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3 Top Restaurant Stocks to Buy Amid Industry Headwinds
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The Zacks Retail – Restaurants industry’s performance continues to be impacted by high wages, food cost inflation and traffic woes. Additionally, consumers are dealing with less disposable income, making them more cautious about spending on dining out. However, rapid increases in menu prices, average check growth and expansion efforts bode well. Industry participants also benefit from partnerships with delivery channels and digital platforms. Stocks like Texas Roadhouse, Inc. (TXRH - Free Report) , El Pollo Loco Holdings, Inc. (LOCO - Free Report) and Potbelly Corporation (PBPB - Free Report) are well-poised to benefit from the aforementioned factors.
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, which include noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage, and license restaurants and lounges worldwide. A few companies also operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
3 Trends Shaping the Future of the Restaurant Industry
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time. A rapid increase in menu prices is the primary reason behind traffic erosion. In the second quarter, quick-service restaurant chains saw a 2.3% decline in customer traffic, according to new data from Revenue Management Solutions. This decline highlights the ongoing challenges the industry faces with maintaining customer counts, especially as consumers grow frustrated with rising prices. However, the traffic did improve compared to the previous quarter, and there are indications that restaurant operators are being more cautious about implementing further price increases. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation are concerning. The industry continues to bear increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure on the company’s margins.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been a catalyst. With the growing influence of the Internet, digital innovation is the need of the hour. Restaurant operators constantly partner 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. Restaurant operators also focused on driverless delivery systems to augment sales amid the coronavirus crisis.
Off-Premise Sales Acting as Key Catalyst: The industry is gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options, such as kiosks and food trucks. Most restaurant operators have initiated the testing of ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service has been garnering positive customer feedback.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Gaming industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #154, which places it in the bottom 39% of more than 251 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, analysts are gradually losing confidence in this group’s earnings growth potential. Since Mar 31, 2024, the industry’s earnings estimates for the current year have decreased 5.4%.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has underperformed the Zacks S&P 500 Composite and its sector over the past year.
Over this period, the industry has grown 3.6% compared with the Zacks S&P 500 Composite’s jump of 25.3%. The sector has risen 20.1%.
One-Year Price Performance
Restaurant Industry's Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 23.96X compared with the S&P 500’s 21.67X. It is marginally above the sector’s forward 12-month P/E ratio of 22.64X.
Over the last five years, the industry traded as high as 34.67X and as low as 22.03X, with the median being at 25.12X.
3 Key Restaurant Picks
Texas Roadhouse: The company is benefiting from positive traffic trends. In second-quarter 2024, its operators have delivered solid performance, and a well-balanced development pipeline puts TXRH in a strong position for the second half of the year. The company is expanding its brand globally, now boasting over 50 international franchise locations.
TXRH carries a Zacks Rank #2 (Buy) at present. The company’s sales and earnings for 2024 are anticipated to improve 39.2% and 15.6% year over year, respectively. In the past year, shares of the company have surged 62.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TXRH
El Pollo Loco: The company delivered a strong performance in the second quarter of 2024, with system-wide comparable restaurant sales increasing 4.5% and company-operated store margins improving to 18.6%, a 170 basis-point increase from the year-ago quarter. The popularity of its iconic Fire-Grilled Chicken, a renewed emphasis on everyday value, and consistent operations that have resonated well with customers drove the company’s performance. The company is pleased with the quarter's achievements and believes there is still significant growth potential for this beloved brand.
Shares of this Zacks Rank #2 company have gained 44.7% in the past year. LOCO’s 2024 sales and earnings are anticipated to rise 2% and 12.7%, respectively, year over year.
Price and Consensus: LOCO
Potbelly: Despite a challenging macroeconomic environment, Potbelly remains optimistic about its future. This confidence is bolstered by strong customer satisfaction scores, indicating high approval of their food and service. Furthermore, the company’s digital initiatives, including the Potbelly Perks loyalty program, continue to be key business drivers. New shop openings are also performing well, often exceeding initial expectations, further fueling growth.
PBPB currently carries a Zacks Rank #2. The company’s fiscal 2024 earnings are anticipated to improve 33.3% year over year. In the past 30 days, the consensus mark for 2024 earnings has been revised upward by 17.6%.
