Restaurant chains stand to gain as independent establishments shutter due to COVID-19

Restaurant chains stand to gain as independent establishments shutter due to COVID-19

Large, publicly traded restaurant chains stand to make gains in the coming months as the economy begins to recover and independent restaurants shutter due to the pressures of the COVID-19 pandemic, analysts say.

BTIG analysts led by Peter Saleh raised the price target on Texas Roadhouse Inc.

to $92 from $78 based on the possibilities that have arisen from the coronavirus. The analysts maintained their buy stock rating.

Texas Roadhouse shares are up nearly 42% in 2020 while the benchmark S&P 500 index has gained 14.6% for the period. The restaurant chain as a market capitalization of about $5.6 billion.

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“[W]e believe that industry closure activity, shouldered
mostly by independent restaurants, creates an opportunity for Texas Roadhouse
to expand its footprint into smaller markets,” BTIG said.

“We estimate this development could increase the concept’s
long-term unit potential by a few hundred restaurants, extending its growth
trajectory by at least another decade. Additionally, we believe the labor
market could experience some softening trends as many independent restaurants
permanently close.”

Independent bars and restaurants, which have far fewer financial resources than large publicly traded restaurant chains, have tried to manage the restrictions on indoor dining by emphasizing their takeaway business and through outdoor seating.

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The $900 billion coronavirus aid package that passed Congress this week provides help for workers, but help for restaurants is limited. And a separate suggested Restaurants Act isn’t part of the current bill.

The National Restaurant Association says 17%, or more than 110,000 establishments, have closed since the start of the pandemic, with about 10,000 closing in the last three months alone. More than half of all restaurants, including chains, expect furloughs and layoffs to continue over the next three months.

With many independent restaurants forced to close under the economic pressure, doors have opened for large restaurant companies.

“Over the past several years, Texas Roadhouse has migrated a
small portion of its development into smaller markets with populations of
40,000-to-60,000,” wrote BTIG.

“We believe these smaller markets are less attractive to
large chain competitors and mostly served by independent restaurant operators.
As we expect industry closures to be largely shouldered by independent
operators this year, the current disruption could disproportionately impact smaller
markets and create unit potential for well-capitalized operators.”

BTIG estimates that Texas Roadhouse has the potential to
increase the number of restaurants it operates to as many as 1,000 from about
800 currently.

Texas Roadhouse isn’t the only company that stands to

“Chains are taking share vs. independents as their
capitalization allows a full-volume effort around off-premise promotion and staffing
while some independents have been unable to break through,” wrote JPMorgan
analysts in a recent note focused on the year ahead.

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JPMorgan thinks 15% of independent restaurants will shutter, representing less than half of sales for the industry. JPMorgan has overweight stock ratings on restaurant companies including Outback Steakhouse parent Bloomin’ Brands Inc.

and Olive Garden parent Darden Restaurants Inc.

Optimistically, analysts don’t think this restaurant decline
will last forever.

“However, we do not believe this contraction to be permanent,” the JPMorgan note says. “Supply lags demand, and we believe a pick-up in demand in deeply affected areas (center cities for example) will see follow-on supply within six months as entrepreneurs take previous restaurant spaces at favorable build-out costs and potentially lower rents.”

Still, big chains that can take advantage of trends in online ordering, delivery, virtual brands and other restaurant trends, are best suited to capitalize on COVID-19-related industry conditions.

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“With this as a backdrop, our base case assumes fast-food
sales trends moderate by the middle of next year, but chains lean heavily into
menu innovation and scale advantages in digital technology to sustain positive
trends against difficult comparisons,” wrote KeyBanc Capital Markets.

“Casual dining should benefit from a surge in post-vaccine
demand, a tailwind from fiscal stimulus and fewer competitors in the
marketplace. Together, these factors have the potential to drive AUVs [average
unit volume] 10-20% above pre-pandemic levels.”

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