Why Restaurant Stocks Have Gone Bad

Summary

Motley Fool Money: Why Restaurant Stocks Have Gone Bad

Release Date: August 13, 2025
Host: The Motley Fool
Guests: Lou Whiteman, Rachel Warren, Travis Hoyam

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Introduction

In this episode of Motley Fool Money, host Lou Whiteman delves into the recent downturn of restaurant stocks, exploring whether changing consumer tastes or broader macroeconomic factors are to blame. Joined by investment analysts Travis Hoyam and Rachel Warren, the discussion provides a comprehensive analysis of key players like Cava and Chipotle, alongside insights into the overall restaurant industry's performance.

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Cava's Sudden Decline

Lou Whiteman opens the conversation by highlighting the significant drop in Cava's stock price, which fell by 23% early trading following a disappointing earnings report. He poses the critical question: "Why have restaurant stocks gone south in 2025?" (00:05).

Travis Hoyam explains that while Cava's headline numbers appeared satisfactory, deeper analysis revealed stagnant traffic and declining margins. He notes, "They lowered their comp sale guidance by 200 basis points to 4% to 6% growth. That's a bad sign." (01:00). Travis attributes part of the woes to a "fluid macro environment" that creates uncertainty for both consumers and investors, leading to diminished confidence in restaurant stocks.

Rachel Warren provides a more nuanced perspective, cautioning against drawing conclusions from a single quarter's performance. She acknowledges Cava's previously strong financials but points out that Q2 saw a significant slowdown in same-store sales growth, down to 2.1% compared to the expected 6%. However, she also highlights positive aspects such as a 20% increase in revenue and restaurant-level profits, suggesting that "it's not all bad news." (02:48).

Lou Whiteman emphasizes Cava's historically impressive same-store sales growth, questioning whether the company's Mediterranean-focused menu can compete with ubiquitous options like pizza and burritos in the American market. He remarks, "I don't know if Kava is going to be able to do the same thing as a burrito place or a pizza place." (03:20).

Travis adds, "There's still a growth story here, but I don't know if the long-term trajectory will match that of other big names." (04:03).

Chipotle's Struggles Amid Leadership Change

Transitioning to Chipotle, Lou notes the stock's significant decline of 38% since its peak in 2024, citing a 4% drop in same-store sales for Q2. The departure of CEO Brian Niccol for Starbucks sparked further concern. Lou questions whether the leadership change is the culprit behind the sales decline, asking, "Is he a reason that same store sales are down?" (06:22).

Travis Hoyam believes the leadership change poses challenges, especially given Brian Niccol's exceptional performance. He states, "If Brian is special, then you do have to ask questions when someone new comes in." (06:55).

Rachel Warren counters by asserting that Chipotle's troubles aren't solely due to the CEO transition. She emphasizes that Scott Boatwright, Niccol's replacement, is a seasoned veteran in the quick-service restaurant industry. Rachel attributes the decline primarily to broader consumer spending issues rather than fundamental business weaknesses. She observes, "Chipotle's recent troubles are more about a consumer spending issue, not a fundamental weakness with the business." (08:04).

Lou further explores whether Chipotle's growth story is over, considering its high valuation and declining same-store sales. Rachel remains optimistic, arguing that Chipotle's long-term advantages and recent positive trends in comps and transactions indicate that the growth narrative is still intact. She points out, "There could be some bumpy quarters ahead, but a solid market and leadership position still give this company a long-term advantage." (09:43).

Macro Trends Affecting the Restaurant Industry

Lou broadens the discussion to the restaurant industry at large, noting a significant pullback in various restaurant stocks, including Sweetgreen, McDonald's, and Starbucks.

Travis Hoyam identifies two macro trends impacting the sector:

1. Slowly Rising Inflation: He describes it as a "boiling frog economy," where gradual inflation affects consumer habits and restaurant operations.