Price and Consensus: PBPB
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3 Top Restaurant Stocks to Buy Amid Industry Headwinds
The Zacks Retail – Restaurants industry’s performance continues to be impacted by high wages, food cost inflation and traffic woes. Additionally, consumers are dealing with less disposable income, making them more cautious about spending on dining out. However, rapid increases in menu prices, average check growth and expansion efforts bode well. Industry participants also benefit from partnerships with delivery channels and digital platforms. Stocks like Texas Roadhouse, Inc. (TXRH - Free Report) , El Pollo Loco Holdings, Inc. (LOCO - Free Report) and Potbelly Corporation (PBPB - Free Report) are well-poised to benefit from the aforementioned factors.
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, which include noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage, and license restaurants and lounges worldwide. A few companies also operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
3 Trends Shaping the Future of the Restaurant Industry
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time. A rapid increase in menu prices is the primary reason behind traffic erosion. In the second quarter, quick-service restaurant chains saw a 2.3% decline in customer traffic, according to new data from Revenue Management Solutions. This decline highlights the ongoing challenges the industry faces with maintaining customer counts, especially as consumers grow frustrated with rising prices. However, the traffic did improve compared to the previous quarter, and there are indications that restaurant operators are being more cautious about implementing further price increases. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation are concerning. The industry continues to bear increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure on the company’s margins.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been a catalyst. With the growing influence of the Internet, digital innovation is the need of the hour. Restaurant operators constantly partner 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. Restaurant operators also focused on driverless delivery systems to augment sales amid the coronavirus crisis.
Off-Premise Sales Acting as Key Catalyst: The industry is gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options, such as kiosks and food trucks. Most restaurant operators have initiated the testing of ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service has been garnering positive customer feedback.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Gaming industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #154, which places it in the bottom 39% of more than 251 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, analysts are gradually losing confidence in this group’s earnings growth potential. Since Mar 31, 2024, the industry’s earnings estimates for the current year have decreased 5.4%.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has underperformed the Zacks S&P 500 Composite and its sector over the past year.
Over this period, the industry has grown 3.6% compared with the Zacks S&P 500 Composite’s jump of 25.3%. The sector has risen 20.1%.
One-Year Price Performance
Restaurant Industry's Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 23.96X compared with the S&P 500’s 21.67X. It is marginally above the sector’s forward 12-month P/E ratio of 22.64X.
Over the last five years, the industry traded as high as 34.67X and as low as 22.03X, with the median being at 25.12X.
3 Key Restaurant Picks
Texas Roadhouse: The company is benefiting from positive traffic trends. In second-quarter 2024, its operators have delivered solid performance, and a well-balanced development pipeline puts TXRH in a strong position for the second half of the year. The company is expanding its brand globally, now boasting over 50 international franchise locations.
TXRH carries a Zacks Rank #2 (Buy) at present. The company’s sales and earnings for 2024 are anticipated to improve 39.2% and 15.6% year over year, respectively. In the past year, shares of the company have surged 62.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TXRH
El Pollo Loco: The company delivered a strong performance in the second quarter of 2024, with system-wide comparable restaurant sales increasing 4.5% and company-operated store margins improving to 18.6%, a 170 basis-point increase from the year-ago quarter. The popularity of its iconic Fire-Grilled Chicken, a renewed emphasis on everyday value, and consistent operations that have resonated well with customers drove the company’s performance. The company is pleased with the quarter's achievements and believes there is still significant growth potential for this beloved brand.
Shares of this Zacks Rank #2 company have gained 44.7% in the past year. LOCO’s 2024 sales and earnings are anticipated to rise 2% and 12.7%, respectively, year over year.
Price and Consensus: LOCO
Potbelly: Despite a challenging macroeconomic environment, Potbelly remains optimistic about its future. This confidence is bolstered by strong customer satisfaction scores, indicating high approval of their food and service. Furthermore, the company’s digital initiatives, including the Potbelly Perks loyalty program, continue to be key business drivers. New shop openings are also performing well, often exceeding initial expectations, further fueling growth.
PBPB currently carries a Zacks Rank #2. The company’s fiscal 2024 earnings are anticipated to improve 33.3% year over year. In the past 30 days, the consensus mark for 2024 earnings has been revised upward by 17.6%.
Price and Consensus: PBPB