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3 Restaurant Stocks to Serve Up Treats Post Q1 Earnings

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As the Q1 earning season is fast wrapping up, investors might want to take a look at the numbers from the U.S. restaurant space which is steadily improving. Per the latest Earnings Outlook, 76.3% of the retail S&P 500 companies that have already reported quarterly numbers witnessed 21.6% year-over-year growth in earnings on revenue improvement of 9.5%.Of these retailers, which also include restaurant operators, 72.4% surpassed earnings estimates while 65.5% beat the revenue mark.

Although the retail sector has recorded decent growth in the quarter, analysts anticipatea deceleration in the quarters ahead. While the forecast for the sector is underwhelming, the strength in the restaurant space is here to stay.

After surviving the seven-quarter spell of declining comps, the U.S. restaurant industry was pleasantly surprised in the fourth quarter of 2017 with comps growth of 0.4%. Let’s now see what the restaurants will dish out post first-quarter earnings.

Restaurant Treats in Order

According to TDn2K’s The Restaurant Industry Snapshot, first-quarter comps were up 0.1%. The restaurant industry, which has been grappling with declining sales for over a year, saw two straight quarters of positive comps. Further, after a 0.8% comps increase in March, the industry posted comps growth of 1.5% in April. Notably, April marked the highest sales for the industry since September 2015.

Meanwhile, the encouraging top-line results by the restaurant industry in the first quarter of 2018 were mainly backed by rise in consumer demand and discretionary spending. This is evident from the fact that guest check growth has been accelerating in recent quarters. Average of guest check growth in the first two quarters of 2017 was 2.1% while that of the last two quarters was 2.3%. Moreover, in the first quarter of 2018, average guest check rose year over year to 2.8%.

Also, most of the restaurants are adopting aggressive sales-building strategies to drive demand. The first quarter benefited from these efforts. Moreover, a favorable effect on consumers’ personal income from tax cut is sure to act as a boon for the industry.

Picking the Right Stocks

We have taken help of the Zacks Stock Screener to zero in on restaurants stocks that have beat earnings estimates in the first quarter. Moreover, these stocks, apart from carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy), are expected to witness year-over-year earnings growth in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop Inc. (WING - Free Report) , sporting a Zacks Rank #1, posted an earnings beat of 25% in the first quarter of 2018. Earnings grew 19% from a year ago. For 2018, the Zacks Consensus Estimate for earnings is pegged at 81 cents, reflecting 9.5% year-over-year growth. Moreover, in a year’s time, Wingstop’s shares have returned 74.2% outperforming the Retail-Restaurant industryand the S&P 500 market.

Dine Brands Global, Inc. (DIN - Free Report) , formerly known as DineEquity, Inc., reported better-than-expected earnings for the fifth straight quarter in first-quarter 2018. Also, the company’s revenues surpassed the Zacks Consensus Estimate for the second straight quarter. Adjusted earnings came in at $1.11 per share beating the consensus estimate of $1.07. (See More: Dine Brands Q1 Earnings & Revenues Surpass Estimates).

Dine Brands’ earnings for 2018 are projected to grow 23.1% year over year. Shares of the company have gained 36.8% in the past year, beating the industry.

Denny's Corporation (DENN - Free Report) posted an earnings beat in the first quarter. Adjusted earnings surpassed the consensus estimate by 15.4% and grew 25% year over year. The consensus estimate for the company’s earnings in fiscal 2018 is pegged at 65 cents, indicating growth of 12.1% year over year. Denny’s carries a Zacks Rank #2.

The company’s shares have gained 29.5% in the past year, outperforming the industry as well as the S&P 500 market.

Challenges Linger

Although the restaurant industry is steadily recovering, it won’t be wise to assume that it has no challenges to face. While average check has increased, same-store traffic declined 1.4% in the month of April. Unless the restaurant bigwigs strategize and innovate across value chains, they might face difficulty in maintaining the momentum or cashing in on the opportunities.

Over the past year, the restaurant industry’s shares have returned 0.6%, underperforming the S&P 500 market’s 13.1%.

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