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Restaurants Hungry for Technology Amid Risks: 4 Key Picks

Rajashree Bhattacharyya

The U.S. restaurant industry has been showing irregularities in terms of comps growth. While comps have grown in the last seven of the eight months, the metric was negative due to weather-related woes in the month of February. Per tdn2k’s Restaurant Industry Snapshot, restaurant sales regained momentum in May after a disappointing April. Comps grew 1.1% in the month of May.

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 is anticipated to experience a 3.4% rise in current-year sales, calling for an improvement from the previous year’s 3.2%. Fine-dining restaurants will also witness a rise of 5.2%, compared with growth of 5% in 2018.

This implies that although the industry is exposed to certain short-term risks like declining traffic, it is likely to strive on other factors over the long haul.

What’s Plaguing the Industry Now?

A pressing problem for restaurants is the persistent traffic erosion since the last recession. The industry’s sales are supported by increased average check but not guest count. Same-store traffic fell 2.1% during May and the trend is likely to persist in the near term.

Secondly, restaurateurs are possibly up against an imminent rise in food and wage costs, which will eat into profits. Also, the recent tariff strife with China and Mexico has been restraining capital investment, which again will affect most restaurant companies. Fluctuating consumer spending due to trade war qualms is also quite a bother.

Thirdly, recent data shows that the rapid mushrooming of restaurants in the United States is inducing fierce competition in the market. Rivalry from sectors like grocery store, prepared foods and convenience stores is also rife. Such aggressive competition has compelled Starbucks Corporation SBUX to pull down the shutters on a few U.S. stores.

Also, a conflict between consumers and restaurateurs over high delivery costs is pretty apparent. The escalated charges are however a result of third-party sharing of delivery revenues, which shrink restaurant operators’ margins.

How Are a Few Staying Afloat?

Many restaurant operators have prevailed over the near-term hurdles, courtesy of a steady shift toward embracing technology. Consumer preferences have changed over time and demand for digital and delivery services have grown exponentially. Also, loyalty programs, kiosks, kitchen display system and table-side ordering are much in demand.

Per The NPD Group, foodservice delivery services have contributed significantly to restaurant sales in the past few years. Digital orders increased 23% over the past four years. Clearly, online service is no longer an extravagant feature but is the need of the hour. Reflective of this, Morgan Stanley expects the food delivery industry to account for 11% of all restaurant sales by 2020.

A few restaurant giants are fine examples of how technology has helped in a big way. For instance, Mc Donald’s MCD and Domino’s DPZ thrive on innovation and large-scale digitization. Meanwhile, Domino’s recently announced a partnership with Nuro, a robotic company, to enhance delivery services. Also, Dunkin’ Brands DNKN has expanded its delivery services with the Grubhub collaboration.



Key Picks

Despite the bottlenecks, the restaurant industry has its own share of positives. With the help of the Zacks Stock Screener, we have zeroed in on four restaurants stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy). These companies display notable estimated earnings growth for 2019 and are well ahead of others in the digitization game. You can see the complete list of today’s Zacks #1 Rank stocks here.

Yum China Holdings, Inc. YUMC holds a leadership position in the Chinese restaurant space when it comes to delivery, mobile order and pay, and loyalty membership. The company is increasingly shifting toward digital and content marketing to expand its customer base. It has adopted a high-grade delivery strategy that covers collaborating with aggregators to source traffic and fulfilling orders through the company’s KFC riders. This is expected to help the company drive volume and leverage the extensive network to control quality.

The company carries a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings is pegged at $1.67, calling for a year-over-year increase of 9.2%.

Noodles & Company NDLS carries a Zacks Rank #1. The company is expected to witness earnings growth of 700% on a year-over-year basis in 2019. The company is known for its undivided focus on off-premise sales. Exclusive of delivery, digital ordering sales and quick pick-up increased 32% in the first quarter of 2019 from the prior year, accounting for 17% of sales. 

Chipotle Mexican Grill, Inc. CMG carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 earnings calls for growth of 43.5% year over year. The company has redesigned and simplified its online ordering site, enabled online payment for catering, online meal customizations and collaborated with several well-known third-party providers for delivery. The first quarter of 2019 particularly saw a strong uptick in delivery sales, with digital sales rising 101% year over year.

The Cheesecake Factory Incorporated’s CAKE technology-enabled initiatives are encouraging. In the third quarter of 2018, the company signed an exclusive national delivery partnership with DoorDash. It expects to reap benefits from these collaborative marketing opportunities. The company is also witnessing incremental sales from its delivery service, which continues to be rolled out nationwide. The company has also been working on improving its to-go business, including online ordering capability. This section is a major contributor to growth in the company’s strong off-premise sales channels. Resultantly, its off-premise business contributed 14% to total sales in 2018 compared with 12% in 2017. Also, in the first quarter of 2019, off-premise business accounted for 16% of total sales.

The consensus estimate for current-year earnings is $2.66, calling for growth of 9.5% from the year-ago level. Cheesecake Factory carries a Zacks Rank #2.

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Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
Starbucks Corporation (SBUX) : Free Stock Analysis Report
The Cheesecake Factory Incorporated (CAKE) : Free Stock Analysis Report
McDonald's Corporation (MCD) : Free Stock Analysis Report
Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
Yum China Holdings Inc. (YUMC) : Free Stock Analysis Report
Noodles & Company (NDLS) : Free Stock Analysis Report
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