After the coronavirus pandemic gutted the industry in 2020, the biggest restaurant stocks this year could reap gains not seen in a generation, analysts say.
Partial lockdowns have dragged on, limiting indoor dining and even outdoor dining. Smaller restaurants, with less money, have closed.
As a result, analysts say that chains like McDonald’s (MCD), Chipotle Mexican Grill (CMG) and even Applebee’s, with more financial resources to weather the crisis and spend on digital ordering, will benefit when customers emerge from quarantine newly vaccinated and eager to spend.
“This is probably the biggest market-share shift toward chains in decades,” said Mark Kalinowski, a restaurant industry analyst and CEO of Kalinowski Equity Research, in an interview.
Some of the biggest gainers of 2020, like delivery giants Domino’s Pizza (DPZ) and Wingstop (WING), will run up against tough comparisons and, potentially, more competition from reopened dining rooms.
But as other restaurants close permanently, billions of dollars of business will be up for grabs. A lot of it seems likely to go to the top restaurant stocks.
“Covid Didn’t Break Many Chains, Just Made Them Stronger,” read the headline of a recent research note from analysts at Wells Fargo.
‘Renaissance’ In Restaurant Stocks
As indoor dining went dark, bigger fast-food chains were able to put their investments in digital and delivery to work. But Wells Fargo also predicted a “renaissance” in casual dining, or the sit-down dining offered by restaurant stocks like Olive Garden parent Darden Restaurants (DRI) and BJ’s Restaurants (BJRI).
“We think this dynamic sets up particularly well for the casual dining space,” Wells Fargo analysts said in a research note this month.
They added that the segment was “likely to see outsized benefits from independent closures.” Things like slimmed-down menus and more digital marketing would also help.
Kalinowski, similarly, said that Applebee’s parent Dine Brands (DIN) was well-positioned into 2021. He said that Applebee’s had held up better than expected. And he said the stock was cheap compared to names like Olive Garden parent Darden or Texas Roadhouse (TXRH), which are both up year to date.
He also said McDonald’s, which has lagged the S&P 500 in 2020, would gain from a pickup in its international business and its abundance of U.S. locations.
Cowen analyst Andrew Charles, meanwhile, has called Chipotle a best stock idea for 2021. He cited the strength of its digital business, which increasingly includes its drive-thru Chipotlanes.
A Generational Loss Of Talent, Knowledge
The gains for those restaurant stocks would come as more independent eateries turn into padlocked, vacant storefronts. More than 110,000 eating or drinking places — or 17% — in the U.S. had closed permanently or long-term as of Dec. 1, according to the National Restaurant Association.
Most were “fixtures in the communities in which they operated,” the restaurant industry group said. On average, they were in business for 16 years. Only 48% of those former restaurant owners said they would stay in the industry.
“Our nation is losing a generation of industry talent, knowledge and entrepreneurial spirit,” the group said.
Even as vaccines trickle through to health workers, most restaurants expect further pain ahead. A survey by the group published last month found that 87% of independent, chain, and franchise restaurants reported an average 36% decline in sales. Eighty-three percent expected sales to be “even worse” in the three months ahead.
Kalinowski estimated that if around a fifth of U.S. casual dining restaurants, excluding the top 10, shut their doors, the closures would represent around $34.9 billion worth of business. If the biggest casual-dining chains grabbed between 10% to 20% of that, it would represent sales gains of between 11.9 to 23.8 percentage points.
The bigger restaurant stocks, however, haven’t been immune to the pandemic. Brinker International (EAT), which owns Chili’s and Maggiano’s, this month withdrew its financial outlook for its fiscal second quarter. The company cited “dining room closures and capacity limitations per state and local guidelines.”
Brinker said that same-store sales fell through late October and early December. However, it said Chili’s “continues to outpace the casual dining industry and grow market share.”
Domino’s management over the summer said the pandemic gave it a chance to add more stores, even as it lamented the shrinking of the retail and restaurant industry.
“I also think that we are going to have, in the near and medium terms, fairly unprecedented opportunity in terms of the availability and the affordability of real estate out there,” Domino’s CEO Ritch Allison said.
Chipotle CFO Jack Hartung said in an interview this month that his company’s stores tend to have a small footprint. That layout doesn’t always fit with the spaces occupied by independent restaurants.
He said the company had moved into open locations once held by chains, but not any closed independent restaurants.
“If we got a call from a broker, of course we’d take a look at it,” he said. “I hope that either the independents come back, or somebody else comes in, and the rents are going to be lower. And maybe another restaurateur, who had a passion for opening up a restaurant someday, will come in.”
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