Bet High On Earnings Beat By These 3 Restaurant Stocks

The fourth-quarter earnings season has witnessed releases from about half of the retail companies in the S&P 500 cohort. The results so far reflect gains from increasing and shifting consumer demand among a range of formats and channels.

Q4 Retail Earnings Expectations

Half of the Zacks broad sectors (8 out of 16) are expected to report double-digit growth in the fourth quarter of 2018. Restaurants in the wider Retail-Wholesale sector seem to have a solid footing as well. Per the latest Earnings Preview (as of Feb 8), 21% rise is expected to be witnessed in the sector’s fourth-quarter earnings compared with 26.1% growth in the last reported quarter. Revenues in the quarter under review are expected to rise 5.6% (lower than the third quarter’s 6.4%). Margins in the quarter are anticipated to increase 0.6% compared with the prior quarter’s increase of 0.8%.

How is the Restaurant Industry Positioned?

The U.S. restaurant industry made an impressive comeback, with 0.7% comps growth in 2018. The top-line momentum is anticipated to continue in 2019. Per TDn2K’s The Restaurant Industry Snapshot, the overall fourth quarter was satisfactory, with comps growth of 1.4%, the highest since 2015. Guest check-in in the quarter grew 3.1% year over year, offsetting the negative impact of traffic erosion. Same-store traffic declined 1.6% in the fourth quarter.

Persistent erosion in traffic despite comps growth indicates that it is only guest checks and not guest counts that contributed to restaurant sales. This also means that consumers are not frequently visiting restaurants and are getting increasingly reliant on delivery services instead.

Moreover, restaurant giants are plagued by a high cost of operations. Further, sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to margins. Apart from this, competition, high wage and food cost inflation remain concerns.

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