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3 Restaurant Stocks to Bet on Despite Industry Headwinds
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The Zacks Retail – Restaurants industry has been benefiting from the gradual improvement in demand, robust off-premise sales, sales-building efforts and digital initiatives for a while. However, increased cost of employee wages, benefits and insurance, and other operating costs, such as rent and traffic, continue to hurt companies in the said space. Rising prices are also affecting the industry’s traffic. However, Arcos Dorados Holdings Inc. (ARCO - Free Report) , Portillo's Inc. (PTLO - Free Report) and Potbelly Corporation (PBPB - Free Report) are well-poised to counter this 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 industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies develop, operate and franchise quick-service restaurants worldwide. A few restaurant operators offer cooked-to-order dishes, including noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage and license restaurants and lounges worldwide. Some of the companies also operate technology-enabled Japanese restaurants in the United States, providing Japanese cuisine through a revolving sushi service model.
3 Trends Shaping the Future of Restaurant Industry
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic further aggravated the scenario. A rapid increase in menu prices and the coronavirus pandemic are the primary reasons behind traffic erosion. The restaurant operators are grappling with the high cost of operations. Intense competition, steep wages and food cost inflation remain concerns. The industry is persistently enduring increased expenses, which have been affecting margins of late. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are weighing on the margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye and tri-tip, and salmon, is hurting the industry. Per the NPD Group, physical and online traffic dipped 2% in the quarter from the year-ago tally. Quick service restaurant traffic declined 3% year over year during second-quarter 2022. Moreover, full-service restaurant traffic decreased 3% year over year.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst for a while. With the growing influence of the Internet, digital innovation became 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 the 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 removes the need to recruit delivery personnel.
Off-Premise Sales a Key Catalyst: The industry is consistently gaining from the spike 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 the National Restaurant Association, more than 60% of 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 initiated trialing ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service is steadily garnering positive customer feedback.
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 grim near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #189, which places it at the bottom 25% of 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Since Jan 31, 2022, the industry’s earnings estimates for the current year have moved 10.5% south.
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 the valuation picture.
Industry Lags S&P 500 but Beats Sector
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 declined 18.8% compared with the Zacks S&P 500 composite’s decrease of 9.6%. Meanwhile, the sector has declined 28.2%.
One Year Price Performance
Restaurant Industry's Valuation
On the basis of the forward 12-month P/E ratio, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 24.2X compared with the S&P 500’s 17.32X. It is marginally below the sector’s forward 12-month P/E ratio of 28.01X.
Over the last five years, the industry traded as high as 34.57X and as low as 20.49X, with the median being 24.39X.
3 Key Restaurant Picks
Arcos Dorados: Based in Montevideo, Uruguay, ARCO operates as a franchisee of McDonald's restaurants. It is benefiting from a sharp rise in systemwide comparable sales and new restaurant openings.
Shares of this presently Zacks Rank #2 (Buy) player have gained 20.4% against the industry’s decline of 18.6%. Arcos Dorados’ earnings for fiscal 2022 are anticipated to improve 83.3%. In the past 90 days, the consensus mark for 2022 earnings has been revised 10% upward. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ARCO
Portillo's: Headquartered in Oak Brook, IL, Portillo's continues benefiting from robust same-restaurant sales and restaurant openings. PTLO is gaining from higher average check, driven by an increase in menu prices and to some extent, mix of items sold.
Portillo's earnings for fiscal 2022 are anticipated to improve 147.6% year over year. In the past 30 days, the consensus mark for 2022 earnings has been revised 11.1% upward. In the past three months, shares of PTLO have gained 6.5% compared with the industry’s increase of 3.5%. The stock is currently Zacks #2 Ranked.
Price and Consensus: PTLO
Potbelly: Based in Chicago, IL, Potbelly owns, operates and franchises Potbelly sandwich shops. PBPB is gaining from solid same-store sales, robust digital channels and a strong loyalty program.
PBPB carries a Zacks Rank of 2 at present. The Zacks Consensus Estimate for Potbelly’s current financial year sales and EPS suggests growth of 16.9% and 140%, respectively, from the prior-year comparable figures. Shares of Potbelly have declined 28.9% in the past year.
