Investing in the restaurant sector is certainly fraught with risk right now. The COVID-19 pandemic has caused governments to issue stay-at-home orders and place restrictions on dining out. Already serving a reduced number of customers, cases are rising again, creating an uncertain future for the sector.
That makes it challenging to buy a restaurant company's shares. But patient investors willing to ride out the storm may find a compelling opportunity. So, which is a better choice: Starbucks (SBUX -1.02%) or Restaurant Brands International (QSR -0.75%)?
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Starbucks
Starbucks was one of the first companies affected by COVID-19 after it closed over 80% of its more than 4,000 stores in China by early February. The following month, it closed most of its 10,000 U.S. and Canadian company-operated locations to in-person customers, and the majority of its 8,000 licensed stores also shut down. These restrictions spread to other geographic areas.
Naturally, Starbucks' results were hurt, as it had to primarily rely on drive-thru traffic at certain locations. Its fiscal third-quarter same-store sales (comps) fell by 40%. This was for the period that ended on June 28.
However, with stores reopening and customers adapting by going through the drive-thru to order, and Starbucks making the process easier by giving them the ability to use its app to order in advance, fourth-quarter comps were only down 9%. While this isn't great, it is a vast improvement from the prior period. There was good momentum throughout the quarter in its key growth markets, too. China had positive comps in September. Meanwhile, its U.S. locations also improved throughout Q4, with a 4% decline during the final month.
Management feels so good about Starbucks' prospects that it is calling for an 18% to 23% comps increase in 2021.
While rising COVID-19 cases present a risk to the guidance, Starbucks' sales have quickly rebounded, demonstrating that it still draws customers, which bodes well for the company's long-term prospects. Showing its confidence, the board of directors raised November's quarterly dividend by 10% to $0.45. This provides a 2% dividend yield.
Restaurant Brands International
This franchisor and owner of quick-service chains Burger King, Popeyes, and Tim Hortons was able to keep most of its restaurants open in some capacity via drive-thru, delivery, and take out. Nonetheless, the coronavirus crisis hurt its results. In the third quarter, its Burger King comps fell by 7% while dropping by 12.5% at its Tim Hortons chain. Restaurant Brands is planning to close underperforming restaurants and alter the menus at these chains. However, its Popeyes business continues to stand out, with a 17.4% comps increase, and management is looking to continue capitalizing by opening new locations.
Offering a lower-price menu while investing in technology should allow its restaurants to do well in a down economy. But Restaurant Brands still faces challenges rolling out its digital initiatives and there is no guarantee that it will choose better locations after it shuts down some restaurants.
On the other hand, Starbucks' performance has improved. Even if it temporarily stalls due to government action to contain COVID-19, its popularity, global presence, and growth opportunities make this the better long-term investment.
