The U.S. restaurant space has painted a mixed picture so far this year. After being plagued by declining comps through most of 2017, the industry reversed the trend in fourth quarter of 2017. However, after recording spectacular growth in comps during April, the industry again witnessed flat comps during May. Further, in June and July, restaurant comps improved slightly.
In the month of August, the restaurant industry recorded its highest comps growth since September 2015. Same store sales increased 1.8% year over year in the month. But this striking growth appears exaggerated as it is compared with the year-ago period’s dismal comps affected by hurricane Harvey.
However, if we take a look at the first three weeks of August (that excludes the hurricane affected period last year), comps were up 1.5%, which is appreciable. Moreover, stronger-than-expected U.S economic growth in the second quarter is likely to boost consumer spending in restaurant services. Meanwhile, Federal Reserve raised its outlook on U.S. economic growth. The median real GDP forecast increased from 2.7% to 2.8% for the current year. This is also likely to support the industry’s growth in 2018.
Why is The Industry Lagging on Shareholder’s Return?
Zacks Retail Restaurant Industry, within the broader Zacks Retail-Wholesale sector has underperformed both the S&P 500 and its own sector over the past year. While stocks in this industry have collectively gained 8.4%, the Zacks S&P 500 Composite and Zacks Retail-Wholesale Sector have rallied 16.3% and 28.5%, respectively.
Looking at shareholder returns over the past year, it is apparent that investors are not particularly confident about the industry’s prospects. This can be attributed to certain underlying anomalies.
The primary and most 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. The same declined 0.8% in August, proving that it is only guest checks and not guest counts that are positively contributing to restaurant sales.
Many restaurateurs are plagued with high costs of operation. Sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to the industry operators’ margins. Apart from this, competition, high wage expenses and food cost inflation remain concerns.
Moreover, 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, most restaurants reported that they are understaffed, more so because unemployment is currently low. With turnover rates are escalating for both restaurant hourly employees and restaurant managers, a shortage of qualified skill has been hurting the restaurant operators.
The Silver Lining
As a book should never be judged by its cover, similarly investors should not be deterred by the industry’s overall performance. Though companies in the space are facing several headwinds, a few of them have a fair chance to thrive.
It is notable how restaurant giants like Mc Donald’s (
MCD - Free Report) , Domino’s ( DPZ - Free Report) , Starbucks ( SBUX - Free Report) and a few others are thriving on innovation and large-scale digitization. Restaurant operators are continuously partnering with delivery channels and digital platforms to drive incremental sales. We believe that such efforts will benefit the industry in the long term. Picking the Right Stocks
Despite being plagued by a host of problems, there are a few hidden gems in the industry that have transcended all industry trends with strategic endeavors. With the help of the
Zacks Stock Screener, we have zeroed in on five restaurants stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are witnessing northward estimate revisions. These stocks have also outperformed the industry over the past year. You can see . the complete list of today’s Zacks #1 Rank stocks here BJ's Restaurants , Inc. ( BJRI - Free Report) sports a Zacks Rank #1. The company’s shares have gained a whopping 152.9% in the past year. In the last 60 days, 10 earnings estimates moved north, while none moved in the opposite direction for the current year. The Zacks Consensus Estimate for earnings rose 6% in the same period. The stock’s expected earnings growth rate for the current year is 50.4%. Darden Restaurants, Inc.’s ( DRI - Free Report) shares have rallied 42.8% in the past year. Its earnings estimates for the current year have moved up 0.2% over the past two months to $5.50, reflecting an increase of 14.4% from the prior year. Darden carries a Zacks Rank #2 Dine Brands Global, Inc. ( DIN - Free Report) carries a Zacks Rank #2. The company operates and franchises under both the Applebee's Neighborhood Grill & Bar and IHOP brands. Over the past two months, earnings estimates for 2018 have moved up 4.9%. The Zacks Consensus Estimate for current year earnings is pegged at $5.36, reflecting year-over-year growth of 29.2%. The company’s shares have also gained 94.7% over the past year.
The Zacks Rank #2 company,
Sonic Corp. ( SONC - Free Report) has witnessed its shares rise 57% over the past year. Over the past two months, two analysts have raised their expectations. The company’s current year earnings estimate is pegged at $1.39, reflecting a year-over-year increase of 26.4%. Estimates moved 2.2% northward in the same time frame.
Famous steakhouse company,
Ruth's Hospitality Group, Inc. ( RUTH - Free Report) carries a Zacks Rank #2. The consensus estimate for current year earnings is $1.39, highlighting growth of 26.4% from the year-ago level. Further, estimates have moved upward by 3% over the last 60 days, reflecting analysts’ optimism about the stock’s prospects. Shares of Ruth’s Hospitality have returned 47% over the past year. Looking for Stocks with Skyrocketing Upside?
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