2. Shifts in Consumer Behavior: There appears to be a move towards valuing sit-down dining experiences over quick-service options. Travis observes, "If people are eating out less, they might prefer the atmosphere and are choosing to spend on special occasions rather than everyday meals." (14:05)

Rachel Warren adds that while consumers are shifting their spending, it's not uniformly affecting all discretionary purchases. She notes, "Consumers are becoming increasingly picky about where they want to put their money to work," leading many restaurants to struggle with maintaining traffic and sales. (15:36)

Lou highlights an interesting dynamic where full-service restaurants like Chili's and Olive Garden are seeing growth, while fast casual and fast food establishments are experiencing declines. This contrast suggests a nuanced shift in consumer preferences towards higher-value dining experiences.

Success Story: Toast's Ascendancy

Amidst the challenges faced by traditional restaurant stocks, Toast, a technology company serving the restaurant industry, stands out as a positive performer.

Lou asks, "Toast seems to be benefiting from all trends. Is this something that can continue, Rachel, for the foreseeable future?" (17:23)

Rachel Warren responds affirmatively, detailing Toast's impressive growth trajectory. She points out that in Q2, Toast added a record 8,500 net new locations and expanded its services beyond restaurants to include retail businesses, convenience stores, and grocery stores. Additionally, strategic partnerships with major players like Applebee's and American Express bolster Toast's market position. Rachel concludes, "There's a lot of good going on for Toast right now." (18:15)

Travis Hoyam, however, expresses skepticism about the long-term appeal of Toast. He views it as a commoditized business within the fintech space, lacking the margin opportunities found in other fintech companies. Despite recognizing Toast's current success, Travis remains cautious about its future growth potential, stating, "I fail to see the investor excitement about this. I feel like they're a winner here, but it's a pretty blah business once it levels off from early-stage growth." (19:39)

Investment Recommendations

As the episode wraps up, the hosts discuss potential investment opportunities within the beleaguered restaurant sector.

Rachel Warren voices her bullish stance on Cava, appreciating its discounted stock price and robust business fundamentals despite recent setbacks. She states, "I'm still really bullish on that business. If anything, I'm intrigued by the fact that it's trading at a discount right now." (20:18)

Travis Hoyam remains hesitant to buy Cava immediately but acknowledges its improved valuation compared to Chipotle. He suggests considering established names like Brinker or Darden for investment instead. (20:29)

Lou Whiteman expresses a desire to invest in Toast, especially if its stock continues to decline, highlighting it as a potential buy despite reservations about its long-term prospects. (20:47)

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Conclusion

The episode concludes with a cautionary note, reminding listeners not to base their investment decisions solely on podcast discussions. The Motley Fool team emphasizes that personal financial decisions should consider individual circumstances and professional advice.

Travis Hoyam signs off, encouraging listeners to stay informed and engaged with future episodes of Motley Fool Money for ongoing financial insights.

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Notable Quotes

• Lou Whiteman (00:05): "Why have restaurant stocks gone south in 2025?"
• Travis Hoyam (01:00): "They lowered their comp sale guidance by 200 basis points to 4% to 6% growth. That's a bad sign."
• Rachel Warren (02:48): "It's not all bad news."
• Lou Whiteman (03:20): "I don't know if Kava is going to be able to do the same thing as a burrito place or a pizza place."
• Travis Hoyam (04:03): "There's still a growth story here."
• Lou Whiteman (06:22): "Is he a reason that same store sales are down?"
• Rachel Warren (08:04): "Chipotle's recent troubles are more about a consumer spending issue, not a fundamental weakness with the business."
• Rachel Warren (09:43): "There could be some bumpy quarters ahead, but a solid market and leadership position still give this company a long-term advantage."
• Travis Hoyam (14:05): "If people are eating out less, they might prefer the atmosphere and are choosing to spend on special occasions rather than everyday meals."
• Rachel Warren (15:36): "Consumers are becoming increasingly picky about where they want to put their money to work."
• Rachel Warren (18:15): "There's a lot of good going on for Toast right now."
• Travis Hoyam (19:39): "I fail to see the investor excitement about this. I feel like they're a winner here, but it's a pretty blah business once it levels off from early-stage growth."
• Rachel Warren (20:18): "I'm still really bullish on that business. If anything, I'm intrigued by the fact that it's trading at a discount right now."

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This comprehensive discussion sheds light on the multifaceted challenges facing restaurant stocks in 2025, from macroeconomic pressures and shifting consumer preferences to leadership changes and technological disruptions. Investors are encouraged to consider these factors carefully when evaluating opportunities within the restaurant sector.

