Hurricane Harvey hammers restaurants and the worst is yet to come
Hurricane Harvey ripped through Houston and other parts of Texas over the weekend, with areas in the region expected to see a year's worth of rainfall in the span of a week. The hurricane hit in the heart of oil and gas country, but that's not the only industry to see devastation due to severe flooding.
"It's going to have a major impact on the [restaurant] industry," Bonnie Riggs, analyst at The NPD Group, told CNBC in a phone interview. "Because even if these restaurants are able to be open or if some are able to open up later on down the road, the demand is just not going to be there because these people have just been totally wiped out of everything."
With thousands focused on rebuilding their lives and homes, going out to eat will not be a priority. Evacuees will have restricted disposable income, with most of their funds going toward rebuilding. Riggs said that customers will not have the luxury of eating out very often, if at all, and restaurants in that area will struggle for the foreseeable future because of this.
"We know what happened to the industry when Katrina hit, but this is far greater," Riggs said.
There are some 13,000 restaurants in Houston, Riggs said, and more than 7,000 of those locations are chain restaurants.
Restaurant brands that have a significant number of locations in the Texas and Louisiana area, stand to see sales shrink in the third quarter because of closures and displaced workers. And that could continue into the fourth quarter.
On Friday, ahead of the storm, David Tarantino, a Baird analyst, determined which restaurants would see the most disruption from Hurricane Harvey. He said that Chuy's (NASDAQ: CHUY), Wingstop (NASDAQ: WING), Zoe's Kitchen (NYSE: ZOES) and Jack in the Box (NASDAQ: JACK) were likely to be the most affected by the storm.
Tarantino's data depicts what he expects would happen if half of each company's locations in Texas and Louisiana lost 100 percent of sales for the full five days the storm is expected to hover over the area.
"We would view this potential impact as a hypothetical case rather than a precise estimate," he wrote in a research note Friday. "Furthermore, we would consider any impact on sales as a one-time issue that should have fairly immaterial impact to the value of these businesses."
Tarantino did not immediately respond to a request for further comment.
Source: Baird Equity Research
Chuy's, Zoe's Kitchen and Jack in the Box did not immediately respond to CNBC's request for comment.
However, people familiar with the matter told CNBC that while Tarantino says 35 percent of Wingstop's locations will be affected by the storm the restaurant count in that area is actually less than 10 percent of its total locations.
"With the storm still very much underway, the company cannot speculate on its impact on the quarter as we are busy mobilizing our teams to support the first responders and those that have been displaced by this disaster," the company told CNBC.
In Monday trading, shares of Wingstop fell 4.4 percent; shares of Jack in the Box slipped 3.6 percent; Zoe's Kitchen was down 2.3 percent; and Chuy's stock was down 1 percent.
"It's too early to know exactly what the devastation will mean in terms of lost sales, but when the fourth-largest market in the country is essentially stopped in its tracks for what looks like at least a week and probably more, there will be lost sales," David Henkes, principal at Technomic, told CNBC via email. "And the lingering impact of restaurant closures mean that it will continue well after the storm ends."
Additionally, the majority of relief efforts will be geared toward rebuilding homes, not businesses. So, restaurant owners who are unable to finance the restoration of their location may be forced to stay closed longer or shutter their business altogether.
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