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4 Restaurant Stocks to Watch Amid Growing Challenges

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Rising prices have started impacting retail sales, the first signs of which were seen in May. Also, people have once again started spending more on services than goods. However, restaurant sales have been steadily growing over the past few months despite soaring prices and slowing retail sales.

Restaurants and bars have been hiring aggressively over the past few months, giving an indication that footfall is increasing with the economy starting to function at its optimum level after almost two years of occasional shutdowns due to the pandemic and lower sales. Given this scenario, restaurant stocks like Arcos Dorados Holdings Inc. (ARCO - Free Report) , Yum! Brands, Inc. (YUM - Free Report) , Sweetgreen, Inc. (SG - Free Report) and Dave & Buster's Entertainment, Inc.(PLAY - Free Report) are likely to gain in the near term.

Restaurant Sales Growing Steadily

Retail sales unexpectedly declined 0.3% in May, as higher prices prevented people from spending more on consumer goods. However, sales at U.S. bars and restaurants grew an impressive 0.7% in May.

Restaurants are the only services included in retail sales. The jump in restaurant sales despite a surge in commodity prices hints at two things. First, people who were spending more on goods since the onset of the pandemic have once again started shelling out on services.

The services sector was largely affected by the pandemic but slowly started recovering from the beginning of 2021 on economic reopening. However, there were disruptions in the form of the Delta and Omicron variants that again slowed down the turnaround for the services sector.

Things finally picked up from the end of last year. Higher spending on services is once again helping the restaurant space.

The other thing we notice is that people are finally confident about stepping out of their homes as fears of the pandemic have somewhat waned following the massive vaccination drive. Also, traveling, holidaying and outdoor leisure activities had come to a standstill over the past couple of years. People are now desperate to go out and unwind. Thus, footfall at restaurants is picking up at a rapid pace, helping boost sales.

Restaurant Industry Bouncing Back

According to the latest report from the U.S. Census Bureau, U.S. bars and restaurants generated $84.98 billion in revenues in May. People are not hesitant to spend at restaurants despite high prices. Higher sales at restaurants have also given employers the courage to hire over the past few months.

In fact, the restaurant and hospitality businesses are on top of the list of employers that have been aggressively hiring since the beginning of this year. According to the latest report from the Labor Department, the U.S. economy added a solid 372,000 jobs in June, higher than 268,000 expected by economists.

Of these, the hospitality and leisure sector added 67,000 jobs. This clearly is an indication that the industry holds promise and hiring is being done keeping in mind expectations of higher footfall and sales in the near term.

Stocks to Watch

People are aggressively spending at restaurants and sales are likely to get a further boost in the coming days. Given the situation, it would be ideal to focus on restaurant stocks.

Arcos Dorados Holdings Inc. operates as a franchisee of McDonald's, with its operations divided into 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 10% over the past 60 days. ARCO has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Yum! Brands, Inc. is the global leader in multi-branding and offers consumers more choice and convenience at one outlet. YUM presently reports through four segments — KFC, Pizza Hut, Taco Bell and Habit Burger Grill. Notably, Yum! Brands owns, operates and franchises over 50,000 restaurants in more than 150 countries and territories.

Yum! Brands’ expected earnings growth rate for the current year is 4.3%. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the past 60 days. YUM has a Zacks Rank #2.

Sweetgreen, Inc. manages a chain of salad restaurants. SG offers salads, frozen yogurts, nutritional specialties and seasonal selections. Sweetgreen also offers stainless steel bottles, gift cards, shirts, salad blaster bowls and reusable shopping bags through its online stores.

Sweetgreen’s expected earnings growth rate for the current year is 72.1%. Shares SG have gained 8.5% in the past 30 days. Sweetgreen has a Zacks Rank #2.

Dave & Buster's Entertainment, Inc. is a leading owner and operator of high-volume venues in North America that combine dining and entertainment for both adults and families. As of May 1, 2022, PLAY owned and operated 145 stores in 41 states, Puerto Rico and one Canadian province.

Dave & Buster's Entertainment’s expected earnings growth rate for the current year is 56.6%. The Zacks Consensus Estimate for current-year earnings has improved 3.6% over the past 60 days. PLAY has a Zacks Rank #3 (Hold).