What happened

It's Wednesday, and restaurant stocks are in free fall. As of 12:40 p.m. EDT, shares of The Cheesecake Factory (NASDAQ:CAKE) are down 8.1%, BJ's Restaurants (NASDAQ:BJRI) has fallen 9.2%, and Bloomin' Brands (NASDAQ:BLMN) is positively wilting -- down 10.2%. Why?

So what

There are a couple of specific factors at play in the restaurants sector today -- and one broad theme that could be dragging the rest down. Specifically, Bloomin' Brands suffered a reduction in price target this morning, with analysts at Loop Capital (reports TheFly.com) cutting the shares' estimated value to $15. That sounds like bad news, but in fact, Loop notes that it's actually positive on the Outback Steakhouse operator's fortunes (and rates the stock a buy).

Same-store sales dropped 63.5% at Outback in late March but were down only 38% in the first week of May and appear to be trending toward "just" a same-store sales decline of 17% in the past week. Thus, Bloomin' Brands is a story of things being bad... but getting gradually less bad over time.

Eye in the sky looking down on a city

Image source: Getty Images.

The story with Cheesecake Factory is a bit less optimistic. Here we find an analyst -- Stephens Inc. -- actually downgrading the stock to underweight. The firm is warning that because Cheesecake Factory has 65% of its stores located in malls that are suffering foot-traffic declines due to closed department stores and theaters, this is likely to translate into lower foot traffic at Cheesecake Factory, as well. In Stephens' view, Cheesecake Factory's future is "inseparable from [that of] the regional mall," and malls are "facing an existential crisis." 

That's not good news for Cheesecake Factory.

Now what

But what about BJ's Restaurants -- and what about restaurants, in general? Here we turn to the macro story. In Washington State, the government has announced new requirements for restaurants that want to reopen for business after COVID-19-inspired shutdowns.

Most of the requirements are familiar to most of us by now and are entirely logical and expected -- making hand sanitizer available to patrons, seating fewer people per table, separating tables by the recommended six-foot distance, and so on. The biggie, though, is a requirement buried in the middle of Washington state's list: "If [a restaurant] offers table service, create a daily log of all customers and maintain that daily log for 30 days, including telephone/email contact information, and time in. This will facilitate any contact tracing that might need to occur." 

On the one hand, this requirement was certainly well-intended as a means of informing restaurant patrons afterwards if it's discovered that they were exposed to coronavirus on a recent visit. On social media, however, this new requirement is blowing up -- and blowing back on both the state government and the restaurant industry. Potential restaurant customers are expressing their fear that this is a "Big Brother" kind of a move that will hand over personal information to the state so that it can monitor their movements. 

The more that spin on the news becomes "the story," and the more states try to follow Washington state's lead, the more potential customers it will scare away, and the worse things will get for restaurant stocks.