Restaurant Stock Outlook - Part 2
<< Read Restaurant Stock Outlook - Part 1
Will Restaurant Industry Positives Offset the Weaknesses?
The turnaround in the restaurant industry gives investors ample reason to be positive. An improvement in employment rate and lower gasoline prices are helping to increase consumer discretionary spending. Restaurateurs, on their part, are trying to boost sales through diverse initiatives and striving to bring the best to the table.
However, worries persist about certain patches of high interest rates, higher health care costs and still-tightened credit availability that would continue to hurt consumer spending in the U.S.
On the brighter side, there are plenty of reasons to be optimistic about the broader restaurant industry over both the short and long term. Below we have highlighted some of the positives for the restaurant industry going forward:
Improving Comps and Traffic Trends: With improving consumer sentiment, a number of restaurant companies like Buffalo Wild Wings Inc. (BWLD), Darden Restaurants, Inc. (DRI - Analyst Report) and Domino's Pizza, Inc. (DPZ - Analyst Report) witnessed improved comps and traffic mainly in the second part of 2014. Sales initiatives coupled with economic recovery have aided improvement in these metrics.
Improving Economic Growth: An improving economic and employment picture and growing consumer confidence led to a slow but steady recovery in the second half of 2014. Better job prospects, heightened economic activities and better-than-expected GDP numbers have helped in improving the bleak economic picture to some extent.
It is generally believed that the U.S. economy should sustain the growth seen in 2014 and do even better in 2015. There are several reasons to support this optimistic outlook. Lower energy costs encourage consumer spending, while further easing of credit conditions and growing consumer and business confidence indicate faster economic growth in 2015.
Lower Gasoline Prices: Middle-income households spend the lion’s share of the total household budget on gasoline. Falling gas prices will free up a significant amount for consumers to spend next year and the middle class will benefit the most. Therefore, Americans are expected to spend more on discretionary items and dine out more often.
Sales Initiatives: Restaurants strive to improve sales by targeting higher footfall and focusing on delivering something unique. Food chains are responding in different ways to address heightened competition in a somewhat over-supplied domestic market. One of the initiatives taken by the food chains is re-imaging of stores, which has received an overwhelming response from guests. The Wendy's Company (WEN - Analyst Report) and Bob Evans Farms, Inc. (BOBE) have been working along these lines.
Having stabilized their financial positions, the operators are constantly striving to add new offerings to their menu in order to cater to the ever-changing palates of customers while making food presentation better. Chipotle Mexican Grill, Inc. (CMG - Analyst Report), Fiesta Restaurant Group, Inc. (FRGI - Snapshot Report) and Jack in the Box Inc. (JACK -Snapshot Report) are focusing on this strategy. Restaurateurs like Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) and Panera Bread Company (PNRA - Analyst Report) are offering loyalty programs at their units to enhance value dining. This is a ploy to encourage sales at a time when customers are spending moderately on dining and need added incentives.
Some industry players like BJ's Restaurants, Inc. (BJRI), Buffalo Wild Wings and Chipotle Mexican Grill are rolling out prototypes and smaller restaurant chains to augment value and drive traffic, thereby reducing construction and occupancy costs but enhancing returns on capital. Also, these smaller prototype restaurants help to accelerate growth in non-traditional locations. Companies such as Darden Restaurants, Panera Bread and BJ's Restaurants are busy investing in kitchen equipments to improve capacity and speed.
Modern Technology, Digital Ordering, & Delivery Gaining Precedence: The digital wave has hit the U.S. fast casual restaurant sector as more and more restaurants are deploying technology to enhance guest experience. While smartphone apps lure consumers to restaurants, video menu boards in quick-service restaurants and tabletop devices are some of the tools used to push sales.
Panera Bread, Buffalo Wild Wings and Krispy Kreme Doughnuts, Inc. (KKD - Snapshot Report) are some of the restaurants that use tablets and kiosks to drive traffic. Meanwhile, the world’s largest coffee-shop operator, Starbucks Corporation (SBUX - Analyst Report) also recently launched its “Mobile Order & Pay” initiative in the Portland, OR area and plans to launch it nationwide by 2015-end.
So far, Domino's Pizza has been a huge beneficiary of this trend. A few others following the footsteps of this leading pizza brand are Papa John's International Inc. (PZZA - Snapshot Report) and Cracker Barrel Old Country Store, Inc. (CBRL).
In order to capitalize on the increasing demand for their products, a few players in the industry like BJ's Restaurants, Chipotle Mexican Grill and Noodles & Company (NDLS - Snapshot Report) have begun providing off-premise catering programs. These programs are especially designed to serve a large number of customers at their homes, offices or at any other venue.
The restaurant operators also rely on social media for promotions and incorporate Facebook (FB), online review sites, Twitter (TWTR) and blogs aggressively into their marketing mix.
Adapting to Changing Consumer Preference: The latest trend at U.S. eateries is to serve a healthy menu owing to consumer preference for fresh, organic, nutritious and low calorie food. Rising health concerns and increasing awareness about obesity and related diseases have led to the shift in consumer preference toward healthy and “good for you” products. A few companies like Chipotle Mexican Grill and Kellogg Co. are coming up with low-calorie offerings to improve revenues and profits. Focus on child nutrition is also a priority.
To Sum Up
Investors could definitely take advantage of the near-term opportunities to cash in on the turnaround in the restaurant sector. Check out our latest Restaurant Industry Outlook here for more on the current state of affairs from an earnings perspective and the trend for this important sector.
>> Continue to Restaurant Stock Outlook - Part 3
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