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Restaurant Stocks Soar Wednesday on Positive COVID-19 Developments

By Daniel Miller - Apr 29, 2020 at 1:24PM

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Multiple positive developments have restaurant stocks moving higher – but is the worst really over?

What happened

Restaurant stocks are on a good way. Brinker International (EAT 1.52%) is soaring nearly 30% on an earnings beat, and Cheesecake Factory (CAKE 2.08%) and Darden Restaurants (DRI 1.62%) jumped as much as 20% and 8%, respectively, as more states talk about reopening parts of their economies.

So what

Restaurant stocks continued to rebound from their initial sell-off as COVID-19 took the nation's attention. There were some positive updates Wednesday, as Gilead Sciences (GILD 0.18%) claimed positive results for a COVID-19 treatment candidate. Between the update from Gilead, and more states discussing plans to reopen parts of their economies, investors brushed off a dismal first-quarter GDP (gross domestic product) report that showed a shrinking U.S. economy, on an annualized basis, for the first time since 2014. More specifically, the U.S. economy contracted by 4.8%, which is the most since the financial crisis in 2008.

DRI Chart

DRI data by YCharts.

Brinker's stock is soaring thanks to its gradually improving sales at Chili's and Maggiano's, as the two brands operate and innovate with its off-premise-only business, and beats on both the top and bottom lines during its fiscal third-quarter 2020. Comparable sales declined 64.6% for the week ending April 1, but recovered to a 46.8% decline for the week ending April 22. Those are still brutal results, but they're trending in the right direction. And management emphasized the company has plenty of liquidity, at $175 million total, compared to a cash burn of roughly $5 million per week.

Steak dinner and sides

Image source: Getty Images.

Cheesecake Factory also benefited recently from Roark Capital investing $200 million through a convertible preferred investment, a transaction that bolsters Cheesecake Factory's liquidity and ability to weather the coronavirus slowdown. While the transaction will come at a cost, in either share dilution or interest expense, Wells Fargo analyst Jon Tower called it a "better alternative" to traditional debt financing, because it brings in a solid partner with previous dealings in the restaurant industry.

Darden Restaurants, the parent company of popular brands such as Olive Garden and LongHorn Steakhouse, among others, is likely up because of recent news that it will be opening some of its dining rooms. More specifically, the company is opening roughly 100 of its locations in Georgia this week, giving investors hope that more and more states will slowly begin reopening parts of the consumer economy, with extra safety measures to keep COVID-19 under control.

Now what

It's certainly positive news if some progress is being made on COVID-19 treatments, and if some states are planning to reopen parts of their economy in a safe and sustainable way.

But investors would be wise to anticipate more market volatility in the near term: We certainly haven't seen the worst of financial impacts, and there's a chance that reopening parts of the economy too quickly could return us all to square one of this pandemic.

Also, remember that much of the first quarter was taking place in a normal economy, and businesses really only felt the negative impact from social distancing in March. The second quarter will absorb the full impact from COVID-19 -- and the measures that slowed the economy drastically and sent unemployment soaring.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$134.35 (1.62%) $2.14
Brinker International, Inc. Stock Quote
Brinker International, Inc.
$33.35 (1.52%) $0.50
The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
$33.89 (2.08%) $0.69
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$66.33 (0.18%) $0.12

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

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