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Are Restaurateurs' Initiatives Enough to Attract Investors?
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As per National Restaurant Association’s data, 2016 marked the seventh consecutive year of real growth in restaurant sales. Meanwhile, restaurateurs are going, guns blazing, to counter comps and traffic issues with strong sales, digital initiatives and shift to consumer likings.
Taking the past trends and long-term growth prospects of the industry into account, we highlight a few positives of investing in the restaurant space:
Improving U.S. Economy: An improving U.S. economy and employment picture, along with rising consumer confidence, has contributed to slow but steady recovery in the restaurant industry. Though the decline in oil prices raised concerns of global deflation and economic slowdown, it has actually driven consumer spending, which accounts for over two-thirds of U.S. economic growth. Thus, stepped-up economic activities, improving business conditions, renewed optimism following the November election are expected to keep investors’ confidence high in 2017.
Various Sales Building Strategies: Endeavors to augment sales by targeting higher footfall and improvising on the menu are reaping benefits. Having stabilized their financial positions, restaurant operators are continually striving to add new items to their menu in order to cater to the ever-changing palates of customers while enhancing food presentation. Some of the notable restaurateurs playing this card are Buffalo Wild Wings Inc. , The Wendy's CompanyWEN, Papa John's International Inc.PZZA and Jack in the Box Inc. (JACK - Free Report) .
Another initiative undertaken by the food chains is re-imaging of stores, which has received overwhelming response from guests. Wendy's, Domino's Pizza, Inc. (DPZ - Free Report) , Brinker International, Inc.EAT, Ruby Tuesday, Inc. and Carrols Restaurant Group, Inc.TAST have been working on these lines. Notably, reimaging of stores helps to create an appealing and differentiated concept that helps the brand connect better with guests, especially millennials.
Meanwhile, restaurant companies like BJ's Restaurants, Inc. (BJRI - Free Report) , Buffalo Wild Wings, Brinker International,Red Robin Gourmet Burgers Inc.RRGB, Panera Bread Company and more recently Chipotle Mexican Grill, Inc. (CMG - Free Report) have started offering loyalty programs at their outlets to enhance value dining. Loyalty programs help retain previous diners while bringing in new ones, thereby driving traffic.
On the other hand, industry players like Brinker International, BJ's Restaurants and Red Robin Gourmet are rolling out prototypes and smaller restaurant chains to augment value and drive traffic, which in turn will lower construction and occupancy costs but boost return on invested capital. Notably, smaller prototypes also accelerate growth in non-traditional locations.
Modern Technology, Digital Ordering & Other Channels Gain Precedence: The digital wave has hit the U.S. fast casual restaurant sector as an increasing number of restaurateurs are deploying technology to enhance guest experience. The companies’ online and digital marketing activities have thus increased significantly over the past several years in response to increasing use of online and mobile web technology.
While smartphone apps attract consumers, video menu boards in quick-service restaurants and tabletop devices speed up sales and ensure convenience. Further, restaurant operators rely on social media for promotions and incorporate Facebook, Inc.FB, online review sites, Twitter, Inc.TWTR and blogs aggressively into their marketing mix.
Chipotleis introducing more efficient food production lines to fulfill online orders, order-taking tablets in restaurants to bypass the lines and a new mobile optimized ordering site that provides an alternative to its iOS and Android ordering apps. Also, McDonald's Corp. (MCD - Free Report) is undertaking digital initiatives to better serve customers, with over 90% of its U.S. restaurants now using digital menu boards.
Meanwhile, Papa John's aims to continue making investments in technology focused on foundational improvements to its digital channels to increase order conversion rate, frequency and ticket average. Also, Domino's Pizza is adding to its digital capabilities with the launch of various ordering apps and platforms. Particularly, Domino's world-class digital ordering platforms like Facebook Messenger, Apple Watch and Amazon Echo should boost digital orders.
