GrubHub said the first quarter showed strength, then weakness, then strength again amid the COVID-19 pandemic
Shares of GrubHub (GRUB) are under pressure on Monday after the food-delivery service withdrew its earnings forecast for full year 2020 as demand suffered in New York City and in other places as well. The company also said it expects first quarter revenue and adjusted EBITDA to be slightly above the midpoints of the guidance issued back on February 5. While William Blair analyst Ralph Schackart still believes Grubhub is likely to benefit as the country begins its return to relative normalcy, his peer at KeyBanc cut the stock to Underweight as he expects the small-to-medium sized restaurant space to be impaired and increasingly competitive exiting the COVID-19 crisis.
GUIDANCE UPDATE: GrubHub said that, "For the first quarter of 2020, we expect our revenue and adjusted EBITDA to be slightly above the midpoints of the guidance we issued on February 5, 2020. While the business was trending at or above the high end of our guidance range for the first 10 weeks of the quarter, like most businesses, we experienced a swift change in customer behavior in the middle of March when the pandemic took hold across the country. Initially, we observed a decrease in orders across our entire business as the news upended typical routines and there was considerable uncertainty about what day-to-day life would be like. […] In New York City our consumer business was affected more than in other metro areas due to the severity of the COVID-19 impact in that market. We believe this is due to a number of factors, including New York City residents choosing to temporarily leave the city and/or cooking at home more often, as well as more local restaurants deciding to pause operations because of the temporary drop in demand. As a result of all of these factors, our first quarter DAGs ended up flattish compared to the first quarter of 2019.
“Exiting the first quarter and in the beginning of the second quarter, we have seen trends improve significantly - so far in April our overall year-over-year DAG growth has been approximately 10%. […] While we are confident we could generate meaningful profits in the second quarter that would keep us comfortably on the previously announced path to deliver at least $100 million of Adjusted EBITDA in 2020, we are instead planning to reinvest most of the profits we expect to generate during the second quarter into programs that directly drive more business to our restaurant partners. […] As a result, we plan to intentionally manage the business to approximately $5 million of Adjusted EBITDA in the second quarter to continue to support our ecosystem. […] We are confident that our ability to manage our business profitably while competing aggressively has not changed, but because of the uncertainty surrounding the timing of when and how the COVID-19 outbreak will resolve, we believe it's prudent to withdraw our full year 2020 revenue and EBITDA guidance."
GRUBHUB LIKELY TO BENEFIT: Following the company’s update, William Blair analyst Ralph Schackart told investors that as seen by recent increases in order volume over the last few weeks, Grubhub is likely to benefit as the country begins its return to relative normalcy. He maintained an Outperform rating on the shares.
SHARES TO REMAIN RANGE-BOUND: Also commenting on GrubHub’s pre-announcement, Raymond James analyst Aaron Kessler told investors that given recent news reports and data showing increased interest in food delivery services, he believes the mixed results for the company came as a “negative surprise.” The analyst expects shares to remain range-bound at current levels until one sees stronger overall DAG growth, improved EBITDA outlook, and improved NYC results. Kessler has a Market Perform rating on the stock.
SELL GRUBHUB: Meanwhile, KeyBanc analyst Edward Yruma downgraded GrubHub to Underweight from Sector Weight with a $32 price target. The analyst cited his view that the small-to-medium sized restaurant space - which accounts for about 80% of GrubHub's revenue - will be impaired and increasingly competitive exiting the COVID-19 crisis. In the near-term, an industry-wide consolidation for delivery service operators is likely off the table, Yruma added.
PRICE ACTION: In afternoon trading, shares of GrubHub have dropped over 10% to $40.39.