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Why Cheesecake Factory Shares Fell 41% in the First Half of 2020

By Anders Bylund – Jul 8, 2020 at 12:07PM

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The COVID-19 lockdown era was tough for restaurants, in general, and downright brutal for this dining destination, in particular.

What happened

Shares of Cheesecake Factory (CAKE -2.33%) fell 41% in the first half of 2020, according to data from S&P Global Market Intelligence. The restaurant chain entered the year in a precarious position, and the COVID-19 pandemic undermined the business plan even further.

So what

The company spent roughly $440 million on a pair of acquisitions in 2019, adding several new dining concepts and several dozen new locations. The deals were financed with debt papers, a risky decision that gave Cheesecake Factory fewer options when the health crisis upended the restaurant sector.

Restaurant closings hit the company hard because a lot of Cheesecake Factory's charm comes from its bistro-like ambiance and close proximity to busy shopping malls. Takeout and delivery options delivered disappointing results in the first quarter. The company suspended its dividend plan, asked its landlords for "understanding" when April's rent payments didn't come in, and watched its share prices plunge.

A restaurant worker holds up a sign saying Sorry we're closed.

Image source: Getty Images.

Now what

Investors caught a brief whiff of fresh air at the start of June when Cheesecake Factory reported strong sales in reopened restaurants. The gains were short-lived, fading out as coronavirus infections started to surge again, and the takeout business is still disappointing.

Several analysts have downgraded this stock in recent weeks, citing stalled reopening plans in many states.

Some restaurant stocks will bounce back from the COVID-19 crisis with a spring in their step, applying the lessons learned in this difficult operating environment to deliver stronger results in a healthy market. I'm not convinced that Cheesecake Factory will be among these long-term winners.

This is a risky investment, even at today's low share prices.

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

The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
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