Several restaurant stocks, including Shake Shack (SHAK 0.65%), Bloomin' Brands (BLMN 1.21%), and BJ's Restaurants (BJRI 1.43%) fell hard this week, declining by between 5% and 15% through Thursday trading compared to a 6% slump in the S&P 500, according to data provided by S&P Global Market Intelligence. The drops added to losses for these stocks so far in 2022, as each one is underperforming the wider market's 23% decline.
The sell-off was powered by worries about the impact of inflation on profits over the coming quarters. Wall Street is also increasingly concerned about a recession on the way that might disproportionately hurt these consumer discretionary businesses.
Shake Shack, Bloomin' Brands, and BJ's Restaurants each cater to different customers. But they are all located in the restaurant industry, which is a consumer discretionary category that is sensitive to any economic slowdown. This segment tends to enjoy strong growth during periods of rising consumer spending, and investors have seen evidence of this boom in recent results.
Shake Shack said in early May, for example, that customer traffic rebounded sharply in March and April. BJ's Restaurants noted "strong sales momentum," in its Q1 report, too.
Yet investors fear that the good times are about to end. An analyst at Citi downgraded Bloomin' Brands along with several other competitors in the space this week, citing inflation, rising interest rates, and the potential for a recession.
Many consumer-facing stocks were hit especially hard during the market downturn this week as Wall Street worries that shoppers will pull back on non-essential spending over the coming quarters. Inflation is also pinching restaurant businesses right now, and the combination of slower sales growth, in addition to rising costs, could mean reduced earnings for the industry as rivals try to protect market share by allowing profit to fall.
There's no evidence yet that demand is collapsing in the restaurant industry. That doesn't mean investors shouldn't brace for weaker results ahead from these companies, though. Retail spending appears to be slowing overall, and economic growth rates are likely to decline in the second half of 2022, and potentially even turn to contraction.
BJ's, Shake Shack, and Bloomin' Brands have each survived prior economic downturns, and they are likely to emerge from any upcoming slump, too. The bad news is that profits could be pressured, though, as spending slows.
The main reason these stocks have fallen is that investors don't know the scale or the duration of the upcoming economic slowdown. That uncertainty will be resolved as more economic data comes in and as these companies update investors on their most recent operating results. Bloomin' Brands' and BJ's next reports will arrive in late July, and Shake Shack's is on the way in early August.
Those updates will help investors judge whether these restaurant stocks are seeing just a modest pullback in consumer demand, or if instead the companies are bracing for a more prolonged decline in sales and earnings in 2022 and beyond.