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The Zacks Retail – Restaurants industry is benefiting from rapid increases in menu prices, average check growth and expansion efforts. The industry participants are also benefiting from partnerships with delivery channels and digital platforms. Sales have been steadily rising, which is a good sign for the industry. However, high wages and food cost inflation woes remain concerns. Stocks like McDonald's Corp., Chipotle Mexican Grill, Inc., Shake Shack Inc. and BJ's Restaurants, Inc. are well-poised to counter the scenario.
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.
4 Trends Shaping the Future of the Restaurant Industry
Sales Continue to Increase: According to the latest report from the Commerce Department, sales at U.S. bars and restaurants increased 0.4% in May after increasing 0.6% in April. Food prices are still high but consumer spending has been steady. Solid sales seen in U.S. bars and restaurants during May suggest a resurgence in consumer spending on services as demand for consumer goods continues to slow, owing to rising price pressures. On the other hand, per the National Restaurant Association, consumer spending in restaurants rose 8.0% in the last 12 months.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators 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. Restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as companies do away with delivery personnel.
Off-Premise Sales Acting as a Key Catalyst: The industry has been 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, owing to the coronavirus pandemic. Per the National Restaurant Association, more than 60% of restaurant foods are consumed off-premise. By 2025, off-premise will likely 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 & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. A rapid increase in menu prices and coronavirus are the primary reasons behind traffic erosion. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation remain concerns. The industry is persistently bearing 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 companies’ margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail – Restaurants industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #29, which places it in the top 12% of more than 251 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright 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 two to one.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
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 Outperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has outperformed the Zacks S&P 500 composite and its own sector over the past year.
Over this period, the industry has increased 21.1% compared with the Zacks S&P 500 composite’s gain of 17.8%. The sector has increased 11.5%.
Restaurant Industry's Valuation
On the basis of the forward 12-month P/E, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 25.36X compared with the S&P 500’s 19.92X. It is marginally above the sector’s forward 12-month P/E ratio of 20.44X.
Over the last five years, the industry has traded as high as 34.64X and as low as 20.71X, with the median being 24.95X.
4 Key Restaurant Picks
Shake Shack: Shake Shack is one of the nation’s largest hamburger chains, offering beef burgers, flat-top dogs, chicken sandwiches, frozen custard and crinkle cut and other food items. The company has been benefiting from various digital initiatives, strong same-shack sales and unit expansion efforts. Shake Shack’s digital retention continues to remain strong. It has also been making more investments in digitization in an effort to sustain its digital guest enhancement strategies in the near term.
Shake Shack sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s current financial year sales and EPS suggests growth of 21.5% and 148.4%, respectively, from the prior-year comparable figure. Shares of SHAK have gained 73.5% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
BJ's Restaurants: BJ’s Restaurants owns and operates a chain of high-end casual dining restaurants in the United States. The company is benefiting from strong comparable restaurant sales, operational efficiency and menu-pricing initiatives. The growth of comparable restaurant sales was backed by strong guest traffic, average checks and increased menu prices.
Shares of this Zacks Rank #1 company have surged 55.4% in the past year. BJRI’s sales and earnings for fiscal 2023 are anticipated to rise 5.5% and 317.7%, respectively, year over year.
McDonald's: McDonald’s is a leading fast-food chain that currently operates more than 39,000 restaurants in more than 100 countries. The company’s upside is fueled by strong comps performance, digital initiatives, marketing campaigns and loyalty programs. McDonald’s is increasing its focus on menu innovation, as it believes that the strengthening of the core menu, solid marketing and improved pricing are likely to pave the way for additional growth in the upcoming periods.
MCD carries a Zacks Rank #2 (Buy) at present. McDonald's sales and earnings for fiscal 2023 are anticipated to improve 7.7% and 9.5%, respectively, year over year. In the past year, shares of the company have gained 16.8%.
Chipotle: The company is one of the most recognized fast-casual Mexican restaurant chains in the United States. It is benefiting from its strong comparable restaurant sales growth, digital efforts, Chipotlane add-ons and menu innovation. This and strength in digital sales, rise in menu prices, new restaurant openings and higher restaurant-level operating margin have been driving the company’s performance.
CMG currently carries a Zacks Rank #2. Chipotle’s sales and earnings for fiscal 2023 are anticipated to improve 14.2% and 34.4%, respectively, year over year. In the past year, shares of the company have gained 55.9%.
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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, Chipotle Mexican Grill, Shake Shack and BJ's Restaurants
For Immediate Release
Chicago, IL – July 18, 2023 – Today, Zacks Equity Research discusses McDonald's Corp. (MCD - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) , Shake Shack Inc. (SHAK - Free Report) and BJ's Restaurants, Inc. (BJRI - Free Report) .