Price and Consensus: PBPB
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3 Restaurant Stocks to Bet on Despite Industry Headwinds
The Zacks Retail – Restaurants industry has been benefiting from the gradual improvement in demand, robust off-premise sales, sales-building efforts and digital initiatives for a while. However, increased cost of employee wages, benefits and insurance, and other operating costs, such as rent and traffic, continue to hurt companies in the said space. Rising prices are also affecting the industry’s traffic. However, Arcos Dorados Holdings Inc. (ARCO - Free Report) , Portillo's Inc. (PTLO - Free Report) and Potbelly Corporation (PBPB - Free Report) are well-poised to counter this 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 industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies develop, operate and franchise quick-service restaurants worldwide. A few restaurant operators offer cooked-to-order dishes, including noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage and license restaurants and lounges worldwide. Some of the companies also operate technology-enabled Japanese restaurants in the United States, providing Japanese cuisine through a revolving sushi service model.
3 Trends Shaping the Future of Restaurant Industry
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic further aggravated the scenario. A rapid increase in menu prices and the coronavirus pandemic are the primary reasons behind traffic erosion. The restaurant operators are grappling with the high cost of operations. Intense competition, steep wages and food cost inflation remain concerns. The industry is persistently enduring increased expenses, which have been affecting margins of late. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are weighing on the margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye and tri-tip, and salmon, is hurting the industry. Per the NPD Group, physical and online traffic dipped 2% in the quarter from the year-ago tally. Quick service restaurant traffic declined 3% year over year during second-quarter 2022. Moreover, full-service restaurant traffic decreased 3% year over year.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst for a while. With the growing influence of the Internet, digital innovation became 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 the 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 removes the need to recruit delivery personnel.
Off-Premise Sales a Key Catalyst: The industry is consistently gaining from the spike 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 the National Restaurant Association, more than 60% of 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 initiated trialing ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service is steadily garnering positive customer feedback.
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 grim near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #189, which places it at the bottom 25% of 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Since Jan 31, 2022, the industry’s earnings estimates for the current year have moved 10.5% south.
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 the valuation picture.
Industry Lags S&P 500 but Beats Sector
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 declined 18.8% compared with the Zacks S&P 500 composite’s decrease of 9.6%. Meanwhile, the sector has declined 28.2%.
One Year Price Performance
Restaurant Industry's Valuation
On the basis of the forward 12-month P/E ratio, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 24.2X compared with the S&P 500’s 17.32X. It is marginally below the sector’s forward 12-month P/E ratio of 28.01X.
Over the last five years, the industry traded as high as 34.57X and as low as 20.49X, with the median being 24.39X.
3 Key Restaurant Picks
Arcos Dorados: Based in Montevideo, Uruguay, ARCO operates as a franchisee of McDonald's restaurants. It is benefiting from a sharp rise in systemwide comparable sales and new restaurant openings.
Shares of this presently Zacks Rank #2 (Buy) player have gained 20.4% against the industry’s decline of 18.6%. Arcos Dorados’ earnings for fiscal 2022 are anticipated to improve 83.3%. In the past 90 days, the consensus mark for 2022 earnings has been revised 10% upward. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ARCO
Portillo's: Headquartered in Oak Brook, IL, Portillo's continues benefiting from robust same-restaurant sales and restaurant openings. PTLO is gaining from higher average check, driven by an increase in menu prices and to some extent, mix of items sold.
Portillo's earnings for fiscal 2022 are anticipated to improve 147.6% year over year. In the past 30 days, the consensus mark for 2022 earnings has been revised 11.1% upward. In the past three months, shares of PTLO have gained 6.5% compared with the industry’s increase of 3.5%. The stock is currently Zacks #2 Ranked.
Price and Consensus: PTLO
Potbelly: Based in Chicago, IL, Potbelly owns, operates and franchises Potbelly sandwich shops. PBPB is gaining from solid same-store sales, robust digital channels and a strong loyalty program.
PBPB carries a Zacks Rank of 2 at present. The Zacks Consensus Estimate for Potbelly’s current financial year sales and EPS suggests growth of 16.9% and 140%, respectively, from the prior-year comparable figures. Shares of Potbelly have declined 28.9% in the past year.
Price and Consensus: PBPB
