos Dorados has the financial flexibility to survive. It has negligible amounts of short-term debt coming due, $771 million in long-term debt, and $136.5 million in cash. The hard part will be waiting for this health crisis to be resolved, but with effective vaccines soon to be deployed, normalcy should return soon enough. And at around $5 a share, Arcos Dorados is an attractive stock to consider.
The same forces of value, menu changes, and off-premise sales that have helped maintain Cracker Barrel (NASDAQ:CBRL) for the past few years are the ones driving the restaurant operator during the pandemic.
In the earnings report it delivered last week for its fiscal 2021 first quarter, which ended Oct. 30, Cracker Barrel said comparable-restaurant sales were down more than 16%, while retail sales were off by 8%. However, that was a marked improvement from its fiscal fourth quarter, when comparable-restaurant and retail sales fell 39% and 32%, respectively.
Those relative improvements were driven by a strong off-premise business. Revenues from such sales now represent 25% of its total, up from 9% last year.
That's key, because Cracker Barrel sees its fiscal second quarter as an important period for the off-premise business. It's attempting to adapt to the different ways people will be celebrating the holidays this year -- rolling out catering options for families planning on more intimate gatherings than usual. For example, its popular Heat n' Serve Feasts are made to feed up to 10 people; the company has begun offering a smaller version intended for up to six.
"Our redesigned menu reinforces our strong value proposition and underscores our variety that we're known for," Cracker Barrel CEO Sandra Cochran said during the earnings conference call.
Investors seem happy with the direction the company is heading, and rejected for the fifth consecutive time an attempt by activist investor Sardar Bigalari to gain a seat on the board of directors.
Cracker Barrel stock is up 170% from its March low but remains 15% below its 52-week high. With a business that's getting back on track despite the pandemic, investors can expect further growth from this restaurant operator in the quarters to come.