Wendy's Is A 'Show Me' Story, Goldman Sachs Analyst Says: Fast Food Joints Like Chipotle, Domino's Are Still Hot

Zinger Key Points
  • Goldman Sachs analyst Christine Cho initiated Buy ratings for several fast food companies.
  • The analyst cited same-store sales growth, location expansion and digital integration as important factors for brand success.

Restaurant stocks have seen mixed results in 2024, but Goldman Sachs analyst Christine Cho is encouraged by many prominent brands amid today’s price tailwind environment.

The Fast Food Analyst: Cho initiated ratings for the following fast food stocks:

  • Wendy’s Co WEN with a Sell rating and price target of $16.
  • Chipotle Mexican Grill, Inc CMG with a Buy rating and price target of $3,730.
  • Domino’s Pizza Inc DPZ with a Buy rating and price target of $612.
  • Restaurant Brands International Inc QSR with a Buy rating and price target of $80.
  • Starbucks Corp SBUX with a Buy rating and price target of $100.
  • Sweetgreen Inc SG with a Buy rating and price target of $39.
  • Shake Shack Inc SHAK with a Buy rating and price target of $110.
  • McDonald’s Corp MCD with a Netural rating and price target of $288.
  • Yum! Brands, Inc. YUM with a Neutral rating and price target of $150.
  • Wingstop Inc WING with a Neutral rating and price target of $407.
  • Jack in the Box Inc. JACK with a Sell rating and price target of $55.

Investment Rationale: Cho noted a key incongruency in consumer demand for fast food and fast casual establishments.

Customers say they plan to cut down on eating out, given that the value proposition of groceries is arguably higher, but are still visiting restaurants more and more.

The analyst is focused on same-store sales growth (SSSG) and store location growth as determiners of company success. Drivers of SSSG include taste, speed, price, order accuracy, portion size and brand trust. Cho is skeptical of value’s role in driving revenue.

Consumer “perception/assessment of ‘value’ is expanding into more qualitative factors such as culinary (i.e., taste, ingredients) and guest experience (i.e., order accuracy, shorter wait-times, convenience),” the report said.

Wendy’s Takeaways: Wendy’s likewise carries a Sell rating due to slowing same-store sales and higher franchise-related costs. The company’s breakfast menu has seen slowing sales growth and remains a “show-me” story.

Chipotle Takeaways: Cho is encouraged by Chipotle’s continued growth and success in driving operational improvements (cutting down on wait times and serving fresher food). Achievable growth of locations in North America to 7,000 and growth in Canada are cited as additional pluses.

Domino’s Pizza Takeaways: The analyst noted the success of the Ann Arbor, Michigan-based pizza giant’s marketing campaigns to drive transaction growth along with strong unit economics for pizza. Cho is also encouraged by Domino’s continued growth in market share, primarily through marketing and channel expansion, even though it is already the world’s largest pizza chain.

Restaurant Brands Takeaways: Restaurant Brands owns Burger King, Tim Hortons’s, Popeyes and Firehouse Subs. The analyst is encouraged by Burger King’s store modernization efforts and product diversification at Popeye’s and Tim Horton’s. Cho also believes that Burger King’s value deals have finally caught up to McDonald’s and other peers’ value platforms.

Starbucks Takeaways: Amid a period of underperformance, Cho believes that SBUX is an “attractive risk-reward opportunity.” The analyst believes new digital initiatives, such as increasing wait time visibility and digitizing its stores, could mark an inflection point for the chain.

Sweetgreen Takeaways: Cho believes that Sweetgreen will benefit from trends toward health and wellness and its entry into new markets. Despite the company’s continued losses, the analyst believes that store and margin growth can lead Sweetgreen to become EBITDA positive within 1-2 years.

Shake Shack Takeaways: Shake Shack is a long-term play for Cho. The analyst cited Shake Shack’s scalable business model and franchise growth as drivers of company performance. Additionally, SHAK has improved in key areas such as order accuracy, kiosk ordering, and digital integration.

McDonald’s Takeaways: Cho cited McDonald’s size and scale along with historically resilient performance as pluses. However, the analyst pointed to slips in low-income traffic and industry competition as a rationale for its Neutral rating.

Yum! Brands Takeaways: Yum owns Taco Bell, Pizza Hut and KFC. Cho noted Yum’s continued investments into technology integration has driven digital sales as an encouraging sign. The analyst is also encouraged by Taco Bell’s position as a “value leader” and KFC’s global expansion. Cho holds a Neutral rating: “…we find better upside opportunity elsewhere in our coverage”

Wingstop Takeaways: Initiating coverage on Wingstop, Cho presents already high valuation and slowing SSSG as a reason for a Neutral rating. Although the analyst believes WING’s risk/reward profile is currently fairly balanced, she cites product quality and store growth as encouraging.

Jack in the Box Takeaways: Cho is discouraged by JACK’s refranchising of recent acquisition Del Taco locations, issuing a Sell rating. The analyst’s forecasts are driven by lower SSSG and store growth, higher competition, and rising costs.

Also Read: McDonald’s Ready To Launch $5 Meal Deal: Everything You Need To Know

Image: Shutterstock

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