What happened
Casual dining stocks including Brinker International (EAT 1.16%), Darden Restaurants (DRI -0.28%), and BJ's Restaurants (BJRI 0.75%) were heading lower as stocks fell broadly today and one analyst slashed his price target on Chili's parent Brinker.
After making gains last week, the S&P 500 pulled back as investors remained nervous about next steps in the coronavirus crisis and looked ahead to what will likely be an ugly earnings season with big banks set to kick off first-quarter earnings this week. Restaurant stocks, especially casual dining chains, are especially sensitive to the lockdown-style conditions in effect across much of the country as dining inside restaurants has been banned. That change effectively limits these chains to takeout and delivery, and also takes away high-margin alcohol sales.
As of 12:49 p.m. EDT today, Brinker was down 13.5%, Darden had declined 6%, and BJ's was off 9%. At the same time, the S&P 500 was trading 1.8% lower.
Image source: Getty Images.
So what
The only real piece of company-specific news on these stocks today was the price cut on Brinker. Deutsche Bank analyst Brian Mullan slashed his price target on the Chili's parent to $21 from $44 as he lowered his estimates for the restaurant chain through 2022. Mullan maintained his hold rating on the stock, however, and his new price target calls for about 40% upside to Brinker shares after today's sell-off. Nonetheless, investors interpreted the announcement poorly, which seems to explain why Brinker was pacing the declines in the sector today. Mullan's decision to cut estimates through 2022 also shows that the recovery could be a slow one for these stocks as customers will likely be wary of the virus for several months and the financial impact of the closures themselves will take time to overcome.
Early reports from these companies have indicated that they are getting hit hard by the outbreak. Darden, for example, said last week that comparable sales had fallen by 60% at Olive Garden, and by more than 70% at its other business segments, which include Longhorn Steakhouse, fine dining like Capital Grille, and other businesses.
With sales evaporating, all three of these companies have been forced to draw down lines of credit and cut capital and operational expenses in order to conserve cash. BJ's said that in the scenario where all of its restaurants are closed, it would still spend $5 million a week on operational expenses. Though none of these chains seem particularly at risk of bankruptcy right now, they are all losing cash while dine-in service is closed. Therefore, these stocks will remain sensitive to any news about the coronavirus outbreak as that will guide the lifting of stay-at-home policies in individual states.
Now what
Investors should expect the sector to continue to be volatile as performance will be badly damaged until the outbreak fades and stay-at-home orders are lifted. Still, there are a number of other questions facing investors here as it's unclear if and when the restaurants will return to full strength, and the risk of a second wave of infections would also sink these stocks. Meanwhile, investors also have to take into account the liquidity these companies have available and the impact that the recent borrowings will have on their balance sheets and on profit potential.
All three of these stocks have bounced off of their lows during the coronavirus sell-off, indicating that investors believed the sector to be oversold at one point. However, the crisis is far from over, and shares could certainly fall further. We should learn more when BJ's Restaurants and Brinker report first-quarter earnings at the end of the month.