Transcript

[Travis Hoyam]

Foreign.

[Lou Whiteman]

Why have restaurant stocks gone south in 2025? Molly fool money starts now. Restaurant stocks like Chipotle, Darden and Starbucks have been some of the biggest winners for investors over decades. But are consumer tastes changing? I'm joined by Lou White and Rachel Warren to try to answer that question. Let's get to the news of the day. And that's cava. There's been some really strange trends in a lot of the restaurant industry over the past few months. Companies that were growing like crazy suddenly reporting negative numbers. Cava reported after the market closed yesterday as we're recording, and the stock's down 23% early in trading. Lou, what did we learn from Cava and why is this such a huge reaction from the from investors?

[Travis Hoyam]

So the headline numbers were fine, but if you dig a little deeper, the traffic was flat, margins are down, and they did warn of comp sales guidance. So comp sales are kind of. Because these restaurant chains are growing so fast, you kind of want to compare apples to apples. Like how many stores did you have last year, how many stores you have this year? And obviously just kind of getting more throughput through those stores. This is such a scale business that's so important. They lowered their comp sale guidance by 200 basis points to 4% to 6% growth. That's a bad sign. Some of this, I think, is the big macro. CFO Tricia Toliver said, we're operating in a fluid macro environment, economic environment, and that one that sort of creates fog for consumers with things changing constantly. If there's fogs for consumers, it's translating to fog for the business, which is fog for investors. And investors are heading for the exits.

[Rachel Warren]

I don't think we can really take a single quarter of Kava earnings and really make a holistic determination about the business. I think this is obviously one of those stocks that we look at as investors. The valuation is very high and expectations accordingly are also quite high. The company has had one of the best financial performances recently across all comps leading up to this point in Q1. That was definitely the case compared to other quick service competitors. But Q2 was more mixed. Cava same restaurant sales growth decelerated to 2.1%. That was quite a bit behind what analysts were expecting. They had been targeting more of the 6% range. But I will note this follows the first quarter where Cava's same restaurant Sales growth was 10.8% up year over year. So I think that there are some positive points to note. They also grew revenue by more than 20% and restaurant level profits grew about 20% as well in Q2. So it's not all bad news.

[Lou Whiteman]

Yeah, those same store sales numbers have been absolutely crazy at Cava. They've been over 20% for a lot of the last couple of years, which is almost unheard of in the restaurant industry. That's why this is a stock that was trading. I think right now it's about 70% times trailing earnings. But this is also you're as you're scaling your business, you're growing, entering new markets. Lou, do they have the right menu for the American eater right now? I mean burritos is something that kind of translates to everybody. Is, is Kava going to be able to do the same thing?

[Travis Hoyam]

I, I think that is a great question and it has to be baked into the kind of the growth estimates I have. Full disclosure, Cava is my go to. I love Mediterranean food, but we are a culture of pizza and burritos. And I Wonder they at 400 locations now they have big plans to get I think to a thousand by 2032. Will they have success selling the Mediterranean diet kind of versus pizza and burritos nationally? I think there's still a growth story here, but I don't know if the long term trajectory, like if we compare it to some of these other big names, I don't know if it's going to turn out that way with their menu versus what you can do with a burrito place or a pizza place place.

[Lou Whiteman]

Yeah, it's easy to put a huge growth multiple when you have those kind of same store sales. We still don't have Cava where I live, so this is one I, I would like to.

[Travis Hoyam]

The American heartland's a huge question, I think.

[Lou Whiteman]

Yeah, pizza burgers definitely translates here. Don't know if necessarily Cava does. Rachel, what's the growth thesis? I mean the stock has taken a beating, down over 50% just from its highs earlier this year, much less as high as last year. What are you looking for? For this to be a buy?

