Goldman Sachs has initiated its coverage of the restaurant sector with a warning to investors: Avoid names that are at risk of losing market share to Chick-fil-A.
Among the chains that Chick-fil-A is taking a bite out of are Wendy’s Co. WEN, -1.93% , Jack in the Box Inc. JACK, -2.03% , Yum Brands Inc.’s YUM, -0.47% KFC chain, and Restaurant Brands International Inc.’s QSR, -0.69% Popeyes brand. Wendy’s (price target $17.50) and Jack in the Box (price target $69) are rated sell.
Goldman Sachs quotes Technomic data showing Chick-fil-A is the number five chain, in terms of U.S. market share. These at-risk chains face headwinds from Chick-fil-A based on store overlap, menu analysis and survey data.
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“Our brand survey shows Chick-fil-A has had the most brand momentum across quick-service restaurants, supporting the most increase in total revenue (in dollar terms) in the U.S.,” the Goldman note said. “In fact, despite being open only six days a week, Chick-fil-A’s AUVs [average unit volumes] are more than two times McDonald’s.”
However, Goldman Sachs rates McDonald’s buy with a $250 price target. Analysts think McDonald’s will look to innovate its chicken sandwich menu in order to compete with Chick-fil-A.
Other chains rated buy are Shake Shack Inc. SHAK, +0.77% (price target $95), Wingstop Inc. WING, -0.04% (price target $135), Starbucks Corp. SBUX, -1.14% (price target $110), and Chipotle Mexican Grill Inc. CMG, +3.09% (price target $1,000). Goldman calls Chipotle a “top idea” and sees 28% upside to its price target.
“While shares are up 80% this year, they have lagged the sector by 100% since 2015 (food safety concerns),” the note said. “Of note, we expect the potential for menu innovation and a remodel cycle (designed with digital in mind) to be a powerful catalyst for continued sales momentum.
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Analysts think both Shake Shack and Wingstop are “in the early days of expansion with the potential to substantially grow their unit base over time.”
Goldman is initiating the restaurants at a time when analysts think there are a few things working in the sector’s favor: stable revenue from increased refranchising activity, “very strong low-end consumer spending,” profits that are benefiting from digital enhancements, and higher checks and traffic thanks to increased access to delivery service.
Minimum wage hikes, lower gas prices and promotions from third-parties like GrubHub Inc. GRUB, +3.37% are also helping quick-service and limited-service restaurants.
“Restaurants is a rare sector in the market that doesn’t yet face Amazon encroachment – digital is helping to drive growth and profits,” the note said.
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Analysts note there are some downsides to these positive factors. For instance, some franchisees don’t have the capital to withstand same-store sales volatility, which could lead to store closures and other challenges.
And customers are sensitive to delivery charges, with a Goldman consumer survey showing that the majority won’t spend more than $6 for a delivery order.
“A less promotional third-party delivery environment would likely be an important positive catalyst for Domino’s,” analysts said.
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Domino’s Pizza Inc. DPZ, -2.49% (price target $280), Dunkin’ Brands Inc. DNKN, -0.68% (price target $85), Restaurant Brands International (price target $71), and Yum (price target $115) are all rated neutral.
The Invesco Dynamic Food & Beverage ETF PBJ, -0.48% has gained 17.3% for the year to date while the S&P 500 index SPX, -0.20% is up 20.4% and the Dow Jones Industrial Average DJIA, +0.16% is up 16.7% for the period.