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Why Restaurant Stocks Crashed on Friday

By Anders Bylund - Mar 27, 2020 at 1:02PM

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The coronavirus stimulus bill might be delayed, and one major restaurant brand is already furloughing most of its workers.

What happened

Many household-name restaurant chains took a dive on Friday, in many cases breaking a strongly positive trend. A few minutes past noon, EDT, shares of Cheesecake Factory (CAKE -0.55%) and Outback Steakhouse parent Bloomin' Brands (BLMN 0.04%) both traded 14.6% lower. Denny's (DENN -0.80%) fell 15.4% and Chili's parent company Brinker International (EAT 3.60%) took a 17% haircut. Olive Garden operator Darden Restaurants (DRI 0.27%) followed the pack with a milder 9.1% drop, having recovered somewhat from an earlier 12.3% plunge.

Closeup view of a pottery plate, empty except for a few crumbs.

Image source: Getty Images.

So what

All of these stocks enjoyed fantastic gains earlier this week, driven by the seemingly inexorable progress of a massive bill to manage the economic impact of the coronavirus crisis. The $2.2 billion relief bill, unanimously approved by the Senate, includes loan forgiveness and payroll assistance measures for restaurants as well as a few thousand dollars in cash for each American family. The bonus cash should help families under "shelter-in-place" orders find room in their budgets for a few delivered restaurant meals.

But the bill hit a snag on Friday as lawmakers raced back from their constituent states to Washington in order to record their votes. The crucial vote may be delayed by the requirement to have a quorum of at least 216 representatives present.

And that's not all. In a regulatory filing, Cheesecake Factory announced that it has furloughed 41,000 hourly staff members and reduced pay for its remaining employees by up to 20%. The salary reductions also apply to Cheesecake Factory's executive officers and board members. The company is not planning to pay rent on its restaurant properties in April. If a solid performer like Cheesecake Factory is forced to make these radical moves now, others may have to follow suit as the virus crisis rolls on.

Now what

The COVID-19 outbreak is changing the restaurant industry in many subtle ways. Consumers are getting used to the idea of take-out and delivery options, arguably reducing the value of physical restaurant locations in the long run. A multiweek run of weak sales may force some of the weaker competitors in this space to close their doors forever, or sell their brands and operations to private equity firms and more well-heeled restaurant rivals.

It's no surprise to see restaurant stocks suffering under these conditions. Don't forget that the huge relief-bill gains this week didn't amount to much in the light of even steeper drops in the coronavirus era:

DRI Chart

DRI data by YCharts

Fearless investors might be able to find fantastic values in this depressed market, but they will also run into a few landmines along the way. Pick your restaurant tickers with care, dear investor. I recently said that Darden looks like a probable survivor, but even that well-run company could fall if the coronavirus lockdowns stay around deep into the summer.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$130.23 (0.27%) $0.35
Bloomin' Brands Stock Quote
Bloomin' Brands
$23.21 (0.04%) $0.01
Brinker International, Inc. Stock Quote
Brinker International, Inc.
$31.40 (3.60%) $1.09
Denny's Corporation Stock Quote
Denny's Corporation
$9.97 (-0.80%) $0.08
The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
$32.31 (-0.55%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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