On a flat day in the market, shares of casual dining chains were moving higher, a sign that investor hopes are building for a quicker-than-expected end to the lockdowns that have taken place across the country. Though there was no specific news moving the sector higher today, restaurant stocks had fallen so sharply over the last month that many of them are trading for bargain prices, or at least what would be bargains if they were able to operate normally.
Among the casual dining stocks moving higher today as of 11:16 a.m. EDT were Chili's-owner Brinker International (NYSE:EAT), which was up 11.3%, BJ's Restaurants (NASDAQ:BJRI), which had gained 7.8%, and Dave and Buster's (NASDAQ:PLAY), which rose 8.3%.
Casual dining chains are in a particularly tight spot these days as many states have required restaurants to limit themselves to takeout and delivery. This has been challenging for restaurants of all types, but those policies have hurt casual dining chains more than the fast-food restaurants, since most business for chains like Chili's comes from dine-in customers -- and liquor sales, which are basically nonexistent for takeout and delivery, are an important profit driver for such restaurants.
Given that impact, it's not surprising that casual dining stocks plunged in the first weeks of the coronavirus-driven sell-off. As you can see from the chart below, all three of these stocks had fallen by more than 70% at one point during the recent crash.
These casual dining stocks have been bouncing back on hopes for the federal government's $2 trillion rescue package, which includes some money earmarked for restaurants, and on general hopes for a recovery.
In an update last week, BJ's Restaurants said that it would defer its current quarterly dividend and suspend future dividends "until the significant uncertainty of the current situation has passed." Additionally, the company is pausing its capital spending, delaying or cancelling new restaurant spending, and significantly reducing operating expenses. It also drew down the $250 million remaining in its line of credit, on top of $95 million in cash on its balance sheet, and said that if all of its restaurants were closed, the company would incur $5 million in weekly operating expenses. In other words, it can survive over a year of mass closures, but would clearly benefit from restaurants reopening as soon as possible.
Two weeks ago, Dave & Buster's had adopted a "poison pill" shareholders right plan designed to prevent a hostile takeover of the eat-and-play chain. The move came as the private-equity firm KKR has accumulated a 12% stake in the company and has held talks with management. That process started before the coronavirus crisis, and it's unclear what the activist investor's goals are with Dave & Buster's. Still, investors seemed to interpret the poison pill maneuver as a positive sign, showing that management was confident in its ability to recover from the pandemic. The company has not yet addressed the impact of the outbreak, but is set to report fourth-quarter earnings after hours on April 2. It will likely discuss recent changes to the business on the call.
Chili's parent Brinker has yet to make a COVID-19-related update, though that company is facing the same challenges as other casual dining chains, as its dining rooms in most states are now closed.
Casual dining chains should expect at least weeks of continued closures ahead as the pandemic has not yet reached its peak. New case counts may be reaching a plateau nationally; there have been roughly 20,000 new cases recorded in each of the last few days. However, there's a lot of uncertainty ahead for the country and the economy, and especially for restaurant chains. Investors are clearly hopeful that these chains will be able to reopen for business as usual in the near future and get back on their feet, but it's not clear when that will be. Furthermore, some Americans may be reluctant to visit restaurants, as the virus could linger in some populations even after the peak passes and the threat of a recession looms. That means it will likely take several months, if not years, for these companies to achieve pre-crisis sales levels.