The coronavirus is coming for the bottom line of U.S. restaurants and likely their stock prices.
On Monday, Guggenheim Securities slashed its sales outlooks across the board for the U.S. restaurant industry citing the rising risk of the coronavirus keeping U.S. diners at home. The investment bank sees fast food and quick casual brands experiencing 0.9% and 0.2% “domestic [sales] slowdowns” in the first quarter. Full-service restaurant sales are expected to get hit by 1.3% in the quarter.
Starbucks (outsized exposure to China) and Wendy’s (the virus may delay lift from new breakfast launch) received some of the higher sales estimate cuts from Guggenheim’s Matthew DiFrisco. The analyst thinks Domino’s Pizza and Dunkin Brands are some of the best positioned restaurants to weather the coronavirus storm owing to their delivery platforms.
“Our outlooks now assume a retrenchment in domestic consumer demand in March & April with a return to "normal" behavior in late spring. We view this trajectory as practical but not overly conservative. While near-term demand lacks visibility and consensus outlooks will likely follow us down, we continue to view COVID-19 impact to demand as transitory and maintain our investment opinions based on underlying fundamentals and long-term outlooks,” writes DiFrisco.
DiFrisco is among the first on the Street to cut restaurant sales estimates due to the growing U.S. coronavirus outbreak. Further estimate revisions by the sell-side community will likely pressure restaurant stocks — which have largely sidestepped the broader market plunge — further in the weeks ahead.
The S&P 500 Restaurant Index has only dropped 7.1% year-to-date, outperforming the S&P 500 for the better part of 2020. Investors have stayed long in the space on the view — which is now petering out — that the U.S. wouldn’t be hit too hard from the coronavirus. With that now proving to be folly, the restaurant index has collapsed in March and has lagged the S&P 500.
The next shoe to drop on restaurant stocks could be more financial warnings from big name players. Thus far, restaurant companies not named Starbucks have not factored in the coronavirus impact into their guidance for the first quarter and year.
“At this time, none of the management teams have updated 2020 guidance to account for a slowdown relating to COVID-19,” DiFrisco notes, adding he assumes a slowdown in sales this month that extends into April.