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3 Sizzling Restaurant Stocks to Buy Despite Industry Woes

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The Zacks Retail – Restaurants industry has been benefiting from the gradual improvement in demand, robust off-premise sales, sales-building efforts and digital initiatives. However, a dismal increase in the cost of employee wages, benefits and insurance, and other operating costs such as rent and traffic continue to hurt the company. Although traffic has been increasing, it is still below the pre-pandemic level. However, Dave & Buster's Entertainment, Inc. PLAY, Arcos Dorados Holdings Inc. ARCO and BBQ Holdings, Inc. BBQ are well-poised to counter the scenario.

Industry Description

The Zacks Retail – Restaurants industry comprises several owners and operators of casual, upscale casual, fine dining, full-service and fast-casual restaurants. Some of the industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies develop, operate, and franchise quick-service restaurants worldwide. Few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage, and license restaurants and lounges worldwide. Some of the companies also operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.

4 Trends Shaping the Future of Restaurant Industry

Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic has aggravated the scenario. A rapid increase in menu prices and the coronavirus pandemic are the primary reasons behind traffic erosion. The restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation remain concerns. The industry is persistently bearing increased expenses, which have been affecting margins of late. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are weighing on the company’s margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye and tri-tip, and salmon, is hurting the industry.

Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost savings efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators are constantly partnering with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats and the rollout of self-service kiosks and loyalty programs continue to drive growth. The restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.

Sales Rising Gradually: The restaurant industry is gradually witnessing improving sales. The industry participants are hiring, which indicates that the industry is finally coming out of the woods. Eating and drinking added 124,000 jobs in February, on a seasonally-adjusted basis, according to data from the Bureau of Labor Statistics. Per the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for February 2022 were $658.1 billion, up 0.3% sequentially. The improvement can be attributed to enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.

Off-Premise Sales Acting as a Key Catalyst: The industry has been gaining from the 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. Per the National Restaurant Association, more than 60% of restaurant foods are consumed off-premise. By 2025, off-premise is likely to account for approximately 80% of the industry’s growth. Most restaurant operators have initiated testing of ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service has been garnering positive customer feedback.

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 dismal near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #162, which places it at the bottom 36% of 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Since Nov 30, 2021, the industry’s earnings estimates for the current year have moved south by 194.2%.

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 Outperform the S&P 500

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

Over this period, the industry has declined 8.5%, compared with the Zacks S&P 500 composite’s rally of 16.8%. Meanwhile, the sector has declined 23.3%.

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 23.52X compared with the S&P 500’s 20X. It is marginally above the sector’s forward 12-month P/E ratio of 28.01X.

Over the last five years, the industry has traded as high as 34.23X and as low as 20.37X, with the median being at 24.29X.

3 Key Restaurant Picks

Dave & Buster's: Headquartered in Dallas, TX, Dave & Buster's has been benefiting from strategic initiatives that include a new menu, optimized marketing and technology investments. Expansion of entertainment options bodes well. The company, which carries a Zacks Rank #2 (Buy), continues to pursue a disciplined new store growth strategy in both new and existing markets, given the broad appeal of its brand. Management believes that it can expand the concept to more than 200 units in North America over time. In addition to growth potential in North America, management is optimistic regarding the brand’s significant appeal in certain international markets.

Dave & Buster's earnings for fiscal 2022 are anticipated to improve by 149.2%. In the past 30 days, the consensus mark for 2022 earnings has been revised upward by 0.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: PLAY

Arcos Dorados: Based in Montevideo, Uruguay, the company operates as a franchisee of McDonald's restaurants. The company is benefiting from sharp increase in systemwide comparable sales and new restaurant openings. In 2021, its systemwide comparable sales increased 38.8% and were up 10.1% on a two-year basis.

Shares of this Zacks Rank #2 company’s have gained 63.1%, against the industry’s decline of 8.5%. Arcos Dorados’ earnings for fiscal 2022 are anticipated to improve by 62.5%. In the past 30 days, the consensus mark for 2022 earnings has been revised upward by 5.4%.

Price and Consensus: ARCO

BBQ Holdings: Based in Minnetonka, MN, BBQ Holdings develops, owns, operates, and franchises casual and fast dining restaurants in the United States, Canada, and the UAE. The company is gaining from acquisitions of Tahoe Joe’s Steakhouse brand. In 2022, it anticipates restaurant revenues in the range of $265 million to $280 million.

BBQ Holdings sports a Zacks Rank #1. The Zacks Consensus Estimate of the company’s current financial year sales and EPS suggests growth of 40.9% and 66.2%, respectively, from the prior-year comparable figure. Shares of the company have soared 129.9% in the past year.

Price and Consensus: BBQ

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Dave & Buster's Entertainment, Inc. (PLAY) : Free Stock Analysis Report

Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report

BBQ Holdings, Inc. (BBQ) : Free Stock Analysis Report

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