Back to top

Image: Bigstock

4 Stocks to Buy on Steady Growth in Restaurant Sales

Read MoreHide Full Article

Retail sales declined for the first time in five months in May. While rising prices have been a concern that has led people to spend cautiously, another reason behind the decline is that people lately have been spending on services more than goods.

This possibly is a reason that sales at U.S. restaurants are growing despite a decline in retail sales, sales at bars and restaurants are the only services that are included as part of retail sales. Given this, investing in restaurant stocks like Arcos Dorados Holdings Inc. (ARCO - Free Report) , BBQ Holdings, Inc. (BBQ - Free Report) , The ONE Group Hospitality, Inc. (STKS - Free Report) and Potbelly Corporation (PBPB - Free Report) are likely to benefit in the near term.

Restaurant Sales Grow  

According to the latest report from the U.S. Census Bureau, U.S. bars and restaurants generated $84.98 billion in revenues in May, up 0.7% month over month. This comes despite a 0.3% decline in overall retail sales.

People lately have been spending cautiously on fuel, food and other necessities as the price of consumer goods continues to rise. This has been a major reason behind retail sales taking a hit in May. Higher demand for goods made people spend despite rising prices, which so far had been helping the retail sector.

However, the sector couldn’t hold on to the momentum and sales plunged finally after five months. The scene at restaurants, however, has been completely different. Although people are spending cautiously on luxuries, they are spending a lot at restaurants.

The gains at U.S. bars and restaurants in May follow strong sales in March and April, when revenues of $84.42 billion and $82.39 billion, respectively, were earned. This shows the steady growth in sales at the eateries.

Restaurant Sales Poised to Grow

A separate report from Mastercard SpendingPulse shows that restaurant sales jumped a whopping 26.7% in May on a year-over-year basis. Higher spending at bars and restaurants also proves that people have started spending more on services once again.

The peak of the pandemic and the months following that saw a change in the trend when people spent more on goods and less on services as the economy remained only partially open. This finally started changing at the beginning of the year when the economy started operating at the optimum level.

With the majority of the Americans now fully vaccinated, most of the COVID-related restrictions have now been lifted and people are stepping out of their homes more confidently. This has seen people start traveling once again and are planning holidays, going to amusement parks and eating out at restaurants.

As a result, spending on the services sector is again on the rise, although rising prices have somewhat slowed down the pace of growth. However, the services sector is still growing. The U.S. services sector PMI came up with a reading of 55.9%. Anything above 50 signals higher growth.

This shows that people are still quite aggressively spending on services and is an indication that spending at restaurants and bars will continue to grow.

Our Choices

Given the situation, it would be ideal to invest in restaurant stocks. We have shortlisted four restaurant stocks, each carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Arcos Dorados Holdings Inc. operates as a franchisee of McDonald's, with its operations divided in Brazil; North Latin America division; South Latin America and the Caribbean division. ARCO also runs quick-service restaurants in Latin America and the Caribbean.

Arcos Dorados’ expected earnings growth rate for the current year is 83.3%. The Zacks Consensus Estimate for current-year earnings has improved 12.8% over the past 60 days. ARCO has a Zacks Rank #2.

BBQ Holdings, Inc. operates and franchises barbeque restaurants and blues clubs. BBQ currently owns locations and franchises locations in Minnesota, Wisconsin, Illinois, Iowa, Nebraska, Utah, Maryland and Virginia and has signed development agreements for an additional franchised locations. BBQ Holdings’ menu features award-winning barbecued and grilled meats, an ample selection of salads, side items, sandwiches and unique desserts.

BBQ Holdings’ expected earnings growth rate for the current year is 67.6%. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the past 60 days. BBQ sports a Zacks Rank #2.

The ONE Group Hospitality, Inc. operates as a hospitality company. STKS develops, manages and operates a portfolio of high-energy restaurants, lounges and bars. The ONE Group Hospitality also provides food and beverage hospitality solutions. STKS’ primary restaurant brand is STK, which is a steakhouse concept with locations in metropolitan cities throughout the United States and in London.

The ONE Group Hospitality’s expected earnings growth rate for the current year is 27.1%. The Zacks Consensus Estimate for current-year earnings has improved 1.4% over the past 60 days. STKS has a Zacks Rank #2.

Potbelly Corporation is a neighborhood sandwich concept. PBPB manages establishments for consuming food on premises to offer sandwiches, salads, soups, chili, chips, cookies, ice cream and smoothies. It serves customers throughout the United States.

Potbelly Corporation’s expected earnings growth rate for the current year is more than 100%. Shares of PBPB have gained 2.8% in the past six months. Potbelly Corporation has a Zacks Rank #2.

Published in