The U.S. restaurant industry witnessed an impressive turnaround in 2022 after two pandemic-ridden years. This industry suffered major jolts during the coronavirus outbreak due to lockdowns and other restrictive norms to maintain social distancing. As we are out of pandemic-era restrictions, restaurant businesses are thriving in 2023.

Strong Restaurant Sales in April

Although the retail sector has been taking a beating over the past year, sales at U.S. restaurants have not been impacted much despite inflationary pressure. The Department of Commerce reported that sales at U.S. bars and restaurants increased 0.6% in April. This came despite inflationary pressure. Food prices have been soaring but consumer spending has been steady, boosting sales of restaurants.

The restaurants’ space is the main driver of growth for overall retail sales. Steady consumer spending continued in April despite worries that the economy will enter a recession this year. Although higher interest rates have made customers concerned, they are nonetheless spending lavishly at restaurants and bars.

Importantly, after the removal of pandemic-era restrictions, on-premises dining is gaining popularity. The industry body, the National Restaurant Association (NRA) stated “Despite the booming popularity of off-premises restaurant meals and snacks in recent years, pent-up demand for in-restaurant experiences — socialization, celebration, and culinary exploration — is strong, with 70% of respondents noting customer desire to gather on-premises.”

The NRA in its latest report said that the restaurant industry is poised to grow at a fast pace in 2023. It projects restaurant sales to reach $997 billion in 2023, up 11% from the 2022 estimates of $898 billion. The pandemic-led supply-chain disruptions are easing gradually.

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 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 NRA, 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 30 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 year to date.

Image Source: Zacks Investment Research

Chipotle Mexican Grill Inc. (CMG Quick QuoteCMG - Free Report) has been benefiting from its strong comparable restaurant sales growth, digital efforts, Chipotlane add-ons and menu innovation. Moreover, strength in digital sales, rise in menu prices, new restaurant openings and higher restaurant-level operating margin have been driving CMG’s performance.

CMG reported solid benefits from Project Square One with improvements, including throughput on the frontline, on-time and accuracy on the digital make line. CMG also emphasizes smarter pickup times to boost growth.

Zacks Rank #1 Chipotle Mexican Grill has an expected revenue and earnings growth rate of 14% and 33.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.9% over the last 30 days.

McDonald's Corp. (MCD Quick QuoteMCD - Free Report) continues to impress investors with robust comps growth. MCD’s increased focus on menu innovation and loyalty program expansion is commendable. MCD is also undertaking every effort to drive growth in international markets.

Robust digitalization is likely to help McDonald's in driving long-term growth and capture market share. MCD plans to open more than 1,900 restaurants globally in 2023.

Zacks Rank #1 McDonald's has an expected revenue and earnings growth rate of 7.7% and 9.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last 30 days.

Wingstop Inc. (WING Quick QuoteWING - Free Report) franchises and operates restaurants. WING’s operating segment consists of the Franchise and Company segments. WING offers classic wings, boneless wings, and tenders that are cooked-to-order, and hand-sauced-and-tossed in various flavors.

Zacks Rank #1 Wingstop has an expected revenue and earnings growth rate of 18.6% and 13%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 9.4% over the last 30 days.

Shake Shack Inc. (SHAK Quick QuoteSHAK - Free Report) has been benefiting from various digital initiatives, strong same-shack sales and unit expansion efforts. SHAK’s digital retention continues to remain strong. It has also been making more investments in digitization in an effort to sustain its digital guest enhancement strategies in the near term.

Improvement in average weekly sales also bodes well. Going forward, SHAK intends to focus on conducting tests on new items, including new packaging, caffeinated lemonades and mini shakes.

Zacks Rank #2 Shake Shack has an expected revenue and earnings growth rate of 21.4% 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.

Chuy's Holdings Inc. owns and operates full-service restaurants serving a distinct menu of authentic Mexican food. CHUY offers a menu that includes appetizers, soups and salads, tacos, burritos, enchiladas, fajitas and combination platters. CHUY operates chains throughout Texas, Alabama, Indiana, Kentucky, and Tennessee.

Zacks Rank #2 Chuy's Holdings has an expected revenue and earnings growth rate of 9.9% and 24.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.2% over the last seven days.