What happened

Shares of restaurant stocks were flying higher on optimism for an upcoming reopening of the U.S. economy. The news came as President Trump encouraged states to start reopening and as some, like Ohio and Wisconsin, outlined plans for businesses to come back to life in the coming weeks. At the same time, investors responded enthusiastically to a report that remdisivir, a drug made by Gilead, had some success in treating patients with COVID-19. 

These news items showed progress in overcoming the outbreak, and investors sent restaurant stocks roaring higher as the sector is particularly sensitive to the shutdown, with dining rooms closed in most locations. Among the winners today were Darden Restaurants (DRI -1.26%), up 9.3%; Bloomin' Brands (BLMN -1.71%), up 11.4%; Yum! Brands (YUM -0.38%), up 5%; Wendy's (WEN -0.54%), up 6.5%; and Texas Roadhouse (TXRH -0.23%), which finished up 10.4%. The S&P 500, meanwhile, closed up 2.7%.

A group of young people sitting around a restaurant table eating pizza

Image source: Getty Images.

So what

There was not a lot of company-specific news out on these stocks today, though Olive Garden-parent Darden Restaurants received an outperform rating from Wolfe Research, which initiated coverage with a $75 price target. This represents nearly 20% upside from where Darden finished today. Wolfe also initiated coverage on Yum with a peer-perform rating, while Outback Steakhouse-parent Bloomin' Brands saw its price target lowered from $23 to $14 at Deutsche Bank, following the company's business update yesterday.

In that update, Bloomin' Brands said it had not terminated or furloughed any of its 90,000 employees, and also shed light on its comparable sales during the crisis. Companywide, U.S. comparable sales bottomed out at a decline of 69.5% in the week ended March 29, and bounced back to a decline of 55.9% in the week of April 12, though that week included the benefit of the Easter holiday.

Off-premise sales at its brands have also more than doubled since stay-at-home orders began, showing it's able to recoup some of its lost sales. Bloomin' Brands also said it was currently operating at a cash burn rate of $8 million to $10 million a week, similar to other casual dining chains, and had $304 million in cash on its balance sheet as of April 15. 

That cash burn rate shows why investors are so eager for positive news showing restaurants may soon be able to open their dining rooms and resume regular service. If that doesn't happen, they'll need to borrow money to avoid going bankrupt.

Casual-dining chains have struggled more with the shutdowns than fast-food operators, though other chains, including Darden, have reported a modest recovery in sales in recent weeks as consumers seem to be adjusting to living under stay-at-home orders. Longbow Research analyst Alton Stump said that Wendy's comparable-store sales had improved from a 20% decline at the end of March to a decline of 12%-15% through April.

Now what

Restaurant earnings reports are just around the corner, beginning next week with Chipotle reporting earnings on Tuesday, so investors will get more details on how the industry is faring amid the coronavirus pandemic. Despite optimistic signs about states starting to reopen their economies and even a treatment, investors should brace themselves for a slow recovery in the industry. It'll likely take months for restaurants to be allowed to return to full capacity, as social distancing policies will have to be in effect to some degree to prevent a second wave of infections. Similarly, a recession could impact the ability of consumers to spend at restaurants.

With that in mind, the market may be getting ahead of itself on a recovery in restaurant stocks, as some bigger names are trading in tandem with the S&P 500. We'll learn more as industry earnings reports start coming in next week.