Dunkin' Brands Group, Inc. DNKN is also growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivering. Additionally, the world’s largest coffee shop operator, Starbucks Corporation (SBUX - Free Report) has secured a leading position in leveraging its mobile and digital assets and loyalty and e-Commerce platforms to create more revenue streams.
Meanwhile, in order to capitalize on the increasing demand for their products, a few players in the industry like Panera Bread, BJ's Restaurants, Chipotle and Noodles & CompanyNDLS are offering off-premise catering programs. These programs are especially designed to serve a large number of customers at their homes, offices or at any other venue.
Also, restaurateurs’ are increasingly focusing on the delivery channel, which is a growing area for the industry driven by ease of access. By driving incremental sales at the companies, delivery services should turn out to be a strong revenue growth driver in the long term, given the huge demand.
Starbucks has initiated a food and beverage delivery service through its employees at New York’s Empire State building. Buffalo Wild Wings is also exploring delivery to meet the needs of fans and is currently working with third party delivery providers in 90 company-owned restaurants. The Cheesecake Factory Inc. (CAKE - Free Report) is also witnessing incremental sales from the delivery service it has been piloting with a third-party partner in select locations. Meanwhile, based on Panera Bread’s initial success with delivery, it now plans to have delivery in 35% to 40% of its total system by year-end fiscal 2017.
International Expansion: A number of restaurateurs are committed to accelerate their presence in high-growth international markets to boost their business. Pizza chains Domino’s Pizza and Papa John’s are leading the race for international expansion.
Notably, Domino’s Pizza earns a big chunk of its revenues from outside the U.S. with many international franchisees continuing to generate robust returns. In fact, the third quarter of 2016 marked the 91st consecutive quarter of positive same-store sales in its international business. Many of Papa John’s restaurants are also located in international markets like United Kingdom, Mexico and China. The third quarter of 2016 marked the 27th consecutive quarter of positive comps in the international segment.
Meanwhile, Cheesecake Factory continues to foray into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait and Lebanon and Chile. Also, Brinker International is one of the few fast casual restaurant chains that have been expanding despite sluggish economic development. Management is gearing up for international expansion, especially in the faster growing emerging markets.
Cost-Cutting Efforts & Shift to Franchise-Based Business Model: Given the exponential rise in costs, companies are striving to keep them under control. Through its Project Q initiatives, BJ's Restaurants is striving to reduce kitchen hours and enhance labor efficiencies. Cheesecake Factory and Darden Restaurants, Inc. (DRI - Free Report) are also working on techniques to aggressively cut costs. Meanwhile, Panera Bread has also rolled out its Panera 2.0 program to drive sales as well as earnings while lowering costs.
Of late, various companies in the restaurants space like Yum! Brands, Inc. (YUM - Free Report) , Domino's Pizza, Wendy's, Papa John's and Jack in the Box have adopted a de-risking strategy by reducing their ownership of restaurants through refranchising. Notably, refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and ROE expansion. In addition, free cash flow continues to grow, thus allowing reinvestment for increasing brand recognition and shareholder return. Moreover, since a major portion of their business is re-franchised, these companies are less affected by food inflation than their peers.
Adapting to Changing Consumer Preference: The latest trend in U.S. eateries is a healthy menu, as consumers are increasingly showing preference for fresh, organic, nutritious and low-calorie food. Rising health concerns and growing awareness about obesity and related diseases have led to the shift in consumer preference toward healthy and “good for you” products.
Starbucks and Panera are replacing all artificial flavors and colors used in their food with natural alternatives. Chipotle is also well known for using genetically modified organism-free ingredients in its food. Meanwhile, as part of its clean label commitment, Papa John was the first national pizza delivery chain to announce the removal of preservatives such as BHA and BHT, flavor enhancer, MSG, cellulose, partially hydrogenated oils and high fructose corn syrup. All these efforts reinforce the company’s commitment to provide quality food and deliver better ingredients to its customers.