[Rachel Warren]

Yeah, I mean, I don't think the story is nearly as bleak as the market's reaction might have. You think? And I agree the valuation is high and I think one could even argue that a drop down in shares have been warranted. But you know, here's the value proposition you really need to be thinking about. If this is a business that you're looking to invest in, this is a company with extensive growth plans. They're looking to reach 1,000 locations by 2032. That's up from 398 locations currently. And historically this is a business that has boasted really unit level economics, including high profit margins and average sales per restaurant. And that's enabled them to fund that expansion with internally generated cash. Even if you look at the first half of Cava's fiscal 2025, you've got year to date free cash flow of about 22 million on about 612 million in revenue and 44 million in profits. Those top and bottom line figures were up 24% and 31% from one year ago. It's still a business with a really robust addressable market and they are still bucking that tre same store sales declines that we've seen from a lot of their competitors. So I think that there's still a lot to like about Cava.

[Lou Whiteman]

Speaking of same store sales declines, we're going to talk about Chipotle next and see why there are so many struggles there. We will get to that when we come back. You're listening to Motley Fool Money trading.

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[Lou Whiteman]

Over the past couple of years. The stock's actually in its biggest drawdown, down 38% from its high in 2024. That's the biggest drop in shares since 2017. The big news over the past few weeks is that same store sales, this number and concept that we keep talking about so important for restaurants, down 4% in the second quarter. The big change at Chipotle is that CEO Brian Niccol left for Starbucks. Is he a reason that same store sales are download? Is there something else going on?

[Travis Hoyam]

So I don't think he's the reason that same store sales are going down. I do wonder though about where you go from here. I'll be honest, I'm probably more bullish on this company as far as remaining a growth story than I am Kava. Although I'd prefer to eat at Kava. But bottom line, Brian, I think there is a CEO question here. It's probably unfair to Scott Boatwright Brian Nichols replacement because he seems to have the credentials. But Brian Nicholl is special. That is what we've been told to believe. He did an amazing job here. He's well thought of what he's done at Starbucks. If he is special, then I think you do have to ask questions. When someone new comes in. It's no guarantee that the next person will be as good and it's no guarantee that you can get this performance with average if you had someone special. I think there's just a lot of question marks around the company because of that. It might turn out to be unfair, might turn out that everything's fine. And I do probably think so. But I do think given the leadership change in a tough macro environment, I think it sort of makes sense for investors to have questions here.

[Rachel Warren]

Yeah, I mean we know the market hates uncertainty, right. And that's certainly been, I think a trend that's been reflected across a lot of stocks, including restaurant stocks. With Chipotle specifically, I don't think that one can fairly attribute Chipotle's recent troubles to Brian Nichols departure. I mean Scott Boatwright is a veteran in the quick service restaurant space long before Chipotle think the ship is in good hands. Overall, Chipotle's performance within the fast casual segment is lagging peers right now. I mean if you look at Q2, they had a roughly 6% drop in per location traffic and that was compared to flat performance for the segment overall they had a 4% decline as you noted Travis, in comparable restaurant sales. And that decline in comps was primarily driven by an almost 5% decrease in transactions. But ultimately I do think that this is a consumer spending issue, not a fundamental weakness with the business. And it's operating in a cyclical space. And I think investors should not be surprised that the business is being impacted by the downtrend of that cycle right now.

[Lou Whiteman]

Yeah, this is has been one of the companies that's grown their same store sales almost like clockwork really since they had that E. Coli outbreak. The stock obviously cratered when that happened. But now this is another example of a stock that was kind of priced for perfection, still has a $57 billion market cap. We got a 3030 PE multiple on a forward basis. So is the growth story over? I think that's the big question for investors right now. You start to have negative same store sales comps and you're paying a pretty high price still for Chipotle, can they get that magic back or is something fundamentally change for Chipotle?

[Rachel Warren]

Rachel, I Do not think that the growth story for Chipotle is over. And I want to take a step back for a minute. I mean, if you look back to last year, Chipotle ESS outpaced the growth of the restaurant industry where a lot of key names were already experiencing sales and traffic declines. And that trend only really started to affect Chipotle's business at the end of December. I mean, if you go back to their Q1 earnings call, Boatwright said that diners concerns about the economy had led them to skip restaurant visits and maybe save their money instead. You Fast forward to Q2. May was a tough month for Chipotle. But by June, same store sales began increasing again. And Boatwright said that by exiting the quarter they had begun to return to positive comp and transaction trends which continued into July. So I do think that it is important to take a more nuanced view here. There could be some bumpy quarters ahead, but a solid market and leadership position I think still gives this company a long term advantage.

