The restaurant industry is benefitting from easing inflation and the rise in consumer spending. It is poised for further expansion due to heightened consumer enthusiasm for dining experiences, evolving consumer preferences, and innovative dining concepts.
Considering these factors, it could be wise to buy fundamentally strong restaurant stocks Carrols Restaurant Group, Inc. (TAST), Domino's Pizza Group plc (DPUKY), and Luckin Coffee Inc. ADR (LKNCY).
Before diving deeper into their fundamentals, let’s discuss what’s shaping the restaurant industry’s prospects.
In November, the restaurant industry achieved its strongest same-store traffic performance in nearly two years, showing a year-to-year growth acceleration of 0.7 percentage points. Same-store sales growth was 1.9% in November, a 0.5 percentage-point sequential improvement. Moreover, consumer spending increased by $46.7 billion (0.2%) in November.
According to the NRA, restaurant sales have been steadily rising, reaching $94.7 billion in November, marking the ninth consecutive month of growth. Over the last nine months, eating and drinking place sales increased by 8.5%, outpacing the 1.7% gain in non-restaurant retail sectors during the same period, highlighting consumers' sustained prioritization of dining out and spending on experiences.
The restaurant industry is expected to see robust growth in the near term due to the rising popularity of dining out, takeout, and delivery. The surge in demand for online food delivery services since the pandemic underscores the importance of adapting to evolving consumer preferences for sustained success.
The global quick-service restaurant market is projected to reach $1.78 trillion by 2030, growing at a CAGR of 11.2%. The global food service market is expected to grow at a CAGR of 10.8% and reach $5.42 trillion by 2030.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Restaurants picks, beginning with the third choice.
Stock #3: Carrols Restaurant Group, Inc. (TAST)
TAST and its subsidiaries operate as a restaurant company in the United States. The company operates as a Burger King and Popeyes franchisee.
In terms of the trailing-12-month asset turnover ratio, TAST’s 1.14x is 14.4% higher than the 1x industry average.
TAST’s restaurant sales for the third quarter that ended October 1, 2023, increased 7.2% year-over-year to $475.76 million. The company’s adjusted net income stood at $9.99 million and $0.16 per share, compared to an adjusted net loss of $7.29 million and $0.14 per share in the year-ago quarter. Also, its adjusted EBITDA rose 136.9% over the prior-year quarter to $41.87 million.
For the quarter ended December 31, 2023, TAST’s revenue is expected to increase 4.6% year-over-year to $465.52 million. Its EPS for the fiscal 2024 is expected to increase 2.6% year-over-year to $0.49. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past nine months, the stock has gained 211.7% to close the last trading session at $7.98.
TAST’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and Sentiment and a B for Value. It is ranked #4 out of 44 stocks in the Restaurants industry. To see TAST’s Momentum, Stability, and Quality ratings, click here.
Stock #2: Domino's Pizza Group plc (DPUKY)
Based in Milton Keynes, United Kingdom, DPUKY owns, operates, and franchises Domino's Pizza stores. It operates stores in the United Kingdom and the Republic of Ireland and also leases its stores internationally.
In terms of the trailing-12-month net income margin, DPUKY’s 18.28% is 304.3% higher than the 4.52% industry average. Likewise, its 16.34% trailing-12-month EBIT margin is 115.6% higher than the 7.58% industry average. Additionally, its 11.13% trailing-12-month levered FCF margin is 108.3% higher than the 5.34% industry average.
DPUKY’s system sales for the half year that ended June 25, 2023, increased 7.9% year-over-year to £766.4 million ($971.98 million). Its group revenue rose 19.6% over the prior-year quarter to £332.9 million ($422.20 million). The company’s underlying EBITDA for the period increased 8.2% year-over-year to £68.7 million ($87.13 million). Also, the company's statutory EPS came in at 19.3p, representing an increase of 3.1% year-over-year.
Analysts expect DPUKY’s revenue for the fiscal year ended December 31, 2023, to increase 16.4% year-over-year to $832.80 million. Over the past year, the stock has gained 37.7% to close the last trading session at $9.65.
DPUKY’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #3 in the same industry. It has an A grade for Stability. To see DPUKY’s Growth, Value, Momentum, Sentiment, and Quality ratings, click here.
Stock #1: Luckin Coffee Inc. ADR (LKNCY)
Headquartered in Xiamen, the People's Republic of China, LKNCY offers retail services of freshly brewed drinks and pre-made food and beverage items in the People's Republic of China. It provides hot and iced freshly brewed coffee and specialty coffee based on market and seasonal trends.
In terms of the trailing-12-month Return on Total Capital, LKNCY’s 18.55% is 206.4% higher than the 6.05% industry average. Likewise, its 15.18% trailing-12-month Return on Total Assets is 279.8% higher than the 4% industry average. Additionally, its 1.58x trailing-12-month asset turnover ratio is 58.2% higher than the 1x industry average.
For the third quarter that ended September 30, 2023, LKNCY's total net revenues increased 84.9% from the previous year's quarter to RMB7.20 billion ($1.01 billion). Its non-GAAP operating income rose 47.8% year-over-year to RMB1.03 billion ($144.61 million).
In addition, the company’s net income and net income per ADS came in at RMB1.14 billion ($160.05 million) and RMB3.60, up 122.2% and 125% year-over-year, respectively.
Street expects LKNCY’s EPS and revenue for fiscal 2024 to increase 32.2% and 43.7% year-over-year to $2.29 and $5.02 billion, respectively. Over the past year, the stock has gained 11.9% to close the last trading session at $26.15.
LKNCY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #2 in the Restaurants industry. It has a B grade for Growth, Sentiment, and Quality. Click here to see LKNCY’s Value, Momentum, and Stability ratings.
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LKNCY shares were trading at $26.10 per share on Friday morning, down $0.05 (-0.19%). Year-to-date, LKNCY has declined -4.33%, versus a -1.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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