McDonald'shas pledged to shift completely to cage-free eggs for roughly 16,000 restaurants in the U.S. and Canada over the next 10 years, in order to meet consumer preference for quality food. Further, companies like Dunkin' Brands, Wendy's and Panera are shifting to cage-free eggs to appease health conscious guests.
Moving to the consumer side, it seems that Americans are keener on having breakfast at restaurants. Exclusive breakfast offerings such as coffee, sandwiches, pancakes and doughnuts have been driving traffic at most U.S. restaurants, outpacing conventional lunch and dinner items. The breakfast segment is also gaining popularity because of lower rates than other meals and lesser waiting time. In fact, the consumption of breakfasts and morning snacks, in- and away-from-home, is projected to grow by 5% through 2019, according to research firm NPD Group.
Fast food giant, McDonald's started its own all-day breakfast platform in the U.S., which has proven to be a remarkable success. In fact, Denny's CorporationDENN and Jack in the Box have been offering all-day breakfast for quite some time now, highlighting how the trend has been successfully driving sales. Dunkin' Brands also sells breakfast sandwiches all day, which is a major contributor to sales. Other players in the industry like Yum! Brands’Taco Bell is also capitalizing on rising demand for breakfast.
With breakfast foods playing a key role in the daily eating habits of restaurant-goers, the fast food industry has been able to turn around and drive growth even as the non-healthy items in their menus are falling out of favor.
Bottom Line
There are plenty of reasons to be optimistic about the restaurant industry’s near- to medium-term outlook. Though the industry has its share of headwinds, effective sales and digital initiatives undertaken by the companies should keep it going. Also, companies with strong fundamentals and sufficient capacity for innovation are poised to hog the limelight. We thus expect the industry to sustain the momentum going ahead, allowing investors to cash in on its bountiful opportunities.
Check out our latest “Restaurant Industry Outlook” here for more on the current state of affairs from an earnings perspective and the trend for this important sector.
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Are Restaurateurs' Initiatives Enough to Attract Investors?
As per National Restaurant Association’s data, 2016 marked the seventh consecutive year of real growth in restaurant sales. Meanwhile, restaurateurs are going, guns blazing, to counter comps and traffic issues with strong sales, digital initiatives and shift to consumer likings.
Taking the past trends and long-term growth prospects of the industry into account, we highlight a few positives of investing in the restaurant space:
Improving U.S. Economy: An improving U.S. economy and employment picture, along with rising consumer confidence, has contributed to slow but steady recovery in the restaurant industry. Though the decline in oil prices raised concerns of global deflation and economic slowdown, it has actually driven consumer spending, which accounts for over two-thirds of U.S. economic growth. Thus, stepped-up economic activities, improving business conditions, renewed optimism following the November election are expected to keep investors’ confidence high in 2017.
Various Sales Building Strategies: Endeavors to augment sales by targeting higher footfall and improvising on the menu are reaping benefits. Having stabilized their financial positions, restaurant operators are continually striving to add new items to their menu in order to cater to the ever-changing palates of customers while enhancing food presentation. Some of the notable restaurateurs playing this card are Buffalo Wild Wings Inc. , The Wendy's Company WEN, Papa John's International Inc. PZZA and Jack in the Box Inc. (JACK - Free Report) .
Another initiative undertaken by the food chains is re-imaging of stores, which has received overwhelming response from guests. Wendy's, Domino's Pizza, Inc. (DPZ - Free Report) , Brinker International, Inc. EAT, Ruby Tuesday, Inc. and Carrols Restaurant Group, Inc. TAST have been working on these lines. Notably, reimaging of stores helps to create an appealing and differentiated concept that helps the brand connect better with guests, especially millennials.
Meanwhile, restaurant companies like BJ's Restaurants, Inc. (BJRI - Free Report) , Buffalo Wild Wings, Brinker International,Red Robin Gourmet Burgers Inc. RRGB, Panera Bread Company and more recently Chipotle Mexican Grill, Inc. (CMG - Free Report) have started offering loyalty programs at their outlets to enhance value dining. Loyalty programs help retain previous diners while bringing in new ones, thereby driving traffic.
