4 Restaurant Stocks to Buy on Continued Jump in Sales
The retail sector so far hasn’t suffered as much as it was feared owing to rising commodity prices. And the U.S. restaurant industry has emerged as one of the best performers. In fact, the restaurant industry has held its ground amid the ongoing inflationary pressures.
This year also has started on a high for the industry, with sales recording an impressive jump in January, following a solid turnaround in 2022 after two years of poor show owing to the pandemic. Given this situation, stocks like Arcos Dorados Holdings Inc. ARCO, Chuy's Holdings, Inc. CHUY, Yum China Holdings, Inc. YUMC and Brinker International, Inc. EAT are likely to benefit in the near term.
Restaurant Sales Jump
The Department of Commerce said on Feb 15 that retail sales rose a solid 3% month over month in January after declining 1.1% in December and came in above the consensus estimate of 1.7%. The jump in January can be attributed to impressive sales at bars and restaurants, which jumped 7.2%.
The report comes as fresh data showed that inflation rose 0.5% in January after increasing 0.1% in December. Understandably, higher costs have been pinching the pockets of consumers. However, that hasn’t stopped people from spending at restaurants, which is driving sales.
In fact, price pressures have been crippling personal spending for more than a year now. Yet, the restaurant industry has managed to put up a great show, with revenues increasing practically every month.
The industry’s fight to bounce back from the pandemic lows has been going on since the beginning of 2022. Sales were hampered in 2020 and 2021 following the COVID-19 outbreak and the subsequent reemergence of mutant variants, which discouraged people from socializing.
This took a toll on the restaurant industry. However, the rebound started when the COVID-induced lockdown ended and the economy reopened.
Moreover, consumers tend to spend more on services than on goods during normal times. This changed during the outbreak as a result of the dearth of options, with consumers spending more on goods than services.
However, now that everything has returned to normal, people have again started spending more on services. The only service category that falls under retail sales is restaurants.
Also, the jump can be linked to the strengthening of fundamentals, including adjustments in operational procedures, personnel, workplace layouts and technology.
Restaurant operators are also putting in a lot of effort to overcoming the ongoing challenges, particularly the rising costs. Restaurants are putting a lot of emphasis on digital innovation, working toward increasing sales, and implementing cost-cutting initiatives, which is helping the industry bounce back.
Digital innovation is now a key element in boosting sales due to Internet's growing importance. Large restaurant businesses are frequently using delivery services and Internet platforms, which have been driving sales.
Our Choices
Given this situation, it would be ideal to invest in these four 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 earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 20.4% over the past 60 days. Currently, ARCO has a Zacks Rank #2.
Chuy's Holdings, Inc. owns and operates full-service restaurants serving a distinct menu of authentic Mexican food. CHUY offers a menu, which includes appetizers, soups and salads, tacos, burritos, enchiladas, fajitas and combination platters. Chuy's Holdings operates chains throughout Texas, Alabama, Indiana, Kentucky and Tennessee.
Chuy's Holdings’ expected earnings growth rate for the current year is 8.8%. The Zacks Consensus Estimate for current-year earnings has improved 4.2% over the past 60 days. CHUY currently has a Zacks Rank #2.
Yum China Holdings, Inc. operates both company-owned and franchised restaurants. YUMC’s brands include The KFC, Pizza Hut and Taco Bell. The company also owns East Dawning, Little Sheep, and COFFii & JOY.
Yum China Holdings’ expected earnings growth rate for the current year is 70.5%. The Zacks Consensus Estimate for current-year earnings has improved 9.1% over the past 60 days. YUMC currently has a Zacks Rank #2.
Brinker International, Inc. primarily owns, operates, develops and franchises various restaurants under the Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. EAT took over Chili’s, Inc., a Texas corporation in September 1983 and completed the acquisition of Maggiano’s in August 1995. Chili’s is a preeminent leader in the bar & grill category of casual dining. The brand has been functioning for over the last 40 years.
Brinker International’s expected earnings growth rate for next year is 36.4%. The Zacks Consensus Estimate for current-year earnings has improved 5.8% over the past 60 days. EAT currently carries a Zacks Rank #2.
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