With 20% of all restaurants in the U.S. expected to permanently close in the coming months, the industry losing over $25 billion in sales and an expected 5-7 million jobs by June, the COVID-19 pandemic has really hammered the restaurant sector. Businesses have been forced to take drastic steps to secure some form of revenue like selling ingredients in bulk and alcoholic beverages for clientele to take home. However, not all restaurants are in trouble and we offer two companies that warrant investment consideration.
Chipotle (NYSE: CMG) had to temporarily close 100 stores in shuttered malls and, like most restaurants, withdrew its guidance for 2020. Unlike other restaurants, however, it seems like Chipotle has been preparing for all the current chaos by beefing up its digital and health initiatives, including contact-free pickup shelves, delivery, and drive-thru options via their Chipotlanes service. Prior to the outbreak, Chipotle has been operating profitably since veteran Taco Bell CEO Brian Niccol took charge in 2018, helping the company post accelerated comparable restaurant sales growth for eight consecutive quarters, topping off at 13.4%.
That number fell to 3.3% once guidelines were set in motion for the pandemic. However, its Q1 2020 digital sales went up by more than 80%, reaching a record $372 million, and accounted for over 26% of all sales. Prior to the outbreak, Chipotle’s loyalty rewards program membership, an important tool to analyze purchasing habits and preferences, was at 8.5 million and is now at 11.5 million (a 35% increase) as more people are using the company’s app to place pickup and delivery orders.
On the pandemic front, Chipotle ensures all their deliveries are sealed in tamper-proof containers and have nurse inspections for their staff before shifts. The company is also raising hourly wages by 10%, paying their quarterly bonuses of nearly $9 million, and giving away 100,000 burritos to healthcare workers.
Chipotle has over $900 million in cash and zero debt (as of their last quarterly report) and with all the closures that have happened, Chipotle is in a position to snatch up prime real estate and add restaurants with Chipotlanes, which are a boost for digital sales. With numbers like that, this company can sustain the pandemic for at least a year and secure loans for any time beyond that.
2. Texas Roadhouse
Texas Roadhouse (NASDAQ: TXRH) suspended dividends and the company’s founder and CEO, W. Kent Taylor, chose to waive his own salary during the pandemic to help his employees. Prior to the outbreak, the company has steadily grown revenues 174% from $1 billion in 2010 to $2.76 billion in 2019 and its comparable restaurant sales grew 6.4% in the first 45 days of 2020. Although the bulk of its restaurants are in suburban areas, far from cities where the contamination rate is growing rampantly, they are still only limited to delivery and takeout.
It is in these suburban areas, however, that restaurants are outperforming, according to Black Box Intelligence. Since the start of the pandemic, Texas Roadhouse’s employee numbers grew from a low of 10% to 50% of its total workforce as it started taking creative measures like offering groceries and essentials in some locations, like eggs, milk, and sanitizing gel, as well as ready-to-grill steaks, and running farmers markets. The company is also offering full service to truckers and free meals for first responders and teachers in some locations.
Texas Roadhouse had roughly $108 million cash on hand and no debt at the end of 2019 and will draw down $190 million from its revolving credit with an option to increase by an additional $200 million. Paired with the fact that the company has kept its new-location launches at 5% in the last few years, Texas Roadhouse has a good balance sheet to weather the current crisis.
The dine-in restaurant sector was one of the hardest-hit in these volatile times. Chipotle has recouped its price and is up nearly 2% since the start of the year, but will probably continue to grow with its advanced digital offerings and great financials. Texas Roadhouse is available at a discount right now, having lost about 20% of its price since the beginning of 2020.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in stocks mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
David fell in love with the stock market in 2000 after making $30,000 overnight on Techniclone. His favorite stocks today are Netflix, Google, Amazon, and Apple as they are the market leaders in their sectors and are safe long-term investments.