Robust Off-Premise Sales To Drive Restaurant Industry

The Zacks Retail – Restaurants industry comprises of several owners and operators of casual dining restaurants, full-service restaurants, quick-service restaurants and fast-casual restaurants. Some of the industry participants also operate as roaster, marketer and retailers of specialty coffee.

Let us take a look at the three major themes in the industry:

• Increase in consumer spending, steady rise in wages, lower unemployment and restaurant operators’ focus on digital innovation are key catalysts for the industry. With the growing clout of Internet, digital innovation has become the need of the hour. Restaurant operators like Starbucks Corporation (NASDAQ:SBUX) (SBUX) and McDonald's Corporation (NYSE:MCD) (MCD) are constantly partnering with delivery channels and digital platforms to drive incremental sales. Notably, partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber (NYSE:UBER) Eats, and rollout of self-service kiosks and loyalty programs are likely to drive sales for the industry in 2020. Moreover, restaurant operators are focusing on driverless delivery systems to augment sales. This is expected to bring down expenses substantially as it does away with delivery personnel.
  
• Restaurant industry is also benefiting from increase in off-premise sales, which primarily includes delivery, takeout, drive-thru, catering, meal kits and off-site options such as kiosks and food trucks. Per National Restaurant Association, more than 60% of the restaurant foods are consumed off-premise. By 2025, off-premise is likely to account for approximately 80% of the industry’s growth.
  
• The restaurant industry has been facing declining traffic for quite some time now. According to Black Box Intelligence (formerly TDn2K), restaurant industry’s same-store sales declined 0.1% in the fourth quarter. The decrease can primarily be attributed to same-store traffic decline of 3.4%. Meanwhile, despite lower traffic, average guest check growth has been accelerating, which shows that restaurant operators are exclusively deriving sales from higher guest spend. Rapid increase in menu price is most likely the reason behind erosion in traffic. Moreover, restaurant operators are grappling with high cost of operations. Further, sales-building efforts such as promotional activities and prudent pricing plans are eating away at margins. Apart from this, competition, high wage and food cost inflation remain concerns. Moreover, most restaurateurs are facing rising employee vacancies and are perpetually understaffed, which is affecting overall performance.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Retail – Restaurants industry is grouped within the broader Retail-Wholesale sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #71, which places it at the top 28% of 254 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperform S&P 500 & Sector

The Zacks Retail – Restaurants industry has outperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 17.8%, compared with the sector and the Zacks S&P 500 composite’s rally of of 18.5% and 21%, respectively.

One Year Price Performance

Restaurant Industry’s Valuation

On the basis of the forward 12-month P/E ratio, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 25.54X compared with the S&P 500’s 19.3X. It is marginally below the sector’s forward 12-month P/E ratio of 25.9X. Over the last five years, the industry has traded as high as 26.41X and as low as 20.45X, with the median being at 23.25X.

Forward Price To Earnings Ratio Compared With S&P

Bottom Line

Restaurant industry’s 2020 revenues are likely to be supported by strong growth in to-go and other forms of off-premise sales. However, high costs and traffic decline remain a concern.

Here are four stocks with positive earnings estimate revisions and a favorable Zacks Rank that investors can take a look at.

Denny's Corporation (DENN) owns and operates full-service restaurant chains under the Denny's brand. The company sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2020 earnings has moved up 1.3% over the past two months to 81 cents. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: DENN

Domino's Pizza, Inc. (DPZ), which operates as a pizza delivery company in the United States and internationally, has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2020 earnings has moved 0.9% north over the past seven days to $10.67. This indicates year-over-year earnings growth of 14.2% in 2020.

Price and Consensus: DPZ

Chipotle Mexican Grill (NYSE:CMG), Inc. (CMG) is currently one of the best performing restaurant stocks. The Mexican food restaurant chain’s enhanced focus on food safety and sales-building initiatives bodes well. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for 2020 earnings has climbed 2.8% over the past month to $18.39. This indicates earnings growth of 30.9% year over year in 2020.

Price and Consensus: CMG

Brinker International, Inc. (EAT), which owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar and Maggiano’s Little Italy brands, has a Zacks Rank #2. The Zacks Consensus Estimate for its fiscal 2020 earnings has risen 2.1% over the past month to $4.33.

Price and Consensus: EAT

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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