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Why Wendy's, Shake Shack, and Bloomin' Brands Jumped Today

By Jeremy Bowman – Apr 29, 2020 at 4:55PM

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Restaurant stocks rose on positive news in the sector and on hopes for a new drug trial.

What happened

Shares of Wendy's (WEN -0.92%)Shake Shack (SHAK -2.00%), and Bloomin' Brands (BLMN -2.33%) were climbing today along with the broad market as investors were encouraged by news of a drug trial that showed positive results in helping patents recover from COVID-19, and on better-than-expected earnings reports in the restaurant industry. Though there was no company-specific news out on those stocks, the restaurant sector gained across the board, propelling these three names with them. 

As of 2:40 p.m. EDT, Wendy's stock was up 5.3%, while Shake Shack had gained 8.3%, and Outback Steakhouse-parent Bloomin' Brands jumped 17.8%. At the same time, the S&P 500 was 2.9% higher, showing the rally in the broad market.

A blurry image of a menu and line of customers at a fast-food restaurant

Image source: Getty Images.

So what

Stocks surged as the National Institute of Allergy and Infectious Diseases, headed by Dr. Anthony Fauci, said a trial found that remdesivir has a significant and positive effect on reducing the recovery time from COVID-19. 

Investors applauded as the news showed progress on the medical front, which seemed to drive hopes that medical advances will help fight back against the economic havoc the pandemic has wrought.

Elsewhere, a number of restaurant chains reported earnings that were better than feared. Chili's-parent Brinker International surged by 33% as it said comparable sales climbed steadily through April, though they were still down sharply. Additionally, earnings for the first quarter crushed expectations. The report helped lift shares of fellow casual-dining operators like Bloomin' Brands, which has yet to report first-quarter earnings. 

On the fast-food front, both Yum! Brands and Starbucks reported earnings last night, and though the stocks dipped slightly, both companies were optimistic about a recovery. Yum! said sales improved through April, while Starbucks plans to re-open next week and said China sales were recovering after hitting a bottom in February.

For Wendy's, Shake Shack, and Bloomin' Brands, the paths to recovery look different.

As a legacy fast-food business with a franchise model, Wendy's needs to ensure its franchisees stay afloat through the pandemic and the company has extended payment terms for rent, royalties, and marketing. In a March 26 update, Wendy's said it had drawn down $120 million from a line of credit and comparable sales had fallen 20% in the week ended March 22, though it hasn't provided further insight since then. Still, based on results from peers like Yum!, investors may suspect that Wendy's comps have improved in April as well.

Shake Shack has been particularly sensitive to the pandemic as New York is its biggest market. The fast-casual burger chain reported that comps declined 29% in March, though comparable sales began to recover in the first half of April. Management estimated a cash-burn rate of $1.3 to $1.5 million in week, and had $112 million in cash on April 16 after drawing down a $50 million credit facility. Following that, Shake Shack raised $150 million in an April 17 equity offering, helping to give it more financial flexibility as it manages through the crisis.  

Finally, in a mid-April press release, Bloomin' Brands said that U.S. comparable sales had improved from 69.5% in the week ended March 29 to 55.6%, though that last week included Easter. Off-premise sales have also nearly tripled at its locations -- a sign that consumers are adapting to the new model and still patronizing restaurants even as dining rooms are closed.  

As of April 15, Bloomin' said it had $304 million in cash on hand and was facing a cash burn rate at $8 million to $10 million at current sales levels.

Now what

All three of these companies are set to report earnings next week, giving investors their first full look at results since the pandemic started. Shake Shack already spilled the beans in a preliminary report, saying that comparable sales for the quarter fell 12.8%, but revenue increased from $126.9 million to $143 million. It had an operating loss of $0.8 million, but did report earnings per share.

Updates from all three of these chains will help shed light on their current performance, but investors should expect a long road to recovery for restaurant stocks as the economy is sinking into a deep recession and social distancing is expected to remain in place at least for the coming months. 

Jeremy Bowman owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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