On Wednesday, a Bernstein analyst provided a detailed examination of the prospects and challenges facing restaurant brands in the international market, highlighting the potential for stock growth in 2025.
According to InvestingPro data, the restaurant sector shows promising growth indicators, with companies like Darden Restaurants (NYSE:DRI) maintaining strong revenue growth of nearly 6% over the last twelve months and analysts predicting continued profitability for the sector.
According to the analyst, international markets are a largely untapped opportunity, making up approximately 80% of the global foodservice industry.
Brands covered by Bernstein have experienced faster growth internationally, with a compound annual growth rate (CAGR) of around 12% compared to about 6% domestically since 2019. This international expansion has been a key driver for revenue growth as the North American market becomes more saturated.
The analyst pointed out that contrary to popular belief, only a select few companies, including McDonald's (NYSE:NYSE:MCD), Domino's Pizza (NYSE:NYSE:DPZ), Yum! Brands (NYSE:NYSE:YUM), Restaurant Brands International (TSX:QSR) (NYSE:NYSE:QSR), and to a lesser extent, Starbucks (NASDAQ:SBUX), derive a significant portion of their sales from international markets, with more than 30% of their sales coming from overseas.
For investors seeking deeper insights into restaurant sector valuations and growth metrics, InvestingPro offers comprehensive analysis of over 1,400 US stocks, including detailed Pro Research Reports that transform complex financial data into actionable intelligence. For most other companies, international sales are not as material, representing a long-term growth option rather than an immediate revenue driver.
The analysis also challenges the common perception that China is the most critical international market, noting that developed markets are more significant. Except for KFC and Pizza Hut, China contributes less than 5% to total sales for most brands, with average unit volumes in China being about 40% of those in the U.S.
Additionally, franchising royalty rates in China are lower, further diminishing its contribution to parent company earnings. In contrast, the top 10 markets in the quick-service restaurant (QSR) sector, especially four Western European countries, account for 70% of total international sales and have exhibited faster growth than China.
Addressing another misconception, the analyst suggested that focusing solely on unit growth to gauge a stock's earnings potential can be misleading. Factors such as royalty rates, supply chain presence, and average unit volumes in a country can influence earnings per share (EPS) even if unit growth targets are not met. Bernstein's EPS decomposition by brand demonstrates the impact of unit growth on EPS by country.
Furthermore, the analysis indicated that international markets have only contributed to about mid-20% of the EPS growth over the past four years. Looking ahead, international markets are expected to lag behind domestic markets in terms of EPS growth contribution through 2028. C
urrent InvestingPro data shows that leading restaurant companies maintain healthy profit margins, with metrics like Darden's impressive 21% gross profit margin and strong return on equity of 49%.
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The report also dispelled the notion that the presence of a scaled player in a market precludes the success of other brands. The analyst cited Burger King and Popeyes as examples of brands that have successfully grown market share and sales internationally, despite the presence of established competitors.
In terms of near-term pressures, Yum! Brands and McDonald's may face challenges, particularly due to issues in the Middle East and international operated markets, respectively. On the other hand, Restaurant Brands (TSX:QSP_u) International and Domino's Pizza are seen as having the most upside, given the current undervaluation of their international opportunities.
Over the long term, the analyst expects Yum! Brands to continue diversifying internationally with the help of committed franchisees, while Restaurant Brands International has significant potential to close the performance gap with its peers.
In other recent news, Darden Restaurants has seen its price target revised by several firms. BMO (TSX:BMO) Capital Markets reduced its price target to $165, citing potential challenges for the company's earnings per share (EPS) in the upcoming fiscal year. The firm also expressed concerns about sustained pressure on comparable sales across Darden's portfolio.
On a similar note, Goldman Sachs (NYSE:GS) anticipates modest margin expansion for Darden through fiscal year 2027, but their EPS estimates for fiscal years 2025 to 2027 are slightly below consensus. The firm based its price target on a forward price-to-earnings (P/E) multiple of 17 times, in line with Darden's five-year average.
Meanwhile, Citi trimmed Darden's price target to $206 while retaining a buy rating, noting potential positive developments despite ongoing softness in same-store sales. Stifel maintained a steady price target of $190, expressing optimism about Darden's strategies to increase customer visits and enhance service speed. These developments come as Darden reported a modest 1% increase in sales, totaling $2.8 billion, but fell short of EPS expectations at $1.75.
In addition to these financial revisions, Darden has finalized its acquisition of Chuy's Holdings (NASDAQ:CHUY) for $605 million, a strategic move to diversify its restaurant offerings. The company also expanded its partnership with Uber (NYSE:UBER) Eats, which may counterbalance concerns about ongoing softness in same-store sales. These recent developments reflect the various perspectives of financial firms on Darden's performance and strategic initiatives.
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