Restaurant stocks continue to be risky for most investors as declining sales and bankruptcies surround the industry. While many restaurant stocks are lousy investments due to their declines or increased competition, wise investors can spot the winners that can continue to produce long-term gains.
In the first quarter of 2017, restaurant same store sales declined 1.1%, which was the fifth consecutive quarter posting a loss. The fourth quarter saw declines of 2.6% for restaurants. Restaurants have turned in some really bad quarters and also see themselves with falling sales each month. The month of February 2016 was the last positive month for the overall restaurant industry.
Some of the restaurant sub-sectors have been okay as they adapt to changes. Some of the largest restaurant stocks have been okay thanks to growth in units and appealing to eating habits.
I reported recently on three restaurant stocks that were headed to zero. These three restaurant stocks were seeing major declines, major brand transformations and an alarming number of store closures. This time, I’m back with three restaurant stocks that have performed exceptionally well over the last five to 10 years and will continue to do so.
Restaurant Stocks to Buy: Domino’s Pizza (DPZ)
Dominos Pizza, Inc. (NYSE:DPZ) was one of the earliest restaurant companies to truly use technology to innovate its brand and operations. As a result, Dominos has become one of the biggest pizza chains in the world and one of the best performing restaurant stocks. Dominos looks primed to continue its winning ways thanks to the transformation put in place by CEO Patrick Doyle.
In 2010, Doyle took over as CEO of Dominos. A bold advertising campaign that made fun of their own pizzas and Doyle’s vision took the company to new heights. The company also rapidly expanded its international store base, while it was revamping its brand in the U.S.
Dominos has more than 14,000 stores worldwide. In the United States, the company has more than 5,000. Internationally, there are more than 8,600 Dominos locations. From the five-year period of 2011 to 2016, Dominos added more than 3,600 stores, an incredible growth rate for an established brand. Compare that to competitors Pizza Hut (+2,651) and Papa John’s Int’l, Inc. (NASDAQ:PZZA) (+834) and you can see that Dominos is taking the lead in international expansion.
What’s even more impressive is Domino’s strong same-store sales growth. In the U.S., Domino’s has turned in positive same store sales growth in 16 of the last 20 years. Internationally, Dominos has 23 consecutive years of positive same store sales growth.
Dominos has a number one or number two market share in its top 15 markets. In the U.S., Dominos has a 27% market share of the pizza delivery segment. The company’s growth plan calls to continue gaining market share and also rapidly gain in store counts.
The company believes it can support an additional 3,400 stores in developed markets and nearly 2,000 more in emerging markets. Plans call to grow unit count by 6% to 8% annually. Dominos believes it can increase its same store sales by 3% to 6% annually in the U.S. and by 3 to 6% in international markets annually as well.
Doyle told an audience recently, “We are as much a tech company as we are a pizza company.” For investors that appears to be good news. Dominos is beating other pizza competitors and looks like one of the best restaurant stocks to buy. Investors have been rewarded with gains of more than 1,000% over the last 10 years and nearly 500% the last five years. With the strong plan to continue international expansion, DPZ stock looks poised to deliver.
Restaurant Stocks to Buy: Wendy’s (WEN)
New unit expansion and an extensive plan to remodel existing stores has helped transform Wendy’s Co (NASDAQ:WEN). In 2016, Wendy’s hit its highest global total of restaurants open since 2005.
In 2016, Wendy’s completed the third phase of its system optimization, which included selling off stores to franchisees. The company also opened 149 new stores worldwide. Wendy’s is quickly transforming into a restaurant owner with the majority of its stores franchised. In 2012, Wendy’s owned around 22% of its stores. In 2016, Wendy’s owned only 5% of its stores.
Wendy’s has set an impressive lists of goals to complete by 2020. This gives investors several years to get in before the company sees further gains from their shares. Wendy’s want to hit global restaurant sales of $12 billion, global image activation of 70% (store remodels), adjusted EBITDA margins between 38% and 40%, and a restaurant count of around 7,500 locations.
Wendy’s is already getting close to several of these goals. The company ended 2016 with 6,537 stores worldwide. The company’s revenue was around $10 billion in 2016, putting it within reach of its 2020 goal.
Over the last five years, shares of WEN have gained 245%. A look at the 10-year chart shows a gain of less than 30%. Wendy’s suffered for several years in the early 2000s and is now in the middle of a brand turnaround. Investors are also seeing a huge increase in the company’s dividends and share buyback rates, which is why they should consider putting WEN on their list of stocks to buy.
Restaurant Stocks to Buy: Dave & Buster’s (PLAY)
Since its 2014 IPO, Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) has been a great restaurant stock for many portfolios. PLAY shares are up more than 250% in less than four years and are giving investors a new restaurant sub-sector to invest in.
Dave & Buster’s has only 99 stores in 34 states, but is quickly expanding its brand of eat and play combination restaurants. The company’s industry-leading figures are also making PLAY one of the best short- and long-term restaurant stocks to buy.
In 2016, Dave & Buster’s locations had average unit volumes of $12 million, putting it at the top of the restaurant sector. Even without the games portion of revenue, Dave & Buster’s food and beverage sales would put it fifth in the industry with $5.4 million per store.
The revenue mix has changed dramatically at Dave & Buster’s, which has helped already impressive margins. In 2006, food and beverage sales accounted for 56% of the company’s revenue. By the first quarter of 2017, food and beverage make up 44%, leading to a big increase in margins, which are among the best in the restaurant industry.
One of the things that makes the future exciting for a company like Dave & Buster’s is its ability to adapt. By recognizing trends and different city needs, the company has created different floor models to fit different sizes. This allows new locations to fit into mall, free-standing or big-box anchor locations. As large retailers close and malls look for new tenants, Dave & Buster’s may be able to get some prime real estate locations on sale from desperate tenants.
Dave & Buster’s has an exciting future. The company believes it can grow and increase the value of PLAY shares through building new stores, driving same-store sales and expanding the brand to international markets. The company has set a goal of 200 stores in North America. With an untapped international market and the company’s main market only 50% tapped, investors should be able to sleep well at night with PLAY shares in their portfolio.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.