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4 Hot Restaurant Stocks to Buy Amid Industry Challenges
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The Zacks Retail – Restaurants industry has been benefiting from gradual improvement in demand, robust off-premise sales, sales building efforts and digital initiatives. However, dismal dine-in visitations and increase in the cost of employee wages, benefits and insurance, and other operating costs such as rent continue to hurt the company. Although traffic has been increasing, it is still below the pre-pandemic level. Nevertheless, Dave & Buster's Entertainment, Inc. (PLAY - Free Report) , Papa John's International, Inc. (PZZA - Free Report) , Del Taco Restaurants, Inc. and Noodles & Company (NDLS - Free Report) 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 of the industry participants operate as roaster, marketer and retailers of specialty coffee. Some companies also develop, operate, and franchise quick service restaurants worldwide. Few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Few industry players develop, own, operate, manage, and license restaurants and lounges worldwide. Some of the companies 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 Restaurant Industry
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators are constantly partnering with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, and rollout of self-service kiosks and loyalty programs continue to drive growth. The restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.
Sales Rising Gradually: Restaurant industry is gradually witnessing improving sales. The industry participants are hiring, which indicates that the industry is finally coming out of the woods. Eating and drinking added 119,400 jobs in October, on a seasonally-adjusted basis, per preliminary data from the Bureau of Labor Statistics. October’s growth was approximately more than four times net payroll growth of only 31,000 in August and September. However, October’s figure is still well below the average monthly increase of nearly 200,000 jobs during the first seven months of 2021. Per the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for October 2021 were $638.2 billion, up 1.7% sequentially. The improvement can be attributed to enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.
Off-Premise Sales Acting as a Key Catalyst: The industry has been gaining 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, owing to the coronavirus pandemic. 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. 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. The pandemic has aggravated the scenario. Rapid increase in menu price and the coronavirus pandemic are the primary reasons behind traffic erosion. The restaurant operators are grappling with high cost of operations. 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 woes. Dine-in visitations have declined sharply in the past 12 months. Full-service restaurants, which depend mostly on dine-in customers, have struggled due to the pandemic.
Zacks Industry Rank Indicates Dismal 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 dismal near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #207, which places it at the bottom 18% of 253 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 Jul 31, 2021, the industry’s earnings estimates for the current year have moved south by 2.9%.
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 Outperform the S&P 500
The Zacks Retail – Restaurants industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year.
Over this period, the industry has gained 14.4%, compared with the Zacks S&P 500 composite’s rally of 34.1%. Meanwhile, the sector has declined 2.9%.
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 26.84X compared with the S&P 500’s 22.06X. It is marginally above the sector’s forward 12-month P/E ratio of 28.01X.
Over the last five years, the industry has traded as high as 34.34X and as low as 20.37X, with the median being at 23.96X.
4 Key Restaurant Picks
Dave & Buster's: Headquartered in Dallas, TX, Dave & Buster's has been benefiting from reopening initiatives, ramped-up vaccinations and excellent operational execution. The company, which sports a Zacks Rank #1 (Strong Buy), anticipates the momentum to sustain on the back of its strategic initiatives that include a new menu, optimized marketing and technology investments. Dave & Buster's continues to pursue a disciplined new store growth strategy in both new and existing markets, given the broad appeal of its brand. Management believes that it can expand the concept to more than 200 units in North America over time. In addition to growth potential in North America, management is optimistic regarding the brand’s significant appeal in certain international markets.
Dave & Buster's earnings for fiscal 2021 are anticipated to improve 147.7%. In the past 30 days, the consensus mark for 2021 earnings has been revised upward by 0.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: PLAY
Papa John's International: Headquartered in Louisville, KY, Papa John’s operates and franchises pizza delivery and carryout restaurants in the United States and other specific international markets.
Papa John's continues to impress investors with robust comparable sales growth. In the fiscal third quarter, total comparable sales rose 7.3% year over year compared with growth of 23% in the prior-year period. Domestic company-owned restaurant comps for the reported quarter increased 7.4% compared with 18.2% growth in the year-ago period. In the North America and international segment, the company’s comp sales have risen for the ninth and 10th consecutive quarter, respectively.
Shares of this Zacks Rank #2 (Buy) company have gained 41.7% in the past six months. In the past 60 days, the consensus mark for 2021 earnings has been revised upward by 6.4% to $3.34.
Price and Consensus: PZZA
Del Taco Restaurants: Headquartered in Lake Forest, CA, Del Taco Restaurants develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants in the United States. The company has been benefiting from the signing of new franchise development agreements and robust comparable restaurant sales growth.
Del Taco Restaurants carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 25.7%, on average. The Zacks Consensus Estimate for Del Taco Restaurants’ current financial year sales and EPS suggests growth of 7.2% and 33.3%, respectively, from the prior-year comparable figure.
Price and Consensus: TACO
Noodles & Company: Based in Broomfield, CO, Noodles & Company develops and operates fast-casual restaurants. Robust comparable restaurant sales growth and increase in average unit volumes have been favoring the company. In third-quarter 2021, average unit volumes climbed 16% year over year.
Noodles & Company has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s current financial year sales and EPS suggests growth of 22.5% and 196.6%, respectively, from the year-ago period.
