Full-Service Restaurant Sales to Remain Sluggish This Quarter

With renewed bans on indoor dining and a limited ability to offer outdoor dining in much of the country during the winter months, growth in off-premise restaurant sales due to carry-out, drive-thru and delivery will only provide a partial offset to the decline in on-premise sales, says Fitch Ratings. Therefore, coronavirus’ negative effect on US restaurant sales, especially for full-service operators, will continue for the next several months. Fitch expects sequential sales trends to stabilize around the second quarter as warmer weather returns and vaccinations increase, but renewed restrictions may threaten the trajectory of the recovery.

As the health crisis continues, widely varying restrictions across states and counties have resulted in restaurant location topping the list of the most significant drivers of restaurant performance. Specifically, restaurants in urban locations are underperforming those in suburban locations and restaurants in states that took aggressive lockdown actions such as New York are underperforming operations in less-restrictive states.

Monthly sales at eating and drinking establishments have continued to decline at double digit rates on a Y-O-Y basis since March when initial lockdowns across the country were put in place, according to data from the US Census Bureau. Monthly sales started to turn around slightly in September but the trend reversed in November due to renewed on-premise dining restrictions. Monthly sales remain well below pre-pandemic levels with November 2020 sales 19% below the same period last year.

Same-restaurant sales are a key credit factor for Fitch-rated restaurants. Those sales at full-service casual dining establishments such as Darden Restaurants and Wok Holdings, operator of the PF Chang’s China Bistro chain, were negatively affected by on-premise dining restrictions originally put in place in mid-March. Fitch downgraded Darden to BBB- with a Negative Outlook from BBB with a Stable Outlook in April, due to the pandemic-related business interruption and its expectations regarding consumer discretionary spending. Wok Holdings’ CCC+ rating reflects in part its high financial leverage, small scale relative to other casual chains and the secularly challenged casual dining segment.

Fitch revised its Global Economic Outlook Forecast last month as evidence of an effective vaccine. Its imminent rollout raised the prospect of a significant easing of the global health crisis by the middle of 2021. US GDP growth of 4.5% is forecast for 2021, with consumer spending projected to increase 5% in 2021 after declining 3.6% in 2020. However, Fitch’s coronavirus downside scenario considers numerous risks including setbacks in the distribution of the vaccine and reluctance by Americans to get vaccinated, both of which could delay the economic recovery.

Unit closures and bankruptcies remain a watch item for the industry, particularly for smaller restaurants and chains with limited access to liquidity sources. The National Restaurant Association indicated last month that about 17% or 110,000 US restaurants permanently closed last year.

Restaurant bankruptcies were occurring prior to the pandemic due to heightened competition, shifting consumer tastes and rising labor costs. However, risk remains high due to the pandemic.

Numerous restaurant chains have filed for bankruptcy this year including Ruby Tuesday’s and California Pizza Kitchen. Unit closures will continue as the number of distressed restaurants increase. Fitch restaurant bankruptcy studies indicate bankruptcy filers closed 25% of units on average.