The COVID-19 pandemic has altered the definition of what is normal across the world, with most industries having to adjust their operations to survive. The chain restaurant industry has been no different. With eateries across the globe forced to close their sit-down service for months on end, many struggled to keep their heads above water as foot traffic and online reservations dropped to near zero. In fact, the chain restaurant sector in the U.S. was valued at approximately $128.99 billion in 2020, a notable downgrade from the previous year’s total of $158.86.
Yet, the health crisis has also brought about new opportunities as more and more consumers continued to order their favourite meals online and opted for drive-through services. Establishments that capitalised on these have been thriving during the most adverse of times. Those who haven‘t, have been struggling to keep their kitchens open and their customers happy.
From McDonald’s and Domino’s Pizza to Chipotle and others, here are the top chain restaurants that have been booming.
Chipotle Mexican Grill (CMG)
Originally serving as a low-risk investment to fund founder Steve Ells’ own fine-dining restaurant, Chipotle has transformed into a burrito empire, with restaurants in the U.S, UK, Canada, Germany and France. Becoming the world’s second most valuable fast-food chain, in October analysts at Goldman Sachs maintained a buy rating for the chain restaurant, as well as a $2,105 price target just ahead of its third-quarter-earnings report. Q3 earnings beat estimates, with Chipotle reporting solid third-quarter 2021 results, earning $204 million or $7.18 per share during the third quarter on revenue of $1.95 billion. These numbers mean that revenue was up 22% from a year earlier, while earnings were also up a whopping 154%. Meanwhile, operating margins at its restaurants were 23.5%, whereas digital sales also increased 8.6% year-over-year to $840.4 million.
In the meantime, the market appears to have picked up on the company's success. Its stock is up by more than 35% year-to-date and with a market cap of $45.68 billion as of December 7, it joins the ranks of one of the top quick-service restaurant stocks. And with Brian Niccol holding the reins since 2018, the firm has been given a boost, tapping into online ordering and drive-through lanes, while restoring its earlier reputation for offering fresh food with a Mexican kick.
More recently, the company has been applauded for its partnership with The Farmlink Project which aims to fight food waste and hunger. The initiative will see Chipotle’s digital customers donating 10 pounds of unsold produce from Chipotle’s farming partners to food banks across the U.S. with orders placed on the restaurant’s app or website.
After a profitable couple of years, the question remains whether Chipotle has more to gain. According to management the aim is to operate at least 6,000 restaurants in North America alone, while the plan is to increase average unit volumes (AUVs) above $3 million, up from around $2.5 million over the past 12 months. Should higher sales per restaurant take place, this should enable the company to continue expanding its operating margin, which in turn, will boost its stock.
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Yum! Brands Inc (YUM)
From KFC and Pizza Hut to Taco Bell and The Habit Burger Grill, Yum! Brands has for decades built global, iconic brands after its spin-off from PepsiCo in 1997, becoming a truly global company with over 2,000 franchisees. Yum! Brands ended 2020 on a digital sales high note, reporting a record $17 billion, an approximate 45% increase over the same period a year ago as it opened seven gross restaurants per day. This saw it ending the year with more than 50,000 global restaurants in approximately 290 brand-country combinations, with a system sale that exceeded $50 billion. At the same time, more than 35,000 of its restaurants were offering delivery, representing a 16% increase year-over-year, a service that boded well with consumers who were stuck at home during most of 2020.
As a result, Yum! Brands ushered the new year stronger than ever, reporting solid 2021 Q3 results from a development standpoint, with 760 net new units, while it saw positive comps across the board on both a 1-year and a 2-year basis, posting revenues of $1.60 billion, an 11% growth from the $1.44 in Q3 2020. Its net income in the third quarter ended September 30 surged to $528 million, an 87% increase from $283 million in the same period last year, while the company’s worldwide system sales, grew 8%, with KFC at 11%, Taco Bell at 8% and Pizza Hut at 4%. Third-quarter GAAP EPS was $1.75, a jump of 90% when compared with the previous year.
And amid its profit growth, Yum! Brands stock has climbed up 15% year-to-date, outperforming its benchmark by 500 basis points despite inflationary and staffing headwinds that have affected the sector. Indeed, from it Covid-crash low when it was trading at $58.08, the stock has recovered spectacularly, reaching its highest closing price on August 13, 2021 at $134.96.
As consumers looked for alternatives to savour their favourite fast food when dining-in became a no-go, Yum! Brands went big on their digital capabilities, accelerating digital and technology initiative to enhance the customer experience, off-premise capabilities and unit economics across the globe. The firm’s digitals sales momentum continued right through the latest quarter of the year despite dining rooms reopening in most of its international markets, with its digital sales almost 40% of the total mix and crossing the $5 billion mark. It also made a crucial acquisition when it acquired Dragontail Systems. With the ability to make franchisees manage their store better, this could lead to more development deals and more productive restaurants, while faster drive-through, dine-in and delivery items are set to increase brand loyalty.
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McDonald’s Corporation (MCD)
Feeding approximately 68 million individuals daily and with its restaurants found in over 38,000 locations, the fast-food powerhouse’s Golden Arches are universally recognised in all corners of the world. One of the largest restaurants by revenue, McDonald’s has recorded a year-over-year growth in its net income from 2015 to 2019 due to a combination of factors, mainly recent innovations like refranchising restaurants, technology implementation, delivery services and more. As a result, the company recorded net income of approximately $4.73 billion, a notable and expected decrease from the previous year’s figure of around $6.03 billion due to the temporary shutdown of several McDonald’s restaurants across the globe.
