At the onset of the pandemic, significant limits and regulations on eating severely damaged restaurant equities on the stock market. As a result, eateries were compelled to implement pickup and delivery services. Today, eating restrictions have been lifted around the nation, and the restaurant sector appears to be rebounding.
There are both small mom-and-pop restaurants and national and international chains in the restaurant sector. Sixty percent of new restaurants fail during their first year in business, making the field challenging for entrepreneurs. This is due, in part, to the discretionary nature of restaurant expenditure, which fluctuates substantially with the overall economy. During the COVID-19 epidemic, numerous restaurants and restaurant chains encountered growing costs, accumulating debt, and declining revenues, which led to a significant increase in financial strain. McDonald's and Chipotle Mexican Grill Inc. are two of the most well-known publicly-listed eateries.
As the restaurant business struggles to recover, some investors compile a list of the best restaurant stocks to purchase during earnings season. Before that, it is also important to note that some of the most successful corporations in the world are in the food industry. Consider the stock performance of Domino's Pizza (NYSE: DPZ) over the years. Earlier this year, a $1,000 investment made in 2004 would have returned roughly 4,000 percent at its all-time highs.
Even if some of the issues still exist in the restaurant sector, investing in some top restaurant companies might still result in substantial long-term profits.
1. McDonald's
McDonald's (NYSE: MCD) was as prepared for a global epidemic as any restaurant business. Drive-thrus are available at around 65 percent of McDonald's locations globally and 95 percent of establishments in the United States. When McDonald's dining rooms were closed last year, the drive-thru played a crucial role.
Additionally, McDonald's had invested in digital sales and delivery. The firm released a redesigned mobile app in 2017 that allowed consumers to order and pay using a mobile device. Its McDelivery service reached its stride in 2019 when a partnership with DoorDash (NYSE: DASH) expanded delivery to over 10,000 locations.
McDonald's was not immune to the restaurant industry's upheaval in the epidemic's early days. With fewer commuters, the company's breakfast business in the United States took significant damage. In overseas countries, where drive-thrus are less common, sales also decreased. Global comparable sales fell 7.7 percent in 2020.
McDonald's is making a solid comeback even though the epidemic is still ongoing. In the second quarter of this year, global comparable sales increased by more than 40 percent and over 7 percent on a two-year basis. International markets have returned to their pre-pandemic sales levels, and the U.S. market was incredibly robust. The reopening of dining rooms in foreign markets contributes to the global recovery.
McDonald's efforts in its digital platforms before and throughout the epidemic are finally bearing fruit. In the first half of this year, digital sales in the company's six central regions were close to $8 billion, a 70 percent increase over 2020. There are currently 12 million consumers enrolled in the new MyMcDonald's Rewards loyalty program, offering a significant incentive to select McDonald's over the competition.
McDonald's shares have climbed well over their pre-pandemic peak, but the company is still an excellent pick for investors seeking a high-quality restaurant for their portfolios. With a price-to-earnings ratio of around 26, based on the average analyst forecast for 2021, it is not too late to invest in an excellent fast-food chain.
2. Starbucks
Let's begin the list with one of the world's leading coffee merchants, Starbucks. With activities in around 83 global markets, the firm is familiar to most customers. In addition, the firm sells brands and services under a variety of brand names, such as Teavana, Seattle's Best Coffee, Evolution Fresh, Ethos, and Princi. The price of SBUX shares has increased by more than 30 percent during the past year.
Despite being primarily a coffee specialist, Starbucks continues to meet client needs. Today, the firm has added additional plant-based dishes to its vegetarian menu in Chile. In addition, there are non-dairy milk substitutes and faux-meat sandwiches. This demonstrates that the corporation reacts to the client's demand for vegetarian choices.
Yesterday, the firm stated that its fiscal fourth-quarter results report would be released on October 28. So, let us evaluate its prior quarter's results. Comparing the previous year's third quarter to the current quarter, consolidated net revenues climbed by 78% to $7.5 billion. In addition, it launched 352 new shops during the third quarter, concluding the period with a global total of 33,295.
3. Domino's Pizza
Domino's Pizza (NYSE: DPZ) has mastered the art of fast delivering hot meals to customers, whereas McDonald's has only lately adopted delivery. With the majority of Domino's outlets optimized for carryout and delivery, the epidemic benefited the pizza company.
In 2020, same-store sales in the United States increased by more than 11 percent, while other markets also saw robust growth. Amid the uncertainty of the pandemic, the firm established more than 600 additional sites last year, a feat that many restaurant chains could only dream of.
Domino's faces greater delivery competition than ever before as many eateries rely on third-party delivery services to increase sales. Domino's has several significant competitive advantages.
Domino's charges its franchisees a minimal fee for digital orders. The firm and its franchisees perform all deliveries in-house. In contrast, a restaurant that uses a third-party service incurs much greater expenses, occasionally passing on to customers through increased prices. For customers, third-party delivery is sometimes accompanied by many layers of fees that can substantially increase the price of a meal.
