Top 3 Restaurant Stocks to Buy Amid Increasing Industry Sales
The Zacks Retail – Restaurants industry is benefiting from rapid increases in menu prices, average check growth and expansion efforts. The industry participants also benefit from partnerships with delivery channels and digital platforms. Sales have steadily risen, which is a good sign for the industry. However, high wages and food cost inflation woes stay. Stocks like Chipotle Mexican Grill, Inc. CMG, Yum! Brands, Inc. YUM and Red Robin Gourmet Burgers, Inc. RRGB are well-poised to counter the scenario.
Industry Description
The Zacks Retail – Restaurants industry comprises several owners and operators of casual, upscale casual, fine dining, full-service and fast-casual restaurants. Some industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies develop, operate, and franchise quick-service restaurants worldwide. A few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage, and license restaurants and lounges worldwide. A few companies also operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
4 Trends Shaping the Future of the Restaurant Industry
Sales Continue to Increase: Despite facing inflationary pressures, restaurant sales in August saw an uptick, driven by a rapid rise in menu prices, growth in average checks, and ongoing expansion efforts. This marks the sixth consecutive month of sales growth for the industry. Per the U.S. Census Bureau, eating and drinking places recorded total sales of $90.8 billion on a seasonally adjusted basis in August, up 0.3% from July’s downward-revised sales volume of $90.5 billion. The metric increased by 8.2% on a year-over-year basis. Most restaurant operators are also gaining from implementing ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service is steadily garnering positive customer feedback.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators constantly partner with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats and the rollout of self-service kiosks and loyalty programs continue to drive growth.
Off-Premise Sales Acting as a Key Catalyst: The industry has been gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits, and off-site options such as kiosks and food trucks. Most restaurant operators have initiated testing of ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service has been garnering positive customer feedback.
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. A rapid increase in menu prices is the primary reason behind traffic erosion. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation remain concerns. The industry is persistently bearing increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure on the company’s margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Gaming industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #72, which places it in the top 29% of more than 245 Zacks industries.
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. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries results from a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, analysts are gradually gaining confidence in this group’s earnings growth potential. Since Aug 31, 2023, the industry’s earnings estimate for the current year has increased by 3.4%.
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 Underperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has outperformed the Zacks S&P 500 composite and its sector over the past year.
Over this period, the industry has increased 5.4%, compared with the Zacks S&P 500 composite’s gain of 13.8%. The sector has increased 5.7%.
One-Year Price Performance
Restaurant Industry's Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 20.65X compared with the S&P 500’s 17.92X. It is marginally above the sector’s forward 12-month P/E ratio of 20.44X.
Over the last five years, the industry has traded as high as 34.70X and as low as 20.65X, with the median being at 25.08X.
3 Key Restaurant Picks
Chipotle: The company is one of the most recognized fast-casual Mexican restaurant chains in the United States. The company benefits from its strong comparable restaurant sales growth, digital efforts, Chipotlane add-ons and menu innovation. This and strength in digital sales, rise in menu prices, new restaurant openings and higher restaurant-level operating margin have driven the company’s performance.
CMG carries a Zacks Rank #2 (Buy). Chipotle's sales and earnings for fiscal 2023 are anticipated to improve 13.6% and 31.8% year over year, respectively. In the past year, shares of the company have gained 20.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CMG
Yum! Brands: The company’s growth is attributable to solid comps growth driven by robust digital initiatives through mobile and online platforms across all brand segments and increased contributions from Taco Bell, KFC and Pizza Hut. The emphasis on unit expansion efforts also bodes well.
Yum! Brands carries a Zacks Rank #2. The Zacks Consensus Estimate of the company’s current financial year sales and EPS suggests growth of 5.9% and 15.1%, respectively, from the prior-year comparable figure. Shares of the company have increased 9.5% in the past year.
Price and Consensus: YUM
Red Robin Gourmet Burgers: The company benefits from increased comparable restaurant revenue, average Guest check and menu prices. Also, its focus on menu innovation and strategic plans bodes well. Red Robin too, has been investing more in technology and data infrastructure. The company is set to grow its off-premise, online ordering business via carry-out, delivery and catering.
Shares of this Zacks Rank #2 company gained 1.5% in the past year. RRGB’s sales and earnings for fiscal 2023 are anticipated to rise 2.8% and 65.6%, year over year, respectively.
Price and Consensus: RRGB
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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
Red Robin Gourmet Burgers, Inc. (RRGB) : Free Stock Analysis Report
