In 2024, the food service industry is projected to bring in $1 trillion in income. In light of this, now is an excellent moment to purchase quality restaurant stocks.
As we examine three quality restaurant stocks, it is important to establish why this trio makes the cut. Three metrics, free cash flow growth, operating margin, and three-year revenue growth rate, were selected. Thereafter, these three names emerged, and all of them are beating the majority of companies in their sector with respect to these figures.
Chipotle Mexican Grill (CMG)
Despite growth slowing down in recent quarters, Chipotle Mexican Grill (NYSE:CMG) is one of the best restaurant stocks because of margin expansion, which makes up for slowing growth in revenue with superior operating margins.
Chipotle Mexican Grill has ranked higher than 93% of the 349 firms in the restaurant category thanks to its operating margin of 17% and free cash flow margin of 12%, which puts it higher than 77% of the food sector.
Chipotle’s operating margins can improve further, thanks to initiatives such as an automated production line for salads and burrito bowls and the Autocado robot for scooping avocados.
However, it isn’t like CMG is not growing the top line. The latest financials show a 15% year-on-year revenue gain despite a 3% menu price increase absorbed by CMG customers. Inelastic demand is great for any brand.
Customers are willing to pay extra for Chipotle’s healthier offerings, part of a global trend where consumers, particularly young people and parents, are eager to pay additional cash for more nutritious foods. Sales growth for Chipotle bails out this narrative, with a three-year revenue growth rate per share of 19%; higher than 87% of the sector.
Chipotle also reported a 7.4% increase in foot traffic, defying industry trends. The company also opened 121 new locations and plans to add 285 to 315 more within a year.
Finally, Chipotle is looking to split its shares 50-for-1 in late June. This would be a key catalyst for a new base of potential investors.
Domino’s Pizza (DPZ)
Domino’s Pizza (NYSE:DPZ) is on cloud nine. With a 20% gain this year, it showcases the robustness of its pizza brand despite persistent inflationary pressures.
Much of Domino’s success is due to its franchise model. Ninety percent of the U.S. and all of its overseas outlets are franchised.
Domino’s also prides itself on its sterling reputation as a “truly digital-first business.” It has already hit $1 billion in digital sales in both the U.S. and abroad, showcasing a significant digital footprint.
In 2023, Domino’s earned over 85% of its retail sales in the United States through digital channels, thanks to innovative ordering methods like Pinpoint Delivery, which allows customers to receive deliveries practically anywhere.
In addition, Domino’s is aggressively looking to expand its presence in China and India. By the end of September, the pizza chain operated 716 stores across 21 cities on the Chinese mainland. According to the firm, Domino’s current business strategy has been enhanced by tailoring its primary features for Chinese clients.
In India, there are plans to increase the number of Domino’s restaurants to 3,000. In some zones, the company is offering 20-minute pizza delivery, expected to increase sales volumes greatly.
The initiatives in China and India will help ensure that the top line continues to grow. Domino’s already boasts a three-year revenue growth rate per share of 7%, ranking it above 62% of the 324 companies in the restaurant industry. Much like Chipotle, Domino’s is also outperforming its entire sector in terms of operating margin and free cash flow margin.
Finally, DPZ recently raised its quarterly dividend by 25%, further adding to its allure among restaurant stocks.
Starbucks (SBUX)
Starbucks (NASDAQ:SBUX), with over 38,000 stores, is the biggest coffeehouse chain and finishes off our exploration of the best restaurant stocks.
In recent quarters, Starbucks has had to contend with geopolitical tensions, falling sales and union conflicts. Against this backdrop, the coffee giant reported an earnings miss in its Q1 2024 report. However, at 2.91x price to sales, it has been trading at the cheapest valuation for a while.
Starbucks itself is looking to regain its market position by strengthening its digital capabilities with its “Triple Shot Reinvention, with two pumps.” The plan includes growing the number of Starbucks locations to 55,000 worldwide by 2030. Also on the agenda is tripling the 75 million global Starbucks Rewards members within five years.
In addition, after several attempts, it looks like the leadership transition to Laxman Narasimhan is complete. Legendary CEO Howard Schultz, having served as CEO on three occasions, personally guided the recent leadership transition.
Financial metrics also show Starbucks is a very strong company. The three-year revenue growth rate stands at 16%, while the EBITDA growth rate is 35%. The growth rate for EPS without NRI over the same period is 54%. The free cash flow growth rate is 221%. The operating margin percentage is reported at 16%, with a net margin of 12% and an FCF margin of 12%. All of these metrics from Starbucks beat the industry.
Finally, with 14 years of dividend growth, SBUX is an excellent income play as well. Among restaurant stocks, its 2.4% yield beats the sector average of 0.9% handily.
On the publication date, Faizan Farooque did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