During the epidemic, delivery was essential for restaurants, but it is uncertain if many will continue to offer it after the dine-in business has completely recovered. Domino's has a cost advantage over any restaurant that utilizes a third-party delivery service.
Domino's business has begun to slow down somewhat. Comparable sales in the United States decreased marginally during the third quarter of the fiscal year, but overall sales increased due to robust foreign growth and new store openings. Domino's is coming off many great quarters in 2020, so a decrease is not unexpected. The actual test will be the company's performance once the epidemic is ultimately behind it.
Domino's sells convenience. Before the epidemic was a popular option throughout the pandemic, it was a popular option and will likely remain a popular option after the pandemic. Domino's stock may be somewhat volatile due to a high valuation colliding with a slowdown in growth. However, the firm is well-positioned to maintain its dominance in the pizza sector.
4. Chipotle Mexican Grill
After that, we shall examine Chipotle Mexican Grill. Chipotle is currently one of the largest restaurant chains globally that offer burritos, tacos, and salads. It runs about 2,500 restaurants globally, most of which are located in the United States. CMG stock has seen increases of about 40 percent since the beginning of the year, so one might say it has been a phenomenal year thus far.
Chipotle said earlier this month that it is continuing to expand its digital experience by enhancing the Chipotle Rewards program. The campaign has helped the corporation reach $2 billion in digital sales this year. It already has over 24 million members and remains one of the restaurant industry's most rapidly expanding loyalty programs.
In response, the company is introducing Extras, a unique feature that allows access to additional points. Thus, making it easier for members to obtain free Chipotle. The new function mimics a game where players must complete objectives to gain different points and acquire accomplishment badges. The organization strives to be at the forefront of digital business development as we see it. In addition, Chipotle will release its profits for the third quarter on October 21.
5. Sweetgreen
Sweetgreen is a fast-casual restaurant brand that focuses on offering eco-friendly and healthful meals. The majority of the menu consists of salads, heated bowls, and soups, to mention a few. In addition, it sells packaged items such as dressings, sauces, and packed fruits and vegetables. Sweetgreen runs around 140 locations throughout thirteen states. In addition, the corporation employs around 4,000 individuals. Due to the company's recent IPO in November, investors are likely interested in the company's performance during the last quarter.
Last Thursday, the firm revealed its financial results for the fourth quarter. The total sales reached $96.4 million, a 63 percent increase year-over-year. This gain may be attributed to the company's 36 percent growth in same-store sales, and this is compared to the 28 percent decline in 2020. Despite reporting a quarterly loss of $66.2 million, Sweetgreen gave optimistic predictions for the whole year. First, the corporation anticipates the opening of 35 new restaurants. In addition, the company expects annual revenues between $515 million and $535 million.
6. Yum! Brands
Yum! Brands is another prominent restaurant stock on the radar of investors. The corporation operates the global brands KFC, Pizza Hut, Taco Bell, The Habit Burger Grill, and Wingstreet for those unaware. The lone exception would be in China, where Yum China Holdings operates independently (NYSE: YUMC).
Yum! Brands closed the acquisition of Dragontail Systems Limited in September. It is an innovative provider of food industry technological solutions. Dragontail's technology optimizes and manages the whole meal preparation process from order to delivery. Therefore, it automates both the kitchen flow and the driver dispatching procedure. Again, we observe that the leading restaurant corporations, such as Yum!, highlight the necessity of expanding their digital operations.
Additionally, the firm stated its intention to employ 40,000 additional permanent team members to work in restaurants nationwide. The bulk of vacant employment is for cooks and drivers in corporate and franchise restaurants. This is a significant indication of the increasing demand for Yum! Brands.
7. Dave & Buster's Entertainment
Dave & Buster owns and operates high-volume eating and entertainment facilities. The organization provides its consumers with the option to eat, drink, play, and watch in a single area. You might have a social and enjoyable time while enjoying delicious food and beverages. Additionally, its establishments are intended to host premier sports viewing events, private parties, and corporate activities.
The company's finances appear to have returned to pre-pandemic levels. The company's second-quarter sales were a record $377,6 million, an astounding 642.9 percent rise year-over-year. Comparatively, its net gain was $52.8 million, compared to a net loss of $58.6 million in the same time of the last year. It is safe to say that Dave & Buster's is shown remarkable resiliency since all 142 of its locations are now open, and the company is producing record revenues.
In addition, it announced last week the beginning of its NFT Digital Collectibles Prize program. In celebration of the debut, the first collector to acquire every city card and the game coin will get a 1 of 1 Super Master NFT and a $10,000 Dave & Buster's Power Card. It suffices to say that the program will improve the cheerful mood of the organization.