[Travis Hoyam]

So they're at under 4,000 stores. They hope to get to 7,000. As I said, kind of the style of food. I'm more confident that they can get there. I think I am. Then the kava gets to 1,000, maybe not 7,000, but at least big growth from here. I think it's easier to expand once you have that scaling and critical mass too. So it kind of is an easier ramp. I think there's also that lever of breakfast which we've been joking about forever, but that makes more sense here as far as just expanding the comp.

[Lou Whiteman]

Yeah, when are we going to get some breakfast burritos? I mean McDonald's has that.

[Rachel Warren]

I'd be down for that.

[Travis Hoyam]

And that seems a lot easier here than it is for Cava. Again, again, I don't want to be too hard on Boatwright. I think he's the right person for the job. But I do think sort of the wild card here, you're getting a much better valuation than Cava. Cava before trading this morning was I think, think forex the forward valuation as, as you know. So you're getting a better valuation. But if, if you buy into the fact that they had a best of class CEO before, will there be some sort of drop off and if so, how does that affect the business? I don't think that that is a bear case, but it is at least a question for the bulls that we only time will answer.

[Lou Whiteman]

We're going to take a bit more of a macro view of the restaurant industry. And talk about a tech company you may be interested in. We'll get to that next. You're listening to Motley Fool Money.

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[Lou Whiteman]

Given that operating leverage restaurants have been phenomenal winners for investors who have been able to buy at the right price and hold for a long time. Chipotle, McDonald's going back decades, even Starbucks if you want to add kind of coffee into this. But we're seeing a huge pullback in a lot of restaurant stocks we haven't even talked about. Sweetgreen that's down 70% this year. So Lou, is there something specific with restaurant stocks? Is this a macro story? What do we need to take away? Because you know, we've been hearing multiple things from different companies and these consistent growers just aren't growing anymore. It seems like some sort of canary in a coal mine.

[Travis Hoyam]

Yeah, I think there's two kind of related macro trends going on here. And the first, as I Keep calling it the boiling frog economy. I think things seem better than they are because it's just slowly, slowly inflation is creeping up. And so I think it is affecting consumer habits.

[Lou Whiteman]

By the way, inflation is one of these things that comes up on every one of these conference calls. Absolutely. Prices are up. It gets very specific for restaurants.

[Travis Hoyam]

It hits on both sides because it hits on their costs. And it also, I think does influence consumer behavior and maybe bring down traffic. Also. I think it's interesting and maybe this is related. If you look at this quarter, full service restaurants have outperformed fast food and fast casual in a big way. Talk about comp sales. Chili's is out this morning up 22%. Olive Garden comp sales up almost 7%. Same with Longhorn Texas Roadhouse, up 6%. You compare that you mentioned sweet greens, which is kind of fast casual, down almost 8%. Wendy's down 4%. Jack in the box down 7%. I don't know exactly what is going on here. I kind of suspect that maybe if people are eating out less, they are just kind of want atmosphere and they're like, all right. Instead of. It's just that incremental stop stuck three times a day that's going away and special occasions are holding on. But I do think that there is that the restaurants are telling us something about just the state of the consumer. And Travis, you're right. It's not something we're hearing universally. So I do wonder if this is a canary.

[Rachel Warren]

I do think it's a really interesting dynamic we're seeing right now. I mean, we know and we're witnessing the ways in which the macro environment is giving consumers pause. We're seeing consumer sentiment numbers that come out. We are seeing consumers shifting their spending behaviors, but they're not curtailing all discretionary purchases. I mean, obviously there's been a shift towards essential items like groceries, but then there's discretionary areas that have shown significant resilience, like spending on leisure travel and other big ticket items. But it's been really interesting to see the ways in which some of those trends have and have not trickled down to restaurant spending. There seems to be a lot more nuance. And I do think Lou's right. You know, consumers are becoming increasingly picky about where they want to put their money to work. I think that's a reality that a growing number of restaurants are contaminated ending with. And I see a lot of consumers prioritizing value. You know, maybe if they're going to spend money to go out to eat, they'd rather have that sit down experience than a quick grab and go. And at least right now I think that that is a common through line that we are seeing in restaurant earnings.

