4 Appetizing Restaurant Stocks to Bet On This Holiday Season
According to Joel Naroff, TDn2K economist and president of Naroff Economic Advisors, the restaurant industry is likely to witness robust growth this holiday season on account of strong wage gains. Further, National Retail Federation president and CEO Matthew Shay remains optimistic regarding overall economic growth during the holiday season.
Per a report by eMarketer, consumers in the United States are likely to spend more than $1 trillion on retail goods this holiday season. Moreover, U.S. consumer confidence surged to its highest in 18 years in the month of October, per the Conference Board. Consumer confidence index climbed to 137.9 in October from 135.3 in September. Although the index slightly declined to 135.7 in November, consumer confidence is expected to remain strong in the months ahead.
Consequently, the ongoing economic scenario has offered a conducive environment for growth of restaurant stocks so far this year and the trend is likely to continue through the holiday season to 2019. Notably, year-to-date shares of the Zacks Retail – Restaurants industry have rallied 7.5%, outperforming the sector’s growth of 2.5%. Meanwhile, the S&P 500’s witnessed a decline of 1.5%.
Future Prospects Look Enticing
The restaurant industry continues on the path of recovery. According to TDn2K’s The Restaurant Industry Snapshot, growth has been strong for the industry so far this year and the top-line momentum is likely to continue in 2019. Comps grew 1% in the month of November, marking the sixth consecutive month of positive sales growth for the industry. In fact, except for a slight dip in May, the restaurant industry has reported positive comps in every month starting March. Same store traffic, which has been plaguing restaurant operators, declined 1.9% in November, indicating a 0.3 percentage points improvement from October.
Although traffic has been a concern, the industry’s top-line momentum is supported by strong growth in to-go and other forms of off-premise sales. Also, so far this year, to-go sales grew 9% year over year.
Key Strengths of the Industry
The restaurant industry is getting increasingly dependent on digital and delivery sales. With the ever-growing presence of Internet and smartphones analysts expect 25% of all restaurant sales to be generated from digital ordering and delivery over the next four years. This will roughly amount to $200 billion of the $800 billion industry, per a recent report by Forbes.
A persistent erosion in traffic compared with comps growth indicate that it is only guest checks and not guest counts that are positively contributing to restaurant sales. This also means that consumers are not frequently visiting restaurants and instead are getting increasingly reliant on delivery services.
Per The NPD Group, foodservice delivery has contributed significantly to restaurant sales over the past five years. The increase of 20% in delivery sales were primarily supported by digital ordering. Consequently, digital sales are no longer a luxurious feature but dire need of the hour. Moreover, Morgan Stanley predicts the food delivery industry could account for 11% of all restaurant sales by 2020.
The U.S. quick-service pizza providers can be considered as pioneers in this aspect as they were the one of the firsts to bolster digital capabilities. Per a recent study by Consumer Reports, spending on dining-out has increased nominally, with greater demand for easily accessible, high-quality food. Incorporation of better technologies has been a key sales-driving strategy of large pizza chains in the United States.
Further, a tectonic shift has been witnessed in consumer behavior with online shopping being preferred over traditional brick-and-mortar stores. This has persuaded restaurant stocks to adapt to the changing tide as evident from Starbucks’ SBUX efforts in digital, card, loyalty and mobile capabilities. Starbucks’ mobile app is undoubtedly one of the most widely used mobile payment app in the United States. In fact, mobile payments represented 14% of U.S. transactions in fourth-quarter fiscal 2018.
Other high-end casual dining restaurants are also deploying technology to enhance guest experiences.
Picking the Right Restaurant Stocks
With the help of the Zacks Stock Screener, we have zeroed in on four restaurants stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). These companies are also ahead of others in the digital game and promises year-over-year earnings growth of more than 15%. You can see the complete list of today’s Zacks #1 Rank stocks here.
McDonald's Corporation MCD, a leading fast-food chain, carries a Zacks Rank #2. The company has been undertaking digital initiatives to better serve customers, with nearly all of its U.S. restaurants now using digital menu boards. The Zacks Consensus Estimate for current year earnings is pegged at $7.76, reflecting year-over-year increase of 16.5%.
Darden Restaurants, Inc. DRI, a Zacks Rank #2 company, banks on various sales bolstering initiatives and cost saving efforts to drive growth. The company’s current year earnings are expected to grow 17.1% year over year, per the Zacks Consensus Estimate.
BJ's Restaurants, Inc. BJRI owns and operates a chain of 200 high-end casual dining restaurants in the United States. The company is investing heavily in technology-driven initiatives, like digital ordering, to boost sales. The consensus estimate pegs the company’s current year earnings at $2.35, reflecting growth of 66.7% from the year-ago level. BJ’s Restaurants carries a Zacks Rank #2.
Dunkin' Brands Group, Inc. DNKN is a franchisor of quick service restaurants under the Dunkin' and Baskin-Robbins brands. The company is growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivery.
Dunkin’ Brands carries a Zacks Rank #2. The company is expected to witness earnings growth of 16.9% in 2018 compared with 2017.
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