Cracker Barrel and the Restaurant Industry Face Extraordinary Lack of Short-Term Visibility
The response by governments worldwide to stop the spread of the novel coronavirus has created unprecedented uncertainty in the restaurant industry.
Restrictions are coming into place around the world that require restaurants to close or switch to carryout only. France, Italy, and Spain announced closures over the weekend, and several states (California, Ohio, Illinois, and others) followed suit soon thereafter (though carryout may still be offered).
At this point, it would be unsurprising to see similar restrictions imposed more broadly across the U.S., potentially even in a matter of days or weeks.
Even without mandatory closures, restaurant traffic will likely plummet due to social distancing recommendations made by the government. On Monday, President Trump issued guidance that people should avoid groups of 10 or more.
Indeed, OpenTable, a widely-used online reservation platform, reported a 56% year-over-year drop in bookings in the U.S. for Monday, March 16. As you can see, the trend has significantly accelerated over the last 10 days
Source: OpenTable
Making matters worse, there's no timeline on when restaurants that've shuttered might reopen. Governments have sought to act quickly and fill in the blanks later.
The uncertainty ahead for the restaurant industry is staggering:
Will restaurants be closed nationwide, or just in some states and cities?
How long will any closures last? A few weeks? Months?
What will demand for carryout look like, especially for restaurants where to-go is not the norm?
What assistance will governments provide restaurants?
Once restaurants are reopened, will traffic return to normal? Or will people be timid to dine at restaurants due to concerns of infection?
There are a lot more questions than answers, as there's no precedent to what's currently taking place in the industry. Moreover, the situation is changing by the day.
Cracker Barrel (CBRL) came into this downturn in reasonable financial shape with low leverage. In fact, management even announced a $25 million share repurchase plan on March 7, though that was before the industry's bookings took a major hit.
Source: Simply Safe Dividends
Cracker Barrel is one of the more committed restaurants to its dividend as well, having paid them without interruption for more than 30 years.
However, management is now facing an unprecedented lack of short-term visibility, and over 80% of Cracker Barrel's restaurants are located along interstate highways, with many others located near tourist destinations.
With travel freezing up, the company's restaurant footprint is especially not positioned well. As a result, a temporary dividend cut or suspension to preserve cash in this unusual environment would not be surprising if management sees this situation dragging out.
In light of these sudden developments and the non-zero risk of a temporary dividend cut that they bring, we're downgrading Cracker Barrel's Dividend Safety Score to Unsafe.
Too little is known right now to make conjectures about what the impact will be on Cracker Barrel's finances — the range of outcomes is too wide. If restaurant closures turn out to be minimal or short-lived (a couple weeks), then Cracker Barrel's Dividend Safety Score could be quickly upgraded.
For now, investors should weigh whether they're comfortable owning a stock with this much short-term uncertainty, even if the firm's long-term outlook remains stable.
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