Restaurants can never go out of style, especially with avid lovers of burgers, pizzas, grilled sandwiches, ice creams, and a range of other food items.
The first half of 2019 reads as an eventful chapter of the restaurant industry. So far this year, the industry has witnessed a gain of 25.2%, compared with the S&P 500’s rally of 18.2%.
The restaurant industry is buzzing, thanks to recent partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, digital innovation, rollout of self-service kiosks and loyalty programs. Further, given the growing transactions on the Internet, digital innovation is the need of the hour.
Sales Rise Despite Traffic Woes
Most restaurateurs have been grappling with soft traffic. Same-store traffic fell 2.1% in May and the trend is likely to persist in the near term. Persistent erosion in traffic compared with comps growth indicates that only guest checks and not guest count contribute to restaurant sales.
Despite low traffic, the industry is likely to witness impressive sales growth in 2019. Per tdn2k’s Restaurant Industry Snapshot, restaurant sales picked up in May after a disappointing April. Comps grew 1.1% in May. The report also revealed that two-year same-store sales have grown in the last seven of eight months. Right from menu innovation, introduction of digital platforms to serving up healthy food items, such initiatives have been contributing massively to the industry’s growth trajectory since 2017-end.
Considering the trend-driven nature of the industry, restaurateurs have been constantly coming up with new and unusual items for consumers while maintaining complete transparency about ingredients. Moreover, restaurant operators are focusing on driverless delivery systems to drive sales. This is expected to bring down expenses substantially as it does away with delivery personnel. Per Mordor Intelligence, the autonomous delivery robots market is likely to see a CAGR of more than 49.5% during the 2019-2024 period.
Meanwhile, online ordering has been gaining popularity. While direct delivery from restaurants is still the highest, the third-party app space is getting creative with their approach to attract diners to their platforms. Per The NPD Group, foodservice delivery has contributed extensively to restaurant sales in the past few years. Digital orders have increased 23% over the last four years. Moreover, Morgan Stanley expects the food delivery industry to account for 11% of overall restaurant sales by 2020.
Meanwhile, we expect the fast-casual restaurants to lead gains in this space. According to an article by Restaurant Business, the fast-casual restaurant space is likely to record sales growth of 8.3% in 2019 compared with 8% in 2018. Casual dining sales are expected to rise 3.4% in the current year, up from last year’s 3.2%. Fine-dining restaurants are also slated to grow 5.2% compared with 5% in 2018.
This versatile approach of industry players is expected to help reverse the declining traffic trend. According to the National Restaurant Association (NRA), U.S. restaurant sales are projected to hit a record high of $863 billion this year, up 3.6% from last year.
4 Solid Picks
Given the rosy forecast for restaurants in 2019, adding stocks from this space to your portfolio might be prudent.
With the help of the Zacks Stock Screener, we have zeroed in on four stocks in the Retail-Restaurants industry with a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
We have narrowed down our search to the following stocks based on a solid earnings growth rate of more than 10% for the current year. Further, these stocks have gained more than 10% year to date and are likely to maintain the momentum in the second half of 2019.
Chipotle Mexican Grill, Inc. CMG is currently one of the best performing restaurant companies. The Mexican food restaurant chain’s increased focus on food safety and sales-building initiatives bodes well.
Zacks Rank: #1
YTD Share Price: 69.3%
F1 EPS Growth Rate: 43.6%
Noodles & Company NDLS develops and operates fast-casual restaurants in the United States.
Zacks Rank: #1
YTD Share Price: 14%
F1 EPS Growth Rate: 700%
Domino's Pizza, Inc. DPZ, through its subsidiaries, operates as a pizza delivery company in the United States and internationally.
Zacks Rank: #2
YTD Share Price: 13.3%
F1 EPS Growth Rate: 10.9%
J. Alexander's Holdings, Inc. JAX owns and operates complementary upscale dining restaurants in the United States through its subsidiaries.
Zacks Rank: #2
YTD Share Price: 26.5%
F1 EPS Growth Rate: 16.7%
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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
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