The U.S. restaurant industry has been a mixed bag so far this year. Despite exhibiting significant signs of recovery, the May numbers display an aberration in the trend when put under the scanner.
Taking into account the period commencing from January 2018 to May, the overall Retail – Restaurants industry’s collective decline has been 1.4% against the S&P composite market’s increase of 1.4%. After recording its highest growth in comps during April, the industry witnessed flat comps during May. This highlights the underlying tensions surrounding the otherwise flourishing industry.
Glimpse of May Performance
Per Restaurant Performance Index (“RPI”), measured in relation to a neutral level of 100, May experienced a modest decline. The RPI for the industry in the month of May was 101.2, slightly down from the April’s level of 101.3. Comps in May remained flat, following growth of 1.5% in April. Although May marked the third consecutive month of flat or growing same store sales, a break in the industry’s momentum raises concern. Notably, same store traffic was down 2.9% during May, proving that it is only guest checks and not guest counts that are positively contributing to restaurant sales.
What is Bucking the Trend?
First and the most pressing concern at the moment is the persistent erosion in traffic plaguing the restaurant operators. Secondly, most restaurants reported that they are remaining understaffed. With turnover rates escalating for both restaurant hourly employees and restaurant managers, a shortage for qualified skill has been hindering the restaurant operators. Thirdly, recent data shows that there is an oversupply of restaurants in the United States which is resulting in fierce competition among operators. Restaurant industry is also facing competition from other sectors like grocery store prepared foods and convenience stores. Consequently, restaurants are cannibalizing each other’s business creating an extremely competitive scenario.
Is There Hope?
Despite the fact that the industry witnessed a decline in comps in the month of May compared with April, there is still enough room for shielded optimism. However, if declining same-store sales over the past two years is taken into consideration, May results appear quite encouraging.
Moreover, TDn2K’s The Restaurant Industry Snapshot reveals that same-store sales from the beginning of 2018 till the end of May was up 0.3%, against a decline of 1% in comps comparable period of 2016 and 2017. Further, traffic in the first five months of 2018 fell 2.5%, a modest improvement from a decline 3.2% recorded for each of the previous two years.
Meanwhile, positive comps in the restaurant industry during the first quarter of 2018 can primarily be attributed to rise in consumer demand and discretionary spending. This is evident from the fact that guest check growth has been northbound in recent quarters. Average of guest check growth in the first two quarters of 2017 was 2.1% while that of the last two quarters was 2.3%. Moreover, average guest check rose year over year to 2.8% in the first quarter of 2018. Moreover, a favorable effect on consumers’ personal income from tax cut is sure to act as a catalyst for the industry.
Restaurant Giants Continue to Strategize
Owing to the tricky nature of the overall industry and highly volatile consumer spending, restaurant operators are massively strategizing to sustain competition. Per a report by National Restaurant Association, majority of restaurant operators are intending capital expenditures in the second half of the year. Notably, 64% of the restaurant companies are planning to expand, remodel and innovate across menu offerings in the next six months, up from 59% reported in the month of April.
Digital innovation has also become the dire need of the hour. Restaurant operators are continuously partnering with delivery channels and digital platforms to drive incremental sales. We believe that such efforts will continue to benefit the industry for the remaining of 2018.
Picking the Right Stocks
We have taken help of the Zacks Stock Screener to zero in on restaurants stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are expected to witness year-over-year earnings growth in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.
Wingstop Inc. WING sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2018 earnings is pegged at 84 cents, suggesting an increase of 13.5% from 2017. Current year earnings estimates have also been revised upwards by 3.7% over the past month, reflecting analysts’ optimism surrounding its future earnings potential. Over the past six months, the stock gained 28.1%, outperforming the industry’s collective loss of 5.5%.
Domino's Pizza, Inc. DPZ is currently one of the world's largest fast-food chains, with more than 14,800 stores in over 85 international markets. The company’s operational advantages, given its market share and scale, along with consistent focus on innovation, execution of growth strategy and digital initiatives is likely to aid the stock maintain solid performance in the quarters ahead. Domino’s currently has a Zacks Rank #2. The company’s shares gained 42.5% in the past six months. Also, current year earnings are projected to increase 55.2%. Additionally, Domino’s 2018 earnings estimates have moved up 1.2% over the past 60 days. This is evidence of the unwavering confidence of analysts in the company’s future earnings potential.
Dunkin' Brands Group, Inc. DNKN is another well-performing stock in the U.S. restaurant space. With an impressive share price appreciation, the stock is a lucrative investment choice at the moment. For the current year, the consensus estimate for earnings is pegged at $2.74, mirroring year-over-year growth of 12.8%. Over the past month, earnings estimates for 2018 have moved up 0.4%. Dunkin’ Brands carries a Zacks Rank #2. The company's stock rallied 5.9% in the past six months.
Denny's Corporation DENN, a Zacks Rank #2 stock, has seen upward revisions in its current year estimates. Over the past month, earnings estimates for 2018 have increased 3.1%. The company’s current year earnings are also estimated to grow 15.5% year over year. Its shares have also gained 18.4% in the past six months.
Investors can also take a look at Good Times Restaurants Inc. GTIM carrying a Zacks Rank #2. The consensus estimate for current year earnings predicts growth of 33.3% compared with 2017. The company's shares have rallied 44.3% in the past six months.
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