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3 Restaurant Stocks Well Poised to Grow on Digital Evolution

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The restaurant industry exhibited a moderate growth rate in 2017. Per the National Restaurant Association (NRA), the industry is expected to have generated $799 billion in revenues in the year, up 4.3% from 2016. However, this translates into a growth rate of just 1.7% when accounted for inflation.

The year saw the space grappling with rising costs, weak comps, higher restaurant prices, consumer spending uncertainty on dining out, decline in at-home food costs, market saturation and shifting preference of consumers.

However, the industry remains steady, thanks to strategies in order to counter the abovementioned headwinds. These include various sales building and cost cutting efforts, franchisee-based business models, loyalty programs and the most important increased usage of technology.

Digital Enhancement: Key Ingredient in the Recipe for Success

Technology plays a pivotal role in determining customer experience as they increasingly look for convenience. And restaurant industry is no exception in this regard.

Major restaurant operators are all guns blazing, with their online and digital marketing activities, to meet consumers’ increasing dependence on and penchant for online and mobile web technology and consequently attract them.

While smartphone apps attract consumers, video menu boards in quick-service restaurants and tabletop devices speed up sales and ensure convenience. Further, restaurant operators rely on social media for promotions and incorporate Facebook, online review sites, Twitter and blogs aggressively into their marketing mix. In fact, mobile ordering is fast becoming a crucial part of many restaurants' plans, as it can bring enhanced sales to the table.

Pizza giants Domino's (DPZ - Free Report) and Papa John's International Inc. (PZZA - Free Report) have been the industry bellwethers in the digital ordering space. The world’s largest coffee shop operator, Starbucks Corp. (SBUX - Free Report) has secured a leading position in leveraging its mobile and digital assets and loyalty and e-commerce platforms to create more revenue streams. In fact, Starbucks’ mobile app is undoubtedly one of the most widely used mobile payment app in the United States. Apart from Starbucks, Buffalo Wild Wings , Brinker International (EAT - Free Report) and Red Robin also offer loyalty programs at their outlets to enhance value dining.

The list of restaurants making investments and enhancements in digital and mobile offerings is growing and will surely continue to grow.

Our Picks

We believe Domino's, Darden (DRI - Free Report) and McDonald’s (MCD - Free Report) are well poised to grow on this evolving digital trend. Further, they are innovative operators with strong fundamentals that make them suitable for investments.  Let's delve deeper into how they're leading the restaurant industry's digital and mobile revolution.

Domino's Pizza is investing heavily in technology-driven initiatives like digital ordering to boost sales. The company’s digital loyalty program -- Piece of the Pie Rewards -- continues to contribute significantly to traffic.

Moreover, the company is adding to its digital capabilities with the launch of various ordering apps and platforms. Particularly, Domino's world-class digital ordering platforms like Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and ordering via a Pizza emoji on text are expected to further boost digital orders. The extended ways to order a pizza has thus kept the company at the forefront of digital ordering and customer convenience.

Meanwhile, the company continues to ramp up its worldwide digital participation with 25 markets now utilizing its global online ordering platform and more than 70% of stores outside the United States using its proprietary point-of-sale system – Domino's PULSE.

Notably, digital leadership is helping the company expand its brand in the domestic market as well as overseas. In fact, emphasis on technology innovation helped Domino's reach an estimated $5.6 billion in global digital sales in 2016. At the end of 2016, the company generated over 60% digital sales in the United States. More than half of the national television campaign topics were directly related to digital initiatives. Further, nearly 50% of its international sales come from digital channels.

Domino'scurrently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Its earnings in 2018 are expected to improve 23.5%.

Domino's Pizza Inc. Price

Meanwhile, Darden Restaurants is also focusing on technology-driven initiatives like the system wide rollout of tablets in order to capitalize on the digital wave that has hit the U.S. fast casual restaurant sector. This initiative has boosted sales for the past few quarters. Sales of the company have also picked up since the launch of mobile ordering in 2014.

Meanwhile, Olive Garden’s To Go business, which offers online ordering at selected locations, is also growing rapidly (increasing 12% year over year in the fiscal second quarter). The company has also launched catering in the United States, which is expected to add to its top line.

Further, the company’s digital advertising efforts at LongHorn are contributing significantly in attracting guests. Owing to these efforts, segment comps have grown for the past 19 consecutive quarters.

Darden carries a Zacks Rank #2 (Buy). Its earnings in fiscal 2018 are expected to improve 13.2%.

Darden Restaurants, Inc. Price

McDonald's is undertaking several digital initiatives to better serve customers, with nearly all of its U.S. restaurants now using digital menu boards. Also, McDonald’s is set to launch mobile order-and-pay capabilities at nearly all its 14,000 U.S. restaurants and 6,000 of its restaurants outside the United States. Having witnessed continual traffic declines, the company considers mobile ordering a way to win back customers.

At the same time, the company is accelerating Experience of the Future (EOTF) deployment in the United States, building on its success in markets around the world. The rollout of self-order kiosks, digital menu boards, table service, and the mobile app offer customers more choices and flexibility.

By enhancing customer experience at McDonald's, this initiative represents one of the greatest opportunities to build on business momentum and increase guest count. Currently, the company has Experience of the Future deployed at 13% of its restaurants and that number is expected to increase significantly in the next couple of years.  The company targets to convert most of the traditional restaurants in the U.S. system by 2020.

McDonald's carries a Zacks Rank #2 (Buy). The company’s earnings in 2018 are expected to improve 8.9%.

McDonald's Corporation Price

Wrapping Up

There is no doubt that the restaurant space will see much innovation in the next few years. Digital initiatives with enhanced focus on technology, to cater to the ever-changing needs of customers, are likely to aid restaurant companies in countering industry-wide headwinds.

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