What happened
On Aug. 26, the Food and Drug Administration authorized a new coronavirus test from Abbott Laboratories that is quicker and cheaper than anything else so far. And investors believe that's good news for beaten-down restaurant stocks like BJ's Restaurants (BJRI 1.35%), Dave & Buster's Entertainment (PLAY -0.24%) and Bloomin' Brands (BLMN -0.30%). Each stock is still down in 2020, but with each new encouraging development in the ongoing COVID-19 saga, investors purchase shares in anticipation of a turnaround.
Today, BJ's Restaurants stock was up 14%, Dave & Buster's shares were up 16%, and Bloomin' Brands was up 9%. It was a continuation of the momentum from the previous day, right after the rapid tests were announced.
So what
All casual-dining restaurants have been challenged in 2020. The pandemic forced dining rooms to limit seating or close altogether, and not many chains were equally equipped to facilitate to-go operations. But these three restaurant companies are particularly challenged.
Bloomin' Brands has a large portfolio of over 1,450 restaurants divided among four brands. Therefore, each brand needs custom adjustments to weather the storm. Dave & Buster's serves food, but it's really the in-store gaming and hanging-out experience that sets it apart -- not very adaptable in the crisis. For its part, BJ's Restaurants has a large percentage of locations (30%) in California, a state with strict dine-in regulations.
While Bloomin' Brands and BJ's Restaurants have grown their respective to-go operations, they haven't come close to replacing the sales they've lost. Dave & Buster's has only experimented with curbside delivery in a couple of stores so far. In short, sales are down for all three because of COVID-19, and they likely won't recover until dining rooms can reopen normally.
That's where the rapid coronavirus tests from Abbott come in. The federal government reportedly ordered 150 million tests to help get the pandemic under control. And the company believes it can ship 50 million a week by October. These could, in theory, be used to safely reopen dining rooms, giving these restaurant stocks a fighting chance to return to normal. And with each stock still down from 52-week highs, investors are betting they'll return to highs once restaurant activity is back to normal.
Image source: Getty Images.
Now what
Investors should tap the brakes on their optimism for two reasons. First, we have no idea how feasible it will be to test people before dining in a restaurant. Will patrons want to be swabbed and wait in line for the 15 minutes it takes to get results? We don't know. Will local legislators even believe the tests are good enough to allow full dine-in seating? We don't know.
Second, these companies have been through the ringer. When athletes break a leg, they're not the same players they were as soon as the cast is removed; rehab takes time. Likewise, BJ's Restaurants, Dave & Buster's, and Bloomin' Brands have taken on debt to varying degrees. And they've received rent relief from landlords, but that'll have to be repaid down the line. In short, even when restaurants are operating at normal capacity, the businesses will still need time to get back to where they were pre-pandemic.
Does that mean they're bad investments? Not necessarily. These three stocks will have to be evaluated on an individual basis to judge the long-term prospects. But consider this: A full 85% of independent restaurants are still at risk of closing permanently in 2020, according to the Independent Restaurant Coalition. Even some chain restaurants like Dunkin' Brands Group and Yum! Brands' Pizza Hut are permanently closing locations.
This most likely means we will have fewer restaurants at the start of 2021 than we had at the beginning of 2020. But this sober reality actually creates an opportunity for restaurants that make it through to the other side. Assuming demand stays the same, there will be fewer options. Therefore, the remaining restaurants will get that business, boosting sales to higher levels.
Personally, I believe consumers are adopting the convenience of third-party delivery, which will benefit quick-service and fast-casual chains more than these casual-dining restaurant stocks. But even if I'm wrong, investors need to keep in mind that the new coronavirus tests aren't immediate fixes for the problems at BJ's Restaurants, Dave & Buster's, and Bloomin' Brands. As always when investing in stocks, you have to take a long-term view, since it may take some time for your investing thesis to prove itself.
