• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Discretionary

3 Ingredients for Hot Restaurant Stocks

The restaurant industry is experiencing a rebirth.
By BRIAN SOZZI Mar 03, 2015 | 09:00 AM EST
Stocks quotes in this article: DIN, EAT, DPZ, PZZA, MCD, CMG, YUM, DNKN, SBUX, SONC

Happy 10th National Pancake Day!

Although a fun day for the likes of pancake flippers IHOP, Denny's and countless roadside diners, there is more going on in the restaurant industry than free short-stack giveaways and lower gas prices spurring visits by hungry Americans. And the market knows there is more at play in the sector, sending shares of sit-down restaurants such as DineEquity (DIN) and Brinker International (EAT) surging in the past several months, along with further gains for pizza makers Domino's (DPZ) and Papa John's (PZZA) to better burger and hotdog purveyor Sonic (SONC), whose CEO I interviewed last November.

So what gives? The restaurant industry, excluding struggling McDonald's (MCD), is being reborn right in front of our very own eyes. The fundamental transformations I am seeing -- from how data are used to how menus are revamped -- are impressive. These structural changes will yield outsized earnings growth during pockets of improving U.S. economic conditions, as we are experiencing now.

I'm interviewing DineEquity CEO Julia Stewart later today (to be published Wednesday), and here are the three burning issues that I see facing the industry.

More effective marketing: Before 2013, restaurants would inundate TV with a single promotion -- for a specific new entrée at a specific point in the day (referred to by the industry as a "daypart"). Now, however, restaurants are spreading marketing investments out to different dayparts, which is creating a consistent stream of traffic. The impact of this could be seen at DineEquity's IHOP. In the fourth quarter, IHOP had positive same-restaurant sales in all dayparts, which is impressive considering its menu offerings for lunch and dinner are not as extensive as those of its breakfast offerings. That definitely highlighted how a revamped approach to marketing for restaurants, one also being seen at Brinker-owned Chili's, could yield tasty benefits.

A "golden age" of ingredients and flavor combinations: DineEquity just rolled out something called a "Pub Diet" at its Applebee's chain, highlighting shareable plates of interesting foods. An example: a churro with a chocolate dipping sauce. Another dish boasts a favorite of Millennials, quinoa. Items such as these not only excite the customer, but they are often unique to a restaurant. Further, smaller plates generally mean fatter profits because a group will order more plates for the table so that everyone can get full and within approachable price points. We are also entering a golden age for the bars at Chili's and Applebee's. The drinks are better prepared, and there is an emphasis on premium spirit combinations. If you have watched Spike TV's "Bar Rescue," you will be aware that the trend toward cocktail mixology could be quite lucrative to bar owners. Mixology is now moving outside of hipster mom and pop joints in urban areas and into publicly traded restaurants that call suburbia home. To get some context: alcohol sales are about 14.5% of DineEquity total sales.

New, bold menu items that just make sense: The restaurant industry has long been synonymous with poorly thought-out new menu additions. Remember TGI Friday's Tex-Mex Tower? Or how about Burger King's enormous fried fish sandwich, the Whaler? Those days of silly new items are in the rearview mirror, in large part because big data and good old-fashioned research are helping to understand consumer preferences at a minute level. Yum! Brands' (YUM) Pizza Hut now sells skinny pizza at 250 calories per slice. I received an email from a contact that Dunkin' Brands (DNKN) just introduced a limited-time spicy omelet breakfast sandwich. This seems like a win to me, targeting preferences by many for indulgent breakfast sandwiches with a little kick (see Yum!'s Taco Bell Crunchwrap AM Supreme). Starbucks (SBUX) last week quietly released a host of new pre-made drinks to be sold in grocery stores, some featuring a favorite of workout lunatics like me: protein. The product risks are being minimized and, by extension, so are the risks of holding restaurant stocks.

Finally, old-school restaurants finally have the capital to reinvest in newer, flashier restaurant remodels. In doing so, they are positioning themselves to compete with upstart fast-casual chains that include Blaze Pizza, PizzaRev (part owned by Chipotle (CMG)), or NYC's Dig Inn that have inviting interior ambience and external signage that grabs in the eye.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline on this article.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Sozzi had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

More from Consumer Discretionary

Apple's Price Charts Are Getting Badly Bruised

Bruce Kamich
May 12, 2022 1:10 PM EDT

Here's what the odds favor.

RH and Its Charts Don't Have That Homey Feeling Right Now

Bruce Kamich
May 12, 2022 8:32 AM EDT

The technical signals of the home furnishings provider indicate more downside to come in its stock.

Crocs Is Still Slipping to the Downside on Its Charts

Bruce Kamich
May 11, 2022 7:44 AM EDT

The footwear maker isn't seeing a lot of technical support at this point.

Screening for Deep-Value Stocks Turns Up a Pair of Possibilities

Jonathan Heller
May 9, 2022 10:00 AM EDT

A producer of small appliances and a maker of fishing, camping and kayaking gear pop up as possible value plays.

Bearish Bets: 3 Slumping Stocks You Should Consider Shorting This Week

Bob Lang
May 8, 2022 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:24 PM EDT PAUL PRICE

    An interesting chart

    I'm betting heavily that stocks will be way up aga...
  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login