Via SeekingAlpha.com

With economic reopening pending, and some states set to expire stay-at-home orders soon, the restaurant sector could have some hope ahead, with Restaurant Brands International (QSR) and Shake Shack (SHAK) two large names posting earnings within a week. Restaurant Brands has fallen ~26% YTD, while Shake Shack has rebounded slightly, only down ~17% YTD. Going into earnings, Shake Shack is the high-risk play on smaller restaurants and lower quarterly net income, while Restaurant Brands offers more stability going into its earnings due to its conglomerate, highly franchised model.

Overview

Shake Shack operates as a corporate-owned hamburger joint, while Restaurant Brands operates as a holding company and primarily franchising of Tim Horton’s, Burger King, and Popeye’s restaurants. Size-wise, Shake Shack is much smaller, with only 275 Shack’s internationally, while Restaurant Brands owns and franchises over 27,000 locations between its three holdings (with 18,838 of those Burger Kings). Annual revenues for Shake Shack for FY2019 were just under 1/10th of Restaurant Brands – $594 million versus $5.603 billion; market-cap wise, the same 1/10th is apparent – Shake Shack at ~$2.0-$2.1 billion, Restaurant Brands ~$21.5-$22 billion.

Shake Shack – Volatile on Earnings

Over the past 8 trading days following earnings releases, Shake Shack closed lower on 5 of those days, with the last up day on Q2 2019’s results posted 08/05/2019. Average moves following earnings are +/-13.41%, with the smallest % move being -4.31% and the largest +20.64%. Since quarterly net income has fluctuated between -$1 million to $10.3 million, EPS for the past quarters are low: $0.31 in diluted EPS has been the highest reported figure from Q3 2019 (also met with a positive EPS surprise of $.10 and the -20.64% move post-earnings).

Going in to this earnings report on May 4 after hours, Shake Shack has a history of large swings post-earnings, and that will most likely continue, as estimates to sales and EPS are unknown due to the effects of shutdowns, with Shake Shack resorting to to-go operations and temporary closures.

Key Factors to Watch

Look for any commentary on the 27 domestic stores that were temporarily closed, and whether Shake Shack will be reopening all/some of these stores on the to-go operating method like the remaining locations. Quarterly revenues for the past three quarters hovered in the $150 million range, and current quarter estimates are pegged at ~$145 million in revenue and EPS loss of ~$0.01. Only two weeks during the quarter had operated with the two-go model (which Shake Shack instilled on March 16) so revenues for the current quarter could come in either way; however, with the past two quarters coming off of revenue misses (by $0.03 million and $1.62 million), there is a stronger chance that Q1 revenues will come up short due to extenuating circumstances around the virus, and EPS as well.

A majority of the impact to revenues, EPS and cash flows will not be seen until the following quarter, but look for updates from management on liquidity – Shake Shack came under fire recently for receiving $10 million from PPP small business loans, and eventually returned the full amount. Management expects operating losses to be ~$1.5 million or more per week for the current period, so any update on extended liquidity or changes with economic reopening and how that might affect the current Q2 could be key for the future health of the restaurant chain.

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A large (> +/-10%) move post-earnings will most likely boil down to: a) how much does revenue exceed or miss expectations (~1% or more exceeding or missing should be the key number); b) is EPS positive or negative, and the surprise – a negative EPS is already expected, but should that come in much lower (from lower sales in NYC stores), shares could sink; if EPS is positive, shares might see a boost early in the session on May 5; c) any management commentary on Q2 and outlook on liquidity or store changes with possible economic reopening – if management is tentatively positive for Q2, that could be a good sign for shares to head higher.

Options trading for the May 8 expiration are currently expecting an ~$6.50-7.50 per share move post-earnings, represent a 12.8% to 14.8% move from April 27 price of $50.64.

For the Current Quarter

Although the upcoming report will be about the quarter ending March 30, the current quarter ending June 30 will see the majority of effects of sales slowdowns. Here’s where the next quarter could be impacted, and any commentary on these points could affect the post-earnings move: a) location is key, and Shake Shack is primarily concentrated in NYC and the surrounding region. Of the 185 domestic restaurants, 46 are in New York and New Jersey – the two hardest hit states from coronavirus, which could definitely impact consumers and the amount of food ordered to-go. b) Shake Shack has looked towards expansion, and domestically, 8 of the 10 newly opened licensed locations were in airports – which could hurt revenues as air traffic began to slow; the company had planned to open 40 to 42 restaurants this year, but financially may struggle to do that.

Restaurant Brands – Safer, But Still Rewarding

Over the past 8 trading days following earnings releases, Restaurant Brands closed higher 5 times, with the last up day on the previous report on February 10. Average moves following earnings are +/-2.90%, with the smallest % move -1.04% and the largest +6.10%. As an overall net franchiser, Restaurant Brands has much more security in net income from franchising revenues, with quarterly net income ranging from $134 million to $201 million for the past 8 quarters. EPS has ranged from $0.53 to $0.75, with Q3 2019 also the highest EPS generating quarter.

