Yahoo Finance Top 3 Restaurant Stocks to Consider Amid Industry Woes
The Zacks Retail – Restaurants industry’s performance continues to be impacted by high wages, food cost inflation and traffic woes. However, rapid increases in menu prices, average check growth and expansion efforts bode well. Industry participants also benefit from partnerships with delivery channels and digital platforms. Stocks like Wingstop Inc. WING, Brinker International, Inc. EAT and El Pollo Loco Holdings, Inc. LOCO are well-poised to benefit from the aforementioned factors.
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. Some companies develop, operate and franchise quick-service restaurants worldwide. A few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Some 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.
3 Trends Shaping the Future of the Restaurant Industry
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time. A rapid increase in menu prices is the primary reason behind traffic erosion. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation are concerning. The industry continues to bear 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.
Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been a catalyst. With the growing influence of the Internet, digital innovation is the need of the hour. Restaurant operators constantly partner 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 focus on driverless delivery systems to augment sales amid the coronavirus crisis.
Off-Premise Sales Acting as 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. Most restaurant operators have initiated the testing of ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service has been garnering positive customer feedback.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Gaming industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #144, which places it in the bottom 42% 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 dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, analysts are gradually losing confidence in this group’s earnings growth potential. Since Jan 31, 2024, the industry’s earnings estimates for the current year have decreased 3.8%.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has underperformed the Zacks S&P 500 composite and its sector over the past year.
Over this period, the industry has grown 6.8% compared with the Zacks S&P 500 composite’s jump of 16.3%. The sector has risen 22.3%.
One-Year Price Performance
Restaurant Industry's Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 22.27X compared with the S&P 500’s 20.62X. It is marginally above the sector’s forward 12-month P/E ratio of 20.44X.
Over the last five years, the industry traded as high as 34.54X and as low as 21.7X, with the median being at 25.12X.
3 Key Restaurant Picks
Wingstop: The company is benefiting from delivery channel expansion, menu innovation and digital marketing initiatives. Also, its supply-chain strategy and robust unit economics are adding to the positives. Going forward, the company will likely focus on technological advancements to drive growth.
WING sports a Zacks Rank #1 (Strong Buy) at present. The company’s sales and earnings for 2024 are anticipated to improve 27.5% and 36.7% year over year, respectively. In the past year, shares of the company have lost 31.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: WING
Brinker International: The company is benefiting from increased menu pricing, effective marketing strategies and traffic-driving initiatives. Its focus on menu adjustments bodes well. The company intends to emphasize balancing value offerings with margin expansion and adaptability to changing consumer preferences to drive growth.
EAT currently carries a Zacks Rank #2 (Buy). The company’s fiscal 2024 earnings are anticipated to improve 41.3% year over year. In the past 30 days, the consensus mark for 2024 earnings has been revised upward by 2.3%.
Price and Consensus: EAT
El Pollo Loco: The company's success is driven by several key factors. The brand's core strength lies in its signature product — fire-grilled, citrus-marinated chicken, which is freshly prepared daily, garnering customer loyalty. Its unique positioning at the crossroads of the Chicken and Mexican food categories provides a distinctive market advantage.
Shares of this Zacks Rank #2 company have gained 8.2% in the past year. LOCO’s 2024 sales are anticipated to rise 1.5% year over year.
Price and Consensus: LOCO
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Wingstop Inc. (WING) : Free Stock Analysis Report
Brinker International, Inc. (EAT) : Free Stock Analysis Report
El Pollo Loco Holdings, Inc. (LOCO) : Free Stock Analysis Report
