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Dining out: US restaurant sales, jobs gain in May but lag pre-pandemic levels

U.S. restaurant and bar sales and job figures improved in May but the industry still lags its pre-coronavirus and year-ago performance.

May sales fell by nearly 40% from the year-ago period, likely pushing the total shortfall for restaurants and food service sales past $120 billion during the first three months of the pandemic, according to the National Restaurant Association. But the May sales decline was less than the more than 50% year-over-year drop in April, and the industry added 1.4 million workers back to its payrolls in May after shedding 6.1 million jobs during the prior two months.

Shares of most of the biggest publicly traded restaurant companies rose in the month ended June 17 as eateries began reopening their dining rooms at limited capacities and reported improving same-store sales.

It is likely that the combination of government support to businesses, direct payments to American consumers that began in April and indications that consumer spending is picking up all played a factor in the May jobs report, Martha Gimbel, an economist and labor market expert at Schmidt Futures, said in an interview.

But it remains "very unclear how both consumer demand and government support are going to play out in the long run," Gimbel said. "In this particular industry, those are really the two key questions."

Improving sales

Sales for food services and drinking places were down 39.4% in May from the year-ago period to a seasonally adjusted $38.63 billion, according to U.S. Census Bureau advance monthly estimates released June 16. May sales mark an uptick from April when food services and drinking places sales fell 52.6% year over year to $29.92 billion, according to revised Census Bureau numbers for the month.

All retail sales were down 6.1% from the year-ago period in May to $485.55 billion, below the 2.9% growth posted in May 2019.

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The pandemic put restaurants and bars in crisis mode but the easing of lockdowns begun by states around the U.S. could be helping lessen the pain, even as fears mount that re-opening the economy too soon will lead to a second wave of the coronavirus outbreak.

Andrew Strelzik, a BMO Capital Markets analyst, said in a June 15 report the recovery over the last few months has been "in line to better than we initially anticipated."

The forces driving the recovery, however, could taper off and slow down the momentum, not to mention the possibility that a resurgence of COVID-19 cases could temporarily derail sales, Strelzik said. Factors driving up sales that could fade away include the availability of stimulus and unemployment funds, the initial surge of pent-up demand, demand outpacing reopenings and delivery and takeout orders being above sustainable levels, Strelzik said.

Traffic to restaurants appears to be picking up, as well. The number of seated diners in the U.S. was down 65.2% June 17 from the same time last year, which is up from the doldrums of April when traffic declines hovered near 100%, according to online reservation platform OpenTable. Some states are seeing more traffic than others: Rhode Island reported a 16.8% increase on June 17 compared to the same time last year, while Hawaii's traffic was down 93.1% for the same time period, according to OpenTable.

Additionally, sales and traffic data from the past two weeks signals that consumers seem increasingly comfortable returning to casual dining restaurants, Gordon Haskett analyst Jeff Farmer said in a June 16 note.

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McDonald's Corp. said June 15 its comparable sales improved from late March through May. Comparable sales at U.S. McDonald's locations were down 5.1% in May from the year-ago period, which was better than the 19.2% decline in April for year-over-year comparable sales, the company said. Guest counts also remained negative in April and May, and McDonald's said its performance remains particularly challenged during breakfast.

Jobs bump

Food services and drinking places unexpectedly added 1.4 million workers in May for a seasonally adjusted 7.6 million, a 36.6% drop from the same time a year ago, according to the U.S. Bureau of Labor Statistics. The industry, though, recorded 4.6 million fewer total jobs in May than January. Total nonfarm industries added 2.5 million jobs in May for a total of 132.9 million despite expectations the economy would shed more jobs overall.

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The May jobs numbers represented the restaurant industry's lowest level of employment since May 1988, according to the National Restaurant Association, which noted that staffing at buffets, cafeterias, bars and taverns has been hit worse than other sectors of the restaurant industry.

Rising share prices

Fourteen of the 15 largest publicly traded U.S. restaurants posted stock gains in the month ended June 17, according to S&P Global Market Intelligence. More broadly, the S&P Composite 1500 Restaurants subindex rose 7.2%, and the S&P Composite 1500 index rose 9.2%.

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Shares of Cracker Barrel Old Country Store Inc. rose 29.6% in the month ended June 17, the biggest swing and gain for the period. Cracker Barrel on June 2 reported better than expected same-store sales, margin improvement and cash burn, SunTrust Robinson Humphrey analyst Jake Bartlett said in a June 2 note. The company said comparable-store restaurant sales were down 45% for the week ended May 29, an improvement from a 55% decline for the week ended May 22.

Cracker Barrel's "rural, highway exposure and everyday value mitigates risks of a COVID resurgence and/or prolonged economic downturn," Bartlett said.

Shares of Wingstop Inc. fell 1.4% for the month ended June 17, despite reporting May 6 its system-wide sales increased 18.6% in the first quarter.

Vulnerability

A June analysis of the one-year probability of default scores identified 15 U.S. public restaurants with scores ranging from 41.2% to 5.7% and corresponding implied credit scores of "cc" to "b-," according to Market Intelligence data.

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Kisses from Italy Inc. topped the list of the most vulnerable public U.S. restaurants with a 41.2% probability the Miami-based casual dining chain could default in the next 12 months.

Muscle Maker Inc., which owns Muscle Maker Grill and Healthy Joe's restaurants, had a 36.9% chance it could default in the next year. Giggles N' Hugs Inc., a chain of kid-friendly restaurants, had a 34.3% chance it could default.

Larger chains carried reduced chances of defaulting. Domino's Pizza Inc. ranked eighth out of the 15 companies with a 10.1% chance it could default in the next year, while Starbucks Corp. came in ninth with a 9.6% chance it could default. Yum! Brands Inc. had a 7% chance it could default in the next year, which put the company at fourteenth on the list.

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S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, see the PD Model Fundamentals - Public Corporates white paper.