Are you worried about a recession? I'm guessing that you are – but probably not so much as to affect your spending (yet, anyway).
On average, the American consumer is feeling just fine. Actually, more than "just fine," as we learned after the Commerce Department issued its monthly retail sales update. Sales at the U.S. shops, restaurants and online retailers rose 0.7% in July from the previous month -- the highest monthly increase since March -- and were higher than a year earlier by 3.4%.
While spending in some categories, including furniture retailers and automotive purchases, was weak, spending in others surged.
Consumers spent more than $137.7 billion online -- a record amount. And our appetite for dining out and eating takeout drove U.S. restaurant spending higher by 1.3%, to $61.6 billion, in July. Taken alone, this number might not look all that impressive. But the increase means that restaurants as a group have been doing better than the average retailer. Moreover, this also means that the annualized rate of growth in the money spent at restaurants over the past three months stands at a massive 25.3% -- the fastest pace on record (with numbers going back to 1992).
The Best Play for Restaurant Spending
While not directly involved in food preparation, restaurant-delivery stocks have contributed to this boom by making access to restaurants, fancy and chain-store alike, easier and faster. Thanks to food-delivery apps, much of the country can now satisfy its cravings for almost any type of food without even leaving the house.
This convenience, much like the convenience of online shopping for books and clothes, has resulted in explosive growth – and growth expectations -- for the food-delivery business. Worth $3.8 billion in 2017, food delivery is expected to grow at a better than 27% annual pace over the next few years to reach $16.6 billion in 2023.
One long-term beneficiary of this explosive growth is Grubhub (Nasdaq: GRUB).
A pioneer in the food-ordering business (GRUB was founded in 2002 and went public in April 2014), Grubhub is an online and mobile food-ordering juggernaut that connects people in over 2,400 U.S. cities (and London) to more than 125,000 takeout restaurants. The Grubhub portfolio of brands includes Grubhub, Seamless, Eat24, LevelUp, Tapingo, AllMenus and MenuPages.
Thanks to its industry positioning -- and also to the fast pace with which food consumers are moving online and adopting food-ordering technology over the more traditional phone ordering -- GRUB has been able to quadruple its revenue over the past five years. While in 2014 it generated about $254 million in sales, last year (2018) was the first year that GRUB's sales exceeded $1 billion.
Over the same period, the company's net income more than tripled (from $24.4 million in 2014 to $78.5 million in 2018), as did earnings per share (EPS), which grew from $0.31 in 2014 to $0.90 in 2018.
But the company's growth has been slowing: 2018 per-share earnings were lower by some 24% than what the company reported in 2017 ($0.85 vs $1.12). This market does not forgive such a slowdown. In the case of GRUB, because its growth drastically slowed last year, the stock lost more than 44% during the fourth-quarter 2018 sell-off.
The company also disappointed investors in the second quarter ended in June, as reported July 30. While GRUB posted better-than-expected revenue, the company tightened its revenue guidance, now expecting full-year revenue of $1.34 billion to $1.39 billion, vs $1.315 billion to $1.415 billion it expected earlier.
On the other hand, GRUB has delivered strong growth in what it calls "active diners" (the number of unique accounts from which at least one order has been placed over the year). The number of active diners grew 30% year over year to 20.3 million as the company's new customer acquisition accelerated (GRUB added 1 million net new active diners during the quarter compared with 500,000 net additions during the same period in 2018).
The market, already worried about revenue slowdown amid competition, reacted negatively, driving the shares down some 12% -- and creating a new bargain in the process.
Action To Take
As I see it, both the risk of slowing sales and competition-driven lower margins are largely already reflected in the share price. That means GRUB is likely to soar on any good news.
Yes, Grubhub faces competition from companies such as Uber Eats -- a division of ride-sharing giant Uber (Nasdaq: UBER) -- plus privately held DoorDash and Postmates. But the food-delivery industry is young, and ultimately it looks to grow large enough to have more than one dominant player (and more than one ultimate winner) -- with GRUB positioned to be one of the long-term beneficiaries of the industry growth. Meanwhile, don't overlook the progress GRUB made in the latest quarter. In particular, the growth in the "active diners" metric is a good indicator of potential, as is the growth in the number of partner restaurants (GRUB added more than 10,000 in the second quarter alone).
If you've followed along with my recommendations in the past, then you may recall that my readers and I have owned Grubhub in the past. In fact, the last time we owned the stock, we made 40% in less than a year. And while I can't guarantee the exact same scenario will play out again, I consider the stock a "buy" once again.