Consumer spending worries haven’t dampened Goldman Sachs’ conviction on Americans’ willingness to eat out. But only a few restaurant brands that can hold on to their pricing will be able to come out on top, the firm said. Analyst Christine Cho initiated research coverage on the restaurant sector with a “relatively constructive view.” Six popular stocks in the group were each given a buy rating: Chipotle , Domino’s Pizza , Restaurant Brands International , Starbucks , Sweetgreen and Shake Shack . Cho placed a neutral rating on McDonald’s , Yum Brands and Wingstop and a sell on Jack in the Box and Wendy’s . “We are less worried about a pullback in the restaurant spending or share of [personal consumption expenditures] given a still-healthy spending outlook and more lasting behavior shifts post-Covid (i.e., digital, convenience),” Cho wrote in a note on Thursday. “However, strong pricing tailwinds are beginning to fade and value competition is stepping up as we come out of the post-pandemic inflation surge.” Restaurant traffic and unit growth will become an increasingly important part of the growth equation, driving a divergence in performance across the group, according to Cho. Chains’ ability to integrate digital technology into their operations and customer experience will also affect companies, although Goldman did not use that framework to assess its valuation, she said. “We believe consumers’ perception/assessment of value is expanding into quality (i.e., taste, ingredients), guest experience (i.e., order accuracy, shorter wait-times, and convenience), and brand trust/relevance in addition to the more traditional metrics such as price and portion sizes,” Cho said. “This paves the way for resilient growth/continued market share gains for select brands (including many fast casual brands) that stand out on relative quality vs. value.” Chipotle is Goldman’s top idea. “We find a compelling growth story in CMG driven by a still-significant throughput opportunity,” Cho said, noting that the company has surpassed its $3 million average unit volume target for annual sales and is looking toward its next goal of $4 million in the medium term. “This underpins [the] company’s ability to scale the business in a highly profitable manner without losing grip on the core operations including the quality of food/customer experience.” Chipotle shares reached an all-time high on Thursday and are up 42% this year. The stock could climb another 18%, based on Goldman’s 12-month price target. Goldman expects Chipotle to deliver a unit annual compound growth rate of 8% to 10% and “industry-leading” profit margins of 29% by the end of 2026, supporting “best-in-class” double-digit earnings growth. The firm also sees a strong opportunity in Starbucks, which has significantly underperformed the broader market this year, calling the coffee chain Goldman’s “most out-of-consensus buy,” Cho said in the note. Although shares have dropped nearly 17% this year, Goldman expects a roughly 26% upside compared with Wednesday’s close and sees an “attractive risk-reward opportunity” after a reset of consensus expectations following Starbucks’ weaker-than-expected fiscal second quarter. “We acknowledge the still-prevalent market skepticism as well as fundamental issues (throughput, engagement of younger customers, etc.) which need to be addressed; however, we believe the worst is behind and expect to see the second derivative start to improve from FY3Q 24E,” Cho said, noting that Starbucks’ is tackling new digital initiatives through its personalized app offer, for example, that’s helping fuel traffic. Salad maker Sweetgreen and burger chain Shake Shack are Goldman’s best small-cap ideas. The firm said it thinks both companies can rapidly boost market share while offering differentiated products, consistent consumer experience and increased brand awareness with help from digital improvements. Sweetgreen and Shake Shack could gain between 15% and 19% over the next year, respectively, according to Goldman’s forecasts. The bank is also bullish on Restaurant Brands, owner of Burger King and Popeye’s, which Cho noted is undergoing a business transformation. Another restaurant Goldman is bullish on is Domino’s Pizza, which Cho believes has numerous catalysts that could lift the stock, including a newly revamped rewards program and an Uber Eats expansion.