On the other hand, industry players like Brinker International, BJ's Restaurants and Red Robin Gourmet are rolling out prototypes and smaller restaurant chains to augment value and drive traffic, which in turn will lower construction and occupancy costs but boost return on invested capital. Notably, smaller prototypes also accelerate growth in non-traditional locations.
Modern Technology, Digital Ordering & Other Channels Gain Precedence: The digital wave has hit the U.S. fast casual restaurant sector as an increasing number of restaurateurs are deploying technology to enhance guest experience. The companies’ online and digital marketing activities have thus increased significantly over the past several years in response to increasing use of online and mobile web technology.
While smartphone apps attract consumers, video menu boards in quick-service restaurants and tabletop devices speed up sales and ensure convenience. Further, restaurant operators rely on social media for promotions and incorporate Facebook, Inc. FB, online review sites, Twitter, Inc. TWTR and blogs aggressively into their marketing mix.
Chipotleis introducing more efficient food production lines to fulfill online orders, order-taking tablets in restaurants to bypass the lines and a new mobile optimized ordering site that provides an alternative to its iOS and Android ordering apps. Also, McDonald's Corp. (MCD - Free Report) is undertaking digital initiatives to better serve customers, with over 90% of its U.S. restaurants now using digital menu boards.
Meanwhile, Papa John's aims to continue making investments in technology focused on foundational improvements to its digital channels to increase order conversion rate, frequency and ticket average. Also, Domino's Pizza is adding to its digital capabilities with the launch of various ordering apps and platforms. Particularly, Domino's world-class digital ordering platforms like Facebook Messenger, Apple Watch and Amazon Echo should boost digital orders.
Dunkin' Brands Group, Inc. DNKN is also growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivering. Additionally, the world’s largest coffee shop operator, Starbucks Corporation (SBUX - Free Report) has secured a leading position in leveraging its mobile and digital assets and loyalty and e-Commerce platforms to create more revenue streams.
Meanwhile, in order to capitalize on the increasing demand for their products, a few players in the industry like Panera Bread, BJ's Restaurants, Chipotle and Noodles & Company NDLS are offering off-premise catering programs. These programs are especially designed to serve a large number of customers at their homes, offices or at any other venue.
Also, restaurateurs’ are increasingly focusing on the delivery channel, which is a growing area for the industry driven by ease of access. By driving incremental sales at the companies, delivery services should turn out to be a strong revenue growth driver in the long term, given the huge demand.
Starbucks has initiated a food and beverage delivery service through its employees at New York’s Empire State building. Buffalo Wild Wings is also exploring delivery to meet the needs of fans and is currently working with third party delivery providers in 90 company-owned restaurants. The Cheesecake Factory Inc. (CAKE - Free Report) is also witnessing incremental sales from the delivery service it has been piloting with a third-party partner in select locations. Meanwhile, based on Panera Bread’s initial success with delivery, it now plans to have delivery in 35% to 40% of its total system by year-end fiscal 2017.
International Expansion: A number of restaurateurs are committed to accelerate their presence in high-growth international markets to boost their business. Pizza chains Domino’s Pizza and Papa John’s are leading the race for international expansion.
Notably, Domino’s Pizza earns a big chunk of its revenues from outside the U.S. with many international franchisees continuing to generate robust returns. In fact, the third quarter of 2016 marked the 91st consecutive quarter of positive same-store sales in its international business. Many of Papa John’s restaurants are also located in international markets like United Kingdom, Mexico and China. The third quarter of 2016 marked the 27th consecutive quarter of positive comps in the international segment.
Meanwhile, Cheesecake Factory continues to foray into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait and Lebanon and Chile. Also, Brinker International is one of the few fast casual restaurant chains that have been expanding despite sluggish economic development. Management is gearing up for international expansion, especially in the faster growing emerging markets.
