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The Zacks Retail – Restaurants industry is benefiting from robust off-premise sales, pent-up demand for dine-in experience, sales building efforts and digital initiatives. The industry players are resorting to hiring and retention of team members to support high volumes. The upside is evident from industry sales, which are gradually attaining the pre-pandemic level. Stocks like McDonald's, Papa John's, BJ's Restaurants and The Wendy's are likely to gain from the aforementioned industry trend.
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 of the industry participants operate as roaster, marketer and retailers of specialty coffee. Some companies also develop, operate, and franchise quick service restaurants worldwide.
Few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Industry players such as The ONE Group Hospitality develop, own, operate, manage, and license restaurants and lounges worldwide. Some of them operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
4 Trends Shaping the Future of Restaurant Industry
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts have been acting as catalysts. With the growing influence of Internet, digital innovation has become the need of the hour. Restaurant operators like Starbucks and McDonald's 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 in 2021. The restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to bring down expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.
Sales Rising Gradually: Restaurant industry is gradually witnessing improving sales. The industry participants are hiring, which indicates that the industry is finally coming out of the woods. Food services and drinking places added 194,300 jobs in June, on a seasonally-adjusted basis, per preliminary data from the Bureau of Labor Statistics. This marks the sixth straight month of staffing growth.
Sales at U.S. restaurants and bars reached $67.3 billion in May, increasing for the third month in a row, according to Census Bureau Statistics. The 1.8% jump in May sales is the highest since January 2020, when sales had reached $66.3 billion. The improvement can be attributed to enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.
Off-Premise Sales Acting as a Key Catalyst: The industry is benefiting from increase 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 the 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 have initiated testing of ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service has been garnering positive customer feedback.
Traffic Woes Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic has aggravated the scenario. Rapid increase in menu price and the coronavirus pandemic are the primary reasons behind traffic erosion.
The restaurant operators are grappling with high cost of operations. 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 remain concerns.
Zacks Industry Rank Indicates Bright 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 bright near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #89, which places it at the top 35% of 254 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. Since Dec 31, 2020, the industry’s earnings estimates for the current year have moved north by 7.2%.
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 valuation picture.
Industry Outperform 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 40.7%, compared with the sector and the Zacks S&P 500 composite’s rally of 12.1% and 40.3%, respectively.
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 28.52X compared with the S&P 500’s 22.12X. It is marginally above the sector’s forward 12-month P/E ratio of 28.01X.
Over the last five years, the industry has traded as high as 34.23X and as low as 20.37X, with the median being at 23.71X.
4 Key Restaurant Picks
McDonald's: Oak Brook, IL-based McDonald’s is a leading fast-food chain. Recently, the company launched its first-ever loyalty program in the United States. It is worth mentioning that the company started testing its loyalty program in November last year. McDonald’s already has a loyalty program in other countries like France.
Amid the coronavirus pandemic, it has been focusing on drive-thru, delivery & take-away. Prior to the coronavirus crisis, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now accounts for approximately 90% of sales. McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding presence in existing markets and entering new ones.
Papa John's International: Headquartered in Louisville, KY, Papa John’s operates and franchises pizza delivery and carryout restaurants in the United States and other specific international markets. The company continues to impress investors with robust comparable sales growth.
It recorded positive comparable sales growth in the first quarter of fiscal 2021, which marks the fifth straight quarter of comps growth. It benefited from initiatives revolving around menu innovation, operational efficiencies and cost-saving efforts.
Shares of this Zacks Rank #2 company have gained 17.7% in the past three months. In the past 60 days, the consensus mark for 2021 earnings has been revised upward by 7.8% to $2.78.
BJ's Restaurants: Founded in 1978 in Orange County, CA, BJ’s Restaurants owns and operates a chain of high-end casual dining restaurants in the United States. Even though the company has reopened majority of its dining rooms with limited capacity, its off-premise operations continue to drive overall sales.
During September 2020, the company added individually portioned group meals to its catering line-up. This along with its expanded family feast and bundle offerings has been a major contributor to off-premise sales.
Shares of this Zacks Rank #2 company have soared 195.3% in the past year. The company’s earnings for 2021 are likely to increase 122.9%. The consensus mark for 2021 earnings suggests an improvement of 227.3%, which reflects analysts’ optimism regarding the stock’s growth potential.
Wendy's: Headquartered in Dublin, OH, operates as a quick-service restaurant company. Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. Ever since its launch on Mar 2, 2020 across the United States, the model has contributed 6.2%, 6.4% and 6.3% to U.S. systemwide same-restaurant sales during fiscal second, third and fourth quarter of 2020, respectively.
During the fiscal fourth quarter, breakfast remained solid at approximately 7% of sales. In first-quarter 2021, breakfast accounted for nearly 7% of sales. It contributed significantly to restaurant average unit volumes (or AUV).
The company has been benefiting from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. Going forward, Wendy’s remains bullish on this business model with plans to boost breakfast daypart sales by 30% in 2021.
Shares of this Zacks Rank #2 company have gained 10.7% in the past six months. The company’s earnings for 2021 are likely to increase 29.8%. The consensus mark for 2021 earnings suggests an improvement of 7.2%, which reflects analysts’ optimism regarding the stock’s growth potential.
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: McDonald's, Papa John's, BJ's Restaurants, Wendy's and Starbucks
For Immediate Release
Chicago, IL – July 14, 2021 – Today, Zacks Equity Research discusses Restaurants, including Brinker McDonald's Corporation (MCD - Free Report) , Papa John's International, Inc. (PZZA - Free Report) , BJ's Restaurants, Inc. (BJRI - Free Report) , The Wendy's Company (WEN - Free Report) and Starbucks Corporation (SBUX - Free Report) .
