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News

Restaurant Stocks Serve up a Tasty Dish

Aaron Levitt Mar 03, 2016


Guess what? Americans are finally acting like Americans again, at least on the consumer spending front. With the economy finally hitting the point at which many Americans feel okay about their prospects, we’ve once again started opening our wallets to frivolities.


While retail sales have started to see some upticks, the real place that we’re forking it over is on forks and knives. Consumers are spending their hard-earned coin on dining out, and they are doing it spades.

What’s more is that recent income, spending and earnings data suggests that the trend will continue for quite some time. For investors, that means ordering up a slice of restaurant stocks for their portfolio.


Take That Grocery Stores


One year ago, an interesting and overlooked data point was released that set up restaurants for long-term bullishness: consumer spending on bars and restaurants overtook grocery store spending for the first time since 1992 at just over $50 billion dollars per month. We’ve finally hit the point at which eating out has become the priority over cooking at home once again. The last time that happened it set off the last great boom in chain restaurants and fast-casual eateries.

And it looks like that trend won’t be reversing any time soon.

For starters, personal spending power is on the rise. According to a Sentier Research report, the median annual household income in America clocked in at $57,173. That’s an increase of $424 over November’s numbers and puts the average American above where they were before the recession. While that amount might not seem like that much, it’s actually a good thing for restaurant stocks. It’s not so much that people can buy large items like a new car or a house, but it is enough for consumers to find a few extra dollars per paycheck to spend eating out. Having an extra meal out per week is certainty doable on an extra $400.

Low gas prices are also helping this trend. With cost per gallon well below $2 for much of the country, consumers have basically doubled the wealth effect. They are now earning more and spending less on their “needs.”

This combo has translated into rising sales at restaurants. Country-styled restaurant Cracker Barrel Old Country Store’s (CBRL ) latest earnings report highlights the trend of rising sales. Even though weather clipped foot traffic a bit, those who dined did spend an average of 3.4% more on their meals. Comparable store restaurant sales also increased. Industry-wide, the average guest check increased by 2.4%.

That’s why industry insiders are projecting a great year for restaurants. The National Restaurant Association (NRA) is estimating that the combination of factors will help the sector see some pretty big numbers over the course of 2016. According to the group, consumers will spend a whopping $783 billion on eating out this year. That would be the seventh consecutive year of dining out sales growth.


Making a Restaurant Play


Given the secular trends pushing restaurants along, investors may want to order a dose of diner, drive-in and dive stocks for their portfolios. An easy way is through the new Restaurant ETF (BITE). BITE offers exposure to 45 different quick service, fast casual, casual dining and fine dining eateries. Top holdings for the ETF include Buffalo Wild Wings (BWLD) and previously mentioned Cracker Barrel. The only problem with BITE is that it’s expensive to own at 0.75% in fees. Not to mention that it doesn’t throw off much of a yield. For that, investors need to look at individual picks.

A prime one could be Starbucks (SBUX ). The company continues to feed America’s, and the world’s, caffeine addiction, one expensive cup of Joe at a time. Further, as reported in their latest earnings, SBUX has managed to increase sales by focusing on other parts of the day via promotions and different food items. That’s helped it see a 9% increase in sales. It’s also helped the firm continue sharing profits with investors. Starbucks yields 1.33%.

Deep-fried onions and big steaks are big businesses for Bloomin’ Brands (BLMN ). The owner of Outback Steakhouse, Carrabba’s and Bonefish Grill recently reported a bad quarter that could be used by investors to snag up its 1.57% dividend. Much of the drop in profits came from international operations and currency effects, and a slight decline at two of its chains also hurt. However, the firm has some of the best margins in the business and its Outback chain, the largest of the three, continues to grow. With its recent upsized buyback program and cheap P/E of 17, BLMN is a big buy.


The Bottom Line


With rising incomes, Americans are finally spending again, and they are doing so on food. Restaurant sales continue to rise, making them a big buy for investors. The previous picks, along with stocks like Brinker (EAT ) or Panera Bread (PNRA) make ideal selections to play the trend.

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