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Soft Traffic to Hurt Restaurant Industry's Near-Term Prospects

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The Zacks Retail – Restaurants industry includes owners and operators of casual dining restaurants and full-service restaurants, and roaster, marketer and retailers of specialty coffee. Companies in the industry also develop, franchise, license and operate quick-service restaurants.

Let’s take a look at the industry’s three major themes:

  • Growth in the restaurant industry is likely to be driven by increase in consumer spending, steady rise in wages, lower unemployment and restaurant operators’ focus on digital innovation. With the growing clout of Internet, digital innovation has become the need of the hour. Restaurant operators are continuously partnering with delivery channels and digital platforms to drive incremental sales. Such efforts should continue benefiting the industry. According to an article by Restaurant Business, the fast-casual restaurant space is likely to record sales growth of 8.3% in 2019 compared with 8% in 2018. Casual dining sales are expected to rise 3.4% in the current year, up from the past year’s 3.2%. Fine-dining restaurants will also see a rise in sales of 5.2% compared with 5% growth in 2018.
     
  • Even though comps have increased over the past months, decline in traffic continues to be a major concern for the companies in this space. Persistent erosion in traffic compared with comps growth indicates that it is only guest checks and not guest counts that contribute to restaurant sales. This also means that consumers are not frequently visiting restaurants and instead are getting increasingly reliant on delivery services.
     
  • Moreover, restaurant giants are plagued by high cost of operations. Further, sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to margins. Apart from this, competition, high wage and food cost inflation remain concerns.


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 gloomy near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #167, which places it at the bottom 35% of 256 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.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Jun 30, 2018, the industry’s earnings estimate for the current year has gone down 2%.

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half in the past eight weeks.


 
 

Industry Outperforms S&P 500 & Sector

The Zacks Retail – Restaurants industry has outperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 5.4% against the sector and Zacks S&P 500 composite’s decline of 3% and 5.1%, respectively.

 

Despite the industry’s drab near-term prospects, we’ll present a few restaurant industry stocks that one can buy. But it’s worth taking a look at the industry’s shareholder return and current valuation before that.

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 22.22X compared with the S&P 500’s 15.71X. It is also above the sector’s forward 12-month P/E ratio of 21.37X.

Over the last five years, the industry has traded as high as 25.29X, as low as 19.55X and at the median of 22.42X, as the chart below shows.


 
 

Bottom Line

Steady decline in traffic has been raising concerns about the near-term fate of restaurant operators. Moreover, restaurants are highly susceptible to the inconsistent nature of consumer discretionary spending. However, restaurant operators are continuously partnering with delivery channels and digital platforms to drive incremental sales.

Below we have discussed four stocks that investors may want to buy now.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bojangles', Inc. BOJA: This Charlotte, NC-based company, which develops, operates, and franchises limited service restaurants in the United States, has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2019 EPS indicates year-over-year growth of 10.6%. Earnings estimates have been stable over the past 30 days.

Price and Consensus: BOJA



 

Darden Restaurants, Inc. (DRI - Free Report) ): This Orlando, FL-based owner and operator of full-service restaurants in the United States and Canada holds a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 EPS indicates year-over-year growth of 18.1%. Earnings estimates for fiscal 2019 have witnessed upward revisions of 1.1% in the past 30 days.

Price and Consensus: DRI



 

Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) : This Lebanon, TN-based company develops and operates the Cracker Barrel Old Country Store concept in the United States. It carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 EPS indicates year-over-year growth of 1.2%. Earnings estimates for fiscal 2019 have witnessed upward revision of 1.4% in the past 60 days.

Price and Consensus: CBRL



Wingstop Inc. (WING - Free Report) : This Dallas, TX-based company, which franchises and operates restaurants under the Wingstop brand name, has a Zacks Rank #2. The Zacks Consensus Estimate for 2019 EPS indicates year-over-year growth of 1.2%. Earnings estimates have been stable over the past 30 days.

Price and Consensus: WING



 

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