Government Shutdown Could Hurt These Fast-Casual Restaurant Stocks

Sweetgreen has 12 locations in Washington, D.C., and more in surrounding areas. (Angus Mordant/Bloomberg)

Key Points

• A government shutdown could significantly impact fast-casual restaurants in Washington, D.C., due to their concentrated presence.
• Cava’s same-store sales growth declined to 2% in the latest quarter, from 11% in the prior quarter and 21% two quarters ago.
• Shake Shack’s same-restaurant sales grew 1.8%, missing Wall Street expectations of 2.2% and down from 4% a year ago.

If the federal government shuts down, it could impact many businesses that operate in the nation’s capital. Fast-casual restaurants might be among the businesses hit hardest, given their relatively concentrated footprint in urban areas, including Washington, D.C.

A government shutdown would lead to a sudden decline of restaurant visits by federal employees during lunch hours. What’s more, since the workers won’t be paid during the shutdown, they’ll likely feel more financial pressure and dine out less.

According to Shake Shack’s website, the burger chain has six restaurants in D.C., and at least a dozen more in surrounding cities in Virginia and Maryland. That is about 5% of its nearly 400 total U.S. store count.

Cava has seven restaurants in D.C. and Sweetgreen has 12, according to the companies’ websites. Including the surrounding suburbs, each has 20 to 30 locations in the area, according to Barron’s estimates. That is a notable part of their network of 400 and 260 restaurants, respectively.

Shake Shack, Cava, and Sweetgreen didn’t immediately respond to a request for comment.

This would be the latest challenge for fast-casual restaurants that are already struggling with weaker sales in urban areas as working professionals balk at $15 salad bowls.

In the latest quarter ended in July, Cava’s same-store sales were up 2% from a year ago, down from 11% growth in the three months prior and the 21% growth two quarters ago. At Sweetgreen, existing restaurants saw an 8% drop in revenue in the latest quarter. The stocks have tumbled 48% and 75% this year, respectively.

Some region-specific headwinds have particularly hurt consumption in Los Angeles, New York, and D.C. markets. L.A. was affected by the wildfires earlier this year, cold weather and weak international tourism have dragged on NYC’s dining sector, while federal job cuts under the Department of Government Efficiency led to fewer restaurant visits in D.C.

“All of those things are disproportionately impacting those markets, and we are saturated in those markets,” said Shake Shack CEO Robert Lynch on the May earnings call. The burger joint posted a 1.8% growth in same-restaurant sales, missing Wall Street expectations of 2.2% and down from 4% a year ago. Shares are down 30% this year.

Shake Shack noted that the vast majority of its new restaurant pipeline is in markets outside of New York and D.C., where sales growth remains strong. “As cycles turn and markets turn, we believe that we’re also well positioned to win when the macro trends in our favor in those two markets,” said CFO Katherine Fogerte on the September earnings call.

Write to Evie Liu at evie.liu@barrons.com