The
restaurant
industry is gradually getting back on track, courtesy of pent-up demand for dine-in experience and robust off-premise sales. However, high inflation, increased cost of employee wages and other operating costs such as rent continue to hurt the industry. Although traffic has been increasing, it is still below the pre-pandemic level.
Restaurant operators’ focus on digital innovation, sales-building initiatives and cost savings efforts has been acting as a catalyst. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant operators constantly partner with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats and the rollout of self-service kiosks and loyalty programs continue to drive growth.
In line with the industry’s growth, leading restaurant companies —
The Wendy’s Company
WEN
and
Jack in the Box Inc.
JACK
— are trying out different strategies to generate profits. With both the companies carrying a Zacks Rank #3 (Hold), let’s analyze and find out which is poised better with respect to different parameters.
Price Performance and Valuation
Shares of Wendy’s have declined 13.5% in the past year, while Jack in the Box stock has plunged 45%.
Based on the forward 12-month P/E ratio, which is a commonly-used multiple for valuing restaurant stocks, the industry is currently trading at 23.3X compared with the S&P 500’s 16.43X. Jack in the Box has an edge with a lower forward 12-month P/E ratio of 8.71 compared with Wendy’s figure of 21.42X.
Image Source: Zacks Investment Research
Estimated Earnings & Revenues
Arguably, earnings growth is of utmost importance in determining a stock’s potential as surging profit levels indicate strong prospects (and stock price gains).
For the current year, Wendy’s earnings per share are expected to remain flat year over year. Year-over-year sales growth for the current year is expected at 9.9%. Jack in the Box’s current-year earnings are likely to decline 17.8% year over year, while sales are likely to improve 26.6% year over year. Hence, this round goes to Wendy’s.
Fundamentals
Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. In first-quarter 2022, breakfast accounted for nearly 7% of sales. The company is benefiting from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. In 2021, the company’s breakfast business surged 25%. The company expects the breakfast business in the United States to accelerate in 2022 by roughly 10% to 20%. By the end of 2022, it anticipates average weekly U.S. breakfast sales to be $3,000-$3,500 per restaurant.
Wendy’s continues to impress investors with robust global same-restaurant sales growth. After posting global same-restaurant sales growth of 4.3% and 4.7% in third- and fourth-quarter 2020, respectively, the company reported global restaurants comps sales improvement of 13% and 17.4% in first- and second-quarter fiscal 2021. During the fiscal third and fourth quarter, comps at Global restaurants increased 3.3% and 7.3%, respectively, year over year. The uptrend continued in first-quarter 2022, with global comps rising 2.4% year over year. The improvement was driven by continued strength across its U.S. and international businesses. During the quarter under discussion, comps in the United States witnessed growth of 1.1% year over year. The upside was driven by growth in breakfast and digital businesses. Same-restaurant sales at international restaurants (excluding Venezuela and Argentina) rose 14.1% year over year. For 2022, the company now anticipates global system-wide sales growth to be 6-8%.
Jack in the Box is also increasingly focusing on delivery channels, which is a growing area for the industry. Given the high demand for this service, the company has undertaken third-party delivery channels to bolster transactions and sales. The company partnered with DoorDash, Postmates, Grubhub and Uber Eats.
On Mar 8, 2022, the company completed its previously announced acquisition of Del Taco Restaurants for approximately $585 million. The move is in sync with its strategy of expanding the customer base. Del Taco, which has nearly 600 restaurants, serves more than three million guests every week. Following the deal, the companies have more than 2,800 restaurants in 25 states with similar guest profiles, menu offerings and company cultures. It is worth mentioning that 99% of the Del Taco restaurants have a drive-thru, which helps the company in achieving robust off-premise sales. The acquisition will enable Jack in the Box to tap the robust Mexican QSR category, where Del Taco is a major brand with a track record of steady performance.
Our Take
The fundamentals of both companies are solid. However, earnings growth and share price performance provide Wendy’s a slight edge over Jack in the Box.
Key Picks
Some better-ranked stocks in the Zacks
Retail-Wholesale
sector are
Dollar Tree Inc.
DLTR
and
BBQ Holdings, Inc.
BBQ
.
Dollar Tree sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have surged 65.9% in the past year. You can see
the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.
BBQ Holdings carries a Zacks Rank #2. BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have declined 37.2% in the past year.
The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.
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