Restaurant Stocks: A Year in Review and What to Order in 2015

NEW YORK (TheStreet) -- Due to a recovering economy and what industry experts believe were historically high levels of pent-up consumer demand, restaurant-industry sales were expected to hit record highs in 2014, according to the National Restaurant Association.

Due to rising food costs and a weak consumer spending climate, not to mention -- a few geopolitical issues -- the restaurant industry didn't live up to expectations, gaining just 6.34%, according to research firm Fidelity, trailing the 7.41% gain in the Dow Jones Industrial Average and the 12.03% gain in the S&P 500.

Take a look at the chart below. Among 2014's biggest restaurant decliners were Dunkin' Brands (DNKN) (down 13.55%), Yum! Brands (YUM) (down 5.87%) and McDonald's (MCD) , which lost 3.93%.

MCD Chart
MCD data by YCharts

In some case, weak same-store sales and declining consumer traffic were the biggest hurdles to growth. That, and rising health and obesity concerns, causing consumers to rethink their eating habits and spurring a trend towards “good for you” products.

Weak operations were only part of the problem hurting share prices. There were also some self-inflicted wounds.

For instance, Friday, the National Labor Relations Board filed complaints in 78 cases against McDonald's and franchisees across the country, alleging that McDonald’s and its franchisees violated worker rights. This is the most recent case. But for most of 2014, McDonald's has been hurt by negative press, including what some believe are poor wages for its frontline workers.

Then there was the food scandal. In July, an undercover news report depicted Shanghai Husi, which supplies meat to both Yum Brands and McDonald's, to have allegedly re-labeled expired meat. The supplier was accused as having deliberately ignored proper food safety protocols.

Both McDonald's and Yum apologized for the incident. But neither have fully recovered from the negative publicity. To the extent 2015 will be different remains to be seen. But both McDonald's and Yum! have to figure out ways to fix their image, while giving a more health-conscious consumer more choices.

Where McDonald's and Yum! Brands struggled, Chipotle Mexican Grill (CMG) and Buffalo Wild Wings (BWLD) thrived, posting 2014 gains of 22.27% and 21.2%, respectively.

SBUX Chart SBUX data by YCharts

Both restaurant groups found strategic ways to give consumers what they want. More importantly, they've kept their margins and profits up by constantly re-inventing their store concepts.

Chipotle increased its store value and boosted traffic by launching smaller restaurants, which boosted returns on capital because of lower construction and occupancy costs. Not to mention, this is helped Chipotle significantly offset the rising costs of beef and chicken.

Rivals like Panera Bread Company (PNRA) , whose shares are down 6.28% this year, have taken notice. The company is looking to accelerate 2015 growth by embracing a similar model. These shares might be worth buying if Panera can duplicate Chipotle's success. But at 25 times forward earnings, the stock is not cheap.

Another restaurant making news is 2014 was Burger King Worldwide, now known as Restaurant Brands International (QSR) following its $11 billion tax-inversion acquisition of Canada-based Tim Hortons in August.

On Dec. 9 Tim Hortons shareholders approved the merger, making the newly formed company the world's third-largest quick service operator. The lower corporate tax rate should make Restaurant Brands more profitable in the years ahead, making it a restaurant group to watch in 2015.

Likewise, investors would do well betting on Starbucks (SBUX) (up 1.34%) and Krispy Kreme Donuts (KKD) (flat). Both restaurants are embracing more technology to engage with their customers and offer a better experience.

Starbucks is looking to capitalize on the growth of smartphones, launching its mobile payments app that lets customers order and pay prior to arriving at the store. Meanwhile, pizza chains like Papa John's International (PZZA) and Domino's Pizza (DPZ) are encouraging customers to order online and from their smartphone as a ways to lower costs. These cost savings can potentially boost profits in years ahead.

All told, restaurant stocks did not perform in 2014 as strongly as some investors hoped. But with consumers saving more money at the gas pump due to lower oil prices, restaurants should perform better in 2015.

Consistent winners like Chipotle and Buffalo Wild Wings will continue to outperform. Look for Starbucks and Panera Bread to emerge as leaders in 2015. I don't expect McDonald's and Yum! to tear it up in 2015, but things won't get worse. And their dividends yields of 3.7% and 2.3%, respectively, makes them worth the wait.

Follow @Richard_WSPB


TheStreet Ratings team rates STARBUCKS CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate STARBUCKS CORP (SBUX) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

You can view the full analysis from the report here: SBUX Ratings Report

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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