Dining Out, Cashing In: 2 Restaurant Stocks Leading the Pack

October 15, 2024 at 07:00 AM EDT

At daytime. Group of young friends sitting together in bar with beer.

With consumers tightening their spending habits, one would assume the consumer discretionary sector and, specifically, the restaurant industry would be feeling the sting. However, this isn't the case for some restaurants as they continue to navigate the macroeconomic climate masterfully, still collecting tight-fisted consumer dollars while maintaining strong margins. Some restaurants' stocks are cut above the rest. In this case, you can still have your CAKE and EAT it, too, with these two restaurant stocks eating their way to new highs.

The Cheesecake Factory: Upscale Dining Experience and Large Portions

With over 300 restaurants throughout the United States and Canada, Cheesecake Factory Inc. (NASDAQ: CAKE) offers upscale dining experiences in its flagship locations with an extensive menu known for its large portion sizes and signature desserts. It also owns and operates many smaller restaurant brands, including North Italia, Flower Child, and other Fox Restaurant Concept (FRC) logos.

The Cheesecake Factory spends very little by way of traditional advertising, relying mostly on word of mouth and reputation. The recent addition of its Cheesecake Rewards program has helped bolster its stickiness with loyal customers. The company is targeting 22 new restaurant openings in 2024, with 11 that opened midway through the year.

Improving Metrics Puts Cheesecake on the Right Path

The Cheesecake Factory's stock recently hit a 52-week high at $42.82 before pulling back. In its second quarter of 2024 earnings report, the company reported an EPS of $1.09, up 24% YoY, which beat consensus for a third consecutive quarter, this time by 9 cents. Revenue climbed 4.4% YoY to $904 million, considered soft, missing consensus estimates by just over $5 million. North Italia had 2% YoY comps with average unit volumes (AUVs) of $7.9 million per location. The restaurant level's profit margin at mature locations was 15.3%.

Margin Improvement Led to Stronger Profitability

When a company beats EPS, but revenue comes in light, it's usually a sign of improving margins, which was the case with Cheesecake Factory. Operating margins rose 100 bps to 6.5%. Higher menu pricing than commodity inflation led to the cost of sales dropping by 90 bps. Labor costs also decreased by 20 bps from productivity improvements. General and administrative (G&A) expenses fell by 40 bps from lower legal fees. Labor costs Comparable restaurant sales (comps) returned to positive territory, up 1.4% YoY, an improvement from being down 0.6% in its first quarter of 2024.

Quality Affords Higher Menu Prices

Cheesecake is well known for its quality. The company continued to raise prices, which was another reason margins improved despite softer revenues. Off-premise sales were 21% of total sales or around $50,000 per week at restaurants. The company launched its Cheesecake Rewards Program in the quarter to a strong reception. All the metric improvements in the quarter should continue to accelerate into year's end in terms of profitability. However, the Cheesecake Factory projected full-year 2024 revenue to be around $3.58 billion, falling short of the $3.61 billion consensus estimates. Again, a softer top line is more acceptable when margins are improving along with profitability, as demonstrated in the second quarter.

Brinker International: Chili’s Comp Sales Surge a Whopping 14.8%

Comps or same-store sales (SSS) are the key metrics that analysts pay laser focus on when it comes to restaurant performance. It quantifies growth as how much better you performed over this time last year on a unit basis. Brinker International Inc. (NYSE: EAT) operates Chili’s Grill & Bar and Maggiano’s Little Italy restaurants. The company has been able to beat analyst EPS estimates consistently for seven straight quarters until its fiscal fourth quarter of 2024, where it missed by 13 cents, despite revenue rising 12.3% YoY to $1.21 billion, beating analyst estimates for $1.17 billion. Did the market understand? Yes and no. Shares initially gapped down nearly 15% the following day but rebounded sharply to 52-week highs.

It's All About the Comps

While weak hands panicked, prudent investors jumped at the opportunity to buy the dip. They focused on the exceptional 13.5% YoY comps growth. Chili's Grill and Bar posted an impressive 14.8% YoY comps. That is some of the highest in the restaurant industry, beating fast-casual leaders like Chipotle Mexican Grill Inc. (NYSE: CMG) at 11.1% YoY SSS and CAVA Group Inc. (NYSE: CAVA) even at a whopping 14.4% YoY comps, and beating out Texas Roadhouse Inc. (NASDAQ: TXRH) which did 9.3% YoY comps.

Chili’s Did the Heavy Lifting

Chili's did the heavy lifting as Maggiano's restaurants only posted 2.5% comps. Its rollout of the half-pound Big Smasher burger was a smash hit, coupled with its 3 For Me specials, which include the burger, fries, optional salad, and a drink for $10.99. The 3 For Me has variations, which include an appetizer, entrée, and beverage starting at $10.99. The pricing hit the sweet spot in its campaign to make itself a more viable dining option than the largely inflated fast food and quick service restaurant (QSR) alternatives. Chili's traffic jumped 5.9% YoY in large part due to the promotion.

Mixed Guidance Issued for Fiscal Full Year 2025

Brinker International issued mixed full-year guidance, missing consensus estimates on the EPS but beating on the revenue front. For fiscal full year 2025, the company expects EPS of $4.35 to $4.75 versus $4.80 and revenue of $4.55 billion to $4.63 billion versus $4.53 billion consensus estimates.

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