The restaurant industry has been witnessing a series of changes lately. Apart from continuously trying to strategize and retain their competitive positions, restaurant operators are partnering with delivery channels and digital platforms to drive incremental sales. Furthermore, digital innovations have become the need of the hour with the growing clout of the internet.

Though these strategic efforts will help rev up sales, margins will continue to be under pressure due to high operating costs. Also, sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to the industry operators’ margins. The industry has been struggling with lower foot traffic as well.

Per TDn2K’s The Restaurant Industry Snapshot, the industry witnessed comps growth of 0.4%, 0.1%, 0.8% and 1.2% in fourth-quarter 2017 and the first, second and third quarter of 2018, respectively. Rise in consumer demand and discretionary spending led to comps growth.

However, according to TDn2K, erosion in traffic is a pressing concern. Notably, same-store traffic decreased 1.3% in the third quarter of 2018, proving that only guest checks and not guest counts are contributing to restaurant sales.

Q3 Expectations

Majority of the Zacks sectors (14 out of 16) are expected to perform well in the third quarter of 2018. Restaurants, which are part of the broader Zacks Retail wholesale sector seem to have a solid footing as well. According to the Zacks Earnings Preview report, as of Oct 24, the sector’s aggregate third-quarter EPS is expected to increase by 15.4% compared to 31.8% in the last reported quarter. Revenues are expected to increase 6.2%, lower than 8.9% in the second quarter. Margins in the quarter under review are anticipated to expand 0.4% compared with the previous quarter’s increase of 0.9%.

How to Make the Right Pick?

Amid a wide range of restaurant stocks, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.