While Papa John’s and Cheesecake Factory flaunts a Zacks Rank #2 (Buy), Domino's Pizza and Brinker International carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cost-Cutting Efforts & Shift to Franchise-Based Business Model: Given the exponential rise in costs, companies are striving to keep them under control. Through its Project Q initiatives, BJ's Restaurants is striving to reduce kitchen hours and enhance labor efficiencies. Cheesecake Factory and Darden Restaurants, Inc. (DRI - Free Report) are also working on techniques to aggressively cut costs. Meanwhile, Panera Bread has also rolled out its Panera 2.0 program to drive sales as well as earnings while lowering costs.
Of late, various companies in the restaurants space like Yum! Brands, Inc. (YUM - Free Report) , Domino's Pizza, Wendy's, Papa John's and Jack in the Box have adopted a de-risking strategy by reducing their ownership of restaurants through refranchising. Notably, refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and ROE expansion. In addition, free cash flow continues to grow, thus allowing reinvestment for increasing brand recognition and shareholder return. Moreover, since a major portion of their business is re-franchised, these companies are less affected by food inflation than their peers.
Adapting to Changing Consumer Preference: The latest trend in U.S. eateries is a healthy menu, as consumers are increasingly showing preference for fresh, organic, nutritious and low-calorie food. Rising health concerns and growing awareness about obesity and related diseases have led to the shift in consumer preference toward healthy and “good for you” products.
Starbucks and Panera are replacing all artificial flavors and colors used in their food with natural alternatives. Chipotle is also well known for using genetically modified organism-free ingredients in its food. Meanwhile, as part of its clean label commitment, Papa John was the first national pizza delivery chain to announce the removal of preservatives such as BHA and BHT, flavor enhancer, MSG, cellulose, partially hydrogenated oils and high fructose corn syrup. All these efforts reinforce the company’s commitment to provide quality food and deliver better ingredients to its customers.
McDonald'shas pledged to shift completely to cage-free eggs for roughly 16,000 restaurants in the U.S. and Canada over the next 10 years, in order to meet consumer preference for quality food. Further, companies like Dunkin' Brands, Wendy's and Panera are shifting to cage-free eggs to appease health conscious guests.
Moving to the consumer side, it seems that Americans are keener on having breakfast at restaurants. Exclusive breakfast offerings such as coffee, sandwiches, pancakes and doughnuts have been driving traffic at most U.S. restaurants, outpacing conventional lunch and dinner items. The breakfast segment is also gaining popularity because of lower rates than other meals and lesser waiting time. In fact, the consumption of breakfasts and morning snacks, in- and away-from-home, is projected to grow by 5% through 2019, according to research firm NPD Group.
Fast food giant, McDonald's started its own all-day breakfast platform in the U.S., which has proven to be a remarkable success. In fact, Denny's Corporation DENN and Jack in the Box have been offering all-day breakfast for quite some time now, highlighting how the trend has been successfully driving sales. Dunkin' Brands also sells breakfast sandwiches all day, which is a major contributor to sales. Other players in the industry like Yum! Brands’Taco Bell is also capitalizing on rising demand for breakfast.
With breakfast foods playing a key role in the daily eating habits of restaurant-goers, the fast food industry has been able to turn around and drive growth even as the non-healthy items in their menus are falling out of favor.
Bottom Line
There are plenty of reasons to be optimistic about the restaurant industry’s near- to medium-term outlook. Though the industry has its share of headwinds, effective sales and digital initiatives undertaken by the companies should keep it going. Also, companies with strong fundamentals and sufficient capacity for innovation are poised to hog the limelight. We thus expect the industry to sustain the momentum going ahead, allowing investors to cash in on its bountiful opportunities.
Check out our latest “Restaurant Industry Outlook” here for more on the current state of affairs from an earnings perspective and the trend for this important sector.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>