While fast casual has struggled along with the rest of the restaurant industry, the category still has tremendous room for growth.
In some cases it's going to take a while to sort out the winners from the losers. For example, it seems as if there are dozens of players trying to become the Chipotle Mexican Grill (NYSE:CMG) of pizza, with no clear leader emerging. The same could be argued for companies trying salad concepts, as well as ones attempting a variation on healthy or "clean" foods.
Still, heading into 2017, there are three stocks that seem poised to do well. One has been a steady leader. Another has carved out its own niche while blazing trails in its own right. The third, well, for that chain, there may be no place to go but up.
Starbucks will continue to lead
Starbucks (NASDAQ:SBUX) has a major change coming in 2017, as longtime CEO Howard Schultz will step down from the top position and hand the reins to COO Kevin Johnson in April. While a transition like that could harm many stocks, in this case it should be a smooth transition, as Johnson has already been deeply involved in day-to-day operations and Schutlz is staying on as chairman of the board.
In fact, this new setup puts both men -- and the company -- in a stronger position to succeed. Johnson, who has a string technology background, having served in multiple leadership position for Microsoft, will lead a company that has increasingly become a technology leader. The incoming CEO led industry-leading efforts such as mobile order and pay, as well as the company's upcoming artificial-intelligence My Barista project, which launches in 2017.
Schultz will also be taking on a role he has some experience with. Instead of stepping away from the company, the outgoing CEO will lead a small group in charge of growing the company's Roasteries and rolling out its Reserve retail format. In that position, Schutlz will be trying to once gain change how Americans (as least some of us) drink coffee. That will involve educating people so they appreciate higher-priced beverages sold at these locations.
Panera has set itself up well
Partly because Chipotle has stumbled, Panera Bread (NASDAQ:PNRA) has been able stake out the "we care about what you eat" territory. It has done that by first rolling out its No No List of artificial preservatives, sweeteners, and flavors along with colors from artificial sources that it will not use in its stores. In addition it recently committed to using "clean" bacon, and the chain has taken a leadership position when it comes for advocating for chickens to be treated better.
In addition, while those are commendable things, Panera has also spent the past year upgrading its stores to the Panera 2.0 model. Essentially, that means enabling its locations to use the technology Starbucks pioneered while in some cases adding delivery. Revamped Panera stores offer ordering and payment via app, as well as digital payment at checkout.
Those efforts are clearly starting to pay off. In Q3, the most-recent on the chain has reported on, company-owned comparable-stores sales were up 3.4% year-over-year and 7.2% on a two-year basis. In addition Panera has a digital utilization rate of 22% in company-owned locations, and it now offers delivery in 13% of its stores.
Because of those things and other factors, the company has raised its 2016 non-GAAP earnings per share target range to $6.67 to $6.72, up 7% to 8%. That positive momentum should continue into 2017, as more stores are upgraded to the 2.0 model.
Chiptole has no place to go but up
Chipotle has been suffering since its food-safety issues first broke in September 2015. Since then the company has taken aggressive steps to win people back and show that it has put its E. coli issues in the past, but so far they haven't been working.
In Q3, the company roughly followed the pattern it has followed all year. The chain saw revenue decrease 14.8% and watched comparable restaurant sales drop by 21.9%. That leaves Chipotle with a year-to-date 18.1% drop in revenue and a 24.9% decrease in same-stores sales. Those numbers are awful, but they will create some easy comps for next year -- and at some point you have to believe (at least I do) that Chipotle will remind consumers that they used to really like its products.
The chain has been well punished for its food-safety issues, but it has also made every reasonable effort to eliminate future problems. Customers will come back because at its core, Chipotle offers good food at a decent price. Eventually that will win the day, and while it might be a while before the company approaches its 2015 numbers, it should handily beat its 2016 results in 2017.