3 Restaurant Companies Worth Considering

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The National Restaurant Association forecasts total restaurant sales to increase 3.8% year over year to $660 billion in 2013. Restaurant companies with snack and non-alcoholic beverage bars are expected to post revenue of $29.1 billion, while cafeterias and grill-buffets are expected to post revenue of $8.3 billion in 2013.

The restaurant companies, with the aim of enhancing their revenue, are planning to expand their footprints by opening new restaurants, improving their services, and looking for merger and acquisition deals. I have selected three companies that have the potential for long-term gains with their current expansion plans 

Increasing product portfolio

Starbucks (NASDAQ: SBUX) completed the acquisition of Teavana, the Atlanta-based specialty tea and accessory retailer on Dec. 31, 2012, for $620 million, which will work as the wholly-owned subsidiary of Starbucks. By this acquisition, Starbucks is planning to capture higher market share of the $40 billion global tea market. At Teavana stores, Starbucks intends to add tea bars that will offer handcrafted beverages, and later, these beverages will be included in Starbucks stores. To promote the Teavana brand, requirements for capital expenditure will be negligible, except for the initial cost of opening new stores.

Due to an increase in Arabica coffee prices, the operating cost of Starbucks' coffee was raised by $200 million in both 2010 and 2011. In 2013, the Arabica coffee prices have fallen 50% from their peak and the company has entered into future contracts, booking more than half of the coffee needs for fiscal year 2014. At the time of the contract, coffee future prices were trading below $1.40 per pound. Starbucks expects $100 million as tailwind opportunity in its operating profit, as future contract prices are trading well below its likely levels for 2014 usage. The company also expects this opportunity to continue in fiscal year 2015.

Opening new restaurants with new services

Chipotle Mexican Grill (NYSE: CMG), in the first quarter of 2013, rolled-out its catering services in Colorado and is planning it to launch them at all its restaurants nationwide by the end of 2013. This service will help customers to customize their meal in the same way they do at Chipotle restaurants. Catering menus are available for groups of 20 to 200 people.

In Colorado, the company has marked three to four catering orders per week per cafe with an average ticket price of around $300. It has estimated four orders a week, which will add 3% to the current average unit volume and $0.74 - $1.11 in 2014 earnings per share. The catering segment is considered a good opportunity for the company, as its competitors with this service are generating around 8% of their sales.

Additionally, Chipotle is looking to enhance its revenue from the restaurant business, where it is planning to open more restaurants with its recently launched catering services. Currently, it has 1,458 restaurants in its portfolio and a majority of them are in the U.S. It plans to open 165-180 more restaurants in 2013. Average annual restaurant sales were around $2.1 million in 2012 and it is expecting the same sales from the new restaurants. By opening new restaurants, Chipotle is expecting to generate incremental revenue of approximately $360 million in 2014.

Expanding footprint by opening new cafes

Panera Bread (NASDAQ: PNRA), with the view of enhancing its penetration in the U.S. and Canada, has opened 10 company-owned bakery-cafes and 12 franchise-operated bakery-cafes in the first quarter of 2013. The company plans to open 115 to 125 new bakery-cafes in fiscal year 2013.

Its new company-operated bakery-cafe generated average weekly sales, or AWS, of $61,912 in the first quarter, compared to $51,331 last year, and the new franchise-operated generated AWS of $51,543, versus $47,982 last year. Panera is expecting that each new bakery-cafe will generate the same amount of AWS in the future too. This will help the company make its top-line stronger.

Panera's catering business increased 12% and contributed 7.8% to the revenue in the first quarter of 2013. It has recorded an increase in single catering transaction, with an average ticket size of $130, compared $125 in 2012. It is expected that the catering business will contribute 8%-12% revenue by the end of 2013. It believes that catering remains a significant growth opportunity for the next several years.

For the continuous growth of the catering segment, the company has rolled out an upgraded web-based ordering system, which is designed to improve customers' experience. It will also help the company in improving its operations with a planned investment in the new sales force management system.

Conclusion

Starbucks, with the acquisition of Teavana, is looking to capture higher tea market share. It has also entered into coffee future contracts, booking the needs for 2014 and 2015, which will enhance its revenue.

Chipotle Mexican Grill is planning to open more restaurants with its new catering business. This will generate additional revenue growth for the company.

With a view of expanding footprint, Panera Bread is opening new restaurants and advancing its catering business, which will provide good growth opportunity in the future.

I recommend a buy for all these stocks.

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Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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