The restaurant industry is passing through a massive transformation. Some industry watchers argue that a glorious phase of eating out is being replaced by the rising trend of online ordering. Consumers are increasingly willing to experiment with new dining experiences, but at the same time, are spending far more consciously.
Despite such major changes, the restaurant industry remains resilient, deriving power from a robust U.S. economy. While a deceleration on the growth front is also likely, fears of a recession are largely unfounded.
Meanwhile, the job market remains strong and steady wage gains are consistently boosting purchasing power. This is why it is a good idea to pick up select stocks from the industry that are likely to outperform their earnings estimates.
Restaurant Sales to Hit Record Level in 2019
According to the National Restaurant Association (NRA), U.S. restaurant sales will touch a record level of $863 billion this year. This represents a 3.6% improvement over last year. While the NRA agrees that the pace of growth has moderated since the Great Recession, it is quick to indicate that the compound annual growth rate between 1970 and 2019 clocks in at 6.4%.
This is significantly better than most industries, despite the fact that growth has remained at the high 4% mark for most of the past decade. Moderation in growth will have restaurant operators reaching out for new technologies in order to boost traffic and sales. Already, operators are allocating more of their resources to investments in technology, specifically on digital ordering, payment and delivery models.
VIDEO Key Industry Metrics Improve
Fresh data from restaurant insights company TDn2K reveals that same store sales for the industry increased by 1.1% in May and is now up 0.5% rolling three months. This represents a 1.6% rebound from May’s year-ago growth pace. The absence of unfavorable weather conditions led to more people eating out, resulting in higher sales for the industry.
Additionally, the NRA’s Restaurant Performance Index (RPI) also rebounded in May, posting a solid increase. The RPI, a monthly gauge of the health and outlook of the industry, increased from 100.1% in April to 101.6 in May. The Current Situation Index improved, powered by restaurant traffic and same store sales. The Expectations Index also showed marked improvement.
Consumer Discretionary Space to Witness Higher Q2 Revenues
Earnings and revenue growth for sectors across the board are expected to decelerate appreciably in the second quarter. Restaurant stocks are part of the consumer discretionary sector, total Q1 earnings for which were up 1.6% on 12.6% higher revenues.
Total Q2 earnings for the sector are expected to be up 0.9% on 12.8% higher revenues. This represents a considerable decline in pace, but is still better than basic materials, conglomerates and aerospace. Earnings growth for these sectors is set to decline 32.1%, 15.7% and 13.9%, respectively.
For the S&P 500 Index as a whole, total Q2 earnings are expected to be down3% from the same period last year on 4.3% higher revenues.(Read:
Handicapping the Q2 2019 Earnings Season) Our Choices
Despite a number of challenges, the restaurant sector remains in fine fettle and is slated to post record sales numbers this year. A robust economy, particularly a strong labor market, is boosting purchasing power significantly, which is continuing to fuel growth for the sector this year.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see
the complete list of today’s Zacks #1 Rank stocks here .
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Domino's Pizza, Inc. ( DPZ - Free Report) , through its subsidiaries, operates as a pizza delivery company in the United States and internationally, with over 15,900 locations in more than 85 markets.
Domino's surpassed the Zacks Consensus Estimate for earnings in three of the last four consecutive quarters, with an average positive earnings surprise of 5.7%.
Powered with the right combination of the two key ingredients — an Earnings ESP of +0.33% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for Domino's in the to-be-reported quarter as well.
The company is expected to report second-quarter 2019 results on Jul 17.
Chipotle Mexican Grill ( CMG - Free Report) , together with its subsidiaries operates quick-casual and fresh Mexican food restaurant chains.
Chipotle Mexican Grill surpassed the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 12%.
Powered with the right combination of the two key ingredients — an Earnings ESP of +7.3% and a Zacks Rank of 1 — our proven model shows that an earnings beat is expected for Chipotle Mexican Grill in the to-be-reported quarter as well.
The company is expected to report second-quarter 2019 results on Jul 23.
Starbucks Corporation ( SBUX - Free Report) is the leading roaster and retailer of specialty coffee in the world.
Starbucks beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 7.7%.
Powered with the right combination of the two key ingredients — an Earnings ESP of +0.42% and a Zacks Rank of 2—our proven model shows that an earnings beat is expected for Starbucks in the to-be-reported quarter.
The company is expected to report third-quarter fiscal 2019 results on Jul 25.
Del Frisco's Restaurant Group, Inc. is an owner, developer and operator of restaurants in the United States.
Del Frisco's beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 68.3%.
Powered with the right combination of the two key ingredients — an Earnings ESP of +100% and a Zacks Rank of 2— our proven model shows that an earnings beat is expected for Del Frisco's in the to-be-reported quarter as well.
The company is expected to report fiscal first-quarter 2019 results on Jul 26.
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