Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why Casual Restaurants May Be Better Stocks Than Fast-Food Chains

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Despite the frustratingly slow recovery in the labor market and U.S. economy more broadly, American consumers remain optimistic about their finances. For the most part, they've continued to spend. Consumer sentiment has shown remarkable resilience in recent months, as Americans finally begin to feel better about their finances.

As a result, consumer-discretionary stocks, or those that are reliant on the health of the consumer for profits, stand to prosper. And yet, not all consumer-discretionary stocks are created equal. This is especially true when it comes to restaurants.

There's a striking disparity emerging between fast-food chains such as McDonald's (NYSE: MCD  ) and sit-down restaurants such as DineEquity (NYSE: DIN  ) and Brinker International (NYSE: EAT  ) . While McDonald's is infamously struggling to produce growth in the current economic climate, DineEquity and Brinker are having no such issues.

McDonald's investors are hungry for growth
In McDonald's most recent earnings report, the company showed notable weakness in its key growth metrics. The same-restaurant sales metric, which measures sales only at locations open at least a year, is perhaps the most important financial figure to gauge the way a restaurant stock is performing. By that measure, McDonald's latest report left much to be desired.

McDonald's global same-restaurant sales declined by 0.1% in the fourth quarter and inched up by 0.2% in 2013. McDonald's poor performance stands in contrast to DineEquity and Brinker International. DineEquity, operator of the IHOP and Applebee's brands, delivered a 0.1% same-restaurant sales decline at Applebee's over the first nine months of the fiscal year. This was more than offset by nearly 2% same-restaurant sales growth at IHOP in the same period.

Meanwhile, Brinker International, which operates the Chili's and Maggiano's brands, increased its same-restaurant sales by 0.8% in its fiscal second quarter.

What McDonald's needs to get back on track this year
McDonald's is desperately counting on its aggressive international expansion to make up for its lackluster growth last year. This is where McDonald's may have an advantage over much smaller rivals DineEquity and Brinker International. After all, the U.S. is a very saturated market, and McDonald's status as one of the largest and most valuable brands in the world means it has the size and scale to quickly and effectively break into the emerging markets.

DineEquity does not yet have an established international presence. While Brinker operates in 32 countries across the world, it plans to open just 34 to 39 international restaurants in fiscal 2014.

McDonald's plans to open at least 1,500 new restaurants as well as perform more than 1,000 renovations in the year ahead. McDonald's plans to spend up to $3 billion on this, and investors can bet most of it will be concentrated in the emerging markets. Management cites the company's Asia-Pacific, Middle East, and Africa region as its main target of capital expenditures in 2014.

However, McDonald's aggressive expansion is going to take time to pay off. Management expects January global comparable-store sales to be flat year over year. Meanwhile, DineEquity and Brinker International expect strong near-term performance to continue. For example, DineEquity projects flat same-restaurant sales at Applebee's for the full fiscal year along with solid 2.5% growth at IHOP.

Closing thoughts
While McDonald's retains its status as the largest and most well-known restaurant chain in the world, it's not growing as fast as investors would like. Recently, it's being outperformed by smaller sit-down chains such as DineEquity and Brinker International. Whether or not McDonald's will be successful at re-engineering growth in the future remains to be seen. That depends hugely on its international expansion efforts.

For the time being, investors have viable alternatives to choose from among restaurant stocks. DineEquity and Brinker International are seeing great success in the U.S. and aren't counting on strong international growth to improve their future bottom lines. It may be the case that DineEquity and Brinker International are starting to steal some of McDonald's thunder.

Want to learn more about profiting from the restaurants you eat at?
In our special report "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started investing in your favorite companies. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2819208, ~/Articles/ArticleHandler.aspx, 9/2/2015 5:59:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:02 PM
DIN $94.65 Up +1.03 +1.10%
DineEquity CAPS Rating: **
EAT $53.22 Up +1.04 +1.99%
Brinker Internatio… CAPS Rating: ***
MCD $96.04 Up +2.57 +2.75%
McDonald's CAPS Rating: ***