Link: https://www.zacks.com/commentary/1760770/4-restaurant-stocks-to-buy-from-a-prospering-industry
The Zacks Retail – Restaurants industry is benefiting from robust off-premise sales, pent-up demand for dine-in experience, sales building efforts and digital initiatives. The industry players are resorting to hiring and retention of team members to support high volumes. The upside is evident from industry sales, which are gradually attaining the pre-pandemic level. Stocks like McDonald's, Papa John's, BJ's Restaurants and The Wendy's are likely to gain from the aforementioned industry trend.
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 of the industry participants operate as roaster, marketer and retailers of specialty coffee. Some companies also develop, operate, and franchise quick service restaurants worldwide.
Few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Industry players such as The ONE Group Hospitality develop, own, operate, manage, and license restaurants and lounges worldwide. Some of them operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
4 Trends Shaping the Future of Restaurant Industry
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts have been acting as catalysts. With the growing influence of Internet, digital innovation has become the need of the hour. Restaurant operators like Starbucks and McDonald's 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 in 2021. The restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to bring down expenses substantially and ensure safety amid the pandemic as it does away with delivery personnel.
Sales Rising Gradually: Restaurant industry is gradually witnessing improving sales. The industry participants are hiring, which indicates that the industry is finally coming out of the woods. Food services and drinking places added 194,300 jobs in June, on a seasonally-adjusted basis, per preliminary data from the Bureau of Labor Statistics. This marks the sixth straight month of staffing growth.
Sales at U.S. restaurants and bars reached $67.3 billion in May, increasing for the third month in a row, according to Census Bureau Statistics. The 1.8% jump in May sales is the highest since January 2020, when sales had reached $66.3 billion. The improvement can be attributed to enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.
Off-Premise Sales Acting as a Key Catalyst: The industry is benefiting from increase 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 the 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 have initiated testing of ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service has been garnering positive customer feedback.
Traffic Woes Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic has aggravated the scenario. Rapid increase in menu price and the coronavirus pandemic are the primary reasons behind traffic erosion.
The restaurant operators are grappling with high cost of operations. 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 remain concerns.
Zacks Industry Rank Indicates Bright 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 bright near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #89, which places it at the top 35% of 254 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. Since Dec 31, 2020, the industry’s earnings estimates for the current year have moved north by 7.2%.
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 valuation picture.
Industry Outperform 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 40.7%, compared with the sector and the Zacks S&P 500 composite’s rally of 12.1% and 40.3%, respectively.
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 28.52X compared with the S&P 500’s 22.12X. It is marginally above the sector’s forward 12-month P/E ratio of 28.01X.
Over the last five years, the industry has traded as high as 34.23X and as low as 20.37X, with the median being at 23.71X.
4 Key Restaurant Picks
McDonald's: Oak Brook, IL-based McDonald’s is a leading fast-food chain. Recently, the company launched its first-ever loyalty program in the United States. It is worth mentioning that the company started testing its loyalty program in November last year. McDonald’s already has a loyalty program in other countries like France.
Amid the coronavirus pandemic, it has been focusing on drive-thru, delivery & take-away. Prior to the coronavirus crisis, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now accounts for approximately 90% of sales. McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding presence in existing markets and entering new ones.
The Zacks Rank #2 (Buy) company’s earnings for 2021 are anticipated to improve 42%. In the past 30 days, the consensus mark for 2021 earnings has been revised upward by 0.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Papa John's International: Headquartered in Louisville, KY, Papa John’s operates and franchises pizza delivery and carryout restaurants in the United States and other specific international markets. The company continues to impress investors with robust comparable sales growth.
It recorded positive comparable sales growth in the first quarter of fiscal 2021, which marks the fifth straight quarter of comps growth. It benefited from initiatives revolving around menu innovation, operational efficiencies and cost-saving efforts.
Shares of this Zacks Rank #2 company have gained 17.7% in the past three months. In the past 60 days, the consensus mark for 2021 earnings has been revised upward by 7.8% to $2.78.
BJ's Restaurants: Founded in 1978 in Orange County, CA, BJ’s Restaurants owns and operates a chain of high-end casual dining restaurants in the United States. Even though the company has reopened majority of its dining rooms with limited capacity, its off-premise operations continue to drive overall sales.
During September 2020, the company added individually portioned group meals to its catering line-up. This along with its expanded family feast and bundle offerings has been a major contributor to off-premise sales.
Shares of this Zacks Rank #2 company have soared 195.3% in the past year. The company’s earnings for 2021 are likely to increase 122.9%. The consensus mark for 2021 earnings suggests an improvement of 227.3%, which reflects analysts’ optimism regarding the stock’s growth potential.
Wendy's: Headquartered in Dublin, OH, operates as a quick-service restaurant company. Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. Ever since its launch on Mar 2, 2020 across the United States, the model has contributed 6.2%, 6.4% and 6.3% to U.S. systemwide same-restaurant sales during fiscal second, third and fourth quarter of 2020, respectively.
During the fiscal fourth quarter, breakfast remained solid at approximately 7% of sales. In first-quarter 2021, breakfast accounted for nearly 7% of sales. It contributed significantly to restaurant average unit volumes (or AUV).
The company has been benefiting from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. Going forward, Wendy’s remains bullish on this business model with plans to boost breakfast daypart sales by 30% in 2021.
Shares of this Zacks Rank #2 company have gained 10.7% in the past six months. The company’s earnings for 2021 are likely to increase 29.8%. The consensus mark for 2021 earnings suggests an improvement of 7.2%, which reflects analysts’ optimism regarding the stock’s growth potential.
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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.