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Why These Beaten-Down Restaurant Stocks Are Surging

By Daniel Miller – Updated Jun 5, 2020 at 11:54AM

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Surprising jobs news and optimism from another beaten-down sector has restaurant stocks rising Friday.

What happened

Shares of Dave & Buster's (PLAY 5.39%), Ruth's Hospitality Group (RUTH 5.84%), and Darden Restaurants (DRI 4.81%), various restaurant chains are jumping Friday -- Dave & Buster's and Ruth's jumped over 17% at one point -- after a positive jobs report pumped optimism into the markets.

So what

Friday brought surprising yet incredibly welcomed news when the Labor Department's jobs report showed that the economy added 2.5 million non-farm jobs in May. Not only was May's result a strong number, it was shocking considering consensus forecasts called for a 7.5 million loss in non-farm payrolls. While unemployment is still a staggering 13.3%, that's vastly favorable to the expected 19% and better than the 14.7% level in April.

In addition to the phenomenal jobs report Friday, consider that American Airlines Group announced plans to boost flights by 74% next month, suggesting there is hope in a quick rebound for even the most beaten-down industries.

Four people enjoying a meal at a restaurant

Image source: Getty Images.

May's jobs report and a planned surge in flights are encouraging to beaten down sectors including the restaurant industry, which would benefit hugely from a V-shaped economic recovery that was considered unlikely until Friday's spark of optimism.

More good news for restaurant stocks came earlier this week from Cheesecake Factory (CAKE 6.99%), which said that on average, its reopened stores operating at limited capacity recaptured roughly 75% of the prior year's sales. That's encouraging for restaurant investors who were uncertain how quickly the American consumer would get out to spend at dine-in restaurants.

Currently, Cheesecake Factory has about 25% of its restaurants open in limited capacity, and it's aiming for 65% to be open by mid-June, offering investors hope that reopening can happen quickly and at least return companies to operating at near normal levels. 

Now what

PLAY Chart

PLAY data by YCharts.

There are a few things to consider, both good and bad. First, investors have to consider that even with this week's rally in restaurant stocks, they still largely lag the S&P 500's recovery.

Second, some restaurants need a return to normal more than others. Dave & Buster's, for instance, was less able to offset its business losses because so much comes from its gaming segment. On the other hand, restaurants such as Cheesecake Factory were able to innovate and focus on off-premise sales deals, which have stayed strong even with a return of dine-in traffic.

Third, while it seems that consumers are ready to get out and eat at restaurants, there is still uncertainty as to whether or not we'll see a resurgence in COVID-19 cases and, thus, consumers returning to a more reluctant and cautious state of spending.

Only time will tell how this recovery plays out, but one thing is certain: The May jobs report was a welcome surprise, and even beaten-down sectors could be seeing a light at the end of the tunnel.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$131.44 (4.81%) $6.04
Ruth's Hospitality Group, Inc. Stock Quote
Ruth's Hospitality Group, Inc.
RUTH
$17.57 (5.84%) $0.97
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
PLAY
$33.02 (5.39%) $1.69
The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$31.13 (6.99%) $2.03

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

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