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Fallout for restaurant industry could be even worse than forecast after Harvey batters Texas

  • Canaccord on Wednesday lowered its August same-store sales estimate for the restaurant industry to a drop of between 2 and 4 percent.
  • Houston, which is one of the largest restaurant markets in the U.S., represents about 2 percent of the restaurant footprint in the country.
  • "We know what happened to the industry when Katrina hit, but this is far greater," NPD analyst Bonnie Riggs told CNBC.
The Bayfront Seafood restaurant is surrounded by floodwaters in the aftermath of Hurricane Harvey Saturday, Aug. 26, 2017, in Palacios, Texas.
David J. Phillip | AP
The Bayfront Seafood restaurant is surrounded by floodwaters in the aftermath of Hurricane Harvey Saturday, Aug. 26, 2017, in Palacios, Texas.

Heavy rainfall and flooding continued in Houston and other parts of Texas and Louisiana on Wednesday, with areas in these regions expected to see a year's worth of rainfall before the storm is set to dissipate on Thursday.

The continued deluge was already expected to weigh on restaurant sales, but it seems the fallout could be even worse than originally forecast.

Canaccord on Wednesday lowered its August same-store sales estimate for the restaurant industry to a drop of between 2 and 4 percent. Previously the research firm had expected same-store sales for the month to be down between 1 and 2 percent.

"We expect the month to be significantly impacted in the final week by the ongoing record rainfall and flooding in south Texas and Louisiana from Hurricane Harvey, which made landfall on August 25," Lynne Collier, an analyst at Canaccord, wrote in a research note Wednesday.

Collier said that Houston, which is one of the largest restaurant markets in the U.S., represents about 2 percent of the restaurant footprint in the country.

"While the restaurant industry will lose a week or more of business in Houston and surrounding areas, some restaurant companies will have a lengthened impact to sales depending on the severity of property damage," she wrote. "In some cases, we think the lingering effects will carry well into September and likely into Q4."

There are some 13,000 restaurants in Houston and more than 7,000 of those locations are chain restaurants, Bonnie Riggs, an NPD Group analyst, told CNBC.

Restaurant brands that have a significant number of locations in the Texas and Louisiana area stand to see sales shrink in the near term because of closures and displaced workers.

Also, with thousands focused on rebuilding their lives and homes, going out to eat will not be a priority. Evacuees will have restricted disposable income, with most of their funds going toward rebuilding. Riggs said that customers will not have the luxury of eating out very often, if at all, and restaurants in that area will struggle for the foreseeable future because of this.

"We know what happened to the industry when Katrina hit, but this is far greater," Riggs said.

On Wednesday, Wedbush analyst Nick Setyan identified the restaurants that it covers that are most at risk for sales losses due to the destruction of Harvey: Jack in the Box, Chuy's, The Cheesecake Factory, BJ's Restaurants, and Fiesta Restaurant Group, which owns Taco Cabana.

Setyan's data depicts what he expects would happen to sales and EPS per day if 100 percent of each company's locations in the Houston area remained shuttered. All EPS numbers are the worst-case scenario for each company.

"Our goal is to put parameters around the possible impact as stores remain closed," he wrote.

In addition, he predicted that Jack in the Box would lose about $24,000 per day in royalty payments and that The Cheesecake Factory's Grand Lux location would lose about $27,000 in sales per day.

In Wednesday trading, shares of Chuy's fell a quarter of a percent, shares of Jack in the Box were up about a quarter of a percent, The Cheesecake Factory was up 1.7 percent, Fiesta Restaurant Group was up about half a percent, and BJ's Restaurants was up about 1.5 percent.

"It's too early to know exactly what the devastation will mean in terms of lost sales, but when the fourth-largest market in the country is essentially stopped in its tracks for what looks like at least a week and probably more, there will be lost sales," David Henkes, principal at Technomic, told CNBC via email. "And the lingering impact of restaurant closures mean that it will continue well after the storm ends."

In addition, the majority of relief efforts will be geared toward rebuilding homes, not businesses. So, restaurant owners who are unable to finance the restoration of their location may be forced to stay closed longer or shutter their business altogether.