Just as we pointed out last week with retailers, restaurants have a similar “adapt or die” feeling among them.
Americans love going to restaurants. It’s about the experience and the ambiance.
In fact, the foodservice industry employs 10% of the U.S. workforce. And in May, restaurant employment fell to the lowest level since 1989.
Most states still have some kind of restriction on restaurant capacity. Just south of our office, I witnessed lines of people on the sidewalks of Delray, Fla. waiting to get into different restaurants.
The first round of PPP (Paycheck Protection Program) may have gotten thousands of restaurants through the spring shutdown. But with all the restrictions, they are still hurting.
Many people can’t justify eating out without the experience of sitting and eating in a restaurant. And under the Senate Heals Act, 55% of restaurants won’t even be eligible for aid … including some that are facing bankruptcy.
It’s not just small names that are facing this dire situation. Already Bar Louie, Souplantation/Sweet Tomatoes, California Pizza Kitchen, TooJay’s and NPC International (a large Pizza Hut/Wendy’s franchisee) have all filed for bankruptcy.
With just over four months left in the year, that list is certainly not complete. Industry wide sales are recovering… however, it’s still not looking that good.
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But some management teams are looking to the bright side of the coronavirus pandemic. For those that see the other side of the tunnel, there will be prime real estate locations that were previously unavailable.
The theory is that the coronavirus didn’t put these companies out of business, but instead accelerated the inevitable for many businesses.
So, as always, I checked in with the Weiss Ratings to see which companies made the grade … and which companies didn’t.
Our highest rated restaurant stock is Domino’s Pizza, Inc. (NYSE: DPZ, Rated “B”).
What started as a single store in 1960 is now a global enterprise with more than 17,100 stores in over 90 markets. Just a few weeks ago, it opened its first franchise in Croatia.
Domino’s might not have known it at the time, but it was perfectly set up to take on the coronavirus landscape. It has a straightforward model: handcrafted quality food at a competitive price with easy ordering and efficient service.
It was actually the first to offer mobile ordering and pizza tracking. If you’ve never used the app, it shows exactly what process your pizza is in until it ends up at your door. Plus, Domino’s store locations are selected based on the best delivery routes to optimize efficiency and customer satisfaction.
But that’s not why it’s outperforming its competitors. The secret to its success is that Domino’s was already optimized for delivery and takeout.
The last time I was in a Domino’s, there were only two seats at a little bar area where you could watch them prepare the pizzas. So, it’s not surprising that it didn’t lose a huge chunk of dine-in revenue, as most restaurants did.
This meant that very little adaptation was needed to handle contactless delivery, while other restaurants scrambled to set up their online presence. On top of that, Domino’s was able to avoid the high fees charged by delivery services like Doordash and UberEats.
And their success is making its way into the numbers.
For the first half of the fiscal year 2020, net income was $240.3 million. That was up almost 30% when compared to the first half of 2019. Diluted EPS was up 36% when compared.
More important than how they performed in the first half of the year is where they see themselves going in the second half. The company recently announced that it is looking to fill more than 20,000 positions. That’s incredible when most places are laying people off right and left.
And investors are taking notice.
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Shares are up 40.2% since the beginning of the year and 77% since over a year ago. Investors are being paid to own those shares, too. Domino’s is still paying out its dividend of 78 cents at the end of September.
The company definitely deserves its high rating.
Our runner up, Wingstop Inc. (Nasdaq: WING, Rated “B”), proudly proclaims it’s not in the wing business, but rather the flavor business. With over 1,385 global locations and 26 years of same-store sales growth, it’s quite clear why it has such a high rating.
Shares are up 88.5% since the beginning of the year. And while many companies are cutting dividends completely, Wingstop went ahead with its dividend increase and will pay 14 cents to shareholders in September.
Those two are the only ones that made it in the “A”/“B” range — ratings which indicate a “buy”. Close trailers are McDonald’s Corp. (NYSE: MCD, Rated “C+”), Yum! Brands (NYSE: YUM, Rated “C”), which not only owns Pizza Hut, but also KFC and Taco Bell. Those “C”-range ratings signify a “hold” order. While not suffering, neither company is outperforming in this market compared to Domino’s and Wingstop.
How about the bottom of the list?
Potbelly Corporation (Nasdaq: PBPB, Rated “D-”), Red Robin Gourmet Burgers, Inc. (Nasdaq: RRGB, Rated “D-”) and Fiesta Restaurant Group, Inc. (Nasdaq: FRGI, Rated “D-”), which is the parent company of Pollo Tropical and Taco Cabana, round out the losers.
It’s no surprise, either. Their business models are more dependent on in-store dining. Prior to the pandemic, that likely would have led to a slow decline as food delivery and online ordering became more popular. Now, though, lacking an online presence is a death knoll.
Across the board, the coronavirus is widening the gap in industries. The weak are failing faster than they would have and the strong are proving why they belong at the top.
Using the Weiss Ratings can make sure that you are investing in the right side of that trend.
Best wishes,
Kelly Green