8. Dutch Bros
Dutch Bros (BROS) is an up-and-coming player in the U.S. specialty coffee sector. It describes itself mainly as a high-growth operator and franchisor of drive-through coffee cafes. The firm caters to the demands of coffee drinkers by providing a variety of handmade drinks of superior quality. BROS operates via a network of 471 sites in eleven western states of the United States. And the coffee chain operator recently disclosed its quarterly profits last Thursday.
Revenue reached $140.1 million, an increase of 55.8 percent over the previous year. Additionally, system same-store sales increased by 10.1% in the fourth quarter and 15.3% over the last two years. The company's gross profit increased by 15.4 percent year-over-year to $16.1 million. BROS established 35 new stores this quarter, exceeding its previous quarterly high of 33.
9. Brinker International
Brinker International is among the top casual dining restaurant chains in the United States. Its restaurant portfolio includes the American staple Chili's Grill & Bar and the Italian restaurant Maggiano's Little Italy. It also has two virtual brands. Namely, It's Just Wings and Maggiano's Italian Classics. Brinker also runs or franchises over 1,600 restaurants in 29 countries and two U.S. territories. The firm released its second-quarter fiscal 2022 profits last month.
Brinker's sales climbed to $904.5 million from $746.2 million. This 21 percent rise is due to Chili's and Maggiano's outlets' robust revenue growth. Chili's revenue grew to $791,9 million, 12.1% year-over-year. According to Brinker, the rise in revenues was primarily attributable to increasing dining room sales. In contrast, Maggiano's sector revenues climbed due to increasing dining and function room sales. Specifically, revenues were $112.6 million, rising 78.1 percent from the previous year. The net income per diluted share jumped to $0.60 from $0.26.
10. Wingstop
Wingstop (WING, $115.95) is a Dallas-based owner and franchisor with over 1,700 locations worldwide, specializing in cooked-to-order chicken wings, hand-cut fries, and homemade sides.
Midway through 2021, WING added chicken thighs to its menu to stabilize its food expenses. The newest addition to the menu is anticipated to prevent the restaurant's 2022 poultry expenses from increasing.
With the growth of "Thighstop," WING started purchasing the whole bird rather than simply the wings. While the market price for jumbo chicken wings climbed by 41 percent in the last quarter of 2021 compared with the same time in 2020, Wingstop's prices for bone-in chicken wings rose by just 27.5 percent.
During the company's fourth-quarter earnings call, Wingstop's senior vice president and chief financial officer (CFO) Alex Kaleida told analysts, "This progress has persisted into 2022, as we continue to observe a lowering pricing trend for jumbo wings and the positive impact of menu price hikes." Last year, to preserve its profit margins, Wingstop increased its pricing by 10 percent, a massive rise over its typical yearly price increase of 1 to 2 percent.
WING announced quarterly profits per share (EPS) of 24 cents and quarterly revenue of $72 million. While these results fell short of analysts' expectations, the year-over-year increase was robust.
Baird Equity Research notes that the Q4 earnings miss and 2022 projection for essential cost items have led to a modest decrease in its near-term EPS estimates.
Baird analyst David Tarantino, who has an Outperform rating on WING, says, "We are lowering our 2022 earnings per share estimate to $1.67 with marginally improved comps assumption offset by increasing spending" (the equivalent of a Buy). The analyst's EBITDA (earnings before interest, taxes, depreciation, and amortization) prediction for the entire year remained within 1% of the preceding model.
On the other hand, Stifel maintained its EPS forecast for 2022 at $1.80, noting new menu items that utilize extra bird parts.
Stifel analyst Chris O'Cull, who has a Buy rating on the stock, says that management is optimistic about introducing its bone-in and boneless thigh products this year and will assess additional portions of the bird. I'll also have a Buy rating on the stock.
Should You Invest in Restaurant Shares?
Restaurant stocks that are well-positioned to withstand economic shocks are often the best to include in your portfolio. Long-term success is probable for restaurant franchises focusing on value, and McDonald's, Domino's, and Chipotle all fit under this classification.
Eventually, the epidemic will fade into history, but specific changes in consumer behavior may persist. The prevalence of working from home will almost probably increase, and restaurant delivery will likely remain a ubiquitous service. If you decide to add restaurant stocks to your portfolio, you should prioritize those more likely to profit from the current trends.
Conclusion
This year, industry titans such as McDonald's Corp (NYSE: MCD) and Domino's Pizza (NYSE: DPZ) performed very well. Both MCD and DPZ stocks have increased by more than 15% this year. As people begin dining again, eateries are confident that their operations will recover to pre-pandemic levels. Takeout and delivery are indeed handy, but nothing surpasses a home-cooked meal shared with loved ones and delivered piping hot. These are occurrences that are frequently taken for granted. Do you believe that restaurant stocks will flourish after the current epidemic wave subsides? If so, you may try investing in our 10 best restaurant stocks.
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