[Lou Whiteman]

It's so interesting that value has become the sit down experience. I mean even going back to 2008, 2009, you would see pretty good numbers from McDonald's because people stopped going to sit down restaurants and traded down to McDonald's. Now it seems like prices have gone up at a lot of those, those fast casual, fast food places. And you're right. If, if I'm going to go and take the family out to eat, do I want to spend 40, $50 at McDonald's or do I want to spend 60 or $70 to actually sit down and have full service? It seems like a lot more people are doing the full service choice. But we'll see how this plays out. This is going to be fascinating because you know Lou, restaurants really tell us a lot about what consumers are choosing.

[Travis Hoyam]

Yeah. And to me, I think it's, you're still going out with the family to celebrate a birthday or something and that's why you're still seeing it. But if you're racing home, you could either make a PB and J at home or grab a Big Mac. I think that's where the, maybe the little bit of cost creep and the pressure on the household budget, maybe that's where it's showing through.

[Lou Whiteman]

One company we haven't talked about, the real technology play in restaurants is Toast. And Toast seems to be doing just benefiting from all trends. You know, it's not only growing in some of these sit down restaurants, which is where they're going to have a majority of their business, but also just adding more restaurants. They grew 24.8% in the quarter. So we're talking about negative same store sales comps for some of these companies. But Toast seems to just be crushing it. Is this something that can continue, Rachel, for the foreseeable future?

[Rachel Warren]

For Toast, I think that they are on a very impressive growth trajectory right now. I would expect as the company becomes more mature for that to slow, but that doesn't appear to be something that's going to happen anytime soon. In Q2, they added a record 8,500 net new locations. Their enterprise international food and beverage retail segments passed 10,000 live locations. They onboarded another 1300 unit chain to the platform. They even launched their first customer in Australia. And another thing that's key here is that Toast is expanding beyond restaurants. They're broadening their focus to include retail businesses, convenience stores, bottle shops, grocery stores. And that allows them to offer their technology solutions to a much wider range of clients. And they provide that core infrastructure for these businesses. One final thing, they just signed one of the biggest deals in their company history with Applebee's. And this is as they onboarded topgolf as a new client, they inked a strategic multi year partnership with American Express. There's a lot of good going on for Toast right now.

[Travis Hoyam]

I think Toast is the winner here and I think they've done a really good job. I guess my surprise is that I don't really get excited about any of these companies. Even the winner. Just I don't like this category as a long term investor. If you judge this as a fintech, I see much better margin opportunities in other fintechs. This strikes me as sort of a commoditized business by its nature.

[Rachel Warren]

Nature.

[Travis Hoyam]

If you judge it as a service business and it sort of is a service business, software as a service, whatever. I just see much more stable TAM opportunities. You have a company, the share count's going up, it's priced at more than 40 times earnings. I really like the company, but I just, I fail to see the investor excitement about this. I feel like that they're a winner here and it's a pretty blah business, you know, once it levels off from early stage growth.

[Lou Whiteman]

So final question. You have to buy one restaurant stock today. We got some pretty good discounts from previously previous prices. Rachel, which one are you adding to your portfolio?

[Rachel Warren]

Honestly, I gotta say, Kava, I'm still really bullish on that business. I like it and if anything, I think I'm intrigued by the fact that it's trading at a discount right now because the business still looks good to me.

[Travis Hoyam]

It's cheaper than it was. I don't know if I'm ready to buy it yet. I might choose Kava just because, just as a consumer I wanted to go up. But I do think whether it's Brinker, whether it's Darden, just kind of one of these tried and trues, that's probably where I would look to invest.

[Lou Whiteman]

I would love to buy Toast. I can't get over the price. So if we still, if we keep getting discounts with some of these stocks, that's the one I would love to add to the portfolio. As always, people on the program may have interest in the stocks they talk about in the motley pool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Cool editorials standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. See our full advertising disclosure. Please check out our show notes for Lou Whiteman, Rachel Warren and Dan Boyd, behind the glass and the entire Motley fool team. I'm Travis Hoyam. Thanks for listening. The Motley Fool Money. We'll see you here tomorrow.