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4 Restaurant Stocks to Buy Amid Ongoing Challenges

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Retail sales have been slowing down as rising prices are compelling consumers to spend cautiously. However, spending at U.S. bars and restaurants hasn’t yet been hampered, which is a good sign for the industry amid this economic turmoil. The restaurant industry got battered during the peak of the pandemic but has been trying to make a comeback.

Although the industry is once again faced with challenges, sales are far higher than a year ago and have surpassed the pre-pandemic levels. Also, hiring at U.S. bars and restaurants is surging as higher sales are prompting owners to quickly fill up posts that have been lying vacant. Given this scenario, stocks like Arcos Dorados Holdings Inc. (ARCO - Free Report) ,First Watch Restaurant Group, Inc. (FWRG - Free Report) , Ruth's Hospitality Group, Inc. (RUTH - Free Report) and Potbelly Corporation (PBPB - Free Report) are likely to benefit in the near term.

Restaurant Sales Grow, Hiring Increases

The Census Bureau reported last week that restaurant sales grew 11.6% year over year in July. On a month-over-month basis, sales grew 0.1% in July. Although the month-over-month increase is marginal, the good sign for the industry is that sales are growing steadily compared to other segments like apparel, jewelry and furniture, where sales have been declining lately, owing to rising commodity prices.

Moreover, retail sales remained unchanged in July, after increasing 1% in June, showing signs of inflationary pressures.

The restaurant industry also has been feeling the heat of rising costs but people are still spending quite aggressively. The report said that a chunk of the increase in sales was because of higher prices on the menu, but in July, prices for "food away from home" also increased 7.6%, showing that demand was actually higher than last year.

Restaurants, bars and other eating and drinking establishments made a remarkable comeback from COVID-19 lockdowns and the resulting changes in customer expenditure. During the peak of the pandemic, people were spending more on goods as they didn’t have many options to go out of their houses.

Things started changing again once the economy started and peaked during the end of last year after the COVID-related restrictions started getting lifted almost fully. Higher spending on services has once again been beneficial to the restaurant business.

Higher sales have also seen restaurants go on a hiring spree. Given that footfall increases with more sales, hiring at restaurants around the country has been increasing steadily.

In fact, restaurants and bars are at the top of the list of employers that have been aggressively hiring since the beginning of the year. According to the most recent Labor Department report, the U.S. economy added 528,000 new jobs in July, which is higher than the 258,000 jobs that economists had projected.

Of these, the hospitality and leisure sector added 96,000 new jobs. However, the industry is still 1.2 million workers short of the pre-pandemic levels, which indicates that hiring will continue as sales grow further. Unmistakably, this indicates that the industry is promising and that hiring decisions are being made with the expectation of rising traffic and revenues in the near future.

Our Choices

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 invest in restaurant stocks.

Arcos Dorados Holdings Inc. operates as a franchisee of McDonald's with its operations divided in Brazil; the 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 the earnings growth rate for the current year to be more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 20.5% 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.

First Watch Restaurant Group, Inc. 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.

First Watch Restaurant Group’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 17.6% over the past 60 days. FWRG has a Zacks Rank #2.

Ruth's Hospitality Group, Inc. is the largest fine dining steakhouse company in the United States as measured by the total number of company-owned and franchisee-owned restaurants. RUTH has over 150 Ruth's Chris Steak House locations worldwide that specialize in USDA Prime grade steaks served in Ruth's Chris' signature fashion — sizzling.

Ruth's Hospitality Group’s expected earnings growth rate for the current year is 24.8%. The Zacks Consensus Estimate for current-year earnings has improved 8.1% over the past 60 days. RUTH 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. Potbelly serves customers throughout the United States.

Potbelly’s expected earnings growth rate for the next year is 100%. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the past 60 days. PBPB has a Zacks Rank #2.

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