eResearch | This week, quick service restaurants Dunkin’ Brands Group, Inc. (NASDAQ: DNKN), McDonald’s Corporation (NYSE: MCD), Restaurant Brands International Inc. (TSX: QSR ; NYSE: QSR), and Starbucks Corporation (NASDAQ: SBUX), reported Q2/2020 earnings, as most franchises experienced double-digit decreases in revenues due to COVID-19 impacts.
According to Harvard Business School, 40% of U.S. restaurants shuttered doors due to the pandemic, with eight million workers furloughed, three times the loss compared with any other industry.
At the end of Q1/2020, the National Restaurant Association called on the U.S. government for support, as economic forecasts revealed an expected shortfall of US$240 billion for the restaurant industry this year, as most retail stores were limited to only takeout, delivery, or out-door dining options.
Although some countries are slowly phasing through re-opening plans for retail industries, many governments put restrictions on dine-in capacities of 25% to 50%, which brings into question for some restaurants if re-opening is even financially feasible.
Last week, A&W Revenue Royalties Income Fund (TSX: AW.UN) reported Q2/2020 earnings with the lowest revenue, net income, and EPS in its last 10 reported quarters. Revenue for the quarter was down 28% compared to the same quarter a year ago.
Dunkin’ Brands
In Q2/2020, Dunkin’ Brands, the operator of global restaurant franchises Dunkin’ Donuts and Baskin-Robbins, reported revenues of US$287 million versus S&P Capital IQ analysts’ consensus estimate of US$274 million, with EPS of US$0.44 versus consensus estimate of US$0.43.
Dunkin’ Brands experienced a 20% decrease in revenues, year-over-year, as the Dunkin’ Donuts franchise sales dropped to US$137 million, a 21.3% decrease year-over-year, and the Baskin-Robbins franchise sales dropped to US$38.9 million, a 17% decrease year-over-year.
Dunkin’ Brands third main revenue segment, advertisements, revenue dropped to US$99.5 million, a 19.5% decrease year-over-year.
This quarter, Dunkin’ Brands implemented net closures of 42 Dunkin’ Donuts locations and 187 Baskin-Robbins locations, primarily from markets including India, Japan, and Russia. This year, Dunkin’ Brands expects to close approximately 800 U.S. stores, including 450 stores at Speedway LLC gas stations, and 350 international stores.
Dunkin’ Brands‘ stock price is currently trading at US$68.00 per share, a 1% decrease since the earnings announcement and a 14.2% decrease in the last year.
Dunkin’ Brands Financial Highlights Q2/2020
- Revenues of US$287 million, a 20% decrease year-over-year, which included Franchise and royalty income of US$115.9 million, Advertising income US$109 million, Rental income of US$26 million, Ice-cream sales of US$22.7 million, and Other revenues of US$13.1 million.
- Operating costs and expenses of US$210 million, a 13.1% decrease year-over-year, mainly consisting of Advertising expenses of US$111.1 million and General and administrative expenses of US$52.2 million.
- Net income of US$36.5 million, a 38.9% decrease year-over-year.
- Balance sheet consists of Cash and cash equivalents of US$516 million, Current liabilities of US$529 million, and Long-term liabilities of US$3.89 billion.
McDonald’s
In Q2/2020, McDonald’s, a global fast-food franchise based in the U.S., reported revenues of US$3.76 billion versus S&P Capital IQ analysts’ consensus estimate of US$3.73 billion, with EPS of US$0.66 versus consensus estimate of US$0.75..
McDonald’s reported a 30% decrease in revenues, year-over-year, as corporate-operated locations dropped in sales to US$1.59 billion, a 34% decrease year-over-year, and franchise-operated locations dropped in sales to US$2.09 billion, a 29% decrease year-over-year.
McDonald’s recently announced plans to close 200 retail stores, including all stores in Walmart Inc. (NYSE: WMT) partnered locations. However, McDonald’s forecasts 350 net new stores by the end of this year.
Various support programs were implemented by McDonald’s for franchises amid the pandemic, including over US$200 million in franchise marketing support and US$31 million in payment distributions for obsolete inventory to support franchise liquidity.
McDonald’s’ stock price is currently trading at US$203.18 per share, a 3.5% increase since the earnings announcement and a 5.1% decrease in the LTM.
McDonald’s Financial Highlights Q2/2020
- Revenues of US$3.76 billion, a 30% decrease year-over-year, which include Sales by Company-operated restaurants of US$1.59 billion and Revenues from franchised restaurants of US$2.09 billion/
- Operating costs and expenses of US$2.8 billion, an 11% decrease year-over-year, which mainly include Company-operated restaurant expenses of US$1.45 billion, Franchised restaurants-occupancy expenses of US$525 million, SG&A expenses of US$647 million, and Other operating expenses of US$117 million.