Going in to earnings on May 1, Restaurant Brands offers a better track record of positive post-earnings moves, yet the current quarter poses uncertainties around earnings, since restaurants overall have suffered with dine-in options unavailable for parts of the quarter.

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Key Factors to Watch

Restaurant Brands has a much wider range of operations and more stable revenues from franchising, as well as more restaurants to operate under modified operations that can possibly float revenues higher for its quarter. Current revenue estimates are ~$1.22 billion and EPS of ~$.50, pointing to a lower figure than any of the past 8 quarters. Analyst expectations seem more in line with the damages to business that have occurred in the end of the quarter, as well as the larger presence in the market which could hurt sales more. Restaurant Brands also took quick steps to ensure social distancing and thermometers in their locations to prevent the spread of coronavirus among employees and also ensure food safety.

For the past 8 quarters, EPS has beat expectations 5 times, and revenues 3. Q1 2018 had the largest revenue beat of 10.9%, while Q4 2019, the most recent, had a 1.7% revenue beat. However, the largest miss for EPS occurred in Q1 2019, missing by 5.3%. With expectations already low, Restaurant Brands could be set to beat on both ends, although a slight miss in revenue and flat or a marginal beat in EPS could be the more probable outcome of the upcoming report.

The upcoming report in pre-market on May 1 could lead to a positive move that day if: a) earnings come in above consensus of $.50; b) revenues exceed $1.25 billion; c) a combination of a) and b); d) any positive comments on the current Q2 and if restaurant sales are not as negatively affected as expected. A negative move could easily occur if: a) earnings or revenues both fall flat or miss estimates (which could occur from social distancing measures and less customers dining-in, which is much more likely next quarter than it is for Q1), b) management does not provide any significant update on the chains and/or provides a sub-par outlook for the current quarter.

Restaurant Brand’s more stable moves following earnings as opposed to Shake Shack lend it more towards a positive reaction, especially with revenues and EPS already estimated to be the lowest of the past 9 consecutive quarters. However, circumstances within the markets about possible further economic reopening could boost a sub-par report, while any fear of extending social distancing could harm a good report or exacerbate a negative move on a bad report.

For the Current Quarter

Again, just like Shake Shack, most of the effects of the coronavirus will be felt during Q2. During April, Restaurant Brands has dedicated to offering free meals and more to support the communities it is involved in – in the US, Burger King has already donated over 500,000 meals to children out of school (who relied on school lunch) through a promotion of 2 free King Jr. meals with a purchase of an adult meal. Worldwide, Burger King has donated ¥1 million in China, 8 tons of food in Italy, and other commitments. Tim Horton’s has offered free coffee and donuts to health workers in Canada, and orders through Popeye’s mobile app will have free delivery and the ability to donate $1 to No Kid Hungry. These measures of giving back as well as free meals could drive revenues higher than expected Q2, where customers might purchase more on a day-by-day basis (or start to purchase from) to capitalize on the Burger King free meal promotion.

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Value for money – like McDonald’s, Burger King offers a wide range of burgers and other meals for cheap prices, unlike Shake Shack. With incomes falling and customers out of work or unemployed, eating out could be more cumbersome to financials, but to others it’s a relief from cooking at home every day. Ordering from the value menu at Burger King could be much more feasible for families and individuals at this time rather than ordering from a relatively higher-priced Shake Shack. More locations domestically (from both Popeye’s and Burger King) can also drive consumer spending higher in those two as lockdowns are pending to be lifted and possibly lifted in more states during the quarter.

Conclusion

Earnings are a guessing game currently, with no solid expectations for revenues or EPS as the whole restaurant dynamic has switched so rapidly. However, only the end of March was impacted for Q1, so overall impacts of the social distancing and new dynamic will be felt in Q2.

Shake Shack’s tendency to have double-digit percentage moves following earnings as well as high estimates (only ~-5% down QoQ revenues) and a concentration in the hardest-hit regions could easily lead to a sharp slide in shares following earnings; should revenues beat, shares could be sent higher; all in all, any management reports on the current quarter and outlook, should it be provided, could be the ultimate determinant of share prices following earnings.

Restaurant Brands trades much more stable on earnings relatively to Shake Shack, but still has had positive moves greater than 4%, a solid one-day gain. The company’s over 27,000 locations definitely have the ability to float revenues higher than consensus $1.22 billion, and the value menu could definitely have driven revenues higher in the end of March. Should revenues and EPS come higher than expectations, shares could easily see 2-3% gain, but again, any management perspective, if provided, as well as the market movement, could determine where shares end up. Restaurant Brands seems to be the much safer play heading in to earnings, with a better one-day track record and less volatility post-earnings.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.