After reopening some of its restaurants in May, TravelCenters of America (TA) (NASDAQ: TA) is in the process of closing restaurants again due to the “recent increase in COVID-19 infections in several states,” it reported in its second-quarter 2020 earnings press release.
On its earnings conference call with analysts, management said approximately half of their restaurants are open with some offering only a limited menu. They said they haven’t decided if they will permanently close any restaurants but noted the pandemic has provided them the opportunity to review their dining plan. They like the cost profile of a smaller menu and will continue to explore potential options with other restaurant chains.
On Wednesday, the operator of more than 260 travel plazas and truck stops in the U.S. and Canada reported adjusted earnings per share of 59 cents, almost four times the year-ago result. However, the company came in light of analysts’ expectations of 68 cents per share.
“The improved year-over-year performance was a consequence of improved discipline in managing expenses, prompt furloughing of employees in response to reduced business as a result of COVID-19 and business management improvements,” stated CEO Jonathan M. Pertchik.
Total revenue of $986 million, down 38.3% year-over-year, came in $73 million better than analysts’ forecasts. Much of the decline was associated with lower diesel and gas prices compared to 2019. Fuel revenue declined 48.3% year-over-year.
While the pandemic stunted sales at most of the Westlake, Ohio-based company’s travel stops, the sale of diesel fuel was in line with the prior year as gallons sold declined only 0.8%. Trucking fared well amid the lockdowns as demand for essential goods like household and cleaning supplies, and food and grocery items spiked. However, the sale of gasoline declined, with gallons sold dipping 29.9% year-over-year as domestic travel plummeted. An increase in e-commerce and last-mile deliveries only partially offset the decline.
Gross margin on fuel increased 19.6% year-over-year. Favorable fuel prices and the reinstatement of the federal biodiesel blenders’ tax credit were the drivers. The tax credit was reinstated retroactively for 2018 and 2019 and resulted in a $7.7 million benefit in the period. TA has approximately $1.8 million in biodiesel tax credits remaining. Fuel gross margin improved 9.6% on an adjusted basis.
The pandemic did hamper nonfuel revenue in the quarter, which was down 14.8% year-over-year to $406 million. Truck service revenue declined 7.2%, the sale of retail goods was down 6.9% and restaurant revenue fell 43.5%. The company noted year-over-year improvement in demand for truck service and retail goods during June and July.
Pertchik cited “improved discipline in managing expenses” as the driver of improved results compared to 2019. Store-level operating expenses declined 15.8% year-over-year, or 60 basis points as a percentage of nonfuel revenue, as the company furloughed 4,300 field employees on COVID headwinds. The company also eliminated 130 positions as part of its restructuring plan and furloughed 120 corporate positions in response to the pandemic. Declines in nonlabor costs — maintenance, utilities and supplies — were noted as well.
The company currently has 2,600 employees on furlough and has been recalling some previously furloughed corporate employees.
“On a strategic front, in early July, we raised approximately $80.1 million of net proceeds in an equity offering intended primarily to fund deferred maintenance and other capital expenditures necessary to update property conditions and implement growth initiatives, as well as for working capital and for general corporate purposes,” said Pertchik.
However, TA struggled pricing the secondary stock offering, cutting the deal price by more than a third and increasing the shares to be sold.
The company previously cut its planned 2020 capital expenditures (capex) in half due to COVID-19. The reduction in capex includes idling the planned rebrand of its restaurants to International House of Pancakes (IHOP) restaurants. The two companies signed an agreement in 2019 to convert 94 TA locations to the IHOP brand over a five-year period. Given the restrictions on dining out, they agreed to push back the conversion schedule by a year.
In the earnings press release, TA announced it is only obligated to convert 20 of its restaurants to the IHOP brand, with the decision for the other conversions remaining “at its discretion.” The average rebranding cost per site is expected to be $1.1 million.
TA ended the quarter with $142.8 million in cash and $200 million available on its untapped credit facility. The company recorded $27.6 million in capex in the first half of 2020. The company’s capex guidance for 2020 is approximately $68 million.
“With this capital raise complete, our management team in place and our plan to transform the business in hand, we can focus our collective energy on executing through operational initiatives to improve TA’s performance and create long term value for our stockholders,” concluded Pertchik.
Shares of TA are up more than 8% in early trading compared to the S&P 500, which is up less than 1%.