The State of the Restaurant Industry

The restaurant industry was arguably one of the hardest hit sectors during the COVID pandemic. Thankfully this sector is starting to see a recovery as most parts of the country emerge from lockdowns and restrictions.

What Are We Seeing in The Casual Dining Sector?

Nick Setyan Managing Director, Restaurants Equity Research at Wedbush Securities indicates that we are seeing levels above pre-COVID levels in some casual dining establishments.

The increased levels of folks being vaccinated is certainly helping. With many cities easing or eliminating indoor dining restrictions, those who are fully vaccinated can generally dine without masks or other restrictions. This will help restaurants as they seek to receive lost ground from the depths of the pandemic.

Setyan cites the ability of many consumers to spend as another reason the casual dining sector will do well this year. He says, “The stimulus, while transitory, is pushing up wage growth, with wages now above pre-COVID levels and rising.” Consumers are eager to dine out and many have the money to spend to do so.

Setyan adds, “Home prices are at record levels, and rising. Stock prices are at record levels. Households are not only earning more, but they feel and in many cases are wealthier than pre-COVID.” He says, “We’re seeing broad wealth creation across the country. Homes in places that usually don’t see home price appreciation, places like Western Pennsylvania, upstate NY, Cleveland and Detroit, are seeing significant price appreciation.”

All of this adds up to consumers with the desire to dine out and the money to do so. Both are positives for the casual dining sector.

The Catalysts Driving the Restaurant Industry

In addition to consumers having more money to spend, there are other factors that are driving the resurgence and growth of the restaurant industry.

Setyan cites the growth of off-premises dining as a key factor that will continue to drive the casual dining sector forward. He says, “Casual dining off-premises sales were about 10% of store volumes pre-COVID. It is increasingly likely that they will stabilize at levels two-times pre-COVID levels even as dining rooms return to 100% capacity.”

Setyan says, “Technology has played a big role in enabling and facilitating the growth of off-premises dining. Paying via app, mobile orders, the rise of delivery options and other factors have all contributed to the growth of this facet of restaurant service.”

He adds that the trial of off-premises services like carry out and delivery by consumers during the pandemic has helped consumers develop a greater appreciation for the quality and value of casual dining over that of fast casual or quick service restaurants. This should continue even into the post-COVID era as consumers realize the quality and value offered by off-premises dining from the casual restaurant sector.

Setyan cites one other factor that will have a positive impact on the sector. “The supply of restaurants is about 10% lower than before COVID, particularly in and around urban areas like Chicago, Boston, New York City and others. This benefits larger chains, allowing them to gain share.”

Opportunities in Restaurant Stocks

Setyan feels there are a number of restaurant stocks in the casual dining space that could do well in 2021 in the wake of the recovery from COVID. He singled out Darden Restaurants as a company who is poised to excel in 2021. He cited Darden chains Olive Garden and Longhorn as examples of restaurants whose costs have remained low and who have seen increased revenues above 2019 levels at this stage with the return of diners to the restaurants.

Consumers are eager to get back out and eat at their favorite restaurants. This creates many opportunities for those establishments that offer great food and an appealing dining experience, both in-person and off-premises. The shares of these types of restaurant groups may present an opportunity for investors as the country emerges from COVID.

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