Motley Fool Hidden Gems Investing - Why Restaurant Stocks Have Gone Bad

Episode Date: August 13, 2025

Restaurants are starting to see a drop in traffic and pressure from higher commodity prices and labor costs. So, it’s no surprise restaurant stocks are down big this year, but the size of the drop in names like Cava and Chipotle are shocking. Plus, we cover the one restaurant tech stock you need to know. Travis Hoium, Lou Whiteman, and Rachel Warren discuss: - Cava’s big earnings drop - Why Chipotle has struggled - Restaurants as an economic warning - 1 restaurant tech stock that’s still growing Companies discussed: Cava (CAVA), Chipotle (CMG), Host: Travis Hoium Guests: Lou Whiteman, Rachel Warren Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit megaphone.fm/adchoices

Why have restaurant stocks gone south in 2025? Motley 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 Whiteman and Rachel Warren to try to answer that question. Let's get to the news of the day, and that's Kava. 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. Kava 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 Kava, and why is this such a huge reaction from investors? The headline numbers were fine, but if you dig a little deeper, the traffic goes flat, margins are down. They did warn of comp sales guidance. Comp sales, because these restaurant chains are growing so fast, you want to compare apples to apples, like how many stores did you have last year, how many stores do you have this year? Obviously, just 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. Now, some of this, I think, is the big macro. CFO Tricia Tolliver said, we're operating in a fluid

macroeconomic environment, and that one that creates fog for consumers with things changing constantly. If there's fogs for consumers, it's translated into fog for the business, which is fog for investors, and investors are heading for the exits? I don't think we can really take a single quarter of GAVA 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. Kava's 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 Kava'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. Yeah. Those same-store sales numbers have been absolutely crazy at Kava. 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, 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 Kava going to be able to do the same thing? I think that is a great question, and it has to be baked into kind of the growth estimates. Full disclosure, Kava's my go-to. I love Mediterranean food, but we are a culture of pizza and burritos. And I wonder, they're only at 400 locations now. They have big plans to get, I think, to 1,000 by 2032. Will they have success selling the Mediterranean diet versus

pizza and burritos nationally? I think there's still a growth story here, but I don't know if the long-term trajectory, 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. Yeah. It's easy to put a huge growth multiple when you have those kind of same store sales. We still don't have Kava where I live. So this is one I would like to. The American Heartland's a huge question, I think. Yeah. Pizza, burgers definitely translates here. Don't know if necessarily Kava 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 this to be a buy? 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 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 strong 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 trend of 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 Kava. 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.

try breakfast at A&W. And what better way than with a delicious Pret organic coffee, starting with just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. Chipotle has been fascinating 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 no this number and concept that we keep talking about so important for restaurants down four percent in the second quarter the big change at chipotle is that ceo brian nickel left for starbucks is he a reason that same store sales are down low or is there something else going on

So, I don't think he's the reason that same-source 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 Nicol 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. It 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. 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. So, you know, 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. I do 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. Yeah. This 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 this is another example of a stock that was priced for perfection, still has a $57 billion market cap. We got a 30 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 changed for Chipotle, 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 essentially 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. 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 scale and critical mass too. So it kind of is an easier ramp. I think that 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 sales. Yeah, where are we going to get some breakfast burritos? I mean, McDonald's has that. I'd be down for that. And that seems a lot easier here than it is for Kava 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 Kava. Kava, before trading this morning, was, I think, 4X the forward valuation, so you're getting a better valuation. But 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 only time will answer. 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. 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 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. Yeah, I think there's two kind of related macro trends going on here. And the first is, 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. And by the way, inflation is one of these things that comes up on every one of these conference calls. Absolutely. Prices are up, you know, and it gets very specific for restaurants. 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 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 one atmosphere and they're like, all right, instead of, it's just that incremental stop 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. 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. You know, 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 contending 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. 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 for 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 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. 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.

One company we haven't talked about the real technology play in restaurants is toast and Toast seems to be benefiting from all trends. 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. 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 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 1,300 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 things going on for Toast right now. 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. 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. 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 fail to see the investor excitement about this. I feel like that they're a winner here and it's a pretty blah business once it levels off from early stage growth. So final question, you have to buy one restaurant stock today. We got some pretty good discounts from previous prices. Rachel, which one are you adding to your portfolio? Honestly, I got to 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. It's cheaper than it was. I don't know if I'm ready to buy it yet. I might choose Kava just as a consumer. I want it to go up, but I do think

whether it's Brinker, whether it's Darden, just one of these tried and trues, that's probably where I would look to invest. I would love to buy Toast. I can't get over the price. If we keep getting discounts for 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, and The Motley Fool 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 Fool editorial's standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To 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 Hoem. Thanks for listening to Motley Fool Money. We'll see you here tomorrow. you