5 Restaurant Stocks to Buy as Holiday Season Approaches
U.S. restaurant sales have returned to the pre-pandemic level. The latest estimates from the U.S. Census Bureau showed that monthly sales of food services and drinking places amounted to $86.2 billion in August, almost flat with July, and increased nearly 11% year over year.
Several research firms estimate retail sales growth to remain tepid this holiday season. However, sales at restaurants and bars are likely to increase as COVID-19 infections almost disappear.
Consequently, investment in restaurant stocks with a favorable Zacks Rank should be prudent. Five such stocks are — Chipotle Mexican Grill Inc. CMG, The Wendy's Co. WEN, First Watch Restaurant Group Inc. FWRG, The ONE Group Hospitality Inc. STKS and Wingstop Inc. WING.
Impressive Turnaround by U.S. Restaurants
The U.S. restaurant industry is showing signs of an impressive turnaround in 2022 after two pandemic-ridden years. This industry received major jolts during the coronavirus outbreak due to lockdowns and other restrictive norms to maintain social distancing.
However, the massive implementation of COVID-19 vaccines by the U.S. government in 2021 and the complete reopening of the economy gave a major boost to the restaurant and bar industry.
The restaurant industry is gradually witnessing improving sales. The industry body, the National Restaurant Association (NRA), forecasts restaurant and bars industry sales to reach $898 billion in 2022. The improvement can be attributed to the enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology.
The industry participants are hiring indicating that the industry is finally coming out of the woods. The NRA projects that the industry will recruit 400,000 manpower taking its total employment to 14.9 million at the end of 2022.
Innovative Measures
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 2022. These stocks have seen positive earnings estimate revision in the past 60 days. Each of our picks carries a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Chipotle Mexican Grill operates quick-casual and fresh Mexican food restaurant chains globally. CMG has been benefiting from its digital efforts, Chipotlane add-ons and marketing initiatives. These, along with strength in digital sales, rise in menu prices, new restaurant openings and higher restaurant-level operating margin have been aiding Chipotle.
Also, a solid financial position with no debt is encouraging. CMG continues to focus on the stage gate process, and leverages digital programs to expand access as well as convenience.
Chipotle has an expected earnings growth rate of 28.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the past seven days.
The Wendy's is the world’s third-largest quick-service restaurant company, operating through its subsidiary holding company — Wendy’s Restaurants, LLC. WEN has been benefiting from its focus on menu innovation, technological upgrades and international expansion.
This along with an emphasis on Breakfast daypart offerings bodes well. The Wendy's has increased its focus on new global restaurant design that is likely to pave the way for future growth opportunities.
The Wendy's has an expected earnings growth rate of 3.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 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 provides food and beverage hospitality solutions. The ONE Group Hospitality’s primary restaurant brand is STK, which is a steakhouse concept with locations in metropolitan cities throughout the United States and in London.
STKS provides ONE Hospitality, a signature turn-key food and beverage service for hospitality venues including, hotels, casinos and other high-end locations both nationally and internationally.
The ONE Group Hospitality has an expected earnings growth rate of 13.6% for the current year. The Zacks Consensus Estimate for the current year has improved 1.5% over the past 30 days.
First Watch Restaurant Group 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.
FWRG has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 25% over the past 60 days.
Wingstop franchises and operates restaurants under the Wingstop brand name. WING’s restaurants offer classic wings, boneless wings and tenders that are cooked to order, and hand-sauced and tossed in various flavors. WING’s operating segment consists of Franchise and Company.
Wingstop has an expected earnings growth rate of 16.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.6% over the past 60 days.
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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
The Wendy's Company (WEN) : Free Stock Analysis Report
Wingstop Inc. (WING) : Free Stock Analysis Report
The ONE Group Hospitality, Inc. (STKS) : Free Stock Analysis Report
First Watch Restaurant Group, Inc. (FWRG) : Free Stock Analysis Report
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