Overall, this third-quarter earnings season was mostly positive. But the holiday quarter is one of the biggest events of the year for restaurant stocks.
Restaurants can manipulate pricing, promotions and accounting to beef up their top- and bottom-line numbers. But foot traffic is the true measure of the health of a restaurant business. In a recent study comparing top fast-food restaurant stocks, Placer.ai’s Tali Rozenman rounded up the top-performing companies in terms of foot traffic heading into this holiday season.
Here are five fast-food restaurant stocks that account for the most holiday foot traffic.
Restaurant Stocks: Starbucks (SBUX)
Starbucks (NASDAQ:SBUX) accounted for 27.9% of recent fast-food foot traffic, more than any other restaurant stock. In the third quarter, Starbucks’ foot traffic was up roughly in line with the 1.3% growth of the entire group, suggesting the company didn’t gain or lose market share.
Starbucks was also second only to McDonald’s (NYSE:MCD) in customer loyalty, another important metric for investors. The average Starbucks customer visited 2.4 times during the quarter. Placer.ai found Starbucks was the group leader in length of stay at more than 50 minutes. In addition, Starbucks reported 5% same-store sales growth last quarter and guided for fiscal 2020 comparable-store sales growth of between 3% and 4%.
McDonald’s was a close second behind Starbucks in foot traffic with 22.9% market share. Unfortunately, foot traffic was down slightly in the third quarter, suggesting a modest market share loss. McDonald’s was the top-scoring company among restaurant stocks in customer loyalty. The average McDonald’s customer visited the restaurant 2.8 times last quarter. The average length of stay was around 40 minutes, roughly in-line with the group average.
MCD stock investors got some shocking news in November when CEO Steve Easterbrook stepped down amid accusations of an inappropriate relationship with a coworker. Easterbrook is credited with spearheading McDonald’s digital transformation. But McDonald’s will carry on with its long-term strategy with or without Easterbrook.
As long as McDonald’s keeps growing same-store sales by nearly 6%, MCD investors will be just fine.
Dunkin’ Brands (DNKN)
Dunkin’ Brands (NASDAQ:DNKN) is a distant fourth in foot traffic behind Starbucks, McDonald’s and privately owned Chick-fil-A. The donut giant has just 7.7% share of fast-food foot traffic. Like McDonald’s, Dunkin’ experienced a modest drop in foot traffic last quarter. Customers visited Dunkin’ stores just over two times on average and spent about 40 minutes there per visit.
Last quarter, Dunkin’ reported 1.7% U.S. same-store sales growth and 7.3% international same-store sales growth. Its Baskin-Robbins stores reported 3.6% U.S. growth and 3% international growth. Given foot traffic was down slightly on the quarter, this growth was generated mostly via increases in average ticket size, a potentially unsustainable trend.
Yum! Brands (YUM)
Yum! Brands (NYSE:YUM) owns three top fast-food chains: Taco Bell, Pizza Hut and KFC. Placer.ai focused on Taco Bell, which had 6.8% market share of recent fast food-foot traffic. Taco Bell had the most foot traffic growth of all five restaurant stocks mentioned at more than 1.2% last quarter. Unfortunately, Taco Bell came in on the low end on customer loyalty, with customers visiting less than two times per quarter on average and staying less than 40 minutes per visit.
Taco Bell was the biggest growth driver in the third quarter for YUM stock, generating 4% same-store sales growth. KFC had 3% growth on the quarter, and Pizza Hut was flat. Yum! also has a 3% stake in Grubhub (NYSE:GRUB), which is down more than 47% in 2019.
Wendy’s (NASDAQ: WEN) is the fifth highest-scoring market share leader with 6.4% of foot traffic. Unfortunately, Wendy’s foot traffic is trending in the wrong direction. Wendy’s was the biggest market share loser of all five restaurant stocks last quarter. It also had the lowest customer loyalty score in the group.
The return of its spicy chicken nuggets drove 4.4% North American same-store sales growth in the third quarter. But Wendy’s is planning to invest heavily in a re-launch of its breakfast menu that flopped back in fiscal 2010. If breakfast works out, it could be a major growth driver for WEN stock. If not, it could be another costly mistake for investors.
After taking a closer look at the foot traffic numbers, recent sales trends and stock valuations of the five stocks mentioned above, I’m not particularly inspired. Foot traffic growth of 1.3% is on the low side. Rising wages and investments in delivery and technology initiatives are weighing on margins. And earnings multiples appear to mostly be on the high end of historical ranges for the five restaurant stocks mentioned. Unless Chick-fil-A has an IPO in the near future, I would recommend avoiding the group all together.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.