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The U.S. restaurant industry has been grappling with continued soft consumer spending on dining out over the past few quarters.
Resultantly, same-store sales growth has been dull in this difficult sales environment. Foot traffic declined, and profits at many chains followed suit. Although the fourth quarter witnessed same-store growth (first time in the last two years), growth dropped off in January and February, per TDn2K’s Black Box Intelligence.
This is further reflected in the industry’s stock price performance. Over the past year, while the Zacks Restaurant Industry has gained 10.2%, the S&P 500 added 10.8%.
The unfavorable environment is expected to persist for some time.
Traffic, Same-store Sales Remain Weak
The industry continues to struggle with weak same-store sales and traffic. Foot traffic declined 3.2% in 2017 and 3% and 3.1% in January and February, 2018 respectively. Same-store sales that account for traffic declined 2.2%, 1.6% and 1%, respectively, in the first three quarters of this year. Although the fourth quarter witnessed positive same-store growth of 0.4%, the metric declined thereafter, falling 0.3% in January and 0.8% in February, per TDn2K’s Black Box Intelligence.
We note that the prime reason for such a drop in same-store sales is essentially the increased number of new restaurants amid restricted growth in eating-out budgets. Supply glut and limited demand are thus hampering traffic as well as stock prices for restaurants. Instead of generating added sales, each new restaurant is eating up share from others. This has resulted in bankruptcy for many public and private restaurants.
Another major challenge that restaurants are facing is an increase in menu prices at a much quicker rate than the prices of food items at grocery stores. This is adding to the competitive pressure for restaurants, as preparing food at home has become much more attractive from a cost perspective, resulting in lower footfall.
Additionally, rising labor costs and a complex legislative and regulatory landscape on federal, state and local levels is dampening business performance and bottom lines.
What Can Possibly Drive Growth?
Restaurants have been witnessing solid sales growth ever since the Great Recession and 2017 was no exception, despite an industry-wide slowdown. In fact, in its 2017 Restaurant Industry Forecast, the National Restaurant Association revealed that it expects sales in the industry to reach $799 billion, reflecting an increase of 4.3% over estimated sales of $766 billion in 2016. This marks the eighth consecutive year of real growth in restaurant sales.
Some of the big names like Darden Restaurants, Domino's Pizza, Inc., McDonald's Corp., Yum! Brands, Inc. and Restaurant Brands International, Inc. have remained unperturbed by the recent softness and continue to do well on the back of strong fundamentals and innovative offerings. All these companies carry a Zacks Rank #3 (Hold).
Recent strong gains in the labor market on the back of a steady rise in wages will likely encourage consumers to dine out more. Besides, restaurant operators are undertaking various sales building and digital initiatives to enhance guest experience and, in turn, drive traffic and comps. Also, they are increasingly adapting to the changing tastes and preferences of their guests to attract them once again. The restaurant industry should thus get its mojo back going forward.
Valuation Looks Bit Stretched
The restaurant industry has historically traded at a premium to the broader market, both on a trailing as well as forward basis.
On a trailing 12-month P/E basis, the industry is currently trading at 25.4X, which compares to the 20.4X for the S&P 500 index. Over the last 5 years, the industry has traded as high as 29.3X and as low as 21.8X, with a median of 25.3X.
The industry is currently trading at 21X forward 12-month EPS estimates, which compares to the S&P 500 index’s 16.9X multiple. Over the last 5 years, the industry has traded as 25.3X and as low as 19.3X, with a 5-year median of 22.4X.
In other words, the industry is trading below the 5-year highs and close to the median for the period. Valuation isn’t cheap, but it isn’t nose-bleed expensive either.
Zacks Industry Rank
Within the Zacks Industry classification, restaurant companies are grouped under the broader Retail-Wholesale sector (one of the 16 Zacks sectors).
We rank 265 industries into 16 Zacks sectors based on their earnings outlook and fundamental strength of the constituent companies in each industry. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. The Zacks Industry Rank for the Retail-Restaurants industry is currently at #188 (bottom 27%).
The position of the industry suggests that the general outlook for the restaurant space as a whole is leaning toward Negative.
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has nearly tripled the market from 1988 through 2015. Its average gain has been a stellar +26% per year.See these high-potential stocks free >>.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: Darden Restaurants, Domino's Pizza, McDonald's, Yum! Brands and Restaurant Brands International
For Immediate Release
Chicago, IL – April 3, 2018 – Today, Zacks Equity Research discusses the Industry: Restaurants, Part 1, including Darden Restaurants (DRI - Free Report) , Domino's Pizza, Inc. (DPZ - Free Report) , McDonald's Corp. (MCD - Free Report) , Yum! Brands, Inc. (YUM - Free Report) and Restaurant Brands International, Inc. (QSR - Free Report) .