- Net income of US$484 million, a 68% decrease year-over-year.
Starbucks
In FQ3/2020, Starbucks, a global coffee-chain based in the U.S., reported revenues of US$4.2 billion versus S&P Capital IQ analysts’ consensus estimate of US$4.1–, with an EPS loss of US$0.46 versus consensus estimates of a loss of US$0.61.
Starbucks experienced a 39% decrease in revenue year-over-year, as North American sales dropped to US$2.8 billion, a 40% decrease- year-over-year and International sales dropped to US$950 million, also a 40% decrease year-over-year,
Shortly before the earnings release, Starbucks announced plans to optimize its U.S. portfolio of stores by closing up to 400 locations by next year. However, Starbucks opened 130 net new stores this quarter, with expectations to open at least 500 net new stores in China and 300 net new stores in North America this year.
In the earnings call, Kevin Johnson, CEO of Starbucks, said “As we reopened stores, we created safe, familiar, and convenient experiences for our customers. We remain committed to doing so as we adapt the store portfolio to cater to evolving patterns of consumer behavior, including on-the-go consumption, mobile order and pick-up, drive-thru, and contactless pick-up and delivery in accordance with our multiyear strategy which has been further validated by the unfortunate dynamics created by COVID-19”.
Starbucks’ stock price is currently trading at US$75.74 per share, a 1.5% increase since the earnings announcement and a 20.6% decrease in the LTM.
Starbucks Financial Highlights FQ3/2020
- Revenue of US$4.2 billion, a 39% decrease year-over-year, which includes Company-operated store sales of US$3.44 million, Licensed-store sales of US$300 million, and Other sales of US$477 million.
- Operating expenses of US$4.99 billion, a 14% decrease year-over-year, which mainly includes Store operating expenses of US$2.54 billion, Product and distribution costs of US$1.48 billion, SG&A expenses of US$400 million, and Depreciation and amortization expenses of US$361 million.
- Net loss of US$678 million.
- Balance sheet consists of Cash and cash equivalents of US$3.97 billion, Current liabilities of US$8 billion, and Long-term liabilities of US$29.8 billion.
Restaurant Brands International
In Q2/2020, RBI, a U.S. fast-food operator of franchise brands Burger King, Popeyes Louisiana Kitchen, and Tim Hortons, reported revenue of US$1.048 billion versus S&P Capital IQ analysts’ consensus estimate of US$1.05 billion, with US$0.35 EPS versus the consensus estimate of US$0.34.
RBI reported a 25% decrease in revenues year-over-year, due to system-wide sales deteriorating as Tim Hortons sales dropped to US$1.21 billion, a 33.4% decrease year-over-year, and Burger King sales dropped to US$4.13 billion, also a 25% decrease year-over-year.
However, RBI’s third franchise, Popeyes Louisiana Kitchen, grew system-wide sales to US$1.25 billion, a 24% increase year-over-year.
RBI expects net restaurant growth to be flat this year, with permanent store closures only representing a small percentage of RBI’s global footprint.
In the earning release, Jose Cil, CEO of RBI, said “During this crisis, the strength of our drive thru, digital and delivery channels have been a particularly important differentiator as guests have looked to us for a combination of safety, convenience, quality and great value that few can match. It was encouraging to see our investments in digital channels drive meaningful incremental sales in the quarter and we’re excited that in our home markets, digital sales across brands grew over 120% year-over-year and more than 30% quarter-over-quarter”.
RBI’s stock price is currently trading at C$73.83 per share, a 2% decrease since the earnings announcement and a 26% decrease in the last year.
RBI Financial Highlights Q2/2020
- Revenues of US$1.048 billion, a 25.1% decrease year-over-year, which includes Company-sales of US$406 million and Franchise and property sales of US$642 million.
- Operating costs and expenses of US$805 million, a 11.4% decrease year-over-year, which includes Cost of sales of US$339 million, Franchise and property expenses of US$134 million, and SG&A expenses of US$295 million.
- Net income of US$164 million, a 36.2% decrease year-over-year.
- Balance sheet consists of Cash and cash equivalents of US$1.54 billion, Current liabilities of US$1.28 billion, and Long-term liabilities of US$16.9 billion.
In conclusion, it will be hard for restaurants to maintain year-over-year revenue growth while adhering to social distancing guidelines at their restaurants and the permanent shutdown of some locations. Until a Covid-19 vaccine is widespread or public & consumer spending sentiments shift, expect restaurants’ stock prices to be under pressure.
CHART 1: S&P 500 (black) vs DNKN (red), MCD (orange), QSR (blue), and SBUX (yellow) – LTM Stock Performance
