High energy costs have posed a massive challenge for the restaurant industry. However, the space has held its ground as consumers continue to spend lavishly on eating out, driving overall retail sales.
Given this situation, it would be ideal to invest in restaurant stocks with a strong online presence. We have selected four stocks, namely, Arcos Dorados Holdings Inc. ARCO, Dutch Bros Inc. BROS, The Cheesecake Factory Incorporated CAKE and Yum China Holdings, Inc. YUMC.
Restaurant Sales Grow
Sales at U.S. eating and drinking places totaled $104.5 billion, increasing 0.1% sequentially in June, the Commerce Department reported last week. Year over year, restaurant sales jumped 3.8% last month. Restaurant sales totaled $603.9 billion in the first half of the year, indicating robust spending.
This came as the report showed overall retail sales grew 0.2% in June on a month-over-month basis. Restaurant sales are the only services category in the report, and Economists view spending at restaurants as a key indicator of consumers' financial health.
Higher gasoline prices since the beginning of the U.S.-Iran war in late February have posed a major problem for restaurants. Energy prices eased in June after a temporary truce between the two warring nations. This somewhat helped restaurant owners.
However, hostilities have resumed over the past nine days, and oil prices have already started moving northward. Meanwhile, inflation eased substantially in June. The consumer price index (CPI) fell 0.4% sequentially in June, after rising 0.5% in May and surpassing analysts’ expectations of a decline of 0.2%. Year over year, CPI fell to 3.5% in June, beating analysts’ expectations of a reading of 3.8%.
The latest reading is likely to give the Federal Reserve some more time before deciding on the timing of the next rate hike. If inflation continues to ease substantially, the Federal Reserve could also not go for a rate hike.
Consumers’ Focus Changing
Higher prices have made it more difficult for restaurant owners, as customers grow more cautious about their spending and look for meals that provide better value. Quick-service restaurants, especially those recognized for their affordable prices, have fared better than many others during these challenging times.
As more budget-conscious diners seek inexpensive meal options, competition in the value segment has become more intense. To draw in and keep customers, restaurant brands are rolling out special promotions, discounts and value-focused combo meals.
Despite these challenges, demand for affordable dining remains solid. Many restaurant chains are stepping up their marketing campaigns, forming partnerships and adding new menu items to stay competitive and encourage repeat business.
4 Restaurant Stocks With Upside
Arcos Dorados
Arcos Dorados Holdings Inc. operates as a franchisee of McDonald's, with its operations divided into 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 7.4% over the past 60 days. Currently, ARCO has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Dutch Bros
Dutch Bros Inc. is an operator and franchisor of drive-thru shops that focus on serving high-quality, hand-crafted beverages with unparalleled speed and superior service.
Dutch Bros’ expected earnings growth rate for the current year is 22.4%. The Zacks Consensus Estimate for current-year earnings has improved 1.1% over the past 60 days. BROS presently carries a Zacks Rank #2.
The Cheesecake Factory
The Cheesecake Factory Incorporated owns and operates 370 restaurants throughout the United States and Canada under brands, including The Cheesecake Factory and North Italia, Flower Child and a collection within the Fox Restaurant Concepts subsidiary. Internationally, CAKE operates 36 Cheesecake Factory restaurants under licensing agreements. It operates two bakery production facilities as well.
The Cheesecake Factory’s expected earnings growth rate for the current year is 6.9%. The Zacks Consensus Estimate for current-year earnings has improved 1.3% over the past 60 days. CAKE currently has a Zacks Rank #2.
Yum China Holdings
Yum China Holdings operates both company-owned and franchised restaurants. YUMC’s brands include 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 17.1%. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 60 days. YUMC currently has a Zacks Rank #2.
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The Cheesecake Factory Incorporated (CAKE): Free Stock Analysis Report
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Dutch Bros Inc. (BROS): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).