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Why Shares of Restaurants Spiked Higher Friday Morning

By Lou Whiteman - Mar 20, 2020 at 4:38PM

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The industry is taking a hit, but there will be some survivors.

What happened

Shares of restaurants traded up sharply on Friday morning, on hopes for government assistance to help them through the COVID-19 pandemic and a significant decline in consumers eating out. The stocks faded as the day went on, however, as it became increasingly clear investors would have to go into the weekend uncertain about what a bailout would look like.

Shares of Wendy's (WEN -0.52%) opened up 20% and were up 5% heading toward the close, while shares of Dave & Buster's Entertainment (PLAY -2.18%) and Darden Restaurants (DRI 1.77%) both opened up with significant gains but headed toward the close in the red.

So what

It's not hard to understand how restaurants have been devastated by the pandemic. Consumers are being told to keep a distance between one another, and in some large metropolitan areas are being told to shelter in place. That's not good for an industry built around social occasions.

The National Restaurant Association has asked for a $145 billion recovery fund from Washington for the restaurant and food service industry, but as of Friday afternoon, it was still unclear what would be done, and how quickly. As large as that number is, it is likely not enough to prevent a large number of failures among small restaurants and weak franchisees, but it would at least be a start.

A group of friends toasting each other around a table full of food.

Image source: Getty Images.

Of the group listed above, Darden appears to be the best able to weather the storm thanks to its $1 billion cash balance. Oppenheimer analyst Brian Bittner estimates the company could last at least six months even if revenue went to zero, and Bittner noted that Darden could take significant market share over time if the pandemic causes other dining options to fail.

Wendy's is still enjoying support on Wall Street because it is perceived as big enough to get through the turmoil, and analysts are excited about the company's new focus on breakfast and what Stephens analysts called "a motivated franchise base."

Dave & Buster's, meanwhile, is bouncing back after rocketing higher on Thursday after the chain adopted a poison-pill shareholder rights plan designed to prevent an activist or unsolicited buyer from gaining a significant stake.

Now what

Shares of Dave & Buster's are down 83% in the last month, and shares of Darden and Wendy's are down 68% and 53% respectively. It's hard to get too excited about a morning bounce given the significant declines investors have had to endure.

The silver lining is that the stocks are beginning to stabilize, and perhaps even trying to find a bottom, on the market's recognition that these companies are strong enough to survive this brutal period and come out stronger on the other side. It's just going to take a long time to get there.

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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$121.93 (1.77%) $2.12
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$19.03 (-0.52%) $0.10
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
PLAY
$34.95 (-2.18%) $0.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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