New Zealand markets closed
  • NZX 50

    +53.88 (+0.48%)

    +0.0031 (+0.52%)

    +0.0037 (+0.67%)

    +3.40 (+0.05%)
  • ASX 200

    +3.60 (+0.05%)
  • OIL

    +0.70 (+0.78%)
  • GOLD

    +5.30 (+0.27%)

    +6.85 (+0.05%)
  • FTSE

    +5.29 (+0.07%)
  • Dow Jones

    -106.58 (-0.31%)
  • DAX

    -14.57 (-0.09%)
  • Hang Seng

    +402.04 (+2.28%)
  • NIKKEI 225

    -168.62 (-0.52%)

    +0.9600 (+1.10%)

3 Restaurant Stocks Benefiting From a Prospering Industry

The Zacks Retail – Restaurants industry is benefiting from the rapid increase in menu prices, average check growth and expansion efforts. Industry participants are also benefiting from partnerships with delivery channels and digital platforms. However, high wages and food cost inflation woes persist. Rising prices are also hurting the industry’s traffic. These factors have been affecting margins of late. Stocks like, Darden Restaurants, Inc. DRI, Cracker Barrel Old Country Store, Inc. CBRL and Jack in the Box Inc. JACK are well-poised to counter the scenario.

Industry Description

The Zacks Retail – Restaurants industry comprises several owners and operators of casual, upscale casual, fine dining, full-service and fast-casual restaurants. Some industry participants operate as roasters, marketers and retailers of specialty coffee. A few companies develop, operate and franchise quick-service restaurants worldwide. Some restaurant operators offer cooked-to-order dishes, including noodles and pasta, soups, salads and appetizers. Other industry players develop, own, operate, manage and license restaurants and lounges worldwide. A few companies also operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.

4 Trends Shaping the Future of the Restaurant Industry

Sales Increased in March: Per the industry body, the National Restaurant Association (“NRA”), restaurant sales increased in March to $93.1 billion, up 0.1% from February’s upward-revised sales of $92.9 billion. In the first quarter, eating and drinking place sales rose 4.6% compared with fourth-quarter 2022 levels.

Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators are partnering with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats and the rollout of self-service kiosks and loyalty programs continue to drive growth. Restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as companies do away with delivery personnel.

Off-Premise Sales Acting as a Key Catalyst: The industry is gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options such as kiosks and food trucks, owing to the coronavirus pandemic. Per the NRA, more than 60% of restaurant foods are consumed off-premise. By 2025, off-premise will likely account for approximately 80% of the industry’s growth. Most restaurant operators have initiated testing of ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service has been garnering positive customer feedback.

Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. A rapid increase in menu prices and coronavirus are the primary reasons behind traffic erosion. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation are a concern. The industry is persistently bearing increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure on the company’s margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye and tri-tip and salmon, is hurting the industry.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Gaming industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #57, which places it in the top 23% of more than 249 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since Jan 31, 2023, the industry’s earnings estimate for the current year has gone up 0.7%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms the S&P 500 & Sector

The Zacks Retail – Restaurants industry has outperformed the Zacks S&P 500 composite and its own sector over the past year.

Over this period, the industry has increased 21.7%, compared with the Zacks S&P 500 composite’s decrease of 1.5%. The sector has declined 8.1%.

One-Year Price Performance

Restaurant Industry's Valuation

On the basis of the forward 12-month P/E, which is a commonly-used multiple for valuing restaurant stocks, the industry is currently trading at 25.84X compared with the S&P 500’s 18.53X. It is marginally above the sector’s forward 12-month P/E ratio of 20.44X.

Over the last five years, the industry has traded as high as 34.64X and as low as 20.53X, with the median being at 24.92X.

3 Key Restaurant Picks

Darden Restaurants: Darden Restaurants is one of the largest casual dining restaurant operators worldwide. The company is gaining from business-model enhancements and menu simplifications. This and a focus on technological enhancements in online ordering, the introduction of To Go capacity management and Curbside I'm Here notification bodes well.

Darden Restaurants carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate of the company’s current financial year sales and EPS suggests growth of 8.9% and 7.2%, respectively, from the prior-year comparable figure. Shares of the company have increased 13.5% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: DRI

Cracker Barrel: The company is benefiting from menu innovation, digital initiatives, expansion strategies and an off-premise business model despite the challenging macro environment. Also, increased focus on cost-saving efforts bodes well. In fiscal 2023, the company anticipates contributions worth $25 million from cost savings and business model improvements.

Shares of this Zacks Rank #2 company declined 11.5% in the past year. CBRL’s sales for fiscal 2023 are anticipated to rise 7.3% year over year. In the past 30 days, the consensus mark for 2023 earnings has been revised upward by 0.3%.

Price and Consensus: CBRL

Jack in the Box: The company is benefiting from initiatives like regular menu innovations, focus on delivery channels and marketing strategies. The company is heavily investing in store improvements and new store build, innovating via digital operations. It uses its digital platforms to enhance overall guest experiences and customer satisfaction.

JACK carries a Zacks Rank #2. Jack in the Box sales for fiscal 2023 are anticipated to improve 14.7% year over year. In the past 30 days, the consensus mark for 2023 earnings has been revised upward by 0.5%. In the past year, shares of the company have gained 8.5%.

Price and Consensus: JACK

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report

Cracker Barrel Old Country Store, Inc. (CBRL) : Free Stock Analysis Report

Janus Henderson Sustainable & Impact Core Bond ETF (JACK) : Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research