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2 Market-Beating Fast-Food Stocks That Might Lose Steam in 2021

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The coronavirus pandemic has crippled the global economy. However, the Restaurant industry has had a decent run in 2020. So far this year, the Zacks Restaurant industry has gained 12.8%, while the S&P Zacks S&P 500 composite has gone up 16.4%.

However, the rally hasn’t been a smooth one. The restaurant operators faced a number of concerns, including dismal traffic, limited operations, store re-closures and further delays in reopening stores. Dine-in restaurant operators were primarily impacted by the pandemic.

Moreover, restaurant operators are grappling with high cost of operations. Further, sales-building efforts such as promotional activities and prudent pricing plans are eating away at margins. Apart from this, intense competition, high wage and food-cost inflation are concerns. Nevertheless, the companies were able to overcome the challenging scenario on the back of different strategies.

Change in Business Model Helped the Industry

Restaurant foot traffic and online reservations have declined sharply due to the pandemic, but the industry is benefiting from increase in off-premise sales, which primarily includes delivery, takeout, drive-thru, catering, meal kits as well as off-site options such as kiosks and food trucks.

Notably, the combination of re-engineering order and delivery process is likely to boost sales in the upcoming periods. Moreover, restaurant operators are focusing on driverless delivery systems to augment sales. This is expected to lower expenses substantially and ensure safety amid the pandemic.

Owing to the pandemic, restaurant operators are continuously coming up with new ideas to keep their businesses afloat. This includes expansion of seating capacity at indoor dining rooms and outdoor seating (which includes extension of patios, all weather-tents and igloos) in keeping with social-distancing protocols. To this end, partitions are being installed in dining rooms to safely optimize and expand indoor seating. Also, companies have been opting for heaters and breathable panel set-ups to enhance the outdoor seating area.

Also, fast food companies with robust online ordering system did reasonably well even during the pandemic. Fast food giant, Domino's Pizza, Inc. (DPZ - Free Report) , initiated car-side delivery, enabling convenient and contact-free carryout experience for customers in second-quarter 2020. During the third quarter, Domino's franchisees overwhelmingly accepted it, thereby rolling out the services at 95% of its U.S. stores. Apart from this, enhanced make-line tools are being rolled out to ensure faster and improved service levels. These tools are available at 80% of the U.S. stores.

Restaurant industry is gradually witnessing improving sales. The industry participants are also hiring, which indicates that the industry is finally gaining confidence. This along with the much-awaited coronavirus vaccine, the rollout of which has begun, is likely to help restaurant operators in 2021.

However, we have highlighted two fast food stocks that have performed exceptionally well under difficult circumstance this year, but may lose momentum next year.

Dump These Stocks Now

With the help of the Zacks Stock Screener, we have shortlisted two fast food companies companies with a market cap of more than $1 billion, which have outperformed the S&P 500 and the restaurant industry so far this year on the back of robust digitalization but don’t have much upside left for 2021. These stocks carry a Zacks Rank #4 (Sell) and have seen their earnings estimates for 2021 decline in the past 60 days.

Papa John's International, Inc. (PZZA - Free Report) : Shares of the company have surged 38.2% year to fate compared with the industry’s and the S&P 500’s growth of 12.6% and 16.4%, respectively. The company benefited from robust comparable sales growth. In the North America and the international segment, the company’s comp sales have been rising for five and six consecutive quarters, respectively. At North America franchised restaurants, third-quarter fiscal 2020 comps rose 25.6% compared with 0.6% growth in the year-ago quarter. Also, comps at system-wide North America restaurants increased 23.8% during the fiscal third quarter compared with 1% growth in the year-ago quarter. Papa John’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. The company’s online and digital marketing activities have increased significantly in the past several years in response to increasing use of online and mobile web technology.

However, the Zacks Consensus Estimate for the company’s 2021 earnings has moved south by 8.9% in the past 60 days. High costs and debt are a concern for the company. As of Sep 27, 2020, the company had $328.1 million of long-term debt compared with $327.9 million at the end of Jun 28, 2020. The company’s debt-to-capitalization at the end of third-quarter fiscal 2020 is at 430%. Moreover, the company ended the fiscal third quarter with cash and cash equivalents of $140.1 million, which may not be enough to manage the high debt level. Also, rise in commodity and other operating costs might take a toll on the company’s margin.

Wingstop Inc. (WING - Free Report) : Shares of the company have surged 62.6% year to date.  Wingstop benefited from sharp increase in digital sales, system-wide sales and new store openings. Digital sales rose 62% during third-quarter 2020. For the second quarter, domestic same-store-sales jumped 31.9%. The company kept that momentum even after the lockdowns ended, adding same-store-sales comps of 25.4% in the third quarter.

The Zacks Consensus Estimate for the company’s 2021 earnings has moved south by 6.8% in the past 60 days. Moreover, the company’s projected earnings growth for 2021 is at 18.3%, much lower than the growth expectation of 60.3% for this year. Moderating comps and higher costs are a concern.

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

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Dominos Pizza Inc (DPZ) - free report >>

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Wingstop Inc. (WING) - free report >>