Mastercard’s SpendingPulse report for this year’s holiday season came out on Dec. 26. The numbers could best be described as decent, up 7.6% over last year.
The figures, which aren't adjusted for inflation, saw growth slow from an 8.5% gain in 2021. MasterCard’s numbers, which run from Nov. 1 through Dec. 24, measure in-store and online retail sales across all forms of payment.
This year's biggest winners were restaurants, which notched a 15.1% gain, 450 basis points higher than online sales growth.
“Ringing in the holidays in restaurants: Building on the ongoing demand for experiences, in-person dining continued to show strong momentum, with restaurants up 15.1% YOY. From gatherings with co-workers to dinners out with friends and family, the festive season brought consumers out for the holidays,” stated Mastercard’s SpendingPulse report.
Despite a challenging year for consumers and businesses coping with inflation and higher interest rates, restaurants benefited from a need for people to get together and celebrate the holiday season.
Will the good times last for restaurants and restaurant stocks heading into 2023? I think it can. Here’s why.
Reversion to the Mean
The AdvisorShares Restaurant ETF (EATZ) is the only U.S.-listed ETF that invests exclusively in the restaurant and food service industries. Launched in April 2021 at $25 a share, they’re down slightly more than 22% in 2022 and 26% since inception.
However, over the past six months, EATZ has gained 6.18%, 598 basis points better than the S&P 500. Investors must have had a hunch that consumers would eat out more during the holidays.
Another restaurant-related ETF that’s had a good run is the Invesco Dynamic Leisure & Entertainment ETF (PEJ). It’s up 6.5% in the fourth quarter despite being down nearly 26%.
Restaurant stocks took it on the chin in the first half of 2022, but the bounce back in the second half suggests some of the names held by both EATZ and PEJ could be excellent contrarian bets in 2023.
The EATZ ETF is actively managed, while PEJ is a passive fund. EATZ’s top 10 holdings account for 55% of the ETF’s assets, while PEJ’s top 10 account for 47%. The former has 28 holdings, the latter 31. The most significant difference: All 28 of EATZ’s holdings are restaurant or food service stocks. PEJ only has 10.
So, if you’re looking for individual names to play, EATZ gives you more options.
Potential Winners in 2023
Although McDonald’s (MCD) isn't in EATZ’s top 10, it is one of the 28 names held by portfolio manager Dan Ahrens. As a result, I don’t think you can go wrong with MCD stock over the long haul. Of the 23 analysts covering McDonald’s stock, 15 rates it a Moderate or Strong Buy with a 4.17 rating out of 5.
Yahoo Finance recently reported Jefferies restaurant analyst Andy Barish had some positive things to say about McDonald’s.
“We view McDonald's as the best defensive/offensive play in restaurants given a looming recession but also opportunity to take [market] share,” Barish said in a new client note Wednesday. “4Q likely to see continued strong U.S. demand trends and reset margin expectations (after 3Q) achievable, in our view. Through 2024, we think brand relevancy, led by value and convenience, to support same-store sales /profitability outperformance vs peers.”
Whether we experience a recession in 2023, McDonald’s is an excellent stock to own for the long haul.
A second quality restaurant stock to consider in 2023 is Chipotle Mexican Grill (CMG). Again, both EATZ and PEJ have the Mexican restaurant chain in their top 10 holdings.
Chipotle delivered excellent Q3 2022 results in late October, including a 7.6% increase in comparable restaurant sales, a 280 basis-point increase in its operating margin to 15.1%, and a 35.5% jump in adjusted earnings per share to $9.51.
In mid-November, Chipotle opened its 500th restaurant with a Chipotlane digital order drive-thru pick-up lane. Of the 255 to 285 restaurants it plans to open in 2023, at least 80% will have a Chipotlane. In Q3 2022, its digital sales accounted for 37.2% of its $2.2 billion food and beverage revenue.
Of the 23 analysts covering CMG stock, 18 rate it a Moderate or Strong Buy with a 4.43 rating out of 5 and a mean target price of $1,776.27, 27% higher than where it’s currently trading.
In 2022, Chipotle launched Cultivate Next, a $50 million venture fund to help the restaurant chain keep up with the future. To date, it’s made two investments with a bunch more under consideration.
“Typical franchise organizations have multiple layers of ownership and buy-in that’s required,” Emerging Tech Brew reported Chipotle Chief Technology Officer Curt Garner’s comments about its venture fund. “We have over a billion dollars in capital and self-fund all our growth through our operating income.”
Through the first nine months of 2022, its operating income was $864 million, 34% higher than a year earlier.
Chipotle’s ready for whatever 2023 brings.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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