Hurricanes Harvey and Irma Hurt the Restaurant Industry
For the first time in seven years, the U.S. economy lost more jobs last month than it created. The Labor Department said non-farm payrolls fell by 33,000, with most of the losses hitting the leisure and hospitality sector. In fact, food-service and drinking establishments lost 105,000 jobs in September, the largest one-month decline in the history of the jobs report.
There was one big reason for the job losses. Well, two actually: hurricanes Harvey and Irma.
The massive storms slammed into Texas and the Gulf Coast on Aug. 25 and Sept. 10, respectively, with Harvey estimated to have caused between $70 billion and $108 billion worth of damage, and Irma, $20 billion to $65 billion.
It marked the first time in 166 years of recorded weather history that two Category 4 storms made landfall in the same year.
While many businesses in those storm-ravaged regions suffered at the hands of Harvey and Irma, it seems the restaurant industry fared the worst. Industry watchers at Avero estimate that restaurants in the Houston metro area suffered a nearly 50% collapse in sales the week of Harvey, while Miami and various regions of Florida saw a 25% drop in the week of Irma.
The storms couldn't have come at a worse time for the restaurant industry. Year-over-year job growth was already at best flat, with improvement not expected to arrive until early 2018. And even before the storms hit, same-store sales were declining. In July and August, they fell more steeply than they had over the prior three months. Worse, August was the 15th month out of the past 16 that comps fell and restaurant traffic was negative.
Although there are some pockets of hope, such as fast-food chains and fast-casual restaurants, which saw higher average checks and more total sales, every segment of the restaurant industry still saw traffic decline in August. While September data will be published soon, it can hardly be expected to be any better.
Darden Restaurants (NYSE: DRI), for instance, said the two storms may have cost it $5.6 million in profits.
The owner of Olive Garden, Longhorn Steakhouse, and other brands also noted how fragile its business is: Comparable sales had been running 2% higher before the storm, but Hurricane Harvey wiped out 30 basis points of gains in less than a week.
Whirlwind of chaos
Though fast-food chains have been doing somewhat better than others in the restaurant industry, McDonald's (NYSE: MCD) will probably be taking an earnings hit, as it has some 2,000 stores in the affected areas. Texas alone accounts for almost 20% of its annual sales. Including North Carolina, Georgia, Florida, and Tennessee, the five states represented over half of the chain's sales, with Florida having the second largest number of restaurants.
Starbucks (NASDAQ: SBUX) also said the hurricanes will hurt, as it closed 400 stores ahead of Harvey and some 700 stores across the Southeast and Puerto Rico when Irma hit.
Shares of restaurant stocks were hit hard by the impact the hurricanes dealt, though most have begun to rise in the weeks after. The job losses may also end up being a temporary drop. While some areas still dig out of the muck, better reporting now that the storms are in the rearview mirror may allow more businesses to update their status.
Still, with the restaurant industry on edge as it has been, it's clear that calamities large and small remain present. The weakest chains may not be able to handle further disasters, while even the best ones will be put to the test.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.