4 Restaurant Stocks Worth a Look Amid Traffic Concerns

The Zacks Retail – Restaurants industry continues to grapple with dismal traffic, limited indoor dining services and soft comparable store sales due to the coronavirus pandemic. Moreover, contraction in margin on account of high costs remains a concern.

Nevertheless, robust off-premise sales, sales building initiatives and digital initiatives bode well for the industry. Stocks including Jack in the Box Inc. (JACK), Starbucks Corporation (SBUX), Yum! Brands, Inc. (YUM) and McDonald’s Corporation (MCD) are likely to gain from the aforementioned industry trend.

Industry Description

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.

4 Trends Shaping the Future of Restaurant Industry

Traffic & Margin Woes Linger: The restaurant industry has been facing declining traffic for quite some time now, and the pandemic only aggravated the scenario. Rapid increase in menu price and the coronavirus pandemic are the primary reasons behind traffic erosion. Moreover, the emergence of COVID-19 virus variants and the resultant increase in the number of cases might continue to hurt the traffic in the coming months. Also, 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.

Sales Well Below Pre-pandemic Level: Although the industry is witnessing gradual improvement in sales, its still well below pre-pandemic level. Per the National Restaurant Association, restaurant sales declined $240 billion from the anticipated levels. Meanwhile, according to preliminary data from the U.S. Census Bureau, restaurant sales increased 6.9% in January from December. However, the U.S. Census Bureau added that January eating and drinking place sales were more than 16% lower than their pre-coronavirus levels in January and February 2020.

Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts have been acting as catalysts. With the growing influence of Internet, digital innovation has become the need of the hour. Restaurant operators like Starbucks and McDonald’s 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 in 2021. Moreover, restaurant operators are focusing on driverless delivery systems to augment sales amid the ongoing pandemic. This is anticipated to bring down expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.

Off-Premise Sales Acting as a Key Catalyst: 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, due to the coronavirus pandemic. With dining rooms still not operating at full capacity on account of 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.

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 #217, which places it at the bottom 15% of 254 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. Since Mar 31, 2020, the industry’s earnings estimates for the current year have moved south by 8.2%.

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 gained 24.7%, compared with the sector and the Zacks S&P 500 composite’s rally of 35.9% and 35.8%, 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 28.84X compared with the S&P 500’s 22.11X. It is marginally above the sector’s forward 12-month P/E ratio of 28.98X.

Over the last five years, the industry has traded as high as 34.23X and as low as 20.37X, with the median being at 23.12X.

4 Restaurant Stocks to Keep an Eye on

Jack in the Box: Based in San Diego, Jack in the Box is a restaurant company that operates and franchises through Jack in the Box quick-service restaurants, and is one of the nation’s largest hamburger chains. Various Initiatives like regular menu innovation and increased focus on catering, delivery and marketing are expected to boost sales in the days ahead. Comps at Jack in the Box’s stores increased 9.6% in the fiscal fourth quarter compared with 4.1% and 2.8% growth in the fiscal third and second quarter of 2020, respectively. This upside can be attributed to average check growth of 21.9%. However, transactions declined 12.3% in the quarter.

Shares of this Zacks Rank #2 (Buy) company have gained 18% in the past six months. The company’s earnings for 2021 are anticipatede to increase 37.2%. Moreover, the consensus mark for 2021 earnings suggests an improvement of 13.9%, which reflects analysts’ optimism regarding the stock’s growth potential.

Price and Consensus: JACK

Yum! Brands: Louisville, KY-based YUM! Brands, is the global leader in multi-branding and offers consumers more choice and convenience at one outlet. The company’s partnership with online food delivery platform, Grubhub, has been enhancing online sales and delivery from restaurants. Additionally, the company implemented various digital features in mobile and online platforms across all brand segments to enhance guest experience. Yum! Brands has also been working toward making its delivery services faster and the results have been positive so far. At the end of fourth-quarter 2020, the company had more than 35,000 restaurants offering delivery globally, up 16% year over year. In 2020, digital sales amounted to $17 billion, suggesting an improvement of 45% from the prior year.

Shares of this Zacks Rank #3 (Hold) company have appreciated 12.7% in the past six months. In the past 60 days, earnings estimate for 2021 has been revised upward by 0.3% to $3.89.

Price and Consensus: YUM

Starbucks: Based in Seattle, WA, Starbucks is the leading roaster and retailer of specialty coffee in the world. The company’s sales have been impacted by the coronavirus pandemic. However, it is witnessing faster than anticipated sales recovery in the United States. In first-quarter fiscal 2021, comps fell 5% in the United States, compared with a decline of 9% in fourth-quarter fiscal 2020. The company is optimistic regarding achieving full sales recovery in the United Sates by the end of second-quarter fiscal 2021. Moreover, China is a major market and the company is regarding its prospects in the region.

Shares of this Zacks Rank #3 company have surged 23.7% in the past six months compared with the industry’s growth of 9.3%. Moreover, the company expects earnings for fiscal 2021 to increase 141.9%. In the past 60 days, earnings estimate for fiscal 2021 has been revised upward by 0.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: SBUX

McDonald’s: McDonald’s is a leading fast-food chain that currently operates more than 39,000 restaurants in more than 100 countries. During the coronavirus pandemic, the company has been focusing on drive-thru, delivery & take-away. Prior to the coronavirus crisis, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now accounts for approximately 90% of sales. The company, which carries a Zacks Rank #3, has more than 25,000 drive-thrus globally. Moreover, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option.

The company’s earnings for 2021 are likely to increase 38.2%. Moreover, earnings estimate for 2021 has remained stable over the past seven days.

Price and Consensus: MCD

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