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Daily Traders Edge

2 Restaurant Stocks In Undervalued Territory

September 16
10:29 2022

It’s been a challenging year thus far for the restaurant industry, with dollars typically allocated to entertainment and a Friday night out wrestling to steal priority from rising gas bills, elevated energy costs, and higher mortgage rates.

Some restaurants have resorted to discounting to drive traffic, while others have relied on menu innovation and limited-time offers vs. promotional activities to protect their already softening margins.

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Those brands that are the most out of touch have continued to raise prices at a double-digit pace to ensure they maintain margins, with Chipotle (CMG) being one such offender. While this is likely to protect margins in the interim and allow the company to meet earnings estimates, it could backfire over the medium-term, with loyal customers feeling taken advantage of after being hit with consistent menu price increases in a recessionary environment.

Although this has made it difficult to invest in the sector, a few names are doing a great job navigating the current environment, and following recent share price weakness, they’ve slipped into undervalued territory.

One is a new breakfast chain that’s bucking the negative traffic trends in the casual dining space and enjoying industry-leading retention due to a key competitive advantage. The other is a pizza chain that’s enjoying strong unit growth, and while it’s having a tough year, annual EPS is forecasted to hit new all-time highs in FY2023 and FY2024.

Let’s take a look below:

First Watch Restaurant Group (FWRG)

First Watch Restaurant Group (FWRG) is a brand with over 450 restaurants serving breakfast in the United States, with a unique model being open from just 7 AM to 2:30 PM.

This has allowed the company to evade the industry-wide staffing issues, with its team members able to maintain a work-life balance, which isn’t possible for most restaurant brands.

In addition to solid staffing metrics that led the industry average, the company released blowout results in Q2, reporting traffic growth of 8.1% vs. an industry that saw negative 4% traffic in the quarter.

This translated to 20% system-wide sales growth ($231.2MM) and 13.4% same-restaurant sales growth, which trounced analyst estimates. The only negative in the report was that commodity costs came in higher than expected, stealing the sales leverage and leading to a 400 basis point decline in restaurant operating profit.

That said, this is still a very respectable figure, and the contraction in margins was largely due to being so conservative with pricing since the pandemic began. With the benefit of an overdue 3.9% price increase in July, I expect much of this margin pressure to abate.

Continue Reading at INO.com

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