U.S. restaurants’ probability of default jumps: S&P Analysis
Yahoo Finance’s Heidi Chung joins Zack Guzman to discuss how the coronavirus is disrupting restaurants.
Video Transcript
ZACK GUZMAN: Welcome back to live coverage here on Yahoo Finance. I'm Zack Guzman. Of course, we've been tracking the way that states are opening up their local economies here, and restaurants are very happy to see that happen as they've seen traffic completely fall off a cliff since we can't dine in restaurants. But a new report from S&P Global Market Intelligence is looking at the way that some restaurants might be more hurt by the downturn than others, more desperate to see things come back to normal. But as we know, a lot of Americans are still pretty hesitant to actually go out and dine in. For more on that, I want to get to Yahoo Finance's Heidi Chung who's seen the report and breaking down which restaurants might have the hardest road ahead. Heidi.
HEIDI CHUNG: Hey, Zack. Yes so according to S&P Global Market Intelligence, the probability that the US will default has soared. In recent weeks, the market data firm saying that the median one year market signal probability of default rose to above 30% for US restaurants in April before dropping to about 24% as of May 18. That is up from less than 5% at the beginning of this year before the COVID-19 pandemic really started to wreak havoc on the US restaurant industry.
Now, taking a look at the largest US restaurants that are likely to default, topping the list is Dave and Busters, which has a linear probability of default score of 53.5% as of May 18. Outback Steakhouse which, of course, is owned by Bloomin' Brands has a default score of about 36.1%, and The Cheesecake Factory coming in at number three with a score of 28.8%. But on the other hand, on the flip side here, the US restaurants most likely to not default include Wingstop at 1.1%, Papa John's at 3.3%, and Chipotle at 3.6%. But just taking a look at these respective lists, Zack, it makes a lot of sense that we're seeing fast food restaurants look better positioned here, and therefore a little less likely to default in this challenging environment.
Fast food restaurants do have a couple of advantages here over full service restaurants. One, because they are heavily franchised, they're more likely to be able to receive and collect those royalties. And also they already have a business that is structured with drive-throughs, takeout and delivery. And for an example of that, Taco Bell actually brings in about 70% of total sales just from their drive-through. So as we've seen this pandemic really start to hammer a lot of industries here in the US, it looks as if the restaurants are finally going to have to see how all of this reopening of economies plays out for their businesses. Zack.
ZACK GUZMAN: Yeah, interesting standouts there. I mean, we've talked about the way that those restaurants more levered to delivery have been able to navigate this all right, but also interesting times to point out how different the space is when you look at some well capitalized restaurants and those who aren't so well capitalized as you highlight there with Cheesecake Factory. On the flip side, Darden Restaurants, the owner of Olive Garden, still sitting at a relatively in a much better position than some of the other names despite not necessarily always being focused on takeout, but we have seen them increasingly focus on the area. Even mama got Olive Garden on Mother's Day, so there that is. Heidi Chung, appreciate you bringing us that.
