The restaurant sector has not been kind to investors in 2020. The COVID-19 pandemic forced eateries to close their doors to sit-down diners, focusing exclusively on takeout and delivery options, instead. The S&P 500 Restaurants index fell 35% from the new year to March 18 before staging an impressive recovery.
Some restaurant stocks have suffered more than others this year. Investors should keep a close eye on Chipotle Mexican Grill (NYSE:CMG), Bloomin' Brands (NASDAQ:BLMN), and Restaurant Brands International (NYSE:QSR) this month, for very different reasons.
The parent company of Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and Fleming's Prime Steakhouse was not in great shape before the coronavirus crisis. The company put itself up for sale in February under pressure from activist investors to reshape the portfolio of restaurant concepts. Bonefish Grill stood out like a sore thumb, posting lower sales, while the other brands reported rising revenues.
The search for buyers has been put on hold, at least until the end of the COVID-19 health crisis. The company might restart that process if the return to regular sit-down service goes smoothly. Bonefish Grill could be offered for sale as a separate brand in order to unlock some value from that struggling operation. Bonefish continued to post worse results than its Bloomin' brethren during the coronavirus lockdown period, after all.
Bloomin's stock is trading 40% lower in 2020. I wouldn't be surprised to see activist investor JANA Partners demanding a quicker path toward positive returns, even if that involves selling off underperforming brands.
The owner of fast-food brands Burger King, Tim Hortons, and Popeye's entered the COVID-19 era from a different angle. Popeyes found a goldmine in its revamped spicy chicken sandwich last year, helping that brand deliver 42% year-over-year sales growth in the holiday quarter.
Popeye's spicy growth slowed down to 32% in the first quarter, while Burger King and Tim Hortons suffered single-digit revenue slowdowns. The company was looking into a renewed growth effort for Tim Hortons and Burger King, based on remodeled stores and upgraded ordering systems. That project is still underway, albeit at a different pace than originally planned. Some upgrades are on hold while the installation of digital-ordering systems was accelerated by the health crisis.
Like Bloomin', Restaurant Brands would love to get back to full-service operations across its three-store networks. The sense of urgency is somewhat milder here, thanks to the drive-through windows found in most of this fast-food vendor's locations, but Burger King and Tim Hortons could use a quick rebound, and Popeyes isn't making the most of its unique chicken sandwich, which was hit under coronavirus lockdown orders.
So the reopening of restaurants and other businesses is important to this company, too, but it's more of a growth-chasing thing than a desperate gasp for air. Restaurant Brand's stock is only trading 9% lower this year, giving management a little more room to maneuver.
Chipotle Mexican Grill
Some restaurants are actually thriving right now, and Chipotle is a good example of that. This stock is trading at all-time highs today, and Chipotle's top-line growth clocked in at 8% in the first quarter.
The company introduced drive-through options in 2019, just in time to meet the takeout demands of the COVID-19 era. In fact, the success of these drive-through operations is helping Chipotle negotiate remodeling options with their landlords. Adding a so-called Chipotlane isn't always a simple change, sometimes requiring dramatic changes to the landscape and other buildings around the Chipotle location.
As CFO John Hartung said in Chipotle's first-quarter earnings call:
While they might have resisted that a bit in the past, we're not seeing much resistance of that anymore. The fact that we're looking to go into a site, we're continuing to grow -- that's what we're most excited about. But we do think we'll be able to get more sites, higher quality sites, more Chipotlanes, and I would expect that the rents should be at least incrementally more attractive."
Keep an eye on Chipotle's store openings and Chipotlane remodeling operations this summer. These efficient drive-through windows just might hold the key to the company's long-term growth prospects.