Fast food or quick service restaurants have had a good earnings season till date. Some of these results are still to come in, but it seems that despite mixed economic data, the sector has delivered. However, new challenges have emerged for the sector recently, which may cause some hiccups in the future.
The Rise of Fast Casual Chains
An emerging trend in recent years is the fact that consumers seem to be switching their spending from quick-service or fast food to "fast casual" restaurants. Unlike conventional casual dining establishments, these restaurants do not normally offer table service. However, they offer better quality of food and a better ambience for customers.
Growing awareness about the quality of food among consumers is significantly responsible for the success of fast casual restaurants. Panera Bread Co. (PNRA - Analyst Report) and Chipotle Mexican Grill, Inc. (CMG - Analyst Report) have emerged as key players in the space.
Data from global information company NPD group shows that fast casual restaurant visits rose 8% in 2013. Spending at such establishments grew 10%, compared to a 2% increase in all restaurants during the same period.
Growing Global Footprint
Meanwhile, the American consumer has become more and more health conscious. This has happened at individual as well as governmental levels. New York City requires fast food restaurants to specify the number of calories on their menus. The city’s health department has banned restaurants from using any trans-fats in their food.
Fast food brands have adapted by offering healthier menu options and reducing portion sizes. However, such a stringent attitude towards their fare has prompted them to look for greener pastures.
With a fast growing and prosperous middle class, emerging markets like China and India have emerged as the destinations of choice. Traditional brands like McDonald's Corp. (MCD - Analyst Report) have greatly benefited from this development, but several others are poised to gain from this change.
Below we present three fast food chains which are growing or have the potential to grow quickly in the international arena, each of which also has a good Zacks Rank.
Yum! Brands, Inc.
Yum! Brands, Inc. (YUM - Analyst Report) owns KFC, the fastest growing quick service international brand. Despite avian flu concerns in China, which resulted in comps dropping 4% in that key market, the company has posted good fourth quarter results.
In fact, the 4% drop was still an improvement over last fiscal year’s decline of 13%. Overall, comps grew 2% in the international space which contributes around 70% of the company’s profits.
Yum! Brands, Inc. holds a Zacks Rank #2 (Buy) and has expected earnings growth of 14.70%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 20.20.
Domino's Pizza, Inc.
Domino's Pizza, Inc. (DPZ - Analyst Report) domestic stores comps were up 3.7% in the fourth quarter. However, they were lower than the third quarter comps of 5.4% and the year-ago level of 4.7%. On the other hand, comps took a higher jump in international stores, recording 7% growth (foreign currency translation excluded).
The international comps were also better than the third-quarter comps of 5%. Excluding the impact of foreign currency translation, global retail sales were up 9.9% year over year.
Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 16.10%. It has a P/E (F1) of 26.57.
Dunkin' Brands Group, Inc.
Our third choice is Dunkin' Brands Group, Inc. (DNKN - Analyst Report).The company owns Baskin-Robbins, one of the fastest growing brands in the international space. In the fourth quarter, domestic sales grew 7.4% at Dunkin’ Donuts coffee outlets. Baskin-Robbins store sales increased by 5.8%.
However, international sales also grew at a fast clip. Established restaurant sales increased 10.9% for Baskin-Robbins stores. Dunkin’ Donuts international stores registered a 2.9% increase in sales.
Besides a Zacks Rank #2 (Buy), Dunkin' Brands Group, Inc. has expected earnings growth of 20.60%. It has a P/E (F1) of 28.31.
Fast food restaurants are increasingly focusing on the international space to grow sales and profits. These three stocks follow this very strategy and would make good additions to your portfolios.