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Why Some Restaurant Stocks Are Falling Today

By Anders Bylund – Jun 9, 2020 at 12:32PM

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Gloomy COVID-19 news took the edge off a sector rally that was inspired by states moving back toward normal business operations -- perhaps a bit too early.

What happened

Shares of many restaurant-chain operators fell hard on Tuesday. Olive Garden parent company Darden Restaurants (DRI 1.25%) fell as much as 6.1%, Outback Steakhouse owner Bloomin' Brands (BLMN -2.92%) dropped as low as 11.6%, fast-casual burger chain Red Robin Gourmet Burgers (RRGB 0.60%) bottomed out at a 12.6% drop, and high-end steakhouse operator Ruth's Hospitality Group (RUTH -0.52%) notched an 18.9% collapse at its worst.

So what

None of these consumer discretionary businesses had any company-specific news to share today. After several days of rosy COVID-19 news, the coronavirus news flow soured and the restaurant sector suffered a sharp correction as a result.

Most of these stocks had been soaring in recent days, based on optimistic assumptions around states scaling back their COVID-19 lockdown orders. Ruth's Hospitality rose 54% over the first seven days of June, Red Robin gained 38% in the same period, Bloomin' posted a 24% return, and Darden trailed the pack with an 8% gain. Today's correction took the edge off of these gains.

A young woman at a bistro cafe, holding a coffee cup and frowning at her face mask.

Image source: Getty Images.

The coronavirus tidings were indeed negative today. Fourteen states reported their highest-ever average infection rates after starting their stepwise reopening strategies, including massive population centers like California, Texas, and my own home state of Florida. Furthermore, many states have not followed guidelines from the Center for Disease Control (CDC), which led to undercounting of their COVID-19 cases.

This list of states that should adjust their COVID-19 reports sharply upward also includes all of the large states mentioned above. Despite these discouraging disease trends, many states are moving forward with their reopening plans.

Now what

It's no surprise to see restaurant investors losing confidence in their holdings under these circumstances. A second wave of coronavirus infections would bring most of the optimistic reopening plans back to square one and leave restaurants closed for on-premise services again.

That would be a disaster for the vulnerable stocks mentioned above. They're staring down massive debt holdings, armed with far smaller cash reserves. These companies are on shaky ground for as long as their revenue streams are stunted by COVID-19 mitigation orders, and their stocks are heavily shorted for good reason:

Company

Cash Equivalents

Total Debt

Short % of Float

Bloomin'

$403 million

$2.9 billion

16%

Darden

$322 million

$5.8 billion

7%

Ruth's

$71 million

$385 million

15%

Red Robin

$30 million

$715 million

52%

Data taken from Yahoo Finance on 6/9/2020.

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

Red Robin Gourmet Burgers, Inc. Stock Quote
Red Robin Gourmet Burgers, Inc.
RRGB
$6.72 (0.60%) $0.04
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$129.32 (1.25%) $1.60
Bloomin' Brands Stock Quote
Bloomin' Brands
BLMN
$18.63 (-2.92%) $0.56
Ruth's Hospitality Group, Inc. Stock Quote
Ruth's Hospitality Group, Inc.
RUTH
$17.16 (-0.52%) $0.09

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

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