What happened
Shares of BJ's Restaurants (BJRI 1.69%), Dave & Buster's Entertainment (PLAY -2.77%), and Dine Brands Global (DIN 0.86%), are up 15%, 19%, and 22% respectively on Thursday afternoon, after the $2 trillion coronavirus relief package cleared the U.S. Senate and was passed on to the House.
So what
The S&P 500 and Dow Jones Industrial Average surged 5% and 4.7% Thursday afternoon, respectively, despite a historic spike in unemployment claims. New claims exploded to a record 3.283 million, a figure much higher than expected, and even above levels seen after the 2008 financial crisis.
But the markets' surge today, despite those frightening figures, emphasizes that many believe the economy will be able to snap back after the virus is under control. The gains also show that sometimes Wall Street prefers to have concrete numbers and data, rather than uncertainty, even when the numbers are brutal.
While the relief package seems promising, there's no question the restaurant industry has been one of the hardest-hit industries. Between some restaurant chains closing their doors, some going to carryout or delivery only, and the overall uncertainty of how long social distancing will be required, restaurant stocks have plunged. In fact, data from OpenTable shows that the year-over-year number of seated diners crashed 35% for March 13, and the trend is likely to get much worse with new data.
Image source: Getty Images.
Thursday brought some relief with the previously mentioned companies' double-digit bounces, but the truth is that many restaurants will need help, or decisive actions, to get through this:
- Dave & Buster's lost food, gaming, and liquor sales all in one swoop, and it's not well-equipped to offset those losses with drive-through or delivery.
- BJ's Restaurants took action by suspending future quarterly dividends until the COVID-19 crisis and its economic impact have passed, but will that prove to be enough additional liquidity?
- Dine Brands announced it had drawn $223 million of its total $225 million available under its revolving financing facility.
Now what
The harsh truth is that the restaurant industry is wildly competitive, and many restaurants aren't prepared to handle an environment in which revenue goes to zero -- some restaurants aren't prepared for even a sizable drop or slowdown.
While restaurant stocks have rebounded on the hope of aid, and a possible faster snapback in economic activity once the outbreak passes, investors should take the gains with a grain of salt. If you're looking for bargains, you must do your due diligence: Dig into financials and see whether a restaurant chain has a strong enough balance sheet to weather the storm. Broader markets will almost certainly rebound from COVID-19 and its impacts, but not all stocks will, so invest wisely.