Industry: Restaurants, Part 1
Link: https://www.zacks.com/commentary/155990/restaurant-industry-outlook---april-2018
The U.S. restaurant industry has been grappling with continued soft consumer spending on dining out over the past few quarters.
Resultantly, same-store sales growth has been dull in this difficult sales environment. Foot traffic declined, and profits at many chains followed suit. Although the fourth quarter witnessed same-store growth (first time in the last two years), growth dropped off in January and February, per TDn2K’s Black Box Intelligence.
This is further reflected in the industry’s stock price performance. Over the past year, while the Zacks Restaurant Industry has gained 10.2%, the S&P 500 added 10.8%.
The unfavorable environment is expected to persist for some time.
Traffic, Same-store Sales Remain Weak
The industry continues to struggle with weak same-store sales and traffic. Foot traffic declined 3.2% in 2017 and 3% and 3.1% in January and February, 2018 respectively. Same-store sales that account for traffic declined 2.2%, 1.6% and 1%, respectively, in the first three quarters of this year. Although the fourth quarter witnessed positive same-store growth of 0.4%, the metric declined thereafter, falling 0.3% in January and 0.8% in February, per TDn2K’s Black Box Intelligence.
We note that the prime reason for such a drop in same-store sales is essentially the increased number of new restaurants amid restricted growth in eating-out budgets. Supply glut and limited demand are thus hampering traffic as well as stock prices for restaurants. Instead of generating added sales, each new restaurant is eating up share from others. This has resulted in bankruptcy for many public and private restaurants.
Another major challenge that restaurants are facing is an increase in menu prices at a much quicker rate than the prices of food items at grocery stores. This is adding to the competitive pressure for restaurants, as preparing food at home has become much more attractive from a cost perspective, resulting in lower footfall.
Additionally, rising labor costs and a complex legislative and regulatory landscape on federal, state and local levels is dampening business performance and bottom lines.
What Can Possibly Drive Growth?
Restaurants have been witnessing solid sales growth ever since the Great Recession and 2017 was no exception, despite an industry-wide slowdown. In fact, in its 2017 Restaurant Industry Forecast, the National Restaurant Association revealed that it expects sales in the industry to reach $799 billion, reflecting an increase of 4.3% over estimated sales of $766 billion in 2016. This marks the eighth consecutive year of real growth in restaurant sales.
Some of the big names like Darden Restaurants, Domino's Pizza, Inc., McDonald's Corp., Yum! Brands, Inc. and Restaurant Brands International, Inc. have remained unperturbed by the recent softness and continue to do well on the back of strong fundamentals and innovative offerings. All these companies carry a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Recent strong gains in the labor market on the back of a steady rise in wages will likely encourage consumers to dine out more. Besides, restaurant operators are undertaking various sales building and digital initiatives to enhance guest experience and, in turn, drive traffic and comps. Also, they are increasingly adapting to the changing tastes and preferences of their guests to attract them once again. The restaurant industry should thus get its mojo back going forward.
Valuation Looks Bit Stretched
The restaurant industry has historically traded at a premium to the broader market, both on a trailing as well as forward basis.
On a trailing 12-month P/E basis, the industry is currently trading at 25.4X, which compares to the 20.4X for the S&P 500 index. Over the last 5 years, the industry has traded as high as 29.3X and as low as 21.8X, with a median of 25.3X.
The industry is currently trading at 21X forward 12-month EPS estimates, which compares to the S&P 500 index’s 16.9X multiple. Over the last 5 years, the industry has traded as 25.3X and as low as 19.3X, with a 5-year median of 22.4X.
In other words, the industry is trading below the 5-year highs and close to the median for the period. Valuation isn’t cheap, but it isn’t nose-bleed expensive either.
Zacks Industry Rank
Within the Zacks Industry classification, restaurant companies are grouped under the broader Retail-Wholesale sector (one of the 16 Zacks sectors).
We rank 265 industries into 16 Zacks sectors based on their earnings outlook and fundamental strength of the constituent companies in each industry. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. The Zacks Industry Rank for the Retail-Restaurants industry is currently at #188 (bottom 27%).
The position of the industry suggests that the general outlook for the restaurant space as a whole is leaning toward Negative.
The ranking is available on the Zacks Industry Rank page.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has nearly tripled the market from 1988 through 2015. Its average gain has been a stellar +26% per year.See these high-potential stocks free >>.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.