Sales and employment at U.S. restaurants improved for the second month in a row, but the industry still trails pre-pandemic growth levels.

June sales dropped more than 25% from the year-ago period, likely pushing the total shortfall for restaurants and food service sales past $145 billion over the last four months, according to the National Restaurant Association. The June sales decline was an improvement from the revised 38% drop in May, and the sector added 1.5 million workers back to its payrolls in June.

Shares of most of the biggest publicly traded restaurant companies rose in the month ended July 15 as smaller players struggled to stay afloat.

Improving sales

Sales for food services and drinking places were down 26.3% in June from the year-ago period to a seasonally adjusted $47.43 billion, according to U.S. Census Bureau advance monthly estimates released July 16. Sales for food services and drinking places rebounded for the second month in a row year over year after seeing a sharp decline of 52.4% in April.

All retail sales were up 1.1% from the year-ago period in June to $524.31 billion, which was less than the 3.5% growth posted in June 2019.

The improving fortunes of U.S. restaurants and bars in May and June came as states eased business restrictions to stop the spread of the coronavirus despite fears the pandemic was not yet under control. The restaurant industry's struggles seem far from over, as coronavirus cases rise and business restrictions return in several states.

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"Looking forward, the road to recovery will be uneven, as some jurisdictions are backtracking amid spiking case levels," the National Restaurant Association said in a July 16 report.

Accommodation and food services businesses received $41.87 billion from the Paycheck Protection Program, the fifth-highest amount across all sectors, according to the Small Business Administration. The National Restaurant Association is calling on Congress to pass legislation that would provide targeted relief for eateries.

Bigger restaurants, especially ones focused on takeaway and delivery services, are outperforming their smaller peers. Domino's Pizza Inc. reported July 16 that its second-quarter same-store sales grew 16.1% for U.S. stores from the year-ago period. By contrast, Kura Sushi USA Inc. said July 14 that its comparable restaurant fell 85.4% year over year for the quarter ended May 31.

"Rising cases, delayed dine-in re-openings and potential re-closings are a clear near-term negative for full-service restaurants," Jake Bartlett, a SunTrust Robinson Humphrey analyst, said in a July 14 report.

The number of seated diners in the U.S. was down 64.05% July 15 from a year ago. This is also down from some good days experienced by restaurants in recent weeks, such as June 21, when traffic was down 41.4% from the year-ago period, according to the online reservation platform OpenTable.

Traffic patterns vary by state. In Hawaii, where the five-day moving average of coronavirus cases was below 30 on July 15, seated diners fell 92.2% from a year ago on the same day. Rhode Island, which on July 15 reported a three-day average of 75 new positive cases, had a 12.6% jump in seated diners year over year on the same day.

"Restaurant sales and traffic data sets show that the recovery has reversed on a national level and more sharply reversed in key casual dining states including Florida and Texas," Jeff Farmer, a Gordon Haskett Research Advisors analyst, said in a July 10 report.

Job gains

Food services and drinking places added 1.5 million jobs in June for a seasonally adjusted total of 9.2 million, which is 23.7% fewer jobs than the sector had the same time a year ago, according to the U.S. Bureau of Labor Statistics. Total nonfarm industries added 4.8 million jobs for a total of 137.8 million.

June was the second month in a row the restaurant industry added jobs to its ranks as states across the country tried reopening parts of the economy. Still, the nearly 3 million jobs added in May and June fall short of the more than 5 million jobs eating and drinking places lost in March and April.

"While a two-month employment bounce of 3 million jobs is impressive, it only marks the beginning of a long road to recovery for the restaurant industry," the National Restaurant Association said in a July 2 report. "Job losses also varied significantly by industry segment, and so to will the recovery period."

Restaurants dependent on dine-in services had the largest job losses recently, while takeout and delivery eateries fared comparatively better, the National Restaurant Association said.

Rising share prices

Ten of the 15 largest publicly traded U.S. restaurants posted stock gains in the month ended July 15, according to S&P Global Market Intelligence. More broadly, the S&P Composite 1500 Restaurants subindex rose 1.3%, and the S&P Composite 1500 index rose 5.0%.

Shares of Papa John's International Inc. rose 18.5% in the month ended July 15, the biggest swing and gain for the period. The pizza company reported June 30 that comparable sales growth for domestic company-owned restaurants grew 18.5% for the five weeks ended June 28.

"We continue to believe the brand is still in the early stages of a turnaround and has yet to benefit from menu innovation, expanded digital reach and accelerating unit development," Peter Saleh, a BTIG analyst, said in a June 29 report. "In the near term, we expect Papa John's to benefit from double-digit same-store sales gains, bolstering franchisee economics and leading to the end of franchisee assistance in September."

Shares of Shake Shack Inc. fell 8.5% for the month ended July 15. The burger company on July 7 reported a 39% sales decline for the week ended July 1, with "the overall speed of company-wide sales recovery remaining uncertain due to ongoing volatility related to COVID-19," Shake Shack said.

"Despite current challenges, we continue to view Shake Shack's runway as one of the strongest and most proven among emerging restaurant brands," Sharon Zackfia, a William Blair analyst, said in a July 7 report. "Risks include the potential for same-store sales volatility given a relatively small number of comp locations and geographic concentration in the northeastern United States."

Vulnerability

A July 16 analysis of the one-year probability of default scores identified 15 U.S. public restaurants with scores ranging from 41.2% to 5.7% and corresponding implied credit scores of "cc" to "b-," according to Market Intelligence data.

Kisses from Italy Inc. again topped the list of the most vulnerable public U.S. restaurants with a 41.2% probability the Miami-based casual dining chain could default in the next 12 months.

Muscle Maker Inc., which owns Muscle Maker Grill and Healthy Joe's restaurants, had a 36.9% chance it could default in the next year. Giggles N' Hugs Inc., a chain of kid-friendly restaurants, had a 34.3% chance it could default.

Larger chains carried reduced chances of defaulting. Potbelly Corp. ranked fifth out of the 15 companies with a 16.3% chance it could default in the next year, while Starbucks Corp. came in ninth with a 9.6% chance it could default. Yum! Brands Inc. had a 7% chance it could default in the next year, which put the company at 13th on the list.

S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, see the PD Model Fundamentals - Public Corporates white paper.