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Restaurant Industry Banks on Off-Premise Sales Amid Pandemic

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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.

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

  • Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts are key 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 for the industry players in 2020. Moreover, restaurant operators are focusing on driverless delivery systems to augment sales during the coronavirus pandemic. This is anticipated to bring down expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.
     

  • 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 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.
     

  • 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 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, 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 #94, which places it at the top 37% of 253 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 underperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 7.2%, against the sector and the Zacks S&P 500 composite’s rally of 19.1% and 6.8%, 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 34.94X compared with the S&P 500’s 22.42X. 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 34.04X and as low as 20.49X, with the median being at 23.09X.

Bottom Line

Restaurant industry’s 2020 revenues are likely to be sustained by strong growth in to-go and other forms of off-premise sales. However, high costs and traffic decline owing to the pandemic remain concerns.

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

Domino's Pizza, Inc. (DPZ), which operates as a pizza delivery company in the United States and internationally, carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2020 earnings has moved north by 3.6% over the past 30 days to $11.32, indicating year-over-year growth of 18.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

                                   Price and Consensus: DPZ

Cracker Barrel Old Country Store, Inc. (CBRL) develops and operates the Cracker Barrel Old Country Store concept in the United States. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 77.8% in the past month to $4.96, suggesting an improvement of 462.3% year over year.

                             Price and Consensus: CBRL

Yum China Holdings, Inc. (YUMC), which owns, owns, operates, and franchises restaurants in China, has a Zacks Rank #2. The Zacks Consensus Estimate for its fiscal 2020 earnings has been revised upward by 76.1% in the past two months to $1.08.

 

                           Price and Consensus: YUMC

 

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Yum China Holdings Inc. (YUMC) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
McDonalds Corporation (MCD) : Free Stock Analysis Report
 
Dominos Pizza Inc (DPZ) : Free Stock Analysis Report
 
Cracker Barrel Old Country Store, Inc. (CBRL) : Free Stock Analysis Report
 
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