DC Advisory
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I haven’t written much in the last two weeks (seems a lot longer), because there is not much any one individual can add to the 24/7 conversation in the news. It is amazing how many commentators, who are presented as “authorities”  have no credentials better than yours or mine. many of which even have a particularly  poor success record. Brings to mind what Yogi Berra said: “Predictions are tough, especially about the future”.
Relative to the restaurant industry:
It’s normally about day to day execution, the “micro” side of things. You’re only as good as the last meal you served.  These days, it’s all about worldwide health trends and “macro” financial considerations.
(1) There will be no V shaped recovery. While there will be a “recovery” from the disastrous current situation, as the “cabin fever” breaks, consumers will still be traumatized. I will be happy  to get out again, but I’m not going to eat three times as many meals to make up for those I missed. Our parents remembered the depression for their lifetimes. This is a shorter term event, but won’t end all it once. Economic and health concerns will still be with us.
(2) Yesterday we read an 8-K  filing by Dave & Buster’s (PLAY)(in which I have no current position)  that included reference to “going concern considerations”.  The Company has received a waiver from their lender, allowing PLAY to have a “qualified opinion” from their auditor. As the filing says “The Company currently anticipates that its financial statements will contain disclosures indicating substantial doubt about the Company’s ability to continue as a going concern as a result of the events occurring after February 2, 2020.”
We do not point this  as a negative for PLAY, in particular, who are apparently now negotiating for additional equity. There are now thousands of businesses, worldwide, that are not “going concerns” under current circumstances and with the lack of visibility. It will be commonplace for companies that have not yet finalized year end audits to have audit opinions qualified by “going concern” considerations. It will also be commonplace for waivers to be given by lenders, who have lots of other things to do rather than run these businesses. Their “workout” departments aren’t nearly big enough. All of these financial adjustments, for almost all companies,  will not be a source of comfort to investors.
“Moratorium” is becoming the operative word. Salaries, rents, and mortgage payment relief have increasingly been discussed over the last couple of weeks. For the first time, this morning we heard the Bank of America CEO suggest that mortgage obligations over the next 3-6 months be “suspended” and added to the end of the mortgage. The domino effect of a restaurant not paying rent is obvious. The landlord has a mortgage to pay, and the lender has its own financial obligations. Everybody can’t be covered, and we will likely  go through some sort of a “force majeure”, though it may be piecemeal and unstated. There are going to be multi-trillion dollar inefficiencies, and this will last for years. It ought to be inflationary, but who can tell?  Read our “Semi-Monthly Fiscal/Monetary Update that we published yesterday.
(3) ON A POSITIVE NOTE: Nobody knows how this plays out, or the timing. There were huge changes in our life after 9/11, airport security being the first to come to mind. There will be similar adjustments after this crisis. It’s is easy to suggest  that nobody will ever sit in the middle seat on an airline. When will Cheesecake Factory or Olive Garden be packed again? Seems like never. HOWEVER: less than twenty years ago, we watched people jump off the WTC buildings to save themselves. Who would believe that those tower “targets” would be replaced and that companies would locate on the top floors. LIFE WILL CHANGE, BUT NEVER SAY NEVER!
Roger Lipton