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Why These Restaurant Stocks Popped by Double Digits Wednesday

By Daniel Miller – Apr 8, 2020 at 3:22PM

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Investors hope that stay-at-home orders will be lifted in four to eight weeks, enabling restaurants to generate optimal revenue.

What happened

Shares of Darden Restaurants (DRI -2.32%), BJ's Restaurants (BJRI -0.25%), Texas Roadhouse (TXRH -1.99%), and Dave & Buster's Entertainment (PLAY -1.40%) all popped over 10% at one point on Wednesday as trends for new COVID-19 cases and hospitalizations continue to improve and the government begins to strategize how to restart the economy after the outbreak is more under control.

So what

^SPX Chart

^SPX data by YCharts.

It's been a wild ride over the past month for most entertainment, restaurant, and transportation stocks, among others, but hope that the economy will bounce back is providing some support to beaten-down stocks. Management teams across the restaurant industry have taken quick action to reduce expenses, curb capital expenditures, and bolster liquidity.

In fact, Darden Restaurants was upgraded Wednesday by analysts at Wedbush because of the company's $1 billion in cash on hand. It drew $750 million from its revolving credit facility and received a new $270 million term-loan agreement. The company is burning through $25 million per week, but its cash on hand should enable it to easily weather the storm until its doors can reopen for full operations.

A 'sorry closed' sign hanging on a window.

Image source: Getty Images.

Wedbush analysts also noted that Texas Roadhouse had enough liquidity and is well positioned to survive the outbreak and thrive during the recovery. Texas Roadhouse was ahead of the game, suspending its dividend and boosting its cash position weeks ago by drawing $190 million from its revolving credit facility, with an option for an additional $200 million, for a total of over $300 million in cash on hand.

Dave & Buster's topped fourth-quarter earnings estimates, but noted that it's attempting to reduce expenses and extend payment terms while also exploring selling a stake of the company to private equity firms as it faces a cash crunch. Dave & Buster's has been one of the hardest-hit restaurant stocks as the company simply can't replace lost revenue from its gaming area.

While Guggenheim named BJ's Restaurants as one of five restaurant stocks for the long term, there's no escaping a near-term speed bump as it laid off 16,000 hourly employees and closes certain stores depending on off-premise sales.

Now what

The truth is simple: As we continue to follow stay-at-home orders and socially distance ourselves, the restaurant industry will feel immense financial pressure. It's positive news that new COVID-19 cases and hospitalizations are trending in the right direction and that stay-at-home orders could be lifted in four to eight weeks. But make no mistake: We're still in the middle of this pandemic. Darden noted its sales dropped over 70% for each of the last three weeks, and its same-store sales are down almost 40% quarter to date. Darden is one of the first restaurants to provide a glimpse into its current quarter, but the pain is likely very similar throughout the industry.

For investors willing to take on risk and invest in beaten-down stocks, it's imperative to perform due diligence by checking for balance sheet strength, excess liquidity, upcoming debt payments, and a long-term growth story that will support the company's business during post-COVID-19 recovery.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool recommends BJ's Restaurants and Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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Stocks Mentioned

BJ's Restaurants, Inc. Stock Quote
BJ's Restaurants, Inc.
$23.85 (-0.25%) $0.06
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$126.32 (-2.32%) $-3.00
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
$87.26 (-1.99%) $-1.77
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
$31.03 (-1.40%) $0.44

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

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