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Restaurant Sector Trends : Same Store Sales

The BDC Credit Reporter has identified five sectors that are at greater-than-average risk of credit loss for BDC investors. These are Mining, Energy, For Profit Education, Retail and Restaurants. We track both broad and micro developments in each sector daily and subscribe to specialist publications where possible for insights into what’s happening. Generally speaking, the BDC Credit Reporter has been undertaking this fact gathering exercise in the back ground, and for over a year. However, to give an idea to readers of some of the forces underway today which may result in unexpectedly higher investment looses tomorrow, we’re sharing a standard example of a new and worrying data point for the Restaurant sector, to which many BDCs have exposure:

Nation’s Restaurant News reported that same store restaurant sales declined for the third month in a row in April. Sales were down (1.0%) but the publication, desperately  seeking some upside, noted this was an “improvement” from a (1.1%) decline in March. The data is from a very broad database of 27,000 different restaurant units, which enhances the usefulness of the news. Traffic at the restaurants, too, was once again down: by (3.3%).

Longer term, twelve month trailing sales were down (1.5%). A staff economist explained (regarding the most recent quarterly data) that sales were weak due to lower consumer spending. That’s consistent with reports coming out all over the place of an over-extended consumer pulling back to make ends meet as lower income groups default rates on installment debt (See Blue Stem Brands article) and sub-prime auto borrowing jump, as do consumer and commercial bankruptcies.

Not helping the restaurant industry are cost trends, including ever greater difficulty recruiting and retaining staff. We were struck particularly by the following:

Almost four out of every five restaurant employee terminations in 2016 were workers leaving their jobs voluntarily, and about 40 percent of all hourly employee terminations are within 90 days of hire.

Of course, the tenor of the Restaurant News article is much more optimistic than the BDC Credit Reporter’s summary above might suggest. As has been the case for over two years now, market participants are constantly looking by the dismal data to a potential but elusive change  in consumer sentiment and behavior ahead, as well as skipping over the cost pressures which the current administration’s policies appear to have made only more acute. Restaurant investment is coming off historical highs. From the skeptical perspective of the BDC Credit Reporter all these inter-twining factors (and this is a very general discussion of a complex subject) only confirm why we should be paying special attention to the sector. There have already been  number of bankruptcies that have affected BDC borrowers, and a series of out of bankruptcy restructurings. Nothing – to our mind – suggests above average losses should not continue.