The Zacks Retail – Restaurants industry has been benefiting from the gradual improvement in demand, robust off-premise sales, sales-building efforts and digital initiatives. However, intense competition, high wages and food cost inflation have taken a toll on the industry. These have been affecting margins of late. Rising prices are also hurting the industry’s traffic. However, Chipotle Mexican Grill, Inc. CMG, Wingstop Inc. WING and Cracker Barrel Old Country Store, Inc. CBRL are well-poised to counter the scenario.

Industry Description
The Zacks Retail – Restaurants industry comprises several owners and operators of casual, upscale casual, fine dining, full-service and fast-casual restaurants. Some of the industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies develop, operate, and franchise quick-service restaurants worldwide. A few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage, and license restaurants and lounges worldwide. Some of the companies also operate technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
4 Trends Shaping the Future of the Restaurant Industry
Improving Sales: The industry sales are gradually improving. The industry body, the National Restaurant Association (NRA), forecasts restaurant and bars industry sales to reach $898 billion in 2022. The improvement can be attributed to the enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.

Digitalization to Drive Growth: Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators are constantly partnering with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats and the rollout of self-service kiosks and loyalty programs continue to drive growth. Restaurant operators are focusing on driverless delivery systems to augment sales amid the coronavirus crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as companies do away with delivery personnel.

Off-Premise Sales Acting as a Key Catalyst: The industry has been gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits, and off-site options such as kiosks and food trucks, owing to the coronavirus pandemic. Per the National Restaurant Association, more than 60% of restaurant foods are consumed off-premise. By 2025, off-premise is likely to account for approximately 80% of the industry’s growth. Most restaurant operators have initiated testing of ghost or virtual kitchens. The idea of providing off-premise offerings along with a connected curbside service has been garnering positive customer feedback.

Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time now. The pandemic has aggravated the scenario. A rapid increase in menu prices and the coronavirus pandemic are the primary reasons behind traffic erosion. Restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation remain concerns. The industry is persistently bearing increased expenses, which have been affecting margins of late. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are weighing on the company’s margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye and tri-tip, and salmon, is hurting the industry.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Gaming industry is grouped within the broader Retail-Wholesale sector.  It carries a Zacks Industry Rank #92, which places it in the top 37% of more than 252 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since Aug 31, 2022, the industry’s earnings estimate for the current year has gone up 0.8%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has outperformed the Zacks S&P 500 composite and its own sector over the past year.

Over this period, the industry has declined 9.9%, compared with the Zacks S&P 500 composite’s decrease of 20.4%. Meanwhile, the sector has declined 22.39%.

Restaurant Industry’s Valuation
On the basis of the forward 12-month P/E, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 24.65X compared with the S&P 500’s 16.81X. It is marginally above the sector’s forward 12-month P/E ratio of 20.44X.

Over the last five years, the industry has traded as high as 34.64X and as low as 20.53X, with the median being at 24.5X.

3 Key Restaurant Picks
Chipotle: Chipotle Mexican Grill, together with its subsidiaries, operates quick-casual and fresh Mexican food restaurant chains. The company has been benefiting from its digital efforts, Chipotlane add-ons and marketing initiatives. These, along with strength in digital sales, rise in menu prices, new restaurant openings and higher restaurant-level operating margins have been aiding the company.

Shares of this Zacks Rank #2 (Buy) company have declined 23.4%. Chipotle’s earnings for fiscal 2022 are anticipated to improve 30.8%. In the past 30 days, the consensus mark for 2022 earnings has been revised upward by 3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Wingstop: The company, along with its subsidiaries, franchises and operates restaurants under the Wingstop brand name. The company is benefiting from robust system-wide sales, royalty revenues and franchise fees. New restaurant openings are also aiding the company.  

WING carries a Zacks Rank #2. Wingstop’s earnings for fiscal 2022 are anticipated to improve 22.2%. In the past 30 days, the consensus mark for 2022 earnings has been revised upward by 5.1%. In the past three months, shares of the company have gained 7.5%.
Cracker Barrel: Cracker Barrel is engaged in the ownership and operation of full-service restaurants with a restaurant and a retail store in the same unit. Cracker Barrel’s continuous expansion strategies are also helping the company to drive growth. Also, increased focus on cost-saving efforts bodes well. In fiscal 2023, the company anticipates contributions worth $20-$25 million from cost savings and business model improvements.

Cracker Barrel carries a Zacks Rank #2. The Zacks Consensus Estimate of the company’s current financial year sales and EPS suggests growth of 6.4% and 7.1%, respectively, from the prior-year comparable figure. Shares of the company have declined 23.4% in the past year.
Price and Consensus: CBRL

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