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3 Chains That Are Defying the Restaurant Recession

By Nicholas Rossolillo - Feb 25, 2018 at 12:03PM

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One trend is pointing to a rebound, but it’s too soon to call. Here are the stocks to buy while you wait.

It's been a tough two-year stretch for the restaurant industry. Amid overexpansion, many chains have been seeing falling foot traffic and lower average sales per location, taking a bite out of profitability.

While signs have emerged that a corner may have been turned, it's too soon to know for sure. Here are the chains to bet on while you wait.

First, some background color

According to industry research group TDn2K, the average restaurant in America suffered from negative same-store sales for two years. That trend turned positive during the fourth quarter of 2017, though, indicating that things may be finally looking up.

A bar chart showing an average of 1.5% negative comparable sales growth for the restaurant industry since the start of 2016.

 Data source: TDn2K. Chart by author.

However, despite that increase, the numbers were largely due to increasing menu prices. Foot traffic at restaurants is still falling. In the fourth quarter, the average store recorded a 1.9% decline compared with the prior year, and 2018 started with another 3% decrease in January. Blame can be laid on industry overexpansion, especially in the fast-casual space that dwells somewhere between fast food and traditional service.

That doesn't mean everyone is losing the battle, though. Here's who is still winning.

Weathering the storm

Texas Roadhouse (TXRH -2.73%), Darden Restaurants (DRI -5.60%), and McDonald's (MCD -1.70%) have all been able to grow despite the headwinds working against them. What are they doing to win? A unique dining experience and a good deal on food.

TXRH Chart

Data by YCharts.

Casual dining has been one particular area of weakness within the restaurant universe. Fast-casual chains have expanded too much and are cannibalizing each other, but they're also the main target of blame from many traditional casual chains. Bucking the trend have been both Texas Roadhouse and Darden Restaurants, and they've pulled their successes off with unique experiences.

Texas Roadhouse has found its niche in suburban America, putting together a fun-loving Texas atmosphere and big food portions. The combination has helped the company maintain positive same-store sales throughout the "restaurant recession", posting a 4.5% increase at company-operated locations in 2017. A new sports bar chain called Bubba's 33 is also in the beginning stages of development, with as many as seven slated for opening in the year ahead.

As for Darden -- the owner of over 1,700 restaurant locations that include Olive Garden, Longhorn Steakhouse, Cheddar's Scratch Kitchen, Yard House, and others -- is also winning with its atmosphere and menu. While casual diners have been a particular area of weakness, upscale casual dining has been outperforming. Darden aims for that image, and it's been working. Same-restaurant sales in its current fiscal year are up 3.2%. As a bonus, shareholders are also treated to Darden's 2.6% dividend.

A table set with various dishes and people toasting over drinks.

Image source: Getty Images.

McDonald's, which was a top performer among restaurant stocks last year, is firing on all cylinders. Not only does the fast-food giant continue its expansion overseas, but it has also returned to growth in the United States. McDonald's had fallen out of favor for several years on its home turf, but menu changes centered on value and the introduction of all-day breakfast have rekindled the public's interest. Add in a refranchising plan, and the result has been double-digit profit growth and stock returns. The company also pays a dividend, currently yielding 2.5% a year.

Even though restaurants aren't out of the woods yet, the fact that these chains have been able to keep growing makes them best-in-class options. While others struggle, these are good companies for investors to hold on to regardless of industry woes.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$242.83 (-1.70%) $-4.20
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$115.10 (-5.60%) $-6.83
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
TXRH
$74.92 (-2.73%) $-2.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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