The restaurant industry can be very competitive. However, if management gets it right, these stocks can outperform massively. Restaurant stocks like Domino’s Pizza (NYSE:DPZ) have delivered outstanding returns due to their superior execution.
Typically, comparable store growth and new restaurant openings drive revenue growth over the long term. A restaurant needs to refresh its menu regularly to continue to attract customers. A good example is McDonald’s (NYSE:MCD), which has grown despite its size through menu innovation.
In addition, investments in technology are crucial in driving growth. Good technology in ordering and loyalty programs increases conversion and drives growth. Lastly, opening new locations can be a significant revenue driver for growth over the long term.
Larger restaurant stocks like McDonald’s – which has over 40,000 worldwide locations, have a substantially lower growth runway. Therefore, if you want growth, you should focus on chains that could considerably increase their locations over the long term.
The following restaurant stocks to buy are smaller players. They can grow through menu innovation and technology investments. However, their most significant growth driver will be new openings over the next decade.
Chipotle Mexican Grill (CMG)
Over the past decade, Chipotle Mexican Grill (NYSE:CMG) has had its fair share of challenges, particularly food safety issues. Since the company appointed Brian Niccol CEO in 2018, the restaurant chain has largely resolved its problematic issues. Now, the stock is set for long-term growth.
Part of Chipotle’s reason for success is that it has found a profitable niche. It attracts and retains customers who want natural, fresh food instead of junk foods sold by other restaurant chains.
The strategy is working, and the company earns one of the highest cash-on-cash returns among restaurant stocks. Notably, it has managed to maintain restaurant-level EBIT margins of over 20%. Operating margins have improved materially and are now above 15%.
Secondly, the company has been a growth engine. Over the past two decades, revenues have grown 40x at a 20.6% compounded annual growth rate. Notably, revenues have increased from $204 million in 2002 to $8.6 billion in the last fiscal year.
Still, the company is posting outstanding numbers. In the second quarter of fiscal year 2023, total revenue increased 13.6% to $2.5 billion. Comparable restaurant sales were 7.4% and operating margins improved from 15.3% to 17.2%.
The potential in new restaurant openings makes Chipotle one of the best restaurant stocks to buy. As of December 31, it owned and operated 3,129 Chipotle restaurants in the U.S. and 53 internationally. Considering McDonald’s has more than 40,000 restaurants globally, Chipotle can grow for decades through new locations and expanding internationally.
Furthermore, the company is opening more Chipotlane restaurants that generate more growth than traditional restaurants. They deliver 10-15% higher volume and higher margins. Chipotlanes could be a significant revenue and profit driver going forward.
Wingstop (NASDAQ:WING) has been one of the best growth stories among restaurant stocks. The company has achieved 19 consecutive years of same-store sales growth. Indeed, the growth story is a key reason to buy WING stock.
Besides growth, the company is highly profitable due to its impressive digital sales mix. In the latest quarter, digital sales accounted for over 65% of revenues. The firm has partnered with platforms such as Doordash to deliver to customers. In the long term, the company aims to convert all its transactions to digital.
In terms of profitability, its unit economics are phenomenal. The restaurant produces 40% unlevered cash on cash returns. And the company is executing and delivering solid results. In Q2 FY2023, system-wide sales increased 27.8% to $809.8 million and total revenue grew 27.9% to $107.2 million. Meanwhile, domestic same-store sales grew 16.8%.
Management raised the same-store sales guidance from the previous high-single digits to 10% to 12%. In addition, management expects to open 240 to 250 new restaurants.
Over the next few years, the company is relying on several initiatives to power growth. First, it has partnered with Uber Eats, which means there is room for incremental revenue growth through that channel. Secondly, ongoing menu innovation, such as the launch of the chicken sandwich, will be a positive.
Lastly, it has one of the most compelling international growth plans among restaurant stocks to buy. Stifel cited this opportunity while raising the price target to $200. “Longer-term, we expect the company will secure new development commitments from partners in attractive markets in Western Europe, APAC, the Middle East, and—ultimately—China,” Stifel said.
While the restaurant stocks mentioned above are all established players, CAVA (NYSE:CAVA) is still a young company. The first CAVA restaurant opened in 2011 and the company recently IPOed at $22 per share in June. Initially, the stock rallied, hitting $57 in July. However, the gains have faded and the stock is now hovering slightly above $30.
This restaurant chain hopes to grow by making the Mediterranean diet popular among American consumers. It has positioned itself as a healthy alternative and acquired rival Zoe’s Kitchen for $300 million in 2018 to grow in the category. Strategically, the acquisition was crucial to expand its restaurant footprint.
CAVA hopes to use some of the $318 million raised in the IPO for expansion. The company had 237 locations at the end of 2022 but has ambitious growth plans. In their IPO prospectus, management outlines a target of 1,000 CAVA restaurants in the U.S. by 2032.
Indeed, these growth targets are very ambitious. With key advisors like Ronald Shaich, the founder of Panera Bread, on the board, they could turn that plan into reality. He will bring an incredible wealth of experience that CAVA needs to execute its strategy. Given Ronald’s outstanding success with Panera, his involvement and investment are positive for CAVA stock.
Looking at the results, revenue growth is at an inflection point. Revenues grew 62.4% in the quarter ending June 30, with 18.2% same-restaurant sales growth. “Our performance is representative of the momentum we’ve gained and continued focus on execution as we grow,” said Brett Schulman, Co-Founder and CEO.
Additionally, FY2023 guidance was optimistic, forecasting 13.0% to 15.0% same-restaurant sales growth. The company expects to open 65 to 70 new restaurants. This momentum sets CAVA up for substantial growth if management sticks to its projections. It’s one of the top restaurant stocks to buy for growth.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.