As the rapid spread of the Coronavirus (COVID-19) has wreaked havoc on the economy and stock market of late, restaurants have been one of the most affected sectors. However, using Amenity's Insights Platform we have taken note of a theme that underlies the fear surrounding the virus:  an uptick in positive commentary regarding company margins prior to the outbreak of the virus in the US. As concerns such as rising minimum wage and inflating food costs have been perceived as threats to operating margins over the last few years, we found increasing positivity in management teams’ discussion of the topic.

Restaurant Sector: Margin Commentary

Over the last quarter, the Insights Platform shows a material uptick in positive commentary surrounding restaurant sector margins. This includes generally strong Q4 2020 industry results as well as optimism with regard to future margins.  Stringent expense controls and the ability to pass on increased costs have been factors in the case of some companies, while continued moves toward more franchise-weighted business models has had a positive margin impact in the case of others. The below sample extractions demonstrate these trends, which were building prior to the spread of the Coronavirus:

Christopher Meyer, CFO of Bloomin’ Brands

When you combine our sales growth, productivity efforts and cost savings initiatives, we do anticipate meaningful operating margin expansion in 2020. We expect adjusted operating income margin to be between 5.5% and 5.6%, which is an increase of 70 to 80 basis points from 2019. Keep in mind that similar to 2019, this level of margin expansion will be realized without the benefit of significant menu pricing actions.

Jack Hartung, CFO of Chipotle Mexican Grill

The growth in AUVs and margins in 2019 is evidence that our strong economic model remains intact, and we expect continued growth in both of these metrics during 2020 and beyond.

Robert Verostek, CFO of Denny’s Corporation

Franchise operating margin was 48.9% compared to 48.3% in the prior year quarter. This margin rate expansion was primarily driven by the company's refranchising and development strategy, which yielded an increase in royalty revenue and an improved occupancy margin… Company restaurant operating margin was 17.7% compared to 16.2% in the prior year quarter. This margin rate change was primarily due to decreases in payroll and benefit cost and other operating costs from the leveraging benefit of refranchising restaurants.

Also of note is the Amenity Deception Score with regard to margins, which serves as a cross-check of the veracity of company management commentary on the topic. As illustrated below, Deception has ticked down from Q4 2020 and is in line with historical readings.

Restaurant Sector: Margin Deception Score

As the Coronavirus disruption eventually comes to an end, the suspicion is that there is a high likelihood that previously strong trends in the restaurant sector will re-emerge. The underpinnings of a healthy sector were there a short time ago, and the current upheaval could very well reverse in a hurry.

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Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.

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This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.

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