Moody's predicts COVID-19 will hit Red Lobster harder than most
Red Lobster will likely one of the hardest-hit restaurant chains during the COVID-19 outbreak, with chains like Darden coping more easily, according to an analyst covering the foodservice sector.
Several restaurant chains across the country have already filed for bankruptcy as the ongoing COVID-19 pandemic continues to keep dining rooms closed and customers at home. Red Lobster will fair worse than some due to its focus on seafood, William Fahy, vice president – senior credit officer for Moody’s Investors Service, told SeafoodSource.
Orlando, Florida-based Darden, on the other hand, should perform well in the future, due its diverse portfolio of restaurants that appeal to several different types of diners Fahy said.
In late March, Moody’s forecast that operating profit for the entire restaurant industry could decline by 10 percent to more than 20 percent over the next 12 months, depending on how long closures and restrictions persist.
“Everyone is going to be bruised to a certain extent, [but] casual dining will be a really slow to ramp back up. Companies are figuring out how to do social distancing and many can only use 50 percent capacity,” Fahy said.
Red Lobster, which operates 679 locations nationwide, had nearly USD 2.5 billion (EUR 2.3 billion) in U.S. sales in 2019. But the chain is likely to be negatively impacted more than other casual dining chains because its product offerings are concentrated on seafood, Fahy said.
“It’s got a big veto vote,” he said. “When a group of people go out to eat, if one person doesn’t want seafood, it is vetoed.”
Moody’s recently downgraded Red Lobster to Caa1 (poor quality and high credit risk) and gave it a negative ratings outlook. The firm also downgraded Red Lobster's senior secured bank credit facility to Caa1.
Darden, on the other hand, has multiple types of restaurant chains that appeal to a wide variety of consumers, Fahy said. Olive Garden dominates in the Italian restaurant space, LongHorn Steakhouse is one of the top-performing steak and seafood chains, and The Capital Grille is one of the more well-known upscale chains.
Darden also operates Bahama Breeze, Seasons 52, Eddie V’s, Yard House, and Cheddar’s Scratch Kitchen.
Darden also benefits from its sheer size. It operates 1,799 casual dining restaurants “that are well-known and well-distributed throughout the U.S., which help limit its exposure to regional economic weakness,” Fahy wrote in a research note. He said he expects those brands to survive post-COVID.
“Darden's brand diversity is also a credit positive as it helps to mitigate the risk associated with changing consumer tastes,” Fahy said. “Darden also has a clearly stated financial policy that supports solid credit metrics and strong liquidity.”
Darden’s weekly sales have gradually improved since the start of COVID-19 “stay at home” orders and takeout/delivery offerings performed better for Darden and other restaurant chains than “what everybody thought,” Fahy said.
“But, it’s still not good enough to maintain the operating structure that you had pre-COVID. Even if you do 40 to 50 percent of your prior sales, that is 50 to 60 percent that are you not doing,” Fahy said.
Fahy also expects “a material deterioration in earnings and credit metrics” for Darden, driven by the closure of in-store dining across Darden's entire restaurant base. That “remains a concern particularly given the earnings concentration with Olive Garden and the need of this core brand to generate profitable same restaurant sales trends on a consistent basis,” Fahy said.
“The persistent high level of promotions and discounting throughout the industry is also a concern and could limit margin improvement without negatively impacting traffic,” he added.
Fahy is uncertain about the future of the overall casual dining sector. While most states are currently re-opening restaurant dining rooms in phases, they are currently attracting a limited number of consumers.
“No business customers are traveling [and] that’s a big part of their business,” Fahy said.
Plus, Fahy added, the U.S. restaurant industry has been over-saturated for a long time.
“The number of locations providing some type of food offering has continue to grow in what has been an already over-stored industry,” Fahy said. “Despite continued softness in customer traffic, the industry has not stopped adding net new units.”
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