Despite inflationary pressures and pandemic-related restrictions, the restaurant industry has taken significant strides toward rebuilding over the first half of 2021. The industry continues to show resilience on the back of marketing initiatives, investments in menu innovation and enhancements in digital offerings. Much of the appreciation can be attributed to the pandemic as it has helped catalyze changes such as rapid consumer adoption of technology for online ordering, electronic payment and order pickup. Notably, the industry continues to see a clear link between vaccine rollouts and market reopenings as it traces its way back to pre-pandemic traffic and sales levels.

What's Driving the Industry?

Companies have increased their investments, thereby targeting better ways to offer convenience, value and enhanced guest experience. The investments include new restaurant openings, reimagining initiatives and accelerating technological advances. Further, they have invested more in operations and product innovation to support carryout and delivery businesses.  

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. Restaurant operators have also initiated operations through ghost or virtual kitchens. Notably, positive customer feedback is being registered on the idea of providing off-premise offerings along with a connected curbside service. Per National Restaurant Association, off-premise is likely to account for approximately 80% of the industry’s growth by 2025.

Considering the pandemic scenario, the companies are constantly enhancing their omnichannel guest experience through loyalty and other initiatives. Restaurant operators are of the opinion that the extension of in-store experience with digital customer relationships are likely to expand the respective companies’ reach, deepen engagement and enhance the customer experience.

Hurdles to Overcome

The Delta variant has brought more stops and starts to the COVID story around the world. According to the National Restaurant Association survey (conducted Aug 13-15), six in 10 adults changed their restaurant use due to the rise in the delta variant, while 37% of adults stated to have ordered delivery or takeout instead of dining in a restaurant.

Although the Delta variant weighs heavy on recovery, industry experts are of the opinion that it is unlikely to dramatically affect or force a return to mandated restrictions and thereby impede the industry’s current trajectory.

Staffing remains a concern for the restaurant industry due to the coronavirus pandemic. Per the National Restaurant Association report, jobs in the fullservice segment were down 626,000 (or 11%) below pre-pandemic employment levels as of July 2021. Further, jobs in the limited-service segment were down 175,000 (or 4%) in the same period. According to preliminary data from the Bureau of Labor Statistics, eating and drinking places cut 41,500 jobs in August on a seasonally-adjusted basis.

Given that some operators are offering signing bonuses and extra benefits to survive in the tight job market, additional wage increases are likely.

Our Take

While temporary marketplace dynamics are likely to impact businesses, the enduring strength of the respective companies along with their franchise partners remains intact. Although the challenges related to owning restaurants like dealing with labor issues and commodity cycles persist, we believe that the idea of creating a more frictionless customer experience across all service channels is likely to play a major role in enhancing guest satisfaction as well as creating a sticky and frequent customer behavior. Many opportunities exist as companies are yet to attain their full potential with respect to modifications in processes, staffing, floor plans and technology.

Investing in the retail sector might sound profitable right now. It is worth noting that the Zacks Retail – Restaurants industry is currently at the top 45% (with the rank of 113) of the 251 Zacks industries, which hints at further growth.

Here, we have highlighted four stocks that are likely to witness earnings growth in 2021 buoyed by robust sales-building initiatives.

3 Restaurant Stocks to Watch Out For

Given the backdrop, here are four restaurant stocks that are likely to move higher in 2021. With the help of the Zacks Stock Screener, we have zeroed in on stocks that carry a Zacks Rank #2 (Buy). These companies have witnessed a sharp rise in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Image Source: Zacks Investment Research

McDonald's Corporation (MCD Quick QuoteMCD - Free Report) owns and operates a chain of quick-service restaurants, globally. Shares of the Zacks Rank #2 company have gained 14.2% in the past six months compared with the industry’s 13.4% growth. The company's focus on drive-thru, delivery & take-away bodes well. McDonald’s launched its first-ever loyalty program in the United States. More than 80% of the company’s restaurants across 100 markets globally provide delivery. Also, it has been making every effort to drive growth in international markets. The Zacks Consensus Estimate for its 2021 earnings has been revised 4.7% upward in the past 60 days. The consensus mark for its 2021 earnings also indicates an improvement of 48.6% year over year.

The ONE Group Hospitality, Inc. (STKS Quick QuoteSTKS - Free Report) develops, owns and operates, manages as well as licenses upscale, high-energy restaurants and lounges. It also provides food and beverage services for hospitality venues including hotels, casinos and other high-end locations. Shares of this Zacks Rank #2 company have skyrocketed 108.1% in the past six months. Notably, the company has been benefitting from investments with respect to technology, people, operational execution and the marketing initiatives. Also, the company is benefitting from elevated brunch program ranches across its business concepts. Going forward, the company continues to emphasize on innovations such as VIBE from around the world menu at SDK to drive interest and repeat visits. Meanwhile, the Zacks Consensus Estimate for its 2021 earnings has been revised 84.6% upward in the past 60 days. The consensus mark for its 2021 earnings also indicates an improvement of 263.6% year over year.

Yum! Brands, Inc. (YUM Quick QuoteYUM - Free Report) is the global leader in multi-branding and offers consumers more choice and convenience at one outlet. Shares of this Zacks Rank #2 company have gained 25.7% in the past six months. Continued focus on off-premise channels, strategic investments in digital technology and refranchising efforts bode well. Also, it is benefiting from robust sales momentum in North America, the U.K., and Australia. Meanwhile, Yum Brands has implemented various digital features in mobile and online platforms across all brand segments to enhance guest experience. Also, it continues to innovate core menus to attract customers. The Zacks Consensus Estimate for its 2021 earnings has been revised 7% upward in the past 60 days. The consensus mark for 2021 earnings indicates an improvement of 22.4% year over year.