Price and Consensus: NDLS
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4 Hot Restaurant Stocks to Buy Amid Industry Challenges
The Zacks Retail – Restaurants industry has been benefiting from gradual improvement in demand, robust off-premise sales, sales building efforts and digital initiatives. However, dismal dine-in visitations and increase in the cost of employee wages, benefits and insurance, and other operating costs such as rent continue to hurt the company. Although traffic has been increasing, it is still below the pre-pandemic level. Nevertheless, Dave & Buster's Entertainment, Inc. (PLAY - Free Report) , Papa John's International, Inc. (PZZA - Free Report) , Del Taco Restaurants, Inc. and Noodles & Company (NDLS - Free Report) 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 of the industry participants operate as roaster, marketer and retailers of specialty coffee. Some companies also develop, operate, and franchise quick service restaurants worldwide. Few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Few industry players develop, own, operate, manage, and license restaurants and lounges worldwide. Some of the companies 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 Restaurant Industry
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators are constantly partnering with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, and rollout of self-service kiosks and loyalty programs continue to drive growth. The restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.
Sales Rising Gradually: Restaurant industry is gradually witnessing improving sales. The industry participants are hiring, which indicates that the industry is finally coming out of the woods. Eating and drinking added 119,400 jobs in October, on a seasonally-adjusted basis, per preliminary data from the Bureau of Labor Statistics. October’s growth was approximately more than four times net payroll growth of only 31,000 in August and September. However, October’s figure is still well below the average monthly increase of nearly 200,000 jobs during the first seven months of 2021. Per the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for October 2021 were $638.2 billion, up 1.7% sequentially. The improvement can be attributed to enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.
Off-Premise Sales Acting as a Key Catalyst: The industry has been gaining 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, owing to the coronavirus pandemic. 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. 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. The pandemic has aggravated the scenario. Rapid increase in menu price and the coronavirus pandemic are the primary reasons behind traffic erosion. The restaurant operators are grappling with high cost of operations. 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 woes. Dine-in visitations have declined sharply in the past 12 months. Full-service restaurants, which depend mostly on dine-in customers, have struggled due to the pandemic.
Zacks Industry Rank Indicates Dismal 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 dismal near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #207, which places it at the bottom 18% of 253 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 Jul 31, 2021, the industry’s earnings estimates for the current year have moved south by 2.9%.
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 Outperform the S&P 500
The Zacks Retail – Restaurants industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year.
Over this period, the industry has gained 14.4%, compared with the Zacks S&P 500 composite’s rally of 34.1%. Meanwhile, the sector has declined 2.9%.
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 26.84X compared with the S&P 500’s 22.06X. It is marginally above the sector’s forward 12-month P/E ratio of 28.01X.
Over the last five years, the industry has traded as high as 34.34X and as low as 20.37X, with the median being at 23.96X.
4 Key Restaurant Picks
Dave & Buster's: Headquartered in Dallas, TX, Dave & Buster's has been benefiting from reopening initiatives, ramped-up vaccinations and excellent operational execution. The company, which sports a Zacks Rank #1 (Strong Buy), anticipates the momentum to sustain on the back of its strategic initiatives that include a new menu, optimized marketing and technology investments. Dave & Buster's continues to pursue a disciplined new store growth strategy in both new and existing markets, given the broad appeal of its brand. Management believes that it can expand the concept to more than 200 units in North America over time. In addition to growth potential in North America, management is optimistic regarding the brand’s significant appeal in certain international markets.
Dave & Buster's earnings for fiscal 2021 are anticipated to improve 147.7%. In the past 30 days, the consensus mark for 2021 earnings has been revised upward by 0.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: PLAY
Papa John's International: Headquartered in Louisville, KY, Papa John’s operates and franchises pizza delivery and carryout restaurants in the United States and other specific international markets.
Papa John's continues to impress investors with robust comparable sales growth. In the fiscal third quarter, total comparable sales rose 7.3% year over year compared with growth of 23% in the prior-year period. Domestic company-owned restaurant comps for the reported quarter increased 7.4% compared with 18.2% growth in the year-ago period. In the North America and international segment, the company’s comp sales have risen for the ninth and 10th consecutive quarter, respectively.
Shares of this Zacks Rank #2 (Buy) company have gained 41.7% in the past six months. In the past 60 days, the consensus mark for 2021 earnings has been revised upward by 6.4% to $3.34.
Price and Consensus: PZZA
Del Taco Restaurants: Headquartered in Lake Forest, CA, Del Taco Restaurants develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants in the United States. The company has been benefiting from the signing of new franchise development agreements and robust comparable restaurant sales growth.
Del Taco Restaurants carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 25.7%, on average. The Zacks Consensus Estimate for Del Taco Restaurants’ current financial year sales and EPS suggests growth of 7.2% and 33.3%, respectively, from the prior-year comparable figure.
Price and Consensus: TACO
Noodles & Company: Based in Broomfield, CO, Noodles & Company develops and operates fast-casual restaurants. Robust comparable restaurant sales growth and increase in average unit volumes have been favoring the company. In third-quarter 2021, average unit volumes climbed 16% year over year.
Noodles & Company has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s current financial year sales and EPS suggests growth of 22.5% and 196.6%, respectively, from the year-ago period.
Price and Consensus: NDLS