4 Solid Stocks From Promising Restaurant Industry

The Zacks Retail – Restaurants industry is likely to have benefited from robust off-premise sales, sales building initiatives and digital initiatives. Although the industry sales are still below the pre-pandemic level, it is showing signs of improvement.

Stocks like Brinker International, Inc. (EAT), Yum! Brands, Inc. (YUM), Red Robin Gourmet Burgers, Inc. (RRGB) and Jack in the Box Inc. (JACK), are likely to gain from the aforementioned industry trend.

Industry Description

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

4 Trends Shaping the Future of Restaurant Industry

Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts have been acting as catalysts. With the growing influence of Internet, digital innovation has become the need of the hour. Restaurant operators like Starbucks Corporation (SBUX) and McDonald's Corporation (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 Eats, and rollout of self-service kiosks and loyalty programs are likely to drive sales in 2020. Moreover, restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to bring down expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.

Sales Improve: Restaurant industry is gradually witnessing improving sales. The industry participants are also hiring, which indicates that the industry is finally gaining confidence. Food services and drinking places added 200,300 jobs in September taking the total to 10 million jobs, which was lower by 17.6% compared with the prior year. Per the National Restaurant Association, September's sales were up 2.1% from August's seasonally adjusted volume of $54.47 billion. However, the trade group added that September eating and drinking place sales were around $10 billion, or 15%, below their pre-coronavirus levels in January and February.

Off-Premise Sales Acting as a Key Catalyst: The industry is 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, owing to the coronavirus pandemic. With dining rooms remaining closed for nearly two months due to the coronavirus-induced crisis, off-premise sales have been increasing sharply. 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.

Traffic Woes Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic has aggravated the scenario further. Rapid increase in menu price and the coronavirus pandemic are the primary reasons behind traffic erosion. 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, intense competition, high wage and food cost inflation remain concerns.

Zacks Industry Rank Indicates Bright 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 #118, which places it at the top 46% 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. Since Jun 30, 2020, the industry’s earnings estimates for the current year have moved north by 9.4%.

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 underperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 12.3%, compared with the sector and the Zacks S&P 500 composite’s rally of 14.4% and 41.2%, 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 31.26X compared with the S&P 500’s 22.28X. It is marginally below the sector’s forward 12-month P/E ratio of 32.15XX.

Over the last five years, the industry has traded as high as 34.04X and as low as 20.49X, with the median being at 23.09X.

4 Key Restaurant Picks

Brinker International: Based in Dallas, TX, Brinker International primarily owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. The company remians focused on its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of menu, innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform. Brinker is also investing heavily in technology-driven initiatives, like online ordering, to augment sales.

Shares of this Zacks Rank #1 (Strong Buy) company have gained 129.4% in the past six months compared with the industry’s growth of 21.8%. Moreover, the company’s earnings for fiscal 2021 are anticipated to increase 22.2%. In the past 30 days, earnings estimate for fiscal 2021 has been revised upward by 2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

                          Price and Consensus: EAT

Yum! Brands: Louisville, KY-based YUM! Brands, is the global leader in multi-branding and offers consumers more choice and convenience at one outlet. The company’s partnership with online food delivery platform Grubhub has been enhancing online sales and delivery from restaurants. Additionally, the company implemented various digital features in mobile and online platforms across all brand segments to enhance guest experience. Yum! Brands has also been working toward making its delivery services faster and the results have been positive so far. At the end of second-quarter 2020, the company had more than 34,000 restaurants offering delivery globally, up 13% year over year. Its digital sales mix has increased to more than 30% of system sales.

Shares of this Zacks Rank #2 (Buy) company have gained 12.4% in the past six months. In the past 60 days, earnings estimate for 2020 has been revised upward by 1.9% to $3.17.

                        Price and Consensus: YUM

Red Robin Gourmet: Founded in 1969 in Seattle, WA, and made public in 2002, Red Robin Gourmet Burgers, Inc. is a full-service casual dining restaurant chain that serves an assorted range of burgers. It has been benefiting from robust off-premise sales. The company’s off-premise sales have increased sharply compared with the pre-COVID-19 levels. During second-quarter 2020, off-premise sales increased 208.7% and accounted for 63.8% of total food and beverage sales. Notably, the increase can primarily be attributed to its focus on all off-premise sales channels, carry-out, third-party and Red Robin delivery (or last mile). Also, reductions in menu and refined operating processes resulted in the effeciency of timely pickup and delivery.

Shares of this Zacks Rank #2 company have gained 52.2% in the past three months, compared with the industry’s rally of 15.9%. The company’s earnings for 2020 are likely to decline 1,882.3% owing to the coronavirus-related woes. However, the earnings estimate for 2021 indicates growth of 86.3% that reflects analysts’ optimism regarding the stock’s growth potential.

                      Price and Consensus: RRGB

Jack in the Box: Based in San Diego, Jack in the Box Inc. is a restaurant company that operates and franchises through Jack in the Box quick-service restaurants, and is one of the nation’s largest hamburger chains. Various Initiatives like regular menu innovation and increased focus on catering, delivery and marketing are expected to boost sales, going forward. Comps at Jack in the Box’s stores increased 4.1% in the fiscal third quarter compared with increase of 2.8% in the prior-year quarter. This upside can primarily be attributed to growth of 20.2% in average check, partially offset by a decline of 16.1% in transactions.

Shares of this Zacks Rank #2 company have gained 41.6% in the past six months. The company’s earnings for 2020 are likely to decline 3.9% owing to the coronavirus-related woes. However, the earnings estimate for 2021 suggests an improvement of 17.8%, which reflects analysts’ optimism regarding the stock’s growth potential. In the past 30 days, earnings estimate for 2020 has been revised upward by 0.5% to $4.18.

                      Price and Consensus: JACK

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Yum Brands, Inc. (YUM): Free Stock Analysis Report
Starbucks Corporation (SBUX): Free Stock Analysis Report
Red Robin Gourmet Burgers, Inc. (RRGB): Free Stock Analysis Report
McDonalds Corporation (MCD): Free Stock Analysis Report
Jack In The Box Inc. (JACK): Free Stock Analysis Report
Brinker International, Inc. (EAT): Free Stock Analysis Report
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