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3 Restaurant Stocks to Avoid in July

By Rick Munarriz – Jul 1, 2020 at 8:00AM

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Coffee, doughnuts, and steaks shouldn't be on your investing menu this summer.

I went over five restaurant stocks that seem appetizing for investors earlier this week, but the rising serving tray isn't lifting all publicly traded eateries. There are a few situations that you may want to avoid this summer, and I'm not afraid to name names.

Starbucks (SBUX -2.78%), Dunkin' Brands Group (DNKN), and Ruth's Hospitality Group (RUTH -2.41%) are three chains that seem vulnerable this month. Let's go over what I think can trip up these three concepts.

A server at a casual dining restaurant delivers food.

Image source: Getty Images.

Starbucks

It's hard to dislike the baron of baristas, but Starbucks feels more than a little vulnerable here. It experienced a 10% decline in comparable sales in the fiscal second quarter that ended in March, as a 3% dip in its Americas and U.S. segment was pulled down by a brutal 31% plunge in its smaller international operations. When it reports fiscal third-quarter results later this month, there should be more COVID-19-related pain, even as more of its 32,050 stores worldwide are coming back on line.

My concern about the stock this summer isn't necessarily the pandemic. Investors have adjusted their expectations accordingly, and even the 47% surge in the stock since it bottomed out in mid-March (like most of the market) isn't an outrageous bounce. No, my fear for Starbucks here is all about Panera.

Panera Bread may not be a name that investors have heard much since the popular bakery and sandwich shop went private, but it's making a lot of noise this summer with a free coffee promotion. If you sign up for the MyPanera+ Coffee subscription before July 4, you can get a free cup of hot or iced coffee -- or hot tea -- every two hours through early September. The java subscription will then start setting coffee drinkers back $8.99 a month, but for the next two months you can be sure that a lot of people will be taking advantage of the complimentary caffeine boost.

Starbucks customers are loyal; there are now 19.4 million active Starbucks Rewards members, a 15% uptick over the past year. But while they may be loyal, if they're value-conscious coffee buffs, they may want to spend the next months sipping cups of joe on Panera's dime.

Dunkin' Brands Group

The promotional pours at Panera Bread will also hit the parent company of Dunkin' Donuts, but the bearish thesis here runs deeper than what a rival is doing on the discounting coffee front. Dunkin' Brands offered up a financial update in early June. It pointed out how comparable sales at its Dunkin' Donuts chain declined 23% through the first eight weeks of its latest quarter, improving to 15% in the eighth week ending in late May. Its smaller Baskin-Robbins scoop shops actually improved to flat comps by late May.

The trend is encouraging, but where does Dunkin' fit in the new normal? Dunkin' Donuts is mostly a haven for morning commuters: Folks pick up breakfast or a dozen or so doughnuts to share at the office. A lot of people still haven't returned to the morning rat race, and the aesthetics of a communal doughnut box don't jibe with the current climate of pandemic fears.

Ruth's Hospitality Group

There aren't many stand-alone upscale steakhouses trading these days, so the parent company of Ruth's Chris -- a fine-dining bellwether, given its more than 150 locations worldwide -- is the perfect choice for the third and final stock to avoid this month. Fancy chophouses have been bloodied rare in the pandemic, and Ruth's Hospitality's financial performance painfully spells that out.

Comps had risen 2.2% through the first two months of this year, plummeting 50.5% in March when the company had to shutter locations halfway through the month. All of its domestic dining rooms were closed in April, but those that offered up delivery and takeout experienced a jaw-dropping 83.5% plunge in unit-level sales compared to the same month a year earlier.

I'm a fan of Ruth's Chris when I need to feed my inner carnivore, but I also recognize that it's going to be the last of the publicly traded chains to bounce back. I've looked around the dining room and seen businesspeople making deals, tourists sharing a warm apple-crumb tart, and a largely elderly clientele committing the cardinal sin of ordering a well-done filet. It's a colorful circus, but these are three groups that you won't be seeing at your local Ruth's Chris until 2021 at the earliest. Throw an economic slowdown into the mix, and this is probably one of the last consumer discretionary stocks for you to sink your teeth into right now.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$86.86 (-2.78%) $-2.48
Dunkin Brands Group Stock Quote
Dunkin Brands Group
DNKN
Ruth’s Hospitality Group Stock Quote
Ruth’s Hospitality Group
RUTH
$17.09 (-2.41%) $0.42

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