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Restaurant Industry Outlook: Low Traffic a Pressing Concern

Harendra Ray

The Zacks Retail – Restaurants industry consists of several owners and operators of casual dining restaurants, full-service restaurants, quick-service restaurants and fast-casual restaurants. The industry also includes roaster, marketer and retailers of specialty coffee.

Let’s take a look at the industry’s three major themes:

  • The restaurant industry has been facing declining traffic for quite some time now. According to tdn2k, same-store traffic declined 3.9% in the month of August and 3.7% in the rolling three months. The growing aversion to dining out among consumers is concerning. Moreover, comparable sales declined 0.7% in August for the second straight month. In the rolling three months, comparable sales went down 0.6%. Meanwhile, despite lower traffic, average guest check growth has been accelerating which shows that restaurant operators are solely deriving sales from higher guest spend. The erosion in traffic is probably because of restaurateurs’ rapid menu price increase.

  • Increase in consumer spending, steady rise in wages, lower unemployment and restaurant operators’ focus on digital innovation might turn things around. With the growing clout of Internet, digital innovation has become the need of the hour. Restaurant operators like Starbucks Corporation (SBUX) and McDonald's Corporation (MCD) are continuously partnering with delivery channels and digital platforms to drive incremental sales. Such efforts should continue benefiting the industry. According to an article by Restaurant Business, the fast-casual restaurant space is likely to record sales growth of 8.3% in 2019 compared with 8% in 2018. Casual dining sales are expected to rise 3.4% in the current year, up from last year’s 3.2%. Fine-dining restaurants will also see growth of 5.2% compared with 5% rise in 2018.

  • Restaurant operators are also plagued by high cost of operations. Further, sales-building efforts such as promotional activities and prudent pricing plans are eroding margins. Apart from this, competition, high wage and food cost inflation remain concerns. Moreover, most restaurateurs are facing rising employee vacancies and are perpetually understaffed, which is affecting overall performance.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Retail – Restaurants industry is grouped within the broader Retail-Wholesale sector.

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The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. The Zacks Retail - Restaurant industry currently carries a Zacks Industry Rank #151, which places it at the bottom 41% of 255 Zacks industries. 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.

Despite the drab near-term prospects, we present a few stocks that one can consider buying. Also, it’s worth taking a look at the industry’s shareholder return and current valuation before that.

Industry Outperforms S&P 500 & Sector

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

Over this period, the industry has gained 28%, compared with the sector and the Zacks S&P 500 composite’s increase of 6.7% and 4.8%, respectively.

                                  One Year Price Performance


 
Restaurant Industry’s Valuation

On the basis of the forward 12-month P/E ratio, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 24.71X compared with the S&P 500’s 16.78X. It is also above the sector’s forward 12-month P/E ratio of 23.04X. Over the last five years, the industry has traded as high as 26.41X, as low as 20.27X and at the median of 22.97X.


 
Bottom Line

Restaurants are currently facing the flak of wavering consumer interest on discretionary spending. However, the industry’s top-line momentum is likely to be supported by strong growth in to-go and other forms of off-premise sales.

Here are four stocks with positive earnings estimate revisions and a favorable Zacks Rank.

Dunkin' Brands Group, Inc. (DNKN), which develops, franchises, and licenses quick service restaurants worldwide with its subsidiaries, sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year EPS has moved 2% north over the past three months to $3.05. This indicates year-over-year earnings growth of 5.2% in 2019.

                          Price and Consensus: DNKN

Shake Shack Inc. (SHAK), which operates and licenses Shake Shack restaurants in the United States and globally, has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year EPS has risen 12.1% over the past three months to 65 cents.

                                     Price and Consensus: SHAK

Chipotle Mexican Grill, Inc. (CMG) is currently one of the best performing restaurant stocks. The Mexican food restaurant chain’s enhanced focus on food safety and sales-building initiatives bodes well. The company carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year EPS has climbed 0.9% over the past two months to $13.38. This indicates earnings growth of 47.5% year over year in 2019.

                                    Price and Consensus: CMG

 

Denny's Corporation (DENN) owns and operates full-service restaurant chains under the Denny's brand. The company holds a Zacks Rank #2. The Zacks Consensus Estimate for its current-year EPS has moved up 1.5% over the past month to 66 cents.

                              Price and Consensus: DENN

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Shake Shack, Inc. (SHAK) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
McDonald's Corporation (MCD) : Free Stock Analysis Report
 
Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
 
Denny's Corporation (DENN) : Free Stock Analysis Report
 
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
 
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