The U.S. restaurant industry has been showing irregularities in terms of comps growth. Per TDn2K’s The Restaurant Industry Snapshot, the second quarter of 2019 witnessed comps growth of 0.2%, down 70 basis points (bps) from the growth rate reported in the first quarter of 2019. Traffic declined 2.9% in the second quarter, down 90 bps from that recorded in the first quarter of 2019.
What is Hurting the Restaurant Industry?
A pressing problem for restaurants is the persistent traffic erosion since the last recession. The industry’s sales are supported by increased average check but not guest count. Moreover, restaurant industry players are possibly up against an imminent rise in food and wage costs, which are likely to eat into profits in the quarter to be reported. Also, the recent tariff strife with China and Mexico has been restraining capital investment, which again will affect most restaurant companies. Fluctuating consumer spending due to trade war qualms is also quite a bother.
Recent data shows that the mushrooming of restaurants in the United States is inducing fierce competition in the market. Rivalry from sectors like grocery stores, prepared food and convenience stores is also rife. Such aggressive competition compelled Starbucks Corporation SBUX to pull down shutters on a few U.S. stores.
Also, a conflict between consumers and restaurant operators over high delivery costs is pretty apparent. These escalated charges resulting from third-party sharing of delivery revenues shrink restaurant operators’ margins.
Here’s How Industry Players Are Strategizing
Many restaurant operators have survived the near-term hurdles, courtesy of a steady shift toward technology. Consumer preferences have changed over time and the demand for digital and delivery services has grown exponentially. Also, loyalty programs, kiosks, kitchen display system and table-side ordering are much in demand.
A few restaurant giants are fine examples of how technology has helped in a big way. For instance, McDonald's Corporation MCD and Domino's Pizza, Inc. DPZ thrive on innovation and large-scale digitization. Meanwhile, Domino’s recently announced a partnership with Nuro, a robotics company, to enhance delivery services. Also, Dunkin' Brands Group, Inc. DNKN expanded its delivery services with the Grubhub collaboration.
Q2 Retail Earnings Expectations
Notably, half of the Zacks broad sectors (8 out of 16) are expected to record earnings decline in the second quarter of 2019. Restaurants in the wider Retail Wholesale sector do not have a solid footing as well. The Earnings Preview suggests a 0.6% fall in the sector’s second-quarter earnings, whereas it witnessed 11.6% growth in the last reported quarter. Revenues in the quarter under review are expected to rise 7.3% (slightly higher than the first quarter’s reported 7.2%). Margins in the quarter to be reported are anticipated to decrease 0.4%. In the prior quarter, margins increased 0.2%.
How to Pick the Right Stocks?
Amid a wide number of restaurant stocks, it is by no means an easy task for investors to pick stocks that have the potential to deliver better-than-expected earnings.
While there is no foolproof method of picking outperformers, our proprietary methodology — the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — helps in identifying stocks that have high chances of delivering a positive surprise in their upcoming earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Here are some restaurant industry players set to report second-quarter 2019 earnings that might interest investors.
Chipotle Mexican Grill, Inc. CMG is slated to release quarterly numbers on Jul 23. The company currently sports a Zacks Rank #1 and has an Earnings ESP of +7.34%. The Zacks Consensus Estimate for its quarterly earnings is pegged at $3.71, suggesting a 29.3% increase from the year-ago reported figure. The company topped earnings estimates in each of the trailing four quarters, the average being 12%.
You can see the complete list of today’s Zacks #1 Rank stocks here .
Chipotle Mexican Grill, Inc. Price and EPS Surprise
Chipotle Mexican Grill, Inc. price-eps-surprise | Chipotle Mexican Grill, Inc. Quote
Starbucks has a Zacks Rank #2 and an Earnings ESP of +0.32%, suggesting that the company is likely to beat estimates this time around. The restaurant, which is anticipated to report quarterly numbers on Jul 25, surpassed estimates in each of the trailing four quarters, the average being 7.7%. The Zacks Consensus Estimate for the company’s earnings in the quarter to be reported is pegged at 73 cents, indicating a 17.7% increase from the year-ago reported figure.
Starbucks Corporation Price and EPS Surprise
Starbucks Corporation price-eps-surprise | Starbucks Corporation Quote
McDonald’s is expected to report quarterly results on Jul 26. The company currently carries a Zacks Rank #3 and has an Earnings ESP of +0.88%. It suggests that a beat is likely for the company in the to-be-reported quarter. McDonald’s surpassed estimates in three of the trailing four quarters, the average beat being 3.2%. For the quarter to be reported, earnings estimates for the company are pegged at $2.06, suggesting 3.5% growth from the year-ago quarter’s reported number.
McDonald's Corporation Price and EPS Surprise
McDonald's Corporation price-eps-surprise | McDonald's Corporation Quote
YUM! Brands, Inc. YUM, a fast-casual restaurant company, is scheduled to report results on Aug 1. With a Zacks Rank #2 and an Earnings ESP of +1.50%, the company is likely to beat estimates in the to-be-reported quarter. In fact, it beat the Zacks Consensus Estimate in three of the trailing four quarters. For the quarter to be reported, the consensus estimate for the company’s earnings is pegged at 87 cents, indicating a 6.1% increase from the year-ago quarter’s reported number.
Yum! Brands, Inc. Price and EPS Surprise
Yum! Brands, Inc. price-eps-surprise | Yum! Brands, Inc. Quote
BJ's Restaurants, Inc. BJRI currently has a Zacks Rank #3 and an Earnings ESP of +12.62%, suggesting that it is likely to beat estimates this time around. The restaurant surpassed estimates in three of the trailing four quarters, the average beat being 28.2%. The Zacks Consensus Estimate for the company’s earnings in the quarter to be reported is pegged at 74 cents, indicating a 6.3% decline from the year-ago quarter’s reported figure.
BJ's Restaurants, Inc. Price and EPS Surprise
BJ's Restaurants, Inc. price-eps-surprise | BJ's Restaurants, Inc. Quote
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Starbucks Corporation (SBUX) : Free Stock Analysis Report
McDonald's Corporation (MCD) : Free Stock Analysis Report
Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
BJ's Restaurants, Inc. (BJRI) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research