There is no escape from the inflationary environment right now. Inflation hit a 40-year high due to a continuous surge in the prices of essential items like gasoline, food, and rent. March consumer price index gained 8.5% year-over-year, posting the fastest pace since late 1981. Even after excluding volatile food and energy prices, core prices rose 6.5% in March.
Inflation undoubtedly impacts the restaurant industry because of the basic food costs that restaurants incur. From February 2021 to February 2022, food prices surged 7.9%, which was its largest yearly jump since 1981. Amid the current inflationary environment and labor shortages, the restaurant industry’s current position and strategies might be interesting to look into.
I will analyze prominent restaurant stocks Dine Brands Global, Inc. (DIN), Bloomin' Brands, Inc. (BLMN), and Chuy's Holdings, Inc. (CHUY) in this respect.
Inflation: A Disaster for The Restaurant Industry
The COVID-19 pandemic led to the closures of restaurants to combat the spread of the virus. However, after restrictions eased, the industry made a strong comeback. Food-away-from-home expenditure reached pre-pandemic levels by March 2021 and a record level in July 2021. Moreover, food-away-from-home spending stayed strong in December, 4.4% above December 2019.
As food and labor costs have risen to record highs, restaurants are witnessing pressure on already thin margins. However, frequent price hikes have turned them toward menu engineering to stay profitable. Big restaurant chains are in a better position to increase prices strategically. Moreover, hedging with futures contracts allows them to buy ingredients before their prices rise further.
The USDA expects menu prices for food-away-from-home to increase 5.5%-6.5% this year. Restaurants combat this by streamlining their menus and highlighting dishes that help them with a better margin.
Performance of Industry Leaders
Restaurant industry giant McDonald’s Corporation (MCD) has a market capitalization of $182.77 billion. Its stock has gained 2.3% over the past month, while the S&P 500 tumbled 7.9% over the same period. Another notable name in the industry is Chipotle Mexican Grill, Inc. (CMG), with a $41.29 billion market capitalization. CMG’s stock has gained 9.7% over the past three months compared to the broader market’s 3.3% decline.
While discussing the company’s current economic situation, CMG's CFO, Jack Hartung, said that despite inflation, the company still possesses pricing power. He said, "I would say over the years we’ve been behind a little bit in raising prices, and now we’ve done that intentionally.”
Best Restaurant Stocks to Buy Now
With the U.S. foodservice industry expected to reach $898 billion in sales this year and return to the pre-COVID trajectory, we believe the following restaurant stocks to be solid bets.
Dine Brands Global, Inc. (DIN)
DIN operates, owns, and franchises full-service restaurants. The company operates through the five broad segments of Applebee's Franchise Operations; International House of Pancakes (IHOP) Franchise Operations; Rental Operations; Financing Operations; and Company-Operated Restaurant Operations.
For the fiscal fourth quarter ended December 31, DIN’s total revenues increased 17.1% year-over-year to $229.63 million. Adjusted net income available to common stockholders rose 251.2% from the prior-year quarter to $22.50 million. Adjusted net income available to common stockholders per share improved 238.5% from the same period the prior year to $1.32.
The consensus EPS estimate of $7.13 for the fiscal year 2023 indicates a 16.1% year-over-year increase. Likewise, the consensus revenue estimate for the same year of $979.33 million reflects an improvement of 4% from the prior year. Moreover, DIN has an impressive surprise earnings history as it has topped consensus EPS estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 11.9% to close yesterday’s trading session at $72.43.
DIN’s strong fundamentals are reflected in its POWR Ratings. The stock has a Value grade of B, in sync with its forward non-GAAP P/E multiple of 11.82, 4.2% lower than the industry multiple of 12.34. The stock also has a B grade for Quality, consistent with its trailing 12-month EBITDA and levered FCF margin of 26.57% and 20.59%, which are 110.34% and 326.21% higher than their respective industry averages of 12.63% and 4.83%. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
In the 45-stock Restaurants industry, it is ranked #13. The industry is rated B.
Click here to see the additional POWR Ratings for DIN (Growth, Momentum, Stability, and Sentiment).
Bloomin' Brands, Inc. (BLMN)
BLMN owns casual, upscale, and fine dining restaurants, operating through the two broad U.S. and international segments. The restaurant portfolio has four primary concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Fleming’s Prime Steakhouse & Wine Bar.
BLMN’s total revenues increased 28.9% year-over-year to $1.05 billion in the fiscal fourth quarter ended December 26. Adjusted net income and adjusted EPS came in at $56.88 million and $0.60, up 2,845.4% and 2,900% from the prior-year period.
Street EPS estimate for the quarter ended March 2022 of $0.74 indicates a 2.8% year-over-year increase. Likewise, Street revenue estimate for the same quarter of $1.13 billion reflects a rise of 14.3% from the prior-year quarter. In addition, BLMN has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 9.7% over the past three months and 3.2% over the past month to close yesterday’s trading session at $21.36.
It’s no surprise that BLMN has an overall B rating, which translates to Buy in our POWR Rating system.
BLMN has an A grade for Value. Its forward Price/Sales ratio justifies this at 0.45, 51.9% lower than the industry average of 0.93x. Its forward Price/Cash Flow multiple of 4.81 is 53.2% lower than the industry average of 10.27. The stock also has a Quality grade of B, in sync with its trailing 12-month ROE of 195.42%, 1,019.57% higher than the industry average of 17.45%. It is ranked #9 in the Restaurants industry.
To see the additional POWR Ratings for Growth, Momentum, Stability, and Sentiment for BLMN, click here.
Chuy's Holdings, Inc. (CHUY)
CHUY is the owner and operator of full-service restaurants under Chuy’s name in the United States. The company offers a menu and Mexican and Tex-Mex-inspired foods and homemade sauces and enables customers to customize their orders.
For the fiscal fourth quarter ended December 26, CHUY’s revenue increased 25.4% year-over-year to $98.67 million. Adjusted net income improved 104.2% from the same period the prior year to $7.89 million, while adjusted net income per common share stood at $0.40, up 110.5% from the prior-year period.
Analysts expect CHUY’s EPS to increase 18.3% year-over-year to $1.68 for fiscal 2023. Likewise, Street expects revenue for the same year to increase 12.4% from the prior year to $483.54 million. CHUY has beaten consensus EPS estimates in each of the trailing four quarters.
CHUY’s shares have gained 2.2% over the past three months to close yesterday’s trading session at $25.13.
This promising prospect is reflected in CHUY’s POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
CHUY has a Value grade of B, in sync with its forward Price/Book multiple of 1.69, 29.6% lower than the industry average of 2.39. The stock also has a B grade for Quality, which is justified by its trailing 12-month EBITDA margin and levered FCF margin of 15.06% and 10.71%, which are 18.75% and 122.73% higher than their respective industry averages of 12.68% and 4.81%. It is ranked #7 in the same industry.
In addition to the POWR Rating grades we’ve stated above, one can see the additional CHUY ratings for Growth, Momentum, Stability, and Sentiment here.
DIN shares were trading at $74.56 per share on Thursday afternoon, up $2.13 (+2.94%). Year-to-date, DIN has declined -1.06%, versus a -9.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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