“If anything is good for pounding humility into you permanently, it's the restaurant business.” — Anthony Bourdain.
In the first half of 2018, the U.S. restaurant industry numbers have exhibited deviation from its long standing negative trend.After recording its highest growth in comps during April, the industry witnessed flat comps during May. Further, in June, restaurant comps inched up 1.1%. This highlights the underlying anomaly surrounding the otherwise flourishing industry.
Glimpse of Restaurant Performance in the First Half
After surviving the seven-quarter jinx of declining comps, the U.S. restaurant industry was pleasantly surprised in the fourth quarter of 2017. Per TDn2K’s The Restaurant Industry Snapshot, comps in the fourth quarter were up 0.4%, comparing favorably with the third-quarter’s comps slip of 1%.
For the first quarter of 2018, comps rose a meager 0.1%, making the mood somber. However, in the second quarter, comps again inched up 0.8%, highlighting the restaurant industry’s positive comps with slow-but-steady growth in three successive quarters. Moreover, the same industry witnessed encouraging sales in the last six of the past nine months. In the first half of 2018, overall sales in the industry nudged up 0.5% compared with a 1.2% fall in sales during the first half of 2017.
Growth in comps throughout the first half of 2018 can be attributed to the rise in consumer demand and discretionary spending. This is evident from the guest check’s growth in recent quarters. For the first six months of 2018, average check increased 2.9%, up from the 2.2% rise in the comparable period last year.
Notably, in the first half of 2018, casual dining and fast casual reported the most improvement, reflecting a shift in consumer taste and preferences. Most gains in the industry were derived from to-go and delivery sales. Despite price rises from higher input costs, a large portion of the positive change in average check is attributable to casual dining segment, which is increasingly relying on delivery and other technological advancements to connect with customers.
Therefore, what we can see is that the U.S. restaurant industry has been a mixed bag so far this year. Despite exhibiting significant signs of recovery, the overall Retail – Restaurants industry’s collective decline has been 3.7% against the S&P Composite market’s increase of 2.1% in the first six months of 2018.
Restaurant Giants’ Strategies to Fuel Growth in the Second Half
Thanks to the tricky nature of the overall industry and highly volatile consumer spending, restaurant operators are massively maneuvering to sustain competition. Per a National Restaurant Association report, a majority of restaurant operators is intending to incur capital expenditures in the remainder of the year. Notably, 64% of the restaurant companies is planning to expand, remodel and innovate across menu offerings during the next six months.
Digital innovation has also become the dire need of the hour. Restaurant operators are continuously partnering with delivery channels and digital platforms to drive incremental sales. We believe that such efforts will continue to benefit the industry for the rest of 2018. Also, a favorable effect on consumers’ personal income from tax cut is sure to act as a catalyst for the industry.
Picking the Right Stocks
With the help of the Zacks Stock Screener, we have zeroed in on six restaurants stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are poised 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) sports a Zacks Rank of 1. The Zacks Consensus Estimate for the company’s 2018 earnings is pegged at 84 cents, suggesting an increase of 13.5% from 2017. Current-year bottom line estimates have also been revised 3.7% upward over the past two months, reflecting analysts’ optimism surrounding the stock’s future earnings potential. In the first half of 2018, the stock has surged 33.7%.
Shares of Carrols Restaurant Group, Inc. (TAST - Free Report) have rallied 22.2% in the first half of the ongoing year. Carrying a Zacks Rank #1, earnings growth is expected in 2018. The current-year consensus estimate for earnings is pegged at 34 cents, representing a 70% year-over-year increase. Earnings estimates for the year have moved 30.8% north, buoying analysts’ unwavering confidence in the company’s future earnings prospect.
Dunkin' Brands Group, Inc. (DNKN - Free Report) is another well-performing stock in the U.S. restaurant space. With an impressive share price appreciation, the stock is a lucrative investment choice at the moment. For the current year, the consensus mark for earnings stands at $2.74, mirroring year-over-year growth of 12.8%. Over the past two months, earnings estimates for 2018 have moved 0.4% up. Dunkin’ Brands carries a Zacks Rank #2. The stock has risen 7.1% in the first six months of 2018.
Denny's Corporation (DENN - Free Report) with a Zacks Rank of 2 has seen upward revisions in its current-year earnings estimates. Over the past two months, earnings estimates for 2018 have been raised 3.1%. The company’s current-year bottom line is projected to grow 15.5% year over year. Shares have also jumped 20.3% over the first half of 2018.
Investors can also take a look at Good Times Restaurants Inc. (GTIM - Free Report) , a Zacks #2 Ranked player. The consensus estimate for current-year earnings predicts 33.3% improvement compared with the tally in 2017. Estimates have also improved over the past two months, moving from a loss of 13 cents per share to a loss of 12 cents per share. Good Times’ shares have soared 41.5% in the first half of 2018.
Another appetizing restaurant stock would be Brinker International, Inc. (EAT - Free Report) . Shares of the company have climbed 22.5% in the first six months of 2018. Moreover, over the past 60 days, the Zacks Consensus Estimate for 2018 earnings has been revised 0.3% upward. Earnings for the full year are also expected to increase 10.3% year over year.
Where Does the Glitch Remain?
First and foremost, the pressing concern at the moment is the persistent erosion in traffic, plaguing the restaurant operators. Notably, same store traffic was down 2% during the second quarter of 2018, proving that it is only guest checks and not guest counts that are positively contributing to restaurant sales. However, same store traffic compared favorably with the 2.6% decline in the first quarter of 2018.
Secondly, most restaurants reported that they are understaffed. With turnover rates escalating for both restaurant hourly employees and restaurant managers, a shortage for qualified skill has been hurting the restaurant operators.
Finally, recent data shows that there is an oversupply of restaurants in the United States, inducing fierce competition among operators. Rivalry is also rife from other sectors like grocery store prepared foods and convenience stores. Consequently, restaurants are cannibalizing each other’s business, sparking an aggressive competitive scenario.
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