Concerns about consumer spending haven’t weakened Goldman Sachs’ confidence in Americans’ appetite for dining out. But the firm said only a handful of restaurant brands that can maintain prices will survive. Analyst Christine Cho began coverage of the restaurant sector with a “relatively positive outlook.” The group’s six most popular stocks each have buy ratings: Chipotle, Domino’s Pizza, Restaurant Brands International, Starbucks, Sweetgreen and Shake Shack. Cho has neutral ratings on McDonald’s, Yum Brands and Wingstop, and sell ratings on Jack in the Box and Wendy’s. “We’re not overly concerned about declining restaurant spending or market share,” she said. [personal consumption expenditures] “Given a still-healthy spending outlook and more permanent post-COVID behavioral changes (digital, convenience, etc.),” Cho wrote in a Thursday note. “However, strong pricing tailwinds are beginning to fade and value competition is intensifying as we emerge from a post-pandemic inflation surge.” According to Cho, restaurant traffic and store count growth will be an increasingly important part of the growth equation, driving divergence in performance across the group. While Goldman doesn’t use that framework in assessing valuations, she said chains’ ability to integrate digital technologies into their operations and customer experience will also influence the companies. “We believe consumer value perceptions/assessments are broadening beyond more traditional metrics like price and portion size to include quality (taste, ingredients, etc.), guest experience (order accuracy, short wait times, convenience, etc.) and brand credibility/relevance,” Cho said. “This paves the way for resilient growth/continued market share expansion for select brands (including many fast-casual brands) that stand out on relative quality vs. value.” Chipotle is Goldman’s top idea. “CMG still has a compelling growth story driven by a significant throughput opportunity,” Cho said, noting that the company has surpassed its average unit volume target of $3 million in annual sales and is targeting its next milestone of $4 million in the medium term. [the] Chipotle shares hit an all-time high on Thursday and are up 42% this year, according to Goldman. Based on Goldman’s 12-month price target, the stock could rise another 18%. Goldman expects Chipotle to achieve 8% to 10% compound annual growth rate per unit and an industry-leading margin of 29% by the end of 2026, supporting “best-in-class” double-digit earnings growth. The firm also sees a big opportunity in Starbucks, the coffee chain that has significantly underperformed the broader market this year, calling the coffee chain Goldman’s “biggest outside consensus buy,” Cho said in the note. The stock is down nearly 17% this year, but Goldman sees an upside of about 26% compared to Wednesday’s closing price and sees “an attractive risk-reward opportunity” after the reset of consensus forecasts for the fourth quarter of 2021. Starbucks’ second-quarter results fell short of expectations. “We know there is still skepticism in the market and that there are underlying issues (throughput, engagement of younger customers, etc.) that need to be addressed. But we believe the worst is over and expect performance to start improving in 3Q24,” Cho said, noting that Starbucks has been working on new digital initiatives, including through a personalized app offering, which is helping it attract customers. Salad maker Sweetgreen and burger chain Shake Shack are Goldman’s best small-cap ideas. The firm said it thinks both companies can rapidly gain market share while offering differentiated products, consistent customer experiences and improved brand recognition with the help of digital improvements. Sweetgreen and Shake Shack are expected to rise 15% to 19%, respectively, over the next 12 months, according to Goldman’s forecasts. The bank is also bullish on Restaurant Brands, which owns Burger King and Popeyes, and Cho noted that the company is in the process of transforming its business. Another restaurant company Goldman is bullish on is Domino’s Pizza, and Cho believes there are a number of factors that should drive the stock higher, including the company’s newly revamped loyalty program and the expansion of Uber Eats.
Goldman predicts restaurant price war, recommends 6 growth stocks
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