Tales Of The Trump Depression, Con't

How bad is the Trump Depression right now?  It's "Can't even make money selling coffee and donuts as gas stations" bad.

Dunkin' is permanently closing 8% of its United States locations, which amounts to roughly 800 restaurants. 

The company announced the changes in its second quarter earnings, released Thursday. Dunkin' described the closures as "real estate portfolio rationalization" and said the affected locations are in "low-volume sales locations" that only represent 2% of its US sales as of 2019. 

More than half of the closures are in Speedway convenience stores, a change it previously announced in February. These locations are set to be closed by the end of this year. 

Dunkin' (DNKN) also said approximately 350 locations "may permanently close" outside of the US.

It's "Can't even sell Big Macs in a Wal-Mart" bad.

McDonald's is permanently closing 200 of its 14,000 U.S. locations this year with "low-volume restaurants" in Walmart stores making up over half of the closures. 

During its quarterly earnings call Tuesday, the fast food giant said the closings were previously planned for future years but are being accelerated. Officials also shared the continued impact the coronavirus pandemic is having on sales globally. 

"Within a matter of weeks, the McDonald's system made operational modifications across 30,000 restaurants, while closing and then reopening another 9,000 restaurants," CEO Chris Kempczinski said during Tuesday's earnings call. "We introduced new safety procedures in all our restaurants, modified our menus and developed new contactless ways to serve our customers."

Sit-down restaurants are done.  They are taking those jobs with them, millions of them.  As restaurants and bars are shut down again thanks to COVID-19 spikes, with the GOP killing the PPP, the next several months are going to be brutal.

Even in pre-COVID 2020, at least five restaurant chains filed for bankruptcy protection. The fact that COVID-19 wasn’t even on the radar two weeks before the wave of virus-related closures should be predictive of the additionally massive impact of these temporary closures. 

The Paycheck Protection Program (PPP) helped slow the tide of failures among smaller chains, but for some, PPP money was really just prolonging the inevitable. COVID-19 has provided an additional untimely blow to the casual dining space that cannot transition as nimbly to a takeout-only model. Furthermore, as restaurants start to reopen — potentially more than once as several states have recoiled some of their earlier opening plans — casual-dining restaurants have to deal with reduced seating capacity in addition to a litany of other unfamiliar COVID-related requirements (providing and requiring personal protective equipment, and requiring reservations for seating). 

In the interim, several restaurant companies are renegotiating (or trying to renegotiate) lease terms — most after missing April’s rent payment at a minimum — as well as renegotiating their loan operating covenants. In my experience, banks are more sympathetic than landlords, perhaps because landlords have banks to deal with as well. 

Historically, landlords have generally been unflinching to threats of bankruptcy when dealing with delinquent tenants. Perhaps that will change with the realization that there may not be a lot of new tenants available. Candidly, financing new restaurant growth won’t be very easy from either an equity or debt perspective. 

So where does that leave us today? Some restaurant chains, such as those in the quick-service space, will continue to fare better. For other chains, such as those in the casual-dining space, bankruptcy may be the only option. Other than a fortunate buyer, there are few winners in a Chapter 7 filing.

Equity owners and landlords are on the losing end of this. Even secured creditors usually receive a pittance of their original investment; sales of used restaurant capital equipment were poor before COVID-19, so one can only imagine how abysmal they will be post-COVID. 

For those restaurants with creditors willing to finance a bankruptcy, a Chapter 11 bankruptcy filing may be the only option. To be clear, a Chapter 11 is expensive — requiring teams of bankruptcy lawyers, “turnaround” management firms, and other professionals who all require secured and expensive payments upfront. 

However, whatever the faults of the process, it is inevitable that there will be an onslaught of Chapter 11 filings for chain-restaurant companies in the balance of 2020 and likely through 2021.

I don't know any nice, friendly way to say this folks. A third of all restaurants will be gone by the end of next year.  Millions of jobs will be gone with them.  It's going to take another dismal jobs report or two where "the V-shaped recovery" myth disintegrates, and the GOP will be dragged kicking and screaming into another COVID-19 package...probably...but by that time it will be too late.

The restaurant business was in bad trouble before COVID. It is a doomed, absolutely doomed business model now in the era of pandemics. The big boys like Mickey Ds will survive, moving to a delivery model with limited seating. The Mom and Pop, hole-in-the-wall local places that you know and love?  Odds are they'll be gone in six months, twelve tops, and they won't come back.

Nobody's going to have the money to eat out anyway.  A lot of damage will be done before a new Democratic Congress and president can be sworn in, and should Republicans remain in charge of the Senate, or God forbid the White House, we'll be referring to 2020 as "the good old days". The best case scenario is that restaurants are bailed out and become massive corporate endeavors, like Yum Brands only with hedge fund money.

Order up.

The check is here, and somebody has to pay.