The market loves fast-growing restaurant businesses. Since the beginning of the year, restaurant stocks Chipotle Mexican Grill (CMG 1.07%), Buffalo Wild Wings (BWLD), and Cracker Barrel Old Country Store (CBRL 2.08%) have advanced by 72.40%, 95.67%, and 64.22%, respectively, to beat the S&P 500's gain of 24.50%. Could these three restaurant stocks deliver even higher returns to their shareholders in the future? Let's find out.
A shift to healthier eating habits
Chipotle Mexican Grill has experienced good growth on both its top line and bottom line. In the third quarter, it delivered 18% revenue growth and 6.2% growth in comparable restaurant sales. Its EPS jumped by 17.2% to $2.66 per share. One of the important factors that will drive Chipotle's growth going forward is its focus on healthier eating habits for consumers. In the third quarter, its vegan Sofritas option had been introduced at all of its restaurants in California, Washington, New Mexico, Idaho, and Oregon, which represent around 25% of its total restaurants. The company expects that Sofritas will be available at more than 650 of its restaurants, or 40% of its total restaurant count.
Moreover, a new restaurant concept, ShopHouse Southeast Asia Kitchen, will also attract consumers who have healthier eating habits. ShopHouse offers gluten-and dairy-free Asian dishes. According to Steve Ells, the company's chairman and CEO, ShopHouse is growing much faster than Chipotle in its early days and it is the most important source of long-term growth for the company.
Buffalo Wild Wings looks for 20% earnings growth
Buffalo Wild Wings is also considered a high-growth restaurant chain. In the third quarter, Buffalo Wild Wings delivered 27.9% revenue growth, with same-store sales growth of 4.8% at company-owned restaurants and 3.9% at franchise restaurants. Its diluted EPS jumped by 67% to $0.95. This EPS growth was driven by 21% restaurant-unit growth and a low cost per pound for traditional chicken wings. Looking forward, Buffalo Wild Wings believes it can achieve 20% net earnings growth for both 2013 and 2014, while reaching a total restaurant count of 1,000 in the first quarter of 2014.
Cracker Barrel gets healthier with Wholesome Fixin's
Cracker Barrel also enjoyed decent growth in its first quarter of fiscal 2014. Its revenue increased by 3.5% to $649 million while comparable-store restaurant sales rose by 2.8%, driven mainly by an increasing average check size. This restaurant chain has increased its menu prices by around 2.5%, which created a 0.4% favorable mix impact. Like Chipotle, Cracker Barrel has been trying to offer additional healthy items in its restaurants. In August, it added Wholesome Fixin's to its menu. The new category comprises complete meals with less than 600 calories for breakfast, lunch, or dinner, which are priced similarly to its current menu. According to the company, its guests like Wholesome Fixin's for offering "appealing healthy options" and using "fresh ingredients."
Among the three, Chipotle is the most expensively valued with a forward earnings valuation of 39.6. Buffalo Wild Wings ranks second with a lower earnings valuation of 30.5. Cracker Barrel has the lowest forward earnings valuation at 16.3. Many investors might argue that Chipotle deserves the highest valuation because of its high-growth characteristics. That is true, but when we factor growth into earnings valuation, Chipotle still appears the most expensive with a PEG (price-earnings growth) ratio of 2.30, while Buffalo Wild Wings and Cracker Barrel have ratios of 2.04 and 1.71, respectively.
Which should you choose?
For sure, with their different growth initiatives, all of these three restaurant chains will keep growing in the future. Among the three, I like Cracker Barrel the most because it has the lowest valuation. Moreover, investing in Cracker Barrel gives investors a decent dividend yield of 2.60% with a reasonable payout ratio of 46%. Both Chipotle and Buffalo Wild Wings offer investors no dividend payments at all.
