Where to Start Looking for Restaurant Stocks

Investors might want to continue to mine the fast-casual niche for their best investment ideas.

Jul 28, 2014 at 2:16PM


Investing in a restaurant is like choosing one for dinner, requiring more than a determination of whether you like its food. Sure, you want an enjoyable meal, but you probably don't want to wait an hour for a table or drive 50 miles to get there. For investors, buying what you know is a good start, but whether a restaurant is growing sales, losing market share, or occupying a favored niche are considerations investors also must take into account.

NPD Group just released its latest quarterly update on restaurant industry growth, showing us where diners prefer to spend their money and where we, as investors, might want to channel our dollars.

In an all-too-common refrain, market researchers say the U.S. restaurant industry remains stagnant, with consumer traffic flatlining this past quarter. Despite seeing tens of millions of guest visits over the past 12 months, NPD sees little hope for consumers turning out en masse again like they did before the recession. The report adds some bulk to the poor results we've seen from the likes of McDonald's (NYSE:MCD) and Darden Restaurants (NYSE:DRI)

Screen Shot

Source: NPD Group. 

Traffic in the mid-level dining market that encompasses midscale eateries and casual dining restaurants is still on the wane, with the segments losing 2% to 3% customers from the year-ago period. Those are both one percentage point worse than the numbers realized in the first quarter.

At the investor level we've seen continued sluggishness in Darden's Red Lobster and Olive Garden chains, where second-quarter same-restaurant sales were down 5.6% and 3.5%, respectively, but also at DineEquity's (NYSE:DIN) Applebee's chain, where comps fell 0.5% in the first quarter. Even Brinker International's (NYSE:EAT) Chili's saw barely positive comps of 0.7%. Both DineEquity and Brinker report second-quarter numbers within the next couple of weeks, and investors shouldn't expect anything better from either of them.

While McDonald's poor results would seem to belie the flat results of the quick-serve segment -- the first time in many quarters the niche hasn't produced positive traffic growth -- it's because the sector is again bolstered by the fast-casual component (including Chipotle (NYSE:CMG), which continued to record traffic gains. Fast food, on the other hand, McDonald's home, was down 2% year over year.

Not surprisingly, after Chipotle's recent better-than-expected earnings report, fast casual remains strong, though the Southwest grill continues to dominate the space. It's same-restaurant sales surged over 17% on the strength of increased traffic, which grew an equally robust 12.3% over the year-ago period. Even recently IPO'd Zoe's Kitchen (NYSE:ZOES), a new entrant in the fast-casual category, is trending above the average, with comps up almost 6% on a 4% increase in traffic.


Source: SXC.hu.

The other category seeing growth is upscale restaurants, which recorded 4% traffic gains in the quarter and underscored just how well the well-to-do have made out in this otherwise lame recovery. Ruth's Hospitality Group (NASDAQ:RUTH), which runs the upscale Ruth's Chris Steakhouse, enjoyed comps increases of 2.6% on 1.4% more traffic. While Darden Restaurants' Capital Grille fine dining chain also scored 4% higher comps in its fourth fiscal quarter, its Longhorn Steakhouse also remains classified as one of its growth concepts where overall sales rose 11% as comps climbed 2.4%, perhaps proving that beef remains popular no matter the price point.

In short, investors should continue to mine the fast-casual niche for their best investment ideas instead of looking more broadly at the industry as a whole. Although low valuations may be a tempting morsel for your portfolio, fighting the tide of consumer sentiment can be difficult, and with industry trends favoring continued growth in certain sectors ahead of others, it could just be easier pulling a seat up to the table where everyone else is dining.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Zoe's Kitchen. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers