The Dow Jones U.S. Restaurants & Bars Index has gained 6% over the past three months, outpacing the 3.2% advances in both theS&P 500 and Dow Jones Industrial Average over the same period. Investors are recognizing that the restaurant business has entered a new golden age, as executives embark on transformative initiatives to ignite future earnings beyond simply opening up new venues on every corner.
Tablet-ordering technology has arrived at traditional sit-down establishments owned by DineEquity (DIN - Get Report) and Buffalo Wild Wings (BWLD - Get Report), leading to improved guest experiences. The new tabletop tech has also allowed for efficiencies in kitchen and wait-staff operations with customers being able to more easily order and pay. Meanwhile, Starbucks (SBUX - Get Report) has captured the imaginations of restaurateurs and investors, with the long-term profit potential of its ground-breaking delivery service set to launch nationwide later this year.
Tablet-ordering technology has arrived at traditional sit-down establishments owned by DineEquity (DIN - Get Report) and Buffalo Wild Wings (BWLD - Get Report), leading to improved guest experiences. The new tabletop tech has also allowed for efficiencies in kitchen and wait-staff operations with customers being able to more easily order and pay. Meanwhile, Starbucks (SBUX - Get Report) has captured the imaginations of restaurateurs and investors, with the long-term profit potential of its ground-breaking delivery service set to launch nationwide later this year.
But fancy technology isn't the only explanation for investor enthusiasm: Menus at restaurants are getting makeovers and updates. Whether it's a new, indulgent bacon-and-gouda breakfast sandwich at Starbucks, or honey-glazed pecans and quinoa at DineEquity-owned Applebee's, restaurants are adding the wow factor to their menus to spur more frequent visits. It also doesn't hurt that the revamped menus and better marketing have appeared just as consumers have extra cash in their pockets from lower fuel costs.
TheStreet explores what's making three of the hottest restaurant stocks in the sector sizzle.
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Must Read: The Latest Fast Food Battle Isn't Over Burgers or Coffee
1. The future of Starbucks is one with caffeinated profits.
The hottest restaurant of them all lately isn't some upstart fast-casual pizza or burger joint promoting "better for you" fast food: It's Starbucks, which opened its first store in 1971. Shares of the Seattle-based coffee giant have surged 14.6% over the last three months. The rise can be attributed to a single, foundational concept: The Starbucks of the future is likely to sell both more coffee and food -- and do so on smartphones, smartwatches and tablets.
Technology is at the heart of Starbucks' future and will allow the company to unlock new profits by tapping into how people are consuming goods and services. Later this year, Starbucks will launch a delivery service relying on a combination of its green apron-wearing baristas and a third-party service. No locations or launch dates have been shared by the company for the delivery service, but it's likely to start in its Seattle home base to coincide with the ongoing introduction of mobile order and pay.
In December, Starbucks unveiled its mobile order and pay service at 150 stores in Portland, Ore. Consumers have the option of ordering food and beverages through a mobile device ahead of time and then picking them up at a preferred store. No waiting in line, instant gratification secured.
Starbucks is currently bringing the practice to 600 stores in the Pacific Northwest and then to other parts of the U.S. and Canada later in the year. According to the company, mobile order and pay at early locations has led to a significant increase in mobile-payment transactions and a sales lift for its overall business.
Starbucks is currently bringing the practice to 600 stores in the Pacific Northwest and then to other parts of the U.S. and Canada later in the year. According to the company, mobile order and pay at early locations has led to a significant increase in mobile-payment transactions and a sales lift for its overall business.
The market is now beginning to value Starbucks as more than just a coffee seller, as food becomes an increasingly important sales driver for the company. For the fourth consecutive quarter, food sales contributed 2% to Starbucks same-store sales growth in its Americas division. Overall same-store sales rose 5% in the Americas in the first quarter.
Sales of breakfast sandwiches increased 29%, supported by holiday limited-time food offers, while sales of lunch offerings rose 15% in the quarter, driven by new warm sandwiches.
Must Read: Coming to a Restaurant Near You: Self-Service Tablets in Restaurants
Sales of breakfast sandwiches increased 29%, supported by holiday limited-time food offers, while sales of lunch offerings rose 15% in the quarter, driven by new warm sandwiches.
Must Read: Coming to a Restaurant Near You: Self-Service Tablets in Restaurants
2. Buffalo Wild Wings' stock is flying high as a result of menu price increases and new growth.
Buffalo Wild Wings' shares have tacked on a cool 10.4% in the last three months, while the S&P 500 has gained a mere 1.28%. The chicken-wing joint's stock surge has been fed by sales spiking 11.9% and 11.5% at company-operated and franchised locations, respectively, in the initial five weeks of the first quarter. Credit the college-bowl games and the Super Bowl.
But several other things in the mix are supporting the stock of B-Dubs, as it's affectionately referred to by fanatical patrons.
Led by long-time President and CEO Sally Smith, the company has introduced a new restaurant design it calls "stadia," featuring the bar at the center and a more modern feel. And the flashier look is leading to healthier sales.
On the company's Feb. 5 earnings call, executives said remodeled restaurants have experienced a nice sales lift and outperformed venues without updates. This year Buffalo Wild Wings plans to remodel about 90 restaurants with the new stadia layout, reformatting about 41% of company-owned locales. Only 19% carried the new look last year. And at franchised venues, 30% of the eateries will have the new design by year end, up from 2014's 20%.
Led by long-time President and CEO Sally Smith, the company has introduced a new restaurant design it calls "stadia," featuring the bar at the center and a more modern feel. And the flashier look is leading to healthier sales.
On the company's Feb. 5 earnings call, executives said remodeled restaurants have experienced a nice sales lift and outperformed venues without updates. This year Buffalo Wild Wings plans to remodel about 90 restaurants with the new stadia layout, reformatting about 41% of company-owned locales. Only 19% carried the new look last year. And at franchised venues, 30% of the eateries will have the new design by year end, up from 2014's 20%.
Moreover, what's being dished out at restaurants with the refreshed look is about to receive a dash of fun.
Buffalo Wild Wings will soon serve sandwiches and alcoholic drinks inspired by the four regions represented in the NCAA "March Madness" college-basketball tournament, such as the New Yorker -- pastrami on a pretzel roll -- paired with a Sam Adams Boston Lager.
"It's partly how we test new menu options,"CEO Smith said in a Feb. 6 interview with TheStreet, adding that each pairing could become permanent choices on the menu this year. Investors are wagering the latest menu introductions are hits that will keep people coming back well beyond the March Madness season.
Being able to sell food at a higher price point inside of a newly remodeled restaurant is the Holy Grail of the business. So far, Buffalo Wild Wings is living the dream, not appearing to have experienced much resistance to its 3% price increase in November. The fact that B-Dubs seems to have pricing power is reassuring to investors.
Buffalo Wild Wings has said it will increase prices 4.3% in the first quarter, 3.6% in the second quarter, 3.4% in the third quarter and 1.8% in the fourth quarter.
Investors may also be starting to price in a new revenue stream for Buffalo Wild Wings: franchise fees from investments made in upstart brands. Fast-casual pizza-concept chain PizzaRev, which is minority owned by Buffalo Wild Wings, will open 25 to 30 new outlets this year for a total of 50 nationwide. And street-style taco-concept chain Rusty Taco, majority owned by Buffalo Wild Wings, has been earmarked for quick growth this year that will extend beyond its nine locations.
"We are really excited about the opportunities for Rusty Taco, and are looking to accelerate some growth there," Smith said.
Must Read: Why Investors Are So Excited by Buffalo Wild Wings Despite Its Earnings Miss
Buffalo Wild Wings has said it will increase prices 4.3% in the first quarter, 3.6% in the second quarter, 3.4% in the third quarter and 1.8% in the fourth quarter.
Investors may also be starting to price in a new revenue stream for Buffalo Wild Wings: franchise fees from investments made in upstart brands. Fast-casual pizza-concept chain PizzaRev, which is minority owned by Buffalo Wild Wings, will open 25 to 30 new outlets this year for a total of 50 nationwide. And street-style taco-concept chain Rusty Taco, majority owned by Buffalo Wild Wings, has been earmarked for quick growth this year that will extend beyond its nine locations.
"We are really excited about the opportunities for Rusty Taco, and are looking to accelerate some growth there," Smith said.
Must Read: Why Investors Are So Excited by Buffalo Wild Wings Despite Its Earnings Miss
3. Applebee's and IHOP are being reimagined, winning market cheers.
DineEquity-owed restaurant chains Applebee's and IHOP are undergoing transformations that could improve franchisees' sales and the parent company's profits. And investors are taking notice: DineEquity shares have risen 10.7% in the last three months, currently only slightly off the 52-week high set on Feb. 24.
While Applebee's has started to add a payment function to its new tabletop tablets, investors have been more fixated on its new, streamlined menu and redesigned interior and exterior.
Since 2007, 90% of the Applebee's menu has been refreshed. The chain's most recent update introduced group-friendly shareable plates, bar snacks and jazzed-up cocktails. Its latest iteration of the restaurant's design incorporates sleeker bar and bench seating and less clutter on the walls, signaling to customers that this is longer the Applebee's of 1995.
Since 2007, 90% of the Applebee's menu has been refreshed. The chain's most recent update introduced group-friendly shareable plates, bar snacks and jazzed-up cocktails. Its latest iteration of the restaurant's design incorporates sleeker bar and bench seating and less clutter on the walls, signaling to customers that this is longer the Applebee's of 1995.
Customers are responding to the changes. After falling for three straight quarters from the third quarter of 2013 to the first quarter of 2014, same-restaurant sales at Applebee's have progressively strengthened. Same-restaurant sales rose 2.8% in the fourth quarter, marking the chain's best showing since the second quarter of 2011. For 2015, DineEquity expects Applebee's same-restaurant sales to remain solid and rise 1% to 4%.
And IHOP, where DineEquity CEO Julia Stewart began her career as a server, has become the crown jewel of the DineEquity portfolio due to a consistent stream of limited-time breakfast offerings. A more focused, easy-to-understand lunch and dinner menu has helped, too, and IHOP has churned out seven consecutive quarters of same-restaurant sales increases.
In the fourth quarter, IHOP's same-restaurant sales increased 6.1%, adding up to the highest growth rate since the first quarter of 2004. For 2015, IHOP's same-restaurant sales are projected to improve 2% to 5%.
In the fourth quarter, IHOP's same-restaurant sales increased 6.1%, adding up to the highest growth rate since the first quarter of 2004. For 2015, IHOP's same-restaurant sales are projected to improve 2% to 5%.
On tap for the pancake and waffle chain this year is a revamped menu and further testing of a new restaurant design.
IHOP updates its menu three times a year. Said Stewart: "One of the menus this year there will be a lot about new food and line extensions -- you will also see a new menu this year that's all about the design, making it simpler to read and with fresh graphics."
Twenty-eight U.S. restaurants are beta testing the new, more modern-looking IHOP design. If the new look is well-received by consumers, Stewart expects it will become widely available for franchisees toward the end of this year.
Must Read: DineEquity Continues Its Transformations of Applebee's, IHOP
IHOP updates its menu three times a year. Said Stewart: "One of the menus this year there will be a lot about new food and line extensions -- you will also see a new menu this year that's all about the design, making it simpler to read and with fresh graphics."
Twenty-eight U.S. restaurants are beta testing the new, more modern-looking IHOP design. If the new look is well-received by consumers, Stewart expects it will become widely available for franchisees toward the end of this year.
Must Read: DineEquity Continues Its Transformations of Applebee's, IHOP
By Brian Sozzi
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