US restaurant sales have returned to pre-pandemic levels. The latest estimates from the US Census Bureau showed that monthly food service and drinking establishment sales were $86.2 billion in August, almost flat from July, and up nearly 11% year over year.
Several market research firms are estimating that retail sales growth will remain tepid this holiday season. However, sales at restaurants and bars are likely to increase as COVID-19 infections almost disappear.
Consequently, investing in restaurant stocks with a cheap Zacks rank should be cautious. Five such stocks are – Chipotle Mexican Grill Inc. (CMG – free report) The Wendy’s Co. (WHOM – free report) First Watch Restaurant Group Inc. (FWRG – free report) ONE Group Hospitality Inc. (STKS – Free report) and Wingstop Inc. (WING – free report).
Impressive turnaround of US restaurants
The US restaurant industry is showing signs of an impressive turnaround in 2022 after two pandemic-stricken years. This industry has suffered major shocks during the coronavirus outbreak due to lockdowns and other restrictive norms to maintain social distancing.
However, the US government’s massive rollout of COVID-19 vaccines in 2021 and the full reopening of the economy gave the restaurant and bar industry a major boost.
The restaurant industry is gradually seeing increasing sales. The industry body National Restaurant Association (NRA) forecasts a turnover in the restaurant and bar industry of 898 billion US dollars for the year 2022. The improvement is due to improving fundamentals such as changes in business processes, staffing, floorplans and technology.
Industry participants are hiring, suggesting the industry is finally coming out of the woods. The NRA forecasts the industry will hire 400,000 workers, bringing total employment to 14.9 million by the end of 2022.
Restaurant operators’ focus on digital innovation, their promotional initiatives and cost-saving efforts have acted as key catalysts. With the growing influence of the internet, digital innovation has become the need of the hour. Large restaurant chains are constantly collaborating with delivery channels and digital platforms to increase sales.
The restaurant industry is consistently benefiting from the rise in take-out sales, which primarily include delivery, take-out, drive-thru, catering, meal packages and off-site options such as kiosks and food trucks, due to the coronavirus pandemic. According to the NRA, more than 60% of food consumed in restaurants is eaten away from home.
By 2025, off-premise is expected to account for about 80% of industry growth. The idea of offering off-premise offerings together with a networked curbside service is constantly receiving positive customer feedback.
Our top picks
We’ve narrowed our search to five restaurant stocks that have strong growth potential for the remainder of 2022. These stocks have seen a positive revision in earnings estimates over the past 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.
The following graphic shows the price development of our five tips over the last three months.
Image source: Zacks Investment Research
Chipotle Mexican Grill operates restaurant chains worldwide for fast, casual and fresh Mexican food. CMG has benefited from its digital endeavors, Chipotlane add-ons, and marketing initiatives. These, along with the strength of digital selling, the rise in menu prices, new restaurant openings, and higher restaurant-level operating margin have helped Chipotle.
A solid financial position without debt is also encouraging. CMG continues to focus on the stage-gate process, leveraging digital programming to expand access and convenience.
Chipotle has a year-to-date earnings growth rate of 28.2%. The Zacks consensus estimate for the year-to-date is up 0.1% over the past seven days.
The Wendy’s is the world’s third largest quick service restaurant company, operating through its subsidiary, Wendy’s Restaurants, LLC. WEN has benefited from its focus on menu innovation, technology upgrades and international expansion.
That, along with an emphasis on breakfast offerings during the day, bodes well. The Wendy’s has increased its focus on new global restaurant design that will likely pave the way for future growth opportunities.
The Wendy’s expects an earnings growth rate of 3.7% for the current year. The Zacks consensus estimate for the year to date is up 2.4% over the past 60 days.
The ONE Group Hospitality develops, manages and operates a portfolio of high-energy restaurants, lounges and bars. STKS also offers catering solutions for food and beverages. ONE Group Hospitality’s main restaurant brand is STK, a steakhouse concept with locations in metropolitan areas of the United States and London.
STKS offers ONE Hospitality, a unique turnkey food and beverage service for hospitality venues such as hotels, casinos and other high-end venues domestically and internationally.
ONE Group Hospitality expects a profit growth rate of 13.6% for the current year. The Zacks consensus estimate for the year to date is up 1.5% over the past 30 days.
First Watch Restaurant Group is a daytime restaurant serving cooked-to-order breakfast, brunch, and lunch using fresh ingredients. FWRG offers pancakes, omelets, sandwiches, and salads, as well as specialties like quinoa power bowl, avocado toast, and chickichanga.
FWRG expects an earnings growth rate of more than 100% for the current year. The Zacks consensus estimate for the year to date is up 25% over the past 60 days.
wing stop franchisees and operates restaurants under the Wingstop brand name. WING restaurants offer classic wings, boneless wings and tenders cooked to order and hand sauced and tossed in a variety of flavors. The operating segment of WING consists of franchises and companies.
Wingstop has a year-to-date earnings growth rate of 16.3%. The Zacks consensus estimate for the year to date is up 2.6% over the past 60 days.