The restaurant industry has been hit by the COVID-19 pandemic harder than most sectors over the past year, and many restaurant stocks were hit as well. Indoor dining was shut down in most of the country for at least part of the year, takeout hasn’t replaced the revenue from diners, and entertainment venues have been absolutely crushed.
Despite these general financial headwinds, some restaurant stocks have thrived. Chipotle Mexican Grill (NYSE:CMG) was one chain that seemed almost built for a pandemic, quickly shifting to takeout and delivery and actually growing through this tough time. For an idea of where the industry is headed, investors should keep a close watch on Chipotle’s revenue trends, whether or not Dave & Buster’s Entertainment (NASDAQ:PLAY) can recover its large group entertainment business, and when Ruth’s Hospitality Group (NASDAQ:RUTH) can lure high-end diners back.
These are three restaurant stocks to keep an eye on right now. Let’s discuss why.
One star of the restaurant business in 2020 was Chipotle, which had a takeout and delivery business pre-pandemic and was able to supercharge that part of operations over the last year. You can see below that if you squint, there’s a slight drop in revenue in the second quarter of 2020, but by summer and fall the company was back in growth mode.
What should we be watching at a company like Chipotle? Investors will want to know if this trend continues or not.
Was Chipotle just the best of a limited number of options during the pandemic? Did it benefit from the closure of competitors? Was demand artificially boosted, and will revenue fall when competitors reopen?
If Chipotle has ingrained itself as an easy takeout or delivery option for customers and is able to expand its business after the pandemic, then revenue will continue to rise. But it’s possible that revenue will fall when more options become available, which investors will want to keep an eye on.
2. Dave & Buster’s Entertainment
The most profitable part of operations for entertainment companies like Dave & Buster’s are large gatherings like birthday parties and corporate outings. And that business fell off a cliff during the pandemic, as you can see below.
There may be no better stock to tell us just how quickly the events business will come back than Dave & Buster’s, and that’s why I’ll be watching it. You can see in the revenue numbers above that business started to pick up late in 2020, but big parties are still not gathering, and it may not be until the third or fourth quarter of 2021 that they do.
What I’m looking for is not just when a recovery in big parties takes place but how big the jump in demand is. It’s possible that pent-up demand bursts out and Dave & Buster’s is more profitable than ever by late 2021. For investors, this is a company that will tell us a lot about the entertainment business this year.
3. Ruth’s Hospitality Group
At the high-end of the market is Ruth’s Hospitality, which operates Ruth’s Chris Steak House, and thus will give investors an idea of how quickly more-expensive restaurants will come back. You can see below that by the third quarter of 2020, the company’s operations had recovered significantly from second-quarter lows, although business was still down nearly 40% versus a year ago.
Given smaller table sizes and high tabs per check, it’s possible that restaurants like Ruth’s Chris recover more quickly than restaurants that require larger crowds. If the company’s recovery continues in the first and second quarter of this year, this could be a bellwether for high-end consumer discretionary stocks in 2021.
Watch for signs of a restaurant recovery
Chipotle, Dave & Buster’s, and Ruth’s Hospitality serve very different markets, and that’s why they’re three great companies to watch in 2021. Chipotle is the only one that really thrived in 2020, and if the other two start making a comeback, it could be the sign that consumer spending is loosening, which would be great news for restaurant stocks this year.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.