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Dump SBUX & MCD: 3 Better Restaurant Picks Despite Coronavirus

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The global stock markets have been grappling with the coronavirus-induced crisis. In fact, panic sell-off by investors on account of the coronavirus pandemic ended the longest bull run in the America’s stock market history. The outbreak has wreaked havoc on almost all the industries.

The restaurant industry has been no exception to the trend. Its sales and traffic have been impacted by the practice of social distancing and government imposed lockdowns across major cities worldwide. Shares of the industry bellwethers like Starbucks Corporation SBUX and McDonald's Corporation MCD have declined 18.3% and 11%, respectively, in the past three months.

Starbucks Hit Hard by Coronavirus

Starbucks recently withdrew fiscal 2020 guidance on account of the coronavirus pandemic.

Before coronavirus-induced crisis in the United States, the company had been witnessing robust sales growth for almost four years. Quarter to date through Mar 11, U.S. comparable store sales were up 8%. After Mar 12, comparable store sales declined sharply as the company temporarily closed more stores. Comparable store sales in the United States were down 3% year over year in the second quarter.

Comparable store sales in China are likely to decline sharply in the second quarter. In March, comparable stores sales recovered at a slightly faster pace and the company witnessed a decline of 64%. Moreover, in the last week of March sales declined 42%, representing seventh straight week of sequential improvement. More than 90% of its stores in China are currently operational. However, many are operating with reduced hours and limited seating.

Owing to business disruption in China on account of the coronavirus, the company’s GAAP and non-GAAP earnings per share for the second quarter are likely to be impacted in the range of 15 to 18 cents, in line with its prior estimate. Moreover, the company’s earnings are likely to be affected by coronavirus in the United States and other parts of the world. 

Owing to the aforementioned factors, the company’s adjusted earnings in second-quarter fiscal 2020 is estimated to be 32 cents, down sharply from 60 cents reported in the prior-year quarter. Moreover, Zacks Consensus Estimate for this Zacks Rank #4 (Sell) company for current and next year have declined 22.7% and 11.7% to $2.31 and $3.02, respectively.

McDonald's Solid Comps Trend Ended in March

For the two months ended on Feb 29, comparable sales in the U.S. and International Operated Markets were up 8.1% and 8.5%, respectively. However, the metric declined 13.4% and 34.7% at U.S and International Operated Markets in March, respectively. Total comparable sales declined 22.2% in March.

In first-quarter 2020, U.S. comparable sales inched up 0.1%. However, comps in International Operated Markets and International Developmental Licensed Markets & Corporate fell 6.9% and 4.3%, respectively. The company’s total comparable sales declined 3.4% in first-quarter 2020 after witnessing growth in the last 18 quarters.

The company stated that only 75% of its restaurants are operational worldwide. Owing to the uncertainty of the situation, it has also withdrawn 2020 guidance and long-term outlook, which was issued earlier on Feb 26.

Moreover, the Zacks Consensus Estimate for this Zacks Rank #4 (Sell) company for current and next year have declined 20.1% and 9.3% to $6.82 and $8.35, respectively.

3 Restaurants Stocks to Buy Despite Coronavirus

Though Starbucks and McDonald's prospects may not appear impressive at the moment, there are some restaurants stocks that hold promise despite the overall weakness in the sector.

Here, we have highlighted three stocks in the Retail – Restaurants space for investors, on the basis of their Zacks Rank and sound Zacks Consensus Estimate revisions.

Kura Sushi USA, Inc. (KRUS - Free Report) , a fast-growing technology-enabled Japanese restaurant concept, sports a Zacks Rank #1 (Strong Buy). The company’s earnings are likely to witness growth of 55.6% and 23.8% in the current and next year, respectively. Shares of the company have jumped 25.2% in the past week. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dine Brands Global, Inc. DIN, which owns, franchises, operates, and rents full-service restaurants in the United States and internationally with its subsidiaries, carries a Zacks Rank #2 (Buy). The company’s earnings for current and next year is likely to witness growth of 4% and 6%, respectively.. Shares of the company has surged 28.2% in the past week. 

Denny's Corporation DENN, which owns and operates full-service restaurant chains, has a Zacks Rank #2. In the past week, the company’s shares gained 21.4%, compared with the industry’s growth of 7.9%. The company’s earnings for current and next year is likely to witness growth of 9.1% and 8.7%, respectively. It also has an impressive long-term earnings growth rate of 9%. 

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