The restaurant industry looked like it turned in a relatively strong performance in November, with same-store sales rising over last year, but that was only because of the calendar shift in the Thanksgiving holiday. It arrived at the latest possible time in the month this year, so restaurants fared comparatively better than last year, but the process will unwind when December numbers are posted.
That means investors looking for the best restaurant stocks will have a small menu to choose from, as the industry continues to confront rising costs and declining guest traffic from changing consumer preferences. Picking top stocks that pay a satisfying dividend is the best way to play this space.
A rare mea culpa
Darden Restaurants (DRI 0.68%) made a rare miscue with its Olive Garden lasagna promotion in the fiscal second quarter. Ever since activist investors took over the restaurant operator five years ago, the Italian eatery has been the company's star performer. Comps rose in the latest period (the 21st consecutive quarter they were up), but guest traffic actually fell.
The Lasagna Mia promotion didn't go over well with diners and the chain quickly pulled it, swapping in a $5 take-home meal promotion instead. But the damage was done and comps decelerated for the quarter, though with management reaffirming guidance for the year, it suggests it will be a temporary setback.
Darden's other big chain, LongHorn Steakhouse, did much better by comparison, with strong sales, comps, and traffic growth in the period. It has notched 27 straight quarters of comps growth.
While Darden's stock is up about 8% year to date, it's down more than 15% from the highs it hit a few months ago. With shares trading at 18 times trailing earnings and 16 times next year's estimates, that gives investors a chance to buy into a restaurant stock that's doubled in value since 2014. With a dividend yielding 3.2%, the pullback is an opportunity for this restaurateur.
You'll flip over this stock
Dine Brands Global's (DIN) Applebee's chain is still struggling to find that right combination of value and profit, but its sister IHOP chain continues to march forward with a new take on the breakfast wars.
IHOP recently announced it was launching a fast-casual pancake house concept called Flip'd this coming spring in several major cities. There's a feeling the market could support as many as 1,000 Flip'd restaurants, and analysts believe the chain could increase Dine Brands' EBITDA. The IHOP brand already accounts for two-thirds of the restaurant operator's EBITDA, and opening new locations would spur that higher.
Wall Street also believes the market has fully discounted the value of the Applebee's chain, with Wedbush analyst Nick Setyan noting that IHOP is now worth more than Dine Brands' stock price. "The market now says Applebee's has no value," he wrote. But that also suggests that if Dine Brands can get Applebee's back on track, investors would get a plus-one benefit from the chain for free.
With analysts forecasting almost 15% annual earnings growth over the next three to five years, the 3.3% dividend yield gives investors a compelling opportunity to see if management can make this story work.
A reason to squawk
The chicken sandwich wars have ruffled a lot of feathers in the burger space, but Wendy's (WEN 1.53%) is looking forward to a new breakfast menu next year to drive sales. It anticipates breakfast growing to 10% of total revenue, though it may take some time to change customer perceptions.
As the new IHOP chain indicates, the breakfast daypart remains a key area to exploit. And while Wendy's had previously tried to make a foray into the space, this time it will back it with a $20 million advertising campaign. It also notes almost all of its franchisees are on board with the plan.
That should help Wendy's combat the decline in guest traffic that CEO Todd Penegor sees happening across the industry. It's incumbent on the chain to give customers a reason to visit and spend more, or what Penegor calls the "one more visit, one more dollar" strategy.
Wendy's has been a top-performing restaurant over the past few years and its shares are up 42% in 2019, putting its current yield around 2.2%. The market does price the burger chain at a premium, particularly in comparison with McDonald's and Restaurant Brands International's Burger King, but its prospects for long-term earnings growth are seen as better, too.