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Restaurateurs to Thrive on Digital Innovation: 4 Solid Picks

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Gordon Moore, co-founder of Intel, made a prediction in 1965 which still holds its ground in the contemporary world. According to the famous Moore’s Law, the number of transistors per square inch on integrated circuits has doubled every year since the integrated circuit was invented and will continue to do so in the foreseeable future. In fact, the ramifications of the observation are clearer than ever in this data-driven age. With Internet, digitalization and electronics penetrating every facet of our day-to-day lives, it is only too natural that the restaurant industry has also embraced this trend.

In fact, the industry is getting increasingly dependent on digital and delivery sales. With the ever-growing presence of Internet and smartphones analysts expect 25% of all restaurant sales to be generated from digital ordering and delivery over the next four years. This will roughly amount to $200 billion of the $800 billion industry, per a recent report by Forbes.

Notably, the Zacks Retail Restaurant Industry, within the broader Zacks Retail-Wholesale sector has outperformed the S&P 500 over the past year. While stocks in this industry have collectively gained 11.7%, the Zacks S&P 500 Composite has rallied 1%.

Are Digital Sales Already Taking Over The Industry?

Per TDn2K’s The Restaurant Industry Snapshot, the industry witnessed comps growth of 0.4%, 0.1%, 0.8% and 1.2% in fourth-quarter 2017, first, second and third quarter of 2018, respectively. In the month of October, same store sales increased 0.8%, declining from comps growth of 1.2% recorded in September. Traffic fell 2.2% in the month of October, a 0.8 percentage point drop from the growth rate recorded for September. 

A persistent erosion in traffic compared with comps growth indicate that it is only guest checks and not guest counts that are positively contributing to restaurant sales. This also means that consumers are not frequently visiting restaurants and instead are getting increasingly reliant on delivery services.

Per The NPD Group, foodservice delivery has contributed significantly to restaurant sales over the past five years. The increase of 20% in delivery sales were primarily supported by digital ordering. Consequently, digital sales are no longer a luxurious feature but are the dire need of the hour. Moreover, Morgan Stanley predicts the food delivery industry could account for 11% of all restaurant sales by 2020.

Restaurant Bigwigs’ Reliance on Digital Innovation

The U.S. quick-service pizza providers can be considered as pioneers in this aspect as they were the one of the firsts to bolster digital capabilities. Per a recent study by Consumer Reports, spending on dining-out has increased nominally, with greater demand for easily accessible, high-quality food. Incorporation of better technologies has been a key sales-driving strategy of large pizza chains in the United States.

Consumers are not only particular about the quality and taste of food but also demand efficient and prompt services. The affordability factor also plays a vital role. Thus, in order to boost sales, leading U.S. pizza giants like Domino’s DPZ, Papa John’s PZZA and Pizza Hut focus on providing efficient service through digital facilities while keeping an eye on the prices.

Further, a tectonic shift has been witnessed in consumer behavior with online shopping being preferred over traditional brick-and-mortar stores. This has persuaded restaurant stocks to adapt to the changing tide as evident from Starbucks’ SBUX efforts in digital, card, loyalty and mobile capabilities. Starbucks’ mobile app is undoubtedly one of the most widely used mobile payment app in the United States. In fact, mobile payments represented 14% of U.S. transactions in fourth-quarter fiscal 2018.

Other high-end casual dining restaurants are also deploying technology to enhance guest experiences.

Picking The Right Restaurant Stocks

With the help of the Zacks Stock Screener, we have zeroed in on four restaurants stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). These companies are also ahead of others in the digital game and promises year-over-year earnings growth of more than 15%. You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's Corporation (MCD - Free Report) , a Zacks Rank #2, is a leading fast-food chain. The company has been undertaking digital initiatives to better serve customers, with nearly all of its U.S. restaurants now using digital menu boards. Further, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option. In fact, it has already launched the option in nearly all 20,000 U.S. restaurants. Meanwhile, McDonald’s is increasingly focusing on delivery to provide improved convenience to customers. More than 15,000 McDonald’s stores currently provide delivery. The Zacks Consensus Estimate for current year earnings is pegged at $7.76, reflecting year-over-year increase of 16.5%.

Yum! Brands, Inc. YUM, a Zacks Rank #2 company, is also not far behind in the digital race as evident from its transformation process toward a single point-of-sale system in the United States. To this end, Yum! Brands announced a partnership with online food delivery platform Grubhub in fourth-quarter 2017 in a bid to enhance online sales and delivery from its restaurants. Additionally, the company implemented various digital features in mobile and online platforms across all its brand segments to enhance guest experience. In fact, the initial trends in foot traffic due to the hot rewards royalty programs launched have been encouraging. The company’s current year earnings are expected to grow 25% year over year, per the consensus estimate.

BJ's Restaurants, Inc. BJRI owns and operates a chain of 200 high-end casual dining restaurants in the United States. The company is investing heavily in technology-driven initiatives, like digital ordering, to boost sales. The company’s app and digital platforms are enabling it to offer promotions more effectively and efficiently. The consensus estimate pegs the company’s current year earnings at $2.35, reflecting growth of 66.7% from the year-ago level. BJ’s Restaurants carries a Zacks Rank #2.

Dunkin' Brands Group, Inc. DNKN is a franchisor of quick service restaurants under the Dunkin' and Baskin-Robbins brands. The company is growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivery. These initiatives make Dunkin’ more convenient and accessible for customers. Furthering its delivery program, Dunkin’ has also expanded delivery service to Miami, in partnership with DoorDash, covering over 70% of Baskin-Robbins stores across the United States.

Dunkin’ Brands carries a Zacks Rank #2. The company is expected to witness earnings growth of 16.9% in 2018 compared with 2017.

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