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Starbucks & 4 Restaurant Stocks to Spice Up Your Portfolio

Harendra Ray

Despite operating in an intensely-competitive space, Starbucks Corporation SBUX has performed exceedingly well of late. Shares of this restaurant company have surged 38.3% year to date, outperforming the industry and the S&P 500’s respective rally of 25.2% and 17.8%.

The impressive stock performance can be primarily attributed to a four-quarter stretch of earnings beats. The company continues to benefit from robust Americas and China-Asia-Pacific segments as well as frequent store openings. Comparable sales from China have increased for the third straight quarter. This year, the company intends to open 600 stores in America. Following better-than-expected results in the second quarter, Starbucks raised its fiscal 2019 guidance. Non-GAAP earnings per share are now projected in the range of $2.75-$2.79, up from the previously guided $2.68-$2.73.

In the last two years, Starbucks’ management turned around its Europe, Middle East and Africa (EMEA) business by enhancing customer experience via innovative store designs, better product offerings along with process and supply chain efficiencies. Meanwhile, China Asia Pacific or CAP is now the company’s fastest growing segment. China delivered 3% comps growth in the second quarter. With increasing investment in Asian markets, the Starbucks brand is gaining popularity there.

Management believes that the company will do more meaningful business in China and the Asia-Pacific region over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of digital/mobile/loyalty platforms. Toward the same, the company has announced a partnership with Alibaba for providing seamless Starbucks Experience. In Beijing and Shanghai, Starbucks has started delivery services via Alibaba's Ele.me platform. Notably, the Starbucks Delivers program has expanded to more than 2,100 stores across 35 cities in China. By 2019-end, the company expects to expand Starbucks Delivers to 3,000 stores across 50 cities in the country.

Why the Restaurant Industry?

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.

Despite low traffic, the industry is likely to witness impressive sales growth in 2019. Per TDn2K’s Restaurant Industry Snapshot, restaurant same-store sales growth during the second quarter of 2019 increased 0.2%. Although most of the restaurant operators continue to face declining traffic, a robust economy has helped the industry see higher guest check.

Considering the trend-driven nature of the industry, restaurateurs have been constantly coming up with unusual menu items 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.

This 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 Prominent Picks

We have shortlisted stocks which have gained more than 20% year to date and also carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

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 are working in favor. The Zacks Rank #1 company has an impressive long-term earnings growth rate of 19.2%. The company’s earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, the average being 12%. Further, current-year earnings are likely to witness sharp growth of 43.6%. Shares of Chipotle have gained 71.4% year to date.

Denny's Corporation DENN, which owns and operates full-service restaurant chains under the Denny's brand, sports a Zacks Rank #1. The company’s shares have rallied 32.6% year to date. In the past 90 days, estimates for both the current and next year have witnessed upward revisions of 10.3% and 6.2% to 64 cents and 69 cents, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

YUM! Brands, Inc. YUM, a global leader in multi-branding offering consumers more choice and convenience at outlets, carries a Zacks Rank #2 (Buy). The company has an impressive long-term earnings growth rate of 12.3%. Moreover, earnings for current and next year are likely to witness growth of 20.5% and 10.7%, respectively. Shares of the company have gained 21.3% year to date.

J. Alexander's Holdings, Inc. JAX owns and operates complementary upscale dining restaurants in the United States through its subsidiaries. Earnings for current and next year are likely to grow 16.7% and 8.6%, respectively. The Zacks Rank #2 company has had an impressive run on the bourses. Year to date, the company’s shares have surged 32.7%.

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Denny's Corporation (DENN) : Free Stock Analysis Report
Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
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J. Alexander's Holdings, Inc. (JAX) : Free Stock Analysis Report
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