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Here's How Gift Cards Will Help Restaurant Chains Dominate This Holiday Season

Gift cards, more spending on holiday dining, and higher consumer sentiment may put restaurant stocks on the investment menu.

'Tis the season to go shopping, and with that, retailers can expect a little lift. But actual gifts aren't the only things being wrapped up, tied with ribbon, and stuffed in a stocking these days -- gift cards remain a popular choice, topping consumers' wish lists for the 13th consecutive year, according to the National Retail Federation. And a report from Paytronix showed that holiday gift card sales jumped 15% last year from the one before, with the big gains beginning on Black Friday.

Here's How Gift Cards Will Help Restaurant Chains Dominate This Holiday Season
IMAGE SOURCE: GETTY IMAGES.

That means good news for restaurant companies like The Cheesecake Factory(NASDAQ:CAKE) (which operates the restaurant by the same name), Bloomin' Brands(NASDAQ:BLMN), and Darden Restaurants(NYSE:DRI). Bloomin' Brands owns Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and Fleming's Prime Steakhouse & Wine Bar, while Darden owns LongHorn Steakhouse and Olive Garden. The restaurants all offer gift cards. Dining was the most popular of any category of gift card among consumers during the 2018 holiday season, according to Blackhawk Network, which provides gift cards and related services to companies. Blackhawk predicted the same trend for this year.

Two free slices of cake

Restaurants are already in on the action. The Cheesecake Factory offered two free slices of cake with a $25 gift card purchase over the Black Friday weekend, and Bloomin' Brands and Darden are offering a $10 bonus card with every $50 spent on gift cards this holiday season.

The holidays will also benefit restaurants because of the way consumers prefer to spend their money during the season. According to research by Deloitte, "experience" buying has been growing over the past five years. That means people are spending more money on activities that involve socializing with family and friends. About 40% of consumers' holiday budgets this year will be spent on entertaining at home, dining at restaurants, and staying in hotels. And dining at restaurants represents nearly 60% of this category, the data show.

The cherry on the cake for these restaurant companies is rising consumer sentiment. The University of Michigan's Consumer Sentiment Index increased to 96.8 in November, showing Americans' optimism about the economy climbing for a third straight month.

Busiest shopping days

Though restaurants in general stand to gain from these factors over the holiday season, The Cheesecake Factory may have an edge. The chain is a fixture in malls throughout the U.S., and this is the time when those malls see the most traffic. The Cheesecake Factory may benefit from shoppers stopping for a meal or snack, as well as the sale of gift cards. That said, the busiest days for restaurants during the holiday season have historically been Saturdays in November and December, rather than the biggest shopping days such as Black Friday, CNBC reported.

Especially in relation to its peers, The Cheesecake Factory could be an opportunity for investors looking for a bargain. The stock's valuation is in the same range as its competitors', yet the shares have stagnated this year, trading at the same level today as in January. The Cheesecake Factory trades at about 21 times earnings, while Bloomin' Brands and Darden trade at 19 and 21 times earnings, respectively. As for share prices, Bloomin' Brands is up 23%, and Darden has gained 14% since the start of the year.

The Cheesecake Factory reported third-quarter earnings per share that topped analysts' estimates by 7.3%, surpassing forecasts for a third consecutive quarter. Darden also beat estimates in its latest earnings report, while Bloomin' Brands reported earnings in line with expectations.

Valuation, mall location, and share underperformance may bring some investors to The Cheesecake Factory's table this month. Others may opt for Bloomin' Brands or Darden, whose shares have had more momentum. If forecasts for consumer spending and behavior are right, more than one restaurant operator could reap the holiday rewards.

Topic: #gift
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