Jun 26, 2019

S&P warns of trouble cooking in the restaurant sector

Photo: Jack Culbertson/Getty Images

U.S. restaurants have been a beacon of hope in the moribund brick-and-mortar retail picture, but they now face trouble of their own, analysts at ratings agency S&P Global warn.

What's happening: "Already, cracks are showing across our rated restaurant universe," Diya G. Iyer, S&P's primary credit analyst, wrote in a note to clients Tuesday. Iyer worries rising wages and increasing delivery costs will weigh on fast food restaurants while changing millennial dining preferences will hurt casual dining.

Details: Despite some improving brands, the rise of food halls and continued pressure on lower-income households this year will work against much of the fast casual and fast food sector, Iyer warns, where Pizza Hut, Wendy's and BossCo (parent of Checkers) have all been downgraded to CCC+ ratings with negative outlooks.

By the numbers:

  • "A new normal is unfolding," Iyer says, with U.S. restaurant sales increasing only 3.6% last year versus a compound annual growth rate of 6.4% between 1970 and 2019, according to the National Restaurant Association.
  • The most concerning development is that industry traffic hit a 9-year low with a 4% reduction in February, while the average cost of a check in restaurants hit a 10-year high, according to U.S. restaurant industry benchmarker MillerPulse.
  • Price increases look unsustainable given negative industry traffic since 2015.

Other worries:

  • Remodeling growth is expected to slow after years of capital spending on technology, especially in casual dining.
  • Restaurants will have to raise prices because of swine flu in China, which has slowed global pork supply.

Yes, but: S&P notes that there have been zero restaurant defaults in the last two years and only one a year in the years prior.

Watch this space: "We will continue to closely monitor refranchising efforts that McDonald's Corp., Wendy's, and other major players undertook in recent years," Iyer writes.

  • "The approach passes costs on to the franchise operators, improving margins and free cash flow generation at the franchisor level. But in our view, in some cases it causes potential for strife if mom-and-pop owners feel they shoulder too much expense to execute on the major transformations."

Go deeper: How fast food is pandering to the youths

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Coronavirus dashboard

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  1. Global: Total confirmed cases as of 7 p.m. ET: 1,094,068 — Total deaths: 58,773 — Total recoveries: 225,519Map.
  2. U.S.: Total confirmed cases as of 6 p.m. ET: 273,880 — Total deaths: 7,077 — Total recoveries: 9,521Map.
  3. Public health latest: The CDC is recommending Americans wear face coverings in public to help stop the spread of the coronavirus.
  4. 2020 latest: Wisconsin's governor called for a last-minute primary election delay. "I think a lot of people cheat with mail-in voting," President Trump said on the 2020 election, as more states hold primaries by mail.
  5. Business updates: America's small business bailout is off to a bad start. The DOT is urging airlines to refund passengers due to canceled or rescheduled flights, but won't take action against airlines that provide vouchers or credits.
  6. Oil latest: The amount of gas American drivers are consuming dropped to levels not seen in more than 25 years, government data shows. Trump is calling on the Energy Department to find more places to store oil.
  7. Tech updates: Twitter will allow ads containing references to the coronavirus under certain use cases.
  8. U.S.S. Theodore Roosevelt: Senators call for independent investigation into firing of Navy captain.
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Government will cover uninsured patients' coronavirus treatment

Azar at Friday's briefing. Photo: Win McNamee/Getty Images

The federal government will cover the costs of coronavirus treatment for the uninsured, Health and Human Services Secretary Alex Azar said at a White House briefing Friday.

How it works: The money will come from a $100 billion pot set aside for the health care industry in the most recent stimulus bill. Providers will be paid the same rates they get for treating Medicare patients, and as a condition of those payments, they won't be allowed to bill patients for care that isn't covered.

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Data: Axios reporting; Map: Danielle Alberti/Axios

Alabama Gov. Kay Ivey issued a stay-at-home order on Friday as the novel coronavirus pandemic persists. The order goes into effect Saturday at 5 p.m. and will remain in place through April 30. Missouri Gov. Mike Parson also issued a statewide social distancing order on Friday.

The big picture: In a matter of weeks, the number of states that issued orders nearly quadrupled, affecting almost 300 million Americans.

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