September is turning out to be the most volatile month year to date. However, this is no surprise as this month is historically known as the worst-performing on Wall Street. In fact, this year, the impressive bull run after a highly disappointing 2022 ended in August.

Market participants dilemma about the Fed’s future course of action on a higher interest rate regime and continuation of restrictive monetary policies injected volatility in an otherwise northbound market.

As we are in the last week of the third-quarter, market participants are wondering whether the holiday season can bring back the mojo on Wall Street. Importantly, expectations for third-quarter earnings have been stabilizing gradually.

It should be prudent to invest in restaurant stocks with a favorable Zacks Rank, particularly ahead of the holiday season. U.S. restaurant businesses continue to thrive in 2023 after an impressive turnaround last year. Sales at U.S. restaurants have not been impacted much despite severe inflationary pressure.
The Department of Commerce reported that sales at U.S. bars and restaurants came in at $93.1 billion in August, marginally below the $93.9 billion sales in July. However, year over year, sales grew 9.2% in August.

Innovative Measures

The restaurant industry is gradually witnessing improving sales. The improvement can be attributed to the enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.
Restaurant operators’ focus on digital innovation, their sales-building initiatives, and cost- saving efforts have been acting as the major catalysts. With the growing influence of the Internet, digital innovation has become the need of the hour. Big restaurant chains are constantly partnering with delivery channels and digital platforms to drive incremental sales.

The restaurant industry is consistently gaining from the spike in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options, such as kiosks and food trucks, owing to the coronavirus pandemic. Per the National Restaurant Association, more than 60% of restaurant foods are consumed off-premise.

By 2025, off-premise is likely to account for approximately 80% of the industry's growth. The idea of providing off-premise offerings along with a connected curbside service is steadily garnering positive customer feedback.

Our Top Picks

We have narrowed our search to five restaurant stocks that have strong growth potential for the rest of 2023. These stocks have seen positive earnings estimate revision in the last 60 days. Each of our picks carries either a Zacks Rank # 1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Image Source: Zacks Investment Research

BJ's Restaurants Inc. (BJRI Quick QuoteBJRI - Free Report) owns and operates a chain of high-end casual dining restaurants in the United States. BJRI operates as BJ’s Restaurant & Brewery /BJ’s Restaurant & Brewhouse and/ or BJ’s Pizza & Grill and or BJ’s Grill. BJRI’s menu offers a wide range of dining options, including everyday lunch and dinner, special occasions and late-night business.

Zacks Rank #1 BJ's Restaurants has an expected revenue and earnings growth rate of 5.5% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.1% over the last 30 days.

Carrols Restaurant Group Inc. (TAST Quick QuoteTAST - Free Report) is the largest BURGER KING franchisee in the United States with over 800 restaurants and has operated BURGER KING restaurants since 1976. TAST operates as a Burger King and Popeyes franchisee.

Zacks Rank #1 Carrols Restaurant Group has an expected revenue and earnings growth rate of 8.1% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 30 days.

Kura Sushi USA Inc. (KRUS Quick QuoteKRUS - Free Report) operates technology-enabled Japanese restaurants in the United States. KRUS’ restaurants provide Japanese cuisine through an engaging revolving sushi service model, which is known as Kura Experience.

Zacks Rank #1 Kura Sushi USA has an expected revenue and earnings growth rate of 28.7% and more than 100%, respectively, for the current year (ending August 2024). The Zacks Consensus Estimate for current-year earnings has improved 7.3% over the last 60 days.

First Watch Restaurant Group Inc. (FWRG Quick QuoteFWRG - Free Report) is a daytime dining restaurant concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. FWRG offers pancakes, omelets, sandwiches and salads, alongside specialty items like the Quinoa Power Bowl, Avocado Toast and the Chickichanga.

Zacks Rank #2 First Watch Restaurant Group has an expected revenue and earnings growth rate of 20.5% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 16.1% over the last 60 days.

El Pollo Loco Holdings Inc. (LOCO Quick QuoteLOCO - Free Report) develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco. LOCO specializes in flame-grilled chicken in a variety of contemporary Mexican-influenced entrees, including specialty chicken burritos, chicken quesadillas, chicken tortilla soup, Pollo Bowls and Pollo Salads.

Zacks Rank #2 El Pollo Loco Holdings has an expected revenue and earnings growth rate of 0.9% and 25.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.8% over the last 60 days.