The restaurant industry is expected to be hard hit by the Biden Administration’s increasing “encouragement” of private industry and local governments to mandate proof of COVID-19 vaccination to eat indoors at restaurants, which was triggered by the resurgence of COVID-19 cases. New York City, San Francisco, and California have already mandated proof of immunization to eat indoors. The policy is expected to gain wider traction, creating a host of new challenges for restaurant operators. Many restaurant owners are worried that their businesses might not be able to handle another blow. Furthermore, with the rising cost of food lowering the restaurant chains’ profit margins, lower foot traffic could spell significant losses.

 U.S. consumer sentiment declined to pandemic-era lows recently amid the rapid spread of the COVID-19  Delta variant. The consumer sentiment index fell 11 points to 70.2 in August, its lowest reading since December 2011. Moreover, the index missed analysts’ 80.1 target by a large margin.

Given this backdrop, we believe fundamentally weak restaurant stocks The Cheesecake Factory Incorporated (CAKE), Dave & Buster’s Entertainment, Inc. (PLAY), and FAT Brands Inc. (FAT) are best avoided now.

The Cheesecake Factory Incorporated (CAKE)

CAKE is a leading experiential dining company that owns and operates 301 restaurants in the United States. Its famous brands are: The Cheesecake Factory, North Italia, and Fox Restaurant Concepts. The  Calabasas Hills, Calif., company has 28 franchise restaurants internationally under licensing agreements.

CAKE’s revenues increased 159.9% year-over-year to $768.97 million in its  fiscal second quarter, ended June 29. However, its operating expenses rose 91.8% from the same period last year to $727.84 million. Furthermore, the company incurred $11.40 million in non-cash acquisition-related contingent consideration and amortization expense.

CAKE raised $300 million through a senior notes offering and $175 million through a secondary public offering of 3,125,000 shares in June. Most  of the proceeds from the offerings are expected to go toward repayment of previously issued debt. However, the company’s principal debt burden is expected to remain almost unchanged, while the secondary equity offering is expected to lower returns per shareholder.

CAKE’s EPS is expected to decline at a 10% rate per annum over the next five years. The stock has declined 14.6% over the past month to close yesterday’s trading session at $42.57.

CAKE has a D grade for Stability and Sentiment in our proprietary POWR Ratings system. Of the 45 stocks in the Restaurants industry, it is ranked #31.

In addition to the grades highlighted above, click here to view CAKE ratings for Growth, Value, Momentum, and Quality.

Dave & Buster’s Entertainment, Inc. (PLAY)

PLAY operates dining and entertainment establishments in North America. It operates 141 venues in North America, spread across 40 states of the United States, Puerto Rico, and Canada. PLAY is based in Dallas, Tex.

In its fiscal first quarter, ended May 2, PLAY’s revenues increased 66% year-over-year to $265.30 million. However, the company has yet to reach its pre-pandemic levels of operations. Its overall comparable store sales declined 35% from the same period in 2019, while its comparable-store sales in fully operational stores declined 17% from the first quarter of 2019. Its net income was  $19.60 million, down 53.8% from the same period in 2019, and its EPS fell 64.6% from the first quarter of 2019 to $0.40.

PLAY launched 23 new arcade games and seven new chef-crafted menu items on June 9 while debuting its digital collectibles prize program with unique non-fungible tokens. However, with the reimposition of social distancing and mask mandates, these new launches might fail to attract higher customer traffic in the near term. Shares of PLAY have declined 9.2% over the past six months and 5% over the past five days.

It’s no surprise that PLAY has an F grade for Stability, and a D grade for Sentiment. It is ranked #40 in the  Restaurants industry.

Beyond what we’ve stated above, we have rated PLAY for Growth, Momentum, Quality, and Value. Get all PLAY ratings here.

FAT Brands Inc. (FAT)

FAT is a global franchising company that owns and operates 14 restaurant brands through approximately 2,000 franchises. Present in around 700 locations, the Beverly Hills, Calif., company strategically acquires and markets quick service and casual dining restaurants globally.

FAT’s revenues increased 167% year-over-year to $8.30 million in its  fiscal second quarter, ended June 27. However, its  net loss increased 37.2% from the same period last year to $5.90 million. Its loss before interest, taxes, depreciation, and amortization widened 14% from its  year-ago value to $4.90 million. And its loss per share stood at $0.48, indicating a 33.3% rise from the prior-year quarter.

FAT is currently being investigated for potential securities violations and breach of fiduciary duties by award-winning shareholder rights firm Labaton Sucharow. This could lead to hefty losses for FAT if the investigation paves the way for class-action lawsuits.

The consensus EPS estimate for the fiscal third quarter ending September 2021 indicates a 146.4% decline year-over-year. And analysts expect FAT’s EPS to remain negative until at least this year. Also, the company missed the Street’s EPS estimates in three out of the trailing four quarters. The stock has declined 12.2% over the past five days to close at $9.63 yesterday.

FAT has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Value and Quality. It ranked #44 in the Restaurants industry. Click here to view additional FAT ratings for Growth, Momentum, Sentiment, and Stability.

CAKE shares were trading at $43.31 per share on Wednesday afternoon, up $0.74 (+1.74%). Year-to-date, CAKE has gained 16.86%, versus a 19.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

More Resources for the Stocks in this Article