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Probability of US restaurants defaulting soars amid COVID-19 pandemic: Report

Heidi Chung
Reporter

The probability that U.S. restaurants will default has soared in recent weeks as a result of the devastating COVID-19 pandemic, according to S&P Global Market Intelligence.

The median one-year market signal probability of default rose above 30% for U.S. restaurants in April before falling to 24% as of May 18, the market data firm said in a recent report. That figure was less than 5% at the beginning of this year before the COVID-19 pandemic rocked the U.S. economy.

“The figures represent the odds that a company will default on its debt within the next year based on fluctuations in the company's share price and other country and industry-related risks,” the firm explained.

COVID-19 hit restaurants particularly hard as shelter-in-place mandates across the world forced dining areas of restaurants to shutter their doors. For months, restaurants have had to rely on takeout, delivery and drive-thru to fuel sales.

Guests play arcade games at Dave & Buster's Hollywood & Highland Grand Opening on August 21, 2014 in Hollywood, California. (Photo by Mark Davis/Getty Images for Dave & Buster's)

According to S&P Global Market Intelligence analysis, arcade bar and restaurant chain Dave & Buster’s (PLAY) had the highest one-year probability of default score of 53.5%, as of May 18. Outback Steakhouse, which is owned by Bloomin Brands (BLMN), had a default score of 36.1% and Cheesecake Factory (CAKE) ranked third on the list at 28.8%.

On the other hand, the U.S. restaurants least likely to default included Wingstop (WING) at a 1.1%, Papa John’s (PZZA) at 3.3% and Chipotle (CMG) had a probability of default score of 3.6%.

Full-service restaurants such as Cheesecake Factory and Outback Steakhouse are designed to focus on in-store dining experiences, therefore were hit harder over recent months, as they’ve had to shift their businesses to adapt to the temporarily disrupted environment.

Bloomin Brands revealed that it Outback Steakhouse same-store sales decreased by a shocking 28% in the five weeks ending March 29, as a result of the challenges created by COVID-19.

Fast food restaurants were also hit hard by the novel coronavirus but have been seeing broad improvement in sales. Chipotle reported first-quarter earnings April 22, and the company said that after a 16% same-store sales decline in March, sales improved in April.

Many other fast food chains such as Shake Shack (SHAK), Wendy’s (WEN), McDonald’s (MCD), Yum Brands (YUM) and Restaurant Brands (QSR) have also noted steady sales improvements after seeing a steep decline in sales shortly after shelter-in-place orders were put in place.

Fast food chains are less likely to default because they are often heavily franchised which allows them to collect royalties from individual operators. Furthermore, their businesses were already armed with drive thru, takeout and delivery capabilities.

“Fast food restaurants were built for off-premise usage, with 70%+ of sales coming from drive-thrus,” Stifel analyst Chris O’Cull wrote in a note to clients May 14. “Fast food chains are also better positioned to promote value in the current environment where casual dining profits have been decimated, and value matters during periods of economic distress.”

 

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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