Restaurants US Restaurants – Latest Thoughts on COVID-19 Impacts & Risks

UBS Evidence Lab US Reopening Consumer survey data indicates 26% of respondents feel comfortable eating at a restaurant now (from 17% in late-April), but 29% indicated 6+ months to feel comfortable (25% late-April).

08 Jun 2020

29% of respondents indicated 6+ months to feel comfortable eating at a restaurant, but 26% feel comfortable now, improving from the beg. of May

Source: UBS Evidence Lab, Civic Science

The line graph illustrates survey responses to the question "how soon from now would you be comfortable going out to eat at restaurants?".

Sector momentum and outlook support valuations; What could go wrong?

Industry updates & conversations with management teams & franchisees highlight improving sales trends & optimism in outlook. Quick service restaurants (QSRs) continue to make sequential gains, while casual dining gains have been even more substantial, w/ dine-in representing >50% of total sales in states with dining rooms open, according to Black Box. While current trends & outlook remain favorable and it's difficult to fight the momentum, upcoming headwinds could impact the recovery, including: increased competition as smaller chains & independents reopen, reduced stimulus benefits, and other spending alternatives. We continue to favor brand strength, digital/convenience, and value over the coming quarters. UBS Evidence Lab US Reopening Consumer survey data indicates 26% of respondents feel comfortable eating at a restaurant now (from 17% in late-April), but 29% indicated 6+ months to feel comfortable (25% late-April). UBS Evidence Lab US Consumer Receipt Transaction Monitor data (4MM+ monthly receipts highlights an increase in pizza and CD share of transactions, with continued strength in QSR Burger.

Positive narrative supports investor optimism; But starting to question upside

Business updates & conference presentations last week support investor optimism. Further recovery in sales trends & favorable reopen commentary contributed to a positive recovery narrative, and an outsized rally in casual dining (CD) in particular (even as last week's moves were challenging for investor positioning that got less long / more short to start June). Sector narrative remains positive, but stocks have increased significantly from lows, w/ investors wondering if much more upside exists from here. Additionally, while many investors view rates as supportive of higher valuations, others highlight concerns include: balance sheets are worse, unit growth is pushed out a year, and go forward recovery visibility is limited. We note concern around the impact from civil unrest & curfews on trends is limited, with many seeing any impact as transitory. Key concerns are more medium-term, including: decelerating trends, second wave, international, unit growth, & valuation.

Franchisee sales highlight sequential sales & profit improvement

Conversations with franchisees highlight generally cont. sequential improvement in weekly comps, even as those impacted by civil unrest noted significant declines. Franchisees impacted by civil unrest indicated just limited expected downtime to repair stores, but lost momentum is the bigger concern near-term. Other franchisee takeaways include: 1) Breakfast (-40% for select brands) and late night (-50%) continue to lag for most QSRs; 2) New open demand & acquisition interest is high for larger owner/operators. 3) Menu simplification is supporting throughput & margins, with many hoping slimmer menus & even fewer platforms stick. 

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