It’s becoming an all too familiar and unfortunate scene. Shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) took a massive hit on July 18 as fears of another food-poisoning incident rocked the markets. Chipotle executives made the right move by shutting down the store in question, a lone outlet in Sterling, Virginia. Although it’s a company-specific incident, CMG’s woes may reverberate against other restaurant stocks.
For Chipotle to say that they have a PR crisis on their hands is a massive understatement. Two years ago, multiple food-poisoning incidents rocked CMG, eventually cutting its market value in half. Through a concerted effort, which involved margin-gutting promotions in order to drive sales and traffic, Chipotle punched back.
And this year was when it all started to come together. At its peak, CMG stock was up nearly 31% year-to-date.
Americans tend to give people second chances. However, a third chance in two years time is a big ask. More critically, the poisoning incident makes Chipotle look insincere and disconnected to its customers. With so much pain and turmoil in the general retail sector, restaurant stocks can’t afford to incur missteps. Multiply that sentiment five-fold for CMG.
Indeed, while this latest controversy makes for “great” headlines, the reality is that the American consumer is becoming increasingly selective. If there’s a hint of trouble, the customer has a litany of options. That more than anything else is what concerns CMG and restaurant stocks. After all, Chipotle looked ugly two months before this alleged incident.
Unless the consumer economy improves dramatically, we’ll be seeing more pain. In the meantime, here are three restaurant stocks that will follow Chipotle lower.
Restaurant Stocks to Sell: Jack in the Box Inc. (JACK)
No stranger to the PR impact of food-poisoning, Jack in the Box Inc. (NASDAQ:JACK), can sympathize with Chipotle. Among veteran restaurant stocks, JACK probably endured the most agonizing correction in its market value, and for good reason. More than two decades ago, children died eating tainted meat served from Jack in the Box locations. That fortunately hasn’t been the case for CMG.
Still, JACK investors are not out of the woods. One of the biggest and under-reported concerns is Hispanic consumer behavior. According to Morgan Stanley’s research, the booming Hispanic demographic was forecasted to benefit JACK against many other restaurant stocks. The reasoning is that more than a quarter of JACK guests are Hispanic. Furthermore, the company has been winning with this demographic despite Hispanics’ tendencies to eat more at home.
But it’s an unrelated competitor, Target Corporation (NYSE:TGT), that sounded a shocking alarm. According to Target CEO Brian Cornell, “The Hispanic consumer in the U.S. is shopping much less.” Although it’s difficult to pinpoint how much this is affecting JACK, the charts paint an ugly picture. Shares are down 15% YTD, and it’s hard to see them improving anytime soon.
Combined with general pessimism in the retail sector, and saturated competition among restaurant stocks, JACK has serious challenges to overcome.
Restaurant Stocks to Sell: Buffalo Wild Wings (BWLD)
On the surface, the reason for my pessimism wasn’t quite obvious. It has an adoring fan base, the food is awesome and BWLD was up in positive territory year-to-date. Unfortunately, market sentiment can change in a heartbeat, and that’s exactly what happened to Buffalo Wild Wings.
I hope my readers were paying attention, and didn’t wager on BWLD stock. Since my last article on the company, shares slipped a sickening 23%. Although I wasn’t expecting that dramatic of a fall in such a short time period, it also wasn’t surprising.
Activist investor Marcato Capital complained bitterly that BWLD underperformed against other restaurant stocks, as well as the benchmark index. The hedge fund took to task Buffalo’s “fuzzy math” in terms of its investment performance. One of the primary ways to reverse the bearishness was to franchise a big chunk of its store locations.
I don’t like contentious investments. It’s already difficult enough to make a profit in questionable markets like these. The extra drama makes it all the more difficult to like BWLD. But combine this with shoddy earnings performances and a bearish consumer economy, astute investors are wise to pass on Buffalo Wild Wings.
Restaurant Stocks to Sell: Shake Shack Inc (SHAK)
Those that can’t sell, sell in China. That seems to be the latest mantra on Wall Street these days. It’s also Shake Shack Inc’s (NYSE:SHAK) latest strategy.
According to a recent Bloomberg report, SHAK will open its first location in Hong Kong next year, followed by a push into mainland China. Obviously, the strategy appeals to investors superficially because China has a lot of people.
But dig a little deeper and you’ll find that this is nothing more than a PR distraction. Sure, China is great and all, but it’s not a panacea for an ailing company. As SHAK CEO Randy Garutti notes, domestic revenues represent the “lion’s share” of growth potential. If that’s the case, the sideways action of SHAK stock should concern potential buyers. What the markets are stating is that competition is oversaturated among restaurant stocks.
Guess what? It’s not going to get better in China. Bloomberg warns that American fast-food companies that made the trip overseas haven’t always experienced great results. Anti-western sentiment runs strong, and I don’t think President Trump improved that department. Furthermore, local Chinese competitors undercut the big American brands.
Of course they do! China is the “undercutter” of the world. SHAK is merely converting American problems into Chinese problems, but that doesn’t solve anything.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.