During 2021, the company has fared better, with global comparable sales up 12.7% in the third quarter, marking a 10.2% increase on a 2-year basis, whereas consolidated revenues increased 14% to $6,201 million and systemwide sales increased 16% to $29,948 million. According to the company’s latest financials, its current revenue TTM (trailing twelve months) stood at $22.16 billion. The good results were reinforced further with the company’s declaration of a 7% increase in its quarterly cash dividend to $1.38 per share and the resumption of its share repurchase programme.
And amid the COVID-19 pandemic, the company did not sit idle. In fact, it focused on its Drive-Thru, delivery and take away services. Prior to the pandemic, its Drive-Thru accounted for about two-thirds of all sales in the U.S. and in spite of the steady reopening of restaurants, sales in its top six markets continue to remain strong when compared to pre-pandemic levels. Meanwhile, in an effort to boost its McDelivery channel, which was first launched in 2017, the food chain partnered with DoorDash and Uber Eats, a move that is set to help its franchisees generate more profit and cash flow.
Benefiting from robust digitalisation, expansion efforts, loyalty programmes and menu innovations, the company’s shares have gained around 7.8% in the past six months and as the fast-food giant undertakes a number of digital initiatives to serve its customers better, these together with the partnerships it has forged is expected to help the company drive its sales further.
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Texas Roadhouse Inc (TXRH)
Known for offering free peanuts along with complementary fresh-baked bread with honey cinnamon butter to each dinning-in customer, Texas Roadhouse operates in about 666 locations as of August 2021 and has become an iconic American steakhouse with its Texan and Southwestern style cuisine, as well as its seasoned and aged steaks, hand-cut daily and cooked to order over open gas-fired grills. Yet, Texas Roadhouse has managed to go a step further and offer high-quality food at reasonable prices and this has certainly struck a chord with restaurant goers as can be attested by the fact that it has posted same-restaurant sales increases for the last several years, including a 4.7% in 2019.
Faced with challenges such as higher food costs, supply chain shortages and a tight labour market on top of the COVID-19 pandemic that has left its mark on the industry, the restaurant chain has managed to swiftly adapt to changing realities. As the company was forced to close all of its restaurants to indoor dining, it restricted customers to pick-up and delivery, all the while it added outdoor seating. In turn, demand for its food continued to be strong and by the second quarter of 2020, its comps improved throughout the quarter, moving from a negative 46.1% in April of 2020 to negative 14.1% in June of the same year. Then as governments across the board eased restrictions, the company went into positive territory, eventually rising to 0.8% in October 2020.
More recently, for its financial results for the 13 and 39 weeks ended September 28, 2021 the company reported that comparable restaurant sales at company restaurants increased 30.2% and 22.3% compared to 2020 and 2019 respectively, whereas comparable restaurant sales at domestic franchise restaurants increased 33.5% and 20.4% compared to 2020 and 2019 respectively. Diluted earnings per share increased to $0.75 from $0.42 in the prior year due to the increase in restaurant margin dollars, partially offset by an increase in general and administrative expenses. Its shares are up 33% so far in 2021.
Meanwhile, Texas Roadhouse continues with its expansion strategy, opening the doors of seven company restaurants, including one Bubba’s 33. The company has also tentatively agreed to acquire seven franchise restaurants with a targeted closing date for the beginning of 2022 fiscal year - acquisitions which are set to expand Texas Roadhouse’s footprint.
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Domino’s Pizza Inc (DPZ)
It is the maker of one of the most quintessential fast-food staples, while its name its recognised across the globe. But Domino’s Pizza has not only become a success story for pumping out large amounts of pizza for takeaway lovers. Indeed, thanks to its commitment to reformulate its recipes back in 2009, together with its steady investment in technology which has powered its loyal customer base to order through multiple digital channels, the company has caught on the attention of both consumers and investors alike, so much so that the pizza chain’s stock has gained massively, outpacing the industry in the past six months. More specifically, while the restaurant industry has had to contend itself with traffic decline over the same period, shares of Domino’s Pizza have surged 22.2% in the same time frame, against the industry’s decline of 3.1%.
What’s more, the company’s profit margins are higher than the sector median, which not only indicates strong brand recognition, but also a business model that may be far superior to its counterparts. What’s more, the company continues to benefit from high digital ordering and a notable improvement to its Carside Delivery service, particularly during the third quarter fiscal of 2021, making franchisees and operators happy. On the other hand, its international growth continues to be strong and diverse across markets. Third-quarter fiscal 2021 marked the 111th consecutive quarter of positive same-store sales in its international business, with this improvement in comps mainly attributed to ticket growth. At the same time, the company inaugurated 323 global net store openings during third-quarter fiscal 2021 and in addition to its earnings beat back in July, the company also announced a $1 billion share repurchase programme.
Interestingly, according to Statista, the global pizza market is expected to grow at 10.17% CAGR (compound annual growth rate) and reach $230 billion in 2023, which could potentially mean that demand for Domino’s Pizza is nowhere close to waning. There’s also one more factor that could help the brand grow further. Unlike the U.S. pizza delivery market which is quite saturated, pizza delivery in the rest of the world is less developed and this is something Domino’s Pizza could tap into. At the same time, its international growth plan appears to be gaining pace as it aims to stay competitive with other food delivery services like UberEats and DoorDash (DASH) amongst others. Its international expansion into less saturated markets coupled with its dedication to quality and customer satisfaction should fuel its growth further.
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