Cities across the U.S. are ordering residents to shelter in place in order to prevent the spread of Covid-19, the disease caused by the novel coronavirus. This has resulted in restaurants either closing altogether or shifting to takeout and delivery only.
While most restaurants have seen dramatic declines in sales despite offering takeout and delivery, there are two types of businesses in the food production chain that seem to be marking sales increases: popular delivery services and pizza restaurants. More people are taking advantage of independent delivery services in order to stay quarantined, and some pizza places with entrenched delivery systems are also seeing upticks in orders.
A look into this trend reveals that the following five companies are likely to report higher numbers of orders, potentially leading to higher revenue.
Grubhub
Grubhub Inc. (GRUB, Financial) is a Chicago-based online food ordering company that partners with local restaurants, enabling customers to buy local and providing small restaurants with a channel for online ordering and delivery.
On March 31, shares of Grubhub traded around $40.62 apiece for a market cap of $3.7 billion. GuruFocus gives it a financial strength rating of 6 out of 10 and a profitability rating of 7 out of 10. The company has grown its revenue steadily, but net income dipped into the negatives for 2019.
Grubhub earns its money mostly from a combination of commissions from restaurants, delivery fees from consumers and marketing fees from restaurants, though it does not publicly disclose the exact proportions.
After announcing in early March that it would suspend commissions fees for restaurants, Grubhub released a program called Supper for Support. In the promotion, customers can get $10 off orders from 5 p.m. to 9 p.m. The catch here is that already-struggling restaurants must foot the bill for this $10 discount per order, which has caused some public outcry. Additionally, it is an opt-out program, meaning that all restaurants that use Grubhub are enrolled in the program unless they intentionally opt out of it.
“Though Grubhub is upfront with businesses about the terms, the move is being criticized as an attempt to profiteer from business partners that are struggling under the nationwide measures to limit the spread of the novel coronavirus,” wrote Natt Garun in an article for The Verge.
While the move is being criticized as shameless profiteering, the question here is, which party would it be most ethical to force the bill on? Someone has to pay the cost for delivery. Should the customers continue footing the bill, often while unemployed and/or in quarantine? Should the delivery services waive fees entirely, and could they afford to continue operating while bleeding cash? Despite having long-term financial strength, Grubhub has a cash-debt ratio of only 0.69. The ability to survive while being net cash negative would depend entirely on the structure of its borrowing and the type of credit lines it has access to.
There may be no “right” answer here, but it is true that Grubhub is conducting business at an increased volume and is likely growing its customer base and public awareness, giving it a boost for earnings growth.
Blue Apron Holdings
New York-based Blue Apron Holdings Inc. (APRN, Financial) delivers original recipes and ingredients to customers. It also offers a wine delivery service to accompany its meals.
On March 31, shares of Blue Apron traded around $12.67 for a market cap of $168.49 million. GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 3 out of 10. Growth has stagnated in the last couple of years, while the operating margin remains low at -11.45%.
In a recent Securities and Exchange Commission filing, Blue Apron CEO Linda Findley Kozlowski noted "a sharp increase in consumer demand," which came right at a time when the company was considering its options in light of potential dissolution.
More than the uptick in demand, the company’s unique supply chains have kept its products in stock while many large-scale grocery stores and their suppliers are struggling to keep up with increased buying.
However, Kozlowski warned not to take recent market conditions as "a prediction about current or future performance of the company." The company has shifted its focus from marketing to providing quality service for the customers that remain loyal to what is perhaps destined to be a niche business. In order to achieve long-term growth, buying meal kits sourced from suppliers off the beaten path (and thus less likely to run out of stock in times of crisis) would have to become more popular.
Papa John's International
Papa John's International Inc. (PZZA, Financial), a pizza chain headquartered in Jeffersonville, Indiana, is the largest pizza delivery chain in the U.S.
On March 31, shares of Papa John’s traded around $51.58 for a market cap of $1.69 billion. GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. Despite steady growth through most of its history, Papa John’s has seen its revenue and net income stagnate in recent years.
The company has estimated that its same-store sales in North America will grow 5.3% for the first quarter of 2020, though it has withdrawn its estimates for the full year due to the uncertainty surrounding the crisis.
“While the company’s business is currently performing well, there are many uncertainties related to the Covid-19 pandemic which cannot be predicted,” a Papa John’s representative said in a statement.
From Feb. 24 to March 29, Papa John’s saw its same-store sales increase 3.6%, while international sales dropped 0.6% over the same time frame.
According to data from NPD Group, transactions at fast-food restaurants dropped 34% in the week ended March 22. However, analysts expect pizza delivery chains to post better results in the U.S. as they are already entrenched in the country’s “cheap, fast and easy” delivery market.
Domino's Pizza
Ann Arbor, Michigan-based Domino's Pizza Inc. (DPZ, Financial) is another large-scale U.S. pizza delivery chain that is expecting to see increased same-store sales in North America for the first quarter.
On March 31, shares of the company traded around $321.82 for a market cap of $12.64 billion. GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 10 out of 10. Domino’s has achieved steady revenue and net income growth since reinventing its recipes beginning in 2009.
Domino’s estimates a more modest 1.6% growth in same-store sales during the first quarter. From Feb. 24 to March 22, the chain saw its same-store sales in the U.S. increase 1%, while international sales fell 0.2%.
According to CEO Rich Allison, “55% of our [the company’s] transactions are delivery already,” meaning that its operations have been relatively less affected by the switch than other restaurants. Domino’s has also made efforts to implement contactless delivery to reduce the chances of spreading the virus.
Due to uncertainty, the company has gone ahead with increased borrowing, taking the rest of the $158 million under outstanding variable funding notes to increase its cash position to over $300 million.
Uber Technologies
Uber Technologies Inc. (UBER, Financial) is primarily a ridesharing, food delivery and micromobility company that provides services through its app. It is active in 63 countries and completes an average of about 14 million trips per day.
On March 31, shares of Uber traded around $27.67 for a market cap of $47.99 billion. GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 2 out of 10.
Uber’s “market share over profitability” approach means that the company has been focusing on making itself a household name, leaving its operating margin at -60.72% and its return on capital at -292.21%. The company is not yet profitable, estimating an Ebitda net loss of $1.25 billion to $1.45 billion for 2020 while aiming to turn into the green by 2021 on an adjusted basis.
Uber is a bit of a middle ground when it comes to profiting from increased deliveries. On the one hand, Uber Eats, which offers meal preparation and delivery services, is seeing increased orders, but on the other hand, demand for ridesharing has collapsed as people are remaining home more often.
In response to the Covid-19 crisis, Uber has suspended its carpooling rideshares and pledged 10 million free rides and deliveries for seniors, health care workers and others affected by the virus.
According to a company spokesperson, “any organization, healthcare provider, or governmental entity is eligible,” which means that there are a lot of interested parties to work through for the offer. “And we’re covering the costs associated with delivering food, meals and rides: including free Eats meals, the cost of the ride or delivery of food from a food bank, payments to the drivers and couriers, etc.”
“Uber is not a healthcare expert and follows the guidance of local public health organizations,” said Meghan Casserly, a spokeswoman for Uber Eats. “We are monitoring the situation and take action based on their recommendations.”
While Uber’s operating margins are low, it has a cash-debt ratio of 1.49 and a current ratio of 2.47, indicating financial stability in the near term. Thus, it seems the company is not likely to go bankrupt from its aid efforts during the pandemic. Due to a lack of “profiteering” from the crisis, the company may be able to supercharge its popularity and profitability in the long term, though it is undeniably a risky bet in the short term.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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