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Dining out: Restaurant sales warm in September but lack heat of previous months

Sales at U.S. bars and restaurants in September continued to rebound from pandemic-induced drops earlier in the year, though the pace of growth remained slower than previous months.

Food services and drinking places also added jobs at a muted pace in September, portending that a more drawn-out recovery could be in store for the restaurant industry. The restaurant industry has seen different sectors fare better than others as companies focus on how best to operate in a changing environment.

Meanwhile, shares of most of the biggest publicly traded restaurants rose in the month ended Oct. 15.

Sales

Sales for food services and drinking places declined 14.4% from the year-ago period to a seasonally adjusted $55.60 billion, according to U.S. Census Bureau advance monthly estimates released Oct. 16. September's year-over-year food services and drinking sales decline was an improvement over August's 15.7% and July's 19.3% year over year decline.

All retail sales grew 5.4% from the year-ago period in September to $549.26 billion, which was better than the 3.8% year-over-year increase posted in September 2019.

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September's sales were up 2.1% from August's seasonally adjusted volume of $54.47 billion, which in normal times would represent a robust increase but was only about half the gains made in July and August in terms of both dollar volume and percentage, according to the National Restaurant Association. September eating and drinking place sales still remained nearly $10 billion, or 15%, below their pre-coronavirus levels in January and February, the trade group said.

The fact that overall consumer spending picked up in September as restaurant sales growth slowed suggests that many consumers may have shifted spending away from restaurants to other categories during the month, the National Restaurant Association said.

"If this trend continues in the months ahead, it likely means that the restaurant industry's recovery will be even more drawn out," the trade group said of September's slower growth in eating and drinking place sales compared with other retail categories like clothing stores and department stores.

Full-service restaurant August sales, the latest available, were down 25.1% from a year ago, following a 29.7% decline year over year in July said Jake Bartlett, a Truist Securities analyst, in an Oct. 16 report. Limited-service restaurant sales in August, meanwhile, were up 5% year over year after being up 0.4% from a year ago in July, Bartlett said.

The number of seated diners in the U.S. was down 40.3% on a year-over-year basis, the restaurant reservation platform OpenTable reported. That is higher than the worst days of the pandemic as states continue to slowly ease restrictions on seating capacity.

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Jobs

Food services and drinking places added 200,300 jobs in September for a total of 10 million jobs, which was 17.6% less than a year ago. The added jobs in September come after a downward-revised increase of 104,300 jobs in August, which means eating and drinking places staffing levels are still down 2.3 million jobs from February's peak, the National Restaurant Association said in an Oct. 2 report. The employment gains in August and September were only a fraction of the 3.5 million jobs added during the first three months coming out of the coronavirus lockdowns, the National Restaurant Association said.

"This recent slowdown represents additional evidence that the restaurant industry's return to pre-coronavirus employment levels will likely be measured in years and not months," the National Restaurant Association said in its Oct. 2 report.

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Share prices

Eleven of the 15 largest publicly traded U.S. restaurants posted stock gains in the month ended Oct. 15, according to S&P Global Market Intelligence. More broadly, the S&P Composite 1500 Restaurants subindex rose 3.3% and the S&P Composite 1500 index inched up 2.7%.

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Shares of The Wendy's Co. rose 13% for the month ended Oct. 15. The chain announced Oct. 7 it was offering new technology from The Coca-Cola Co. in its stores that enables touch-free, mobile pouring of beverages by letting guests scan a QR code with their smartphones. Wendy's on Sept. 1 announced plans to add a pretzel bacon pub cheeseburger to its menu, which has resonated with customers, said James Rutherford, a Stephens analyst, in an Oct. 13 report.

Shares of Cracker Barrel Old Country Store Inc. fell 8.5% in the month ended Oct. 15. The chain reported Sept. 15 that its fiscal fourth-quarter comparable-store restaurant sales decreased 39.2% from a year ago, below expectations of a 37.2% decline, according to S&P Capital IQ. Despite improvement with breakfast sales, this part of the day remains the most challenged for Cracker Barrel, and while outdoor seating has helped with capacity constraints, weather will be the deciding factor as to how long outdoor dining can mitigate some of the capacity headwinds, said Jeff Farmer, a Gordon Haskett Research Advisors analyst, in an Oct. 9 report.

Vulnerability

The odds publicly traded restaurant companies would default on their debts within a year changed little from the previous month.

An Oct. 15 analysis of the one-year probability of default scores identified 15 U.S. public restaurants with scores ranging from 22.4% to 8.7%, and corresponding implied credit scores of "ccc" to "ccc+," according to Market Intelligence data. By comparison, the same analysis done on Sept. 15 showed a similar range of 22.4% to 8.4%.

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The three public restaurant companies estimated most likely to default were the same ones with the same odds from the previous month's analysis. Potbelly Corporation again had a 22.4% chance it could default in the next 12 months. Brinker International Inc. had a 16.4% chance it could default in the next year, and Noodles & Company again had a 16.2% chance it could default. Potbelly and Brinker did not respond to requests for comment.

A Noodles & Company spokesperson referred a request for comment to the company's Oct. 1 release of its preliminary fiscal third-quarter results. The company reported systemwide comparable restaurant sales grew 0.4% for the five weeks ended Sept. 29 after declining 4.7% in the four weeks ended Aug. 25 and declining 8.2% in the four weeks ended July 28. As of Sept. 29, Noodles & Company held $7.6 million of cash on hand and had borrowings of $44.0 million, the company said.