Industry: Restaurants
Link: https://www.zacks.com/commentary/2122032/4-restaurant-stocks-to-buy-from-a-prospering-industry
The Zacks Retail – Restaurants industry is benefiting from rapid increases in menu prices, average check growth and expansion efforts. The industry participants are also benefiting from partnerships with delivery channels and digital platforms. Sales have been steadily rising, which is a good sign for the industry. However, high wages and food cost inflation woes remain concerns. Stocks like McDonald's Corp., Chipotle Mexican Grill, Inc., Shake Shack Inc. and BJ's Restaurants, Inc. are well-poised to counter the scenario.
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.
4 Trends Shaping the Future of the Restaurant Industry
Sales Continue to Increase: According to the latest report from the Commerce Department, sales at U.S. bars and restaurants increased 0.4% in May after increasing 0.6% in April. Food prices are still high but consumer spending has been steady. Solid sales seen in U.S. bars and restaurants during May suggest a resurgence in consumer spending on services as demand for consumer goods continues to slow, owing to rising price pressures. On the other hand, per the National Restaurant Association, consumer spending in restaurants rose 8.0% in the last 12 months.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators 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. Restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as companies do away with delivery personnel.
Off-Premise Sales Acting as a Key Catalyst: The industry has been 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, owing to the coronavirus pandemic. Per the National Restaurant Association, more than 60% of restaurant foods are consumed off-premise. By 2025, off-premise will likely 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 & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. A rapid increase in menu prices and coronavirus are the primary reasons behind traffic erosion. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation remain concerns. The industry is persistently bearing 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 companies’ margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail – Restaurants industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #29, which places it in the top 12% of more than 251 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright 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 two to one.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
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 Outperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has outperformed the Zacks S&P 500 composite and its own sector over the past year.
Over this period, the industry has increased 21.1% compared with the Zacks S&P 500 composite’s gain of 17.8%. The sector has increased 11.5%.
Restaurant Industry's Valuation
On the basis of the forward 12-month P/E, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 25.36X compared with the S&P 500’s 19.92X. It is marginally above the sector’s forward 12-month P/E ratio of 20.44X.
Over the last five years, the industry has traded as high as 34.64X and as low as 20.71X, with the median being 24.95X.
4 Key Restaurant Picks
Shake Shack: Shake Shack is one of the nation’s largest hamburger chains, offering beef burgers, flat-top dogs, chicken sandwiches, frozen custard and crinkle cut and other food items. The company has been benefiting from various digital initiatives, strong same-shack sales and unit expansion efforts. Shake Shack’s digital retention continues to remain strong. It has also been making more investments in digitization in an effort to sustain its digital guest enhancement strategies in the near term.
Shake Shack sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s current financial year sales and EPS suggests growth of 21.5% and 148.4%, respectively, from the prior-year comparable figure. Shares of SHAK have gained 73.5% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
BJ's Restaurants: BJ’s Restaurants owns and operates a chain of high-end casual dining restaurants in the United States. The company is benefiting from strong comparable restaurant sales, operational efficiency and menu-pricing initiatives. The growth of comparable restaurant sales was backed by strong guest traffic, average checks and increased menu prices.
Shares of this Zacks Rank #1 company have surged 55.4% in the past year. BJRI’s sales and earnings for fiscal 2023 are anticipated to rise 5.5% and 317.7%, respectively, year over year.
McDonald's: McDonald’s is a leading fast-food chain that currently operates more than 39,000 restaurants in more than 100 countries. The company’s upside is fueled by strong comps performance, digital initiatives, marketing campaigns and loyalty programs. McDonald’s is increasing its focus on menu innovation, as it believes that the strengthening of the core menu, solid marketing and improved pricing are likely to pave the way for additional growth in the upcoming periods.
MCD carries a Zacks Rank #2 (Buy) at present. McDonald's sales and earnings for fiscal 2023 are anticipated to improve 7.7% and 9.5%, respectively, year over year. In the past year, shares of the company have gained 16.8%.
Chipotle: The company is one of the most recognized fast-casual Mexican restaurant chains in the United States. It is benefiting from its strong comparable restaurant sales growth, digital efforts, Chipotlane add-ons and menu innovation. This and strength in digital sales, rise in menu prices, new restaurant openings and higher restaurant-level operating margin have been driving the company’s performance.
CMG currently carries a Zacks Rank #2. Chipotle’s sales and earnings for fiscal 2023 are anticipated to improve 14.2% and 34.4%, respectively, year over year. In the past year, shares of the company have gained 55.9%.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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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.