The Zacks Retail – Restaurants industry benefited from gradually improving demand, strong offsite sales, sales development efforts and digital initiatives. However, a dismal increase in the cost of employee salaries, benefits and insurance, as well as other operating costs such as rent and traffic, continues to hurt the business. Although traffic has increased, it is still below pre-pandemic levels. However, Dave & Buster’s Entertainment, Inc. CHEEK, Arcos Dorados Holdings Inc. ARCO and BBQ Holdings, Inc. The barbecues are well placed to counter the scenario.
Description of the industry
The Zacks Retail – Restaurants industry includes several owners and operators of casual, upscale casual, fine dining, full-service and quick-casual restaurants. Some of the industry participants operate as specialty coffee roasters, traders and retailers. Some companies develop, operate and franchise quick service restaurants around the world. Few restaurants offer cooked-to-order dishes, including noodles and pastas, soups, salads and appetizers. Some industry players develop, own, operate, manage and license restaurants and lounges around the world. Some of the companies also operate technology-enabled Japanese restaurants in the United States and offer Japanese cuisine through a rotating sushi service model.
4 trends shaping the future of the restaurant industry
Traffic problems and high costs persist: The restaurant industry has been dealing with declining traffic for some time now. The pandemic has worsened the scenario. A rapid increase in menu prices and the coronavirus pandemic are the main reasons for the traffic erosion. Restaurant owners are struggling with the high cost of operations. Intense competition, high wages and food price inflation remain concerns. The industry is constantly incurring increased expenses, which have recently affected margins. Rising pre-opening costs, marketing expenses and costs related to sales-enhancing initiatives are weighing on the company’s margins. Rising costs for meat and seafood, including ribs, prime rib, rib eye and tri-tip, and salmon, are hurting the industry.
Digitization to stimulate growth: Restaurant operators’ focus on digital innovation, sales development initiatives and cost reduction efforts acted as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant owners are constantly 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 owners are focusing on driverless delivery systems to boost sales amid the coronavirus crisis. This should significantly reduce expenses and ensure safety amid the pandemic by cutting delivery staff.
Sales increase gradually: The restaurant industry is gradually seeing its sales improve. Industry players are hiring, indicating that the industry is finally coming out of the woods. Eating and drinking added 124,000 jobs in February, on a seasonally adjusted basis, according to data from the Bureau of Labor Statistics. According to the U.S. Census Bureau, the advance estimate for U.S. retail and foodservice sales for February 2022 was $658.1 billion, up 0.3% sequentially. The improvement can be attributed to improved fundamentals such as changes to business processes, staffing, floor plans, and technology.
Offsite sales acting as a key enabler: The industry has benefited from increased off-site sales, which primarily include delivery, take-out, drive-thru, catering, meal kits and off-site options such as kiosks and food trucks , due to the coronavirus pandemic. According to the National Restaurant Association, more than 60% of restaurant food is consumed offsite. By 2025, offsite is expected to account for approximately 80% of industry growth. Most restaurateurs have launched tests of ghost or virtual kitchens. The idea of offering off-site offerings as well as connected curbside service has garnered positive customer feedback.
Zacks’ industry rankings point to bleak outlook
The Zacks Retail – Restaurants industry is grouped within the broader retail and wholesale industry.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bleak short-term outlook. The Zacks Retail – Restaurant industry currently carries a Zacks industry ranking of #162, which places it in the bottom 36% of the 252 Zacks industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1. As of November 30, 2021, industry earnings estimates for the current year have displaced by 194.2%.
Before outlining a few stocks you might consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.
Industry outperforms S&P 500
The Zacks Retail – Restaurants sector has underperformed the Zacks S&P 500 composite, but has outperformed its own sector over the past year.
During this period, the industry fell 8.5%, compared to the 16.8% rally in the Zacks S&P 500 composite. Meanwhile, the sector fell 23.3%.
Year-over-year price performance
Restaurant industry rating
Based on the 12-month forward P/E ratio, which is a multiple commonly used to value restaurant stocks, the sector is currently trading at 23.52X against the 20X of the S&P 500. It is slightly above the price ratio. /sector 12-month forward earnings of 28.01X.
Over the past five years, the industry has traded as low as 34.23X and as low as 20.37X, with the median at 24.29X.
3 key restaurant choices
At Dave and Buster: Based in Dallas, TX, Dave & Buster’s has benefited from strategic initiatives that include a new menu, optimized marketing and technology investments. The expansion of entertainment options bodes well. The company, which holds a Zacks No. 2 ranking (buy), continues to pursue a disciplined strategy of new store growth in new and existing markets, given the broad appeal of its brand. Management believes it can expand the concept to more than 200 units in North America over time. In addition to the growth potential in North America, management is optimistic about the brand’s significant appeal in certain international markets.
Dave & Buster’s earnings for fiscal 2022 are expected to increase by 149.2%. Over the past 30 days, the consensus rating for 2022 earnings has been revised up by 0.4%. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Pricing and Consensus: PLAY
Arcos Dorados: Based in Montevideo, Uruguay, the company operates as a franchisee of McDonald’s restaurants. The company is benefiting from a strong increase in comparable sales across the system and the opening of new restaurants. In 2021, its system-wide comparable sales grew 38.8% and 10.1% year-over-year.
Shares of this Zacks Rank No. 2 company gained 63.1%, against an 8.5% decline for the sector. Arcos Dorados’ earnings for fiscal year 2022 are expected to increase by 62.5%. Over the past 30 days, the consensus rating for 2022 earnings has been revised up by 5.4%.
Pricing and Consensus: ARCO
BBQ Assets: Based in Minnetonka, MN, BBQ Holdings develops, owns, operates and franchises fast casual restaurants in the United States, Canada and the United Arab Emirates. The company benefits from the acquisitions of the Tahoe Joe’s Steakhouse brand. In 2022, he projects restaurant revenue in the range of $265 million to $280 million.
BBQ Holdings sports a Zacks No. 1 rank. Zacks’ consensus estimate of the company’s current fiscal year sales and EPS suggests growth of 40.9% and 66.2%, respectively, over the comparable figure for the previous year. Shares of the company have climbed 129.9% over the past year.
Price and Consensus: BBQ
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Dave & Buster’s Entertainment, Inc. (PLAY): Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
BBQ Holdings, Inc. (BBQ): Free Stock Analysis Report
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