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Here are the top restaurant stocks to buy right now: Analyst

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Jefferies Managing Director of Equity Research Andy Barish joins Yahoo Finance to discuss the growth outlook for restaurants, the effects of the Delta variant, and the labor shortages in restaurants.

Video Transcript

[MUSIC PLAYING]

- Restaurant stocks have treaded water in recent months as investors voiced concerns over the Delta variant's impact to consumer mobility. But our next guest says he is pushing all his chips onto the board with restaurant stocks. Coming out with a host of upgrades this morning, Jefferies' restaurant analyst Andy Barish joins us now for our call of the day. Andy, really good piece of research here. This line among many caught my attention. You say it's the best environment for casual dining since the exit of the Great Recession. Make your case.

ANDY BARISH: Yeah, thanks for having me on, first of all, guys. Nice to see you. Yeah, it's really-- the damage done, unfortunately, to a lot of independents in the sector during the past 18 months of the pandemic-- it's caused a huge amount of capacity reset. So coming out of it, the large chain restaurants, which, as you mentioned, we upgraded many of this morning, are very well-positioned to take incremental market share in the form of better same-store sales growth, including traffic growth as well as potentially accelerating their unit growth as well, which, you know-- both of which we think will be rewarded with higher valuations and higher stock prices.

- One of the names, I believe, you upgraded, Andy, was Cheesecake Factory. And if I read your report right, you were recently had a non-deal road show with that executive team. What did they tell you? And will they be bringing back a dividend any time soon?

ANDY BARISH: Yeah, good question. Yes, we did have a chance to speak with them and investors. And really the big concerns in the industry of late, beyond Delta obviously, have been the inflation concerns that we're all talking about and seeing in the headlines around commodities and labor. And really what Cheesecake management re-emphasized was that they have the pricing power and the use of some other technology and efficiencies to offset some of the near-term inflation and continue to return profitability back to pre-COVID levels. And I think that's really the theme we're going to continue to see for a lot of the casual diners. In terms of returning cash to shareholders, I didn't talk a ton about it in the upgrade report this morning, but I think that will be another layer of positivity for these stocks in that they will generate free cash flow again in a fairly significant way, like Cheesecake Factory. And I think as they get into 2022 and put some of the bank credit amendments behind them, they will be returning cash to shareholders in the form of dividend and probably stock repurchase in a lot of cases as well.

- Hey, Andy, it's Julie here. Well, [INAUDIBLE], kind of, zoomed in. I'm going to zoom back out for a second, and ask more about Delta, and how you're thinking about Delta and its effect on the restaurant industry here, and whether you think it's just a matter of, sort of, the-- little bit of a delay in a recovery for some of these names.

ANDY BARISH: Yeah. Hi, Julie. To be honest with you, I think the market and many thought it was going to be worse than what we're seeing in our data. We have some proprietary foot traffic data. We also get weekly same-store sales data on the industry. And it's been surprisingly quite resilient. You know, there's been some ups and downs, but generally the trend is know is bottoming out to picking up. I think-- you know, in some of the hot spots as Delta moves around, unfortunately, you do get issues with team members and restaurants, which, you know, maybe impact sales because obviously then you have to contact trace, and lose a bunch of people for a week or two, and that's not easy in a tough labor environment. But generally the consumer demand has been quite good. The comparisons get easier as we move into the holidays because of last year, unfortunately, there was the wave of COVID that definitely impacted the holiday season. And we're projecting a very strong holiday season for the restaurant industry this year.

- Andy, you mentioned the tough labor market, which we have talked about an awful lot. Is that a problem for this industry or is it actually, sort of, a hidden benefit in some ways because their costs are lower. But, on the other hand, do you have a lot of angry customers if there's not enough people working?

ANDY BARISH: Yeah, I'm glad you asked that question. And, yeah, I really don't understand the angry customer, you know? Think, people are working hard in-- you know, in a tough environment. But, unfortunately, it does happen in restaurants, as well as airplanes, and other crazy stuff as we all know, unfortunately. But what I think-- what I think's going on in the labor environment-- yes, it's tight. It's really tough. But what the large chain restaurants tend to have is a really good culture that provides excellent training and a pathway for growth. So I think the larger restaurants are really in an advantageous position to use those special factors in their human capital proposition, if you will, to continue to attract talent and provide a runway for growth for that talent so someone can theoretically have a career in the restaurant industry. So I do think the bigger companies with great culture, the ability to pay better, the ability to have better benefits are in an advantageous position. No, not everybody is as staffed up as they like, but, at this point, it's really not causing any major issues. And the industry-- just so people know, the industry has been seeing mid-single digit wage inflation for five-plus years now. So this is nothing new for restaurants.

- Andy, back to some of your picks. Red Robin. Now, we talked to CEO Paul Murphy recently. He told us they are rolling out Donatos Pizza inside their restaurants. How big of initiative is that for the company? Is it going to move their sales and profits?

ANDY BARISH: Yeah, it sounds like the early test results have been very good and very incremental. Obviously, it meets the need of the off-premise consumer as well as in addition to the menu, doesn't sound like that big a capital cost. And I don't have the rollout numbers off the top of my head, but I've known Paul Murphy for a long time. And I think they're going to execute against the plan and Donatos is just one of, you know, several areas that they're really focusing on to improve the Red Robin experience, and broaden the customer base, and frequency. And he is a very good turnaround CEO and I think, you know, we'll see the successes over that-- over the coming quarters and years.

- And, lastly, Dave & Buster's. The new-- the CEO abruptly-- I would say abruptly-- retiring this week. Now you have Kevin Sheehan in there. I remember him when he used to run Norwegian Cruise Lines, so an interesting choice to take over there. How will his leadership impact the stock?

ANDY BARISH: Yeah, well, first of all, I've got to give Brian Jenkins, the CEO and former CFO, a lot of credit for the incredible heavy lifting that had to go on through the pandemic as you can imagine-- the Dave & Buster's business model with, you know, the high-touch games and bars is, you know, probably one of the most impacted businesses. But their recovery has been remarkably strong on the sales line, just showing that the consumer wants to go out and have fun experiences. Their margin performance has been nothing but breathtaking. And I think Brian's really put the initiatives in place that can continue to drive the business going forward. Kevin is the chair of the board. This will be a temporary position as the interim CEO, as they've already begun the search for a permanent CEO, which, you know, hopefully will be in place over the coming months to continue to re-energize the brand, which I think is heading back in a really positive direction right now.

- All right, we'll leave it there. Jefferies' restaurant analyst Andy Barish joining us for our call of the day, really good research here. Have a great weekend.