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Why These Restaurant Stocks Sank on Wednesday

By Daniel Miller – Jun 24, 2020 at 5:15PM

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Recent COVID-19 data could be another setback for beaten-down restaurant stocks.

What happened

Shares of Cheesecake Factory (CAKE -2.33%), Dave & Buster's (PLAY -1.40%), and Denny's (DENN -0.84%), various restaurant chain stocks, all dropped over 10% Wednesday morning as broader markets sold off due to rising numbers of COVID-19 infections in some regions.

So what

Over the past few weeks, the broader markets have consistently climbed higher as consumers and analysts felt the worst of the COVID-19 coronavirus pandemic was behind us. While it is possible the worst is behind us, the harsh truth is that not only is a second wave possible, we're already seeing spikes in infection cases.

Florida and California announced Wednesday record-high, one-day tallies for new cases, and Arizona hit its own record on Tuesday. Worse yet, Houston Mayor Sylvester Turner said the city's intensive care units were at 97% of capacity.

^SPX Chart

^SPX data by YCharts

The market volatility is a sign of how quickly perceptions of the pandemic can change: One day developments are positive, and it's all sunshine and roses, and overnight it can turn pessimistic and gloomy for the foreseeable future. High economic uncertainty remains in the face of rising cases.

How the nation handles the next couple of weeks will be critical in determining the direction of the pandemic, economy, and stock markets. A rise in cases and potentially more cautious consumers are obviously bad news for restaurant chains, such as Cheesecake Factory, Dave & Buster's, and Denny's, as the companies were hoping to have the worst behind them and were ready to continue opening doors and generating dine-in revenue.

Let's use Dave & Buster's as an example of how difficult COVID-19 has been. Management noted during its first-quarter results that on a scaled-down business model with compressed menus and reduced operating hours and capacity, stores were running at about 37% of their pre-pandemic sales volumes. Management was aiming to have 48 of its 137 locations open by mid-June, and the company hopes the sheer size of its locations will enable them to operate sufficiently amid social distancing and capacity restraints.

Cheesecake Factory planned to have roughly 65% of its restaurants open for dine-in by mid-June and also noted that the first set of stores opened are running at about 75% of the prior year's figures. Denny's has also seen sales consistently improve: Every single week during the second quarter sequentially showed improving sales.

Slice of cheesecake on a cutting board with someone drizzling  a topping over the dessert.

Image source: Getty Images.

Now what

Markets do not digest uncertainty well. And uncertainty is the name of the game for restaurant chains trying to balance profitability in the face of restrictions. On top of those challenges, restaurants must continue to innovate new ways to increase off-premise, delivery, takeout or drive-thru businesses, while also attempting to convince consumers it's safe to dine-in at store locations.

Those were difficult tasks even when COVID-19 data suggested the worst of the impacts were behind us and the economy was improving. But recent data suggest the pandemic is still a battle we will be fighting on multiple fronts. At the end of the day, investors need to ask themselves if their long-term catalysts and bull thesis remain intact, and if the company has ample liquidity to survive this speed bump. If the answer to those two questions are yes, take stock price pops and drops like today with a grain of salt.

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

The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$29.28 (-2.33%) $0.70
Denny's Corporation Stock Quote
Denny's Corporation
DENN
$9.41 (-0.84%) $0.08
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
PLAY
$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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