Having gotten over the initial onslaught of the novel coronavirus, many Americans may have a sense of confidence that the worst is behind them. Certainly, the broader hospitality and services industry is hoping that’s the case.
Restaurant stocks in particular suffered brutally when Covid-19 ceased to be an exotic foreign problem. But through grit and ingenuity, many eateries managed to survive and some outright thrived.
But how long can this critical air pocket last amid this once-in-a-century pandemic? Yes, many businesses that focus on sit-down customers have shifted to outdoor dining. But that has been a hit-or-miss affair. Frankly, the idea of sitting in a parking lot doesn’t appeal to many diners, who prefer the ambiance of indoor dining. Further, as The Washington Post noted, when winter weather hits, that may pose serious challenges for restaurant stocks.
I think it’s fair to say that the U.S. government has lost control of the coronavirus pandemic. Earlier in the crisis, White House health advisor Dr. Anthony Fauci consistently talked about flattening the infection curve. Well, looking at data from the Centers for Disease Control and Prevention, we’ve done anything but flatten the curve. On Nov. 16, the seven-day moving average of new daily Covid-19 infections breached the 157,000 case level.
It’s possible that Americans are letting their guard down too quickly. Hopefully, we can get through this surge of coronavirus cases without too much damage and loss of life. But if not — and we should really prepare for this possibility — these restaurant stocks may face severe challenges.
- Dave & Buster’s Entertainment (NASDAQ:PLAY)
- Drive Shack (NYSE:DS)
- Cracker Barrel Old Country Store (NASDAQ:CBRL)
- The Cheesecake Factory (NASDAQ:CAKE)
- Darden Restaurants (NYSE:DRI)
- Brinker International (NYSE:EAT)
- Ruth’s Hospitality Group (NASDAQ:RUTH)
On a final note, it’s important to realize that this isn’t necessarily a list of restaurant stocks to sell. With such a dynamic situation from health, social, economic and political angles, it’s too early to say which companies are done for. Rather, please treat this write-up as an example of organizations that face an uphill climb if we can’t contain the coronavirus.
Dave & Buster’s Entertainment (PLAY)
Although not one of the pure restaurant stocks, Dave & Buster’s Entertainment certainly has a Chuck E. Cheese for adults vibe. Following its market debut, PLAY stock jumped higher as the underlying business represented a great way for workers to mingle after hours or for friends to be introduced to new people. Unfortunately, the novel coronavirus has really put a damper on this high-contact business model.
True, PLAY stock noticeably increased in market value as it became apparent that Joe Biden will be the next President. As well, it doesn’t hurt that coronavirus vaccines from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) have demonstrated a high level of effectiveness in early studies. However, that doesn’t necessarily mean that Dave & Buster’s is in the clear.
First, the Biden administration must get a handle on the pandemic. Unfortunately, that’s much easier said than done. Plus, he’ll be taking over at an unideal time, when cases have soared to record highs. Second, while the vaccine developments are encouraging, you still have to get over a critical roadblock: Convincing millions of Americans to actually take it.
Given how much conspiracy theories have dominated the political discourse, this is going to be a huge obstacle. Therefore, I’d be cautious about buying into restaurant stocks that have a similar business model to Dave & Buster’s.
Drive Shack (DS)
Personally, I’m not a big fan of golf, unless we’re talking about miniature golf. However, this is the sport of big-wig executives and the “normals” that constitute America’s countless cubicles. Combine three levels of interactive golf, mixed in with food, drinks and games, and you have yourself Drive Shack. Essentially, this is Dave & Buster’s for the C-suite crowd — and the people who want to kiss up to them.
Not surprisingly, Drive Shack was one of the more compelling Great Recession recovery plays among restaurant stocks. With the economy building back from the housing and equity market collapse, DS stock represented forward-thinking contrarianism. However, this time around may be different and to a significant magnitude. That’s because the pandemic isn’t just a health crisis, of course, but an economic one.
Beyond that, it’s a distinct kind of economic crisis, one that’s forced people to work from home because of the health threat. That inflicts a double whammy on DS stock because it disincentivizes customers from going to Drive Shack, even if their financial situation could afford the expense.
Sadly, the massive surge in coronavirus cases is exactly what Drive Shack didn’t need, making it one of the restaurant stocks to avoid until the pandemic fades.
Cracker Barrel Old Country Store (CBRL)
Specializing in a Southern country theme, Cracker Barrel Old Country Store is distinct among restaurant stocks. If you want a taste of Americana, this would be it. However, because of its theme, it’s not to everyone’s taste, particularly with the younger and more diverse demographic. Therefore, it’s not surprising that CBRL stock hasn’t moved much in the recent years leading into the pandemic.
As another example, I live in the very liberal state of California. One of the closest Cracker Barrels to me is actually in a different state, conservative (leaning) Arizona. Further, given equality-based controversies surrounding CBRL stock, let’s just say that Cracker Barrel has a reputation. Unfortunately for management, negative PR that just came to light doesn’t help out matters.
