Digital sales and store reopenings help drive these Chipotle competitors.
Of the industries most adversely affected by the pandemic, food service is at the top of the list. Waiters and bartenders aren’t able to work from home, consumers are spending less on eating out and restaurants are struggling to find ways to entice customers into stopping by. You’d be forgiven for thinking that these factors would’ve devastated restaurant stocks this year, yet reopenings around the country coupled with renewed hopes that a vaccine is coming soon have spurred investors to look toward restaurant stocks for investment opportunities. One of those stocks is Chipotle Mexican Grill (ticker: CMG), which will soon open its first digital-only restaurant to accommodate online orders. CMG has seen shares rise about 50% year to date — but that means Chipotle stock is more expensive than ever. For investors who want a little more bang for their buck, here are seven top Chipotle competitors that belong in your portfolio.
Shake Shack (SHAK)
A national beef shortage, the widespread closure of its locations and an exodus from urban areas (where the most profitable Shacks are located) have battered Shake Shack throughout the year — yet the stock swung higher in August, and shares of the burger chain are now up more than 30% in 2020. That’s largely thanks to a slow but steady recovery in Shake Shack’s business: In the second quarter, company-operated Shack sales fell 39% year over year, compared to a mere 17% decline in the third quarter — still not great, but restaurants will take what they can get. Meanwhile, profitability improved as well, as Shack-level operating profit jumped to 14.8% compared with 2.2% in the second quarter. Shake Shack opened 33 new locations this year and plans to open another 35 to 40 Shacks in 2021. Improving financials, store expansion and a huge following of burger fanatics are a potent combination that investors shouldn’t ignore.
Bloomin Brands (BLMN)
On paper, there wasn’t much to celebrate about Bloomin Brands’ third-quarter earnings. The owner of Outback Steakhouse, Carrabba’s Italian Grill and other casual dining options saw sales drop 20.3% year over year, with a loss of 22 cents per share versus a profit of 11 cents per share in the same quarter last year. Yet there were bright spots in the quarter, including its strong off-premises business, and profitability continues to improve, with a restaurant margin of 11.4% down a mere 0.6% year over year. With 99% of dining rooms in company-operated restaurants open once again, management is confident that Bloomin is heading into the holiday season from a position of strength, and BLMN stock has more than tripled from its 52-week lows as shareholders gain confidence that the company will enjoy a comeback.
Restaurant Brands International (QSR)
Diversification is key for any successful business, and luckily for shareholders, Restaurant Brands International doesn’t keep all of its eggs in one basket — instead, it has three baskets: Burger King, Tim Hortons and Popeyes Louisiana Kitchen. In the third quarter, comparable sales at Burger King fell 7%, while comps at Tim Hortons declined 12.5%. Yet Popeyes helped mitigate losses with a 17.4% increase in comparable sales, keeping system-wide sales to a mere 5.4% decline. While other restaurateurs suffer due to closed dining rooms, Restaurant Brands benefits from a drive-through business that the company is heavily investing in, digitizing the experience to keep customers moving. With 96% of its locations fully reopened, Restaurant Brands is generating 94% of prior-year system-wide sales, and shareholders should be pleased that things are nearly back to normal for the company.
Darden Restaurants (DRI)
Darden Restaurants couldn’t have predicted the pandemic, but the company’s previous investments in takeout and to-go dining at its family of restaurants seems downright prophetic. The results speak for themselves: In the fiscal first quarter, Olive Garden saw a 123% increase in off-premises sales, while off-premises sales at Longhorn Steakhouse surged 240%. Unfortunately, that didn’t alleviate the pains of closed dining rooms, and Olive Garden sales declined 27.7% year over year, while Longhorn Steakhouse sales dropped 16.3%. Still, management at Darden has made smart moves to cut costs across the board, slashing marketing budgets and streamlining menus to trim the fat, which is why the company boasted earnings before interest, taxes, depreciation and amortization, or EBITDA, of $185 million last quarter. A strong takeout business coupled with strict cost cutting should work in DRI’s favor, and Darden is poised to bounce back nicely once the pandemic passes.
Texas Roadhouse (TXRH)
As the restaurant industry went into free fall this year, investors have had to take whatever wins they could get — which is why when third-quarter earnings from Texas Roadhouse revealed losses that were lower than expected, shareholders rejoiced. It’s telling of just how strange these times really are that the restaurant chain saw sales drop 3% and net income fall 20% — and investors still sent shares higher. That said, signs of a recovery ahead should keep shareholders happy: Comparable restaurant sales fell 13% year over year in July but declined just 0.5% by September, illustrating slow but steady improvement during the quarter. That improvement has continued, with Texas Roadhouse management reporting 0.8% comp sales growth in October, while to-go orders remain a highlight of the business. Shares of Texas Roadhouse are up more than 35% year to date, and the stock should keep climbing as the company’s momentum picks up.
Brinker International (EAT)
After shares of the parent company of Chili’s and Maggiano’s tanked 80% in the first three months of the year, Brinker International rocketed higher and is now up about 20% in 2020. The key to the company’s success is a mixture of strict cost cutting and sustained sales, which allowed Brinker to return to profitability in the fiscal first quarter after only a single quarter of losses. In addition, the company has created a new virtual brand called “It’s Just Wings” seemingly out of thin air — the entire concept lives online, and Brinker utilizes kitchens at already-established locations to create and sell It’s Just Wings menu items, driving small but steady growth for the business. Analysts believe that Brinker will be able to sustain its growth well into 2021, and one analyst at BMO Capital Markets believes the company will nearly double its post-pandemic earnings per share from where it stands today.
Restaurant brands that relied solely on dine-in customers have suffered during 2020 — but Wingstop, with nearly 1,500 wing-slinging locations, already got 80% of its business from off-premises dining and has barely registered the effects of the pandemic as a result. In fact, in the third quarter, Wingstop reported a 28.3% increase in revenue thanks to a 32.8% increase in system-wide sales and a healthy 62% increase in digital sales. But the growth doesn’t stop there — in its first-quarter report, Wingstop believed it would open around 95 net new locations this year, but now the company reports it will have 135 to 140 net new locations by the end of this year as the company continues to expand and franchisees flock to its successful business model. A company that has performed this well during a pandemic will likely see continued post-pandemic success, and investors may want to get in on the action before Wingstop soars any higher.
Seven top Chipotle competitors to watch:
— Shake Shack (SHAK)
— Bloomin Brands (BLMN)
— Restaurant Brands International (QSR)
— Darden Restaurants (DRI)
— Texas Roadhouse (TXRH)
— Brinker International (EAT)
— Wingstop (WING)
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