The restaurant industry picked up momentum from the second half of 2014 backed by an improving economic picture, improved business and renewed optimism. Rising wages and cheaper fuel were the other positives. In fact, the economy recorded back-to-back quarters of strong growth in over a decade and is now well on track for the best annual job growth rate since late 1999.
In fact, Dec 2014 recorded the best same-store restaurant sales in three years, according to QSR Magazine. Same-store sales growth was 3.1% in this period, up 1.6% over the prior month’s growth rate. This was mainly due to a 0.6% growth in traffic. In fact, it was the best month for the industry since Jan 2012 and the sixth consecutive month of positive comps growth, a first in the last three years.
This reflects a tangible improvement in sales and not just the impact of rising prices. No doubt, the restaurant industry has been one of the stronger performing industries within the broader retail sector.
Also, as per TDn2K’s Black Box Intelligence, the fourth quarter of the last year registered the best same-store sales results in the last six years. As a result, the industry grew 0.8% in 2014, a substantial improvement from a decline of 0.1% recorded in 2013.
However, the real reason behind strong fourth results was the relatively mild winter in U.S. toward the end of 2014. This was favorable for the restaurants which were affected by the severe storms in the U.S. that made the headlines a year ago. Though the storms did dampen spending in Dec 2014, the effect was not as damaging as 2013-end. A slight improvement in the economy driven by consumer confidence also had a role to play.
Labor Market Improves
Average hourly earnings increased 1.7%, or 40 cents, to $24.57 in December. Wage growth has been a major cause of concern this year. Year-on-year growth in average hourly wages came in at 1% in the month. Meanwhile, job additions for November and December increased. November’s tally was the highest since May 2010.
Consumer Confident, Fuel Cheaper
Consumer confidence increased in December, bolstered by the brightening jobs situation. The index rose to 92.6 from 88.7 in November. The index reflected an 8-year high backed by improved prospects for jobs and wages as well as lower gasoline prices.
At the consumer level, falling gas prices – due to a supply glut and low demand – resulted in greater personal disposable incomes during the holiday season. Cheaper fuel translated into higher purchasing power toward the end of 2014 as consumers could channelize spend more on other purchases due to the substantial decline in fuel costs.
Our Choices
Here we present 5 stocks which gained from these trends, each of which also has a good Zacks Rank.
BJ’s Restaurants Inc. (BJRI) owns and operates a chain of 158 high-end casual dining restaurants in the United States (as of Feb 24, 2015), which serve its signature deep-dish pizzas, salads, sandwiches, burgers, pastas, steaks and hand-crafted beers. These outlets operate as BJ’s Restaurant & Brewery, BJ’s Restaurant & Brewhouse, BJ’s Pizza & Grill and B’s Grill.
The Zacks Rank #2 (Buy) company posted strong fourth-quarter 2014 results wherein earnings of 31 cents per share beat the Zacks Consensus Estimate of 21 cents by 48% and increased significantly from the year-ago figure of 6 cents. Revenues of $213.9 million were up 7.1% year over year, backed by an improvement in comps, but came in line with the consensus mark.
Bloomin' Brands, Inc. (BLMN), together with its subsidiaries, owns and operates around 1500 casual, and fine dining restaurants. The company operates these outlets under various concepts, including Outback Steakhouse; Carrabba’s Italian Grill; Bonefish Grill; Fleming’s Prime Steakhouse and Wine Bar; and Roy’s.
The company carrying a Zacks Rank #2 recently posted fourth-quarter 2014 results wherein earnings of 28 cents per share surpassed both the Zacks Consensus Estimate as well as the prior-year figure of 27 cents by 3.7%. Revenues of $11.11 billion were up 5.4% year over year and beat the consensus mark by 1.2%.
Darden Restaurants, Inc. (DRI) owns and operates around 1,500 restaurants in the United States and Canada. It operates restaurants under the Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House brand names.
The Zacks Rank #2 stock posted strong second-quarter fiscal 2015 results with earnings and revenues beating the respective Zacks Consensus Estimate. Earnings from continuing operations of 28 cents per share increased significantly year over year. Total revenue of $1.56 billion increased 5% year over year and beat the consensus mark by 0.5%.
Brinker International, Inc. (EAT) primarily owns, operates, develops and franchises various restaurants under Chili's Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. The Zacks Rank #2 company reported strong fiscal second-quarter 2015 results with both earnings and revenues beating the respective Zacks Consensus Estimate.
Adjusted earnings of 71 cents per share beat the consensus by 4.4% and increased 20.3% year over year. Quarterly revenues rose 5.4% year over year to $742.9 million, and beat the Zacks Consensus Estimate of $733 million by 1.4%.
Jack in the Box Inc. (JACK) operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants with more than 2,200 restaurants in 21 states in the United States and Guam. The Zacks Rank #2 company reported strong fiscal first-quarter 2015 results with both earnings and revenues beating the respective Zacks Consensus Estimate.
Adjusted earnings of 93 cents per share beat the Zacks Consensus Estimate of 87 cents by 6.9% and increased 24% year over year. Quarterly revenues rose 4.2% year over year to $469 million and beat the Zacks Consensus Estimate of $460 million by 1.8%.
To Conclude
Increase in consumer confidence as well as discretionary spending fueled growth in the restaurant industry. We expect sales to improve further, going ahead, and would therefore advise investors to consider adding these stocks to their portfolio.
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