Now, before you start typing and accuse me of presenting Cracker Barrel in a negative light, please note that this isn’t my intention at all. Rather, I’m just looking at this situation from an investor’s perspective. Cracker Barrel had already courted controversies before the pandemic. With the present disruption, it’s certainly not bolstering the company’s image.
Plus, let’s be real — a restaurant like Cracker Barrel thrives on its unique ambiance. A parking lot business model just wouldn’t cut it, making this one of the restaurant stocks to avoid.
The Cheesecake Factory (CAKE)
A few weeks ago, a rumor circulated on social media that The Cheesecake Factory was closing all its locations. Immediately, people expressed their dismay, with some blaming the Trump administration for failing to keep those giant doors open. Fortunately for cheesecake lovers, CAKE is not one of the restaurant stocks that’s about to implode. However, that doesn’t necessarily mean Cheesecake Factory is in the clear.
Indeed, if the pandemic isn’t brought under control quickly, CAKE stock could face some serious risks. While the underlying company benefits from a robust brand image and has pivoted to alternative service deliveries, it’s clearly not enough. In its latest earnings report, revenue was down nearly 12% year-over-year. Similar to the buffet model, Cheesecake Factory has suffered a severe disruption.
In part, CAKE stock depends on a high-volume diner base. How many times have we shopped at a mall, only to eat at a Cheesecake Factory on a whim? Well, that platform has gone out of the window and may be substantially deflated until we have a long-term solution to the coronavirus.
Additionally, Cheesecake Factory relies on setting up shop on premium commercial real estate. It was worth it before the pandemic. Today, this is one of the restaurant stocks where the worst may be yet to come.
Darden Restaurants (DRI)
After the initial shock of the coronavirus pandemic wore off, many restaurant stocks offered viable contrarian opportunities. One of them was Darden Restaurants. With major metropolitan areas suddenly turning into ghost towns, many Americans felt a heavy dose of cabin fever. Therefore, under the theory of pent-up demand, DRI stock appeared a great place to put speculative money to work.
As you can tell from the charts, Darden did its job. However, now may be a time to rethink this narrative.
Here’s the deal with DRI stock. Before the pandemic, many consumers spent a significant portion of their discretionary funds at dine-in restaurants. This was a great way for worker bees to unwind and let off some steam. As well, Darden specializes in comfortable dining experiences at reasonable prices. However, a consumer survey trend by Jungle Scout reports that 61% of consumers are worried about their current financial situation, up from 56% in May.
Sadly, this may translate to a lower revenue stream for DRI stock. In large part, this is because a third of consumers plan to decrease their spending until the end of the year. If the crisis lasts longer, you’d figure that this will badly hurt the restaurant industry.
Brinker International (EAT)
On the surface, Brinker International doesn’t seem to be one of the restaurant stocks to avoid. On a year-to-date basis, EAT stock is up over 21%, having weathered the Covid-19 storm well. Although I’m not overly bearish on Brinker, this may be an opportunity for stakeholders to exit into strength. Should the pandemic worsen — and that appears likely — exposure to the dining industry isn’t ideal.
Under the Brinker umbrella are two flagship brands: Chili’s Grill & Bar and Maggiano’s Little Italy. I’m not familiar with Maggiano’s although I’ve frequented Chili’s many times. In the pre-pandemic era, the casual dining place offered a family-friendly entertainment platform. As well, during football season and major events like the World Cup, Chili’s was the place to go for camaraderie, food and plenty of beverages.
But as you know, this business model has been completely disrupted. Sure, I acknowledge that Brinker has done a fabulous job pivoting to curbside to delivery services. But this transition probably isn’t enough to save EAT stock if the pandemic rears its ugly head again. That’s because the consumer economy has weakened considerably, broadly ruining the appetite for restaurant stocks.
Ruth’s Hospitality Group (RUTH)
I’ve been invited twice to dine at Ruth’s Chris Steak House, the flagship brand under Ruth’s Hospitality Group. Let me tell you, the restaurant puts the fine into fine dining. Further, it’s easy to remember both experiences because the food was outrageously delectable. About the only thing I don’t like is that you’re mostly dining with C-suite tool bags (or wannabe tools that use phrases like “C-suite”).
However, because RUTH stock is levered to an upper-class clientele, you’d think that shares will do well during this crisis. However, the equity is down 33% YTD, which is in stark contrast to other restaurant stocks that have bounced back from the March doldrums. What gives? Well, here’s my contrarian take – the rich aren’t stupid.
According to a report from The New York Times, the affluent have been the demographic most willing to cut its spending during this crisis. And that caused many service workers to lose their hours or in the worst case, lose their jobs. But if the rich can afford to spend lavishly, why don’t they?
Again, it’s because they’re not stupid. When you’re faced with an unprecedented calamity, the last thing you want to do is to be frivolous with your money. And I’m sorry but fine dining is frivolous, which is why RUTH stock is surprisingly risky.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.